HARVARD BIOSCIENCE INC - Quarter Report: 2023 September (Form 10-Q)

PART I. FINANCIAL INFORMATION

HARVARD BIOSCIENCE, INC.

CONSOLIDATED BALANCE SHEETS 

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

See accompanying notes to condensed consolidated financial statements.

HARVARD BIOSCIENCE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share data) 

See accompanying notes to condensed consolidated financial statements.

HARVARD BIOSCIENCE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited, in thousands)

See accompanying notes to condensed consolidated financial statements.

HARVARD BIOSCIENCE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited, in thousands)

See accompanying notes to condensed consolidated financial statements

HARVARD BIOSCIENCE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

See accompanying notes to condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Basis of Presentation and Summary of Significant Accounting Policies

The unaudited consolidated financial statements of Harvard Bioscience, Inc. and its wholly-owned subsidiaries (collectively, the “Company”) as of September 30, 2023 and for the three and nine months ended September 30, 2023 and 2022, have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. The December 31, 2022 consolidated balance sheet was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

In the opinion of management, all adjustments, which include normal recurring adjustments necessary to present a fair statement of financial position as of September 30, 2023, results of operations and comprehensive income (loss) and cash flows for the three and nine months ended September 30, 2023 and 2022, as applicable, have been made. The results of operations for the three and nine months ended September 30, 2023, are not necessarily indicative of the operating results for the full fiscal year or any future periods.

The accounting policies underlying the accompanying unaudited consolidated financial statements are set forth in Note 2 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Except as described below, there have been no material changes in the Company’s significant accounting policies during the three and nine months ended September 30, 2023.

Marketable Equity Securities

Equity securities traded in active markets are marked to market at each balance sheet date based on their prices as quoted on the relevant stock exchange. Fair value mark-to-market adjustments are recorded as non-operating gains (losses) in the consolidated statement of operations. The Company’s investments in marketable equity securities are classified in the consolidated balance sheet based on the nature of the securities and their availability for use in current operations.

Risks and Uncertainties

The global supply chain has experienced significant disruptions over the last few years due to electronic component and labor shortages and other macroeconomic factors which have emerged since the onset of COVID-19. This has led to increased cost of freight, purchased materials, and manufacturing labor costs, while also delaying customer shipments. Additionally, the global economy has recently experienced increasing uncertainty, including inflationary pressure, rising interest rates, and fluctuations in exchange rates. These conditions have negatively impacted the Company’s past business, results of operations, and cash flow. Recent events in Ukraine and the Middle East, as well as delays in U.S. government funding may lead to additional economic uncertainties. If these factors are prolonged or are more severe than anticipated, the Company’s business, results of operations, and cash flow may be materially impacted.

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which eliminates the performance of Step 2 from the goodwill impairment test. In performing its annual or interim impairment testing, an entity will instead compare the fair value of the reporting unit with its carrying amount and recognize any impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss. The Company adopted ASU 2016-13 effective January 1, 2023 with no impact to the consolidated financial statements. The Company will perform future goodwill impairment test according to ASU 2017-04.

In September 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. The FASB issued several ASUs after ASU 2016-13 to clarify implementation guidance and to provide transition relief for certain entities. The Company adopted ASU 2016-13 effective January 1, 2023, which resulted in an immaterial impact to the consolidated financial statements.

The change in the carrying amount of goodwill for the nine months ended September 30, 2023 is as follows:

Intangible assets at September 30, 2023 and December 31, 2022 consist of the following:

*Weighted average life in years as of September 30, 2023

Intangible asset amortization expense was $1.4 million and $1.6 million for the three months ended September 30, 2023 and 2022, respectively, and $4.1 million and $4.5 million for the nine months ended September 30, 2023 and 2022, respectively. Estimated amortization expense of existing amortizable intangible assets for each of the five succeeding years and thereafter as of September 30, 2023, is as follows:

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

On an ongoing basis, the Company reviews the global economy, the healthcare industry, and the markets in which it competes to identify operational efficiencies, enhance commercial capabilities, and align its cost base and infrastructure with customer needs and its strategic plans. In order to realize these opportunities, the Company undertakes restructuring-type activities from time to time to transform its business. A portion of these transformation activities are considered restructuring costs under ASC 420 – Exit or Disposal Cost Obligations and are discussed below.

During the three months ended September 30, 2022, the Company completed a review of its product portfolio in which the Company identified certain non-strategic products for discontinuation, and recorded charges of $1.3 million included in cost of revenues, in connection with excess and obsolete inventory, and $0.6 million in severance expense included in general and administrative expense, in connection with headcount reductions in Europe and North America.

