HARVARD BIOSCIENCE INC - Quarter Report: 2020 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

For the quarterly period ended March 31, 2020

For the transition period from                 to                 

Commission file number 001-33957

HARVARD BIOSCIENCE, INC.

(Exact Name of Registrant as Specified in Its Charter)

84 October Hill Road, Holliston, Massachusetts 01746

(Address of Principal Executive Offices, including zip code)

(508) 893-8999

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES ☒     NO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   ☒ YES      ☐ NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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 ☒

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

As of April 30, 2020, there were 38,380,403 shares of the registrant’s common stock issued and outstanding.

HARVARD BIOSCIENCE, INC.

FORM 10-Q

For the Three Months Ended March 31, 2020

INDEX

PART I. FINANCIAL INFORMATION

HARVARD BIOSCIENCE, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except share and per share data)

See accompanying notes to consolidated financial statements.

HARVARD BIOSCIENCE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited, in thousands, except share and per share data)

See accompanying notes to consolidated financial statements.

HARVARD BIOSCIENCE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited, in thousands)

See accompanying notes to consolidated financial statements.

HARVARD BIOSCIENCE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

See accompanying notes to consolidated financial statements.

HARVARD BIOSCIENCE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

On January 31, 2018, the Company entered into a financing agreement by and among the Company and certain subsidiaries of the Company as borrowers (collectively, the Borrower), certain subsidiaries of the Company as guarantors, various lenders from time to time (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.

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 subject to available borrowing base. 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. Borrowings available under the revolving line of credit are limited to a borrowing base derived from the Company’s eligible accounts receivable and inventory, as defined in the Financing Agreement. As of March 31, 2020, borrowings available under the revolving facility were $4.6 million.

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 in 2023. 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 three months ended March 31, 2020, the Company made an excess cash flow payment of $4.0 million. During the year ended December 31, 2019, the Company made 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.

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 LIBOR index is expected to be discontinued by the end of calendar year 2021. The terms of the revolving credit facility allow for a replacement rate if the LIBOR index is discontinued.

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 is compliant with all covenants under the Financing Agreement as of March 31, 2020.

The Company’s covenants include a requirement to maintain a maximum leverage ratio among other financial and non-financial covenants, as defined in the Financing Agreement. The maximum permitted leverage is the ratio of total debt to consolidated EBITDA, as defined in the Financing Agreement, with a maximum ratio of 3.50 as of March 31, 2020, stepping down to 3.25 for the three months ended June 30, 2020 and all quarters thereafter. Due to the negative impact of COVID-19 on revenue and consolidated EBITDA, the Company’s leverage ratio has increased, and the gap between the leverage ratio and maximum permitted leverage has reduced.

Based on the Company’s current operating plans, including actions taken to mitigate the impact of COVID-19, it expects that available cash, cash generated from current operations and debt capacity will be sufficient to finance current operations, any costs associated with restructuring activities and capital expenditures. This assessment includes consideration of the Company’s best estimates of the impact of the COVID-19 pandemic on its financial results. If the negative impact of COVID-19 is more significant than anticipated it may impact the Company’s ability to comply with financial covenants in the future, which would require the Company to seek an amendment or waivers from its lenders, limit access to or require accelerated repayment of the existing credit facilities, or require the Company to pursue alternative financing. There are no assurances that any such alternative financing, if required, could be obtained at terms acceptable to the Company, or at all.

As of March 31, 2020, the weighted effective interest rate, net of the impact of the Company’s interest rate swap, on its borrowings was 8.40%. 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 March 31, 2020, and December 31, 2019, the Company’s borrowings were comprised of:

The following table represents a disaggregation of revenue from contracts with customers. Revenue originating from the following geographic areas for the three months ended March 31, 2020 and 2019 consist of:

Deferred revenue

The Company had approximately $3.7 million in deferred revenue from service contracts and advance payments as of March 31, 2020 and 2019, respectively. Changes in deferred revenue from service contracts and advance payments from customers during the period were as follows:

Allowance for Doubtful Accounts

Allowance for doubtful accounts is based on the Company’s assessment of the collectability of accounts receivable. A rollforward of allowance for doubtful accounts is as follows:

Concentrations

No customer accounted for more than 10% of the revenues for the three months ended March 31, 2020, and 2019. At March 31, 2020, and 2019, no customer accounted for more than 10% of net accounts receivable.

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; the impact of the COVID-19 pandemic on out business; 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, 2019, 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.

