Company Quick10K Filing
Harvard Bioscience
Price3.41 EPS-0
Shares38 P/E-55
MCap130 P/FCF22
Net Debt45 EBIT-1
TEV175 TEV/EBIT-285
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-08
10-K 2019-12-31 Filed 2020-03-16
10-Q 2019-09-30 Filed 2019-11-08
10-Q 2019-06-30 Filed 2019-08-08
10-Q 2019-03-31 Filed 2019-05-08
10-K 2018-12-31 Filed 2019-03-18
10-Q 2018-09-30 Filed 2018-11-01
10-Q 2018-06-30 Filed 2018-08-02
10-Q 2018-03-31 Filed 2018-05-10
10-K 2017-12-31 Filed 2018-03-16
10-Q 2017-09-30 Filed 2017-11-02
10-Q 2017-06-30 Filed 2017-08-03
10-Q 2017-03-31 Filed 2017-05-08
10-K 2016-12-31 Filed 2017-03-17
10-Q 2016-09-30 Filed 2016-11-03
10-Q 2016-06-30 Filed 2016-08-04
10-Q 2016-03-31 Filed 2016-05-16
10-K 2015-12-31 Filed 2016-04-29
10-Q 2015-09-30 Filed 2015-11-05
10-Q 2015-06-30 Filed 2015-08-06
10-Q 2015-03-31 Filed 2015-05-07
10-K 2014-12-31 Filed 2015-03-12
10-Q 2014-09-30 Filed 2014-11-06
10-Q 2014-06-30 Filed 2014-08-07
10-Q 2014-03-31 Filed 2014-05-08
10-K 2013-12-31 Filed 2014-03-14
10-Q 2013-09-30 Filed 2013-11-08
10-Q 2013-06-30 Filed 2013-08-09
10-Q 2013-03-31 Filed 2013-05-10
10-K 2012-12-31 Filed 2013-03-18
10-Q 2012-09-30 Filed 2012-11-08
10-Q 2012-06-30 Filed 2012-08-09
10-Q 2012-03-31 Filed 2012-05-10
10-K 2011-12-31 Filed 2012-03-15
10-Q 2011-09-30 Filed 2011-11-09
10-Q 2011-06-30 Filed 2011-08-09
10-Q 2011-03-31 Filed 2011-05-06
10-K 2010-12-31 Filed 2011-03-16
10-Q 2010-09-30 Filed 2010-11-05
10-Q 2010-06-30 Filed 2010-08-06
10-Q 2010-03-31 Filed 2010-05-07
10-K 2009-12-31 Filed 2010-03-11
8-K 2020-06-11
8-K 2020-05-04
8-K 2020-05-01
8-K 2020-05-01
8-K 2020-04-18
8-K 2020-04-05
8-K 2020-03-02
8-K 2020-02-26
8-K 2019-12-17
8-K 2019-11-05
8-K 2019-10-31
8-K 2019-09-03
8-K 2019-07-25
8-K 2019-07-18
8-K 2019-07-02
8-K 2019-05-16
8-K 2019-05-08
8-K 2019-05-02
8-K 2019-02-28
8-K 2018-12-14
8-K 2018-10-29
8-K 2018-10-25
8-K 2018-10-18
8-K 2018-08-17
8-K 2018-07-26
8-K 2018-05-17
8-K 2018-05-02
8-K 2018-03-01
8-K 2018-02-28
8-K 2018-01-31
8-K 2018-01-22

HBIO 10Q Quarterly Report

Part I. Financial Information
Item 1.Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II. Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosure.
Item 5. Other Information.
Item 6. Exhibits
EX-10.2 exh_102.htm
EX-31.1 exh_311.htm
EX-31.2 exh_312.htm
EX-32.1 exh_321.htm
EX-32.2 exh_322.htm

Harvard Bioscience Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
175140105703502012201420172020
Assets, Equity
3524132-9-202012201420172020
Rev, G Profit, Net Income
553311-11-33-552012201420172020
Ops, Inv, Fin

10-Q 1 f10q_050820p.htm FORM 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

  

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2020

 

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

 

For the transition period from                 to                 

 

Commission file number 001-33957

 

HARVARD BIOSCIENCE, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware 04-3306140
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)

 

84 October Hill Road, Holliston, Massachusetts 01746

(Address of Principal Executive Offices, including zip code)

 

(508) 893-8999

(Registrant’s telephone number, including area code)

 

 

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

YES ☒     NO ☐

 

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

 

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

 

Large accelerated filer ☐   Accelerated filer ☒
Non-accelerated filer ☐   Smaller reporting company ☒
    Emerging growth company ☐

 

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

 

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

 

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

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.01 par value HBIO The Nasdaq Global Market

 

 

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

 

 

 

  

 

HARVARD BIOSCIENCE, INC.

 

FORM 10-Q

 

For the Three Months Ended March 31, 2020

 

INDEX

 

  Page
   
PART I - FINANCIAL INFORMATION  
     
Item 1. Financial Statements  
     
  Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019 (unaudited) 3
     
  Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2020 and 2019 (unaudited) 4
     
  Consolidated Statements of Stockholders' Equity for the Three Months Ended March 31, 2020 and 2019 (unaudited) 5
     
  Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019 (unaudited) 6
     
  Notes to Unaudited Consolidated Financial Statements 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 26
     
Item 4. Controls and Procedures 27
     
PART II - OTHER INFORMATION  
   
Item 1. Legal Proceedings 28 
     
Item 1A. Risk Factors 28
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 29
     
Item 3. Default Upon Senior Disclosure 29
     
Item 4. Mine Safety Disclosure. 29
     
Item 5. Other Information 29
     
Item 6. Exhibits 29
     
SIGNATURES 30
     

 

 

2

 

PART I. FINANCIAL INFORMATION

 

Item 1.Financial Statements.

 

HARVARD BIOSCIENCE, INC.

CONSOLIDATED BALANCE SHEETS

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

 

   March 31,  December 31,
   2020  2019
Assets          
Current assets:          
Cash and cash equivalents  $5,882   $8,335 
Accounts receivable, net   15,425    20,704 
Inventories   23,143    22,061 
Other current assets   3,715    2,472 
Total current assets   48,165    53,572 
           
Property, plant and equipment, net   4,488    4,776 
Operating lease right-of-use assets   8,127    8,463 
Goodwill   56,792    57,381 
Intangible assets, net   36,807    38,405 
Other long-term assets   1,881    2,273 
Total assets  $156,260   $164,870 
           
Liabilities and Stockholders' Equity          
Current liabilities:          
Current portion of long-term debt  $2,807   $6,900 
Current portion of operating lease liabilities   2,297    2,424 
Accounts payable   6,625    5,339 
Deferred revenue   3,673    3,949 
Accrued income taxes   624    609 
Other current liabilities   7,449    6,091 
Total current liabilities   23,475    25,312 
           
Long-term debt   46,280    46,917 
Deferred tax liability   1,767    1,974 
Operating lease liabilities   7,867    8,224 
Other long-term liabilities   862    749 
Total liabilities   80,251    83,176 
           
Commitments and contingencies          
           
Stockholders' equity:          
Preferred stock, par value $0.01 per share, 5,000,000 shares authorized   -    - 
Common stock, par value $0.01 per share, 80,000,000 shares authorized; 46,120,640 and 45,933,715 shares issued and 38,375,133 and 38,188,208 shares outstanding, respectively   438    438 
Additional paid-in-capital   229,740    229,189 
Accumulated deficit   (129,092)   (124,576)
Accumulated other comprehensive loss   (14,409)   (12,689)
Treasury stock at cost, 7,745,507 common shares   (10,668)   (10,668)
Total stockholders' equity   76,009    81,694 
Total liabilities and stockholders' equity  $156,260   $164,870 

 

See accompanying notes to consolidated financial statements.

