hboi20220630_10q.htm
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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 June 30, 2022

 

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)

 

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

 

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 ☒

 

As of July 29, 2022, there were 41,636,502 shares of the registrant’s common stock issued and outstanding.

 

 

 

HARVARD BIOSCIENCE, INC.

 

FORM 10-Q

 

INDEX

 

 

Page

   

PART I - FINANCIAL INFORMATION

3
   

Item 1.    Condensed Consolidated  Financial Statements (unaudited)

3

   

Consolidated Balance Sheets

3

   

Consolidated Statements of Operations

4

   

Consolidated Statements of Comprehensive Loss

5

   

Consolidated Statements of Stockholders' Equity

6

   

Consolidated Statements of Cash Flows

7

   

Notes to Unaudited Consolidated Financial Statements

8

   

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

17

   

Item 3.     Quantitative and Qualitative Disclosures about Market Risk

23

   

Item 4.     Controls and Procedures

23

   

PART II - OTHER INFORMATION

24
   

Item 1.     Legal Proceedings

24

   

Item1A.   Risk Factors

24

   

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

24

   

Item 3.     Defaults Upon Senior Securities

24

   

Item 4.     Mine Safety Disclosures

24

   

Item 5.     Other Information

24

   

Item 6.     Exhibits

24

   

SIGNATURES

25

 

 

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1.         Financial Statements.

 

 

HARVARD BIOSCIENCE, INC.

CONSOLIDATED BALANCE SHEETS 

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

 

  

 

June 30,

2022

  

 

December 31,

2021

 

Assets

        

Current assets:

        

Cash and cash equivalents

 $4,259  $7,821 

Accounts receivable, net

  17,847   21,834 

Inventories

  29,336   27,587 

Other current assets

  5,056   4,341 

Total current assets

  56,498   61,583 

Property, plant and equipment, net

  3,394   3,415 

Operating lease right-of-use assets

  6,236   6,897 

Goodwill

  56,232   57,689 

Intangible assets, net

  24,219   27,385 

Other long-term assets

  8,694   5,375 

Total assets

 $155,273  $162,344 

Liabilities and Stockholders' Equity

        

Current liabilities:

        

Current portion of long-term debt

 $2,720  $3,235 

Current portion of operating lease liabilities

  2,108   2,142 

Accounts payable

  6,810   4,911 

Deferred revenue

  3,612   4,266 

Other current liabilities

  8,104   10,762 

Total current liabilities

  23,354   25,316 

Long-term debt, net

  45,764   45,095 

Deferred tax liability

  2,427   1,558 

Operating lease liabilities

  5,806   6,488 

Other long-term liabilities

  418   486 

Total liabilities

  77,769   78,943 

Commitments and contingencies - Note 12

          

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: 41,499,741 shares issued and outstanding at June 30, 2022; 41,142,876 shares issued and outstanding at December 31, 2021

  453   452 

Additional paid-in-capital

  227,413   225,650 

Accumulated deficit

  (137,119)  (132,674)

Accumulated other comprehensive loss

  (13,243)  (10,027)

Total stockholders' equity

  77,504   83,401 

Total liabilities and stockholders' equity

 $155,273  $162,344 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

HARVARD BIOSCIENCE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share data) 

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2022

  

2021

  

2022

  

2021

 
                 

Revenues

 $29,208  $29,197  $57,986  $56,186 

Cost of revenues

  12,571   12,844   25,172   24,402 

Gross profit

  16,637   16,353   32,814   31,784 
                 

Sales and marketing expenses

  6,587   5,730   13,274   11,116 

General and administrative expenses

  5,981   6,399   12,306   12,732 

Research and development expenses

  3,497   2,701   6,717   5,188 

Amortization of intangible assets

  1,454   1,465   2,920   2,929 

Settlement of litigation, net - Note 13

  (4,880)  -   311   - 

Total operating expenses

  12,639   16,295   35,528   31,965 
                 

Operating income (loss)

  3,998   58   (2,714)  (181)
                 

Other expense:

                

Interest expense

  (515)  (377)  (899)  (788)

Other expense, net

  (62)  (313)  16   (347)

Total other expense

  (577)  (690)  (883)  (1,135)
                 

