UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
| Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended SeptemberJune 30, 20162017
| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file number 001-33957
HARVARD BIOSCIENCE, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 04-3306140 |
(State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) |
| 84 October Hill Road, Holliston, MA | 01746 |
| (Address of Principal Executive Offices) | (Zip Code) |
(508) 893-8999
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x☒ YES ¨☐ NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x☒ YES ¨☐ NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | Accelerated filer | ||||||
| Non-accelerated filer | Smaller reporting company | ||||||
| Emerging growth company | ☐ | ||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨☐ YES x☒ NO
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of OctoberJuly 28, 2016,2017, there were 34,374,34534,835,049 shares of common stock, par value $0.01 per share, outstanding.
FORM 10-Q
For the Quarter Ended SeptemberJune 30, 20162017
HARVARD BIOSCIENCE, INC.
(Unaudited, in thousands, except share and per share data)
| June 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 4,724 | $ | 5,596 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $602 and $611, | ||||||||
| respectively | 15,981 | 15,746 | ||||||
| Inventories | 20,371 | 19,955 | ||||||
| Other receivables and other assets | 4,762 | 4,175 | ||||||
| Total current assets | 45,838 | 45,472 | ||||||
| Property, plant and equipment, net | 4,286 | 4,296 | ||||||
| Deferred income tax assets | 1,231 | 1,157 | ||||||
| Amortizable intangible assets, net | 16,883 | 17,471 | ||||||
| Goodwill | 39,259 | 38,032 | ||||||
| Other indefinite lived intangible assets | 1,231 | 1,209 | ||||||
| Other assets | 131 | 128 | ||||||
| Total assets | $ | 108,859 | $ | 107,765 | ||||
| Liabilities and Stockholders' Equity | ||||||||
| Current liabilities: | ||||||||
| Current portion, long-term debt | $ | 2,779 | $ | 2,372 | ||||
| Accounts payable | 5,583 | 6,196 | ||||||
| Deferred revenue | 546 | 500 | ||||||
| Accrued income taxes | 127 | 223 | ||||||
| Accrued expenses | 3,733 | 4,550 | ||||||
| Other liabilities - current | 471 | 760 | ||||||
| Total current liabilities | 13,239 | 14,601 | ||||||
| Long-term debt, less current installments | 10,417 | 11,374 | ||||||
| Deferred income tax liabilities | 6,558 | 6,417 | ||||||
| Other long term liabilities | 3,433 | 3,177 | ||||||
| Total liabilities | 33,647 | 35,569 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders' equity: | ||||||||
| Preferred stock, par value $0.01 per share, 5,000,000 shares authorized | - | - | ||||||
| Common stock, par value $0.01 per share, 80,000,000 shares authorized; 42,580,556 and | ||||||||
| 42,186,827 shares issued and 34,835,049 and 34,441,320 shares outstanding, respectively | 418 | 418 | ||||||
| Additional paid-in-capital | 216,728 | 215,134 | ||||||
| Accumulated deficit | (117,549 | ) | (116,030 | ) | ||||
| Accumulated other comprehensive loss | (13,717 | ) | (16,658 | ) | ||||
| Treasury stock at cost, 7,745,507 common shares | (10,668 | ) | (10,668 | ) | ||||
| Total stockholders' equity | 75,212 | 72,196 | ||||||
| Total liabilities and stockholders' equity | $ | 108,859 | $ | 107,765 | ||||
| September 30, | December 31, | |||||||
| 2016 | 2015 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 5,345 | $ | 6,744 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $386 and $310, | ||||||||
| respectively | 15,115 | 17,547 | ||||||
| Inventories | 21,231 | 22,343 | ||||||
| Deferred income tax assets - current | - | 42 | ||||||
| Other receivables and other assets | 4,463 | 3,873 | ||||||
| Total current assets | 46,154 | 50,549 | ||||||
| Property, plant and equipment, net | 5,267 | 5,902 | ||||||
| Deferred income tax assets - non-current | 931 | 995 | ||||||
| Amortizable intangible assets, net | 18,861 | 20,872 | ||||||
| Goodwill | 39,624 | 40,357 | ||||||
| Other indefinite lived intangible assets | 1,227 | 1,223 | ||||||
| Other assets | 112 | 152 | ||||||
| Total assets | $ | 112,176 | $ | 120,050 | ||||
| Liabilities and Stockholders' Equity | ||||||||
| Current liabilities: | ||||||||
| Current portion, long-term debt | $ | 2,374 | $ | 2,364 | ||||
| Accounts payable | 6,142 | 8,782 | ||||||
| Deferred revenue | 729 | 752 | ||||||
| Accrued income taxes | 218 | 290 | ||||||
| Accrued expenses | 4,501 | 4,021 | ||||||
| Deferred income tax liabilities - current | - | 2,246 | ||||||
| Other liabilities - current | 478 | 868 | ||||||
| Total current liabilities | 14,442 | 19,323 | ||||||
| Long-term debt, less current installments | 12,668 | 16,369 | ||||||
| Deferred income tax liabilities - non-current | 6,532 | 3,775 | ||||||
| Other long term liabilities | 2,643 | 2,985 | ||||||
| Total liabilities | 36,285 | 42,452 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders' equity: | ||||||||
| Preferred stock, par value $0.01 per share, 5,000,000 shares authorized | - | - | ||||||
| Common stock, par value $0.01 per share, 80,000,000 shares authorized; 42,119,852 and | ||||||||
| 41,724,772 shares issued and 34,374,345 and 33,979,265 shares outstanding, respectively | 417 | 416 | ||||||
| Additional paid-in-capital | 214,132 | 211,457 | ||||||
| Accumulated deficit | (114,710 | ) | (111,723 | ) | ||||
| Accumulated other comprehensive loss | (13,280 | ) | (11,884 | ) | ||||
| Treasury stock at cost, 7,745,507 common shares | (10,668 | ) | (10,668 | ) | ||||
| Total stockholders' equity | 75,891 | 77,598 | ||||||
| Total liabilities and stockholders' equity | $ | 112,176 | $ | 120,050 | ||||
See accompanying notes to unaudited consolidated financial statements.