Unless the context requires otherwise, references in this Quarterly Report to “we,” “us” and “our” refer to Harvard Bioscience, Inc., and its subsidiaries.

Overview

Harvard Bioscience is a leading developer, manufacturer and seller of technologies, products and services that enable fundamental research, discovery, and pre-clinical testing for drug development. Our customers range from renowned academic institutions and government laboratories, to the world’s leading pharmaceutical, biotechnology and contract research organizations. With operations in North America and Europe, we sell through a combination of direct and distribution channels to customers around the world.

Recent Developments

COVID-19

On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) as a pandemic. The COVID-19 pandemic has had a negative impact on our operations to date and the future impacts of the pandemic and any resulting economic impact are largely unknown and rapidly evolving. Since the COVID-19 outbreak in the United States, Europe and elsewhere, many customers, particularly academic research institutions, have been unable to maintain laboratory work which has, and will continue to, negatively impact our sales. Additionally, to ensure business continuity while maintaining a safe environment for employees aligned with guidance from government and health organizations, we transitioned the majority of our workforce to work-from-home while implementing social distancing requirements and other measures in factories to allow manufacturing and other personnel essential to production to continue work within our facilities. Business travel was significantly reduced during this period. While we have maintained operations under these conditions, these measures represent disruptions which can impact productivity including sales and marketing activities. Accordingly, these conditions in addition to the overall impact on the global economy has negatively impacted our results of operations and cash flows.

As a result of market and economic conditions, in accordance with the guidelines set forth in ASC 350 and ASC 360, we performed an analysis for potential interim impairment indicators of our intangible and other long-lived assets. As of March 31, 2020, we concluded there were no impairments of goodwill, other indefinite-lived intangibles, or long-lived assets that resulted from triggering events due to COVID-19. We will continue to monitor our assets for potential impairment through the remainder of 2020.

We currently believe revenue for the three months ending June 30, 2020 will decline significantly year over year due to the conditions noted and to begin recovering as academic research institutions reopen. In April 2020, we implemented a COVID-19 mitigation plan designed to reduce expenses by approximately $3.0 million for the three months ending June 30, 2020. Actions taken to date include work hour and salary reductions, reductions-in-force and a realignment of our organizational structure to reduce management layers. These cost reductions are in addition to the significant restructuring actions we initiated in the fourth quarter of 2019 as discussed below. If business interruptions resulting from COVID-19 were to be prolonged or expanded in scope, our business, financial condition, results of operations and cash flows would be negatively impacted. We will continue to actively monitor this situation and will implement actions necessary to maintain business continuity. For a further discussion of potential risks to our business from the COVID-19 pandemic, see Item 1A “Risk Factors” in this quarterly reporting on Form 10-Q.

Restructuring Plan

On July 8, 2019, we announced the departure of the previous President and Chief Executive Officer and the appointment by the Board of Directors of James Green as President and Chief Executive Officer. In addition, on July 18, 2019 we announced the appointment of Michael Rossi as Chief Financial Officer.

Immediately after the appointment of Mr. Green and Mr. Rossi, we began a process to identify opportunities to improve profitability, increase cash flow and enhance internal capabilities to position the business for organic growth. As a result of this assessment, in September 2019 we announced a strategic action plan and financial targets for 2020 and 2021 (the “Restructuring Plan ”). Key elements of this plan include:

The Restructuring Plan includes consolidation of our Connecticut manufacturing plant to our existing Massachusetts site, downsizing of operations in the United Kingdom and a reduction in force across the business amounting to a 10% overall reduction in headcount. A portion of the savings generated will be reinvested to drive profitable growth. We have continued to execute our Restructuring Plan during the COVID-19 pandemic, and expanded the scope of the restructuring by realigning our organizational structure to reduce management layers and accelerate our efforts to move to a leaner organization and operation as anticipated within our overall original plans.

We believe these strategic actions will significantly improve our profitability and position the business for improved organic revenue growth. We do not expect to pursue new acquisitions or incur significant capital expenditures until the operational and commercial improvement elements of the strategic action plan are achieved.

Components of Operating Income

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 represented approximately 64% and 68% of our revenues for the three months ended March 31, 2020 and March 31, 2019, 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 March 31, 2020 and March 31, 2019, approximately 36% and 32% of our total revenues, respectively, were derived from sales to distributors.

