HARVARD BIOSCIENCE INC

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 September 30, 2024 and for the three and nine months ended September 30, 2024 and 2023 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, 2023 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, 2023.

In the opinion of management, all adjustments, which include normal recurring adjustments necessary to present a fair statement of financial position as of September 30, 2024, results of operations and comprehensive loss for the three and nine months ended September 30, 2024 and 2023, and cash flows for the nine months ended September 30, 2024 and 2023, as applicable, have been made. The results of operations for the three and nine months ended September 30, 2024, are not necessarily indicative of the anticipated operating results for the full year ending December 31, 2024, 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, 2023. There have been no material changes in the Company’s significant accounting policies during the nine months ended September 30, 2024.

Liquidity

Primarily due to a decline in revenues, the Company experienced a net cash outflow from operations during the nine months ended September 30, 2024. The Company has substantial debt and other financial obligations. Any failure to meet these obligations or maintain compliance with the debt covenants contained in its credit agreement could have a material adverse effect on its business, financial condition and results of operations. As of the date of this report, the Company is unable to make additional borrowings under its revolving credit facility due to net leverage ratio requirements set forth in the Company’s credit agreement and will be unable to make any such borrowings until it delivers to the lenders its financial statements for the year ending December 31, 2024 (see note 8).

The Company continues to take actions intended to improve liquidity, including actions related to cost containment and inventory reduction. Based on its current operating plans, the Company expects that its available cash and cash generated from operations will be sufficient to finance operations and capital expenditures and service its debt for at least the next 12 months. The Company’s ongoing cash flows and ability to meet its debt covenants are dependent on its revenues and operating performance. If the Company is unable to successfully carry out its operating plans or increase its revenues, its ability to maintain compliance with its debt covenants could be adversely affected.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires the use of management estimates. Such estimates include the determination and establishment of certain accruals and provisions, including those for income taxes, credit losses on receivables, and defined benefit pension obligations. Estimates are also required to assess the value for inventories reported at lower of cost or net realizable value, stock-based compensation expense, and the recoverability of long-lived and intangible assets, including goodwill. On an ongoing basis, the Company assesses its previous estimates based upon currently available information. Actual results could differ materially from those estimates.

Other Operating Expenses

The components of other operating expenses for the three and nine months ended September 30, 2024 were as follows:

Recently Issued Accounting Pronouncements Yet to Be Adopted

In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-07,* Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures*, which is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses on an annual and interim basis. Entities with a single reportable segment must provide all the disclosures required by this ASU and all existing segment disclosures in Topic 280. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The adoption of this standard only impacts footnote disclosures and is not expected to have a material impact on the Company's consolidated financial statements.

In December 2023, the FASB issued ASU No. 2023-09,Income Taxes (Topic 740): Improvements to Income Tax, which is intended to enhance disclosures related to the effective tax rate reconciliation, income taxes paid, and other disclosures. This new standard impacts footnote disclosures and will be effective for the Company’s annual consolidated financial statements for the year ending December 31, 2025. The Company is currently evaluating the impact that adoption of ASU No. 2023-09 will have on the footnote disclosures in its consolidated financial statements.

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 and restricted stock units into common stock using the treasury method unless the effect is antidilutive.

The following table summarizes the calculation of basic and diluted net loss per share of common stock:

The following tables represent a disaggregation of revenues from contracts with customers for the three and nine months ended September 30, 2024 and 2023:

Revenues by type were as follows:

Revenues by timing of recognition were as follows:

Revenues by geographic destination were as follows:

Contract Liabilities

The following table provides details of contract liabilities as of the periods indicated:

Changes in the Company’s contract liabilities are primarily due to the timing of receipt of payments under service, maintenance and warranty contracts and lower sales volumes. During the three months ended September 30, 2024 and 2023, the Company recognized revenues of $0.4 million and $1.0 million from contract liabilities existing at December 31, 2023 and 2022, respectively. During the nine months ended September 30, 2024 and 2023, the Company recognized revenues of $3.0 million and $2.3 million from contract liabilities existing at December 31, 2023 and 2022, respectively.

Provision for Expected Credit Losses on Receivables

Activity in the provision for expected credit losses on receivables was as follows:

Concentrations

No customer accounted for more than 10% of revenues for the three and nine months ended September 30, 2024 and 2023. At September 30, 2024 and December 31, 2023, no customer accounted for more than 10% of net accounts receivable.