Income (loss) before income taxes

  3,421   (632)  (3,597)  (1,316)

Income tax expense (benefit)

  986   (222)  848   (237)

Net income (loss)

 $2,435   (410) $(4,445) $(1,079)
                 

Income (loss) per share:

                

Basic income (loss) per common share

 $0.06  $(0.01) $(0.11) $(0.03)
                 

Diluted income (loss) per common share

 $0.06  $(0.01) $(0.11) $(0.03)
                 

Weighted-average common shares:

                

Basic

  41,304   40,152   41,256   39,960 
                 

Diluted

  42,560   40,152   41,256   39,960 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

HARVARD BIOSCIENCE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited, in thousands)

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2022

  

2021

  

2022

  

2021

 
                 

Net loss

 $2,435  $(410) $(4,445) $(1,079)

Other comprehensive loss:

                

Foreign currency translation adjustments

  (2,517)  523   (3,216)  (802)

Comprehensive income (loss)

 $(82) $113  $(7,661) $(1,881)

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

HARVARD BIOSCIENCE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited, in thousands)

 

Three Months Ended

 

Number

      

Additional

      

Other

      

Total

 

June 30, 2022

 

of Shares

  

Common

  

Paid-in

  

Accumulated

  

Comprehensive

  

Treasury

  

Stockholders

 
  

Issued

  

Stock

  

Capital

  

Deficit

  

Loss

  

Stock

  

Equity

 

Balance at March 31, 2022

  41,241  $452  $226,203  $(139,554) $(10,726) $-  $76,375 

Stock option exercises

  5   1   11   -   -   -   12 

Stock purchase plan

  78   -   239   -   -   -   239 

Vesting of restricted stock units

  244   -   -   -   -   -   - 

Shares withheld for taxes

  (68)  -   (279)  -   -   -   (279)

Stock-based compensation expense

  -   -   1,239   -   -   -   1,239 

Net income

  -   -   -   2,435   -   -   2,435 

Other comprehensive loss

  -   -   -   -   (2,517)  -   (2,517)

Balance at June 30, 2022

  41,500  $453  $227,413  $(137,119) $(13,243) $-  $77,504 
                             

Three Months Ended

 

Number

      

Additional

      

Other

      

Total

 

June 30, 2021

 

of Shares

  

Common

  

Paid-in

  

Accumulated

  

Comprehensive

  

Treasury

  

Stockholders

 
  

Issued

  

Stock

  

Capital

  

Deficit

  

Loss

  

Stock

  

Equity

 

Balance at March 31, 2021

  47,696  $448  $234,781  $(133,055) $(14,391) $(10,668) $77,115 

Retirement of treasury stock

  (7,746)  -   (10,668)  -   -   10,668   - 

Stock option exercises

  186   3   630   -   -   -   633 

Stock purchase plan

  56   -   202   -   -   -   202 

Vesting of restricted stock units

  363   -   -   -   -   -   - 

Shares withheld for taxes

  (69)  -   (526)  -   -   -   (526)

Stock-based compensation expense

  -   -   1,164   -   -   -   1,164 

Net loss

  -   -   -   (410)  -   -   (410)

Other comprehensive loss

  -   -   -   -   523   -   523 

Balance at June 30, 2021

  40,486  $451  $225,583  $(133,465) $(13,868) $-  $78,701 
                             

Six Months Ended

 

Number

      

Additional

      

Other

      

Total

 

June 30, 2022

 

of Shares

  

Common

  

Paid-in

  

Accumulated

  

Comprehensive

  

Treasury

  

Stockholders

 
  

Issued

  

Stock

  

Capital

  

Deficit

  

Loss

  

Stock

  

Equity

 

Balance at December 31, 2021

  41,143  $452  $225,650  $(132,674) $(10,027) $-  $83,401 

Stock option exercises

  16   1   42   -   -   -   43 

Stock purchase plan

  78   -   239   -   -   -   239 

Vesting of restricted stock units

  395   -   -   -   -   -   - 

Shares withheld for taxes

  (132)  -   (780)  -   -   -   (780)

Stock-based compensation expense

  -   -   2,262   -   -   -   2,262 

Net loss

  -   -   -   (4,445)  -   -   (4,445)

Other comprehensive loss

  -   -   -   -   (3,216)  -   (3,216)

