HARVARD BIOSCIENCE, INC. 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 endedDecember 31, 2021 and our other filings with theSecurities and Exchange Commission . 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 COVID-19 The COVID-19 pandemic has had a negative impact on our operations to date and the future impacts of the pandemic and any resulting economic impact are largely unknown and continuously evolving. Many countries world-wide continue to issue COVID-19 related policies in an attempt to control the pandemic. In particular, during the beginning of 2022,China implemented area-wide shutdowns in order to control the spread of COVID-19, which have continued for different parts ofChina throughout 2022.
Global Supply Chain and Economic Environment
The global supply chain has experienced significant disruptions 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, purchased materials and manufacturing labor costs, while also delaying customer shipments. We believe these supply chain trends will continue through the rest of 2022. These conditions, in addition to the overall impact on the global economy, have negatively impacted our results of operations and cash flows. Additionally, during 2022 the global economy has experienced high levels of inflation, rising interest rates, significant fluctuations in currency values, and increasing economic uncertainty, particularly inEurope . Our results of operations have been negatively impacted by higher costs of raw materials, labor and freight resulting from inflationary pressures. These factors and global events including the ongoing military conflict betweenRussia andUkraine , a softening economy inEurope , and rising interest rates on our debt may also have a negative impact on our results. If business interruptions resulting from COVID-19 or the current macroeconomic conditions described above were to be prolonged or expanded in scope, our business, financial condition, results of operations and cash flows would likely be negatively impacted. We will continue to actively monitor this situation and will implement actions necessary to maintain business continuity. 19
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Selected Results of Operations
Three months endedSeptember 30, 2022 compared to three months endedSeptember 30, 2021 . Three Months Ended September 30, (dollars in thousands) 2022 % of revenue 2021 % of revenue Revenues$ 26,922 $ 29,663 Gross profit 12,172 45.2 % 16,308 55.0 % Sales and marketing expenses 5,819 21.6 % 6,183 20.8 % General and administrative expenses 6,324 23.5 % 5,458 18.4 % Research and development expenses 2,763 10.3 % 2,660 9.0 % Amortization of intangible assets 1,572 5.8 % 1,459 4.9 % Settlement of litigation, net (544 ) -2.0 % - - Interest expense 749 2.8 % 373 1.3 % Income tax (benefit) expense (1,285 ) -4.8 % 215 0.7 % Revenue Revenues decreased$2.7 million , or 9.2%, to$26.9 million for the three months endedSeptember 30, 2022 , compared to$29.7 million for the three months endedSeptember 30, 2021 . The decrease in revenues was due primarily to a decrease in sales of our pre-clinical products, as well as unfavorable currency impact. Gross profit Gross profit decreased$4.1 million , or 25.4%, to$12.2 million for the three months endedSeptember 30, 2022 , compared with$16.3 million for the three months endedSeptember 30, 2021 . Gross margin decreased to 45.2% for the three months endedSeptember 30, 2022 , compared with 55.0% for the three months endedSeptember 30, 2021 . The reduction in gross margin was due primarily to the decline in revenue noted, and resulting reduction in labor and overhead absorption, as well as higher costs of labor and materials. Costs of goods sold for the current period also included inventory reserved related to the discontinuation of certain non-strategic products.
The global supply chain has experienced significant disruptions due to electronic components and labor shortages and other macroeconomic factors, leading to increased costs. We believe these supply chain trends will continue through the rest of 2022.
Sales and marketing expenses
Sales and marketing expenses decreased$0.4 million , or 5.9%, to$5.8 million for the three months endedSeptember 30, 2022 , compared to$6.2 million during the same period in 2021. The decrease was due to lower outside service costs and variable compensation as compared to the prior period.
General and administrative expenses
General and administrative expenses increased$0.9 million , or 15.9%, to$6.3 million for the three months endedSeptember 30, 2022 , compared to$5.5 million during the same period in 2021. The increase was primarily due to higher severance costs related to our product portfolio review and other improvement initiatives, partially offset by lower variable compensation.