| - 3 | - |
HARVARD BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSSINCOME (LOSS)
(Unaudited, in thousands, except per share data)
| Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
| September 30, | September 30, | June 30, | June 30, | |||||||||||||||||||||||||||||
| 2016 | 2015 | 2016 | 2015 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||
| Revenues | $ | 25,007 | $ | 25,731 | $ | 78,106 | $ | 80,294 | $ | 25,213 | $ | 26,136 | $ | 49,369 | $ | 53,099 | ||||||||||||||||
| Cost of revenues (exclusive of items shown separately below) | 13,317 | 14,005 | 41,796 | 44,495 | ||||||||||||||||||||||||||||
| Cost of revenues | 13,926 | 14,461 | 26,583 | 28,479 | ||||||||||||||||||||||||||||
| Gross profit | 11,690 | 11,726 | 36,310 | 35,799 | 11,287 | 11,675 | 22,786 | 24,620 | ||||||||||||||||||||||||
| Sales and marketing expenses | 5,006 | 5,028 | 15,194 | 15,355 | 4,982 | 5,086 | 10,030 | 10,188 | ||||||||||||||||||||||||
| General and administrative expenses | 4,800 | 5,005 | 15,984 | 14,758 | 4,404 | 5,236 | 9,610 | 11,184 | ||||||||||||||||||||||||
| Research and development expenses | 1,309 | 1,426 | 4,236 | 4,888 | 1,296 | 1,502 | 2,581 | 2,927 | ||||||||||||||||||||||||
| Restructuring (credits) charges | (17 | ) | 376 | (5 | ) | 487 | ||||||||||||||||||||||||||
| Restructuring charges | - | 1 | - | 12 | ||||||||||||||||||||||||||||
| Amortization of intangible assets | 729 | 666 | 2,099 | 2,137 | 604 | 690 | 1,203 | 1,370 | ||||||||||||||||||||||||
| Impairment charges | 676 | - | 676 | - | ||||||||||||||||||||||||||||
| Total operating expenses | 12,503 | 12,501 | 38,184 | 37,625 | 11,286 | 12,515 | 23,424 | 25,681 | ||||||||||||||||||||||||
| Operating loss | (813 | ) | (775 | ) | (1,874 | ) | (1,826 | ) | ||||||||||||||||||||||||
| Operating income (loss) | 1 | (840 | ) | (638 | ) | (1,061 | ) | |||||||||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||||||||
| Other (expense) income: | ||||||||||||||||||||||||||||||||
| Foreign exchange | 138 | 70 | 411 | 159 | (272 | ) | 282 | (415 | ) | 273 | ||||||||||||||||||||||
| Interest expense | (142 | ) | (204 | ) | (486 | ) | (641 | ) | (183 | ) | (180 | ) | (345 | ) | (344 | ) | ||||||||||||||||
| Interest income | 1 | 1 | 2 | 5 | 3 | - | 3 | 1 | ||||||||||||||||||||||||
| Other expense, net | (64 | ) | (188 | ) | (143 | ) | (984 | ) | (11 | ) | (29 | ) | (110 | ) | (79 | ) | ||||||||||||||||
| Other expense, net | (67 | ) | (321 | ) | (216 | ) | (1,461 | ) | ||||||||||||||||||||||||
| Other (expense) income, net | (463 | ) | 73 | (867 | ) | (149 | ) | |||||||||||||||||||||||||
| Loss before income taxes | (880 | ) | (1,096 | ) | (2,090 | ) | (3,287 | ) | (462 | ) | (767 | ) | (1,505 | ) | (1,210 | ) | ||||||||||||||||
| Income tax expense (benefit) | 758 | (249 | ) | 897 | (1,388 | ) | ||||||||||||||||||||||||||
| Income tax (benefit) expense | (81 | ) | (54 | ) | (58 | ) | 139 | |||||||||||||||||||||||||
| Net loss | $ | (1,638 | ) | $ | (847 | ) | $ | (2,987 | ) | $ | (1,899 | ) | $ | (381 | ) | $ | (713 | ) | $ | (1,447 | ) | $ | (1,349 | ) | ||||||||
| Loss per share: | ||||||||||||||||||||||||||||||||
| Basic loss per common share | $ | (0.05 | ) | $ | (0.02 | ) | $ | (0.09 | ) | $ | (0.06 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.04 | ) | $ | (0.04 | ) | ||||||||
| Diluted loss per common share | $ | (0.05 | ) | $ | (0.02 | ) | $ | (0.09 | ) | $ | (0.06 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.04 | ) | $ | (0.04 | ) | ||||||||
| Weighted average common shares: | ||||||||||||||||||||||||||||||||
| Basic | 34,327 | 33,933 | 34,157 | 33,474 | 34,695 | 34,127 | 34,638 | 34,070 | ||||||||||||||||||||||||
| Diluted | 34,327 | 33,933 | 34,157 | 33,474 | 34,695 | 34,127 | 34,638 | 34,070 | ||||||||||||||||||||||||
| Comprehensive (loss) income: | ||||||||||||||||||||||||||||||||
| Comprehensive income (loss): | ||||||||||||||||||||||||||||||||
| Net loss | $ | (1,638 | ) | $ | (847 | ) | $ | (2,987 | ) | $ | (1,899 | ) | $ | (381 | ) | $ | (713 | ) | $ | (1,447 | ) | $ | (1,349 | ) | ||||||||
| Foreign currency translation adjustments | (2,006 | ) | (526 | ) | (1,390 | ) | (3,263 | ) | 2,066 | (1,821 | ) | 3,008 | (1,205 | ) | ||||||||||||||||||
| Derivatives qualifying as hedges, net of tax: | ||||||||||||||||||||||||||||||||
| Gain (loss) on derivative instruments designated and qualifying as cash flow hedges | 11 | (39 | ) | (37 | ) | (110 | ) | |||||||||||||||||||||||||
