Harvard Bioscience Inc: Form 10-Q for the period ended Jun 30, 2024

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, 2023 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.”

Overview

Harvard Bioscience, Inc., a Delaware corporation, is a leading developer, manufacturer and seller of technologies, products and services that enable fundamental advances in life science applications, including research, pharmaceutical and therapy discovery, bioproduction and preclinical testing for pharmaceutical and therapy development. Our products and services are sold globally to customers ranging from renowned academic institutions and government laboratories to the world’s leading pharmaceutical, biotechnology and contract research organizations (“CROs”). With operations in the United States, Europe and China, we sell through a combination of direct and distribution channels to customers around the world.

Trends and Developments

Our business is affected by global and regional economic trends and uncertainties. The global economy has recently experienced increasing uncertainty as a result of developments including inflationary pressure, higher interest rates, fluctuations in exchange rates, economic conditions in China, and the events in Ukraine and the Middle East. Our business has also been affected by the softening of certain international markets, especially in China and the Asia-Pacific region, as well as by delays in government funding for certain customers. Our business has been affected by a reduced demand from our biotechnology and pharmaceutical company customers, due principally to the increased cost of capital and a reduction in spending following the COVID-19 pandemic.

If these trends are prolonged or are more severe, or if the recovery is less robust or takes longer than anticipated, our business, results of operations, and cash flow may be materially impacted.

Selected Results of Operations

Three months ended June 30, 2024, compared to three months ended June 30, 2023

(dollars in thousands)

Revenues

Revenues decreased $5.7 million, or 19.7%, to $23.1 million for the three months ended June 30, 2024, compared to $28.8 million for the three months ended June 30, 2023. The decrease in revenue was primarily due to softening of worldwide demand compared to a strong second quarter in 2023 as well as decreased sales of preclinical products from contract research organizations (CRO’s).

Gross profit

Gross profit decreased $3.5 million, or 20.7%, to $13.2 million for the three months ended June 30, 2024, compared with $16.7 million for the three months ended June 30, 2023, primarily due to the decrease in revenues. Gross margin decreased to 57.2% for the three months ended June 30, 2024, compared with 58.0% for the three months ended June 30, 2023. The decrease in gross margin was primarily the result of under-absorption of fixed manufacturing overhead costs due to the decrease in revenues and lower mix of high margin products.

Sales and marketing expenses

Sales and marketing expenses decreased $0.8 million, or 12.7%, to $5.4 million for the three months ended June 30, 2024, compared with $6.2 million for the three months ended June 30, 2023. The decrease was primarily due to lower compensation and travel costs.

General and administrative expenses

General and administrative expenses increased $0.3 million, or 6.2%, to $5.7 million for the three months ended June 30, 2024, compared with $5.4 million for the three months ended June 30, 2023. The increase was primarily due to higher stock-based compensation expense as a result of forfeitures during the prior year period.

Research and development expenses

Research and development expenses decreased $0.4 million, or 11.2%, to $2.6 million for the three months ended June 30, 2024, compared with $3.0 million for the three months ended June 30, 2023. The decrease was primarily due to lower compensation costs.

Amortization of intangible assets

Amortization of intangible assets included in operating expenses was $1.3 million for the three months ended June 30, 2024, compared with $1.4 million for the three months ended June 30, 2023.

Other operating expenses

Other operating expenses for the three months ended June 30, 2024 was $0.2 million and included $0.4 million of restructuring costs in connection with headcount reductions in Europe and North America, which was partially offset by a credit of $0.1 million related to closure of an unclaimed property audit.

Interest expense

Interest expense decreased $0.2 million, or 20.4%, to $0.7 million for the three months ended June 30, 2024, compared with $0.9 million for the three months ended June 30, 2023. The decrease was primarily due to lower average borrowings during the period.

Loss on equity securities

As of March 31, 2024, we held shares of common stock of HRGN with an estimated fair value of $1.7 million. These shares were received in April 2023 in connection with settlement of indemnification obligations related to litigation which was resolved during the year ended December 31, 2022. During the three months ended June 30, 2024, we sold all of our remaining HRGN shares for $1.4 million and recorded a loss of $0.3 million.