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 nine months ended September 30, 2023 and 2022, are as follows:

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

Supplemental balance sheet information related to the Company’s operating leases are as follows:

Future minimum lease payments for operating leases, with initial terms in excess of one year at September 30, 2023, are as follows:

As of September 30, 2023 and December 31, 2022, the Company’s borrowings are as follows:

In December, 2020, the Company entered into a Credit Agreement (the “Credit Agreement”) with Citizens Bank, N.A., Wells Fargo Bank, National Association, and Silicon Valley Bank (together, the “Lenders”). Effective March 27, 2023, all commitments and obligations under the Credit Agreement previously held by Silicon Valley Bank were assumed by First-Citizens Bank & Trust Company. The Credit Agreement provides for a term loan of $40.0 million and a $25.0 million senior revolving credit facility (including a $10.0 million sub-facility for the issuance of letters of credit and a $10.0 million swingline loan sub facility) (collectively, the “Credit Facility”). The Company’s obligations under the Credit Agreement are guaranteed by certain of the Company’s direct, domestic wholly-owned subsidiaries; none of the Company’s direct or indirect foreign subsidiaries has guaranteed the Credit Facility. The Company’s obligations under the Credit Agreement are secured by substantially all of the assets of Harvard Bioscience, Inc., and each guarantor (including all or a portion of the equity interests in certain of the Company’s domestic and foreign subsidiaries). The Credit Facility matures on December 22, 2025. Issuance costs of $1.4 million are amortized over the contractual term to maturity date on a straight-line basis, which approximates the effective interest method. Available and unused borrowing capacity under the revolving line of credit was $13.0 million as of September 30, 2023 based on the Credit Agreement, as amended. Total revolver borrowing capacity is limited by the consolidated net leverage ratio as defined under the amended Credit Agreement.

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

The effective interest rate on the Company borrowings for the three months ended September 30, 2023 and 2022, was 8.3% and 5.8%, respectively, and for the nine months ended September 30, 2023 and 2022, was 8.2% and 4.3%, respectively. The weighted average interest rate as of September 30, 2023, inclusive of the effect of the Company’s interest rate swaps, was 7.7%. The carrying value of the debt approximates fair value because the interest rate under the obligation approximates market rates of interest available to the Company for similar instruments.

The term loan amortizes in quarterly installments of $0.75 million for the quarter ended December 31, 2023 and $1.0 million per quarter during the next seven quarters thereafter, with a balloon payment at maturity. Furthermore, within ninety days after the end of the Company’s fiscal year, the term loan may be permanently reduced pursuant to certain mandatory prepayment events including an annual “excess cash flow sweep” of 50% of the consolidated excess cash flow, as defined in the agreement; provided that, in any fiscal year, any voluntary prepayments of the term loans shall be credited against the Company’s “excess cash flow” prepayment obligations on a dollar-for-dollar basis for such fiscal year. As of December 31, 2022, the current portion of long-term debt included an excess cash flow sweep of $1.1 million which was paid during the quarter ended March 31, 2023. Amounts outstanding under the revolving credit facility can be repaid at any time but are due in full at maturity.

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

In April, 2022, the Company entered into an amendment to the Credit Agreement which modified, among other things, the financial covenant relating to the consolidated net leverage ratio, and also provided consent for the Biostage Settlement (as defined in Note 14). In November, 2022, the Company entered into a subsequent amendment to the Credit Agreement which modified, among other things, the financial covenant relating to the consolidated net leverage ratio, and the definition of Consolidated EBITDA used in the calculation of certain financial covenants. The Company was in compliance with the covenants of the Credit Agreement, as amended, as of September 30, 2023.

The Company uses interest-rate-related derivative instruments to manage its exposure related to changes in interest rates on its variable-rate debt instruments. The Company does not enter into derivative instruments for any purpose other than cash flow hedging.

By using derivative financial instruments to hedge exposure to changes in interest rates, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, the Company is not exposed to the counterparty’s credit risk in those circumstances. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with carefully selected major financial institutions based upon their credit profile.

Market risk is the adverse effect on the value of a derivative instrument that results from a change in interest rates. The market risk associated with interest-rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. The Company monitors interest rate risk attributable to both its outstanding and forecasted debt obligations by the use of cash flow sensitivity analysis, which estimates the expected impact of changes in interest rates on the Company’s future cash flows.

