HARVARD BIOSCIENCE INC - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

For the quarterly period ended September 30, 2019

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)

Securities registered pursuant to Section 12(b) of the Act:

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 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).    ☒  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.

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

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

As of October 30, 2019, there were 38,066,101 shares of common stock, par value $0.01 per share, outstanding.

PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements.

See accompanying notes to unaudited consolidated financial statements.

See accompanying notes to unaudited consolidated financial statements.

See accompanying notes to unaudited consolidated financial statements.

See accompanying notes to unaudited consolidated financial statements.

HARVARD BIOSCIENCE, INC.

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 or the Company) as of September 30, 2019 and for the three and nine months ended September 30, 2019 and 2018 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, 2018 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, 2018, which was filed with the SEC on March 18, 2019.

In the opinion of management, all adjustments, which include normal recurring adjustments necessary to present a fair statement of financial position as of September 30, 2019, results of operations and comprehensive income (loss) for the three and nine months ended September 30, 2019 and 2018 and cash flows for the nine months ended September 30, 2019 and 2018, as applicable, have been made. The results of operations for the three months ended September 30, 2019 are not necessarily indicative of the operating results for the full fiscal year or any future periods.

Prior Period Financial Statement Correction of Immaterial Error

During the quarter ended March 31, 2019, the Company identified an immaterial misclassification error in the Company’s consolidated balance sheet as of December 31, 2018.  The immaterial misclassification understated current portion, long term debt and overstated long term debt, less current installments.  This misclassification, in the amount of approximately $4.0 million, related to the classification of the Company’s excess cash flow payment made to its lenders during the quarter ended March 31, 2019 as long term instead of current on its consolidated balance sheet at December 31, 2018.  The misclassification had no impact on total reported debt.  Refer to footnote 14 for further details. The Company assessed the materiality of this error on the financial statements for prior periods in accordance with the SEC Staff Accounting Bulletin (SAB) No. 99, Materiality, codified in Accounting Standards Codification (ASC) 250, Presentation of Financial Statements, and concluded that it was not material to any prior annual or interim periods.  The Company recorded an adjustment to decrease long term debt, less current installments and increase current portion, long term debt in the consolidated balance sheet at December 31, 2018 with no impact on total reported debt.

Reclassifications

As disclosed in Note 5, on January 22, 2018, the Company sold substantially all the assets of its operating subsidiary, Denville Scientific, Inc. (Denville). The sale of Denville represented a strategic shift that had a major effect on the Company’s operations and financial results. As such and pursuant to Accounting Standards Codification (ASC) 205-20 – Presentation of Financial Statements - Discontinued Operations, the operating results of Denville for the three and nine months ended September 30, 2018 have been presented in discontinued operations in the consolidated statements of operations. These reclassifications and adjustments had no effect on total amounts within the consolidated balance sheets, consolidated statements of operations and comprehensive income (loss), consolidated statements of cash flows for any of the periods presented.

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, 2018, which was filed with the SEC on March 18, 2019. Except for the accounting for leases as noted below there have been no material changes in the Company’s significant accounting policies during the nine months ended September 30, 2019.

Leases

The Company accounts for its leases in accordance with ASC 842 Leases. The Company leases office space, manufacturing facilities, automobiles and equipment. The Company concludes on whether an arrangement is a lease at inception. This determination as to whether an arrangement contains a lease is based on an assessment as to whether a contract conveys the right to the Company to control the use of identified property, plant or equipment for period of time in exchange for consideration. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes these lease expenses on a straight line basis over the lease term.

As of September 30, 2019, the Company has assessed its contracts and concluded that its leases consist of operating leases. Operating leases are included in operating lease right-of-use (ROU) assets, current portion of operating lease liabilities, and operating lease liabilities in the Company’s consolidated balance sheets.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company determines an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The incremental borrowing rate represents a significant judgment that is based on an analysis of the Company’s credit rating, country risk, treasury and corporate bond yields, as well as comparison to the Company’s borrowing rate on its most recent loan. The Company uses the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

The Company has lease agreements with lease and non-lease components, which are generally accounted for separately. Additionally, for its leases, the Company applies a portfolio approach to effectively account for the operating lease ROU assets and liabilities.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, 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 ASU is effective for public entities for fiscal years beginning after December 15, 2019, with early adoption permitted. In May 2019, the FASB issued ASU No. 2019-05, Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief, which provided additional implementation guidance on the previously issued ASU. Management has not yet completed its assessment of the impact of the new standard on the Company’s Consolidated Financial Statements. Currently, the Company believes that the most notable impact of this ASU will relate to its processes around the assessment of the adequacy of its allowance for doubtful accounts on trade accounts receivable and the recognition of credit losses.

In August 2018, the FASB issued ASU No. 2018-14, Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans, which amends ASC 715 to add, remove and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The ASU is effective for public entities for fiscal years beginning after December 15, 2020, with early adoption permitted. Management has not yet completed its assessment of the impact of the new standard on the Company’s Consolidated Financial Statements.

In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 815, Derivatives and Hedging, which updates certain guidance previously issued in ASU No. 2017-12, Derivatives and Hedging (Topic 815). The ASU is effective as of January 1, 2020, which is the beginning of the first annual period beginning after the issuance of the ASU for public entities that have adopted ASU No. 2017-12. Entities may elect either to retrospectively apply all amendments in the ASU or to prospectively apply all amendments as of the date of adoption of the ASU. Management has not yet completed its assessment of the impact of the new standard on the Company’s Consolidated Financial Statements.

Recently Adopted Accounting Pronouncements

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815) which amends the hedge accounting recognition and presentation requirements in ASC 815, Derivatives and Hedging. The Board’s objectives in issuing the ASU are to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. The ASU is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2018. The Company adopted this guidance as of January 1, 2019, and it did not have a material impact on its consolidated financial position, results of operations and cash flows.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which is intended to improve financial reporting about leasing transactions. The update requires a lessee to record on its balance sheet the assets and liabilities for the rights and obligations created by lease terms of more than 12 months. The update is effective for fiscal years beginning after December 15, 2018. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company elected to utilize a practical expedient in its method of adoption of the standard and adopted the guidance as of January 1, 2019.  Under this expedient, which is a “current-period adjustment method,” the Company applied ASC 842 as of January 2019 and recognized operating lease liabilities of $11.7 million and right of use assets of $9.4 million for all leases with lease terms of more than 12 months. There was no impact to retained earnings as of that date. In addition, the Company adopted the guidance by electing the following practical expedients: (1) the Company did not reassess whether any expired or existing contracts contained leases, (2) the Company did not reassess the lease classification for any expired or existing leases, and (3) the Company excluded variable payments from the lease contract consideration and recorded those as incurred. The Company’s future commitments under lease obligations and additional disclosures are summarized in Note 12.