| Loss on derivative instruments designated and qualifying as cash flow hedges | (93 | ) | (12 | ) | (89 | ) | (48 | ) | ||||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss to net loss | 8 | 22 | 31 | 72 | 19 | 10 | 22 | 23 | ||||||||||||||||||||||||
| Total comprehensive loss | $ | (3,625 | ) | $ | (1,390 | ) | $ | (4,383 | ) | $ | (5,200 | ) | ||||||||||||||||||||
| Total comprehensive income (loss) | $ | 1,611 | $ | (2,536 | ) | $ | 1,494 | $ | (2,579 | ) | ||||||||||||||||||||||
See accompanying notes to unaudited consolidated financial statements.
| - 4 | - |
HARVARD BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
| Nine Months Ended | Six Months Ended | |||||||||||||||
| September 30, | June 30, | |||||||||||||||
| 2016 | 2015 | 2017 | 2016 | |||||||||||||
| Cash flows from operating activities: | ||||||||||||||||
| Net loss | $ | (2,987 | ) | $ | (1,899 | ) | $ | (1,447 | ) | $ | (1,349 | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||
| Stock compensation expense | 2,596 | 2,049 | 1,671 | 1,653 | ||||||||||||
| Depreciation | 1,173 | 1,157 | 659 | 809 | ||||||||||||
| Impairment charges | 676 | - | ||||||||||||||
| Loss on disposal of fixed assets | - | 25 | ||||||||||||||
| Non-cash restructuring credits | (27 | ) | (79 | ) | ||||||||||||
| Amortization of catalog costs | 13 | 8 | 20 | 6 | ||||||||||||
| Provision for allowance for doubtful accounts | 59 | 3 | 16 | 44 | ||||||||||||
| Amortization of intangible assets | 2,099 | 2,137 | 1,203 | 1,370 | ||||||||||||
| Amortization of deferred financing costs | 72 | 58 | 29 | 56 | ||||||||||||
| Deferred income taxes | 455 | (1,024 | ) | - | 4 | |||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||
| Decrease in accounts receivable | 2,145 | 754 | 125 | 959 | ||||||||||||
| Decrease (increase) in inventories | 735 | (1,310 | ) | 31 | (95 | ) | ||||||||||
| Increase in other receivables and other assets | (742 | ) | (407 | ) | (430 | ) | (865 | ) | ||||||||
| (Decrease) increase in trade accounts payable | (2,785 | ) | 35 | |||||||||||||
| Decrease in trade accounts payable | (703 | ) | (2,459 | ) | ||||||||||||
| Decrease in accrued income taxes | (158 | ) | (362 | ) | (56 | ) | (114 | ) | ||||||||
| Increase (decrease) in accrued expenses | 296 | (2,046 | ) | |||||||||||||
| (Decrease) increase in accrued expenses | (1,282 | ) | 13 | |||||||||||||
| Increase in deferred revenue | 29 | 158 | 28 | 188 | ||||||||||||
| Increase (decrease) in other liabilities | 7 | (316 | ) | 1 | (4 | ) | ||||||||||
| Net cash provided by (used in) operating activities | 3,656 | (1,059 | ) | |||||||||||||
| Net cash (used in) provided by operating activities | (135 | ) | 216 | |||||||||||||
| Cash flows used in investing activities: | ||||||||||||||||
| Additions to property, plant and equipment | (920 | ) | (2,298 | ) | (437 | ) | (402 | ) | ||||||||
| Additions to catalog costs | (34 | ) | - | (39 | ) | (10 | ) | |||||||||
| Proceeds from sales of property, plant and equipment | - | 6 | ||||||||||||||
| Acquisitions, net of cash acquired | - | (4,545 | ) | |||||||||||||
| Net cash used in investing activities | (954 | ) | (6,837 | ) | (476 | ) | (412 | ) | ||||||||
| Cash flows (used in) provided by financing activities: | ||||||||||||||||
| Cash flows used in financing activities: | ||||||||||||||||
| Proceeds from issuance of debt | 3,000 | 4,800 | 2,000 | 2,000 | ||||||||||||
| Repayments of debt | (6,738 | ) | (6,100 | ) | (2,552 | ) | (4,625 | ) | ||||||||
| Payments of debt issuance costs | - | (32 | ) | |||||||||||||
| Net proceeds from issuance of common stock | 80 | 1,953 | ||||||||||||||
| Net cash (used in) provided by financing activities | (3,658 | ) | 621 | |||||||||||||
| Net taxes paid for issuance of common stock | (77 | ) | (9 | ) | ||||||||||||
| Net cash used in financing activities | (629 | ) | (2,634 | ) | ||||||||||||
| Effect of exchange rate changes on cash | (443 | ) | (769 | ) | 368 | (283 | ) | |||||||||
| Decrease in cash and cash equivalents | (1,399 | ) | (8,044 | ) | (872 | ) | (3,113 | ) | ||||||||
| Cash and cash equivalents at the beginning of period | 6,744 | 14,134 | 5,596 | 6,744 | ||||||||||||
| Cash and cash equivalents at the end of period | $ | 5,345 | $ | 6,090 | $ | 4,724 | $ | 3,631 | ||||||||
| Supplemental disclosures of cash flow information: | ||||||||||||||||
| Cash paid for interest | $ | 468 | $ | 625 | $ | 347 | $ | 312 | ||||||||
| Cash paid for income taxes, net of refunds | $ | 725 | $ | 625 | ||||||||||||
| Cash (refunded) paid for income taxes | $ | (196 | ) | $ | 452 | |||||||||||
See accompanying notes to unaudited consolidated financial statements.
