HARVARD BIOSCIENCE INC Management’s report and analysis of the financial situation and operating results. (Form 10-Q)

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Forward-looking statements



This Quarterly Report on Form 10-Q contains statements that are not statements
of historical fact and are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 (the "Exchange Act"). The forward-looking statements are
principally, but not exclusively, contained in "Item 2: Management's Discussion
and Analysis of Financial Condition and  Results  of  Operations." These
statements involve known and unknown risks, uncertainties and other factors that
may cause our actual results, performance, or achievements to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. Forward-looking statements include,
but are not limited to, statements about management's confidence or
expectations, and our plans, objectives, expectations, and intentions that are
not historical facts. In some cases, you can identify forward-looking statements
by terms such as "may," "will," "should," "could," "would," "seek," "expects,"
"plans," "aim," "anticipates," "believes," "estimates," "projects," "predicts,"
"intends," "think," "potential," "objectives," "optimistic," "strategy,"
"goals," "sees," "new," "guidance," "future," "continue," "drive," "growth,"
"long-term," "projects," "develop," "possible," "emerging," "opportunity,"
"pursue" and similar expressions intended to identify forward-looking
statements. These statements reflect our current views with respect to future
events and are based on assumptions and subject to risks and uncertainties.
Given these uncertainties, you should not place undue reliance on these
forward-looking statements. We discuss many of these risks in detail in our
Annual Report on Form 10-K for year ended December 31, 2021. You should
carefully review all of these factors, as well as other risks described in our
public filings, and you should be aware that there may be other factors,
including factors of which we are not currently aware, that could cause these
differences. Also, these forward-looking statements represent our estimates and
assumptions only as of the date of this report. We may not update these
forward-looking statements, even though our situation may change in the future,
unless we have obligations under the federal securities laws to update and
disclose material developments related to previously disclosed information.
Harvard Bioscience, Inc. is referred to herein as "we," "our," "us," and "the
Company."



Recent Developments



COVID-19



The COVID-19 pandemic has had a negative impact on our operations to date and
the future impacts of the pandemic and any resulting economic impact are largely
unknown and continuously evolving. Since the global outbreak of COVID-19, many
customers, particularly academic research institutions, reduced laboratory work
which has negatively impacted, and will continue to negatively impact, our
sales. Also, countries world-wide continue to issue COVID-19 related policies in
an attempt to control the pandemic. In particular, during the beginning of 2022,
China implemented area-wide shutdowns in order to control the spread of
COVID-19, which have continued for different parts of China throughout the first
half of 2022. To ensure business continuity while maintaining a safe environment
for employees aligned with guidance from government and health organizations, we
transitioned a significant portion of our workforce to work-from-home and while
a portion of the workforce has returned to in-office work, travel is still being
managed and the Company continues to have restrictions which can impact
productivity including sales and marketing activities.



Global Supply Chain and Economic Environment



The global supply chain has experienced significant disruptions due to
electronic component and labor shortages and other macroeconomic factors which
have emerged since the onset of COVID-19, leading to increased cost of freight,
purchased materials and manufacturing labor costs, while also delaying customer
shipments. We believe these supply chain trends will continue through the rest
of 2022. These conditions in addition to the overall impact on the global
economy have negatively impacted our results of operations and cash flows.



Additionally, during 2022 the global economy has experienced high levels of
inflation, rising interest rates and significant fluctuations in currency
values. Our results of operations have been negatively impacted by higher labor
costs associated with inflation, and we expect the interest paid on our debt
will continue to increase as a result of these conditions.



If business interruptions resulting from COVID-19 or the current macroeconomic
conditions described above were to be prolonged or expanded in scope, our
business, financial condition, results of operations and cash flows would be
negatively impacted. We will continue to actively monitor this situation and
will implement actions necessary to maintain business continuity.



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Selected operating results



Three months ended June 30, 2022 compared to three months ended June 30, 2021.



