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HARVARD BIOSCIENCE INC - Quarter Report: 2021 June (Form 10-Q)

hboi20210630_10q.htm
 
 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

 

FORM 10-Q

 

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2021

 

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from _____ to _____           

 

Commission file number 001-33957

 

HARVARD BIOSCIENCE, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

04-3306140

(State or other jurisdiction of

(I.R.S. Employer

Incorporation or organization)

Identification No.)

 

84 October Hill Road, Holliston, Massachusetts 01746

(Address of Principal Executive Offices, including zip code)

 

(508) 893-8999

(Registrant’s telephone number, including area code)

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

HBIO

The Nasdaq Global Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ☒     No ☐

 

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

 

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

 

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company ☒

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☒

 

As of July 30, 2021, there were 40,762,931 shares of the registrant’s common stock issued and outstanding.

 

 

 
 

 

HARVARD BIOSCIENCE, INC.

 

FORM 10-Q

 

INDEX

 

   

Page

     

PART I - FINANCIAL INFORMATION

     

Item 1.

Financial Statements

3

     
 

Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020 (unaudited)

3

     
 

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2021 and 2020 (unaudited)

4

     
 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2021 and 2020 (unaudited)

5

     
 

Consolidated Statements of Stockholders' Equity for the Three and Six Months Ended June 31, 2021 and 2020 (unaudited)

6

     
 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2021 and 2020 (unaudited)

7

     
 

Notes to Unaudited Consolidated Financial Statements

8

     

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

     

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

23

     

Item 4.

Controls and Procedures

23

     

PART II - OTHER INFORMATION

     

Item 1.

Legal Proceedings

24

     

Item 1A.

Risk Factors

24

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

25

     

Item 3.

Default Upon Senior Securities

25

     

Item 4.

Mine Safety Disclosures

25

     

Item 5.

Other Information

25

     

Item 6.

Exhibits

25

     

SIGNATURES

26

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1.

  Financial Statements.

 

HARVARD BIOSCIENCE, INC.

CONSOLIDATED BALANCE SHEETS

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

 

  

June 30,

  

December 31,

 
  

2021

  

2020

 

Assets

        

Current assets:

        

Cash and cash equivalents

 $6,237  $8,317 

Accounts receivable, net

  17,391   17,766 

Inventories

  24,709   22,262 

Other current assets

  5,220   3,355 

Total current assets

  53,557   51,700 

Property, plant and equipment, net

  3,429   3,960 

Operating lease right-of-use assets

  7,241   7,761 

Goodwill

  58,424   58,590 

Intangible assets, net

  30,510   33,151 

Other long-term assets

  810   1,092 

Total assets

 $153,971  $156,254 

Liabilities and Stockholders' Equity

        

Current liabilities:

        

Current portion of long-term debt

 $2,220  $1,721 

Current portion of operating lease liabilities

  2,061   2,111 

Accounts payable

  7,489   5,972 

Deferred revenue

  3,675   3,771 

Other current liabilities

  7,823   7,478 

Total current liabilities

  23,268   21,053 

Long-term debt

  40,921   46,286 

Deferred tax liability

  1,572   1,899 

Operating lease liabilities

  6,971   7,481 

Other long-term liabilities

  2,538   2,854 

Total liabilities

  75,270   79,573 

Commitments and contingencies - Note 13

          

Stockholders' equity:

        

Preferred stock, par value $0.01 per share, 5,000,000 shares authorized

  -   - 

Common stock, par value $0.01 per share, 80,000,000 shares authorized; 40,485,586 and 47,152,587 shares issued and 40,485,586 and 39,407,080 shares outstanding, respectively

  451   444 

Additional paid-in-capital

  225,583   232,357 

Accumulated deficit

  (133,465)  (132,386)

Accumulated other comprehensive loss

  (13,868)  (13,066)

Treasury stock at cost, -0- and 7,745,507 common shares, respectively

  -   (10,668)

Total stockholders' equity

  78,701   76,681 

Total liabilities and stockholders' equity

 $153,971  $156,254 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

HARVARD BIOSCIENCE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share data)

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2021

  

2020

  

2021

  

2020

 
                 

Revenues

 $29,197  $23,308  $56,186  $47,079 

Cost of revenues

  12,844   9,452   24,402   20,241 

Gross profit

  16,353   13,856   31,784   26,838 
                 

Sales and marketing expenses

  5,730   4,279   11,116   9,858 

General and administrative expenses

  6,399   5,670   12,732   12,429 

Research and development expenses

  2,701   1,897   5,188   4,387 

Amortization of intangible assets

  1,465   1,454   2,929   2,881 

Total operating expenses

  16,295   13,300   31,965   29,555 
                 

Operating income (loss)

  58   556   (181)  (2,717)
                 

Other expense:

                

Interest expense

  (377)  (1,233)  (788)  (2,532)

Other expense, net

  (313)  (191)  (347)  (80)

Total other expense

  (690)  (1,424)  (1,135)  (2,612)
                 

Loss before income taxes

  (632)  (868)  (1,316)  (5,329)

Income tax (benefit) expense

  (222)  713   (237)  768 

Net loss

 $(410) $(1,581) $(1,079) $(6,097)
                 

Loss per share:

                

Basic and diluted loss per common share

 $(0.01) $(0.04) $(0.03) $(0.16)
                 

Weighted-average common shares:

                

Basic and diluted

  40,152   38,468   39,960   38,389 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

HARVARD BIOSCIENCE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, in thousands)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2021

   

2020

   

2021

   

2020

 
                                 

Net loss

  $ (410 )   $ (1,581 )   $ (1,079 )   $ (6,097 )

Other comprehensive income (loss):

                               

Foreign currency translation adjustments

    523       619       (802 )     (957 )

Derivatives qualifying as hedges, net of tax

    -       86       -       (58 )

Other comprehensive income (loss)

    523       705       (802 )     (1,015 )
    $ 113     $ (876 )   $ (1,881 )   $ (7,112 )

 

See accompanying notes to consolidated financial statements

 

 

 

HARVARD BIOSCIENCE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited, in thousands)

 

                                   

Accumulated

                 

Three Months Ended

 

Number

           

Additional

           

Other

           

Total

 

June 30, 2021

 

of Shares

   

Common

   

Paid-in

   

Accumulated

   

Comprehensive

   

Treasury

   

Stockholders

 
   

Issued

   

Stock

   

Capital

   

Deficit

   

Loss

   

Stock

   

Equity

 
                                                         

Balance at March 31, 2021

    47,696     $ 448     $ 234,781     $ (133,055 )   $ (14,391 )   $ (10,668 )   $ 77,115  

Retirement of treasury stock

    (7,746 )     -       (10,668 )     -       -       10,668       -  

Stock option exercises

    186       3       630       -       -       -       633  

Stock purchase plan

    56       -       202       -       -       -       202  

Vesting of restricted stock units

    363       -       -       -       -       -       -  

Shares withheld for taxes

    (69 )     -       (526 )     -       -       -       (526 )

Stock compensation expense

    -       -       1,164       -       -       -       1,164  

Net loss

    -       -       -       (410 )     -       -       (410 )

Other comprehensive income

    -       -       -       -       523       -       523  

Balance at June 30, 2021

    40,486     $ 451     $ 225,583     $ (133,465 )   $ (13,868 )   $ -     $ 78,701  
                                                         
                                   

Accumulated

                 

Three Months Ended

 

Number

           

Additional

           

Other

           

Total

 

June 30, 2020

 

of Shares

   

Common

   

Paid-in

   

Accumulated

   

Comprehensive

   

Treasury

   

Stockholders

 
   

Issued

   