| - 5 | - |
HARVARD BIOSCIENCE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The unaudited consolidated financial statements of Harvard Bioscience, Inc. and its wholly-owned subsidiaries (collectively, “Harvard Bioscience”Harvard Bioscience or the “Company”)Company) as of SeptemberJune 30, 20162017 and for the three and ninesix months ended SeptemberJune 30, 20162017 and 20152016 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”)(SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”)(U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations. The December 31, 20152016 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, 2015,2016, which was filed with the SEC on April 29, 2016.March 17, 2017.
In the opinion of management, all adjustments, which include normal recurring adjustments necessary to present a fair statement of financial position as of SeptemberJune 30, 2016,2017, results of operations and comprehensive loss for the three and nine months ended September 30, 2016 and 2015 and cash flows for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, as applicable, have been made. The results of operations for the three and ninesix months ended SeptemberJune 30, 20162017 are not necessarily indicative of the operating results for the full fiscal year or any future periods.
Summary of Significant Accounting Policies
The accounting policies underlying the accompanying unaudited consolidated financial statements are those 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, 2015,2016, which was filed with the SEC on April 29, 2016.March 17, 2017.
2. Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09,“Revenue from Contracts with Customers,”a new accounting standard that provides for a comprehensive model to use in the accounting for revenue arising from contracts with customers that will replace most existing revenue recognition guidance within generally accepted accounting principles in the United States. Under this standard, revenue will be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. AtThe Company expects to adopt this standard as of January 1, 2018 using the modified retrospective approach. The Company is in the process of completing a comprehensive assessment of its July 2015 meeting,contracts concerning any unique customer contract terms or transactions that could have implications to the FASB agreed to defer the mandatory effective datetiming of ASU 2014-09 one year. Under the one year deferral, the standard will take effect in 2018 for calendar year-end public entities.
In July 2015, the FASB issued ASU 2015-11, Simplifying Measurement of Inventory. The update requires measurement of most inventory “at the lower of cost and net realizable value”, and applies to all entities that recognize inventory within the scope of ASC 330, except for inventory measuredrevenue recognition under the last-in, first-out (LIFO) method ornew guidance. The Company expects this undertaking will be complete in the retail inventory method (RIM). ASU 2015-11 requires prospective application and represents a change in accounting principle. The update is effective for fiscal years beginning after December 15, 2016. Early adoption is permitted for financial statements that have not been previously issued.second half of 2017.
In February 2016, the FASB issued ASU 2016-02,Leases, which is intended to improve financial reporting about leasing transactions. The update requires a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by lease terms of more than 12 months. The update is effective for fiscal years beginning after December 15, 2018. The Company is evaluating the requirements of this guidance and has not yet determined the impact of the adoption on its consolidated financial position, results of operations and cash flows, however, assets and liabilities will increase upon adoption for right-of-use assets and lease liabilities. The Company’s future commitments under lease obligations are summarized in Note 10.
In May 2017, the FASB issued ASU 2017-09,Stock compensation (Topic 718): Scope of modification accountingwhich amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The ASU is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. The Company is evaluating the requirements of this guidance and has not yet determined the impact of the adoption on its consolidated financial position, results of operations and cash flows.
| - 6 - |
Recently Adopted Accounting Pronouncements
In March 2016, the FASB issued ASU 2016-09,Compensation – Stock Compensation (Topic 718):Improvements to Employee Share-Based Payment Accounting, which simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The update is effective for fiscal years beginning after December 15, 2016 and early adoption is permitted.
In June 2016, the FASB issued ASU 2016-13,Financial Instruments – Credit Losses (Topic 326), Measurement of credit losses on Financial Instruments.The update amends the FASB’s guidance on the impairment of financial instruments. The ASU adds to U.S. GAAP an impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
In August 2016, the FASB issued ASU 2016-15,Classification of Certain Cash Receipts and Cash Payments (Topic 230) which amends ASC 230,Statement of Cash Flows to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
The Company is evaluating the impact of each of ASU 2014-09, ASU 2015-11, ASU 2016-02, ASU 2016-09, ASU 2016-13standard requires an entity to recognize all excess tax benefits and ASU 2016-15 on its consolidated financial statements.