 

3

 

HARVARD BIOSCIENCE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

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

 

   Three months Ended March 31,
   2020  2019
       
Revenues  $23,771   $28,202 
Cost of revenues   10,789    12,048 
Gross profit   12,982    16,154 
           
Sales and marketing expenses   5,579    6,306 
General and administrative expenses   6,759    5,803 
Research and development expenses   2,490    2,735 
Amortization of intangible assets   1,427    1,430 
Total operating expenses   16,255    16,274 
           
Operating loss   (3,273)   (120)
           
Other expense:          
Interest expense, net   (1,299)   (1,405)
Other (income) expense, net   111    (269)
Total other expense   (1,188)   (1,674)
           
Loss before income taxes   (4,461)   (1,794)
Income tax expense   55    576 
Net loss  $(4,516)  $(2,370)
           
Loss per share:          
Basic loss per common share  $(0.12)  $(0.06)
           
Diluted loss per common share  $(0.12)  $(0.06)
           
Weighted-average common shares:          
Basic   38,329    37,645 
Diluted   38,329    37,645 
           
Comprehensive income (loss):          
Net loss  $(4,516)  $(2,370)
Other comprehensive (loss):          
Foreign currency translation adjustments   (1,576)   4 
Derivatives qualifying as hedges, net of tax:          
(Loss) gain on derivative instruments designated and qualifying as cash flow hedges   (216)   (196)
Amounts reclassified from accumulated other comprehensive loss to net loss   72    17 
Derivatives qualifying as hedges, net of tax   (144)   (179)
Other comprehensive (loss)   (1,720)   (175)
Comprehensive loss  $(6,236)  $(2,545)

 

See accompanying notes to consolidated financial statements.

 

4

 

HARVARD BIOSCIENCE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited, in thousands)

 

               Accumulated      
   Number     Additional     Other     Total
   of Shares  Common  Paid-in  Accumulated  Comprehensive  Treasury  Stockholders’
   Issued  Stock  Capital  Deficit  Loss  Stock  Equity
                      
Balance at December 31, 2019   45,934   $438   $229,189   $(124,576)  $(12,689)  $(10,668)  $81,694 
Vesting of restricted stock units   268    -    -   -   -   -    - 
Shares withheld for taxes   (81)   -    (242)   -   -   -    (242)
Stock compensation expense   -    -    793   -   -   -    793 
Net loss   -    -    -   (4,516)   -   -    (4,516)
Other comprehensive loss   -    -    -   -   (1,720)   -    (1,720)
Balance at March 31, 2020   46,121   $438   $229,740    (129,092)   (14,409)   (10,668)   76,009 
                                    
Balance at December 31, 2018   45,124   $436   $226,377   $(119,889)  $(13,532)  $(10,668)  $82,724 
Stock option exercises   3    -    8    -    -    -    8 
Vesting of restricted stock units   440    -    -    -    -    -    - 
Shares withheld for taxes   (134)   -    (429)   -    -    -    (429)
Stock compensation expense   -    -    591    -    -    -    591 
Net loss   -    -    -    (2,370)   -    -    (2,370)
Other comprehensive loss   -    -    -    -    (175)   -    (175)
Balance at March 31, 2019   45,433   $436   $226,547   $(122,259)  $(13,707)  $(10,668)  $80,349 

 

See accompanying notes to consolidated financial statements.

 

 

5

 

HARVARD BIOSCIENCE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

 

   Three Months Ended March 31,
   2020  2019
Cash flows from operating activities:          
Net Loss  $(4,516)  $(2,370)
Adjustments to reconcile net loss to net cash provided by operating activities:          
Depreciation   484    538 
Amortization of intangible assets   1,427    1,430 
Amortization of deferred financing costs   98    91 
Stock-based compensation expense   793    591 
Provision for allowance for doubtful accounts   4    348 
Other non-cash charges   (166)   4 
Changes in operating assets and liabilities:          
Accounts receivable   5,149    2,331 
Inventories   (1,413)   (1,416)
Other current assets   (767)   536 
Accounts payable   1,322    (118)
Accrued income taxes   6    380 
Other current liabilities   1,411    (76)
Deferred revenue   (256)   (116)
Other long-term liabilities   (705)   (143)
Net cash provided by operating activities   2,871    2,010 
           
Cash flows from investing activities:          
Additions to property, plant and equipment   (241)   (143)
Other   -    (9)
Net cash used in investing activities   (241)   (152)
           
Cash flows from financing activities:          
Repayments of debt   (4,829)   (4,583)
Taxes paid for issuance of stock   (242)   (421)
Net cash used in financing activities   (5,071)   (5,004)
           
Effect of exchange rate changes on cash   (12)   3 
Decrease in cash and cash equivalents   (2,453)   (3,143)
Cash and cash equivalents at beginning of period   8,335    8,173 
Cash and cash equivalents at end of period  $5,882   $5,030 
           
Supplemental disclosures of cash flow information:          
Cash paid for interest  $1,237   $1,406 
Cash paid for income taxes  $110   $94 

 

See accompanying notes to consolidated financial statements.

 

6

 

HARVARD BIOSCIENCE, INC.

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

Basis of Presentation

 

The unaudited consolidated financial statements of Harvard Bioscience, Inc. and its wholly-owned subsidiaries (collectively, Harvard Bioscience or the Company) as of March 31, 2020 and for the three months ended March 31, 2020 and 2019, have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations. The December 31, 2019 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, 2019, which was filed with the SEC on March 16, 2020.

 

In the opinion of management, all adjustments, which include normal recurring adjustments necessary to present a fair statement of financial position as of March 31, 2020, results of operations and comprehensive income (loss) for the three months ended March 31, 2020 and 2019 and cash flows for the three months ended March 31, 2020 and 2019, as applicable, have been made. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the operating results for the full fiscal year or any future periods.

 

Risks and Uncertainties

 

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

 

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

 

Summary of Significant Accounting Policies

 

The accounting policies underlying the accompanying unaudited consolidated financial statements are those set forth in Note 2 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the SEC on March 16, 2020. There have been no material changes in the Company’s significant accounting policies during the three months ended March 31, 2020.

