Item 5. Market for Registrant’s Common Equity
Item 5.
Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is quoted on the Nasdaq Global Market under the symbol “HBIO.”
Stockholders
There were 90 holders of record of our common stock as of March 1, 2024. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of our common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies.
Dividend Policy
We have never declared or paid cash dividends on our common stock in the past and do not intend to pay cash dividends on our common stock in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors our board of directors deems relevant.
Item 6 .
[Reserved]
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Item 7.
Management ’ s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
The following section of this Annual Report on Form 10-K contains statements that are not statements of historical fact and are forward-looking statements within the meaning of federal securities laws. 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. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Factors that may cause our actual results to differ materially from those in the forward-looking statements include those factors described in “Item 1A. Risk Factors” in this Annual Report on Form 10-K. You should carefully review all of these factors, as well as the comprehensive discussion of forward-looking statements on page 1 of this Annual Report on Form 10-K.
Overview
Harvard Bioscience is a leading developer, manufacturer and seller of technologies, products and services that enable fundamental advances in life science applications, including research, pharmaceutical and therapy discovery, bioproduction and preclinical testing for pharmaceutical and therapy development. Our products and services are sold globally to customers ranging from renowned academic institutions and government laboratories to the world’s leading pharmaceutical, biotechnology and CROs. With operations in the United States, Europe and China, we sell through a combination of direct and distribution channels to customers around the world.
Trends and Developments
Our business is affected by global and regional economic trends and uncertainties. The global economy has recently experienced increasing uncertainty, including inflationary pressure, rising interest rates, and fluctuations in exchange rates. Our business has also been affected by a recent softening of certain international markets, especially in China and the Asia-Pacific region, the events in Ukraine and the Middle East, as well as delays in government funding for our customers. These developments may lead to additional economic uncertainties.
Overall, our results of operations were negatively impacted by the COVID-19 pandemic. However, we experienced a period of increased demand for certain of our products due to increased COVID-19 related research activity during the pandemic, which is unlikely to be repeated. Our business has been affected by a reduced demand from our biotechnology and pharmaceutical company customers, due principally to the increased cost of capital and a reduction in spending following the COVID-19 pandemic.
If these trends are prolonged or are more severe, or if the recovery is less robust or takes longer than anticipated, our business, results of operations, and cash flow may be materially impacted.
Restructuring Activities
On an ongoing basis, we review our business, the global economy, the healthcare industry, and the markets in which we compete to identify operational efficiencies, enhance commercial capabilities and align our cost base and infrastructure with customer needs and our strategic plans.
During 2022, we reviewed our business and product portfolio and identified opportunities to rationalize our product portfolio, improve our cost structure and optimize our sales organization. In connection with this review, during the year ended December 31, 2022, we identified certain non-strategic products for discontinuation and recorded $1.5 million of inventory charges and also recorded $0.9 million in severance expenses in connection with headcount reductions in Europe and North America. During the year ended December 31, 2023, we incurred an additional $0.3 million in inventory charges and $0.1 million in remaining severance and other expenses related to completion of this restructuring program.
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Selected Results of Operations
In the table below, we provide an overview of selected operating metrics for the year ended December 31, 2023, compared to the year ended December 31, 2022.
Year Ended December 31,
(dollars in thousands)
2023
% of revenue
2022
% of revenue
Revenues
$
112,250
$
113,335
Gross profit
66,071
58.9
%
60,819
53.7
%
Sales and marketing expenses
24,108
21.5
%
25,041
22.1
%
General and administrative expenses
22,780
20.3
%
24,493
21.6
%
Research and development expenses
11,764
10.5
%
12,329
10.9
%
Amortization of intangible assets
5,525
4.9
%
6,122
5.4
%
Litigation settlement
-
-
(233
)
-0.2
%
Interest expense
3,591
3.2
%
2,548
2.2
%
Unrealized loss on equity securities
632
0.6
%
-
-
Income tax expense
859
0.8
%
337
0.3
%
Revenues
Revenues decreased $1.0 million, or 1.0%, to $112.3 million for the year ended December 31, 2023, compared to $113.3 million for the year ended December 31, 2022. Revenues included a net decrease of $5.0 million from the discontinuation of non-strategic products, which was largely offset by growth in preclinical product and service revenue. Foreign exchange favorably impacted revenue by $0.7 million during the year ended December 31, 2023.