Balance at June 30, 2022

  41,500  $453  $227,413  $(137,119) $(13,243) $-  $77,504 
                             

Six Months Ended

 

Number

      

Additional

      

Other

      

Total

 

June 30, 2021

 

of Shares

  

Common

  

Paid-in

  

Accumulated

  

Comprehensive

  

Treasury

  

Stockholders

 
  

Issued

  

Stock

  

Capital

  

Deficit

  

Loss

  

Stock

  

Equity

 

Balance at December 31, 2020

  47,153  $444  $232,357  $(132,386) $(13,066) $(10,668) $76,681 

Retirement of treasury stock

  (7,746)  -   (10,668)  -   -  $10,668   - 

Stock option exercises

  497   7   2,550   -   -   -   2,557 

Stock purchase plan

  56   -   202   -   -   -   202 

Vesting of restricted stock units

  703   -   -   -   -   -   - 

Shares withheld for taxes

  (177)  -   (990)  -   -   -   (990)

Stock-based compensation expense

  -   -   2,132   -   -   -   2,132 

Net loss

  -   -   -   (1,079)  -   -   (1,079)

Other comprehensive loss

  -   -   -   -   (802)  -   (802)

Balance at June 30, 2021

  40,486  $451  $225,583  $(133,465) $(13,868) $-  $78,701 

 

See accompanying notes to condensed consolidated financial statements. 

 

 

 

HARVARD BIOSCIENCE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

 

  

Six Months Ended June 30,

 
  

2022

  

2021

 

Cash flows from operating activities:

        

Net loss

 $(4,445) $(1,079)

Adjustments to reconcile net loss to net cash provided by operating activities:

        

Depreciation

  758   891 

Amortization of intangible assets

  2,920   2,929 

Amortization of deferred financing costs

  140   140 

Stock-based compensation expense

  2,262   2,132 

Deferred income taxes and other

  1,040   (303)
Investment in Convertible Preferred Stock - Note 13  (3,900)  - 

Changes in operating assets and liabilities:

        

Accounts receivable

  3,587   323 

Inventories

  (2,667)  (2,526)

Other assets

  (250)  (1,517)

Accounts payable and accrued expenses

  (435)  1,629 

Deferred revenue

  (611)  (100)

Other liabilities

  (575)  (714)

Net cash (used in) provided by operating activities

  (2,176)  1,805 

Cash flows from investing activities:

        

Additions to property, plant and equipment

  (913)  (357)

Additions to intangible assets

  -   (150)

Net cash used in investing activities

  (913)  (507)

Cash flows from financing activities:

        

Borrowing on bank line of credit

  5,300   - 

Repayment on bank line of credit

  (3,600)  (4,000)

Repayment of term debt

  (1,686)  (1,000)

Debt issuance costs

  -   (102)

Proceeds from exercise of stock options

  282   2,759 

Taxes paid related to net share settlement of equity awards

  (780)  (990)

Net 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 and cash equivalents at beginning of period

  7,821   8,317 

Cash and cash equivalents at end of period

 $4,259  $6,237 

Supplemental disclosures of cash flow information:

     

Cash paid for interest

 $845  $834 

Cash paid for income taxes, net of refunds

 $352  $168 

 

See accompanying notes to condensed consolidated financial statements.

 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

1.

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

 

Basis of Presentation and Summary of Significant Accounting Policies

 

The unaudited consolidated financial statements of Harvard Bioscience, Inc. and its wholly-owned subsidiaries (collectively, the “Company”) as of June 30, 2022 and for the three and six months ended June 30, 2022 and 2021, have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. The December 31, 2021, 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, 2021.

 

In the opinion of management, all adjustments, which include normal recurring adjustments necessary to present a fair statement of financial position as of June 30, 2022, results of operations and comprehensive loss and cash flows for the three and six months ended June 30, 2022 and 2021, as applicable, have been made. The results of operations for the three and six months ended June 30, 2022, are not necessarily indicative of the operating results for the full fiscal year or any future periods.

 

The accounting policies underlying the accompanying unaudited consolidated financial statements are set forth in Note 2 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. There have been no material changes in the Company’s significant accounting policies during the three and six months ended June 30, 2022.