 

2.Recently Issued Accounting Pronouncements

 

Accounting Pronouncements to be Adopted

 

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

 

7

 

In August 2018, the FASB issued ASU No. 2018-14, Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans, which amends ASC 715 to add, remove and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The ASU is effective for public entities for fiscal years beginning after December 15, 2020, with early adoption permitted. Management has not yet completed its assessment of the impact of the new standard on the Company’s Consolidated Financial Statements.

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which enhances and simplifies various aspects of the income tax accounting guidance related to intra-period tax allocation, interim period accounting for enacted changes in tax law, and the year-to-date loss limitation in interim period tax accounting. ASU 2019-12 also amends other aspects of the guidance to reduce complexity in certain areas. ASU 2019-12 will become effective for the Company on January 1, 2021. Early adoption is permitted. The Company is evaluating the impact of adopting this guidance to its financial statements and related disclosures.

 

3.Accumulated Other Comprehensive Loss

Changes in each component of accumulated other comprehensive loss, net of tax are as follows:

 

   Foreign currency  Derivatives      
   translation  qualifying as  Defined benefit   
(in thousands)  adjustments  hedges  pension plans  Total
             
Balance at December 31, 2019  $(13,173)  $(603)  $1,087   $(12,689)
                     
Other comprehensive (loss) income before reclassifications   (1,576)   (216)        (1,792)
Amounts reclassified from AOCI into Income   -    72         72 
Net other comprehensive (loss) income   (1,576)   (144)   -    (1,720)
                     
Balance at March 31,  2020  $(14,749)  $(747)  $1,087   $(14,409)

 

4.Goodwill and Intangible Assets

Goodwill

 

The change in the carrying amount of goodwill for the three months ended March 31, 2020 is as follows:

 

   March 31,
   2020
(in thousands)     
Balance at December 31, 2019  $57,381 
Effect of change in currency translation   (589)
Balance at March 31, 2020  $56,792 

 

Intangible Assets

 

      March 31, 2020  December 31, 2019
      (in thousands)
Intangible assets:  Weighted
Average Life*
(Years)
  Gross  Accumulated
Amortization
  Net  Gross  Accumulated
Amortization
  Net
Distribution agreements/customer relationships   8.4   $17,685   $(6,550)  $11,135   $17,891   $(6,340)  $11,551 
Existing technology   5.5    40,923    (20,327)   20,596    41,222    (19,698)   21,524 
Trade names   5.3    8,511    (3,667)   4,844    7,692    (3,497)   4,195 
Patents   -    206    (206)   -    218    (218)   - 
Indefinite-lived tradename   NA    232    -    232    1,135    0    1,135 
Total intangible assets       $67,557   $(30,750)  $36,807   $68,158   $(29,753)  $38,405 

 

* Weighted average life as of March 31, 2020.

 

8

 

During the three months ended March 31, 2020, the Company determined that $0.9 million of tradenames previously classified as indefinite-lived should be classified as amortizing due to anticipated changes in worldwide marketing programs and estimated an economic life of 4 years for this intangible asset.

 

Intangible asset amortization expense was $1.4 million for each of the three months ended March 31, 2020 and 2019. Amortization expense of existing amortizable intangible assets is currently estimated to be $4.1 million for the remainder of 2020, $5.5 million for the year ending December 31, 2021, $5.5 million for the year ending December 31, 2022, $5.3 million for the year ending December 31, 2023, $5.3 million for the year ending December 31, 2024, and $4.2 million for the year ending December 31, 2025.

 

5.Inventories

Inventories consist of the following:

 

   March 31,
2020
  December 31,
2019
   (in thousands)
Finished goods  $5,280   $5,561 
Work in process   3,160    3,153 
Raw materials   14,703    13,347 
Total  $23,143   $22,061 

 

6.Property, Plant and Equipment

Property, plant, and equipment consist of the following:

 

   March 31,
2020
  December 31,
2019
   (in thousands)
Machinery and equipment  $7,437   $7,198 
Computer equipment and software   8,763    8,954 
Leasehold improvements   2,157    2,151 
Furniture and fixtures   1,309    1,321 
Automobiles   90    92 
    19,756    19,716 
Less: accumulated depreciation   (15,268)   (14,940)
Property, plant and equipment, net  $4,488   $4,776 

 

7.Restructuring and Other Exit Costs

During 2019, the Board of Directors of the Company approved a restructuring program designed to improve gross margins and operating margins while reinvesting in resources required to deliver sustained, profitable organic growth. The restructuring program will entail consolidating and downsizing several sites and includes headcount reductions in Europe and North America to improve operational efficiency and reduce costs.

 

The restructuring program is expected to be completed by the end of 2020. The Company expects to incur costs associated with headcount reductions, program management and other transition costs necessary to affect the site consolidations and other business improvements. Substantially all these costs are expected to result in future cash outlays.

 

9

 

The following table summarizes the activity for the accrued restructuring liability for the three months ended March 31, 2020:

 

(in thousands)  Severance
Costs
  Other  Total
Balance at December 31, 2019  $364   $4   $368 
Restructuring charges   834    40    874 
Adjustments   (45)   -    (45)
Cash payments   (569)   (36)   (605)
Balance at March 31, 2020  $584   $8   $592 

 

As of March 31, 2020, the Company had a restructuring liability of $0.6 million which is payable within the next twelve months and has been included in other current liabilities in the consolidated balance sheet.

 

8.Related Party Transactions

As part of the acquisitions of Multi Channel Systems MCS GmbH (MCS) and Triangle BioSystems, Inc. (TBSI) in 2014, the Company signed lease agreements with the former owners of these acquired companies. The principals of such former owners of MCS and TBSI became employees of the Company. Pursuant to these lease agreements, the Company made rent payments of approximately $0.1 million for each of the three months ended March 31, 2020 and 2019.

 

9.Employee Benefit Plans

The Company’s subsidiary in the United Kingdom, Biochrom Limited, maintains two contributory, defined benefit pension plans that have been closed to new employees since 2014, as well as closed to the future accrual of benefits for existing participating employees.

 

For the three months ended March 31, 2020 and 2019, the Company recorded defined benefit pension expense of $0.1 million and $0.2 million, respectively. For each of the three months ended March 31, 2020 and 2019, the Company contributed $0.2 million to its defined benefit pension plans. The Company expects to contribute approximately $0.7 million to its defined benefit pension plans during the remainder of 2020. As of December 31, 2019, the Company pension assets exceeded its pension liability by approximately $1.1 million that is included in the other long-term asset in the consolidated balance sheets.

 

10.Leases

The Company has noncancelable operating leases for office, manufacturing facilities, warehouse space, automobiles and equipment expiring at various dates through 2024 and thereafter.