Research and development expenses
Research and development expenses increased
Amortization of intangible assets
Amortization of intangible asset expenses were$1.6 million for the three months endedSeptember 30, 2022 , compared with$1.5 million for the three months endedSeptember 30, 2021 . Amortization expense was higher due to a change in the estimated remaining economic life of certain intangible assets. 20
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Table of Contents Settlement of litigation During the three months endedSeptember 30, 2022 , we recorded a credit of$0.5 million as an adjustment to the reserve against the indemnification receivable from Biostage to reflect the final payment by Biostage of the legal fees associated with the Settlement. Interest expense Interest expense increased$0.3 million , or 100.8%, to$0.7 million for the three months endedSeptember 30, 2022 , compared with$0.4 million for the three months endedSeptember 30, 2021 . The increase was the result of higher interest rates under our Credit Agreement as well as higher average borrowing balances. Income tax Income tax (benefit) expense for the three months endedSeptember 30, 2022 was$(1.3) million and was$0.2 million for the three months endedSeptember 30, 2021 . The effective tax rates for the three months endedSeptember 30, 2022 and 2021 were 27.4% and 477.8%, respectively. The difference between our effective tax rates in 2022 and 2021 compared to theU.S. statutory tax rate of 21% is primarily due to changes in valuation allowances associated with our assessment of the likelihood of the recoverability of our deferred tax assets. We currently have valuation allowances against substantially all of our net operating loss carryforwards and tax credit carryforwards. Nine months endedSeptember 30, 2022 compared to nine months endedSeptember 30, 2021 . Nine Months Ended September 30, (dollars in thousands) 2022 % of revenue 2021 % of revenue Revenues$ 84,908 $ 85,849 Gross profit 44,986 53.0 % 48,092 56.0 % Sales and marketing expenses 19,093 22.5 % 17,299 20.2 % General and administrative expenses 18,630 21.9 % 18,190 21.2 % Research and development expenses 9,480 11.2 % 7,848 9.1 % Amortization of intangible assets 4,492 5.3 % 4,388 5.1 % Settlement of litigation, net (233 ) -0.3 % - - Interest expense 1,648 1.9 % 1,161 1.4 % Income tax (benefit) expense (437 ) -0.5 % (22 ) 0.0 % Revenue Revenues decreased$0.9 million , or 1.1%, to$84.9 million for the nine months endedSeptember 30, 2022 , compared to revenues of$85.8 million for the nine months endedSeptember 30, 2021 . The decrease in revenues was due primarily to a decrease in sales of our pre-clinical products, lower revenue inEurope and unfavorable currency impacts. Gross profit Gross profit decreased$3.1 million , or 6.5%, to$45.0 million for the nine months endedSeptember 30, 2022 , compared with$48.1 million for the nine months endedSeptember 30, 2021 due primarily to the decrease in revenue and increases in the cost of goods noted above. Gross margin was 53% for the nine months endedSeptember 30, 2022 and was 56% for the nine months endedSeptember 30, 2021 . The reduction in gross margin was due primarily to higher costs of labor and materials and inventory reserves related to the discontinuation of certain non-strategic products, as well as the impact of lower revenue on overhead absorption. Pricing increases positively impacted gross margin during 2022.
The global supply chain has experienced significant disruptions due to electronic components and labor shortages and other macroeconomic factors, leading to increased costs. We believe these supply chain trends will continue through the rest of 2022.
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Table of Contents Sales and marketing expenses Sales and marketing expenses increased$1.8 million , or 10.4%, to$19.1 million for the nine months endedSeptember 30, 2022 , compared to$17.3 million during the same period in 2021. The increase was primarily due to new marketing and sales support personnel and increases in travel and attendance at in-person trade shows offset by lower variable compensation. Travel and tradeshow costs were lower in the prior year due to COVID-19 related restrictions and efforts to mitigate the spread of COVID-19.
General and administrative expenses
General and administrative expenses increased$0.4 million , or 2.4%, to$18.6 million for the nine months endedSeptember 30, 2022 , compared to$18.2 million during the same period in 2021. The increase was primarily due to operational improvement initiative costs partially offset by lower variable compensation.
Research and development expenses
Research and development expenses increased$1.6 million , or 20.8%, to$9.4 million for the nine months endedSeptember 30, 2022 , compared with$7.8 million for the nine months endedSeptember 30, 2021 . The increase was primarily due to higher costs associated with new product development in our preclinical product lines.
Amortization of intangible assets
Amortization of intangible asset expenses were$4.5 million for the nine months endedSeptember 30, 2022 , compared to$4.4 million for the nine months endedSeptember 30, 2021 . Amortization expense was higher due to a change in the estimated remaining economic life of certain intangible assets. Settlement of litigation During the nine months endedSeptember 30, 2022 , we recorded a net credit of$0.2 million related to the Settlement consisting of$5.2 million in settlement and legal expenses accrued during the three months endedMarch 31, 2022 , offset by credits of$4.9 million and$0.5 million during the three months endedJune 30, 2022 andSeptember 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 onJune 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 Settlement, and iii) other accrual adjustments. Interest expense Interest expense increased$0.5 million , or 41.9%, to$1.7 million for the nine months endedSeptember 30, 2022 , compared to$1.2 million for the nine months endedSeptember 30, 2021 . The increase was the result of both higher interest rates under our Credit Agreement as well as higher average borrowing balances. Income tax Income tax expense (benefit) for the nine months endedSeptember 30, 2022 was$(0.4) million and was less than$(0.1) million for the nine months endedSeptember 30, 2021 . The effective tax rates for the nine months endedSeptember 30, 2022 and 2021 were 5.3% and 1.7%, respectively. The difference between our effective tax rates in 2022 and 2021 compared to theU.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. 22
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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 and payments associated with ongoing business improvement initiatives.