Amounts included in accumulated other comprehensive loss, net of tax consisted of the following:

On January 31, 2018, the Company acquired all of the issued and outstanding shares of Data Sciences International, Inc. (DSI), a Delaware corporation, for approximately $71.1 million. The Company funded the acquisition from its existing cash balances, excess proceeds from the Denville Transaction discussed in Note 5, and proceeds from the Financing Agreement discussed in Note 14.

DSI, a St. Paul, Minnesota-based life science research company, is a recognized leader in physiologic monitoring focused on delivering preclinical products, systems, services and solutions to its customers. Its customers include pharmaceutical and biotechnology companies, as well as contract research organizations, academic labs and government researchers. This acquisition diversifies the Company’s customer base into the biopharmaceutical and contract research organization markets.

The results of operations for DSI have been included in the Company’s consolidated financial statements from the date of acquisition. Included in the net loss for the nine months ended September 30, 2018 was a $3.8 million charge recognized in cost of revenues related to purchase accounting inventory fair value step up amortization. The total inventory fair value step up was recognized into cost of revenues over one inventory turn, or approximately five and a half months. Also included in the net loss of DSI for that period was $2.9 million of intangible asset amortization expense.

The following consolidated pro forma information is based on the assumption that was used at the time of the acquisition of DSI. Accordingly, the historical results have been adjusted to reflect amortization expense, interest expense and other purchase accounting adjustments that would have been recognized on such a pro forma basis. The pro forma information is presented for comparative purposes only and is not necessarily indicative of the financial position or results of operations which would have been reported had the Company completed the acquisition during these periods or which might be reported in the future.

Direct acquisition costs recorded in other expense, net in the Company’s consolidated statements of operations were $3.0 million for the nine months ended September 30, 2018.

On January 22, 2018, the Company sold substantially all the assets of its wholly owned subsidiary, Denville, for approximately $20.0 million, which included a $3.0 million earn-out provision (the Denville Transaction). Upon the closing of the transaction, the Company received $15.7 million. The earn-out provision represented contingent consideration of up to $2.0 million based on Denville achieving certain performance metrics with respect to 2018 operating results and up to $1.0 million based on Denville achieving certain performance metrics with respect to 2019 operating results. During the nine-months ended September 30, 2019, it was determined that the 2018 performance metrics were not achieved.

The following table is a reconciliation of the major line items of income from discontinued operations presented within the Company’s consolidated statements of operations for the nine months ended September 30, 2018.

During the nine months ended September 30, 2019, the Company received a release of an escrow amount of $1.0 million related to the Denville Transaction, which is included in the investing cash flows for disposition in the Company’s consolidated statements of cash flows for the nine months ended September 30, 2019. Total operating cash flows for Denville in the Company’s consolidated statements of cash flows for the nine months ended September 30, 2018, were immaterial.

Amortizable intangible assets consist of the following:

* Weighted average life as of September 30, 2019.

Intangible asset amortization expense from continuing operations was $1.4 million and $1.5 million for each of the three months ended September 30, 2019 and 2018, and was $4.3 million and $4.0 million for the nine months ended September 30, 2019 and 2018, respectively. Amortization expense of existing amortizable intangible assets is currently estimated to be $5.6 million for the year ending December 31, 2019, $5.5 million for the year ending December 31, 2020, $5.5 million for the year ending December 31, 2021, $5.4 million for the year ending December 31, 2022, $5.3 million for the year ending December 31, 2023, and $5.2 million for the year ending December 31, 2024.

During the three months ended June 30, 2019, and as a result of the ongoing evaluation of its capitalized research and development activities, the Company recorded an impairment charge of $0.9 million related to certain of its in-process research and development intangible assets and reclassified $0.4 million as completed technology.

During the three months ended September 30, 2019, the Company recorded an impairment charge of $0.5 million related to customer relationships, existing technology, and trade names intangible assets as a result of the decision to discontinue one of the Company’s product lines and cease operations in its facility in North Carolina.

There were no impairment charges recognized during the three and nine months ended September 30, 2018.

Inventories consist of the following:

Property, plant and equipment consist of the following:

During the nine months ended September 30, 2019, the Company removed approximately $3.5 million of fully depreciated and disposed of property and equipment from its fixed asset records.

During the three months ended September 30, 2019, the Company recorded restructuring charges of $0.9 million as a result of the decision to discontinue one of the Company’s product lines and cease operations in its facility in North Carolina.

The following table summarizes the activity for accrued restructuring liability for the three months ended September 30, 2019:

Of the $0.9 million restructuring costs incurred during the three months ended September 30, 2019, $0.5 million has been recorded as impairment of intangible assets in the accompanying consolidated statements of operations and comprehensive income (loss) and the remaining costs of $0.4 million have been included as a component of selling, general and administrative expenses. As of September 30, 2019, the Company had a restructuring liability of $0.2 million which is payable within the next twelve months.

As part of the acquisitions of Multi Channel Systems MCS GmbH (MCS) and Triangle BioSystems, Inc. (TBSI) in 2014, the Company signed lease agreements with the former owners of these acquired companies. The principals of such former owners of MCS and TBSI were employees of the Company as of September 30, 2019 and 2018. Pursuant to these lease agreements, the Company made rent payments of approximately $0.1 million for the three months ended September 30, 2019 and 2018, and approximately $0.3 million for the nine months ended September 30, 2019 and 2018, respectively.

The Company’s subsidiary in the United Kingdom, Biochrom Limited, maintains contributory, defined benefit pension plans for substantially all of its employees. These defined benefit pension plans have been closed to new employees since 2014, as well as closed to the future accrual of benefits for existing employees. The components of the Company’s defined benefit pension expense were as follows:

For the nine months ended September 30, 2019 and 2018, the Company contributed $0.6 million and $0.5 million, respectively to its defined benefit pension plans. The Company expects to contribute approximately $0.1 million to its defined benefit pension plans during the remainder of 2019. The Company had an underfunded pension liability of approximately $0.9 million as of December 31, 2018 included in the other long term liabilities line item in the consolidated balance sheets.