Recently Adopted Accounting Pronouncements
In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest - Simplifying the Presentation of Debt Issuance Costs. Under this guidance, debt issuance costs related to a recognized debt liability should be presentedtax deficiencies as income tax benefit or expense in the balance sheetincome statement as a direct deduction from the carrying amount of that debt liability. The provisions of this guidance are to be applied retrospectively and are effective for interim and annual periods beginning after December 15, 2015. The Company adopted this guidance during the nine months ended September 30, 2016. The consolidated balance sheet as of December 31, 2015, included in these consolidated financial statements, reflects a restatement to reclassify unamortized deferred financing costs of approximately $0.2 million from other long-term assets to long-term debt. For deferred financing costs paid to secure long-term debt, the Company made a policy election to present such costs as a direct deduction from the debt liability on the consolidated balance sheet.
In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. The update eliminates the requirement to retrospectively adjust financial statements for measurement-period adjustments that occur in periods after a business combination. Under the update, measurement-period adjustments are to be calculated as if they were known at the acquisition date, but are recognizeddiscrete items in the reporting period in which they occur, and such tax benefits and tax deficiencies are determined. Additional disclosuresnot included in the estimate of an entity’s annual effective tax rate, applied on a prospective basis. Further, the standard eliminates the requirement to defer the recognition of excess tax benefits until the benefit is realized through a reduction to taxes payable. All excess tax benefits previously unrecognized, along with any valuation allowance, should be recognized on a modified retrospective basis as a cumulative adjustment to retained earnings as of the date of adoption. Under ASU 2016-09, an entity that applies the treasury stock method in calculating diluted earnings per share is required to exclude excess tax benefits and deficiencies from the calculation of assumed proceeds since such amounts are required aboutrecognized in the impactincome statement. Excess tax benefits should also be classified as operating activities in the same manner as other cash flows related to income taxes on current-period earnings. ASU 2015-16 requires prospective applicationthe statement of cash flows, as such excess tax benefits no longer represent financing activities since they are recognized in the income statement, and should be applied prospectively or retrospectively to adjustments of provisional amounts that occur after the effective date. The update was effective for fiscal years beginning after December 15, 2015. all periods presented.
The Company adopted ASU 2015-16 on2016-09 as of January 1, 2016.2017. The adoptionCompany recorded a cumulative increase in retained earnings of ASU 2015-16 did not have a material impact on its consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. The update requires all deferred income taxes to be presented on the balance sheet as noncurrent. The new guidance is intended to simplify financial reporting by eliminating the requirement to classify deferred taxes between current and noncurrent. The update is effective for fiscal years beginning after December 15, 2016. Early adoption is permitted$0.5 million at the beginning of an interim or annual period. During the nine months ended September 30, 2016, the Company early adopted the new guidance onfirst quarter of 2017 with a prospective basis and has presented allcorresponding increase in deferred tax assets related to the prior years’ unrecognized excess tax benefits. An equal amount of valuation allowance was also recorded against these deferred tax assets with a corresponding decrease to retained earnings resulting in no net impact to retained earnings and deferred tax liabilities as noncurrentassets. In addition, tax deficiencies related to vested restricted stock units and canceled stock options during the six months ended June 30, 2017 have been recognized in the consolidated balance sheet at September 30, 2016. Prior periods presentedcurrent period’s income statement.
ASU 2016-09 also allows an entity to elect as an accounting policy either to continue to estimate the total number of awards for which the requisite service period will not be rendered or to account for forfeitures for service based awards as they occur. An entity that elects to account for forfeitures as they occur should apply the accounting change on a modified retrospective basis as a cumulative effect adjustment to retained earnings as of the date of adoption. The Company elected as an accounting policy to account for forfeitures for service based awards as they occur, and as a result, the Company recorded a cumulative effect adjustment of $0.1 million to reduce retained earnings with a corresponding increase in additional paid in capital related to the consolidated financial statements were not retrospectively adjusted.prior years’ stock-based compensation expense as required under the modified retrospective approach. The tax effect of this adjustment, which included the impact of a valuation allowance was immaterial.
3. Accumulated Other Comprehensive Loss
Changes in each component of accumulated other comprehensive loss, net of tax are as follows:
| Foreign currency | Derivatives | |||||||||||||||
| translation | qualifying as | Defined benefit | ||||||||||||||
| (in thousands) | adjustments | hedges | pension plans | Total | ||||||||||||
| Balance at December 31, 2015 | $ | (9,594 | ) | $ | (10 | ) | $ | (2,280 | ) | $ | (11,884 | ) | ||||
| Other comprehensive loss before reclassifications | (1,390 | ) | (37 | ) | - | (1,427 | ) | |||||||||
| Amounts reclassified from AOCI | - | 31 | - | 31 | ||||||||||||
| Other comprehensive loss | (1,390 | ) | (6 | ) | - | (1,396 | ) | |||||||||
| Balance at September 30, 2016 | $ | (10,984 | ) | $ | (16 | ) | $ | (2,280 | ) | $ | (13,280 | ) | ||||
| Foreign currency | Derivatives | |||||||||||||||
| translation | qualifying as | Defined benefit | ||||||||||||||
| (in thousands) | adjustments | hedges | pension plans | Total | ||||||||||||
| Balance at December 31, 2016 | $ | (14,200 | ) | $ | - | $ | (2,458 | ) | $ | (16,658 | ) | |||||
| Other comprehensive income before reclassifications | 3,008 | (89 | ) | - | 2,919 | |||||||||||
| Amounts reclassified from AOCI | - | 22 | - | 22 | ||||||||||||
| Other comprehensive income | 3,008 | (67 | ) | - | 2,941 | |||||||||||
| Balance at June 30, 2017 | $ | (11,192 | ) | $ | (67 | ) | $ | (2,458 | ) | $ | (13,717 | ) | ||||
| - 7 | - |
The Company completed one acquisition during the nine months ended September 30, 2015.