Stock

   

Capital

   

Deficit

   

Loss

   

Stock

   

Equity

 

Balance at March 31, 2020

    46,121     $ 438     $ 229,740     $ (129,092 )   $ (14,409 )   $ (10,668 )   $ 76,009  

Stock option exercises

    7       -       19       -       -       -       19  

Stock purchase plan

    64       -       167       -       -       -       167  

Vesting of restricted stock units

    246       -       -       -       -       -       -  

Shares withheld for taxes

    (24 )     -       (20 )     -       -       -       (20 )

Stock compensation expense

    -       -       769       -       -       -       769  

Net loss

    -       -       -       (1,581 )     -       -       (1,581 )

Other comprehensive income

    -       -       -       -       705       -       705  

Balance at June 30, 2020

    46,414     $ 438     $ 230,675     $ (130,673 )   $ (13,704 )   $ (10,668 )   $ 76,068  
                                                         
                                   

Accumulated

                 

Six Months Ended

 

Number

           

Additional

           

Other

           

Total

 

June 30, 2021

 

of Shares

   

Common

   

Paid-in

   

Accumulated

   

Comprehensive

   

Treasury

   

Stockholders

 
   

Issued

   

Stock

   

Capital

   

Deficit

   

Loss

   

Stock

   

Equity

 

Balance at December 31, 2020

    47,153     $ 444       232,357     $ (132,386 )   $ (13,066 )   $ (10,668 )   $ 76,681  

Retirement of treasury stock

    (7,746 )     -       (10,668 )     -       -       10,668       -  

Stock option exercises

    497       7       2,550       -       -       -       2,557  

Stock purchase plan

    56       -       202       -       -       -       202  

Vesting of restricted stock units

    703       -       -       -       -       -       -  

Shares withheld for taxes

    (177 )     -       (990 )     -       -       -       (990 )

Stock compensation expense

    -       -       2,132       -       -       -       2,132  

Net loss

    -       -       -       (1,079 )     -       -       (1,079 )

Other comprehensive loss

    -       -       -       -       (802 )     -       (802 )

Balance at June 30, 2021

    40,486     $ 451     $ 225,583     $ (133,465 )   $ (13,868 )   $ -     $ 78,701  
                                                         
                                   

Accumulated

                 

Six Months Ended

 

Number

           

Additional

           

Other

           

Total

 

June 30, 2020

 

of Shares

   

Common

   

Paid-in

   

Accumulated

   

Comprehensive

   

Treasury

   

Stockholders

 
   

Issued

   

Stock

   

Capital

   

Deficit

   

Loss

   

Stock

   

Equity

 

Balance at December 31, 2019

    45,934     $ 438     $ 229,189     $ (124,576 )   $ (12,689 )   $ (10,668 )   $ 81,694  

Stock option exercises

    7       -       19       -       -       -       19  

Stock purchase plan

    64       -       167       -       -       -       167  

Vesting of restricted stock units

    514       -       -       -       -       -       -  

Shares withheld for taxes

    (105 )     -       (262 )     -       -       -       (262 )

Stock compensation expense

    -       -       1,562       -       -       -       1,562  

Net loss

    -       -       -       (6,097 )     -       -       (6,097 )

Other comprehensive loss

    -       -       -       -       (1,015 )     -       (1,015 )

Balance at June 30, 2020

    46,414     $ 438     $ 230,675     $ (130,673 )   $ (13,704 )   $ (10,668 )   $ 76,068  

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

HARVARD BIOSCIENCE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

 

  

Six Months Ended June 30,

 
  

2021

  

2020

 

Cash flows from operating activities:

        

Net loss

 $(1,079) $(6,097)

Adjustments to reconcile net loss to net cash provided by operating activities:

        

Depreciation

  891   982 

Amortization of intangible assets

  2,929   2,881 

Amortization of deferred financing costs

  140   197 

Stock-based compensation expense

  2,132   1,562 

Deferred income taxes and other

  (303)  423 

Changes in operating assets and liabilities:

        

Accounts receivable

  323   5,855 

Inventories

  (2,526)  (1,374)

Other assets

  (1,517)  (601)

Accounts payable and accrued expenses

  1,629   1,925 

Deferred revenue

  (100)  (276)

Other liabilities

  (714)  (233)

Net cash provided by operating activities

  1,805   5,244 
         

Cash flows from investing activities:

        

Additions to property, plant and equipment

  (357)  (524)

Additions to intangible assets

  (150)  - 

Net cash used in investing activities

  (507)  (524)
         

Cash flows from financing activities:

        

Proceeds from issuance of debt

  -   6,115 

Repayments of debt

  (5,000)  (16,411)

Debt issuance costs

  (102)  - 

Proceeds from exercise of stock options

  2,759   187 

Taxes paid related to net share settlement of equity awards

  (990)  (262)

Net cash used in financing activities

  (3,333)  (10,371)
         

Effect of exchange rate changes on cash

  (45)  (55)

Decrease in cash and cash equivalents

  (2,080)  (5,706)

Cash and cash equivalents at beginning of period

  8,317   8,335 

Cash and cash equivalents at end of period

 $6,237  $2,629 
         

Supplemental disclosures of cash flow information:

     

Cash paid for interest

 $834  $2,549 

Cash paid for income taxes, net of refunds

 $168  $98 

 

See accompanying notes to consolidated financial statements.

 

 

HARVARD BIOSCIENCE, INC.

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

1.

Basis of Presentation and Summary of Significant Accounting Policies, and Risks and Uncertainties

 

Basis of Presentation and Summary of Significant Accounting Policies

 

The unaudited consolidated financial statements of Harvard Bioscience, Inc. and its wholly-owned subsidiaries (collectively, Harvard Bioscience or the Company) as of June 30, 2021 and for the three and six months ended June 30, 2021 and 2020, 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, 2020 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, 2020.

 

In the opinion of management, all adjustments, which include normal recurring adjustments necessary to present a fair statement of financial position as of June 30, 2021, results of operations and comprehensive income (loss) and cash flows for the three months and six months ended June 30, 2021 and 2020, as applicable, have been made. The results of operations for the three months and six months ended June 30, 2021 are not necessarily indicative of the operating results for the full fiscal year or any future periods.

 

The accounting policies underlying the accompanying unaudited consolidated financial statements are 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, 2020. There have been no material changes in the Company’s significant accounting policies during the three and six months ended June 30, 2021.

 

Risks and Uncertainties

 

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 the Company’s operations to date and the future impacts of the pandemic and any resulting economic impact are largely unknown and rapidly evolving. Since the global outbreak of COVID-19, many customers, particularly academic research institutions, have reduced laboratory work which has negatively impacted, and will continue to negatively impact, the Company’s sales. While many of the Company's customers, including academic labs, have reopened, a significant number of them remained closed or at significantly lower capacity levels through the second quarter of 2021. Additionally, to ensure business continuity while maintaining a safe environment for employees aligned with guidance from government and health organizations, the Company transitioned a significant portion of its workforce to work-from-home while implementing social distancing requirements and other measures to allow manufacturing and other personnel essential to production to continue work within the Company's facilities. Business travel was significantly reduced during this period. While a portion of the workforce has returned to in-office work and travel is less restricted, the Company continued to have restrictions which represent disruptions which can impact productivity including sales and marketing activities.

 

The global supply chain has experienced significant disruptions during the first half of 2021 due to electronic component and labor shortages and other macroeconomic factors which have emerged since the onset of COVID-19, leading to increased cost of freight and purchased materials, while also delaying customer shipments. Accordingly, these conditions in addition to the overall impact on the global economy have negatively impacted results of operations and cash flows.