The Company has noncancelable operating leases for office, manufacturing facilities, warehouse space, automobiles and equipment expiring at various dates through 2024 and thereafter. As discussed in Footnote 1, the Company adopted ASC 842 as of January 1, 2019, using a current period adjustment method. In accordance with this method, the Company recognized a right of use asset of $9.4 million and an operating lease liability of $11.7 million as of January 1, 2019. As a result of using the current period adjustment method, the lease expense for nine months ended September 30, 2019 and 2018 was recognized under ASC 842, and ASC 840, the previous standard, respectively.

The components of lease expense for the three and nine months ended September 30, 2019 are as follows:

Supplemental cash flow information related to the Company's operating leases was as follows:

Future minimum lease payments for operating leases, with initial or remaining terms in excess of one year at September 30, 2019, are as follows:

Stock-Based Payment Awards

The Company accounts for stock-based payment awards in accordance with the provisions of FASB ASC 718, which requires it to recognize compensation expense for all stock-based payment awards made to employees and directors including stock options, restricted stock units, Market Condition RSUs and employee stock purchases related to the ESPP. The Company has elected as an accounting policy to account for forfeitures for service based awards as they occur, with no adjustment for estimated forfeitures.

Stock option and restricted stock unit activity for the nine months ended September 30, 2019 was as follows:

Stock-based compensation expense related to stock options, restricted stock units, Market Condition RSUs and the ESPP for the three and nine months ended September 30, 2019 and 2018 was allocated as follows:

The Company did not capitalize any stock-based compensation.

Earnings per share

Basic earnings per share is computed by dividing net income by the number of weighted average common shares outstanding during the period. The calculation of diluted earnings per share assumes conversion of stock options, restricted stock units and Market Condition RSUs into common stock using the treasury method. The weighted average number of shares used to compute basic and diluted earnings per share consists of the following:

Excluded from the shares used in calculating the diluted earnings per common share in the above table are options, restricted stock units and Market Condition RSUs of approximately 4,055,076 and 3,286,853 shares of common stock for the nine months ended September 30, 2019 and 2018, respectively, as the impact of these shares would be anti-dilutive.

On January 22, 2018, in connection with the closing of the Denville Transaction, the Company terminated the Third Amended and Restated Credit Agreement (the Credit Agreement), among the Company, Brown Brothers Harriman & Co. and each of the other lenders party thereto, and Bank of America, as administrative agent. All outstanding amounts under the agreement were repaid in full using a portion of the proceeds of the Denville Transaction. At the time of repayment, there was approximately $11.9 million outstanding.

On January 31, 2018, the Company entered into a financing agreement by and among the Company and certain subsidiaries of the Company parties thereto, as borrowers (collectively, the Borrower), certain subsidiaries of the Company parties thereto, as guarantors, various lenders from time to time party thereto (the Lenders), and Cerberus Business Finance, LLC, as collateral agent and administrative agent for the Lenders (the Financing Agreement).

On August 16, 2018, the Company and Cerberus Business Finance, LLC entered into a First Amendment to the Financing Agreement, which such amendment modified certain provisions related to the borrowing base and reporting, among other things.

On November 4, 2019, the Company and Cerberus Business Finance, LLC entered into a Second Amendment to the Financing Agreement, which modified certain provisions effective as of September 30, 2019 related to the Company’s quarterly leverage ratio financial covenant amongst other provisions. See Note 20 – Subsequent Event.

The Financing Agreement provided for senior secured credit facilities (the Senior Secured Credit Facilities) comprised of a $64.0 million term loan and up to a $25.0 million revolving line of credit. The proceeds of the term loan and $4.8 million of advances under the revolving line of credit were used to fund a portion of the DSI acquisition, and to pay fees and expenses related thereto and the closing of the Senior Secured Credit Facilities. In addition, the revolving facility is available for use by the Company and its subsidiaries for general corporate and working capital needs, and other purposes to the extent permitted by the Financing Agreement. The Senior Secured Credit Facilities have a maturity of five years.

Commencing on March 31, 2018, the outstanding term loans began to amortize in equal quarterly installments equal to $0.4 million per quarter on such date and during each of the next three quarters thereafter, $0.6 million per quarter during the next four quarters thereafter and $0.8 million per quarter thereafter, with a balloon payment at maturity. Furthermore, within ten days of the Company’s delivery of its audited annual financial statements each year, the term loans are permanently reduced pursuant to certain mandatory prepayment events including an annual “excess cash flow sweep” of 50% of the consolidated excess cash flow; 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. During the nine months ended September 30, 2019, the Company made an excess cash flow payment of $4.0 million and $1.0 million in connection with the release of an escrow amount associated with the Denville Transaction discussed in Note 5 as required by the Financing Agreement.

The obligations of the Borrower under the Senior Secured Credit Facilities are unconditionally guaranteed by the Company and certain of the Company’s existing and subsequently acquired or organized subsidiaries. The Senior Secured Credit Facilities and related guarantees are secured on a first-priority basis (subject to certain liens permitted under the Financing Agreement) by a lien on substantially all the tangible and intangible assets of the Borrower and the subsidiary guarantors, including all of the capital stock held by such obligors (subject to a 65% limitation on pledges of capital stock of foreign subsidiaries), subject to certain exceptions.

Interest on all loans under the Senior Secured Credit Facilities is paid monthly. Borrowings under the Financing Agreement accrue interest at a per annum rate equal to, at the Borrower’s option, a base rate plus 4.75% or a London Interbank Offered Rate (LIBOR) rate plus 6.25%. The loans are also subject to a 1.25% interest rate floor for LIBOR loans and a 4.25% interest rate floor for base rate loans.

The Financing Agreement contains customary representations and warranties and affirmative covenants applicable to the Company and its subsidiaries and also contains certain restrictive covenants, including, among others, limitations on the incurrence of additional debt, liens on property, acquisitions and investments, loans and guarantees, mergers, consolidations, liquidations and dissolutions, asset sales, dividends and other payments in respect of the Company’s capital stock, prepayments of certain debt, transactions with affiliates and modifications of organizational documents, material contracts, affiliated practice agreements and certain debt agreements. The Financing Agreement contains customary events of default and is subject to covenant and working capital borrowing restrictions. The Company had available borrowing capacity under the revolving line of credit of $9.4 million as of September 30, 2019.