                                                       Three Months Ended June 30,
(dollars in thousands)                   2022        % of revenue         2021         % of revenue
Revenues                              $   29,208                       $   29,197
Gross profit                              16,637              57.0 %       16,353               56.0 %
Sales and marketing expenses               6,587              22.6 %        5,730               19.6 %
General and administrative expenses        5,981              20.5 %        6,399               21.9 %
Research and development expenses          3,497              12.0 %        2,701                9.3 %
Amortization of intangible assets          1,454               5.0 %        1,465                5.0 %
Settlement of litigation, net             (4,880 )           -16.7 %            -                  -
Interest expense                             515               1.8 %          377                1.3 %
Income tax expense (benefit)                 986               3.4 %         (222 )             -0.8 %




Revenue



Revenues for the three months ended June 30, 2022, were $29.2 million as
compared to revenues of $29.2 million for the three months ended June 30, 2021.
Revenue from our cellular and molecular products increased due to improvements
in order fulfillment processes which reduced order backlog.  These increases
were offset by decreases from our preclinical product family related to lower
order volume in Europe and China. Also, revenue was negatively impacted in the
three months ended June 30, 2022, by unfavorable currency adjustments.



Gross profit



Gross profit increased $0.3 million, or 1.7%, to $16.6 million for the three
months ended June 30, 2022, compared with $16.4 million for the three months
ended June 30, 2021. Gross margin increased to 57.0% for the three months ended
June 30, 2022, compared with 56.0% for the three months ended June 30, 2021. The
increase in gross margin percentage was due to a pricing improvements over last
year.



Sales and marketing expenses



Sales and marketing expenses increased $0.9 million, or 15.0%, to $6.6 million
for the three months ended June 30, 2022, compared to $5.7 million during the
same period in 2021. The increase was due to new marketing and sales support
personnel and increases in travel and attendance at in-person trade shows.
Travel and tradeshow costs were lower in the prior year quarter due to COVID
restrictions.


General and administrative expenses

General and administrative expenses decreased $0.4 millioni.e. 6.5%, at $6.0 million for the three months ended June 30, 2022compared to $6.4 million
during the same period in 2021. The decrease is mainly due to lower restructuring expenses and variable compensation.

Research and development costs



Research and development expenses were $3.5 million for the three months ended
June 30, 2022, an increase of $0.8 million, or 29.5%, compared with $2.7 million
for the three months ended June 30, 2021. The increase was primarily due to
higher costs associated with new product development for our preclinical product
lines.


Amortization of intangible assets

Amortization of intangible assets of $1.5 million for the three months ended
June 30, 2022was comparable to the quarter ended June 30, 2021.



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Settlement of litigation



During the three months ended March 31, 2022, we accrued $5.2 million of costs
related to the Settlement as discussed in Note 13 Litigation Settlement to our
Consolidated Financial Statements. Due to the financial condition of Biostage,
we determined that it was uncertain as to whether Biostage would be able to
satisfy its indemnification obligations to us and had fully reserved any
receivable from Biostage.



During the three months ended June 30, 2022, we recorded a credit of $4.9
million as a result of adjustments to the reserves against the indemnification
receivable from Biostage. These adjustments reflect: i) the issuance by Biostage
of Series E Preferred Convertible Stock to us on June 10, 2022, in satisfaction
of $4.0 million of  Biostage's total indemnification obligations, ii) the
payment by Biostage of a portion of the legal fees associated with the
Settlement, and iii) other accrual adjustments.



Interest expense



Interest expense was $0.5 million for the three months ended June 30, 2022, and
$0.4 million for the three months ended June 30, 2021. The increase was the
result of higher interest rates under our Credit Agreement as well as higher
average borrowing balances.



Income tax benefit



Income tax expense (benefit) for the three months ended June 30, 2022 was $1.0
million and was $(0.2) million for the three months ended June 30, 2021. The
effective tax rates for the three months ended June 30, 2022 and 2021 were 28.8%
and 35.1%, respectively. The difference between our effective tax rates in 2022
and 2021 compared to the U.S. statutory tax rate of 21% is primarily due to
changes in valuation allowances associated with our assessment of the likelihood
of the recoverability of our deferred tax assets. We currently have valuation
allowances against substantially all of our net operating loss carryforwards and
tax credit carryforwards.


Six months ended June 30, 2022 compared to the six months ended June 30, 2021.