 

 

2.

Recently Issued Accounting Pronouncements

 

Accounting Pronouncements Adopted

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which enhances and simplifies various aspects of the income tax accounting guidance related to intra-period tax allocation, interim period accounting for enacted changes in tax law, and the year-to-date loss limitation in interim period tax accounting. ASU 2019-12 also amends other aspects of the guidance to reduce complexity in certain areas. The Company adopted the provisions of ASU 2019-12 effective on January 1, 2021. The adoption of this new accounting guidance did not have a material impact on the Company’s consolidated financial statements.

 

 

Accounting Pronouncements to be Adopted

 

In September 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial InstrumentsCredit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. The FASB issued several ASUs after ASU 2016-13 to clarify implementation guidance and to provide transition relief for certain entities. ASU 2016-13 is effective for the Company for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company is evaluating the impact that adopting ASU 2016-13 and related amendments will have on its consolidated financial position, results of operations and cash flows.

 

 

3.

Goodwill and Intangible Assets

 

Goodwill

 

The change in the carrying amount of goodwill for the six months ended June 30, 2021 is as follows:

 

(in thousands)

    

Carrying amount at December 31, 2020

 $58,590 

Effect of change in currency translation

  (166)

Carrying amount at June 30, 2021

 $58,424 

 

Intangible Assets

 

      

June 30, 2021

  

December 31, 2020

 
  

Weighted

  

(in thousands)

 

Amortizable intangible assets:

 

Average

Life*

  

Gross

  

Accumulated

Amortization

  

Net

  

Gross

  

Accumulated

Amortization

  

Net

 

Distribution agreements/customer relationships

  8.4  $18,039  $(8,267) $9,772  $18,237  $(7,746) $10,491 

Existing technology

  4.7   39,032   (22,403)  16,629   38,761   (20,674)  18,087 

Trade names and patents

  4.9   8,617   (4,756)  3,861   8,681   (4,362)  4,319 

Total amortizable intangible assets

     $65,688  $(35,426) $30,262  $65,679  $(32,782) $32,897 

Indefinite-lived intangible assets:

              248           254 

Total intangible assets

             $30,510          $33,151

 

 

* Weighted average life in years as of June 30, 2021

 

Intangible asset amortization expense was $1.5 million for each of the three months ended June 30, 2021 and 2020, respectively, and was $2.9 million for each of the six months ended June 30, 2021 and 2020, respectively. Estimated amortization expense of existing amortizable intangible assets for each of the five succeeding years and thereafter as of June 30, 2021 is as follows:

 

  

Amortization

 

Year Ending December 31,

 

Expense

 
  

(in thousands)

 

2021 (remainder of year)

 $2,923 

2022

  5,814 

2023

  5,704 

2024

  5,398 

2025

  4,280 

Thereafter

  6,143 

Total

 $30,262 

 

 

 

 

 

4.

Balance Sheet Information

 

The following tables provide details of selected balance sheet items as of the periods indicated:

 

Inventories:

 

June 30,

   

December 31,

 

(in thousands)

 

2021

   

2020

 

Finished goods

  $ 5,434     $ 4,938  

Work in process

    3,758       3,513  

Raw materials

    15,517       13,811  

Total

  $ 24,709     $ 22,262  

 

Other Current Liabilities:

 

June 30,

   

December 31,

 

(in thousands)

 

2021

   

2020

 

Compensation

  $ 3,409       3,715  

Professional fees

    815       432  

Warranty costs

    237       185  

Customer related costs

    1,120       1,093  

Accrued income taxes

    544       286  

Other

    1,698       1,767  

Total

  $ 7,823     $ 7,478  

 

 

5.

Restructuring and Other Exit Costs

 

On an ongoing basis, the Company reviews the global economy, the healthcare industry, and the markets in which it competes to identify operational efficiencies, enhance commercial capabilities and align its cost base and infrastructure with customer needs and its strategic plans. In order to realize these opportunities, the Company undertakes restructuring-type activities from time to time to transform its business.

 

The following table summarizes the changes in the restructuring liabilities for the six months ended June 30, 2021:

 

(in thousands)

 

Severance

  

Other

  

Total

 

Balance at December 31, 2020

 $270  $18  $288 

Restructuring and other exit costs

  1,145   79   1,224 

Non-cash charges

  -   (41)  (41)

Cash payments

  (882)  (45)  (927)

Balance at June 30, 2021

 $533  $11  $544 

 

The restructuring liability has been included in other current liabilities in the consolidated balance sheet and is payable within the next twelve months. Restructuring costs were $0.7 million for each of the three months ended June 30, 2021 and 2020, respectively, and were $1.2 million and $1.6 million for the six months ended June 30, 2021 and 2020, respectively. Substantially all of these restructuring costs have been included as a component of general and administrative expenses.

 

 

6.

Related Party Transactions

 

In connection with the 2014 acquisitions of Multi Channel Systems MCS GmbH (“MCS”), the Company entered into a facility lease agreement with the former principal owner of MCS who became an employee of the Company at the time of the acquisition and subsequently retired in 2021. The MCS agreement expires on December 31, 2024. Pursuant to this lease agreement, the Company made rent payments of $0.1 million for each of the three months ended June 30, 2021 and 2020 respectively, and $0.2 million for each of the six months ended June 30, 2021 and 2020, respectively.

 

 

 

 

7.

Leases

 

The Company has noncancelable operating leases for offices, manufacturing facilities, warehouse space, automobiles and equipment expiring at various dates through 2030.

 

The components of lease expense for the three and six months ended June 30, 2021 and 2020 are as follows:

 

  

Three Months Ended June 30,

  

Six Months Ended June 30

 

(in thousands)

 

2021

  

2020

  

2021

  

2020

 

Operating lease cost

 $506  $544  $1,023  $1,079 

Short term lease cost

  55   43   101   85 

Sublease income

  (26)  (25)  (51)  (132)

Total lease cost

 $535  $562  $1,073  $1,032 

 

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

 

  

Six Months Ended June 30,

 

(in thousands)

 

2021

  

2020

 

Cash paid for amounts included in the measurement of lease liabilities:

 $1,061  $1,381 

Right of use assets obtained in exchange for lease obligations:

 $400  $387 

 

Supplemental balance sheet information related to the Company's operating leases was as follows:

 

(in thousands)

 

June 30, 2021

  

December 31, 2020

 

Operating lease right-of use assets

 $7,241  $7,761 
         

Current portion, operating lease liabilities

 $2,061  $2,111 

Operating lease liabilities, long term

  6,971   7,481 

Total operating lease liabilities

 $9,032  $9,592 
         

Weighted average remaining lease term (years)

  7.1   7.4 

Weighted average discount rate

  9.3%  9.3%

 

Maturities of operating lease liabilities at June 30, 2021 were as follows:

 

(in thousands)

    

2021 (remainder of year)

 $1,053 

2022

  2,044 

2023

  1,999 

2024

  1,732 

2025

  1,001 

Thereafter

  4,854 

Total lease payments

  12,683 

Less imputed interest

  (3,651)

Total operating lease liabilities

 $9,032 

 

 

 

 

8.

Capital Stock and Stock-Based Compensation

 

Retirement of Treasury Stock

 

In May, 2021, the Company retired the 7,745,507 shares of common stock held by the Company as treasury shares and returned these shares to the status of authorized and unissued shares of common stock.