On February 28, 2023, the Company entered into an interest rate swap contract to improve the predictability of cash flows from interest payments related to its variable, SOFR-based debt. The swap contract has a notional amount of $28.8 million as of September 30, 2023 and matures on December 22, 2025. This swap contract effectively converts the SOFR-based variable portion of the interest payable under the Credit Agreement into fixed-rate debt at an annual rate of 4.75%. The swap contract does not impact the additional interest related to the applicable interest rate margin as discussed above in Note 7, Long-Term Debt. The interest rate swap is considered an effective cash flow hedge, and as a result, the net gains or losses on such instrument are reported as a component of other comprehensive income (loss) (“OCI”) in the consolidated financial statements and are reclassified as net income when the underlying hedged interest impacts earnings. An assessment is performed quarterly to evaluate the ongoing hedge effectiveness.

The following table presents the notional amount and fair value of the Company’s derivative instrument as of September 30, 2023:

(a) See Note 9 for the fair value measurements related to this financial instrument.

The following table summarizes the effect of derivatives designated as cash flow hedging instruments for the three and nine months ended September 30, 2023:

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

The Company uses the market approach technique to value its financial assets and liabilities. The Company’s financial assets and liabilities carried at fair value include, when applicable, investments in common stock and derivative instruments used to hedge the Company’s interest rate risks. The fair value of the Company’s investment in common stock of Harvard Apparatus Regenerative Technologies (“HART” formerly known as Biostage, Inc.) (see Note 14 for information regarding the Biostage Settlement) was based on the closing price as quoted on the OTCQB Marketplace at the reporting date. The fair value of the Company’s interest rate swap agreements was based on SOFR-yield curves at the reporting date.

Stock-Based Payment Awards

Stock-based awards consist of stock options, time-based restricted stock units, market condition restricted stock units, and shares issued under the Company’s employee stock purchase plan. Activity under the Company’s equity incentive plans for the nine months ended September 30, 2023 is as follows: 

Stock-based compensation expense for the three and nine months ended September 30, 2023 and 2022 is allocated as follows:

As of September 30, 2023, the total compensation costs related to unvested awards not yet recognized is $6.0 million and the weighted average period over which it is expected to be recognized is approximately 1.7 years. The Company did not capitalize any stock-based compensation during the three and nine month periods ended September 30, 2023.

The weighted average estimated fair value of the market condition restricted stock awards that were granted during the nine months ended September 30, 2023 was $2.61 per unit. The estimate of the fair value was determined using a Monte-Carlo valuation simulation, which included the following assumptions:

Earnings (Loss) Per Share

Basic earnings (loss) per share (EPS) is calculated by dividing net income (loss) by the number of weighted average shares of common stock outstanding during the period. The calculation of diluted earnings per share assumes conversion of stock options and restricted stock units into common stock using the treasury method. The weighted average number of shares used to compute basic and diluted EPS consisted of the following:

The following tables represent a disaggregation of revenue from contracts with customers for the three and nine months ended September 30, 2023 and 2022:

The following tables represent a disaggregation of revenue by geographic destination for the three and nine months ended September 30, 2023 and 2022:

Concentrations

No customer accounts for more than 10% of revenues for the three and nine months ended September 30, 2023 and 2022. At September 30, 2023 and December 21, 2022, no customer accounts for more than 10% of net accounts receivable.

Contract Liabilities

The following tables provide details of contract liabilities as of the periods indicated:

The overall increase in contract liabilities was primarily due to receipt of payments under service and warranty contracts. During the three months ended September 30, 2023 and 2022, the Company recognized revenue of $1.0 million and $0.8 million from deferred revenue existing at December 31, 2022 and 2021, respectively. During the nine months ended September 30, 2023 and 2022, the Company recognized revenue of $2.3 million and $2.1 million from deferred revenue existing at December 31, 2022 and 2021, respectively.

Allowance for Expected Credit Losses on Receivables

The allowance for expected credit losses on receivables is used to present accounts receivable, net at an amount that represents the Company’s estimate of the related transaction price recognized as revenue. The allowance represents an estimate of expected credit losses over the lifetime of the receivables, even if the loss is considered remote, and reflects expected recoveries of amounts previously written-off. The Company estimates the allowance on the basis of specifically identified receivables that are evaluated individually for impairment and an analysis of the remaining receivables determined by reference to past default experience. The Company considers the need to adjust historical information to reflect the extent to which current conditions and reasonable forecasts are expected to differ from the conditions that existed for the historical period considered. Losses on receivables have not historically been significant.

