Harvard Bioscience, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; filed August 8, 2023. Amounts below are in millions of dollars unless stated otherwise.
Business context and performance
The company sells instruments, equipment, software, accessories, and related services. Management attributed revenue growth in preclinical products partly to the discontinuation of non-strategic cellular and molecular products.
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $28.8 | $29.2 | $58.7 | $58.0 |
| Gross profit | $16.7 | $16.6 | $35.0 | $32.8 |
| Gross margin | 58.0% | 57.0% | 59.6% | 56.6% |
| Operating income (loss) | $0.8 | $4.0 | $2.5 | $(2.7) |
| Net income (loss) | $(1.0) | $2.4 | $(0.4) | $(4.4) |
| Diluted earnings (loss) per share | $(0.02) | $0.06 | $(0.01) | $(0.11) |
| Operating cash flow | Not presented separately | Not presented separately | $5.4 | $(2.2) |
Financial position and liquidity
- At June 30, cash and cash equivalents were $4.3 million, versus $4.5 million at December 31, 2022. First-half cash decreased $0.2 million.
- Gross borrowings were $42.1 million, down from $47.7 million at year-end; balance-sheet debt net of unamortized financing costs was $41.4 million. Debt matures December 22, 2025.
- Unused revolving-credit capacity was $12.4 million, subject to the agreement’s leverage-based limit. The company reported compliance with its debt covenants.
- The weighted-average borrowing rate, including the interest-rate swap, was 8.1%. A $30.3 million notional swap fixes the SOFR component at 4.75% through December 2025; applicable loan margins remain additional.
- First-half investing cash use was $0.3 million and financing cash use was $5.3 million, including $5.5 million of net debt repayments.
Material changes and unusual items
- Q2 revenue fell 1.5%; first-half revenue rose 1.3%. For the first half, preclinical growth more than offset $2.8 million of revenue lost from discontinued products. U.S. revenue declined while Europe and Greater China grew.
- Gross margin increased year over year, supported by a higher preclinical-product mix and the exit from lower-margin products. Management said a global inventory-costing process alignment adversely affected Q2 margin.
- Q2 net loss included a $1.6 million unrealized loss on Biostage common shares and $0.9 million of interest expense. Interest expense increased from the prior year amid higher rates.
- The prior-year Q2 comparison included a $4.9 million credit related to the Biostage litigation settlement, contributing to the higher reported operating income and net income in Q2 2022.
- After conversion of Biostage preferred stock, the company held 707,626 Biostage common shares valued at $2.6 million at quarter-end. The filing warns that the investment could fluctuate considerably or become worthless due to Biostage’s financial condition and limited trading liquidity.
- The company sold its Hoefer product line in February for $0.5 million cash and recorded a $0.4 million gain; the line’s revenue and gross profit were described as not significant.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance is provided. Management expects cash, operating cash generation, and debt capacity to fund operations and capital expenditures for at least the next 12 months.
- Management expects supply-chain and broader economic uncertainties to continue through 2023. Component and labor shortages, freight and material costs, inflation, higher interest rates, and exchange-rate volatility have affected results and cash flow; more severe or prolonged conditions could have a material impact.
- Tax expense can be volatile due to jurisdictional estimates, GILTI, and valuation allowances; allowances cover substantially all tax-loss and credit carryforwards.
- The Biostage litigation was settled and dismissed. The company reported other ordinary-course claims and state unclaimed-property audits, with no related loss accruals at June 30 because losses were not considered probable and reasonably estimable. An adverse resolution could still be material.
- Management concluded disclosure controls were effective and reported no material changes in internal control over financial reporting during the quarter.
Investor facts to verify
- Whether preclinical growth can sustain revenue and offset discontinued-product sales and geographic weakness.
- Cash generation, debt reduction, covenant headroom, and the $12.4 million of reported revolver availability, particularly given the 8.1% borrowing rate.
- The market value and liquidity of the Biostage shareholding and the potential for further mark-to-market losses.
- The assumptions behind management’s 12-month liquidity assessment and the potential impact of continued supply-chain and macroeconomic pressures.
- Tax-rate volatility, deferred-tax-asset valuation allowances, and developments in unclaimed-property audits or other contingencies.