 

Risks and Uncertainties

 

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 continuously evolving. Since the global outbreak of COVID-19, many customers, particularly academic research institutions, have reduced laboratory work which has negatively impacted, and will continue to negatively impact, the Company’s 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, the Company transitioned a significant portion of its 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.

 

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. Accordingly, these conditions in addition to the overall impact on the global economy have negatively impacted 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. The Company’s results of operations have been negatively impacted by higher costs of raw materials, labor and freight resulting from inflationary pressures and the ongoing military conflict between Russia and Ukraine, and we expect the interest paid on our debt will continue to increase in the current rising interest rate environment.

 

If business interruptions resulting from COVID-19 or current macroeconomic conditions described above were to be prolonged or expanded in scope, the Company’s business, financial condition, results of operations and cash flows would be negatively impacted.

 

2.

Recently Issued Accounting Pronouncements

 

Accounting Pronouncements to be Adopted

 

In November 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-10, Government Assistance (Topic 832), Disclosures by Business Entities About Government Assistance, which requires entities to provide disclosures on material government assistance transactions for annual reporting periods. The disclosures include information around the nature of the assistance, the related accounting policies used to account for government assistance, the effect of government assistance on the entity’s financial statements, and any significant terms and conditions of the agreements, including commitments and contingencies. The new standard impacts footnote disclosures and is effective for the Company’s December 31, 2022 annual financial statements. The Company is currently evaluating the potential impact of adopting ASU 2021-10 will have on its consolidated financial statements.

 

8

 

In January 2017, the FASB issued ASU 2017-04, IntangiblesGoodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04), which eliminates the performance of Step 2 from the goodwill impairment test. In performing its annual or interim impairment testing, an entity will instead compare the fair value of the reporting unit with its carrying amount and recognize any impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss. ASU 2017-04 is effective for the Company for fiscal years beginning after December 15, 2022. The Company is currently evaluating the potential impact that adopting ASU 2017-04 will have on its consolidated financial statements.

 

In September 2016, the FASB issued ASU No. 2016-13, Financial InstrumentsCredit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. The FASB issued several ASUs after ASU 2016-13 to clarify implementation guidance and to provide transition relief for certain entities. 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 that adopting ASU 2016-13 and related amendments will have on its consolidated financial statements.

 

3.

Goodwill and Intangible Assets

 

Goodwill

 

The change in the carrying amount of goodwill for the six months ended June 30, 2022, were as follows:

 

(in thousands)

    

Carrying amount at December 31, 2021

 $57,689 

Effect of change in currency translation

  (1,457)

Carrying amount at June 30, 2022

 $56,232 

 

Intangible Assets

 

Identifiable intangible assets at June 30, 2022 and December 31, 2021 consist of the following:

 

      

June 30, 2022

  

December 31, 2021

 

(in thousands)

 

Average

      

Accumulated

          

Accumulated

     

Amortizable intangible assets:

 

Life*

  

Gross

  

Amortization

  

Net

  

Gross

  

Amortization

  

Net

 

Distribution agreements/customer relationships

  7.4  $17,182  $(8,965) $8,217  $17,689  $(8,675) $9,014 

Existing technology

  3.7   38,220   (25,348)  12,872   38,707   (23,962)  14,745 

Trade names and patents

  4.0   8,324   (5,416)  2,908   8,496   (5,108)  3,388 

Total amortizable intangible assets

     $63,726  $(39,729) $23,997  $64,892  $(37,745) $27,147 

Indefinite-lived intangible assets:

              222           238 

Total intangible assets

             $24,219          $27,385 

 

* Weighted average life in years as of June 30, 2022

 

Intangible asset amortization expense was $1.5 million for each of the three months ended June 30, 2022 and 2021, and $2.9 million for each of the six months ended June 30, 2022 and 2021. Estimated amortization expense of existing amortizable intangible assets for each of the five succeeding years and thereafter as of June 30, 2022, is as follows:

 

  

Amortization

 

 

 

Expense

 

(in thousands)

    

2022 (remainder of year)

 $2,870 

2023

  5,672 

2024

  5,375 

2025

  4,100 

2026

  2,360 

Thereafter

  3,620 

Total

 $23,997 

 

9

 

4.