For the three months ended March 31, 2020 and 2019, approximately 83% and 84% of our revenues, respectively, were derived from products we manufacture and approximately 17% and 16%, respectively, 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 three months ended March 31, 2020 and 2019, approximately 31% and 30% of our revenues, 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 to realize the potential of new technologies that we develop, license or acquire for existing markets.

Selected Results of Operations

In the table below, we provide an overview of selected operating metrics for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019. 

Revenues

Revenues for the three months ended March 31, 2020 were $23.8 million, a decrease of approximately $4.4 million, or 16%, compared to revenues of $28.2 million for the three months ended March 31, 2019. The decrease in revenue was primarily due to the impact of COVID-19 and in particular, lower sales to academic labs and other institutions that are temporarily closed as a result of the pandemic.

Cost of revenues

Cost of revenues were $10.8 million for the three months ended March 31, 2020, a decrease of $1.2 million, or 12% compared with $12.0 million for the three months ended March 31, 2019. Gross margin as a percentage of revenues decreased to 54.6% for the three months ended March 31, 2020 compared with 57.3% for 2019. The decrease in gross margin was primarily due to reduced fixed cost absorption associated with the reduction in sales to academic labs and institutions.

Sales and marketing expenses

Sales and marketing expenses decreased $0.7 million or 11.5% to $5.6 million for the three months ended March 31, 2020 compared to $6.3 million during the same period in 2019. The decrease in these expenses was primarily due to decreased employee-related expenses and variable sales costs and travel related costs as compared to the three months ended March 31, 2019.

General and administrative expenses

General and administrative expenses were $6.8 million for the three months ended March 31, 2020, an increase of $1.0 million, or 16.5%, compared with $5.8 million for the three months ended March 31, 2019. The increase was primarily due to higher employee severance costs and increased stock-based compensation which were partially offset by lower bad debt expense, as compared to the three months ended March 31, 2019.

Research and development expenses

Research and development expenses were $2.5 million for the three months ended March 31, 2020, a decrease of $0.2 million, or 9.6%, compared with $2.7 million for the three months ended March 31, 2019. The decrease was primarily due to lower employee compensation and related costs.

Amortization of intangible assets

Amortization of intangible asset expenses was $1.4 million for the three months ended March 31, 2020 and did not change materially as compared to the three months ended March 31, 2019.

Interest expense

Interest expense was $1.3 million for the three months ended March 31, 2020, a decrease of $0.1 million, or 7.5%, compared with $1.4 million for the three months ended March 31, 2019. The decrease was primarily due to reduced borrowings under our financing agreement.

Income tax expense

Income tax expense was approximately $0.1 million and $0.6 million for the three months ended March 31, 2020 and 2019, respectively. The effective tax rate was (1.2) % for the three months ended March 31, 2020 compared with (32.1) % for the same period in 2019. The difference between our effective tax rates in 2020 and 2019 compared to the U.S. statutory tax rate of 21% is primarily due to the mix of 2020 forecasted income or losses in the U.S. and foreign tax jurisdictions, the impact of different tax rates in certain foreign jurisdictions and the impact of the inclusion of foreign income in U.S. taxable income under the GILTI (Global Intangible Low-Taxed Income) tax rules. Changes made by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) to the limitation on interest expense deductions, including a retroactive change to our calendar year 2019 deduction, also impacted the 2020 effective tax rate.

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 31, 2018, we and certain of our subsidiaries entered into a financing agreement with Cerberus Business Finance, LLC, as collateral agent and administrative agent for the lenders under the agreement (the “Financing Agreement”), which comprised of a $64.0 million term loan which was used in connection with the acquisition of DSI in 2018 and a line of credit of up to $25.0 million.

As of March 31, 2020, we held cash and cash equivalents of $5.9 million, compared with $8.3 million at December 31, 2019. As of March 31, 2020, and December 31, 2019, we had $50.2 million and $55.0 million of borrowings outstanding under our credit facility, respectively. Total debt, net of cash and cash equivalents was $44.3 million at March 31, 2020, compared to $46.7 million at December 31, 2019.

As of March 31, 2020, and December 31, 2019, cash and cash equivalents held by our foreign subsidiaries was $2.2 million and $3.5 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 our foreign subsidiaries would be immaterial.

Our operating activities provided cash of $2.8 million and $2.0 million for the three months ended March 31, 2020 and 2019, respectively. The increase in net cash flow from operations was primarily due to reductions in working capital as a result of lower revenue volume due to COVID-19 as well as improved cash management disciplines.

Our investing activities used cash of $0.2 million for each of the three months ended March 31, 2020 and 2019, primarily consisting of capital expenditures.