                                                         Six Months Ended June 30,
(dollars in thousands)                   2022         % of revenue         2021         % of revenue
Revenues                              $   57,986                        $   56,186
Gross profit                              32,814               56.6 %       31,784               56.6 %
Sales and marketing expenses              13,274               22.9 %       11,116               19.8 %
General and administrative expenses       12,306               21.2 %       12,732               22.7 %
Research and development expenses          6,717               11.6 %        5,188                9.2 %
Amortization of intangible assets          2,920                5.0 %        2,929                5.2 %
Settlement of litigation, net                311                0.5 %            -                  -
Interest expense                             899                1.6 %          788                1.4 %
Income tax expense (benefit)                 848                1.5 %         (237 )             -0.4 %




Revenue



Revenues for the six months ended June 30, 2022 were $58.0 million, an increase
of approximately $1.8 million, or 3.2% compared to revenues of $56.2 million for
the six months ended June 30, 2021. Revenue improved in the first half of  2022
due to improvements in order fulfillment processes which reduced backlog.
Revenue was negatively impacted by lower orders outside the United States.
Orders from customers in Asia continue to be lower than the prior year due to
COVID lockdowns in China. We expect sales to China customers to remain at
reduced levels until lockdown conditions are removed. Also, revenue was
negatively impacted in the six months ended June 30, 2022 by unfavorable
currency adjustments.





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Gross profit



Gross profit increased $1.0 million, or 3.2%, to $32.8 million for the six
months ended June 30, 2022, compared with $31.8 million for the six months ended
June 30, 2021 due primarily to the increase in revenue noted. Gross margin was
56.6% for both the three months ended June 30, 2022 and June 30, 2021.
Increases in gross margin percentage due to pricing improvements and volume were
offset by the impact of supply chain disruption.  The global supply chain has
experienced significant disruptions due to electronic component and labor
shortages and other macroeconomic factors, leading to increased costs. We
believe these supply chain trends will continue to impact our results of
operations through the rest of 2022.



Sales and marketing expenses



Sales and marketing expenses increased $2.2 million, or 19.4%, to $13.3 million
for the six months ended June 30, 2022, compared to $11.1 million during the
same period in 2021. The increase was primarily due to new marketing and sales
support personnel and increases in travel and attendance at in-person trade
shows offset by lower variable compensation. Travel and tradeshow costs were
lower in the prior year quarter due to COVID restrictions.



General and administrative expenses



General and administrative expenses decreased $0.4 million, or 3.3%, to $12.3
million for the six months ended June 30, 2022, compared to $12.7 million during
the same period in 2021. The decrease was primarily due to lower variable
compensation.



Research and development costs



Research and development expenses were $6.7 million for the six months ended
June 30, 2022, an increase of $1.5 million, or 29.5%, compared with $5.2 million
for the six months ended June 30, 2021. The increase was primarily due to higher
costs associated with new product development in our preclinical product lines.



Amortization of intangible assets

The amortization of intangible fixed asset expenses has been $2.9 million for the two months ended June 30, 2022and June 30, 2021.


Settlement of litigation



During the six months ended June 30, 2022, we incurred a net expense of $0.3
million related to the Settlement consisting of $5.2 million in settlement and
legal expenses accrued during the three months ended March 31, 2022 offsets by a
credit recorded during the three months ended June 30, 2022 of $4.9 million as a
result of adjustments to the reserves against the indemnification receivable
from Biostage. These adjustments reflect: i) the issuance by Biostage of Series
E Convertible Preferred Stock to us on June 10, 2022, in satisfaction of $4.0
million of Biostage's total indemnification obligations, ii) the payment by
Biostage of a portion of the legal fees associated with the Settlement, and iii)
other accrual adjustments.



Interest expense


Interest charges were $0.9 million for the six months ended June 30, 2022and
$0.8 million for the six months ended June 30, 2021. The increase is the result of both higher interest rates under our credit agreement as well as higher average loan balances.


Income tax benefit



Income tax expense (benefit) for the six months ended June 30, 2022 was $0.8
million and was $(0.2) million for the six months ended June 30, 2021. The
effective tax rates for the six months ended June 30, 2022 and 2021 were (23.6)%
and 18.0%, respectively. The difference between our effective tax rates in 2022
and 2021 compared to the U.S. statutory tax rate of 21% is primarily due to
changes in valuation allowances associated with our assessment of the likelihood
of the recoverability of our deferred tax assets. We currently have valuation
allowances against substantially all of our net operating loss carryforwards and
tax credit carryforwards.



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Cash and capital resources

Our primary sources of liquidity are cash and cash equivalents, internally generated operating cash flow and our revolving credit facility. Our expected disbursements relate primarily to cash payments due under our credit agreement described below as well as capital expenditures and payments associated with ongoing business improvement initiatives.



As of June 30, 2022, we held cash and cash equivalents of $4.3 million, compared
with $7.8 million at December 31, 2021. Borrowings outstanding was $49.5 million
and $49.4 million as of June 30, 2022 and December 31, 2021, respectively.