Gross profit
Gross profit increased $5.3 million, or 8.6%, to $66.1 million for the year ended December 31, 2023, compared with $60.8 million for the year ended December 31, 2022. Gross margin increased to 58.9% for the year ended December 31, 2023, compared with 53.7% for the year ended December 31, 2022. The increase in gross margin was due primarily to a higher mix of preclinical products, services, and software, which generally have higher gross margins than our other product lines, reduced revenue from lower margin products discontinued during the second half of 2022 and lower cost of sales resulting from restructuring activities related to discontinuing those products. Costs of goods sold for the year ended December 31, 2022, also included a $1.5 million inventory write down related to the discontinuation of certain non-strategic products.
Sales and marketing expenses
Sales and marketing expenses decreased $0.9 million, or 3.7%, to $24.1 million for the year ended December 31, 2023, compared to $25.0 million for the year ended December 31, 2022. A reduction in salaries due to lower headcount was partially offset by increases in variable compensation.
General and administrative expenses
General and administrative expenses decreased by $1.7 million, or 7.0%, to $22.8 million for the year ended December 31, 2023, compared with $24.5 million for the year ended December 31, 2022. The decrease was primarily due to reduced consulting costs and severance costs incurred with restructuring activities in the prior period, partially offset by increases in salaries and variable compensation in the current period.
Research and development expenses
Research and development expenses decreased $0.5 million, or 4.6%, to $11.8 million for the year ended December 31, 2023, compared with $12.3 million for the year ended December 31, 2022. The decrease was primarily due to the capitalization of software development costs. Reduced salaries and consulting costs were offset by increases in variable compensation.
Amortization of intangible assets
Amortization of intangible assets was $5.5 million for the year ended December 31, 2023, compared to $6.1 million for the year ended December 31, 2022. Amortization expense decreased as certain intangible assets became fully amortized during 2022.
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Litigation settlement
During the year ended December 31, 2022, we recorded a net credit of $0.2 million related to the HRGN Settlement consisting of $5.2 million in settlement and legal expenses offset by credits of $5.4 million. The credits consisted of adjustments to the reserve against an indemnification receivable from HRGN to reflect: i) the issuance by HRGN 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 HRGN of legal fees associated with the HRGN Settlement, and iii) other accrual adjustments.
On April 6, 2023, all of the shares of Convertible Preferred Stock we held in HRGN were mandatorily converted into shares of common stock.
Interest expense
Interest expense increased $1.1 million, or 40.9%, to $3.6 million for the year ended December 31, 2023, compared with $2.5 million for the year ended December 31, 2022. The increase was the result of higher interest costs in a rising rate environment, which was partially offset by lower average borrowings during the period.
Unrealized loss on equity securities
In connection with the settlement discussed above, as of December 31, 2023 we held shares of HRGN common stock with an estimated fair value of $3.5 million. During the year ended December 31, 2023, we recorded an unrealized loss of $0.6 million related to these shares. We determine the fair value of our HRGN common stock based on the closing price as quoted on the OTCQB Marketplace at the reporting date. Due to HRGN’s limited operating history, its overall financial condition and the limited trading volumes and liquidity of its common stock, the value of our investment in this common stock could fluctuate considerably or become worthless.
Income tax expense
Income tax expense for the year ended December 31, 2023, was $0.9 million compared to $0.3 million for the year ended December 31, 2022. The effective tax rates for the years ended December 31, 2023 and 2022, were (33.5)% and (3.7)%, respectively. The difference between our effective tax rates compared to the U.S. statutory tax rate of 21% was primarily due to the mix of forecasted income or losses in our U.S. and foreign tax jurisdictions, the impact of the employee retention credit, and a Global Intangible Low-Taxed Income inclusion to taxable income. The effective tax rates in both the years ended December 31, 2023 and 2022, were also impacted by changes in valuation allowances associated with our assessment of the likelihood of the recoverability of our deferred tax assets. We have valuation allowances against substantially all of our net operating loss carryforwards and tax credit carryforwards.
Liquidity and Capital Resources
Our primary sources of liquidity are cash and cash equivalents, internally generated cash flow from operations and our revolving credit facility. Our expected cash outlays relate primarily to cash payments due under our Credit Agreement described below, salaries, inventory, and capital expenditures.
As of December 31, 2023, we held cash and cash equivalents of $4.3 million, compared with $4.5 million at December 31, 2022. Borrowings outstanding under our Credit Agreement were $37.1 million and $47.7 million as of December 31, 2023 and 2022, 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 both maturing on December 22, 2025 (See Note 9 to the Consolidated Financial Statements included in “Part IV, Item 15. Exhibits, Financial Statement Schedules” of this report). As of December 31, 2023, the weighted average interest rate on our borrowings, inclusive of the effect of our interest rate swaps, was 7.4%, and the available and unused borrowing capacity under the Credit Agreement, as amended, was $10.8 million. Total revolver borrowing capacity is limited by our consolidated net leverage ratio as defined under the Credit Agreement, as amended.