Management judgments are used to determine when to charge off uncollectible trade accounts receivable. The Company bases these judgments on the age of the receivable, credit quality of the customer, current economic conditions, and other factors that may affect a customer’s ability and intent to pay. Customers are generally not required to provide collateral for purchases.

Activity in the allowance for expected losses on receivables is as follows:

Income tax expense (benefit) was $0.7 million and $(1.3) million for the three months ended September 30, 2023 and 2022, respectively, and was $0.1 million and $(0.4) million for the nine months ended September 30, 2023 and 2022, respectively. The effective tax rates for the three months ended September 30, 2023 and 2022, were (120.2)% and 27.4%, respectively. The effective tax rates for the nine months ended September 30, 2023 and 2022, were (9.9)% and 5.3%, respectively.

The difference between the Company’s effective tax rates in 2023 compared to the U.S. statutory tax rate of 21% was primarily due to the mix of forecasted income or losses in the U.S. and foreign tax jurisdictions and a Global Intangible Low-Taxed Income (“GILTI”) inclusion to taxable income. The effective tax rates in both the three and nine months ended September 30, 2023 and 2022, were also impacted by changes in valuation allowances associated with the Company’s assessment of the likelihood of the recoverability of deferred tax assets. The Company has valuation allowances against substantially all of its net operating loss carryforwards and tax credit carryforwards.

The determination of the annual effective tax rate is based upon a number of significant estimates and judgments, including the estimated annual pretax income in each tax jurisdiction in which the Company operates and the development of tax planning strategies during the year. In addition, as a global commercial enterprise, the Company’s tax expense can be impacted by changes in tax rates or laws, the finalization of tax audits and reviews and other factors that cannot be predicted with certainty. As such, there can be significant volatility in interim tax provisions.

On April 27, 2022, the Company and Biostage, Inc. (“Biostage”) executed a settlement with the plaintiffs in the Biostage Litigation (as defined below) which resolved all claims relating to the litigation as described in Note 14, Litigation Settlement.

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

In addition, the Company has entered into indemnification agreements with its directors. It is not possible to determine the maximum potential liability amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. The Company has not recorded any liability for costs related to contingent indemnification obligations as of September 30, 2023.

The Company is subject to unclaimed property laws in the ordinary course of its business. State escheat laws generally require entities to report and remit abandoned and unclaimed property to the state. Failure to timely report and remit the property can result in assessments that could include interest and penalties, in addition to the payment of the escheat liability itself. The Company is currently undergoing unclaimed property audits conducted in various states. Based on the current stage of the audits, the Company has not accrued any significant losses related to these audits as of September 30, 2023.

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

On April 27, 2022, the Company and Biostage executed a settlement with the plaintiffs of the Biostage Litigation and Biostage’s products liability insurance carriers (the “Biostage Settlement”), which resolved all claims by and between the parties and Biostage’s product liability insurance carriers and resulted in the dismissal with prejudice of the wrongful death claim and all claims between the Company, Biostage and the insurance carriers. The Biostage Settlement was entered into solely by way of compromise and settlement and was not in any way an admission of liability or fault by the Company or Biostage. Biostage has indemnified the Company for all losses and expenses, including legal expenses that the Company incurred in connection with the Biostage Litigation and the Biostage Settlement.

During the nine months ended September 30, 2022, the Company recorded a net credit of $0.2 million related to the Biostage Settlement consisting of charges (credits) as follows:

As of December 31, 2022, the book value of the shares of Series E Preferred Stock, inclusive of accrued dividends, was $4.0 million and was included in the consolidated balance sheet as a component of Other long-term assets. The Company elected the provisions within ASC 321, Investment Securities, to subsequently measure the Series E Preferred Stock at its original cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of Biostage. As of December 31, 2022, there were no observable price changes or indicators of impairment and therefore, there was no measurement adjustments to the carrying value of the Series E Preferred Stock.

On April 6, 2023, Biostage completed a private placement of its common stock for an aggregate offering amount of approximately $6.0 million at a purchase price of $6.00 per share. This transaction triggered a mandatory conversion of the Company’s remaining Series E Preferred Stock into shares of Biostage common stock at the offering price of $6.00 per share.

On July 20, 2023, Biostage, Inc. changed its corporate name to Harvard Apparatus Regenerative Technology, Inc. (“HART”) and began to trade under the OTCQB Marketplace symbol HRGN.