 

Stock-Based Payment Awards

 

Activity under the Company’s incentive plan for the six months ended June 30, 2021 was as follows:

 

  

Stock Options

  

Restricted Stock Units

  

Market Condition RSU's

 
      

Weighted

                 
  

Stock

  

Average

  

Restricted

      

Market

     
  

Options

  

Exercise

  

Stock Units

  

Grant Date

  

Condition RSU's

  

Grant Date

 
  

Outstanding

  

Price

  

Outstanding

  

Fair Value

  

Outstanding

  

Fair Value

 

Balance at December 31, 2020

  2,637,339  $3.51   1,560,461  $2.44   813,031   2.12 

Granted

  -   -   793,968   4.65   293,509   4.61 

Exercised

  (496,792)  3.76   -   -   -   - 

Vested (RSUs)

  -   -   (539,417)  2.83   (163,218)  2.98 

Cancelled/Forfeited

  (609,310)  4.28   (56,642)  3.64   (6,179)  2.98 

Performance Factor Adjustment

  -   -   -   -   163,216   2.98 

Balance at June 30, 2021

  1,531,237  $3.13   1,758,370  $3.28   1,100,359  $2.78 

 

Stock-based compensation expense related to stock options, restricted stock units, Market Condition RSU’s and the ESPP for the three and six months ended June 30, 2021 and 2020 was allocated as follows:

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 

(in thousands)

 

2021

  

2020

  

2021

  

2020

 

Cost of revenues

 $31  $14  $51  $24 

Sales and marketing expenses

  131   62   224   113 

General and administrative expenses

  969   645   1,803   1,341 

Research and development expenses

  33   48   54   84 

Total stock-based compensation expenses

 $1,164  $769  $2,132  $1,562 

 

As of June 30, 2021, the total compensation costs related to unvested awards not yet recognized is $7.0 million and the weighted average period over which it is expected to be recognized is approximately 2.2 years. The Company did not capitalize any stock-based compensation.

 

The weighted average estimated fair value of the Market Condition RSUs that were granted during the six months ended June 30, 2021 was $4.61 per unit. The following assumptions were used to estimate the fair value of the Market Condition RSUs granted during the six months ended June 30, 2021 using a Monte-Carlo valuation simulation:

 

  

2021

 

Volatility

  65.1

%

Risk-free interest rate

  0.3

%

Correlation coefficient

  35.7

%

Dividend yield

  -

%

 

 

Earnings (Loss) Per Share

 

Basic earnings (loss) per share is calculated by dividing net income (loss) by the number of weighted average shares of common stock outstanding during the period. The calculation of diluted earnings per share assumes conversion of stock options, 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:

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 

(in thousands)

 

2021

  

2020

  

2021

  

2020

 

Basic

  40,152   38,468   39,960   38,389 

Dilutive effect of equity awards

  -   -   -   - 

Diluted

  40,152   38,468   39,960   38,389 

 

The Company has excluded from the shares used in calculating the diluted earnings per common share options, restricted stock units and Market Condition RSUs totaling 4,389,966 and 5,727,716 as of June 30, 2021 and 2020 respectively, as the impact of these shares would be anti-dilutive.

 

 

9.

Long-Term Debt

 

As of June 30, 2021 and December 31, 2020, the Company’s borrowings were comprised of:

 

  

June 30,

  

December 31,

 

(in thousands)

 

2021

  

2020

 

Long-term debt:

        

Term loan

 $39,000  $40,000 

Revolving line

  5,400   9,400 

Less: unamortized deferred financing costs

  (1,259)  (1,393)

Total debt

  43,141   48,007 

Less: current installments

  (2,500)  (2,000)

Current unamortized deferred financing costs

  280   279 

Long-term debt

 $40,921  $46,286 

 

On December 22, 2020, the Company entered into a Credit Agreement (the “Credit Agreement”) with Citizens Bank, N.A., Wells Fargo Bank, National Association, and Silicon Valley Bank (together, the “Lenders”). The Credit Agreement provides for a term loan of $40.0 million and a $25.0 million senior revolving credit facility (including a $10.0 million sub-facility for the issuance of letters of credit and a $10.0 million swingline loan sub facility) (collectively, the “Credit Facility”). The Company’s obligations under the Credit Agreement are guaranteed by certain of the Company’s direct, domestic wholly-owned subsidiaries; none of the Company’s direct or indirect foreign subsidiaries has guaranteed the Credit Facility. The Company’s obligations under the Credit Agreement are secured by substantially all of the assets of Harvard Bioscience, Inc. and each guarantor (including all or a portion of the equity interests in certain of the Company’s domestic and foreign subsidiaries). The Credit Facility matures on December 22, 2025. Issuance costs of $1.4 million are amortized over the contractual term to maturity date on a straight-line basis, which approximates the effective interest method. As of June 30, 2021, available borrowing capacity under the revolving line of credit was $19.6 million. The Credit Facility replaced the Company’s prior credit facility with Cerberus Business Finance, LLC (the “Prior Credit Facility”), which was repaid with borrowings under the Credit Facility.

 

Borrowings under the Credit Facility will, at the option of the Company, bear interest at either (i) a rate per annum based on LIBOR for an interest period of one, two, three or six months, plus an applicable interest rate margin determined as provided in the Credit Agreement (a “LIBOR Loan”), or (ii) an alternative base rate plus an applicable interest rate margin, each as determined as provided in the Credit Agreement (an “ABR Loan”). LIBOR interest under the Credit Agreement is subject to applicable market rates and a floor of 0.50 %. The alternative base rate is based on the Citizens Bank prime rate or the federal funds effective rate of the Federal Reserve Bank of New York and is subject to a floor of 1.0%. The applicable interest rate margin varies from 2.0% per annum to 3.25% per annum for LIBOR Loans, and from 1.5% per annum to 3.0% per annum for ABR Loans, in each case depending on the Company’s consolidated leverage ratio and is determined in accordance with a pricing grid set forth in the Credit Agreement. Interest on LIBOR Loans is payable in arrears on the last day of each applicable interest period, and interest on ABR Loans is payable in arrears at the end of each calendar quarter. There are no prepayment penalties in the event the Company elects to prepay and terminate the Credit Facility prior to its scheduled maturity date, subject to LIBOR breakage and redeployment costs in certain circumstances.

 

 

As of June 30, 2021, the weighted average interest rate on the Credit Agreement borrowings was 3.0%.The effective interest rate for the three months ended June 30, 2021 and 2020 was 3.4% and 9.8%, respectively. The effective interest rate for the six months ended June 30, 2021 and 2020 was 3.3% and 9.6%, respectively.

 

Commencing on March 31, 2021, the outstanding term loans amortizes in quarterly installments of $0.5 million per quarter on such date and during each of the next three quarters thereafter, $0.75 million per quarter during the next eight quarters thereafter and $1.0 million per quarter thereafter, with a balloon payment at maturity. Furthermore, within ninety days after the end of the Company’s fiscal year ended December 31, 2021 and for each fiscal year thereafter, the term loans may be permanently reduced pursuant to certain mandatory prepayment events including an annual “excess cash flow sweep” of 50% of the consolidated excess cash flow, as defined in the agreement; provided that, in any fiscal year, any voluntary prepayments of the term loans shall be credited against the Company’s “excess cash flow” prepayment obligations on a dollar-for-dollar basis for such fiscal year. Amounts outstanding under the revolving credit facility can be repaid at any time but are due in full at maturity.

 

The Credit Agreement includes customary affirmative, negative, and financial covenants binding on the Company. The negative covenants limit the ability of the Company, among other things, to incur debt, incur liens, make investments, sell assets and pay dividends on its capital stock. The financial covenants include a maximum consolidated net leverage ratio and a minimum consolidated fixed charge coverage ratio. The Credit Agreement also includes customary events of default.

 

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.

 

 

10.

