Harvard Bioscience(HBIO) - 2023 Q4 - Annual Report

PART I Business Overview Harvard Bioscience, Inc. develops, manufactures, and sells life science technologies for research, therapy discovery, bioproduction, and preclinical testing - Harvard Bioscience, Inc. is a leading developer, manufacturer, and seller of technologies, products, and services for life science applications, including research, pharmaceutical and therapy discovery, bioproduction, and preclinical testing[13] - The company's strategy for sustainable revenue growth focuses on four key areas: strengthening competitive position in therapy research and preclinical testing, expanding product offerings to higher-volume industrial customers (CROs, biotech, pharma, government labs), expanding bioproduction offerings, and enhancing in vitro testing products for therapy discovery and development[18] - Products are organized into two families: Cellular and Molecular Technologies (CMT) and Preclinical. CMT products support molecular, cellular, organ, and organoid research, making up approximately 49% of global revenues in 2023 (51% in 2022). Preclinical products support drug development's preclinical testing phase, accounting for approximately 51% of global revenues in 2023 (49% in 2022)[20][21][22][27][28] - Sales channels include direct sales (65% of 2023 revenues) and distributors (35% of 2023 revenues) across the United States, China, and major European markets[31] Research and Development Expenses | Year Ended December 31, | R&D Expenses (in millions) | | :---------------------- | :------------------------- | | 2023 | $11.8 | | 2022 | $12.3 | Employee Count by Country (as of December 31, 2023) | Country | Full-time | Part-time | | :-------------- | :-------- | :-------- | | United States | 248 | 9 | | Germany | 55 | 14 | | United Kingdom | 35 | 2 | | Spain | 26 | - | | China | 17 | - | | Rest of World | 10 | - | | Total | 391 | 25 | Risk Factors The company faces significant risks including intense competition, rapid technological change, dependence on volatile pharmaceutical and biotechnology sectors, and potential reductions in government funding - The life sciences industry is highly competitive and subject to rapid technological change, with many competitors possessing greater resources and broader product offerings[54][55] - A significant portion of revenue is derived from pharmaceutical and biotechnology industries, making the company susceptible to their risks, such as government regulation, consolidation, and R&D spending fluctuations[57][58] - Reductions in customer research budgets or government funding (e.g., NIH grants) could adversely affect business, as many customers are dependent on such funding[60] - International operations expose the company to risks including foreign currency fluctuations, local economic conditions, political instability, and compliance with diverse regulations[61][62][63] - Rising inflation and interest rates could negatively impact revenues, profitability, and borrowing costs, as the company may be unable to pass on increased costs[65] - The company has substantial debt ($37.1 million outstanding as of December 31, 2023) and is subject to financial covenants under its Credit Agreement, with potential for adverse impact if compliance is not maintained[66][67][68][69][70] - Cybersecurity incidents pose a risk to critical systems, sensitive data, and reputation, despite ongoing investments in protection and response capabilities[76] - The company's stock price has historically fluctuated and could experience substantial declines due to market volatility, technological innovations, financial performance, and other industry-specific factors[90][93] Unresolved Staff Comments The company reported no unresolved staff comments from the SEC - No unresolved staff comments were reported[102] Cybersecurity The company implements a cybersecurity risk management program, overseen by the Board, to protect systems and data, with no material impact to date - The company has a cybersecurity risk management program based on NIST and ISO 27001 frameworks, including risk assessments, a security team, external service providers, employee training, and an incident response protocol[103][108] - The Board of Directors oversees cybersecurity risk, receiving periodic reports from management, including the Vice President of IT, who is responsible for assessing and managing cybersecurity threats[105][106] - To date, cybersecurity risks and incidents have not materially affected the company's business strategy, results of operations, or financial condition[104] Properties The company operates principal manufacturing facilities and