Balance Sheet Information

 

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

 

Inventories:

 

June 30,

  

December 31,

 

(in thousands)

 

2022

  

2021

 

Finished goods

 $6,150  $5,646 

Work in process

  3,974   3,410 

Raw materials

  19,212   18,531 

Total

 $29,336  $27,587 

 

Other Current Liabilities:

 

June 30,

  

December 31,

 

(in thousands)

 

2022

  

2021

 

Compensation

 $3,119  $6,048 

Professional fees

  628   480 

Warranty costs

  240   240 

Customer related costs

  2,097   2,265 

Litigation related

  472   - 

Accrued income taxes

  52   224 

Other

  1,496   1,505 

Total

 $8,104  $10,762 
 

5.

Restructuring and Other Exit Costs

 

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

 

During 2019, the Company initiated a restructuring program to improve operational efficiency and reduce costs which entailed consolidating and downsizing several sites and headcount reductions in Europe and North America. This program was completed in 2021. Restructuring costs under this program were $0.7 million and $1.2 million for the three and six months ended June 30, 2021, respectively, substantially all of which have been included as a component of general and administrative expenses. 

 

6.

Related Party Transactions

 

In connection with the 2014 acquisitions of Multi Channel Systems MCS GmbH (“MCS”), the Company entered into a facility lease agreement with the former principal owner of MCS who became an employee of the Company at the time of the acquisition and subsequently retired in 2021. The MCS agreement expires on December 31, 2024. Pursuant to this lease agreement, the Company made rent payments of approximately $0.1million for each of the three months ended June 30, 2022 and 2021, and $0.2 million for each of the six months ended June 30, 2022 and 2021.

 

 

 

7.

Leases

 

The Company has noncancelable operating leases for offices, manufacturing facilities, warehouse space, automobiles and equipment expiring at various dates through 2030.

 

The components of lease expense for the three and six months ended June 30, 2022 and 2021, are as follows:

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 

(in thousands)

 

2022

  

2021

  

2022

  

2021

 

Operating lease cost

 $493  $506  $997  $1,023 

Short-term lease cost

  58   55   122   101 

Sublease income

  (26)  (26)  (51)  (51)

Total lease cost

 $525  $535  $1,068  $1,073 

 

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

 

  

Six Months Ended June 30,

 

(in thousands)

 

2022

  

2021

 

Cash paid for amounts included in the measurement of lease liabilities:

 $1,173  $1,061 

Right-of-use assets obtained in exchange for lease obligations:

 $65  $400 

 

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

 

  

June 30,

  

December 31,

 

(in thousands)

 

2022

  

2021

 

Operating lease right-of-use assets

 $6,236  $6,897 
         

Current portion, operating lease liabilities

 $2,108  $2,142 

Operating lease liabilities, long-term

  5,806   6,488 

Total operating lease liabilities

 $7,914  $8,630 
         

Weighted average remaining lease term (years)

  6.4   6.7 

Weighted average discount rate

  9.3%  9.3%

 

Future minimum lease payments for operating leases for each twelve-month period subsequent to June 30, 2022, are as follows:

 

Year Ending December 31,

    

(in thousands)

    

2022 (remainder of year)

 $1,066 

2023

  2,105 

2024

  1,747 

2025

  1,019 

2026

  980 

Thereafter

  3,871 

Total lease payments

  10,788 

Less imputed interest

  (2,874)

Total operating lease liabilities

 $7,914 

 

 

 

8.

Capital Stock and Stock-Based Compensation

 

Stock-Based Payment Awards

 

Stock-based awards consist of stock options, time-based restricted stock units (“RSUs”), performance-based RSUs and shares issued under the Company’s employee stock purchase plan. Activity under the Company’s equity incentive plans for the six months ended June 30, 2022 was as follows:

 

      

Weighted

                 
  

Stock

  

Average

  

Time-Based

      

Performance-

     
  

Options

  

Exercise

  

RSUs

  

Grant Date

  

Based RSUs

  

Grant Date

 
  

Outstanding

  

Price

  

Outstanding

  

Fair Value

  

Outstanding

  

Fair Value

 

Balance at December 31, 2021

  1,404,816  $3.10   1,141,164  $3.57   860,155  $3.13 

Granted

  -   -   690,051   5.11   205,122   5.92 

Exercised

  (15,597)  2.72   -   -   -   - 

Vested (RSUs)