Derivatives

 

The Company monitors interest rate risk attributable to both its outstanding and forecasted debt obligations by the use of cash flow sensitivity analysis which estimates the expected impact of changes in interest rates on the Company’s future cash flows.

 

On January 31, 2018, the Company entered into an interest rate swap contract with a notional amount of $36.0 million and a termination date of January 1, 2023. This swap contract, which converted specific variable-rate debt into fixed-rate debt and fixed the LIBOR rate associated with a portion of the term loan under the Prior Credit Facility at 2.72% was cancelled on December 22, 2020, in connection with the new Credit Agreement as described in Note 9. The Company structured this interest rate swaps to be fully effective in accordance with ASC 815 “Derivatives and Hedging”, and therefore changes in the fair value of the swap offset the variability of cash flows associated with the variable-rate, long-term debt obligations and were reported in accumulated other comprehensive income (AOCI). These amounts subsequently were 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 following table summarizes the effect of derivatives designated as cash flow hedging instruments and their classification within comprehensive loss for the three and six months ended June 30, 2020:

 

  

Three Months Ended

  

Six Months Ended

 

(in thousands)

 

June 30, 2020

  

June 30, 2020

 

Amount of loss recognized in OCT on derivatives (effective portion)

 $(11) $(227)

Amounts reclassified from accumulated other comprehensive loss

        

to interest expense

  97   169 

Total

 $86  $(58)

 

 

 

11.

Revenues

 

The following tables represent a disaggregation of revenue from contracts with customers for the three and six months ended June 30, 2021 and 2020:

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 

(in thousands)

 

2021

  

2020

  

2021

  

2020

 

Instruments, equipment, software and accessories

 $27,992  $22,069  $53,819  $45,006 

Service, maintenance and warranty contracts

  1,205   1,239   2,367   2,073 

Total revenues

 $29,197  $23,308  $56,186  $47,079 

 

The following tables represent a disaggregation of revenue by geographic destination for the three and six months ended June 30, 2021 and 2020:

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 

(in thousands)

 

2021

  

2020

  

2021

  

2020

 

United States

 $13,151  $9,341  $24,328  $19,271 

Europe

  8,026   6,340   16,615   13,983 

Asia

  5,695   5,554   11,233   9,976 

Rest of the world

  2,325   2,073   4,010   3,849 

Total revenues

 $29,197  $23,308  $56,186  $47,079 

 

No customer accounted for more than 10% of revenues for the three and six months ended June 30, 2021 and 2020.

 

 

Deferred revenue

 

Changes in deferred revenue from service contracts and advance payments from customers were as follows:

 

  

Three Months Ended June 30, 2021

 

(in thousands)

 

Service Contracts

  

Customer Advances

  

Total

 

Balance at March 31, 2021

 $1,712  $1,925  $3,637 

Deferral of revenue

  988   322   1,310 

Recognition of deferred revenue

  (846)  (433)  (1,279)

Effect of foreign currency translation

  7   -   7 

Balance at June 30, 2021

 $1,861  $1,814  $3,675 
             
  

Three Months Ended June 30, 2020

 

(in thousands)

 

Service Contracts

  

Customer Advances

  

Total

 

Balance at March 31, 2020

 $1,410  $2,263  $3,673 

Deferral of revenue

  1,177   121   1,298 

Recognition of deferred revenue

  (1,144)  (145)  (1,289)

Effect of foreign currency translation

  (30)  -   (30)

Balance at June 30, 2020

 $1,413  $2,239  $3,652 

 

 

  

Six Months Ended June 30, 2021

 

(in thousands)

 

Service Contracts

  

Customer Advances

  

Total

 

Balance at December 31, 2020

 $1,629  $2,142  $3,771 

Deferral of revenue

  2,239   663   2,902 

Recognition of deferred revenue

  (2,011)  (991)  (3,002)

Effect of foreign currency translation

  4   -   4 

Balance at June 30, 2021

 $1,861  $1,814  $3,675 
             
  

Six Months Ended June 30, 2020

 

(in thousands)

 

Service Contracts

  

Customer Advances

  

Total

 

Balance at December 31, 2019

 $1,587  $2,362  $3,949 

Deferral of revenue

  1,485   344   1,829 

Recognition of deferred revenue

  (1,643)  (467)  (2,110)

Effect of foreign currency translation

  (16)  -   (16)

Balance at June 30, 2020

 $1,413  $2,239  $3,652 

 

Allowance for Doubtful Accounts

 

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

 

  

Six Months Ended June 30,

 

(in thousands)

 

2021

  

2020

 

Balance, beginning of period

 $227  $325 

Bad debt (credit) expense

  (17)  4 

Charge-offs and other recoveries

  (62)  (40)

Effect of foreign currency translation

  (3)  1 

Balance, end of period

 $145  $290 

 

 

 

 

 

12.

Income Tax

 

Income tax (benefit) expense was $(0.2) million and $0.7 million for the three months ended June 30, 2021 and 2020, respectively, and was $(0.2) million and $0.8 million for the six months ended June 30, 2021 and 2020. The effective tax rates for the three months ended June 30, 2021 and 2020, were 35.1% and (82.1)%, respectively. The effective tax rates for the six months ended June 30, 2021 and 2020, were 18.0% and (14.4)%, respectively.

 

The difference between the Company’s effective tax rates in 2021 and 2020 compared to the U.S. statutory tax rate of 21% is primarily due to changes in valuation allowances associated with the Company’s assessment of the likelihood of the recoverability of deferred tax assets. The Company currently has valuation allowances against substantially all of its net operating loss carryforwards and tax credit carryforwards.

 

 

 

13.

Commitments and Contingent Liabilities

 

On April 14, 2017, representatives for the estate of an individual plaintiff filed a wrongful death complaint with the Suffolk Superior Court, in the County of Suffolk, Massachusetts (the “Court”), against the Company and other defendants, including Biostage, Inc. (f/k/a Harvard Apparatus Regenerative Technology, Inc.) (“Biostage”), a former subsidiary of the Company that was spun off in 2013, as well as another third party. The complaint seeks payment for an unspecified amount of damages and alleges that the plaintiff sustained terminal injuries allegedly caused by products, including one synthetic trachea scaffold and two bioreactors, provided by certain of the named defendants and utilized in connection with surgeries performed by third parties in Europe in 2012 and 2013.

 

On October 1, 2019, the Court entered an order granting plaintiffs’ motion to compel the defendant to produce discovery. Subsequently, the plaintiffs filed a motion for sanctions against the Company on January 6, 2020 claiming failure to produce. The Company’s counsel at the time, which had been selected for the case by the Company’s liability insurance carrier, never notified the Company of plaintiffs’ motion and never responded to plaintiff’ motion. As a result of the failure of our former counsel to respond, on January 29, 2020, the Court entered an order allowing plaintiffs’ sanctions against the Company and the other defendants, which establishes a sanction of admitted liability. In June 2021, the Company was informed of these 2019 and 2020 court actions by new defense counsel appointed by the Company’s liability insurance carrier. On June 9, 2021, the Company, together with the other defendants, filed a motion to vacate the Court’s order allowing plaintiffs’ motion for sanctions. On August 3, 2021, the Court held a hearing on the defendants' motion to vacate but no ruling has been made. The Company continues to actively fight the damages in this case.