corporate headquarters in Holliston, Massachusetts, New Brighton, Minnesota, Reutlingen, Germany, Barcelona, Spain, and March-Hugstetten, Germany Principal Leased Facilities (as of December 31, 2023) | Location | Description of Facility | Approximate Square Footage | Expiration | | :------------------------ | :--------------------------------------- | :------------------------- | :--------- | | Holliston, Massachusetts | Manufacturing facility and corporate headquarters | 83,000 | 2024 | | New Brighton, Minnesota | Manufacturing facility | 75,000 | 2030 | | Reutlingen, Germany | Manufacturing facility | 23,000 | 2024 | | Barcelona, Spain | Manufacturing facility | 16,000 | 2024 | | March-Hugstetten, Germany | Manufacturing facility | 11,000 | 2024 | - The company also leases facilities in Cambridge, England; Kista, Sweden; Beijing, China; and Shanghai, China, and believes current facilities are adequate for the foreseeable future[107] Legal Proceedings Legal proceedings information is incorporated by reference, with no expected material adverse effect from current claims - Information related to legal proceedings is incorporated by reference from Note 15 and Note 16 to the Consolidated Financial Statements[110] Mine Safety Disclosures This item is not applicable to the company - This item is not applicable[111] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under 'HBIO', with 43,399,291 shares outstanding as of March 1, 2024, and no intention to pay cash dividends - The company's common stock is quoted on the Nasdaq Global Market under the symbol 'HBIO'[113] - As of March 1, 2024, there were 90 holders of record and 43,399,291 shares of common stock issued and outstanding[5][113] - The company has never declared or paid cash dividends on its common stock and does not intend to in the foreseeable future[114] Item 6. [Reserved] This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations Harvard Bioscience experienced a 1.0% decrease in revenues to $112.3 million in 2023, with gross profit increasing by 8.6% to $66.1 million due to product mix and restructuring, leading to an operating income of $1.9 million - The company's business is affected by global and regional economic trends, including inflationary pressure, rising interest rates, exchange rate fluctuations, and softening international markets (especially China and Asia-Pacific)[119] - Restructuring activities in 2022 and 2023 involved discontinuing non-strategic products and headcount reductions, resulting in inventory charges and severance expenses, aimed at improving operational efficiency and profitability[123] Selected Operating Metrics (Years Ended December 31) | Metric | 2023 (in thousands) | % of Revenue (2023) | 2022 (in thousands) | % of Revenue (2022) | | :------------------------------ | :------------------ | :------------------ | :------------------ | :------------------ | | 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 decreased by $1.0 million (1.0%) in 2023 to $112.3 million, primarily due to a $5.0 million decrease from discontinued non-strategic products, partially offset by preclinical product and service growth and a $0.7 million favorable foreign exchange impact[126] - Gross profit increased by $5.3 million (8.6%) to $66.1 million in 2023, with gross margin improving to 58.9% from 53.7% in 2022, driven by a higher mix of preclinical products, services, and software, and reduced costs from restructuring[127] - Operating income was $1.9 million in 2023, a significant improvement from an operating loss of $6.9 million in 2022[194] - Interest expense increased by $1.1 million (40.9%) to $3.6 million in 2023 due to higher interest rates, partially offset by lower average borrowings[134] - The company recorded an unrealized loss of $0.6 million in 2023 related to its investment in HRGN common stock[135] Condensed Consolidated Cash Flow Statements (Years Ended December 31) | Cash Flow Activity | 2023 (in thousands) | 2022 (in thousands) | | :------------------------------ | :------------------ | :------------------ | | 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 operating activities significantly improved to $14.0 million in 2023 from $1.2 million in 2022, driven by reduced net loss (adjusted for non-cash items) and increased deferred revenue[142] - As of December 31, 2023, cash and cash equivalents were $4.3 million, and outstanding borrowings under the Credit Agreement were $37.1 million. The weighted average interest rate on borrowings was 7.4% (inclusive of interest rate swaps)[138][139] Item 7A. Quantitative and Qualitative Disclosures about Market Risk This item is not applicable to the company - This