Warranties

Activity in the product warranties accrual was as follows:

The change in the carrying amount of goodwill for the nine months ended September 30, 2024 was as follows:

Intangible assets, net at September 30, 2024 and December 31, 2023 consisted of the following:

Intangible asset amortization expense for the three and nine months ended September 30, 2024 and 2023 was as follows:

As of September 30, 2024, estimated future amortization expense of amortizable intangible assets is as follows:

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

The Coronavirus Aid, Relief, and Economic Security Act of 2020 (“CARES Act”) provided an employee retention tax credit (“ERTC”) that was a refundable tax credit against certain employer taxes. The Company elected to account for the credit as a government grant. As there is no authoritative guidance under U.S. GAAP on accounting for grants to for-profit business entities from government entities, the Company accounts for government assistance by analogy to International Accounting Standards Topic 20,Accounting for Government Grants and Disclosure of Government Assistance (“IAS 20”). Under IAS 20, government grants are recognized when there is reasonable assurance that the grant will be received and that all conditions related to the grant will be met.

The Company received ERTC refunds of $3.2 million during the nine months ended September 30, 2024. Due to the subjectivity of the credit, the Company has included the refunds received in other current liabilities in the consolidated balance sheet as of September 30, 2024, subject to a determination that the refunds are recognizable.

The Company engaged a professional services firm under a commission fee arrangement to assist with determining the Company’s eligibility to claim the ERTC refunds and accumulating the necessary support that was used as a basis in the filing. During the nine months ended September 30, 2024, the Company paid fees of $0.5 million for these services, which are included in other operating expenses in the consolidated statement of operations.

In April 2023, the Company received shares of common stock of Harvard Apparatus Regenerative Technology, Inc. (“HRGN”, formerly known as Biostage, Inc.) in connection with settlement of indemnification obligations related to litigation which was resolved during the year ended December 31, 2022. As of December 31, 2023, these shares had an estimated fair value $3.5 million and are included in the consolidated balance sheet as a component of other long-term assets. During the nine months ended September 30, 2024, the Company sold its HRGN shares for $1.9 million and recorded a loss on equity securities of $1.6 million. The Company recorded unrealized gains (losses) of $1.2 million and $(0.4) million during the three and nine months ended September 30, 2023, respectively.

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 nine months ended September 30, 2024 and 2023, were as follows:

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

Supplemental balance sheet information related to the Company’s operating leases is as follows:

Future minimum lease payments for operating leases, with initial terms in excess of one year at September 30, 2024, are as follows:

As of September 30, 2024 and December 31, 2023, the Company’s long-term debt was as follows:

The Company maintains a Credit Agreement (as amended, the “Credit Agreement”) with Citizens Bank, N.A., Wells Fargo Bank, National Association, and First Citizens Bank & Trust Company (together, the “Lenders”). The Credit Agreement provides for a term loan of $40.0 million and a $25.0 million 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 secured by substantially all of the assets of Harvard Bioscience, Inc., including all or a portion of the equity interests in certain of the Company’s domestic and foreign subsidiaries. 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. Issuance costs of $1.6 million are amortized over the contractual term to maturity date on a straight-line basis, which approximates the effective interest method. Total revolver borrowing capacity is limited by the consolidated net leverage ratio as defined under the amended Credit Agreement. As of the date of this report, the Company is unable to make additional borrowings under its revolving credit facility and will be unable to make any such borrowings until it delivers to the lenders its financial statements for the year ending December 31, 2024, due to net leverage ratio requirements set forth in the August 6, 2024 amendment to the Credit Agreement (the “August 2024 Amendment”), as described below.

Borrowings under the Credit Facility will, at the option of the Company, bear interest at either (i) a rate per annum based on the Secured Overnight Financing Rate (“SOFR”) 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 “SOFR Loan”), subject to a floor of 0.50%, or (ii) an alternative base rate plus an applicable interest rate margin, each as determined as provided in the Credit Agreement (an “ABR Loan”). 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%. Pursuant to the August 2024 Amendment, the applicable interest rate margin varies from 2.0% per annum to 3.75% per annum for SOFR Loans, and from 1.5% per annum to 3.5% per annum for ABR Loans, in each case depending on the Company’s consolidated net leverage ratio, and is determined in accordance with a pricing grid set forth in the Credit Agreement, as amended. 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 SOFR Loan breakage and redeployment costs in certain circumstances.