 

While the Company believes that claims made in this lawsuit are without merit and that there are strong grounds to vacate the sanctions, unless the sanctions award is vacated the Company could face a trial on damages. If the sanctions award is vacated, the Company will have the opportunity to contest the underlying claims at trial and, while there can be no assurance of prevailing, the Company believes those claims lack merit. If the Company faces a trial on damages, whether as a result of the sanctions or following a loss on the merits, the Company does not know the exact amount of compensatory and, potentially, punitive damages that could be awarded. In all events, the Company believes that available product liability insurance coverage will be available for all or a significant portion of such damages, although there can be no assurance that the damages awarded will be within the limits of the insurance. The Company is also evaluating possible malpractice claims as an additional source of recovery. The Company cannot provide assurance that any losses will not exceed such recoveries. Further, Biostage has agreed to indemnify us for claims and losses relating to certain liabilities that it has assumed from us, including liabilities in connection with the sale of Biostage’s products and other liabilities related to the operation of Biostage’s business. However, the Company cannot be assured that Biostage will have the ability to indemnify the Company against the liabilities the Company may incur in this lawsuit, in particular due to Biostage having limited revenues, products in early-stage development, a need for additional funds in the future and its overall financial condition.

 

The Company is involved in various other claims and legal proceedings arising in the ordinary course of business. After consultation with legal counsel, the Company has determined that the ultimate disposition of such proceedings is not likely to have a material adverse effect on its business, financial condition, results of operations or cash flows. Although unfavorable outcomes in the proceedings are possible, the Company has not accrued for loss contingencies relating to any such matters as they are not considered to be probable and reasonably estimable. If one or more of these matters are resolved in a manner adverse to the Company, the impact on the Company’s business, financial condition, results of operations and cash flows could be material.

 

 
 

 

Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations.

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains statements that are not statements of historical fact and are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the Exchange Act). The forward-looking statements are principally, but not exclusively, contained in Item 2: Managements 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 managements 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 the duration and severity of the COVID-19 pandemic and its impact on our business; 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 our current and any future 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 Biostages 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 Kingdoms 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 year ended December 31, 2020, 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, Inc. is a leading developer, manufacturer and seller of technologies, products and services that enable fundamental research, discovery, and preclinical 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, Europe, and China, 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 remain unknown and rapidly evolving. Since the global outbreak of COVID-19, many customers, particularly academic research institutions, reduced laboratory work which has negatively impacted, and will continue to negatively impact, our sales. While many of our customers, including academic labs, have reopened, a significant number of them remained closed or at significantly lower capacity levels through the second quarter of 2021. Additionally, to ensure business continuity while maintaining a safe environment for employees aligned with guidance from government and health organizations, we transitioned a significant portion of our workforce to work-from-home while implementing social distancing requirements and other measures to allow manufacturing and other personnel essential to production to continue work within our facilities. Business travel was significantly reduced during this period. While a portion of the workforce has returned to in-office work and travel is less restricted, we continue to have restrictions which represent disruptions which can impact productivity including sales and marketing activities.

 

The global supply chain has experienced significant disruptions during the first half of 2021 due to electronic component and labor shortages and other macroeconomic factors, leading to increased cost of freight and purchased materials, while also delaying customer shipments. We believe these supply chain trends will continue through the rest of 2021.

 

These conditions in addition to the overall impact on the global economy has negatively impacted our results of operations and cash flows.

 

Revenue for the three and six months ended June 30, 2021 and for the year ending December 31, 2020 was negatively impacted due to the conditions noted. 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.

 

Restructuring Plan

 

In December 2019, we implemented a restructuring plan (the “2019 Restructuring Plan”) to deliver significant cost savings beginning in 2020 and support delivery of a strategic action plan announced in September 2019. The 2019 Restructuring Plan includes consolidation of our Connecticut manufacturing plant with our existing Massachusetts site, downsizing of operations in the United Kingdom and a reduction in force across the business equal to approximately 10% of our headcount. The 2019 Restructuring Plan is expected to deliver approximately $4.5 million of annualized run-rate savings. The original initiatives under the 2019 Restructuring Plan were completed in the second half of 2020.

 

We continued to execute the 2019 Restructuring Plan during the COVID-19 pandemic and expanded the scope of the restructuring by realigning our organizational structure to reduce management layers and accelerated our efforts to move to a leaner organization and operation. As a result of this expanded scope, we eliminated additional headcount during 2020 and in the first quarter of 2021 communicated to employees our plan to consolidate certain engineering operations and eliminate two small facilities in Europe. These incremental actions are expected to generate additional annualized cost savings of approximately $2.0 million, and were substantially complete as of June 30, 2021.

 

Through June 30, 2021, we incurred cash outlays of $8.2 million as a result of the actions taken under the 2019 Restructuring Plan and incremental cost reductions and other business improvements. We believe these strategic actions will position the business for improved financial performance.

 

 

Selected Results of Operations

 

Three months ended June 30, 2021 compared to three months ended June 30, 2020

 

   

Three Months Ended June 30,

 

(dollars in thousands)

 

2021

   

% of revenue

   

2020

   

% of revenue

 

Revenues

  $ 29,197             $ 23,308          

Gross profit

    16,353       56.0 %     13,856       59.4 %

Sales and marketing expenses

    5,730       19.6 %     4,279       18.4 %

General and administrative expenses

    6,399       21.9 %     5,670       24.3 %

Research and development expenses

    2,701       9.3 %     1,897       8.1 %

Amortization of intangible assets

    1,465       5.0 %     1,454       6.2 %

Interest expense

    377       1.3 %     1,233       5.3 %

Income tax (benefit) expense

    (222 )     -0.8 %     713       3.1 %

 

Revenues

 

Revenues for the three months ended June 30, 2021 were $29.2 million, an increase of approximately $5.9 million, or 25.3%, compared to revenues of $23.3 million for the three months ended June 30, 2020. Revenue improved significantly due to academic labs reopening in 2021. A large number of academic labs remained closed during the second quarter of 2020. We believe that academic lab activity has not yet returned to pre-COVID levels, but activity is significantly higher than the prior year period. Revenue also increased due to improved sales of products from our preclinical product family associated with improved sales processes and product enhancements released in 2020.

 

Gross profit

 

Gross profit increased $2.5 million, or 18.0%, to $16.4 million for the three months ended June 30 2021, compared with $13.9 million for the three months ended June 30, 2020, due primarily to the increase in revenue noted. Gross margin decreased to 56.0% for the three months ended June 30, 2021 compared with 59.4% for the three months ended June 30, 2020. The decrease in gross margin was due to higher supply chain and logistics costs. The global supply chain has experienced significant disruptions during the first half of 2021 due to electronic component and labor shortages and other macroeconomic factors, leading to increased cost of freight and purchased materials. We believe these supply chain trends will continue through the rest of 2021.

 

Sales and marketing expenses

 

Sales and marketing expenses increased $1.4 million, or 33.9%, to $5.7 million for the three months ended June 30 2021 compared to $4.3 million during the same period in 2020. The increase was primarily due to investments in new marketing and sales support personnel and higher costs as many of our employees returned from part-time to full-time status. During the second quarter of 2020 part-time work, pay reductions and other temporary cost reduction measures were in place in response to the rapid reduction of revenue following the onset of COVID-19.

 

General and administrative expenses

 

General and administrative expenses were $6.4 million for the three months ended June 30, 2021, an increase of $0.7 million, or 12.9%, compared with $5.7 million for the three months ended June 30, 2020. The increase was due to higher overall compensation as many of our employees returned from part-time to full-time status and higher stock-based compensation. During the second quarter of 2020 part-time work, pay reductions and other temporary cost reduction measures were in place in response to the rapid reduction of revenue following the onset of COVID-19.

 

Research and development expenses

 

Research and development expenses were $2.7 million for the three months ended June 30, 2021, an increase of $0.8 million, or 42.4%, compared with $1.9 million for the three months ended June 30, 2020. The increase was due to higher compensation as many of our employees returned from part-time to full-time status and higher stock-based compensation and other costs to affect our strategic plans. During the second quarter of 2020 part-time work, pay reductions and other temporary cost reduction measures were in place in response to the rapid reduction of revenue following the onset of COVID-19.