As of September 30, 2023, the Company held 706,626 shares of HART common stock with an estimated fair value of $3.8 million, which have been included in the consolidated balance sheet as a component of Other long-term assets. During the three and nine months ended September 30, 2023, the Company recorded an unrealized gain (loss) related to these shares of $1.2 million and $(0.4) million, respectively, which were recorded in the Other income (expense) section in the consolidated statements of operations.

The Company determines the fair value of its HART common stock based on the closing price as quoted on the OTCQB Marketplace at the reporting date. Due to HART’s limited operating history, its overall financial condition and the limited trading volumes and liquidity of its common stock, the value of the Company’s investment in this common stock could fluctuate considerably or become worthless.

On February 17, 2023, the Company completed the disposition of its Hoefer product line for cash consideration of $0.5 million. The carrying value of assets sold was $0.1 million resulting in a gain on disposition of $0.4 million which is recorded in Other income, net in the consolidated statement of operations for the nine months ended September 30, 2023. Revenue and gross profit of this disposed product line included in the condensed consolidated statement of operations for the nine months ended September 30, 2023, and for the three and nine months ended September 30, 2022, were not significant.

During the three months ended September 30, 2023, the Company identified immaterial misclassification errors in the financial statement footnote describing the components of accumulated other comprehensive loss as of December 31, 2022 and 2021. These misclassifications overstated the amount attributed to the defined benefit pension plans, net of tax, by $5.4 million and $5.1 million and understated the amount attributed to foreign currency translation adjustments by $(5.4) million and $(5.1) million as of December 31, 2022 and 2021, respectively. This had no impact on total other comprehensive income (loss) for the years ended December 31, 2022 and 2021, included in the Consolidated Statements of Comprehensive Income (Loss), or the total accumulated other comprehensive loss included in the Consolidated Balance Sheets as of December 31, 2022, and 2021. This also had no impact on any of the Company’s previously reported Consolidated Statements of Operations, Stockholders’ Equity, or Cash Flows. These offsetting misclassifications had no impact on any of the periods presented in the interim financial statements and disclosures in this Quarterly Report on Form 10-Q as of September 30, 2023, and applicable corrections will be included in the annual financial statements and disclosures in the Company’s Annual Report on Form 10-K as of December 31, 2023 and for the year then ended.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains statements that are not statements of historical fact and are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). The forward-looking statements are principally, but not exclusively, contained in “Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about management’s confidence or expectations, and our plans, objectives, expectations, and intentions that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “seek,” “expects,” “plans,” “aim,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “intends,” “think,” “potential,” “objectives,” “optimistic,” “strategy,” “goals,” “sees,” “new,” “guidance,” “future,” “continue,” “drive,” “growth,” “long-term,” “projects,” “develop,” “possible,” “emerging,” “opportunity,” “pursue” and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We discuss many of these risks in detail in our Annual Report on Form 10-K for the year ended December 31, 2022 and our other filings with the SEC. You should carefully review all of these factors, as well as other risks described in our public filings, and you should be aware that there may be other factors, including factors of which we are not currently aware, that could cause these differences. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this report. We may not update these forward-looking statements, even though our situation may change in the future, unless we have obligations under the federal securities laws to update and disclose material developments related to previously disclosed information. Harvard Bioscience, Inc. is referred to herein as “we,” “our,” “us,” and “the Company.”

Recent Developments

Global Economic Environment

The global supply chain has experienced significant disruptions over the last few years due to electronic component and labor shortages and other macroeconomic factors which have emerged since the onset of COVID-19. This has led to increased cost of freight, purchased materials, and manufacturing labor costs, while also delaying customer shipments. Additionally, the global economy has recently experienced increasing uncertainty, including inflationary pressure, rising interest rates, and fluctuations in exchange rates. These conditions have negatively impacted our past business, results of operations, and cash flow. Recent events in Ukraine and the Middle East, as well as delays in U.S. government funding may lead to additional economic uncertainties. If these factors are prolonged or are more severe than anticipated, our business, results of operations, and cash flow may be materially impacted.

Selected Results of Operations

Three months ended September 30, 2023 compared to three months ended September 30, 2022.

Revenue

Revenue was $25.4 million for the three months ended September 30, 2023, compared to $26.9 million for the three months ended September 30, 2022, a decrease of $1.5 million, or 5.8%. This decline included a net decrease of $1.3 million from non-strategic products discontinued in the second half of 2022 and decreases in cellular and molecular product revenue, which were largely offset by growth in preclinical products and services. Revenue declines in Asia were partially offset by growth in North America.