As of September 30, 2019, the weighted effective interest rate, net of the impact of the Company’s interest rate swap, on its borrowings was 8.69%. 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. 

As of September 30, 2019 and December 31, 2018, the Company’s borrowings were comprised of:

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. The Company does not speculate using derivative instruments.

By using derivative financial instruments to hedge exposures 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 assesses interest rate risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company maintains risk management control systems to monitor interest rate risk attributable to both the Company’s outstanding or forecasted debt obligations as well as the Company’s offsetting hedge positions. The risk management control systems involve the use of analytical techniques, including cash flow sensitivity analysis, to estimate the expected impact of changes in interest rates on the Company’s future cash flows.

The Company uses variable-rate LIBOR debt to finance its operations. The debt obligations expose the Company to variability in interest payments due to changes in interest rates. Management believes that it is prudent to limit the variability of a portion of its interest payments. To meet this objective, management enters into LIBOR based interest rate swap agreements to manage fluctuations in cash flows resulting from changes in the benchmark interest rate of LIBOR. These swaps change the variable-rate cash flow exposure on the debt obligations to fixed cash flows. Under the terms of the interest rate swaps, the Company receives LIBOR based variable interest rate payments and makes fixed interest rate payments, thereby creating the equivalent of fixed-rate debt for the notional amount of its debt hedged.

As disclosed in Note 14, on January 31, 2018, the Company entered into a Financing Agreement comprised of a $64.0 million term loan and up to a $25.0 million revolving line of credit. Shortly after entering into the Financing Agreement, the Company entered into an interest rate swap contract with PNC Bank with a notional amount of $36.0 million and a termination date of January 1, 2023 in order to hedge the risk of changes in the effective benchmark interest rate (LIBOR) associated with the Company’s Term Loan. The swap contract converted specific variable-rate debt into fixed-rate debt and fixed the LIBOR rate associated with a portion of the term loan under the Financing Agreement at 2.72%. The interest rate swap was designated as a cash flow hedge instrument in accordance with ASC 815 “Derivatives and Hedging”.

The following table presents the notional amount and fair value of the Company’s derivative instruments as of September 30, 2019 and December 31, 2018:

(a) See Note 16 for the fair value measurements related to these financial instruments.

All of the Company’s derivative instruments are designated as hedging instruments. The Company has structured its interest rate swap agreements to be 100% effective and as a result, there was no impact to earnings resulting from hedge ineffectiveness. Changes in the fair value of interest rate swaps designated as hedging instruments that effectively offset the variability of cash flows associated with variable-rate, long-term debt obligations are reported in accumulated other comprehensive income (AOCI). These amounts subsequently are reclassified into interest expense as a yield adjustment of the hedged interest payments in the same period in which the related interest affects earnings. The Company’s interest rate swap agreement was deemed to be fully effective in accordance with ASC 815, and, as such, unrealized gains and losses related to these derivatives were recorded as AOCI.

The following table summarizes the effect of derivatives designated as cash flow hedging instruments and their classification within comprehensive loss for the three and nine months ended September 30, 2019 and 2018:

The following table summarizes the reclassifications out of accumulated other comprehensive loss for the three and nine months ended September 30, 2019 and 2018:

As of September 30, 2019, $0.3 million of deferred losses on derivative instruments accumulated in AOCI are expected to be reclassified to earnings during the next twelve months. Transactions and events expected to occur over the next twelve months that will necessitate reclassifying these derivatives’ losses to earnings include the repricing of variable-rate debt.

Fair value measurement is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy is established, which prioritizes the inputs used in measuring fair value into three broad levels as follows:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.

Level 3—Unobservable inputs based on the Company’s own assumptions.

The following tables present the fair value hierarchy for those assets or liabilities measured at fair value on a recurring basis:

The Company uses the market approach technique to value its financial liabilities. The Company’s financial assets and liabilities carried at fair value include derivative instruments used to hedge the Company’s interest rate risks. The fair value of the Company’s interest rate swap agreements was based on LIBOR yield curves at the reporting date. 

The following table represents a disaggregation of revenue from contracts with customers. Revenue from continuing operations originating from the following geographic areas for the nine months ended September 30, 2019 and 2018 consist of:

Deferred revenue

As of September 30, 2019 and December 31, 2018, the Company had approximately $3.6 million and $3.8 million, respectively, in deferred revenue comprised of revenue deferred from service contracts and revenue deferred from advance payments.

Changes in deferred revenue from service contracts and advance payments from customers during the nine months ended September 30, 2019 and 2018 were as follows:

Allowance for doubtful accounts

Activity in the allowance for doubtful accounts was as follows: 

Warranties are estimated and accrued at the time revenues are recorded. A rollforward of the Company’s product warranty accrual is as follows:

Income tax benefit from continuing operations was approximately $0.1 million and $0.7 million for the three months ended September 30, 2019 and 2018, respectively. The effective tax rate on continuing operations was 2.0% for the three months ended September 30, 2019 compared with 71.8% for the same period in 2018.

Income tax from continuing operations was a benefit of approximately $0.4 million and $0.4 million for the nine months ended September 30, 2019 and 2018, respectively. The effective tax rate on continuing operations was 6.5% for the nine months ended September 30, 2019, compared with 5.2% for the same period in 2018.

The difference between the Company’s effective tax rates in 2019 and 2018 compared to the U.S. statutory tax rate of 21% is primarily due to the mix of year-to-date and forecasted income or losses in the U.S. and foreign tax jurisdictions, the impact of different tax rates in certain foreign jurisdictions, the impact of the inclusion of foreign income in U.S. taxable income under the GILTI (Global Intangible Low-Taxed Income) tax rules, limitations on interest expense deductions, the adjustment of estimates for the tax impact of certain acquisitions and dispositions, the tax impact of stock compensation deductions, and, in 2018, certain non-deductible acquisition costs.

For the three months ended September 30, 2019 and 2018 and the nine months ended September 30, 2019, no income tax expense or benefit was recorded for discontinued operations. For the nine months ended September 30, 2018, income tax benefit recorded for discontinued operations was $0.9 million.