 

The components of lease expense for the three months ended March 31, 2020 and 2019 are as follows:

 

   Three Months Ended  Three Months Ended
   March 31, 2020  March 31, 2019
    (in thousands)    (in thousands) 
Operating lease cost  $535   $523 
Short term lease cost   42    76 
Sublease income   (107)   (102)
Total lease cost  $470   $497 

 

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

 

   Three Months Ended  Three Months Ended
   March 31, 2020  March 31, 2019
    (in thousands)    (in thousands) 
Cash paid for amounts included in the measurement
of lease liabilities:
  $687   $702 

 

 

10

 

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

 

   March 31, 2020  December 31, 2019
    (in thousands)    (in thousands) 
Operating lease right-of use assets  $8,127   $8,463 
           
Current portion, operating lease liabilities  $2,297   $2,424 
Operating lease liabilities, long term   7,867    8,224 
Total operating lease liabilities  $10,164   $10,648 
           
Weighted average remaining lease term (in years)   8.0    8.1 
Weighted average discount rate   9.2%   9.2%

 

Future minimum lease payments for operating leases, with initial or remaining terms in excess of one year at March 31, 2020, are as follows:

 

   Operating
   Leases
   (in thousands)
2021  $2,297 
2022   1,905 
2023   1,842 
2024   1,827 
2025   1,367 
Thereafter   5,574 
Total lease payments   14,812 
Less interest   (4,648)
Total operating lease liabilities  $10,164 

 

11.Capital Stock and Stock-Based Compensation

Employee Stock Purchase Plan (as amended, the ESPP)

 

Under the Company’s ESPP, participating employees can authorize the Company to withhold a portion of their base pay during consecutive six-month payment periods for the purchase of shares of the Company’s common stock. At the conclusion of the period, participating employees can purchase shares of the Company’s common stock at 85% of the lower of the fair market value of the Company’s common stock at the beginning or end of the period. Shares are issued under the ESPP for the six-month periods ending June 30 and December 31. On May 16, 2019, the stockholders of the Company approved an increase of 350,000 shares of common stock in the number of shares available for issuance under the ESPP. Following such amendment, 1,400,000 shares of common stock are authorized for issuance, of which 1,081,404 shares were issued as of December 31, 2019. There were no shares issued under the ESPP during the period ended March 31, 2020. As of March 31, 2020, there were 318,596 shares available for issuance under the plan.

 

Third Amended and Restated 2000 Stock Option and Incentive Plan (as amended, the Third A&R Plan)

 

On May 25, 2011, the stockholders of the company approved the Third A&R Plan, which such plan currently authorizes the grant of stock options and stock-based awards to officers, employees, non-employee directors and other key persons of the Company and its subsidiaries. The Third Amendment to the Third A&R Plan (the Amendment) was adopted by the Board of Directors on April 2, 2018. Such Amendment was approved by the stockholders at the Company’s 2018 Annual Meeting of Stockholders. Pursuant to the Amendment, the aggregate number of shares authorized for issuance under the Third A&R Plan was increased by 3,400,000 shares to 20,908,929. As of March 31, 2020, there were 275,419 shares available for issuance under the plan

 

Restricted Stock Units with a Market Condition (the Market Condition RSUs)

 

In 2019, the Compensation Committee of the Board of Directors of the Company approved and granted deferred stock awards of Market Condition RSUs (the 2019 Market Condition RSUs) to certain members of the Company’s management team under the Third A&R Plan. The vesting of the 2019 Market Condition RSUs is based on a graded-vesting schedule (one third at the end of each year for three years) and linked to the achievement of a relative total shareholder return of the Company’s common stock measured relative to the Nasdaq Biotechnology index from the 2019 Market Condition RSUs grant date to the earlier of (i) the anniversary date of the grant or (ii) upon a change of control.

 

11

 

As of March 31, 2020, the target number of these market condition restricted stock units that may be earned is 529,491 shares; the maximum amount is 150% of the target number.

 

Stock-Based Payment Awards

 

The Company accounts for stock-based payment awards in accordance with the provisions of FASB ASC 718, which requires it to recognize compensation expense for all stock-based payment awards made to employees and directors including stock options, restricted stock units, Market Condition RSUs and employee stock purchases related to the ESPP. The Company has elected as an accounting policy to account for forfeitures for service-based awards as they occur, with no adjustment for estimated forfeitures.

 

Stock option and restricted stock unit activity for the three months ended March 31, 2020 were as follows:

 

   Stock Options  Restricted Stock Units  Market Condition RSU's
      Weighted            
   Stock  Average  Restricted     Market   
   Options  Exercise  Stock Units  Grant Date  Condition RSU's  Grant Date
   Outstanding  Price  Outstanding  Fair Value  Outstanding  Fair Value
                   
Balance at December 31, 2019   2,266,122   $3.93    1,590,450   $2.27    529,491   $1.67 
Granted   42,373    2.58    142,766   3.00   -   - 
Vested (RSUs)   -   -   (267,588)   2.75    -    - 
Cancelled / forfeited   (49,074)   3.81    (31,795)   3.02    -    - 
Balance at March 31, 2020   2,259,421   $3.90    1,433,833   $2.24    529,491   $1.67 

 

For the three months ended March 31, 2020, the total compensation costs related to unvested awards not yet recognized is $3.3 million and the weighted average period over which it is expected to be recognized is approximately two years.

Valuation and Expense Information under Stock-Based-Payment Accounting

 

Stock-based compensation expense for the three months ended March 31, 2020 and 2019 was allocated as follows:

 

   Three Months Ended March 31,
   2020  2019
   (in thousands)
Cost of product revenues  $10   $13 
Sales and marketing   51    (7)
General and administrative   696    551 
Research and development   36    34 
Total stock-based compensation  $793   $591 

 

The Company did not capitalize any stock-based compensation.

 

The weighted-average estimated fair value per share of stock options granted during the three months ended March 31, 2020 was $1.18 using the Black Scholes option-pricing model with the following weighted-average assumptions:

 

   2020
Volatility   54.83%
Risk-free interest rate   1.16%
Expected holding period (in years)   4.6 

 

 

The Company used historical volatility to calculate the expected volatility as of March 31, 2020. Historical volatility was determined by calculating the mean reversion of the daily adjusted closing stock price. The risk-free interest rate assumption is based upon observed U.S. Treasury bill interest rates (risk-free) appropriate for the term of the Company’s stock options. The expected holding period of stock options represents the period of time options are expected to be outstanding and were based on historical experience. The vesting period ranges from one to four years and the contractual life is ten years.

 

Earnings per share

 

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

 

   Three Months Ended March 31,
   2020  2019
Basic   38,328,791    37,644,684 
Diluted   38,328,791    37,644,684 

 

Excluded from the shares used in calculating the diluted earnings per common share in the above table are options, restricted stock units and Market Condition RSUs of approximately 4,222,745 and 3,691,304 shares of common stock for the three months ended March 31, 2020 and 2019, respectively, as the impact of these shares would be anti-dilutive.