 

 

Amortization of intangible assets

 

Amortization of intangible asset expenses was $1.5 million for the three months ended June 30, 2021 and did not change materially as compared to the three months ended June 30, 2020.

 

Interest expense

 

Interest expense was $0.4 million for the three months ended June 30, 2021, a decrease of $0.8 million, or 69.4%, compared with $1.2 million for the three months ended June 30, 2020. The decrease was due to lower interest rates under our new Credit Agreement entered into on December 22, 2020, as well as reduced average borrowing as compared to the prior period.

 

Income tax (benefit) expense

 

Income tax (benefit) expense for the three months ended June 30, 2021 and 2020 was $(0.2) million and $0.7 million, respectively. The effective tax rates for the three months ended June 30, 2021 and 2020 were 35.1% and (82.1)%, respectively. The difference between our effective tax rates in 2021 and 2020 compared to the U.S. statutory tax rate of 21% is primarily due to changes in valuation allowances associated with our assessment of the likelihood of the recoverability of our deferred tax assets. We currently have valuation allowances against substantially all of our net operating loss carryforwards and tax credit carryforwards.

 

Six months ended June 30, 2021 compared to six months ended June 30, 2020

 

   

Six Months Ended June 30,

 

(dollars in thousands)

 

2021

   

% of revenue

   

2020

   

% of revenue

 

Revenues

  $ 56,186             $ 47,079          

Gross profit

    31,784       56.6 %     26,838       57.0 %

Sales and marketing expenses

    11,116       19.8 %     9,858       20.9 %

General and administrative expenses

    12,732       22.7 %     12,429       26.4 %

Research and development expenses

    5,188       9.2 %     4,387       9.3 %

Amortization of intangible assets

    2,929       5.2 %     2,881       6.1 %

Interest expense

    788       1.4 %     2,532       5.4 %

Income tax (benefit) expense

    (237 )     -0.4 %     768       1.6 %

 

Revenues

 

Revenues for the six months ended June 30, 2021 were $56.2 million, an increase of approximately $9.1 million, or 19.3%, compared to revenues of $47.1 million for the six months ended June 30, 2020. Revenue improved significantly due to academic labs reopening in 2021. A large number of academic labs remained closed during 2020. We believe that academic lab activity has not yet returned to pre-COVID levels, but activity is significantly higher than prior year. Revenue also increased due to improved sales of products from our preclinical product family associated with improved sales processes and product enhancements released in 2020.

 

Gross profit

 

Gross profit increased $4.9 million, or 18.4%, to $31.8 million for the six months ended June 30 2021, compared with $26.9 million for the six months ended June 30, 2020, due primarily to the increase in revenue noted. Gross margin decreased to 56.6% for the six months ended June 30, 2021 compared with 57.0% for the six months ended June 30, 2020. The decrease in gross margin on a year-to-date date was due to supply chain cost increases in the second quarter of 2021 which were offset by gross margin increases due to higher volumes and improved product mix.

 

Sales and marketing expenses

 

Sales and marketing expenses increased $1.2 million, or 12.8%, to $11.1 million for the six months ended June 30 2021 compared to $9.9 million during the same period in 2020. The increase was primarily due to investments in new marketing and sales support personnel, higher costs as many of our employees returned from part-time to full-time status and higher variable sales costs offset by cost reduction initiatives and lower travel and trade show related costs due to COVID-19-related restrictions.

 

 

General and administrative expenses

 

General and administrative expenses were $12.7 million for the six months ended June 30, 2021, an increase of $0.3 million, or 2.4%, compared with $12.4 million for the six months ended June 30, 2020. The increase was due to higher compensation costs as many of our employees returned from part-time to full-time status and higher stock-based compensation which were partially offset by cost reduction initiatives and lower restructuring and other costs to affect our strategic plans.

 

Research and development expenses

 

Research and development expenses were $5.2 million for the six months ended June 30, 2021, an increase of $0.8 million, or 18.3%, compared with $4.4 million for the six months ended June 30, 2020. The increase was due to higher compensation costs as many of our employees returned from part-time to full-time status and higher restructuring and other costs to affect our strategic plans.

 

Amortization of intangible assets

 

Amortization of intangible asset expenses was $2.9 million for the six months ended June 30, 2021 and did not change materially as compared to the six months ended June 30, 2021.

 

Interest expense

 

Interest expense was $0.8 million for the six months ended June 30, 2021, a decrease of $1.7 million, or 68.9%, compared with $2.5 million for the six months ended June 30, 2020. The decrease was due to lower interest rates under our new Credit Agreement entered into on December 22, 2020, as well as reduced average borrowing as compared to the prior period.

 

Income tax (benefit) expense

 

Income tax (benefit) expense for the six months ended June 30, 2021 and 2020 was $(0.2) million and $0.8 million, respectively. The effective tax rates for the six months ended June 31, 2021 and 2020 were 18.0% and (14.4)%, respectively. The difference between our effective tax rates in 2021 and 2020 compared to the U.S. statutory tax rate of 21% is primarily due to changes in valuation allowances associated with our assessment of the likelihood of the recoverability of our deferred tax assets. We currently have valuation allowances against substantially all of our net operating loss carryforwards and tax credit carryforwards.

 

Liquidity and Capital Resources

 

Our primary sources of liquidity are cash and cash equivalents, internally generated cash flow from operations and our revolving credit facility. Our expected cash outlays relate primarily to cash payments due under our Credit Agreement described below as well as capital expenditures, severance and other payments associated with ongoing restructuring and cost reduction initiatives.

 

As of June 30, 2021, we held cash and cash equivalents of $6.2 million, compared with $8.3 million at December 31, 2020. As of June 30, 2021 and December 31, 2020, we had $44.4 million and $49.4 million of borrowings outstanding under our Credit Facility, respectively. Total debt, net of cash and cash equivalents, was $38.2 million at June, 2021, compared to $41.1 million at December 31, 2020.

 

On December 22, 2020, we entered into the Credit Facility which provides for a term loan of $40.0 million and a $25.0 million senior revolving credit facility. Obligations under the Credit Agreement are secured by substantially all of our assets and are guaranteed by certain of our direct, domestic wholly-owned subsidiaries. The Credit Agreement matures on December 22, 2025. See Note 9 to the Consolidated Financial Statements for a detailed discussion regarding our Credit Agreement.

 

As of June 30, 2021, the interest rate on our borrowings was 3.0%, and our available borrowing capacity under the revolving line of credit was $19.6 million. We are compliant with all covenants under the Credit Agreement as of June 30, 2021.

 

Based on our current operating plans, we expect that our available cash, cash generated from current operations and debt capacity will be sufficient to finance current operations, any costs associated with restructuring 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. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary as a result of a number of factors.

 

 

CONDENSED CONSOLIDATED CASH FLOW STATEMENTS

 

   

Six Months Ended June 30,

 

(in thousands)

 

2021

   

2020

 

Cash provided by operating activities

  $ 1,805     $ 5,244  

Cash used in investing activities

    (507 )     (524 )

Cash used in financing activities

    (3,333 )     (10,371 )

Effect of exchange rate changes on cash

    (45 )     (55 )

Decrease in cash and cash equivalents

  $ (2,080 )   $ (5,706 )

 

Cash provided by operations was $1.8 million and $5.2 million for the six months ended June 30, 2021 and 2020, respectively. Cash flow from operations for the six months ended June 30, 2021, was lower than the prior year period due to variable compensation paid in 2021 and higher levels of working capital due to sales growth. Cash flow from operations for the six months ended June 30, 2020 was positively impacted by reductions in working capital due to lower revenue and management efforts to offset the initial significant negative impacts that the COVID-19 pandemic had on revenue.