On November 4, 2019, the Company entered into a Second Amendment of its Financing Agreement with Cerberus Business Finance, LLC, as collateral agent for the Lenders, and PNC Bank, National Association, as administrative agent for the Lenders. The amendment increases the maximum leverage ratio covenant and amount of restructuring and related costs to be excluded from consolidated EBITDA and decreases the minimum fixed charge ratio covenant. Additionally, the applicable interest rate margin was modified to adjust based on the Company’s leverage ratio. The Company also agreed to extend the prepayment penalty periods and paid a $50,000 amendment fee. The amendment is effective for covenant calculations commencing with the period ended September 30, 2019, other than the change in minimum fixed charge ratio which is effective beginning the three months ended December 31, 2019.

Prior to this amendment, the Company exceeded the maximum leverage ratio covenant due primarily to costs associated with the resignation of its previous CEO in July 2019 and certain restructuring activity during the quarter ended September 30, 2019. The Company is compliant with all covenants under the Financing Agreement as of September 30, 2019 with the completion of this amendment.

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. Factors that may cause our actual results to differ materially from those in the forward-looking statements include reductions in customers’ research budgets or government funding; domestic and global economic conditions; economic, political and other risks associated with international revenues and operations; recently enacted U.S. government tax reform; currency exchange rate fluctuations; economic and political conditions generally and those affecting pharmaceutical and biotechnology industries; the seasonal nature of purchasing in Europe; our failure to expand into foreign countries and international markets; our inability to manage our growth; competition from our competitors; our substantial debt and our ability to meet the financial covenants contained in our credit facility; failure or inadequacy of the our information technology structure; impact of difficulties implementing our enterprise resource planning systems; information security incidents or cybersecurity breaches; our failure to identify potential acquisition candidates and successfully close such acquisitions with favorable pricing or integrate acquired businesses or technologies; unanticipated costs relating to acquisitions and known and unknown costs arising in connection with our consolidation of business functions and any restructuring initiatives; failure of any banking institution in which we deposit our funds or its failure to provide services; our failure to raise or generate capital necessary to implement our acquisition and expansion strategy; the failure of Biostage to indemnify us for any liabilities associated with Biostage’s business; impact of any impairment of our goodwill or intangible assets; our ability to retain key personnel; failure or inadequacy or our information technology structure; rising commodity and precious metals costs;  our ability to protect our intellectual property and operate without infringing on others’ intellectual property; exposure to product and other liability claims; global stock market volatility, currency exchange rate fluctuations and regulatory changes caused by the United Kingdom’s likely exit from the European Union; plus other factors described under the heading “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, or described in our other public filings. Our results may also be affected by factors of which we are not currently aware. 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.

Overview

Harvard Bioscience, Inc., a Delaware corporation, is a global developer, manufacturer, marketer and provider of a broad range of scientific instruments, systems, software and services used to advance life science for basic research, drug discovery, physiologic monitoring, clinical and environmental testing. Our products and services are sold to thousands of researchers in over 100 countries through our global sales organization, websites, catalogs, and through distributors including Thermo Fisher Scientific Inc., VWR and other specialized distributors. We have sales and manufacturing operations in the United States, the United Kingdom, Germany, Sweden, Spain, France, Canada, Italy and China.

Recent Developments

On an ongoing basis, we review the global economy, the life science industry, and the competitive landscape in the markets it serves to identify opportunities to align capabilities, resources and cost base in a manner that sustains and grows market share and profitability. To realize these opportunities, from time to time we undertake restructuring-type activities to transform our business.

On July 8, 2019, we announced the departure of the previous President and Chief Executive Officer and the appointment by the Board of Directors of James Green as President and Chief Executive Officer. In addition, on July 18, 2019 we announced the appointment of Michael Rossi as Chief Financial Officer, a position that had been vacant for approximately two months.

Immediately after the appointment of Mr. Green and Mr. Rossi, we began a process to identify opportunities to improve profitability, increase cash flow and enhance internal capabilities to position the business for organic growth. We anticipate finalizing our plans during the three months ended December 31, 2019. It is likely that the plans will include site consolidations, reductions in headcount and program management costs required to affect site consolidations and other business improvements in the plan.

We are currently unable to estimate with any level of certainty the total restructuring and related costs we expect to incur. These charges, substantially all of which will result in cash outlays, will be incurred as the specific actions required to execute on these initiatives are identified and approved and are expected to continue through fiscal 2020.

Recent Business Acquisitions and Dispositions

In January 2018, we acquired Data Sciences International, Inc. (DSI) for approximately $71.1 million. DSI, a St. Paul, Minnesota-based life science research company, is a recognized leader in physiologic monitoring focused on delivering preclinical products, systems, services and solutions to its customers. Its customers include pharmaceutical and biotechnology companies, as well as contract research organizations, academic labs and government researchers. This acquisition diversifies our customer base into the biopharmaceutical and contract research organization markets and offers revenue and cost synergies. The acquisition also helped to increase our gross margin.

In January 2018, we sold substantially all the assets of our wholly-owned subsidiary, Denville Scientific, Inc. (Denville) for approximately $20.0 million, which included a $3.0 million earn-out provision contingent on Denville achieving certain performance metrics with respect to 2018 and 2019 (with potential consideration of $2.0 million based on Denville’s performance in 2018, and $1.0 million based on its performance in 2019). During the nine months ended September 30, 2019, it was determined that the first potential earn-out consideration amount of $2.0 million for 2018 was not earned, and therefore the maximum we may potentially receive of the original $3.0 million earn-out provision is now $1.0 million, which, as described above, is contingent on Denville achieving certain performance metrics.

Components of Operating Income

As previously described above, on January 22, 2018, we sold substantially all the assets of our operating subsidiary, Denville. The sale of Denville represented a strategic shift that had a major effect on our operations and financial results. As such and pursuant to the accounting standards, the operating results of Denville for the nine months ended September 30, 2018 have been presented in discontinued operations in the consolidated statements of operations. Therefore, the amounts and percentages discussed below exclude the revenues and expenses of Denville unless otherwise described.