 

12.Long term Debt

 

On January 31, 2018, the Company entered into a financing agreement by and among the Company and certain subsidiaries of the Company as borrowers (collectively, the Borrower), certain subsidiaries of the Company as guarantors, various lenders from time to time (the Lenders), and Cerberus Business Finance, LLC, as collateral agent and administrative agent for the Lenders (the Financing Agreement).

 

On August 16, 2018, the Company and Cerberus Business Finance, LLC entered into a First Amendment to the Financing Agreement, which such amendment modified certain provisions related to the borrowing base and reporting, among other things. On November 4, 2019, the Company and Cerberus Business Finance, LLC entered into a Second Amendment to the Financing Agreement, which modified certain provisions effective as of September 30, 2019 related to the Company’s quarterly leverage ratio financial covenant amongst other provisions.

 

The Financing Agreement provided for senior secured credit facilities (the Senior Secured Credit Facilities) comprised of a $64.0 million term loan and up to a $25.0 million revolving line of credit subject to available borrowing base. The revolving facility is available for use by the Company and its subsidiaries for general corporate and working capital needs, and other purposes to the extent permitted by the Financing Agreement. Borrowings available under the revolving line of credit are limited to a borrowing base derived from the Company’s eligible accounts receivable and inventory, as defined in the Financing Agreement. As of March 31, 2020, borrowings available under the revolving facility were $4.6 million.

 

Commencing on March 31, 2018, the outstanding term loans began to amortize in equal quarterly installments equal to $0.4 million per quarter on such date and during each of the next three quarters thereafter, $0.6 million per quarter during the next four quarters thereafter and $0.8 million per quarter thereafter, with a balloon payment at maturity in 2023. Furthermore, within ten days of the Company’s delivery of its audited annual financial statements each year, the term loans are permanently reduced pursuant to certain mandatory prepayment events including an annual “excess cash flow sweep” of 50% of the consolidated excess cash flow; provided that, in any fiscal year, any voluntary prepayments of the term loans shall be credited against the Company’s “excess cash flow” prepayment obligations on a dollar-for-dollar basis for such fiscal year. During the three months ended March 31, 2020, the Company made an excess cash flow payment of $4.0 million. During the year ended December 31, 2019, the Company made an excess cash flow payment of $4.0 million and a payment of $1.0 million in connection with the release of an escrow amount associated with the Denville Transaction. as required by the Financing Agreement.

 

The obligations of the Borrower under the Senior Secured Credit Facilities are unconditionally guaranteed by the Company and certain of the Company’s existing and subsequently acquired or organized subsidiaries. The Senior Secured Credit Facilities and related guarantees are secured on a first-priority basis (subject to certain liens permitted under the Financing Agreement) by a lien on substantially all the tangible and intangible assets of the Borrower and the subsidiary guarantors, including all of the capital stock held by such obligors (subject to a 65% limitation on pledges of capital stock of foreign subsidiaries), subject to certain exceptions.

 

Interest on all loans under the Senior Secured Credit Facilities is paid monthly. Borrowings under the Financing Agreement accrue interest at a per annum rate equal to, at the Borrower’s option, a base rate plus 4.75% or a London Interbank Offered Rate (LIBOR) rate plus 6.25%. The loans are also subject to a 1.25% interest rate floor for LIBOR loans and a 4.25% interest rate floor for base rate loans. The LIBOR index is expected to be discontinued by the end of calendar year 2021. The terms of the revolving credit facility allow for a replacement rate if the LIBOR index is discontinued.

 

13

 

The Financing Agreement contains customary representations and warranties and affirmative covenants applicable to the Company and its subsidiaries and also contains certain restrictive covenants, including, among others, limitations on the incurrence of additional debt, liens on property, acquisitions and investments, loans and guarantees, mergers, consolidations, liquidations and dissolutions, asset sales, dividends and other payments in respect of the Company’s capital stock, prepayments of certain debt, transactions with affiliates and modifications of organizational documents, material contracts, affiliated practice agreements and certain debt agreements. The Financing Agreement contains customary events of default and is subject to covenant and working capital borrowing restrictions.

 

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

 

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

 

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

 

As of March 31, 2020, the weighted effective interest rate, net of the impact of the Company’s interest rate swap, on its borrowings was 8.40%. The carrying value of the debt approximates fair value because the interest rate under the obligation approximates market rates of interest available to the Company for similar instruments.

 

As of March 31, 2020, and December 31, 2019, the Company’s borrowings were comprised of:

 

   March 31,  December 31,
   2020  2019
   (in thousands)
Long-term debt:          
Term loan  $50,168    54,997 
Revolving line   -    - 
Total unamortized deferred financing costs   (1,081)   (1,180)
Total debt   49,087    53,817 
Less: current installments   (3,200)   (3,200)
Less: excess cash flow sweep   -    (4,093)
Current unamortized deferred financing costs   393    393 
Long-term debt  $46,280   $46,917 

 

13.Derivatives

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. The Company does not speculate using derivative instruments.

 

By using derivative financial instruments to hedge exposures 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.

 

14

 

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 assesses interest rate risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company maintains risk management control systems to monitor interest rate risk attributable to both the Company’s outstanding and forecasted debt obligations as well as the Company’s offsetting hedge positions. The risk management control systems involve the use of analytical techniques, including cash flow sensitivity analysis, to estimate the expected impact of changes in interest rates on the Company’s future cash flows.

 

The Company uses variable-rate LIBOR debt to finance its operations. The debt obligations expose the Company to variability in interest payments due to changes in interest rates. Management believes that it is prudent to limit the variability of a portion of its interest payments. To meet this objective, management enters into LIBOR based interest rate swap agreements to manage fluctuations in cash flows resulting from changes in the benchmark interest rate of LIBOR. These swaps change the variable-rate cash flow exposure on the debt obligations to fixed cash flows. Under the terms of the interest rate swaps, the Company receives LIBOR based variable interest rate payments and makes fixed interest rate payments, thereby creating the equivalent of fixed-rate debt for the notional amount of its debt hedged.

 

As disclosed in Note 12, on January 31, 2018, the Company entered into a Financing Agreement comprised of a $64.0 million term loan and up to a $25.0 million revolving line of credit. Shortly after entering into this Financing Agreement, the Company entered into an interest rate swap contract with PNC Bank with a notional amount of $36.0 million and a termination date of January 1, 2023 in order to hedge the risk of changes in the effective benchmark interest rate (LIBOR) associated with the Company’s Term Loan. The swap contract converted specific variable-rate debt into fixed-rate debt and fixed the LIBOR rate associated with a portion of the term loan under the Financing Agreement at 2.72%. The interest rate swap was designated as a cash flow hedge instrument in accordance with ASC 815 “Derivatives and Hedging”.

 

The following table presents the notional amount and fair value of the Company’s derivative instruments as of March 31, 2020 and December 31, 2019.