Based on our current operating plans, we expect that our available cash, cash generated from current operations and debt capacity will be sufficient to finance current operations and capital expenditures for at least the next 12 months. This assessment includes consideration of our best estimates of the impact of macroeconomic conditions on our financial results described above. Our forecast for 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.
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Condensed Consolidated Cash Flow Statements
Year Ended December 31,
(in thousands)
2023
2022
Cash provided by operating activities
$
14,028
$
1,152
Cash used in investing activities
(1,799
)
(1,590
)
Cash used in financing activities
(12,134
)
(2,837
)
Effect of exchange rate changes on cash
(320
)
(38
)
Decrease in cash and cash equivalents
$
(225
)
$
(3,313
)
Cash provided by operations was $14.0 million and $1.2 million for the years ended December 31, 2023 and 2022, respectively. Cash provided by operating activities for the year ended December 31, 2023 improved due to reductions in our net loss adjusted for non-cash items and increases in deferred revenue for service contracts. During the year ended December 31, 2022, cash used in operations was negatively impacted by the payment of approximately $4.0 million in connection with the HRGN Settlement.
Cash used in investing activities was $1.8 million for the year ended December 31, 2023, and primarily consisted of $2.3 million of capital expenditures in manufacturing, information technology infrastructure, and capitalized software costs, offset by $0.5 million from proceeds from the sale our Hoefer product line. Cash used in investing activities was $1.6 million for the year ended December 31, 2022, and primarily consisted of capital expenditures in manufacturing and information technology infrastructure.
Cash used in financing activities was $12.1 million for the year ended December 31, 2023. During this period, we made term loan installments payments under the Credit Agreement of $4.1 million, with net payments of $6.4 million under the revolving credit facility. We also received proceeds of $0.9 million from the exercise of stock options and the employee stock purchase plan and paid $2.5 million for taxes related to net share settlement of equity awards.
Cash used in financing activities was $2.8 million for the year ended December 31, 2022. During this period, we made term loan payments under the Credit Agreement of $3.2 million, with net borrowings of $1.4 million under the revolving facility. We also received proceeds of $0.6 million from the exercise of stock options and employee stock purchase plan purchases and paid $1.6 million for taxes related to net share settlement of equity awards.
Impact of Foreign Currencies
Our international operations in some instances operate as a natural hedge as we sell our products in many countries and a substantial portion of our revenues, costs and expenses are denominated in foreign currencies, primarily the euro and the British pound. During the year ended December 31, 2023, changes in foreign currency exchange rates resulted in a favorable effect on revenues of $0.7 million and an unfavorable effect on expenses of approximately $0.5 million.
During the years ended December 31, 2023 and 2022, the translation of foreign currency into U.S. dollars included as a component of comprehensive loss resulted in a gain (loss) of $1.5 million and $(2.6) million, respectively. In addition, the currency exchange rate fluctuations included as a component of net loss resulted in currency losses of $(0.2) million and $(0.4) million during the years ended December 31, 2023 and 2022, respectively.
Recent Accounting Pronouncements
For information on recent accounting pronouncements impacting our business, see “Recent Accounting Pronouncements” included in Note 2 to the Consolidated Financial Statements included in “Part IV, Item 15. Exhibits, Financial Statement Schedules” of this report.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, investments, income taxes, litigation and other contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
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We believe the following is one of the more significant judgments and estimates used in the preparation of our consolidated financial statements:
Income Taxes and Valuation Allowance
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Our annual tax rate is based on income, statutory tax rates, tax reserve changes and tax planning opportunities available to us in the various jurisdictions in which we operate. We regularly assess the likelihood of tax adjustments in each of the tax jurisdictions in which we have operations and account for the related financial statement implications. We have established tax reserves that we believe are appropriate given the possibility of tax adjustments. Determining the appropriate level of tax reserves requires significant judgment regarding the uncertain application of tax laws. Reserves are adjusted when information becomes available or when an event occurs indicating a change in the reserve is appropriate. Changes in tax reserves could have a material impact on our financial condition or results of operations.
Significant judgment is also required in determining the amount of deferred tax assets that will ultimately be realized and any corresponding deferred tax asset valuation allowance. When estimating the necessary valuation allowance, we consider all available evidence for each jurisdiction including historical operating results, estimates of future taxable income and the feasibility of ongoing tax planning strategies. If new information becomes available that would alter our estimate of the amount of deferred tax assets that will ultimately be realized, we adjust the valuation allowance through income tax expense. Changes in the deferred tax asset valuation allowance could have a material impact on our financial condition or results of operations.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk.
Not Applicable.