HEKA Elektronik4. Goodwill and Other Intangible Assets
On January 8, 2015, the Company, through its wholly-owned Ealing Scientific Limited and Multi Channel Systems MCS GmbH (“MCS”) subsidiaries, acquired all of the issued and outstanding shares of HEKA Elektronik (“HEKA”) for approximately $5.9 million, or $4.5 million, net of cash acquired. Included in the acquisition of HEKA were: HEKA Electronik Dr. Schulze GmbH, based in Lambrecht, Germany (“HEKA Germany”); HEKA Electronics Incorporated, based in Chester, Nova Scotia, Canada (“HEKA Canada”); and HEKA Instruments Incorporated, based in Bellmore, New York. The Company funded the acquisition from its existing cash balances.
HEKA is a developer, manufacturer and marketer of sophisticated electrophysiology instrumentation and software for biomedical and industrial research applications. This acquisition is complementary to the electrophysiology line currently offered by the Company’s wholly-owned Warner Instruments and MCS subsidiaries.
The aggregate purchase price for this acquisition was allocated to tangible and intangible assets acquired as follows:
| (in thousands) | ||||
| Tangible assets | $ | 4,165 | ||
| Liabilities assumed | (2,426 | ) | ||
| Net assets | 1,739 | |||
| Goodwill and intangible assets: | ||||
| Goodwill | 1,668 | |||
| Trade name | 774 | |||
| Customer relationships | 1,627 | |||
| Developed technology | 1,338 | |||
| Non-compete agreements | 27 | |||
| Deferred tax liabilities | (1,245 | ) | ||
| Total goodwill and intangible assets, net of tax | 4,189 | |||
| Acquisition purchase price | $ | 5,928 | ||
Goodwill recorded as a result of the acquisition of HEKA is not deductible for tax purposes.
In the second quarter of 2016, an immaterial correction was made to the allocation of the aggregate purchase price to the tangible and intangible assets acquired to increase both accrued liabilities and goodwill by $50,000 as of June 30, 2016. This correction has been reflected in the table above.
The results of operations for HEKA have been included in the Company’s consolidated financial statements from the date of acquisition.
Direct acquisition costs recorded in other expense, net in the Company’s consolidated statements of operations were immaterial for both the three and nine months ended September 30, 2016, respectively. Direct acquisition costs recorded in other expense, net in the Company’s consolidated statements of operations were $0.2 million and $0.9 million for the three and nine months ended September 30, 2015, respectively.
Intangible assets consist of the following:
| Weighted | Weighted | ||||||||||||||||||||||||||||||||||||||||||||
| Average | Average | ||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2016 | December 31, 2015 | Life | (a) | June 30, 2017 | December 31, 2016 | Life | (a) | ||||||||||||||||||||||||||||||||||||||
| (in thousands) | (in thousands) | ||||||||||||||||||||||||||||||||||||||||||||
| Amortizable intangible assets: | Gross | Accumulated Amortization | Gross | Accumulated Amortization | Gross | Accumulated Amortization | Gross | Accumulated Amortization | |||||||||||||||||||||||||||||||||||||
| Existing technology | $ | 15,687 | $ | (11,962 | ) | $ | 16,022 | $ | (11,686 | ) | 7.1 | Years | $ | 15,771 | $ | (12,536 | ) | $ | 15,082 | $ | (11,710 | ) | 6.7 | Years | |||||||||||||||||||||
| Trade names | 7,623 | (3,440 | ) | 7,636 | (3,076 | ) | 8.2 | Years | 7,552 | (3,776 | ) | 7,379 | (3,479 | ) | 7.5 | Years | |||||||||||||||||||||||||||||
| Distribution agreements/customer relationships | 23,653 | (12,800 | ) | 23,676 | (11,849 | ) | 9.1 | Years | 23,475 | (13,672 | ) | 22,976 | (12,862 | ) | 8.5 | Years | |||||||||||||||||||||||||||||
| Patents | 216 | (116 | ) | 245 | (96 | ) | 2.4 | Years | 215 | (146 | ) | 204 | (119 | ) | 1.7 | Years | |||||||||||||||||||||||||||||
| Total amortizable intangible assets | 47,179 | $ | (28,318 | ) | 47,579 | $ | (26,707 | ) | 47,013 | $ | (30,130 | ) | 45,641 | $ | (28,170 | ) | |||||||||||||||||||||||||||||
| Indefinite-lived intangible assets: | |||||||||||||||||||||||||||||||||||||||||||||
| Goodwill | 39,624 | 40,357 | 39,259 | 38,032 | |||||||||||||||||||||||||||||||||||||||||
| Other indefinite-lived intangible assets | 1,227 | 1,223 | 1,231 | 1,209 | |||||||||||||||||||||||||||||||||||||||||
| Total goodwill and other indefinite-lived intangible assets | 40,851 | 41,580 | 40,490 | 39,241 | |||||||||||||||||||||||||||||||||||||||||
| Total intangible assets, gross | $ | 88,030 | $ | 89,159 | $ | 87,503 | $ | 84,882 | |||||||||||||||||||||||||||||||||||||
(a) Weighted average life as of SeptemberJune 30, 2016. 2017.