 

      March 31, 2020
      Notional Amount  Fair Value (a)
Derivatives instruments  Balance sheet classification   (in thousands)      
Interest rate swaps  Other long term liabilities  $27,289   $(747)

 

      December 31, 2019
      Notional Amount  Fair Value (a)
Derivatives instruments  Balance sheet classification   (in thousands)      
Interest rate swaps  Other long term liabilities  $28,821   $(603)

 

(a) See Note 14 for the fair value measurements related to these financial instruments.

 

All of the Company’s derivative instruments are designated as hedging instruments. The Company has structured its interest rate swap agreements to be 100% effective and as a result, there was no impact to earnings resulting from hedge ineffectiveness. Changes in the fair value of interest rate swaps designated as hedging instruments that effectively offset the variability of cash flows associated with variable-rate, long-term debt obligations are reported in accumulated other comprehensive income (AOCI). These amounts subsequently are reclassified into interest expense as a yield adjustment of the hedged interest payments in the same period in which the related interest affects earnings. The Company’s interest rate swap agreement was deemed to be fully effective in accordance with ASC 815, and, as such, unrealized gains and losses related to these derivatives were recorded as AOCI.

 

15

 

The following table summarizes the effect of derivatives designated as cash flow hedging instruments and their classification within comprehensive loss for the three months ended March 31, 2020 and 2019:

 

Derivatives in Hedging Relationships  Amount of gain (loss) recognized in OCI on derivative
(effective portion)
   Three Months Ended March 31,
   2020  2019
   (in thousands)
Interest rate swaps  $(216)  $(196)

 

The following table summarizes the reclassifications out of accumulated other comprehensive loss for the three months ended March 31, 2020 and 2019:

 

Details about AOCI Components  Amount reclassified from AOCI into income
(effective portion)
   
   Three Months Ended March 31,  Location of amount reclassified from AOCI
   2020  2019  into income (effective portion)
   (in thousands)   
Interest rate swaps  $72   $17    Interest expense

 

As of March 31, 2020, $0.4 million of deferred losses on derivative instruments accumulated in AOCI are expected to be reclassified to earnings during the next twelve months. Transactions and events expected to occur over the next twelve months that will necessitate reclassifying these derivatives’ losses to earnings include the repricing of variable-rate debt.

 

14.Fair Value Measurement

Fair value measurement is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy is established, which prioritizes the inputs used in measuring fair value into three broad levels as follows:

 

Level 1—Quoted prices in active markets for identical assets or liabilities.

 

Level 2—Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.

 

Level 3—Unobservable inputs based on the Company’s own assumptions.

 

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

 

   Fair Value as of March 31, 2020
(in thousands)  Level 1  Level 2  Level 3  Total
Assets (Liabilities):            
Interest rate swap agreements  $-   $(747)  $-   $(747)

 

   Fair Value as of December 31, 2019
(in thousands)  Level 1  Level 2  Level 3  Total
Assets (Liabilities):                    
Interest rate swap agreements  $-   $(603)  $-   $(603)

 

The Company uses the market approach technique to value its financial liabilities. The Company’s financial assets and liabilities carried at fair value include derivative instruments used to hedge the Company’s interest rate risks. The fair value of the Company’s interest rate swap agreements was based on LIBOR yield curves at the reporting date.

 

16

 

15.Other Current Liabilities

   March 31,  December 31,
   2020  2019
   (in thousands)
Compensation and payroll  $2,896   $2,554 
Professional fees   567    395 
Warranty costs   201    252 
Local taxes, including VAT   91    345 
Customer related costs   1,179    963 
Interest   490    425 
Other   2,025    1,157 
Total  $7,449   $6,091 

 

16.Revenues

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

 

   Three Months Ended March 31, 2020
   (in thousands)
   United
States
  United
Kingdom
  Germany  Rest of the
world
  Total
Instruments, equipment, software and accessories  $15,956   $2,507   $2,573   $1,901   $22,937 
Service, maintenance and warranty contracts   575    204    39    16    834 
Total revenues  $16,531   $2,711   $2,612   $1,917   $23,771 

 

   Three Months Ended March 31, 2019
   (in thousands)
   United
States
  United
Kingdom
  Germany  Rest of the
world
  Total
Instruments, equipment, software and accessories  $18,671   $3,129   $2,913   $2,044   $26,757 
Service, maintenance and warranty contracts   1,143    190    97    15    1,445 
Total revenues  $19,814   $3,319   $3,010   $2,059   $28,202 

 

Deferred revenue

 

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

 

   Three Months Ended March 31, 2020
   (in thousands)
   Service
Contracts
  Customer
Advances
  Total
Balance, beginning of period  $1,587   $2,362   $3,949 
Deferral of revenue   308    223    531 
Recognition of deferred revenue   (499)   (322)   (821)
Effect of foreign currency translation   14    -    14 
Balance, end of period  $1,410   $2,263   $3,673 

 

17

 

 

   Three Months Ended March 31, 2019
   (in thousands)
   Service
Contracts
  Customer
Advances
  Total
Balance, beginning of period  $1,659   $2,161   $3,820 
Deferral of revenue   845    111    956 
Recognition of deferred revenue   (848)   (223)   (1,071)
Effect of foreign currency translation   10    -    10 
Balance, end of period  $1,666   $2,049   $3,715 

 

Allowance for Doubtful Accounts

 

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

 

   Three Months Ended March 31,
   2020  2019
   (in thousands)
Balance, beginning of period  $325   $332 
Bad debt expense   4    348 
Charge-offs and other recoveries   (31)   (337)
Effect of foreign currency translation   (1)   (2)
Balance, end of period  $297   $341 

 

Concentrations

 

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

 

17.Income Tax

Income tax expense was approximately $0.1 million and $0.6 million for the three months ended March 31, 2020 and 2019, respectively. The effective tax rate was (1.2) % for the three months ended March 31, 2020 compared with (32.1) % for the same period in 2019.

 

The difference between the Company’s effective tax rates in 2020 and 2019 compared to the U.S. statutory tax rate of 21% is primarily due to the mix of 2020 forecasted income or losses in the U.S. and foreign tax jurisdictions, the impact of different tax rates in certain foreign jurisdictions and the impact of the inclusion of foreign income in U.S. taxable income under the GILTI (Global Intangible Low-Taxed Income) tax rules. Changes made by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) to the limitation on interest expense deductions, including a retroactive change to the calendar year 2019 deduction, also impacted the 2020 effective tax rate.

 

18

 

18.Commitments and Contingent Liabilities

On April 14, 2017, representatives for the estate of an individual plaintiff filed a wrongful death complaint with the Suffolk Superior Court, in the County of Suffolk, Massachusetts, against the Company and other defendants, including Biostage, Inc. (f/k/a Harvard Apparatus Regenerative Technology, Inc.), the Company’s former subsidiary that was spun off in 2013, as well as another third party. The complaint seeks payment for an unspecified amount of damages and alleges that the plaintiff sustained terminal injuries allegedly caused by products, including synthetic trachea scaffolds and bioreactors, provided by certain of the named defendants and utilized in connection with surgeries performed by third parties in 2012 and 2013. The litigation is at an early stage and the Company intends to vigorously defend this case and has contacted its liability insurance carrier to request defense and indemnification of any losses incurred in connection with this lawsuit. While the Company believes that such claim is without merit, the Company is unable to predict the ultimate outcome of this litigation.