Income tax benefit

The income tax benefit was $0.4 million and $1.1 million for the three months ended June 30, 2024 and 2023, respectively. The effective tax rates for the three months ended June 30, 2024 and 2023 were 10.8% and 53.3%, respectively. The lower effective tax rate during the three months ended June 30, 2024 compared to the three months ended June 30, 2023 was related to a decrease in the Global Intangible Low Tax Income (“GILTI”) inclusion. The effective tax rate for both the second quarters of 2024 and 2023 differed from the U.S. statutory rate primarily due to the inclusion of non-deductible executive compensation and changes in valuation allowances associated with our assessment of the likelihood of the recoverability of deferred tax assets.

Six months ended June 30, 2024, compared to six months ended June 30, 2023

(dollars in thousands)

Revenues

Revenues decreased $11.1 million, or 18.9%, to $47.6 million for the six months ended June 30, 2024, compared to $58.7 million for the six months ended June 30, 2023. The decrease in revenue was primarily due to softening worldwide demand compared to a strong first half in 2023 as well as decreased sales of preclinical products from CRO’s.

Gross profit

Gross profit decreased $7.0 million, or 20.1%, to $28.0 million for the six months ended June 30, 2024 compared with $35.0 million for the six months ended June 30, 2023, primarily due to the decrease in revenues. Gross margin decreased to 58.8% for the six months ended June 30, 2024, compared with 59.6% for the six months ended June 30, 2023. The decrease in gross margin was primarily the result of under-absorption of manufacturing overhead costs due to the decrease in revenues.

Sales and marketing expenses

Sales and marketing expenses decreased $0.9 million, or 7.1%, to $11.3 million for the six months ended June 30, 2024, compared with $12.2 million for the six months ended June 30, 2023. The decrease was primarily due to lower compensation and travel costs.

General and administrative expenses

General and administrative expenses remained relatively unchanged and were $11.6 million for the six months ended June 30, 2024, compared with $11.7 million for the six months ended June 30, 2023. Decreases in compensation during the period were partially offset by increases in professional fees.

Research and development expenses

Research and development expenses decreased $0.4 million, or 5.9%, to $5.5 million for the six months ended June 30, 2024, compared with $5.9 million for the six months ended June 30, 2023. The decrease was primarily due to lower compensation costs.

Amortization of intangible assets

Amortization of intangible assets included in operating expenses remained relatively unchanged and were $2.7 million for the six months ended June 30, 2024, compared with $2.8 million for the six months ended June 30, 2023.

Other operating expenses

Other operating expenses for the six months ended June 30, 2024, were $1.2 million and included a fee of $0.5 million in connection with the receipt of employee retention credits, $0.3 million related to settlement of an unclaimed property audit, and restructuring costs of $0.4 million in connection with headcount reductions in Europe and North America.

Interest expense

Interest expense decreased $0.4 million, or 21.7%, to $1.5 million for the six months ended June 30, 2024, compared with $1.9 million for the six months ended June 30, 2023. The decrease was primarily due to lower average borrowings during the period.

Loss on equity securities

As of December 31, 2023, we held shares of common stock of HRGN with an estimated fair value of $3.5 million. These shares were received in April 2023 in connection with settlement of indemnification obligations related to litigation which was resolved during the year ended December 31, 2022. During the six months ended June 30, 2024, we sold all of our remaining HRGN shares for $1.9 million and recorded a loss of $1.6 million.

Income tax benefit

The income tax benefit was $0.1 million and $0.5 million for the six months ended June 30, 2024 and 2023, respectively. The effective tax rates for the six months ended June 30, 2024 and 2023 were 1.8% and 59.8%, respectively. The lower effective tax rate during the six months ended June 30, 2024, compared to the six months ended June 30, 2023 related to a decrease in the GILTI inclusion and changes to reserves for uncertain tax positions. The effective tax rate for both the second quarters of 2024 and 2023 differed from the U.S. statutory rate primarily due to the inclusion of non-deductible executive compensation and changes in valuation allowances associated with our assessment of the likelihood of the recoverability of deferred tax assets.

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 salaries, inventory, and capital expenditures.

We held cash and cash equivalents of $4.0 million and $4.3 million as of June 30, 2024 and December 31, 2023, respectively. Borrowings outstanding were $36.1 million and $37.1 million as of June 30, 2024 and December 31, 2023, respectively.