The change in the carrying amount of goodwill for the ninesix months ended SeptemberJune 30, 20162017 is as follows:
| (in thousands) | ||||
| Balance at December 31, 2015 | $ | 40,357 | ||
| Adjustment to purchase price allocation of prior year acquisition | 50 | |||
| Effect of change in currency translation | (783 | ) | ||
| Balance at September 30, 2016 | $ | 39,624 | ||
Impairment of intangible assets
During the third quarter of 2016, the Company initiated plans to sell the operations of its AHN Biotechnologie GmbH subsidiary (“AHN”), a manufacturer of liquid handling products, located in Nordhausen, Germany. The Company assessed the held for sale accounting guidance, pursuant to ASC 360-10, and concluded that it had not met all the criteria for AHN’s assets and liabilities to be classified as held for sale as of September 30, 2016. As such, AHN’s assets and liabilities continue to be presented as held and used, and the results of its operations included within continuing operations as of, and for the three and nine months ended September 30, 2016, respectively.
As a result of the Company initiating plans to sell the operations of AHN, the Company evaluated the long-lived assets for impairment, pursuant to ASC 360-10. Based on the impairment analysis,the carrying amount of the long-lived assets exceeded the fair value of the long-lived assets as determined using the probability weighted present value of future cash flows. As a result,the Company recognized an impairment charge of $0.7 million for the three and nine months ended September 30, 2016 as part of operating expenses within its statements of operations. Of the overall charge, approximately $0.1 million was allocated to its intangible assets (trade name and customer relationships), while the remainder of the charge was allocated to its property, plant and equipment (machinery and equipment).
As also noted in footnote 18, on October 26, 2016, the Company sold AHN for $1.7 million in cash proceeds.
| (in thousands) | ||||
| Balance at December 31, 2016 | $ | 38,032 | ||
| Effect of change in currency translation | 1,227 | |||
| Balance at June 30, 2017 | $ | 39,259 | ||
Amortization of intangible assets
Intangible asset amortization expense was $0.6 million and $0.7 million for both the three months ended SeptemberJune 30, 2017 and 2016, and 2015.respectively. Intangible asset amortization expense was $2.1$1.2 million and $1.4 million for both the ninesix months ended SeptemberJune 30, 2017 and 2016, and 2015.respectively. Amortization expense of existing amortizable intangible assets is currently estimated to be $2.6 million for the year ending December 31, 2016, $2.5 million for the year ending December 31, 2017, $2.3 million for the year ending December 31, 2018, $2.2 million for the year ending December 31, 2019, $2.1 million for the year ending December 31, 2020 and $2.1 million for the year ending December 31, 2020.2021.
5. Inventories
Inventories consist of the following:
| September 30, | December 31, | |||||||
| 2016 | 2015 | |||||||
| (in thousands) | ||||||||
| Finished goods | $ | 9,465 | $ | 10,957 | ||||
| Work in process | 935 | 888 | ||||||
| Raw materials | 10,831 | 10,498 | ||||||
| Total | $ | 21,231 | $ | 22,343 | ||||
| June 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| (in thousands) | ||||||||
| Finished goods | $ | 9,302 | $ | 9,340 | ||||
| Work in process | 763 | 823 | ||||||
| Raw materials | 10,306 | 9,792 | ||||||
| Total | $ | 20,371 | $ | 19,955 | ||||
| Table of Contents |
As disclosed in footnote 5, as a result of its decision to initiate a plan to sell the operations of AHN, during the third quarter of 2016 the Company recorded an impairment charge to property, plant6. Property, Plant and equipment of $0.6 million.Equipment
As of SeptemberJune 30, 20162017 and 2015,December 31, 2016, property, plant and equipment consist of the following:
| September 30, | December 31, | |||||||
| 2016 | 2015 | |||||||
| (in thousands) | ||||||||
| Land, buildings and leasehold improvements | $ | 2,594 | $ | 2,825 | ||||
| Machinery and equipment | 9,590 | 10,131 | ||||||
| Computer equipment and software | 7,989 | 7,503 | ||||||
| Furniture and fixtures | 1,590 | 1,358 | ||||||
| Automobiles | 221 | 103 | ||||||
| 21,984 | 21,920 | |||||||
| Less: accumulated depreciation | (16,717 | ) | (16,018 | ) | ||||
| Property, plant and equipment, net | $ | 5,267 | $ | 5,902 | ||||
| June 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| (in thousands) | ||||||||
| Land, buildings and leasehold improvements | $ | 2,164 | $ | 2,095 | ||||
| Machinery and equipment | 7,677 | 7,224 | ||||||
| Computer equipment and software | 8,693 | 8,115 | ||||||
| Furniture and fixtures | 1,316 | 1,274 | ||||||
| Automobiles | 212 | 196 | ||||||
| 20,062 | 18,904 | |||||||
| Less: accumulated depreciation | (15,776 | ) | (14,608 | ) | ||||
| Property, plant and equipment, net | $ | 4,286 | $ | 4,296 | ||||
7. Related Party Transactions