 

The Company is involved in various other claims and legal proceedings arising in the ordinary course of business. Based on the consultation with the Company’s legal counsel, the ultimate disposition of such proceedings is not likely to have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows. The Company has not accrued for loss contingencies relating to any such matters because the Company believes that, although unfavorable outcomes in the proceedings are possible, they are not considered by management 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 its business, financial condition, results of operations and cash flows could be material.

 

19.Subsequent Event

On April 18, 2020, the Company entered into a promissory note (the “Note”) with PNC Bank, National Association (the “Lender”), which provides for a loan in the amount of $6.1 million (the “PPP Loan”) pursuant to the Paycheck Protection Program (the “PPP”) of the CARES Act administered by the U.S. Small Business Administration (the “SBA”).

 

On April 23, 2020, the SBA, in consultation with the U.S. Department of the Treasury issued guidance regarding consideration of alternate available sources of liquidity and its impact on qualification for PPP loans. The Company reassessed its business plans and liquidity available under its existing credit facility and determined it was appropriate to repay funds received under the PPP Loan. The PPP Loan was repaid in full on May 4, 2020.

 

19

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains statements that are not statements of historical fact and are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the Exchange Act). The forward-looking statements are principally, but not exclusively, contained in “Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about management’s confidence or expectations, and our plans, objectives, expectations and intentions that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “seek,” “expects,” “plans,” “aim,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “intends,” “think,” “potential,” “objectives,” “optimistic,” “strategy,” “goals,” “sees,” “new,” “guidance,” “future,” “continue,” “drive,” “growth,” “long-term,” “projects,” “develop,” “possible,” “emerging,” “opportunity,” “pursue” and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Factors that may cause our actual results to differ materially from those in the forward-looking statements include reductions in customers’ research budgets or government funding; domestic and global economic conditions; economic, political and other risks associated with international revenues and operations; recently enacted U.S. government tax reform; currency exchange rate fluctuations; economic and political conditions generally and those affecting pharmaceutical and biotechnology industries; the seasonal nature of purchasing in Europe; our failure to expand into foreign countries and international markets; our inability to manage our growth; competition from our competitors; our substantial debt and our ability to meet the financial covenants contained in our credit facility; failure or inadequacy of the our information technology structure; impact of difficulties implementing our enterprise resource planning systems; information security incidents or cybersecurity breaches; our failure to identify potential acquisition candidates and successfully close such acquisitions with favorable pricing or integrate acquired businesses or technologies; unanticipated costs relating to acquisitions and known and unknown costs arising in connection with our consolidation of business functions and any restructuring initiatives; failure of any banking institution in which we deposit our funds or its failure to provide services; our failure to raise or generate capital necessary to implement our acquisition and expansion strategy; the failure of Biostage to indemnify us for any liabilities associated with Biostage’s business; impact of any impairment of our goodwill or intangible assets; our ability to retain key personnel; failure or inadequacy or our information technology structure; rising commodity and precious metals costs;  our ability to protect our intellectual property and operate without infringing on others’ intellectual property; exposure to product and other liability claims; global stock market volatility, currency exchange rate fluctuations and regulatory changes caused by the United Kingdom’s likely exit from the European Union; the impact of the COVID-19 pandemic on out business; plus other factors described under the heading “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, or described in our other public filings. Our results may also be affected by factors of which we are not currently aware. We may not update these forward-looking statements, even though our situation may change in the future, unless we have obligations under the federal securities laws to update and disclose material developments related to previously disclosed information.

 

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

 

Overview

 

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

 

Recent Developments

 

COVID-19

 

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

 

20

 

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

 

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

 

Restructuring Plan

 

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

 

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

 

•    Capitalizing on the strong existing Harvard Bioscience and Data Science franchises and products;

•    Adding new senior leadership with significant experience with turnarounds and driving growth and operational          improvements within global, middle market life science manufacturing businesses;

    Consolidation of sub-scale operations and integration of existing functions and processes to drive scale and reduce fixed costs;

•    Increasing effectiveness of sales and product management to deliver organic sales growth; and

•    Improve cash flow and reduce debt.

 

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

 

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

 

Components of Operating Income

  

Revenues.     We generate revenues by selling apparatus, instruments, devices, systems, software, services, and consumables through distributors, and our direct sales force, websites and catalogs. Our websites and catalogs serve as the primary sales tools for our various product lines. These product lines include both proprietary manufactured products and complementary products from various suppliers. Our reputation as a leading producer in many of our manufactured products creates traffic to our website, enables cross-selling and facilitates the introduction of new products. We have field sales teams in the U.S., Canada, the United Kingdom, Germany, France, Spain and China. In those regions where we do not have a direct sales team, we use distributors. Revenues from direct sales to end users represented approximately 64% and 68% of our revenues for the three months ended March 31, 2020 and March 31, 2019, respectively.

 

21

 

Our products consist of instruments, consumables, and systems that are made up of several individual products. Sales prices of these products range from under $100 to over $100,000, although are mostly priced in the range of $5,000 to $15,000. They are mainly scientific instruments like spectrophotometers and plate readers that analyze light to detect and quantify a wide range of molecular and cellular processes, or apparatus like gel electrophoresis units. Our products and services also include wireless monitors, data acquisition and analysis products and software, and ancillary services including post-contract customer support, training and installation.

 

We use distributors for both our catalog products and our higher priced products, as well as for sales in locations where we do not have subsidiaries or where we have existing distributors in place from acquired businesses. For the three months ended March 31, 2020 and March 31, 2019, approximately 36% and 32% of our total revenues, respectively, were derived from sales to distributors.

 

For the three months ended March 31, 2020 and 2019, approximately 83% and 84% of our revenues, respectively, were derived from products we manufacture and approximately 17% and 16%, respectively, were derived from complementary products we distribute in order to provide the researcher with a single source for all equipment needed to conduct a particular experiment..

 

For the three months ended March 31, 2020 and 2019, approximately 31% and 30% of our revenues, respectively, were derived from sales made by our non-United States operations.

 

Cost of revenues.     Cost of revenues includes material, labor and manufacturing overhead costs, obsolescence charges, packaging costs, warranty costs, shipping costs and royalties. Our cost of revenues may vary over time, including based on the mix of products sold. We sell products that we manufacture and products that we purchase from third parties. The products that we purchase from third parties typically have a higher cost of revenues as a percent of revenues because the profit is effectively shared with the original manufacturer. We anticipate that our manufactured products will continue to have a lower cost of revenues as a percentage of revenues as compared with the cost of non-manufactured products for the foreseeable future. Additionally, our cost of revenues as a percent of revenues will vary based on mix of direct to end user sales and distributor sales, mix by product line and mix by geography.