Revenues.     We generate revenues by selling apparatus, instruments, devices, systems, software, services, and consumables through distributors, and our direct sales force, websites and catalogs. Our websites and catalogs serve as the primary sales tools for our various product lines. These product lines include both proprietary manufactured products and complementary products from various suppliers. Our reputation as a leading producer in many of our manufactured products creates traffic to our website, enables cross-selling and facilitates the introduction of new products. We have field sales teams in the U.S., Canada, the United Kingdom, Germany, France, Spain and China. In those regions where we do not have a direct sales team, we use distributors. Revenues from direct sales to end users included in continuing operations represented approximately 73% and 63% of our revenues for the three months ended September 30, 2019 and 2018, respectively, and 71% and 58% of our revenues for the nine months ended September 30, 2019 and 2018, respectively.

Our products consist of instruments, consumables, and systems that are made up of several individual products. Sales prices of these products range from under $100 to over $100,000, although are mostly priced in the range of $5,000 to $15,000. They are mainly scientific instruments like spectrophotometers and plate readers that analyze light to detect and quantify a wide range of molecular and cellular processes, or apparatus like gel electrophoresis units. Our products and services also include wireless monitors, data acquisition and analysis products and software, and ancillary services including post-contract customer support, training and installation.

We use distributors for both our catalog products and our higher priced products, as well as for sales in locations where we do not have subsidiaries or where we have existing distributors in place from acquired businesses. For the three months ended September 30, 2019 and 2018, approximately 27% and 37% of our total revenues from continuing operations, respectively, were derived from sales to distributors. For the nine months ended September 30, 2019 and 2018, approximately 29% and 42% of our total revenues from continuing operations, respectively, were derived from sales to distributors.

Our revenues include 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 three months ended September 30, 2019 and 2018, approximately 85% and 86% of our revenues from continuing operations, respectively, were derived from products we manufacture and approximately 15% and 14%, respectively, were derived from complementary products we distribute. For the nine months ended September 30, 2019 and 2018, approximately 84% and 87% of our revenues from continuing operations, respectively, were derived from products we manufacture and approximately 16% and 13%, respectively, were derived from complementary products we distribute.

For the three months ended September 30, 2019 and 2018, approximately 26% and 28% of our revenues from continuing operations, respectively, were derived from sales made by our non-United States operations. For the nine months ended September 30, 2019 and 2018, approximately 27% and 32% of our revenues from continuing operations, respectively, were derived from sales made by our non-United States operations

Cost of revenues.     Cost of revenues includes material, labor and manufacturing overhead costs, obsolescence charges, packaging costs, warranty costs, shipping costs and royalties. Our cost of revenues may vary over time, including 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 typically have a higher cost of revenues as a percent of revenues because the profit is effectively shared with the original manufacturer. We anticipate that our manufactured products will continue to have a lower cost of revenues as a percentage of revenues as compared with the cost of non-manufactured products for the foreseeable future. Additionally, our cost of revenues as a percent of 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. 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.

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 resource functions. Other costs include professional fees for legal and accounting services, information technology infrastructure, 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. Grants received from governmental entities related to research projects are accounted for as a reduction in research and development expense over the period of the project. 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.

Stock-based compensation expenses.   Stock-based compensation expense related to stock options, restricted stock units, restricted stock units with a market condition and the employee stock purchase plan and was recorded as a component of cost of revenues, sales and marketing expenses, general and administrative expenses, research and development expenses, and income (loss) from discontinued operations.

Stock-based compensation expense for the three months ended September 30, 2019 and 2018 was $1.0 million and $0.5 million, respectively. Stock-based compensation expense for the nine months ended September 30, 2019 and 2018 was $2.2 million for both periods, respectively. Included in stock-based compensation for the nine months ended September 30, 2018 was $0.2 million related to discontinued operations.

Selected Results of Operations

Three Months Ended September 30, 2019 compared to Three Months Ended September 30, 2018

Unless otherwise described, the amounts and percentages in the table above and the amounts and percentages discussed below exclude the revenues and expenses of Denville, which is presented in discontinued operations in the Consolidated Statements of Operations and Comprehensive Loss.

Revenues

Revenues for the three months ended September 30, 2019 were $27.4 million, a decrease of approximately $1.2 million, or 4.3%, compared to revenues of $28.6 million for the three months ended September 30, 2018.  The decrease in revenue was primarily due to timing of large equipment orders in Europe and lower volume with contract resource organizations due to all-time high sales to these customers in the prior year. These reductions were partially offset by sales growth in North America across multiple product lines. The impact of currency translation negatively impacted revenues in the period by approximately $0.4 million or (1.4)% of total revenue.

Cost of revenues

Cost of revenues were $12.4 million for the three months ended September 30, 2019, a decrease of $0.4 million, or 3.0%, compared with $12.8 million for the three months ended September 30, 2018. Gross margin as a percentage of revenues decreased to 54.6% for the three months ended September 30, 2019 compared with 55.2% for 2018. The decrease in gross margin was primarily due to reduced fixed cost absorption associated with lower revenue and higher inventory reserves, including inventory write-offs associated with the consolidation of our North Carolina facility.

Sales and marketing expenses

Sales and marketing expenses decreased $0.7 million or 12.1% to $5.3 million for the three months ended September 30, 2019 compared to $6.0 million during the same period in 2018. The decrease in these expenses was primarily due to decreases in employee-related expenses and variable sales costs as compared to the three months ended September 30, 2018.

General and administrative expenses

General and administrative expenses were $6.6 million for the three months ended September 30, 2019, an increase of $1.9 million, or 41.9%, compared with $4.7 million for the three months ended September 30, 2018. The increase was primarily due to higher employee severance costs in the three months ended September 30, 2019, including costs associated with the resignation of our CEO in July 2019.

Research and development expenses

Research and development expenses were $2.6 million for the three months ended September 30, 2019, and did not change materially as compared to the prior period.

Amortization of intangible assets

Amortization of intangible asset expenses was $1.4 million for the three months ended September 30, 2019 and 2018.

Impairment charges

During the three months ended September 30, 2019, we recognized a charge of $0.5 million related to the impairment of certain intangible assets as a result of the decision to discontinue one of our product lines and to close our facility in North Carolina. There was no similar impairment charge recognized in the same period in the prior year.

Other expense, net

Other expense, net, was $1.3 million and $1.8 million for the three months ended September 30, 2019 and 2018, respectively. Other expense, net, consists primarily of interest expense which decreased slightly in the three months ended September 30, 2019 as compared to the same period in the prior year primarily due to lower outstanding debt balances.