item is not applicable[152] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2023 and 2022, including balance sheets, statements of operations, comprehensive loss, stockholders' equity, and cash flows, prepared under U.S. GAAP - The consolidated financial statements for the years ended December 31, 2023 and 2022, are presented, including the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Statements of Operations, Comprehensive Loss, Stockholders' Equity, Cash Flows, and Notes to Consolidated Financial Statements[153][181] - Grant Thornton LLP issued an unqualified opinion on the consolidated financial statements as of and for the year ended December 31, 2023[184] Consolidated Balance Sheet Highlights (in thousands) | Item | December 31, 2023 | December 31, 2022 | | :---------------------------------- | :---------------- | :---------------- | | Total current assets | $49,038 | $51,124 | | Total assets | $137,366 | $145,360 | | Total current liabilities | $26,542 | $23,249 | | Long-term debt, net | $30,704 | $43,013 | | Total liabilities | $64,292 | $73,140 | | Total stockholders' equity | $73,074 | $72,220 | Consolidated Statements of Operations Highlights (in thousands, except per share data) | Item | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | | :---------------------------------- | :---------------------- | :---------------------- | | Revenues | $112,250 | $113,335 | | Gross profit | $66,071 | $60,819 | | Operating income (loss) | $1,894 | $(6,933) | | Net loss | $(3,415) | $(9,516) | | Basic and diluted loss per share | $(0.08) | $(0.23) | Consolidated Statements of Cash Flows Highlights (in thousands) | Item | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | | :---------------------------------- | :---------------------- | :---------------------- | | Net cash provided by operating activities | $14,028 | $1,152 | | Net cash used in investing activities | $(1,799) | $(1,590) | | Net cash used in financing activities | $(12,134) | $(2,837) | | Decrease in cash and cash equivalents | $(225) | $(3,313) | - Goodwill increased to $57.1 million in 2023 from $56.3 million in 2022, primarily due to foreign currency translation effects. Intangible assets, net, decreased to $16.0 million in 2023 from $21.0 million in 2022, mainly due to amortization and write-offs of fully amortized assets[261] - Long-term debt, net, decreased to $30.7 million in 2023 from $43.0 million in 2022, reflecting term loan installment payments and net payments under the revolving credit facility[280] - Total revenues by geographic destination in 2023 were: United States ($48.2 million), Europe ($32.8 million), Greater China ($18.5 million), and Rest of the world ($12.8 million)[297] - The effective tax rate for 2023 was (33.5%) compared to (3.7%) in 2022, primarily due to changes in the mix of pre-tax income/losses at subsidiaries and the impact of uncertain tax positions[302] Notes to Consolidated Financial Statements The Notes detail accounting policies, financial instruments, revenue recognition, tax estimates, restructuring, employee benefits, debt covenants, and an unrealized loss on equity securities - The company operates in one business segment focused on life science applications, with financial performance measured as a single enterprise[254] - Revenue from instruments, equipment, software, and accessories is recognized at a point in time (typically upon shipment), while service, maintenance, and warranty contracts are recognized over time[228][230][297] - The company uses interest rate swap contracts to hedge exposure to changes in interest rates on its variable-rate debt, effectively converting a SOFR-based variable portion into a fixed rate of 4.75%[286] - Significant judgment is required for income tax accounting, particularly in determining deferred tax assets and valuation allowances, which are based on estimates of future taxable income[150][151] Restructuring Activity (Years Ended December 31, in thousands) | Item | 2023 | 2022 | | :---------------------------------- | :--- | :--- | | Restructuring and other exit costs | $391 | $2,394 | | Non-cash charges | $(142) | $(1,471) | | Cash payments | $(801) | $(287) | - The company sponsors employee retirement savings plans, contributing $1.1 million in both 2023 and 2022. It also maintains two defined benefit pension plans for its UK subsidiary, which were closed to new employees and future accruals in 2014[269][270] Long-Term Debt (as of December 31, in thousands) | Item | 2023 | 2022 | | :---------------------------------- | :------ | :------ | | Term loan | $30,723 | $34,814 | | Revolving line | $6,400 | $12,850 | | Less: unamortized deferred