Gross profit

Gross profit was $14.7 million for the three months ended September 30, 2023, compared with $12.2 million for the three months ended September 30, 2022. Gross margin increased to 58.1% for the three months ended September 30, 2023, compared with 45.2% for the three months ended September 30, 2022. The increase in gross margin was due primarily to a higher mix of preclinical products, service and software, which generally have higher gross margins than our other product lines, as well as reduced revenue from lower margin products discontinued during the second half of 2022. Costs of goods sold for the three months ended September 30, 2022, also included a $1.3 million inventory reserve related to the discontinuation of certain non-strategic products.

Sales and marketing expenses

Sales and marketing expenses decreased $0.1 million, or 1.5%, to $5.7 million for the three months ended September 30, 2023, compared to $5.8 million for the three months ended September 30, 2022. A reduction in salaries due to lower headcount was mostly offset by increases in variable compensation and travel expenses.

General and administrative expenses

General and administrative expenses decreased $0.5 million, or 8.2%, to $5.8 million for the three months ended September 30, 2023, compared with $6.3 million for the three months ended September 30, 2022. We undertook a restructuring during the three months ended September 30, 2022, which resulted in higher severance costs in the prior period.

Research and development expenses

Research and development expenses were $2.8 million for both the three months ended September 30, 2023, and 2022. A reduction in salaries due to lower headcount and a reduction in consulting costs were mostly offset by increases in variable compensation.

Amortization of intangible assets

Amortization of intangible asset expenses were $1.4 million for the three months ended September 30, 2023, compared with $1.6 million for the three months ended September 30, 2022. Amortization expense decreased due to the completion of  amortizing certain intangible assets during 2022.

Litigation settlement (2022)

During the three months ended September 30, 2022, we released a reserve of $0.5 million against the indemnification receivable from Biostage to reflect the final payment by Biostage of the legal fees associated with the Biostage Settlement.

Unrealized gain on equity securities

On April 6, 2023, Biostage completed a private placement of its common stock for an aggregate offering amount of approximately $6.0 million at a purchase price of $6.00 per share. As the proceeds of the private placements were in excess of $4.0 million, the transaction triggered a mandatory conversion of our Series E Preferred Stock into shares of Biostage common stock at the offering price of $6.00 per share. On July 20, 2023, Biostage, Inc. changed its corporate name to Harvard Apparatus Regenerative Technology (“HART”) and began to trade under the OTCQB Marketplace symbol HRGN. As of September 30, 2023, we held 706,626 shares of HART common stock with an estimated fair value of $3.8 million. During the three months ended September 30, 2023, we recorded an unrealized gain of $1.2 million related to these shares.

We determine the fair value of our HART common stock based on the closing price as quoted on the OTCQB Marketplace at the reporting date. Due to HART’s limited operating history, its overall financial condition and the limited trading volumes and liquidity of its common stock, the value of our investment in this common stock could fluctuate considerably or become worthless.

Interest expense

Interest expense was $0.9 million and $0.7 million for the three months ended September 30, 2023 and 2022, respectively. The increase was the result of higher interest costs in a rising rate environment, which was partially offset by lower average borrowings during the period.

Income tax

Income tax expense (benefit) for the three months ended September 30, 2023 was $0.7 million and for the three months ended September 30, 2022 was $(1.3) million. The effective tax rates for the three months ended September 30, 2023 and 2022 were (120.2)% and 27.4%, respectively. The difference between our effective tax rates for the three months ended September 30, 2023, compared to the U.S. statutory tax rate of 21% is primarily due to the mix of forecasted income or losses in our U.S. and foreign tax jurisdictions and a Global Intangible Low-Taxed Income (“GILTI”) inclusion to taxable income. The effective tax rates in both the three months ended September 30, 2023 and 2022, were also impacted by changes in valuation allowances associated with our assessment of the likelihood of the recoverability of our deferred tax assets. We have valuation allowances against substantially all of our net operating loss carryforwards and tax credit carryforwards.

Nine months ended September 30, 2023 compared to nine months ended September 30, 2022.

Revenue

Revenue was $84.1 million for the nine months ended September 30, 2023, compared to $84.9 million for the nine months ended September 30, 2022, a decrease of $0.8 million, or 1.0%. Revenue included a net decrease of $4.1 million from the discontinuation of non-strategic products which was largely offset by growth in preclinical product and service revenue.