 

Cash used in investing activities was $0.5 million for each of the six months ended June 30, 2021 and 2020, respectively, primarily consisting of capital expenditures.

 

Cash used in financing activities was $3.3 million and $10.3 million for the six months ended June 30, 2021 and 2020, respectively. During the six months ended June 30, 2021, we repaid $5.0 million of debt, which included a term loan installment payment of $1.0 million and paydown of debt under our revolving facility of $4.0 million, we received proceeds of $2.8 million from the exercise of stock options and we paid $1.0 million for taxes related to net share settlement of equity awards. During the six months ended June 30, 2020, we repaid $10.3 million of debt, which included a term loan installment payment of $1.6 million, and an excess cash flow payment of $4.0 million.

 

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 June 30, 2021, changes in foreign currency exchange rates resulted in a favorable translation effect on our consolidated revenues of approximately $1.0 million and an unfavorable effect on expenses of approximately $0.9 million. During the six months ended June 30, 2021, changes in foreign currency exchange rates resulted in a favorable translation effect on our consolidated revenues of approximately $1.8 million and an unfavorable effect on expenses of approximately $1.7 million.

 

The gain associated with the translation of foreign equity into U.S. dollars included as a component of comprehensive income (loss) during the three months ended June 30 2021 was approximately $0.5 million, compared to a gain of $0.7 million for the three months ended June 31, 2020. The loss associated with the translation of foreign equity into U.S. dollars included as a component of comprehensive income (loss) during the six months ended June 31, 2021 was approximately $(0.8) million, compared to a loss of $(1.0) million for the six months ended June 30, 2020.

 

In addition, currency exchange rate fluctuations included as a component of net income resulted in currency gains (losses) of approximately $(0.2) million and $(0.1) million during each of the three months ended June 30, 2021 and 2020, and currency gains (losses) of $(0.1) million and $0.1 million during each of the six months ended June 30, 2021 and 2020, respectively.

 

Critical Accounting Policies

 

The critical accounting policies underlying the accompanying unaudited consolidated financial statements are those set forth in Part II, Item 7 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

 

Recently Issued Accounting Pronouncements

 

For information on recent accounting pronouncements impacting our business, see “Recently Issued Accounting Pronouncements” included in Note 2 to our Consolidated Financial Statements included in “Part I, Item 1. Financial Statement” of this report.

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

 

Not applicable. 

Item 4.

Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

As of June 30, 2021, 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 second quarter of fiscal 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We continue to monitor the impact of the COVID-19 pandemic and, despite many of our employees working remotely, have not experienced any changes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on Effectiveness of Controls and Procedures

 

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

 

 

PART II. OTHER INFORMATION

Item 1

Legal Proceedings.

 

The information included in Note 13 to the Condensed Consolidated Financial Statements (Unaudited) included in Part I, Item 1 of this quarterly report is incorporated herein by reference.

 

Item 1A.

Risk Factors.

 

You should carefully consider the risk factors set forth below together with the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, which could materially affect our business, financial position, or future results of operations. The risks described below and in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial position, or future results of operations.

 

As a result of our spin-off of Harvard Apparatus Regenerative Technology, Inc., now known as Biostage, together with certain related transactions, third parties may seek to hold us responsible for Biostages liabilities, including liabilities that Biostage has assumed from us.

 

Third parties may continue to seek to hold us responsible for Biostage’s liabilities, including any of the liabilities that Biostage agreed to retain or assume in connection with the separation of the Biostage business from our businesses, and related spin-off distribution. On April 14, 2017, representatives for the estate of an individual plaintiff filed a wrongful death complaint with the Suffolk Superior Court, in the County of Suffolk, Massachusetts, against us and other defendants, including Biostage, as well as another third party. The complaint seeks payment for an unspecified amount of damages and alleges that the plaintiff sustained terminal injuries allegedly caused by products, including one synthetic trachea scaffold and two bioreactors, provided by certain of the named defendants and utilized in connection with surgeries performed by third parties in Europe in 2012 and 2013.

 

On October 1, 2019, the Court entered an order granting plaintiffs’ motion to compel the defendant to produce discovery. Subsequently, the plaintiffs filed a motion for sanctions against us on January 6, 2020 claiming failure to produce. Our counsel at the time, which had been selected for the case by our liability insurance carrier, never notified us of plaintiffs’ motion and never responded to plaintiffs’ motion. As a result of the failure of our former counsel to respond, on January 29, 2020, the Court entered an order allowing plaintiffs’ sanctions against us and the other defendants, which establishes a sanction of admitted liability. In June 2021, we were informed of these 2019 and 2020 court actions by new defense counsel appointed by our liability insurance carrier. On June 9, 2021, we, together with the other defendants, filed a motion to vacate the Court’s order allowing plaintiffs’ motion for sanctions. On August 3, 2021, the Court held a hearing on the defendants' motion to vacate but no ruling on the motion has been made. We continue to actively fight the damages in this case.

 

While we believe that claims made in this lawsuit are without merit and that there are strong grounds to vacate the sanctions, unless the sanctions award is vacated, we could face a trial on damages. If the sanctions award is vacated, we will have the opportunity to contest the underlying claims at trial and, while there can be no assurance of prevailing, we believe those claims lack merit. If we face a trial on damages, whether as a result of the sanctions or following a loss on the merits, we do not know the exact amount of compensatory and, potentially, punitive damages that could be awarded. In all events, we believe that available product liability insurance coverage will be available for all or a significant portion of such damages, although there can be no assurance that the damages awarded will be within the limits of the insurance. We are also evaluating possible malpractice claims as an additional source of recovery. We cannot provide assurance that any losses will not exceed such recoveries. Further, while Biostage has agreed to indemnify us for claims and losses relating to certain liabilities that it has assumed from us, including liabilities in connection with the sale of Biostage’s products and other liabilities related to the operation of Biostage’s business. we cannot assure you that Biostage will have the ability to indemnify us against the liabilities we may incur in this lawsuit, in particular due to Biostage having limited revenues, products in early-stage development, a need for additional funds in the future and its overall financial condition. If Biostage is unable to satisfy its obligations under its indemnity to us, we may have to satisfy the liabilities in this lawsuit, which could have an adverse impact on our financial condition, results of operations or cash flows.

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

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

Item 3.

Defaults Upon Senior Securities.

 

None.

Item 4.

Mine Safety Disclosures.

 

Not applicable.

Item 5.

Other Information.

 

None.

Item 6.

Exhibits

 

10.1

Harvard Bioscience, Inc. 2021 Incentive Plan (previously filed as an exhibit to the Company’s Current Report on Form 8-K (filed May 19, 2021) and incorporated by reference thereto).

31.1

Certification of Chief Financial Officer of Harvard Bioscience, Inc., pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Executive Officer of Harvard Bioscience, Inc., pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*

Certification of Chief Financial Officer of Harvard Bioscience, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*

Certification of Chief Executive Officer of Harvard Bioscience, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

Inline XBRL Instance Document

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Labels Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)

*

This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

 

25

 

 

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: August 6, 2021

 

       
 

HARVARD BIOSCIENCE, INC.

 
       
 

By:

/s/    JAMES GREEN

 
   

James Green

 
   

Chief Executive Officer

 
       
 

By:

/s/   MICHAEL A. ROSSI

 
   

Michael A. Rossi

 
   

Chief Financial Officer

 

 

26