The effective interest rate on the Company’s borrowings for the three months ended September 30, 2024 and 2023, was 8.7% and 8.3%, respectively, and for the nine months ended September 30, 2024 and 2023, was 8.1% and 8.2%, respectively. The weighted average interest rate as of September 30, 2024, net of the effect of the Company’s interest rate swap agreement, was 8.6%. 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.

As of September 30, 2024, the term loan requires quarterly installment payments of $1.0 million with a balloon payment at maturity on December 22, 2025. Furthermore, within ninety days after the end of the Company’s fiscal year, the term loan may be permanently reduced pursuant to certain mandatory prepayment events including an annual “excess cash flow sweep”, as defined in the Credit Agreement, provided that, in any fiscal year, any voluntary prepayments of the term loan shall be credited against the Company’s “excess cash flow” prepayment obligations on a dollar-for-dollar basis for such fiscal year. As of December 31, 2023, the current portion of long-term debt included amounts due under the excess cash flow sweep of $2.0 million which was paid on March 29, 2024. Amounts outstanding under the revolving credit facility can be repaid at any time but are due in full at maturity.

The Credit Agreement includes various customary financial covenants and other affirmative and negative covenants binding on the Company. The negative covenants limit the ability of the Company, among other things, to incur debt, permit liens, make investments, sell assets, or 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.

In March 2024, the Company entered into an amendment to the Credit Agreement pursuant to which the Lenders and administrative agent modified the definition of Consolidated EBITDA used in the calculation of certain financial covenants to adjust for charges related to an abandoned property audit (see Note 13) and commission fees in connection with ERTC filings (see Note 5).

In August 2024, the Company entered into an amendment to the Credit Agreement that, among other things, modified the financial covenants relating to the consolidated net leverage ratio and consolidated fixed charge coverage ratio through the period ended December 31, 2024. The amendment also added a net leverage ratio requirement with respect to additional borrowing under the Company’s revolving credit facility and restrictions on certain additional indebtedness and investments, in each case until the Company delivers to the Lenders the Company’s financial statements for the fiscal year ending December 31, 2024. In addition, until delivery of such financial statements, the applicable interest rate margin is increased by 50 bps during such time as the Company’s consolidated net leverage ratio is greater than 3.0. The Company paid fees of $0.2 million to the Lenders in connection with the amendment. As of September 30, 2024, the Company was in compliance with the financial covenants of the Credit Agreement. As of the date of this report, the Company is unable to make additional borrowings under its revolving credit facility and will be unable to make any such borrowings until it delivers to the lenders its financial statements for the year ending December 31, 2024, due to net leverage ratio requirements set forth in the August 2024 Amendment.

In February 2023, the Company entered into an interest rate swap contract to improve the predictability of cash flows from interest payments related to its variable, SOFR-based debt. The swap contract had a notional amount of $23.1 million as of September 30, 2024 and matures on December 22, 2025. This swap contract effectively converts the SOFR-based variable portion of the interest payable under the Credit Agreement into fixed-rate debt at an annual rate of 4.75%. The swap contract does not impact the additional interest related to the applicable interest rate margin as discussed above in Note 8, Long-Term Debt. The swap contract is considered an effective cash flow hedge, and as a result, net gains or losses are reported as a component of other comprehensive income (“OCI”) in the consolidated financial statements and are reclassified when the underlying hedged interest impacts earnings. An assessment is performed quarterly to evaluate the ongoing hedge effectiveness.

The following table presents the notional amount and fair value of the Company’s derivative instruments as of September 30, 2024 and December 31, 2023:

(a) See Note 10 for the fair value measurements related to these financial instruments.

The effect of the cash flow hedge on other comprehensive income (loss) and earnings for the periods presented was as follows:

The following tables present the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis:

The Company uses the market approach technique to value its financial liabilities. The Company’s financial assets and liabilities carried at fair value include, when applicable, investments in common stock and derivative instruments used to hedge the Company’s interest rate risks. The fair value of the Company’s interest rate swap agreement was based on SOFR yield curves at the reporting date. The fair value of the Company’s investment in HRGN common stock (see Note 6) was based on the closing price per the OTCQB Marketplace at the reporting date.

Stock-based compensation expense for the three and nine months ended September 30, 2024 and 2023 was allocated as follows:

As of September 30, 2024, the total compensation costs related to unvested awards not yet recognized was $5.7 million and the weighted average period over which it is expected to be recognized is approximately 1.8 years. The Company did not capitalize any stock-based compensation.