Gross profit

Gross profit was $49.7 million for nine months ended September 30, 2023, compared with $45.0 million for the nine months ended September 30, 2022. Gross margin increased to 59.2% for the nine months ended September 30, 2023, compared with 53.0% for the nine months ended September 30, 2022. The increase in gross margin was due primarily to a higher mix of preclinical products, services and software, which generally have higher gross margins than our other product lines, as well as reduced revenue from lower margin products discontinued during the second half of 2022. Costs of goods sold for the three months ended September 30, 2022, also included a $1.3 million inventory reserve related to the discontinuation of certain non-strategic products.

Sales and marketing expenses

Sales and marketing expenses decreased $1.2 million, or 6.3%, to $17.9 million for the nine months ended September 30, 2023, compared to $19.1 million for the nine months ended September 30, 2022. A reduction in salaries due to lower headcount was partially offset by increases in variable compensation.

General and administrative expenses

General and administrative expenses decreased $1.1 million, or 6.1%, to $17.5 million for the nine months ended September 30, 2023, compared with $18.6 million for the nine months ended September 30, 2022. The decrease was primarily due to reduced consulting costs and severance costs incurred with restructuring activities in the prior period, partially offset by increases in salaries and variable compensation in the current period.

Research and development expenses

Research and development expenses decreased $0.9 million, or 9.1%, to $8.6 million for the nine months ended September 30, 2023, compared with $9.5 million for the nine months ended September 30, 2022. The decrease was primarily due to reduced salaries and consulting costs, partially offset by increases in variable compensation.

Amortization of intangible assets

Amortization of intangible asset expenses were $4.1 million for the nine months ended September 30, 2023, compared with $4.5 million for the nine months ended September 30, 2022. Amortization expense decreased as we completed the amortization of certain intangible assets during 2022.

Litigation settlement (2022)

During the nine months ended September 30, 2022, we recorded a net credit of $0.2 million related to the Biostage Settlement consisting of $5.2 million in settlement and legal expenses accrued during the three months ended March 31, 2022, offset by credits of $4.9 million and $0.5 million recorded during the three months ended June 30, 2022 and September 30, 2022, respectively. The credits consisted of adjustments to the reserve against the indemnification receivable from Biostage to reflect: i) the issuance by Biostage of Series E Convertible Preferred Stock to us on June 10, 2022, in satisfaction of $4.0 million of Biostage’s total indemnification obligations, ii) the payment by Biostage of legal fees associated with the Biostage Settlement, and iii) other accrual adjustments.

Unrealized loss on equity securities

As discussed above, we held 706,626 shares of HART common stock with an estimated fair value of $3.8 million as of September 30, 2023. During the nine months ended September 30, 2023, we recorded an unrealized loss of $0.4 million related to these shares.

We determine the fair value of our HART common stock based on the closing price as quoted on the OTCQB Marketplace at the reporting date. Due to HART’s limited operating history, its overall financial condition and the limited trading volumes and liquidity of its common stock, the value of our investment in this common stock could fluctuate considerably or become worthless.

Interest expense

Interest expense increased $1.2 million, or 69.7%, to $2.8 million for the nine months ended September 30, 2023, compared with $1.6 million for the nine months ended September 30, 2022. The increase was the result of higher interest costs in a rising rate environment, which was partially offset by lower average borrowings during the period.

Income tax

Income tax expense (benefit) for the nine months ended September 30, 2023 was $0.1 million and for the nine months ended September 30, 2022 was $(0.4) million. The effective tax rates for the nine months ended September 30, 2023 and 2022 were (9.9)% and 5.3%, respectively. The difference between our effective tax rates for the nine months ended September 30, 2023, compared to the U.S. statutory tax rate of 21% was primarily due to the mix of forecasted income or losses in our U.S. and foreign tax jurisdictions and a GILTI inclusion to taxable income. The effective tax rates in both the nine months ended September 30, 2023 and 2022, were also impacted by changes in valuation allowances associated with our assessment of the likelihood of the recoverability of our deferred tax assets. We have valuation allowances against substantially all of our net operating loss carryforwards and tax credit carryforwards.

Liquidity and Capital Resources

Our primary sources of liquidity are cash and cash equivalents, internally generated cash flow from operations and our revolving credit facility. Our expected cash outlays relate primarily to cash payments due under our Credit Agreement described below, salaries as well as capital expenditures.

As of September 30, 2023, we held cash and cash equivalents of $5.3 million, compared with $4.5 million at December 31, 2022. Borrowings outstanding were $39.4 million and $47.7 million as of September 30, 2023 and December 31, 2022, respectively.

