Harvard Bioscience, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Amounts are in U.S. dollars; financial figures below are in millions unless stated otherwise. Harvard Bioscience sells instruments, equipment, software and accessories, as well as related services, primarily for research and preclinical applications.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $26.9 | $29.7 | $84.9 | $85.8 |
| Gross profit / margin | $12.2 / 45.2% | $16.3 / 55.0% | $45.0 / 53.0% | $48.1 / 56.0% |
| Operating income (loss) | $(3.8) | $0.5 | $(6.5) | $0.4 |
| Net income (loss) | $(3.4) | $(0.2) | $(7.9) | $(1.2) |
| Basic and diluted loss per share | $(0.08) | $(0.00) | $(0.19) | $(0.03) |
- For the first nine months, operating cash flow was $(1.5), versus $1.1 provided in the prior-year period. Investing cash flow was $(1.4), and financing cash flow was $(0.1). Cash declined $2.7 to $5.1 at September 30.
- At quarter-end, total assets were $147.0 and current assets were $51.8, against current liabilities of $21.4. Gross borrowings were approximately $50.2; the balance-sheet debt carrying amount was $49.3 after deferred financing costs. The weighted-average borrowing rate was 6.4%.
- Unused revolver capacity was $3.0, constrained by the credit agreement’s leverage limits. Total stockholders’ equity was $72.0.
Changes and notable items
- Q3 revenue fell 9.2% year over year, mainly from lower preclinical product sales and unfavorable currency effects. Nine-month revenue declined 1.1%; management cited lower preclinical sales, weaker European revenue and currency effects.
- Gross margin contracted sharply, particularly in Q3. Management attributed the decline to lower revenue and production overhead absorption, higher labor and materials costs, and inventory reserves for discontinued products. Pricing increases partly supported nine-month margin.
- Operating expenses increased in the first nine months, notably research and development (up 20.8%), reflecting new product development in preclinical product lines. Interest expense rose 41.9% for the period, due to higher rates and average borrowings.
- In Q3, the company recorded $1.3 of inventory charges related to discontinuing non-strategic products and $0.6 of severance expense. The period also included a $0.5 litigation-related credit. For the nine months, litigation settlement expenses and subsequent credits resulted in a net $0.2 credit.
- Foreign-currency translation reduced comprehensive income by $6.2 for the first nine months, compared with a $1.9 loss in 2021.
Outlook, liquidity, and risks
- Management gave no numerical revenue or earnings guidance. It said available cash, operating cash generation and debt capacity are expected to fund operations, restructuring costs and capital expenditures for at least the next 12 months; this forecast is subject to risks and actual results may differ.
- Management expected supply-chain disruptions to continue through the remainder of 2022. The filing also identifies China COVID-related shutdowns, component and labor shortages, inflation, higher freight and materials costs, rising interest rates, currency volatility, the Russia-Ukraine conflict and a softening European economy as risks to operations, margins and cash flow.
- The $40.0 term loan and $25.0 revolving facility mature December 22, 2025 and are secured by substantially all assets of the company and certain guarantors. An April 2022 amendment modified the leverage covenant. A November 8, 2022 amendment further modified covenant terms, changed the benchmark from LIBOR to SOFR, and adjusted covenant EBITDA treatment. The risk-factor discussion says the company was out of compliance with certain financial covenants at September 30 and cured the issue through the November amendment; another note describes compliance as of September 30 under the amended terms. The filing’s descriptions warrant review.
- The Biostage settlement was resolved, and Biostage provided $4.0 of Series E convertible preferred stock in satisfaction of part of its indemnification obligation. Harvard Bioscience carries the investment at $4.0; its value may fluctuate, and the filing cites Biostage’s financial condition and the limited liquidity of its common stock as valuation risks.
- Other ordinary-course legal matters were not considered probable and reasonably estimable for accrual; the company says an adverse outcome could nevertheless be material. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Investor verification priorities
- Review the November credit amendment, covenant calculations and ongoing compliance, including available revolver capacity and any restrictions on borrowing.
- Track cash generation, debt service and liquidity against management’s 12-month funding assessment.
- Assess whether gross-margin pressure from lower volume, product discontinuations, supply costs and overhead absorption is improving.
- Evaluate the carrying value, terms and realizability of the Biostage preferred-stock investment and related indemnification recovery.
- Monitor revenue by geography and product category, and the continuing effects of foreign exchange, supply-chain constraints and inflation.