 

Sales and marketing expenses.     Sales and marketing expense consists primarily of salaries and related expenses for personnel in sales, marketing and customer support functions. We also incur costs for travel, trade shows, demonstration equipment, public relations and marketing materials, consisting primarily of the printing and distribution of our catalogs, supplements and the maintenance of our websites. We may from time to time expand our marketing efforts by employing additional technical marketing specialists in an effort to increase sales of selected categories of products. We may also from time to time expand our direct sales organizations in an effort to concentrate on key accounts or promote certain product lines.

 

General and administrative expenses.     General and administrative expense consists primarily of salaries and other related costs for personnel in executive, finance, accounting, information technology and human resource functions. Other costs include professional fees for legal and accounting services, information technology infrastructure, facility costs, investor relations, insurance and provision for doubtful accounts.

 

Research and development expenses.     Research and development expense consists primarily of salaries and related expenses for personnel and spending to develop and enhance our products. Other research and development expense includes fees for consultants and outside service providers, and material costs for prototype and test units. We expense research and development costs as incurred. Grants received from governmental entities related to research projects are accounted for as a reduction in research and development expense over the period of the project. We believe that investment in product development is a competitive necessity and plan to continue to make these investments to realize the potential of new technologies that we develop, license or acquire for existing markets.

 

22

 

Selected Results of Operations

 

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

 

   Three Months Ended March 31,
   2020  % of revenue  2019  % of revenue
   (dollars in thousands)
Revenues  $23,771        $28,202      
Cost of revenues   10,789    45.4%   12,048    42.7%
Sales and marketing expenses   5,579    23.5%   6,306    22.4%
General and administrative expenses   6,759    28.4%   5,803    20.6%
Research and development expenses   2,490    10.5%   2,735    9.7%
Amortization of intangible assets   1,427    6.0%   1,430    5.1%
Interest expense   1,299    5.5%   1,405    5.0%
Income tax expense   55    0.2%   576    2.0%

 

Revenues

 

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

 

Cost of revenues

 

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

 

Sales and marketing expenses

 

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

 

General and administrative expenses

 

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

 

Research and development expenses

 

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

 

Amortization of intangible assets

 

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

 

Interest expense

 

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

 

23

 

Income tax expense

 

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

 

Liquidity and Capital Resources

 

Historically, we have financed our business through cash provided by operating activities, bank borrowings, and the issuance of common stock. Our liquidity requirements arise primarily from investing activities, including funding of acquisitions, and capital expenditures. On January 31, 2018, we and certain of our subsidiaries entered into a financing agreement with Cerberus Business Finance, LLC, as collateral agent and administrative agent for the lenders under the agreement (the “Financing Agreement”), which comprised of a $64.0 million term loan which was used in connection with the acquisition of DSI in 2018 and a line of credit of up to $25.0 million.

 

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

 

As of March 31, 2020, and December 31, 2019, cash and cash equivalents held by our foreign subsidiaries was $2.2 million and $3.5 million, respectively. As a result of the 2017 Tax Act, post-2017 dividends from qualifying Controlled Foreign Corporations are no longer taxed in the U.S. However, any dividends to the U.S. must still be assessed for withholding tax liability as well as income state tax liability. As a result of our assertion, we determined the potential state income tax liability related to available cash balances at our foreign subsidiaries would be immaterial.

 

CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
    
   Three Months Ended March 31,
   2020  2019
Cash flows from operating activities:          
Net loss  $(4,516)  $(2,370)
Other adjustments to operating cash flows   2,640    3,002 
Changes in assets and liabilities   4,747    1,378 
Net cash provided by operating activities   2,871    2,010 
           
Investing activities:          
Additions to property, plant and equipment  $(241)  $(143)
Other investing activities   -    (9)
Net cash used in investing activities   (241)   (152)
           
Financing activities:          
Repayments of debt  $(4,829)  $(4,583)
Taxes paid on issuance on stock   (242)   (421)
Net cash used in financing activities   (5,071)   (5,004)
           
Effect of exchange rate changes on cash   (12)   3 
           
Decrease in cash and cash equivalents  $(2,453)  $(3,143)

 

 

24

 

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

 

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

 

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

 

Borrowing Arrangements

 

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

 

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

 

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

 

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

 

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

 

Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary as a result of a number of factors.

 

Critical Accounting Policies

 

The critical accounting policies underlying the accompanying unaudited consolidated financial statements are those set forth in Part II, Item 7 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, which was filed with the SEC on March 16, 2020.

 

25

 

Impact of Foreign Currencies

 

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

 

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

 

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

 

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

 

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

 

Recently Issued Accounting Pronouncements

 

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

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

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

 

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

 

We are exposed to market risk from changes in interest rates primarily through our financing activities. As of March 31, 2020, we had $50.2 million outstanding under our Financing Agreement. We entered into an interest rate swap contract with PNC bank with an initial notional amount of $36.0 million and a termination date of January 31, 2023 in order to hedge a portion of the risk of changes in the effective benchmark interest rate (LIBOR) associated with the Financing Agreement. The notional value of the interest rate swap contract as of March 31, 2020 was $27.3 million. The swap contract converted specific variable-rate debt into fixed-rate debt and fixed the LIBOR rate associated with a portion of the term loan under the Financing Agreement at 2.72%.

 

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

 

If compared to the rate as of March 31, 2020  Interest expense
increase
    (in thousands) 
Interest rates increase by 1%  $277 
Interest rates increase by 2%  $554 

 

 

26

 

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

 

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

 

Changes in Internal Control over Financial Reporting

 

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

 

Limitations on Effectiveness of Controls and Procedures

 

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

 

 

 

 

 

 

 

27

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

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

 

Item 1A. Risk Factors.

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

 

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

 

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

 

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

 

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

 

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

 

28

 

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

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

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

 

Item 3. Defaults Upon Senior Securities.

None.

 

Item 4. Mine Safety Disclosure.

Not applicable.

 

Item 5. Other Information.

None.

 

Item 6. Exhibits

10.1 Consulting Agreement, dated as of March 2, 2020, by and between Harvard Bioscience, Inc. and Chane Graziano (previously filed as an exhibit to the Company’s Current Report on Form 8-K (filed March 6, 2020) and incorporated by reference thereto).
10.2 Form of Director Indemnification Agreement
31.1 Certification of Chief Financial Officer of Harvard Bioscience, Inc., pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Executive Officer of Harvard Bioscience, Inc., pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of Chief Financial Officer of Harvard Bioscience, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2* Certification of Chief Executive Officer of Harvard Bioscience, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB XBRL Taxonomy Extension Labels Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document

 

*

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

 

 

29

 

SIGNATURES

 

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

 

Date: May 8, 2020

 

  HARVARD BIOSCIENCE, INC.
   

 

 

  By: /S/    JAMES GREEN        
    James Green
    Chief Executive Officer
   

 

 

 

  By: /S/   MICHAEL A. ROSSI       
    Michael Rossi
    Chief Financial Officer

 

 

 

 

 

 

 

 

30