On December 22, 2020, we entered into a Credit Agreement which provides for a
term loan of $40.0 million and a $25.0 million senior revolving credit facility
and matures on December 22, 2025 (See Note 9 to our Condensed Consolidated
Financial Statements included in "Part I, Item 1. Financial Statement" of this
report). As of June 30, 2022, the weighted average interest rate on our
borrowings was 5.3%, and the available and unused borrowing capacity under the
revolving line of credit was $2.9 million. Total revolver borrowing capacity is
limited by our consolidated net leverage ratio as defined under the Credit
Agreement.



On April 28, 2022, we entered into an amendment to the Credit Agreement and
Pledge and Security Agreement (see Note 9 to our Condensed Consolidated
Financial Statements included in "Part I, Item 1. Financial Statements" of this
report). We are in compliance with the covenants of the Credit Agreement, as
amended, as of June 30, 2022.



Based on our current operating plans, we expect that our available cash, cash
generated from current operations and debt capacity will be sufficient to
finance current operations, any costs associated with restructuring activities
and capital expenditures for at least the next 12 months. This assessment
includes consideration of our best estimates of the impact of the COVID-19
pandemic and other macroeconomic trends on our financial results described
above. Our forecast of the period of time through which our financial resources
will be adequate to support our operations is a forward-looking statement that
involves risks and uncertainties, and actual results could vary as a result of a
number of factors.



                  CONDENSED CONSOLIDATED CASH FLOW STATEMENTS



                                                      Six Months Ended June 30,
(in thousands)                                        2022                2021

Cash (used in) provided by operating activities ($2,176) $

1,805

Cash used in investing activities                          (913 )              (507 )
Cash used in financing activities                          (484 )            (3,333 )
Effect of exchange rate changes on cash                      11                 (45 )
Decrease in cash and cash equivalents             $      (3,562 )     $      (2,080 )




Cash (used in) provided by operating activities was $(2.2) million and $1.8
million for the six months ended June 30, 2022 and 2021, respectively. Cash flow
from operations for the six months ended June 30, 2022 was lower than the
comparable period in the prior year due to increased operating losses as noted,
and offset by the positive impact of improved accounts receivable collections.
Also, during the six months ended June 30, 2022, we paid approximately $4.0
million in connection with the Settlement.



Cash used in investing activities was $0.9 million and $0.5 million for the six
months ended June 30, 2022 and 2021, respectively, and primarily consisted of
capital expenditures in manufacturing and information technology infrastructure.



Cash used in financing activities was $0.5 million and $3.3 million for the six
months ended June 30, 2022 and 2021, respectively. During the six months ended
June 30, 2022, total debt outstanding under our credit facility was unchanged.
Payments of $1.7 million paid against the term loan were offset by net drawings
against our revolver of $1.7 million. We also paid $0.5 million for taxes
related to net share settlement of equity awards. During the six months ended
June 30, 2021, we repaid $5.0 million of debt, which included a term loan
installment payment of $1.0 million and paydown of debt under our revolving
facility of $4.0 million, we received proceeds of $2.8 million from the exercise
of stock options and we paid $1.0 million for taxes related to net share
settlements of equity awards.



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Impact of Foreign Currencies



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



During the three months ended June 30, 2022, changes in foreign currency
exchange rates resulted in an unfavorable translation effect on our consolidated
revenues of approximately $0.9 million and a favorable effect on expense of
approximately $0.9 million. During the six months ended June 30, 2022, changes
in foreign currency exchange rates resulted in an unfavorable translation effect
on our consolidated revenues of approximately $1.3 million and a favorable
effect on expenses of approximately $1.3 million.



The loss associated with the translation of foreign equity into U.S. dollars
included as a component of comprehensive (loss) income during the three months
ended June 30, 2022 was $(2.5) million, compared to gain of approximately $0.5
million for the three months ended June 30, 2021. The loss associated with the
translation of foreign equity into U.S. dollars included as a component of
comprehensive loss during the six months ended June 30, 2022 was $(3.2) million,
compared to loss of $(0.8) million for the six months ended June 30, 2021.



In addition, currency exchange rate fluctuations included as a component of net
income resulted in currency losses of approximately $(0.2) million and $(0.2)
million during each of the three months ended June 30, 2022 and 2021, and $(0.2)
million and $(0.1) million during each of the six months ended June 30, 2022 and
2021, respectively.



Critical Accounting Policies


The significant 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 year ended December 31, 2021.

Recently issued accounting pronouncements



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























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