  -   -   (232,157)  3.77   (163,223)  2.98 

Cancelled/Forfeited

  (29,928)  2.93   (54,631)  4.47   (7,823)  3.18 

Balance at June 30, 2022

  1,359,291  $3.11   1,544,427  $4.19   894,231  $3.80 

 

Stock-based compensation expense for the three and six months ended June 30, 2022 and 2021 was allocated as follows:

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 

(in thousands)

 

2022

  

2021

  

2022

  

2021

 

Cost of revenues

 $52  $31  $88  $51 

Sales and marketing expenses

  192   131   346   224 

General and administrative expenses

  923   969   1,714   1,803 

Research and development expenses

  72   33   114   54 

Total stock-based compensation expenses

 $1,239  $1,164  $2,262  $2,132 

 

As of June 30, 2022, the total compensation costs related to unvested awards not yet recognized is $7.4 million and the weighted average period over which it is expected to be recognized is approximately 1.9 years. The Company did not capitalize any stock-based compensation.

 

The weighted average estimated fair value of the performance-based RSUs that were granted during the six months ended June 30, 2022 was $5.92 per unit. The following assumptions were used to estimate the fair value of the performance-based RSUs granted during the six months ended June 30, 2022 using a Monte-Carlo valuation simulation:

 

  

2022

 

Volatility

  65.1

%

Risk-free interest rate

  1.4

%

Correlation coefficient

  38.5

%

Dividend yield

  -

%

 

12

 

Earnings (Loss) Per Share

 

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

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 

(in thousands)

 

2022

  

2021

  

2022

  

2021

 

Basic

  41,304   40,152   41,256   39,960 

Dilutive effect of equity awards

  1,256   -   -   - 

Diluted

  42,560   40,152   41,256   39,960 

 

The Company excludes from the calculation of diluted EPS the weighted average shares of underlying stock-based awards if the impact of including these potential shares would be anti-dilutive. The Company has excluded the impact of approximately 0.9 million shares and 4.8 million shares for the three months ended June 30, 2022 and 2021, and 3.7 million shares and 4.7 million shares for the six months ended June 30, 2022 and 2021, respectively.

 

9.

Long-Term Debt

 

As of June 30, 2022 and December 31, 2021, the Company’s borrowings were comprised of:

 

  

June 30,

  

December 31,

 

(in thousands)

 

2022

  

2021

 

Long-term debt:

        

Term loan

 $36,314  $38,000 

Revolving line

  13,150   11,450 

Less: unamortized deferred financing costs

  (980)  (1,120)

Total debt

  48,484   48,330 

Less: current installments

  (3,000)  (3,515)

Current unamortized deferred financing costs

  280   280 

Long-term debt

 $45,764  $45,095 

 

On December 22, 2020, the Company entered into a Credit Agreement (the “Credit Agreement”) with Citizens Bank, N.A., Wells Fargo Bank, National Association, and Silicon Valley Bank (together, the “Lenders”). The Credit Agreement provides for a term loan of $40.0 million and a $25.0 million senior revolving credit facility (including a $10.0 million sub-facility for the issuance of letters of credit and a $10.0 million swingline loan sub facility) (collectively, the “Credit Facility”). The Company’s obligations under the Credit Agreement are guaranteed by certain of the Company’s direct, domestic wholly-owned subsidiaries; none of the Company’s direct or indirect foreign subsidiaries has guaranteed the Credit Facility. The Company’s obligations under the Credit Agreement are secured by substantially all of the assets of Harvard Bioscience, Inc., and each guarantor (including all or a portion of the equity interests in certain of the Company’s domestic and foreign subsidiaries). The Credit Facility matures on December 22, 2025. Issuance costs of $1.4 million are amortized over the contractual term to maturity date on a straight-line basis, which approximates the effective interest method. Available and unused borrowing capacity under the revolving line of credit was $2.9 million as of June 30, 2022. Total revolver borrowing capacity is limited by the consolidated net leverage ratio as defined under the Credit Agreement. The Credit Facility replaced the Company’s prior credit facility, which was repaid with borrowings under the Credit Facility.