As ofSeptember 30, 2022 , we held cash and cash equivalents of$5.1 million , compared with$7.8 million atDecember 31, 2021 . Borrowings outstanding were$50.2 million and$49.5 million as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. OnDecember 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 onDecember 22, 2025 (See Note 9 to our Condensed Consolidated Financial Statements included in "Part I, Item 1. Financial Statement" of this report). As ofSeptember 30, 2022 , the weighted average interest rate on our borrowings was 6.4%, and the available and unused borrowing capacity under the Credit Agreement, as amended, was$3.0 million . Total revolver borrowing capacity is limited by our consolidated net leverage ratio as defined under the Credit Agreement, as amended. OnApril 28, 2022 , andNovember 8, 2022 , we entered into amendments to the Credit Agreement and Pledge and Security Agreement (see Notes 9 and 14 to our Condensed Consolidated Financial Statements included in "Part I, Item 1. Financial Statements" of this report). The amendment we entered into onNovember 8, 2022 (the "November 2022 Amendment"), among other things, modified the financial covenant relating to the consolidated net leverage ratio and the definition of Consolidated EBITDA used in the calculation of certain financial covenants. As a result of theNovember 2022 Amendment, we are in compliance with these financial covenants of the Credit Agreement, as amended. Based on our current operating plans, we expect that our available cash, cash generated from current operations and debt capacity will be sufficient to finance current operations, any costs associated with restructuring activities and capital expenditures for at least the next 12 months. This assessment includes consideration of our best estimates of the impact of the COVID-19 pandemic and other macroeconomic conditions on our financial results described above. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary as a result of a number of factors. CONDENSED CONSOLIDATED CASH FLOW STATEMENTS Nine Months Ended September 30, (in thousands) 2022 2021
Cash (used in) provided by operating activities
1,145
Cash used in investing activities (1,355 ) (987 ) Cash used in financing activities (107 ) (2,846 ) Effect of exchange rate changes on cash 312 (81 ) Decrease in cash and cash equivalents$ (2,677 ) $ (2,769 ) Cash (used in) provided by operating activities was$(1.5) million and$1.1 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Cash flow from operations for the nine months endedSeptember 30, 2022 was lower than the comparable period in the prior year due to increased operating losses as noted, payments related to the Biostage Litigation, offset by the positive impact of improved accounts receivable collections. During the nine months endedSeptember 30, 2022 , we paid approximately$4.0 million in connection with the Settlement. Cash used in investing activities was$1.4 million and$1.0 million for the nine months endedSeptember 30, 2022 and 2021, respectively, and primarily consisted of capital expenditures in manufacturing and information technology infrastructure. Cash used in financing activities was$0.1 million and$2.8 million for the nine months endedSeptember 30, 2022 and 2021, respectively. During the nine months endedSeptember 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. During the nine months endedSeptember 30, 2021 , we reduced total debt outstanding under our credit facility by$3.0 million . This reduction included$1.5 million paid under term loan installments and a net reduction in revolver borrowings of$1.5 million . We also received proceeds of$2.9 million from the exercise of stock options and we paid$2.7 million for taxes related to net share settlements of equity awards. 23
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Table of Contents 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 endedSeptember 30, 2022 , changes in foreign currency exchange rates resulted in an unfavorable translation effect on our consolidated revenues of approximately$1.1 million and a favorable effect on expense of approximately$1.0 million . During the nine months endedSeptember 30, 2022 , changes in foreign currency exchange rates resulted in an unfavorable translation effect on our consolidated revenues of approximately$2.4 million and a favorable effect on expenses of approximately$2.3 million . The loss associated with the translation of foreign equity intoU.S. dollars included as a component of comprehensive loss during the three months endedSeptember 30, 2022 was$2.9 million , compared to a loss of approximately$1.1 million for the three months endedSeptember 30, 2021 . The loss associated with the translation of foreign equity intoU.S. dollars included as a component of comprehensive loss during the nine months endedSeptember 30, 2022 was$6.2 million , compared to a loss of$1.9 million for the nine months endedSeptember 30, 2021 . In addition, currency exchange rate fluctuations included as a component of net loss resulted in a loss of$0.3 million during the three months endedSeptember 30, 2022 , and losses of$0.6 million and$0.1 million during the nine months endedSeptember 30, 2022 and 2021, respectively. Currency gains for the three months endedSeptember 30, 2021 were not significant. 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
Recently Issued 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.
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