Our financing activities consisted of repayments under our term loan and tax payments related to net share settlements of equity awards. During the three months ended March 31, 2020, we repaid $4.8 million of debt, which included an excess cash flow payment of $4.0 million and a payment of $0.8 million as required by the Financing Agreement, and ended the quarter with $49.1 million of borrowings, net of deferred financing costs of $1.1 million. During the three months ended March 31, 2019 we repaid $4.6 million of debt and ended the quarter with $56.3 million of borrowings, net of deferred financing costs of $1.5 million.

Borrowing Arrangements

See Note 12 to the consolidated financial statements for a detailed discussion regarding our Financing Agreement and credit facilities.

As of March 31, 2020, we had borrowings of $49.1 million, net of deferred financing costs of $1.1 million and as of December 31, 2019, we had borrowings of $53.8 million, net of deferred financing costs of $1.2 million. We had available borrowing capacity under the revolving line of credit of $4.6 million as of March 31, 2020. As of March 31, 2020, the weighted effective interest rate on our borrowings, net of the impact of our interest rate swap, was 8.4%.

We are compliant with all covenants under the Financing Agreement as of March 31, 2020.

Our covenants include a requirement to maintain a maximum leverage ratio among other financial and non-financial covenants, as defined in the Financing Agreement. The maximum permitted leverage is the ratio of total debt to consolidated EBITDA, as defined in the Financing Agreement, with a maximum ratio of 3.50 as of March 31, 2020, stepping down to 3.25 for the three months ended June 30, 2020 and all quarters thereafter. Due to the negative impact of COVID-19 on revenue and consolidated EBITDA, our leverage ratio has increased, and the gap between the leverage ratio and maximum permitted leverage has reduced.

Based on our current operating plans, including actions taken to mitigate the impact of COVID-19, 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 and capital expenditures for at least the next 12 months. This assessment includes consideration of our best estimates of the impact of the COVID-19 pandemic on our financial results described above. If the negative impact of COVID-19 is more significant than anticipated it may impact our ability to comply with financial covenants in the future, which would require us to seek an amendment or waivers from our lenders, limit access to or require accelerated repayment of the existing credit facilities, or require us to pursue alternative financing. There are no assurances that any such alternative financing, if required, could be obtained at terms acceptable to us, or at all.

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, 2019, which was filed with the SEC on March 16, 2020.

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.

During the three months ended March 31, 2020, changes in foreign currency exchange rates resulted in an unfavorable translation effect on our consolidated revenues and on our consolidated net loss. Changes in foreign currency exchange rates resulted in an unfavorable effect on revenues of approximately $0.2 million and a favorable effect on expenses of approximately $0.1 million.

During the three months ended March 31, 2019, changes in foreign currency exchange rates resulted in an unfavorable translation effect on our consolidated revenues and on our consolidated net loss. Changes in foreign currency exchange rates resulted in an unfavorable effect on revenues of approximately $0.8 million and a favorable effect on expenses of approximately $0.6 million.

The gain associated with the translation of foreign equity into U.S. dollars included as a component of comprehensive loss during the three months ended March 31, 2020, was approximately $1.6 million, compared to a gain of less than $0.1 million for the three months ended March 31, 2019.

Exchange rate fluctuations recorded in other expense, net consist of approximately $0.2 million of currency gains during the three months ended March 31, 2020 and $0.2 million of currency losses during the same period in 2019. 

Recently Issued Accounting Pronouncements

For information on recent accounting pronouncements impacting our business, see "Recent Accounting Pronouncements" included under Note 2 to our Condensed Consolidated Financial Statements.

Most of our manufacturing and testing of products occurs in our facilities in the United States, Germany, Sweden and Spain. We sell our products globally through our distributors, direct sales force, websites and catalogs. As a result, our financial results are affected by factors such as changes in foreign currency exchange rates and weak economic conditions in foreign markets.

We collect amounts representing a substantial portion of our revenues and pay amounts representing a substantial portion of our operating expenses in foreign currencies. As a result, changes in currency exchange rates from time to time may affect our operating results.

We are exposed to market risk from changes in interest rates primarily through our financing activities. As of March 31, 2020, we had $50.2 million outstanding under our Financing Agreement. We entered into an interest rate swap contract with PNC bank with an initial notional amount of $36.0 million and a termination date of January 31, 2023 in order to hedge a portion of the risk of changes in the effective benchmark interest rate (LIBOR) associated with the Financing Agreement. The notional value of the interest rate swap contract as of March 31, 2020 was $27.3 million. 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%.