We maintain 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. On March 28, 2024, we entered into an amendment to the Credit Agreement pursuant to which the Lenders and administrative agent modified the definition of Consolidated EBITDA used in the calculation of certain financial covenants to adjust for charges related to the ongoing abandoned property audit and commission fees expected to be paid in connection with our employee retention credit filings.

On August 6, 2024, we entered into an amendment to the Credit Agreement that, among other things, modifies the financial covenants relating to the consolidated net leverage ratio and consolidated fixed charge coverage ratio through the period ended December 31, 2024. The amendment also adds a net leverage ratio requirement with respect to additional borrowing under our revolving credit facility and restrictions on certain additional indebtedness and investments, in each case until we deliver to the Lenders our financial statements for the fiscal year ending December 31, 2024. In addition, until delivery of the financial statements, the applicable interest rate margin will be increased by 50bps during such time as the consolidated net leverage ratio is greater than 3.0. We paid fees of $0.2 million to the Lenders in connection with the amendment. As a result of the August 2024 Amendment, we are in compliance with the financial covenants of the Credit Agreement (see Note 8 to the Consolidated Condensed Financial Statements included in Part I, Item 1. of this report).

As of June 30, 2024, the weighted average interest rate on our borrowings, net of the effect of the interest rate swaps, was 7.7%, and the available and unused borrowing capacity was $5.4 million. Total revolver borrowing capacity is limited by our consolidated net leverage ratio as defined under the Credit Agreement, as amended on August 6, 2024.

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

(in thousands)

Cash provided by operating activities was $0.6 million and $5.4 million for the six months ended June 30, 2024 and 2023, respectively. Cash flow from operations for the six months ended June 31, 2024 was negatively impacted as a result of the decline in net income for the period adjusted for non-cash items and was positively impacted by the receipt of $3.2 million of employee retention credits.

Cash provided by investing activities was $0.2 million for the six months ended June 30, 2024, and consisted of $1.9 million in proceeds from the sale of marketable equity securities, offset by $1.7 million of capital expenditures in manufacturing and information technology infrastructure, and software development. Cash used in investing activities was $0.3 million for the six months ended June 30, 2023, and consisted of $0.8 million of capital expenditures in manufacturing, information technology infrastructure, and software development, partially offset by $0.5 million from proceeds of the sale our Hoefer product line.

Cash used in financing activities was $0.9 million and $5.3 million for the six months ended June 30, 2024 and 2023, respectively. During the six months ended June 30, 2024, debt outstanding under our credit facility decreased by $1.0 million, consisting of net borrowings under our revolver of $3.0 million, and payments of $4.0 million against the term loan. We also received proceeds of $0.2 million from the exercise of stock options and employee stock purchases and paid $0.1 million for taxes related to net share settlement of equity awards. During the six months ended June 30, 2023, debt outstanding under our credit facility decreased by $5.5 million, consisting of net payments against our revolver of $2.9 million and payments of $2.6 million against the term loan. During the six months ended June 30, 2023, 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.

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 June 30, 2024 changes in foreign currency exchange rates had an insignificant effect on our revenues and expenses. During the six months ended June 30, 2024, changes in foreign currency exchange rates resulted in an unfavorable effect on our revenue of approximately $0.1 million and a favorable effect on expenses of approximately $0.1 million.

The gain (loss) associated with the translation of our foreign equity into U.S. dollars included as a component of other comprehensive income (loss) was $(0.1) million and $0.2 million for the three months ended June 30, 2024 and June 30, 2023, respectively, and $(0.9) million and $1.0 million for the six months ended June 30, 2024 and 2023, respectively.

Currency exchange rate fluctuations included as a component of net loss resulted in currency losses of $(0.1) million for both the three months ended June 30, 2024 and 2023, respectively, and $(0.1) million for both the six months ended June 30, 2024 and 2023, respectively.

Critical Accounting Policies

There have been no material changes to the critical accounting policies underlying the accompanying unaudited consolidated financial statements and as set forth in Part II, Item 7 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

Recent Accounting Pronouncements

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

Evaluation of Disclosure Controls and Procedures

As of June 30, 2024, 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 2024 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.

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, 2023, 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.