Restricted stock unit (“RSU”) activity for the nine months ended September 30, 2024 was as follows:

Unvested shares related to market-based and performance-based vesting conditions are reflected at 100% of their target vesting amount in the table above. Actual vesting could range from zero up to 150% of their target amounts.

Performance-based RSU awards are contingent on the achievement of certain performance metrics. Compensation cost associated with performance-based RSUs are recognized based on the estimated number of shares that the Company ultimately expects will be earned. If the estimated number of shares to be earned is revised in the future, then stock-based compensation expense will be adjusted accordingly.

Stock option activity for the nine months ended September 30, 2024 was as follows:

The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $2.69 as of the last trading day of the reporting period, which would have been received by the option holders had all option holders exercised their options as of that date. The aggregate intrinsic value of options exercised during the nine months ended September 30, 2024, wasnot significant.

The determination of the annual effective tax rate is based upon a number of significant estimates and judgments, including the estimated annual pretax income in each tax jurisdiction in which the Company operates and the development of tax planning strategies during the year. In addition, as a global commercial enterprise, the Company’s tax expense can be impacted by changes in tax rates or laws, the finalization of tax audits and reviews and other factors that cannot be predicted with certainty. As such, there can be significant volatility in interim tax provisions.

Income tax expense was $0.3 million and $0.7 million for the three months ended September 30, 2024 and 2023, respectively, and was $0.2 million and $0.1 million for the nine months ended September 30, 2024 and 2023, respectively. The Company’s effective tax rates of (6.9)% and (1.4)% for the three and nine months ended September 30, 2024, respectively, were different than the U.S. statutory rate primarily due to the inclusion of non-deductible executive compensation and changes in valuation allowances associated with the Company’s assessment of the likelihood of the recoverability of deferred tax assets. The Company’s effective tax rates of (120.5)% and (9.9)% for the three and nine months ended September 30, 2023, respectively, were different than the U.S. statutory rate primarily due to the mix of forecasted income or losses in the U.S. and foreign tax jurisdictions and a Global Intangible Low-Taxed Income (“GILTI”) inclusion to taxable income. The effective tax rates in both the three and nine months ended September 30, 2023, were also impacted by changes in valuation allowances associated with the Company’s assessment of the likelihood of the recoverability of deferred tax assets.

The Company is involved in various 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 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.

In addition, the Company has entered into indemnification agreements with its directors and officers. It is not possible to determine the maximum potential liability amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. The Company hasnot recorded any liability for costs related to contingent indemnification obligations as of September 30, 2024.

The Company is subject to unclaimed property laws in the ordinary course of its business. State escheat laws generally require entities to report and remit abandoned and unclaimed property to the state. Failure to timely report and remit the property can result in assessments that could include interest and penalties, in addition to the payment of the escheat liability itself. The Company recorded an expense of $0.3 million during the nine months ended September 30, 2024 related to unclaimed property audits which have been included in other operating expenses in the consolidated statement of operations.

In February 2023, the Company sold its Hoefer product line for $0.5 million. The carrying value of assets sold was $0.1 million resulting in a gain on disposition of $0.4 million which was recorded in other income (expense), net in the consolidated statement of operations for the nine months ended September 30, 2023. Revenues and gross profit of this disposed product line included in the condensed consolidated statement of operations for the nine months ended September 30, 2023 were not significant.

On an ongoing basis, the Company reviews the global economy, the life sciences 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 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 the nine months ended September 30, 2024, the Company completed restructurings and incurred expenses of $0.6 million, primarily consisting of severance incurred in connection with headcount reductions in Europe and North America. The changes in the accrued liability for restructuring and other charges for the nine months ended September 30, 2024 were as follows:

The inventory-related costs are included in cost of revenues and the severance costs have been included as a component of other operating expenses (see Note 1).

During the three months ended September 30, 2024, the Company terminated its obligations under a defined benefit plan that was maintained by its subsidiary in the United Kingdom. This plan had been closed to new employees, as well as closed to the future accrual of benefits for existing employees since 2014 and represented approximately 11% percent of the Company's total pension liabilities as of December 31, 2023. The Company used $2.3 million of plan assets to purchase non-participating annuity contracts resulting in the full settlement of the benefit obligations. The Company recorded a non-cash charge of $1.2 million, including the immediate recognition of the portion of the accumulated OCI balances related to this plan. This charge has been presented as a component of other income (expense), net, for the three and nine months ended September 30, 2024.