 

13

 

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

 

The effective interest rate for the three months ended June 30, 2022 and 2021, was 4.0% and 3.4%, respectively, and for the six months ended June 30, 2022 and 2021, was 3.6% and 3.3%, respectively. 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.

 

Commencing on March 31, 2021, the outstanding term loans amortizes in quarterly installments of $0.5 million per quarter on such date and during each of the next three quarters thereafter, $0.75 million per quarter during the next eight quarters thereafter and $1.0 million per quarter thereafter, with a balloon payment at maturity. Furthermore, within ninety days after the end of the Company’s fiscal year, the term loans may be permanently reduced pursuant to certain mandatory prepayment events including an annual “excess cash flow sweep” of 50% of the consolidated excess cash flow, as defined in the agreement; provided that, in any fiscal year, any voluntary prepayments of the term loans shall be credited against the Company’s “excess cash flow” prepayment obligations on a dollar-for-dollar basis for such fiscal year. Amounts outstanding under the revolving credit facility can be repaid at any time but are due in full at maturity.

 

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

 

On April 28, 2022, the Company entered into an amendment to the Credit Agreement and Pledge and Security Agreement (the “Amendment”), pursuant to which the Lenders and the Administrative Agent have agreed, among other things, (i) to modify the financial covenant relating to the consolidated net leverage ratio and (ii) to consent to the settlement described in Note 13- Litigation Settlement. In consideration for the Amendment, the Company paid a fee of $0.2 million to the Lenders and the Administrative Agent. The Company was in compliance with the covenants of the Credit Agreement, as amended by the Amendment, as of June 30, 2022.

 

10.

 Revenues

 

The following tables represent a disaggregation of revenue from contracts with customers for the three and six months ended June 30, 2022 and 2021:

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 

(in thousands)

 

2022

  

2021

  

2022

  

2021

 

Instruments, equipment, software and accessories

 $27,765  $27,992  $55,303  $53,819 

Service, maintenance and warranty contracts

  1,443   1,205   2,683   2,367 

Total revenues

 $29,208  $29,197  $57,986  $56,186 

 

14

 

The following tables represent a disaggregation of revenue by geographic destination for the three and six months ended June 30, 2022 and 2021:

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 

(in thousands)

 

2022

  

2021

  

2022

  

2021

 

United States

 $14,075  $13,151  $26,314  $24,328 

Europe

  7,194   8,026   15,017   16,615 

Asia

  5,618   5,695   12,351   11,233 

Rest of the world

  2,321   2,325   4,304   4,010 

Total revenues

 $29,208  $29,197  $57,986  $56,186 

 

Deferred revenue

 

The following tables provide details of deferred revenue as of the periods indicated:

 

  

June 30,

  

December 31,

 

(in thousands)

 

2022

  

2021

 

Service contracts

 $1,653  $1,976 

Customer advances

  1,959   2,290 

Total deferred revenue

 $3,612  $4,266 

 

During the three months ended June 30, 2022 and 2021, the Company recognized revenue of $0.6 million and $0.3 million from contract liabilities existing at December 31, 2021 and 2020, respectively. During the six months ended June 30, 2022 and 2021 the Company recognized revenue of $1.3 million and $1.5 million from contract liabilities existing at December 31, 2021 and 2020, respectively.

 

Allowance for Doubtful Accounts

 

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

 

  

Six Months Ended June 30,

 

(in thousands)

 

2022

  

2021

 

Balance, beginning of period

 $136  $227 

Bad debt (credit) expense

  107   (17)

Charge-offs and other

  (48)  (65)

Balance, end of period

 $195  $145 

 

Concentrations

 

No customer accounted for more than 10% of revenues for the three and six months ended June 30, 2022 and 2021. At June 30, 2022 and December 21, 2021, no customer accounted for more than 10% of net accounts receivable.

 

11.

 Income Tax

 

Income tax expense (benefit) was $1.0 million and $(0.2) million for the three months ended June 30, 2022 and 2021, respectively, and was $0.8 million and $(0.2) million for the six months ended June 30, 2022 and 2021, respectively. The effective tax rates for the three months ended June 30, 2022 and 2021, were 28.8% and 35.1%, respectively. The effective tax rates for the six months ended June 30, 2022 and 2021, were (23.6)% and 18.0%, respectively.