On December 22, 2020, we entered into a Credit Agreement which provides for a term loan of $40.0 million and a $25.0 million senior revolving credit facility both maturing on December 22, 2025. As of September 30, 2023, the weighted average interest rate on our borrowings, inclusive of the effect of our interest rate swaps, was 7.7%, and the available and unused borrowing capacity was $13.0 million. Total revolver borrowing capacity is limited by our consolidated net leverage ratio as defined under the Credit Agreement, as amended. As of September 30, 2023, we were in compliance with the covenants of the Credit Agreement, as amended.

Based on our current operating plans, we expect that our available cash, cash generated from current operations and debt capacity will be sufficient to finance current operations, and capital expenditures for at least the next 12 months. This assessment includes consideration of our best estimates of the impact of macroeconomic conditions 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

Cash provided by operating activities was $9.7 million for the nine months ended September 30, 2023, compared with cash used in operating activities of $1.5 million for the nine months ended September 30, 2022. Cash provided by operating activities for the nine months ended September 30, 2023 improved due to reductions in our net loss adjusted for non-cash items and increases in deferred revenue for service contracts. During the nine months ended September 30, 2022, cash used in operating activities was negatively impacted by the payment of approximately $4.0 million in connection with the Biostage Settlement.

Cash used in investing activities was $0.7 million for the nine months ended September 30, 2023, and primarily consisted of $1.2 million of capital expenditures in manufacturing, information technology infrastructure, and intangible asset acquisitions, offset by $0.5 million from proceeds of the sale our Hoefer product line. Cash used in investing activities was $1.4 million for the nine months ended September 30, 2022, and primarily consisted of capital expenditures in manufacturing and information technology infrastructure.

Cash used in financing activities was $8.0 million and $0.1 million for the nine months ended September 30, 2023 and 2022, respectively. During the nine months ended September 30, 2023, debt outstanding under our credit facility decreased by $8.3 million, consisting of net payments against our revolving line of credit of $5.0 million, and payments of $3.3 million against the term loan. We also received proceeds of $0.7 million from the exercise of stock options and employee stock purchases and paid $0.5 million for taxes related to net share settlement of equity awards. During the nine months ended September 30, 2022, debt outstanding under our credit facility increased by $0.7 million, consisting of net drawings against our revolver of $3.1 million, offset by payments of $2.4 million against the term loan. We also paid $1.2 million for taxes related to net share settlement of equity awards.

Impact of Foreign Currencies

Our international operations in some instances operate in a natural hedge, as we sell our products in many countries and a substantial portion of our revenues, costs and expenses are denominated in foreign currencies, primarily the euro and British pound.

During the three months ended September 30, 2023, changes in foreign currency exchange rates resulted in a favorable translation effect on our consolidated revenues of approximately $0.7 million and an unfavorable effect on expense of approximately $0.5 million. During the nine months ended September 30, 2023, changes in foreign currency exchange rates resulted in a favorable translation effect on our consolidated revenues of approximately $0.3 million and a unfavorable effect on expense of approximately $0.1 million.

The loss associated with the translation of foreign equity into U.S. dollars included as a component of comprehensive loss was $1.3 million and $2.9 million for the three months ended September 30, 2023 and 2022, respectively, and was $0.4 million and $6.2 million for the nine months ended September 30, 2023 and 2022, respectively.

In addition, currency exchange rate fluctuations included as a component of net loss resulted in currency gains (losses) of approximately $0.2 million and $(0.3) million for the three months ended September 30, 2023 and 2022, respectively, and $0.1 million and $(0.6) million for the nine months ended September 30, 2023 and 2022, respectively.

Critical Accounting Policies

The critical accounting policies underlying the accompanying unaudited consolidated financial statements are those set forth in Part II, Item 7 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Recent Accounting Pronouncements

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

Not Applicable.

Evaluation of Disclosure Controls and Procedures

As of September 30, 2023, the end of the period covered by this report, our management, including our Chief Executive Officer and our Chief Financial Officer, reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Exchange Act). Based upon management's review and evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the third quarter of fiscal 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

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

PART II. OTHER INFORMATION

The information included in Note 13 and Note 14 to the Condensed Consolidated Financial Statements (Unaudited) included in “Part I, Item 1 Financial Statements” of this quarterly report is incorporated herein by reference.

You should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which could materially affect our business, financial position, or future results of operations. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial position, or future results of operations.

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.