As of March 31, 2020, the weighted effective interest rates, net of the impact of our interest rate swaps, on our Term Loan was 8.40%. Assuming no other changes which would affect the margin of the interest rate, the estimated effect of interest rate fluctuations on outstanding borrowings under our Financing Agreement as of March 31, 2020 is quantified and summarized as follows:

Evaluation of Disclosure Controls and Procedures

As of March 31, 2020, the end of the period covered by this report, our management, including our Chief Executive Officer and our Chief Financial Officer, reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Exchange Act). Based upon management's review and evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the first quarter of fiscal 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating our controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud within the Company have been detected.

PART II. OTHER INFORMATION

The information included in Note 18 to the Condensed Consolidated Financial Statements (Unaudited) included in Part I, Item 1 of this quarterly report is incorporated herein by reference.

You should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, which could materially affect our business, financial position, or future results of operations. The risks described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial position, or future results of operations. The risk factors set forth below update, and should be read together with, the risk factors described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

The novel coronavirus (COVID-19) outbreak has significantly impacted worldwide economic conditions and has negatively impacted our business, financial condition and results of operations.

Our operations expose us to risks associated with pandemics, epidemics or other public health emergencies, such as the recent outbreak of COVID-19. In March 2020, the World Health Organization categorized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The outbreak has resulted in governments around the world implementing increasingly stringent measures to help combat the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments, school closures, and other measures.

Many of our products and services are considered to be essential under federal, state and local guidelines. Accordingly, we currently continue to operate across our global footprint; however, given recent government regulations, many of our global facilities are not able to operate at optimal capacity. Notwithstanding our continued operations, COVID-19 has begun to have and may have further negative impacts on our operations, supply chain, transportation networks and customers, which may compress our margins, including as a result of preventative and precautionary measures that we, other businesses and governments are taking. The COVID-19 outbreak is a widespread public health crisis that is adversely affecting the economies and financial markets of many countries which may result in a period of regional, national, and global economic slowdown or regional, national, or global recessions. Any resulting economic downturn or slowdown could curtail or delay spending, adversely affect demand for our products and contribute to volatile supply and demand conditions affecting prices and volumes in the markets for our products, services and raw materials. The progression of this matter could also negatively impact our business or results of operations through the temporary closure of our operating locations or those of our customers or suppliers, disrupting raw materials to our factories and assembly plants, inhibiting the manufacture and assembly of products at our plants and distribution centers, delaying or preventing deliveries to our customers, and interruption of our ability to provide servicing and installations of equipment due to travel restrictions, among others.

In addition, the ability of our employees and employees of our suppliers and customers to work may be significantly impacted by individuals contracting or being exposed to COVID-19, or as a result of the control measures noted above, which may significantly hamper our production throughout the supply chain and constrict sales channels. Our customers may be directly impacted by business curtailments or weak market conditions and may not be willing or able to fulfill their contractual obligations or open letters of credit and may seek to modify or terminate their contracts with us. We may also experience delays in obtaining letters of credit or processing letter of credit payments due to the impacts of COVID-19 on foreign issuing and U.S. intermediary banks. In addition, the COVID-19 pandemic may create an increased risk of customer defaults or delays in payments. Our customers may terminate or amend their agreements for the purchase or service of our products due to bankruptcy, lack of liquidity, lack of funding, operational failures, or other reasons.

Further, while we currently do not anticipate issues under our credit agreements, events resulting from the effects of the COVID-19 pandemic may negatively impact our ability to comply with our financial covenants in the future, which could lead us to seek an amendment or waivers from our lenders, limit access to or require accelerated repayment of our existing credit facilities, or require us to pursue alternative financing. We have no assurance that any such alternative financing, if required, could be obtained at terms acceptable to us, or at all, including because of the effects of COVID-19 on financial markets at such time.

The extent to which COVID-19 may adversely impact our business depends on future developments, which are highly uncertain and unpredictable, including new information concerning the severity of the outbreak and the effectiveness of actions globally to contain or mitigate its effects. As we cannot predict the duration or scope of the COVID-19 pandemic, the estimated negative impact to our results of operations, cash flows and financial position cannot be reasonably estimated but might be material and last for an extended period of time.

There were no unregistered sales of equity securities during the period covered by this report.

None.

Not applicable.

None.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by undersigned thereunto duly authorized.

Date: May 8, 2020

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