Income taxes

Income tax benefit from continuing operations was approximately $0.1 million and $0.7 million for the three months ended September 30, 2019 and 2018, respectively. The effective income tax rate was 2.0% and 71.8% for the three months ended September 30, 2019 and 2018, respectively. The difference between our effective tax rates in 2019 and 2018 compared to the U.S. statutory tax rate of 21% is primarily due to the mix of year-to-date and forecasted income or losses in the U.S. and foreign tax jurisdictions, the impact of different tax rates in certain foreign jurisdictions, the impact of the inclusion of foreign income in U.S. taxable income under the GILTI (Global Intangible Low-Taxed Income) tax rules, limitations on interest expense deductions, the adjustment of estimates for the tax impact of certain acquisitions and dispositions, the tax impact of stock compensation deductions, and, in 2018, certain non-deductible acquisition costs. 

Selected Results of Operations

Nine Months Ended September 30, 2019 compared to Nine Months Ended September 30, 2018

Unless otherwise described, the amounts and percentages in the table above and those amounts and percentages discussed below exclude the revenues and expenses of Denville, which is presented in discontinued operations in the Consolidated Statements of Operations and Comprehensive Loss.

Revenues

Revenues for the nine months ended September 30, 2019 were $85.2 million, a decrease of approximately $1.7 million, or 2.0%, compared to revenues of $86.9 million for the nine months ended September 30, 2018.  

The decrease in revenue for the nine months ended September 30, 2019 is due to lower sales volume in Europe as well as lower volume with contract resource organizations due to customer consolidation and all-time high sales to these customers in the third quarter of 2018. These reductions were partially offset by growth in sales of cellular and molecular discovery technologies in North America. Additionally, revenues for the nine months ended September 30, 2019 included nine months of revenues from DSI as compared to eight months of revenues from DSI included in the nine months ended September 30, 2018. The impact of currency translation negatively impacted revenues in the nine months ended September 30, 2019 by approximately $1.6 million.

Cost of revenues

Cost of revenues decreased $4.4 million, or 10.3%, to $38.1 million for the nine months ended September 30, 2019 compared with $42.5 million for the nine months ended September 30, 2018. Gross margin as a percentage of revenues increased to 55.3% for the nine months ended September 30, 2019 compared with 51.1% for the nine months ended September 30, 2018. Cost of revenues for the nine months ended September 30, 2018, included approximately $3.8 million related to a purchase accounting inventory fair value step up amortization. This inventory fair value step-up was fully recognized into cost of revenues over one inventory turn, or approximately six months. Excluding the effect of the step-up amortization, gross profit margin decreased by approximately $1.2 million which was primarily due to reduced fixed cost absorption associated with lower revenue as well as product mix.

Sales and marketing expenses

Sales and marketing expenses decreased $0.6 million or 3.4% to $17.4 million for the nine months ended September 30, 2019 compared to $18.0 million during the same period in 2018. Sales and marketing expenses for the nine months ended September 30, 2019 included nine months of costs from DSI as compared to eight months of costs from DSI in the nine months ended September 30, 2018. The decrease in costs in the nine months ended September 30, 2019, was primarily due to decreases in employee-related expenses, variable sales costs and lower stock-based compensation as compared to the prior period.

General and administrative expenses

General and administrative expenses increased $1.9 million or 12.5% to $17.2 million for the nine months ended September 30, 2019 compared to $15.3 million during the same period in 2018. Costs for the nine months ended September 30, 2019 included nine months of costs from DSI as compared to eight months of costs from DSI in the nine months ended September 30, 2018. Other changes in the nine months ended September 30, 2019 included increases in restructuring related employee expenses and stock-based compensation as compared to the nine months ended September 30, 2018.

Research and development expenses

Research and development expenses were $8.0 million for nine months period ended September 30, 2019 and did not change materially as compared to the nine months ended September 30, 2018.

Amortization of intangible assets

Amortization of intangible asset expenses was $4.3 million and $4.0 million for the nine months ended September 30, 2019 and 2018, respectively. The increase of $0.3 million in amortization of intangible assets expense was primarily due to the impact of the DSI acquisition, as the nine months ended September 2019 included nine months of amortization expenses from DSI as compared to eight months of such expenses in the nine months ended September 30, 2018.

Impairment charges

During the nine months ended September 30, 2019, we recognized an impairment charge of $1.4 million consisting of a charge of $0.9 million related to our in-process research and development intangible assets as a result of our on-going evaluation of our research and development activities, and a charge of $0.5 million related to the impairment of certain intangible assets due to the decision to discontinue one of our product lines and to cease operations in our facility in Raleigh, North Carolina. There were no similar impairment charges recognized in the same period in the prior year.

Other expense, net

Other expense, net, was $4.3 million and $7.3 million for the nine months ended September 30, 2019 and 2018, respectively. The decrease of $2.9 million in other expense, net was primarily due to transaction costs incurred in the nine months ended September 30, 2018 of approximately $2.8 million related to the acquisition of DSI and divestiture of Denville. These decreases were partially offset by an increase in interest expense in 2019 as a result of higher average debt balances due to the additional debt incurred to finance the acquisition of DSI in January 31, 2018.

Income taxes

Income tax from continuing operations was a benefit of $0.4 million and $0.4 million for the nine months ended September 30, 2019 and 2018, respectively. The effective income tax rate was 6.5% for the nine months ended September 30, 2019, compared with 5.2% for the same period in 2018. The difference between our effective rates in 2019 and 2018 compared to the U.S. statutory tax rate of 21% is primarily due to the mix of year-to-date and forecasted income or losses in the U.S. and foreign tax jurisdictions, the impact of different tax rates in certain foreign jurisdictions, the impact of inclusion of foreign income in U.S. taxable income under the GILTI (Global Intangible Low-Taxed Income) tax rules, limitations on interest expense deductions, the adjustment of estimates for the tax impact of certain acquisitions and dispositions, the tax impact of stock compensation deductions and windfalls, and in 2018, certain non-deductible acquisition costs.