 

The difference between the Company’s 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 the Company’s assessment of the likelihood of the recoverability of deferred tax assets. The Company currently has valuation allowances against substantially all of its net operating loss carryforwards and tax credit carryforwards.

 

15

 
 

12.

 Commitments and Contingent Liabilities

 

On April 27, 2022, the Company and Biostage, Inc. (f/k/a Harvard Apparatus Regenerative Technology, Inc.) (“Biostage”) executed a settlement with the plaintiffs which resolves all claims relating to the litigation as described in Note 13 – “Litigation Settlement”.

 

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

 

13.

 Litigation Settlement

 

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

 

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

 

During the three months ended March 31, 2022, the Company accrued $5.2 million of costs related to legal fees and the Settlement. Additionally, during the year ended December 31, 2021, the Company had incurred $0.3 million in legal fees in connection with the litigation. Due to the financial condition of Biostage, the Company determined that it was uncertain as to whether Biostage would be able to meet its indemnification obligation and had fully reserved any receivable from Biostage.

 

During the three months ended June 30, 2022, the Company recorded a credit of $4.9 million as a result of adjustments to the reserves against the indemnification receivable from Biostage. The adjustments reflect: i) the issuance by Biostage of 4,000 shares of its Series E Convertible Preferred Stock (the “Series E Preferred Stock”) to the Company on June 10, 2022, in satisfaction of $4.0 million of Biostage’s total indemnification obligation, ii) the payment by Biostage of a portion of the legal fees associated with the Settlement, and iii) other accrual adjustments. As of June 30, 2022, the Company has fully reserved approximately $0.5 million of unpaid indemnification obligation receivables from Biostage.

 

The Series E Preferred Stock was recorded at an estimated fair value of $3.9 million, and is included in the June 30, 2022 Consolidated Balance Sheet as a component of Other Long-Term Assets. The Series E Preferred Stock ranks senior to all classes of common stock of Biostage and all classes of preferred stock of Biostage (unless the Company consents to Biostage’s issuance of other preferred stock that is senior to or pari passu with the Series E Preferred Stock) and accrues dividends at a rate of 8% per annum that are payable in additional shares of Series E Preferred Stock. Each share of Series E Preferred Stock is convertible at any time at the option of the Company into such number of shares of Biostage common stock determined by dividing (x) the $1,000 face value of the Series E Preferred Stock plus all accrued and unpaid dividends thereon by (b) the average of the volume weighted average trading prices of Biostage’s common stock, which is currently quoted on the OTCQB Marketplace, for the 60 consecutive trading days prior to the conversion. In the event Biostage has a subsequent qualified offering of its common stock, (which is defined as an offering of Biostage common stock that coincides with its uplisting onto Nasdaq, the first subsequent public offering by Biostage, or the first subsequent private placement by Biostage resulting in gross proceeds to Biostage of at least $4,000,000), the Series E Preferred Stock is mandatorily converted into Biostage common stock at the applicable qualified offering price. Due to Biostage’s limited operating history, their overall financial condition and the limited trading volume and liquidity of Biostage’s common stock, the value of the Series E Preferred Stock could fluctuate considerably from time to time. The Company intends to liquidate its position in Biostage following future qualifying events but does not anticipate any material cash inflows in the next twelve months.

 

The Company has elected the provisions within ASC 321 Investment Securities to subsequently measure the Series E Preferred Stock at its original cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of Biostage.

 

 

 

Item 2.        Managements 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: Managements 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 managements 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.

 

 

Selected Results of Operations

 

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 million, or 6.5%, to $6.0 million for the three months ended June 30, 2022, compared to $6.4 million during the same period in 2021. The decrease was primarily due to lower restructuring expenses and variable compensation.

 

Research and development expenses

 

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, 2022, was  comparable to the three months ended June 30, 2021.

 

 

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 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. 

 

 

 

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 expenses

 

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

 

Amortization of intangible asset expenses were $2.9 million for both the six months ended June 30, 2022, and 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 expense was $0.9 million for the six months ended June 30, 2022, and $0.8 million for the six months ended June 30, 2021. The increase was the results of both higher interest rates under our Credit Agreement as well as higher average borrowing 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.