financing costs | $(560) | $(840) | | Total debt | $36,563 | $46,824 | | Less: current portion of long-term debt | $(6,139) | $(4,091) | | Current unamortized deferred financing costs | $280 | $280 | | Long-term debt | $30,704 | $43,013 | - The company was in compliance with the covenants of its Credit Agreement as of December 31, 2023[285] - Stock-based compensation expense was $5.0 million in 2023, up from $4.4 million in 2022. As of December 31, 2023, $4.7 million in compensation costs related to unvested awards remains unrecognized[290] - In April 2023, shares of Series E Convertible Preferred Stock held in HRGN were mandatorily converted into HRGN common stock. As of December 31, 2023, the company held HRGN common stock with an estimated fair value of $3.5 million, and recorded an unrealized loss of $0.6 million in 2023[315][316] - The company completed the disposition of its Hoefer product line in February 2023 for $0.5 million cash, resulting in a $0.4 million gain[317] - Government assistance received was $0.2 million in 2023 and $0.7 million in 2022, primarily for German subsidiaries to offset COVID-19 impacts and support R&D. In February 2024, the company received $3.1 million for the Employee Retention Credit[319][320] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reported no changes in or disagreements with accountants on accounting and financial disclosure - No changes in and disagreements with accountants on accounting and financial disclosure were reported[154] Item 9A. Controls and Procedures Disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no material changes reported - As of December 31, 2023, the principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective[156] - Management assessed and concluded that the company's internal control over financial reporting was effective as of December 31, 2023, based on the COSO framework[158] - Grant Thornton LLP, the independent registered public accounting firm, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2023[162][185] - There were no changes in internal control over financial reporting during the last quarter ended December 31, 2023, that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[159] Item 9B. Other Information CEO James Green's Rule 10b5-1 trading plan, adopted November 23, 2023, for up to 240,000 shares, was terminated January 21, 2024, with no shares sold - James Green, Chairman, President, and CEO, adopted a Rule 10b5-1 trading plan on November 23, 2023, to sell a maximum of 240,000 shares[169] - The trading plan was terminated on January 21, 2024, and no shares were sold under the plan prior to its termination[169] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - This item is not applicable[170] PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the definitive Proxy Statement for the 2024 Annual Meeting of Stockholders[172] Executive Compensation Executive compensation information is incorporated by reference from the company's definitive Proxy Statement for the 2024 Annual Meeting of Stockholders - Information is incorporated by reference from the definitive Proxy Statement for the 2024 Annual Meeting of Stockholders[173] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information for beneficial owners and management is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the definitive Proxy Statement for the 2024 Annual Meeting of Stockholders[174] Certain Relationships and Related Transactions, and Director Independence Information on related transactions and director independence is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the definitive Proxy Statement for the 2024 Annual Meeting of Stockholders[175] Principal Accounting Fees and Services Principal accounting fees and services information is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the definitive Proxy Statement for the 2024 Annual Meeting of Stockholders[176] PART IV Exhibits, Financial Statement Schedules This section lists consolidated financial statements, schedules, and an exhibit index filed as part of the Annual Report on Form 10-K - This section lists consolidated financial statements, financial statement schedules (omitted if not applicable or included in notes), and an exhibit index[179] Form 10-K Summary This item indicates that no Form 10-K Summary is provided - No Form 10-K Summary is provided[179] Exhibit Index The Exhibit Index provides a comprehensive list of all exhibits filed as part of the Annual Report on Form 10-K, detailing their descriptions and methods of filing - The Exhibit Index lists all exhibits filed as part of the Annual Report on Form 10-K, including descriptions and filing methods[325]