Income from discontinued operations

Discontinued operations resulted in income of $1.8 million for the nine months ended September 30, 2018. On January 22, 2018, we sold substantially all the assets of Denville, for approximately $20.0 million, which included a $3.0 million earn-out provision contingent on Denville achieving certain performance metrics with respect to 2018 and 2019 (the Denville Transaction). The results of Denville were presented in discontinued operations for the nine months ended September 30, 2018. The income from discontinued operations for the nine months ended September 30, 2018 included a gain on sale of Denville of $1.3 million and an income tax benefit of $0.9 million. The income tax benefit was mainly due to the reversal of deferred tax liabilities associated with indefinite lived intangibles following the Denville Transaction.

Liquidity and Capital Resources

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

On January 22, 2018, we sold the operations of Denville, and received approximately $15.7 million, net of cash on hand. Simultaneously, we retired existing debt of approximately $11.9 million. On January 31, 2018, we entered into a financing agreement, which comprised of a $64.0 million term loan and up to a $25.0 million line of credit. Finally, on January 31, 2018, we acquired DSI for approximately $67.4 million, net of cash acquired.

As of September 30, 2019, we held cash and cash equivalents from continuing operations of $6.8 million, compared with $8.2 million at December 31, 2018. As of September 30, 2019 and December 31, 2018, we had $54.3 million and $60.8 million of borrowings outstanding under our credit facility, net of deferred financing costs, respectively. Total debt, net of cash and cash equivalents was $47.5 million at September 30, 2019, compared to $52.6 million at December 31, 2018. In addition, we had an underfunded United Kingdom pension liability of approximately $0.9 million at September 30, 2019 and December 31, 2018, respectively.

As of September 30, 2019 and December 31, 2018, cash and cash equivalents held by our foreign subsidiaries was $2.3 million and $3.2 million, respectively. As a result of the 2017 Tax Act, post-2017 dividends from qualifying Controlled Foreign Corporations are no longer taxed in the U.S. However, any dividends to the U.S. must still be assessed for withholding tax liability as well as income state tax liability. As a result of our assertion, we determined the potential state income tax liability related to available cash balances at foreign subsidiaries would be immaterial in both 2019 and 2018.

Our operating activities provided cash of $5.8 million and $0.3 million for the nine months ended September 30, 2019 and 2018, respectively. The increase in net cash flow from operations was primarily due to deal fees, integration costs and other payments associated with the DSI acquisition and Denville sale in the first half of 2018.

Our investing activities provided cash of $0.2 million and used cash of $(53.2) million for the nine months ended September 30, 2019 and 2018, respectively. Investing activities during the nine months ended September 30, 2019 primarily consisted of cash used for capital expenditures, and the receipt of $1.0 million in connection with the release of an escrow amount associated with the Denville Transaction. Investing activities during the nine months ended September 30, 2018 primarily consisted of $68.0 million paid for the acquisition of DSI and $15.8 million received from the disposition of Denville. We spent $0.8 million and $0.9 million on capital expenditures during the nine months ended September 30, 2019 and 2018, respectively.

Our financing activities have historically consisted of borrowings and repayments under our revolving credit facility and term loans, payments of debt issuance costs and the issuance of common stock. During the nine months ended September 30, 2019, financing activities used cash of $7.2 million, compared with $53.4 million of cash provided by financing activities for the nine months ended September 30, 2018. During the nine months ended September 30, 2019, we borrowed $4.3 million and repaid $11.1 million of debt, including an excess cash flow payment of $4.0 million and a payment of $1.0 million in connection with the release of an escrow amount associated with the Denville Transaction as required by the Financing Agreement, and ended the quarter with $54.3 million of borrowings, net of deferred financing costs of $1.3 million. During the nine months ended September 30, 2018 we borrowed $70.8 million, repaid $19.9 million of debt and ended the quarter with $61.0 million of borrowings, net of deferred financing costs of $1.7 million. Net cash paid for tax withholdings from the issuance from common stock related to the vesting of restricted stock units was $0.4 million for the nine months ended September 30, 2019. Net cash proceeds from the issuance of common stock for the nine months ended September 30, 2018 was $2.6 million.

Borrowing Arrangements

See Note 14 to the consolidated financial statements for a detailed discussion regarding our financing agreement and credit facilities.

As of September 30, 2019 and December 31, 2018, we had borrowings of $55.6 million and $62.4 million respectively, outstanding. We had available borrowing capacity under the revolving line of credit of $9.4 million as of September 30, 2019. As of September 30, 2019, the weighted effective interest rate, net of the impact of our interest rate swap, on our borrowings was 8.69%.

On November 4, 2019, we entered into a Second Amendment to the Financing Agreement with Cerberus Business Finance, LLC, which modified certain provisions effective as of September 30, 2019 related to our quarterly leverage ratio financial covenant amongst other provisions.

In anticipation of the restructuring and related costs in the third quarter and future periods associated with the actions described in the accompanying consolidated financial statements, we began discussions in September 2019 with our lender to request a modification of the terms of the Credit Agreement to exclude the impact of these costs from the maximum leverage ratio covenant. On November 4, 2019, we entered into a Second Amendment of the Financing Agreement with Cerberus Business Finance, LLC, as collateral agent for the Lenders, and PNC Bank, National Association, as administrative agent for the Lenders. The Amendment increases the maximum leverage ratio and amount of restructuring and related costs to be excluded from consolidated EBITDA and decreases the minimum fixed charge ratio. Additionally, the applicable interest rate margin was modified to adjust based on our leverage ratio. We also agreed to extend the prepayment penalty periods and paid a $50,000 amendment fee. The amendment is effective for covenant calculations commencing with the period ended September 30, 2019, other than the change in minimum fixed charge ratio which is effective beginning the three months ended December 31, 2019.

Prior to this amendment, we exceeded the maximum leverage ratio covenant due primarily to costs associated with the resignation of the previous CEO in July 2019 and certain restructuring activity in the period. We are compliant with all covenants under the Financing Agreement as of September 30, 2019 with the completion of this amendment.  We expect to be in compliance with covenants and other terms under the amended credit agreement for at least the next 12 months.

Based on our current operations and current operating plans, we expect that our available cash, cash generated from current operations and debt capacity will be sufficient to finance current operations, any costs associated with restructuring activities resulting from initiatives described in “Recent Developments” above and capital expenditures for the next 12 months and beyond. 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.

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, 2018, which was filed with the SEC on March 18, 2019.

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, especially the British pound, the euro, the Canadian dollar and the Swedish krona.