During 2014, and 2015, the Company entered into various restructuring plans, which included eliminating certain positions made redundant as a result of its site consolidations, as well as a realignment of its commercial sales team. The 2014 restructuring plan included plans to relocate the distribution operations of the Company’s Denville Scientific subsidiary from New Jersey to North Carolina, as well as consolidating the manufacturing operations of its Biochrom subsidiary to its headquarters in Holliston, MA. Activity and liability balances related to these charges during the current year were as follows:
| Severance Costs | Other | Total | ||||||||||
| (in thousands) | ||||||||||||
| Restructuring balance at December 31, 2015 | $ | 132 | $ | - | $ | 132 | ||||||
| Restructuring charges | - | 32 | 32 | |||||||||
| Non-cash reversal of restructuring charges | (27 | ) | - | (27 | ) | |||||||
| Cash payments | (101 | ) | (28 | ) | (129 | ) | ||||||
| Effect of change in currency translation | (4 | ) | (4 | ) | (8 | ) | ||||||
| Restructuring balance at September 30, 2016 | $ | - | $ | - | $ | - | ||||||
For the nine months ended September 30, 2015, activity and liability balances related to these charges were as follows:
| Severance Costs | Other | Total | ||||||||||
| (in thousands) | ||||||||||||
| Restructuring balance at December 31, 2014 | $ | 626 | $ | - | $ | 626 | ||||||
| Restructuring charges | 227 | 339 | 566 | |||||||||
| Non-cash reversal of restructuring charges | (79 | ) | - | (79 | ) | |||||||
| Cash payments | (650 | ) | (295 | ) | (945 | ) | ||||||
| Effect of change in currency translation | (8 | ) | - | (8 | ) | |||||||
| Restructuring balance at September 30, 2015 | $ | 116 | $ | 44 | $ | 160 | ||||||
Aggregate net restructuring charges for the three and nine months ended September 30, 2016 and 2015 were as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Restructuring charges | $ | (17 | ) | $ | 376 | $ | (5 | ) | $ | 487 | ||||||
As part of the acquisitions of Multi Channel Systems MCS GmbH (MCS) and Triangle BioSystems, Inc. (“TBSI”)(TBSI) in 2014, the Company signed lease agreements with the former owners of the acquired companies. The principals of such former owners of MCS and TBSI were employees of the Company as of SeptemberJune 30, 20162017 and 2015.2016. Pursuant to a lease agreement, the Company incurred rent expense of approximately $59,000$61 thousand and $172,000$58 thousand to the former owners of MCS for both the three and nine months ended SeptemberJune 30, 20162017 and September 30, 2015,2016, respectively. The Company incurred rent expense of approximately $11,000 and $32,000$10 thousand to the former ownersowner of TBSI for both the three and nine months ended SeptemberJune 30, 2017 and 2016. The Company incurred rent expense of approximately $116 thousand and $113 thousand to the former owners of MCS for the six months ended June 30, 2017 and 2016, respectively. The Company incurred rent expense of approximately $21 thousand to the former owner of TBSI for both the six months ended June 30, 2017 and September 30, 2015, respectively.2016.
8. Warranties
Warranties are estimated and accrued at the time revenues are recorded. A rollforward of the Company’s product warranty accrual is as follows:
| Beginning | Additions/ | Ending | ||||||||||||||
| Balance | Payments | (Credits) | Balance | |||||||||||||
| (in thousands) | ||||||||||||||||
| Year ended December 31, 2015 | $ | 252 | (81 | ) | (24 | ) | $ | 147 | ||||||||
| Nine months ended September 30, 2016 | $ | 147 | (56 | ) | 94 | $ | 185 | |||||||||
| Beginning | Ending | |||||||||||||||
| Balance | Payments | Additions | Balance | |||||||||||||
| (in thousands) | ||||||||||||||||
| Year ended December 31, 2016 | $ | 147 | (97 | ) | 143 | $ | 193 | |||||||||
| Six months ended June 30, 2017 | $ | 193 | (30 | ) | 65 | $ | 228 | |||||||||
9. Employee Benefit Plans
CertainOne of the Company’s subsidiaries in the United Kingdom, or UK, Harvard Apparatus Limited and Biochrom Limited, maintainmaintains contributory, defined benefit or defined contribution pension plans for substantially all of theirits employees. TheseAs of June 30, 2014, these defined benefit pension plans arewere closed to new employees, as well as closed to the future accrual of benefits for existing employees. The components of the Company’s defined benefit pension expense were as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Components of net periodic benefit cost: | ||||||||||||||||
| Interest cost | $ | 156 | $ | 175 | $ | 492 | $ | 542 | ||||||||
| Expected return on plan assets | (168 | ) | (165 | ) | (530 | ) | (510 | ) | ||||||||
| Net amortization loss | 74 | 75 | 233 | 231 | ||||||||||||
| Net periodic benefit cost | $ | 62 | $ | 85 | $ | 195 | $ | 263 | ||||||||
| - 9 - |
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Components of net periodic benefit cost: | ||||||||||||||||
| Interest cost | $ | 133 | $ | 168 | $ | 258 | $ | 336 | ||||||||
| Expected return on plan assets | (167 | ) | (181 | ) | (326 | ) | (362 | ) | ||||||||
| Net amortization loss | 91 | 79 | 178 | 159 | ||||||||||||
| Net periodic benefit cost | $ | 57 | $ | 66 | $ | 110 | $ | 133 | ||||||||
For the three months ended SeptemberJune 30, 20162017 and 2015,2016, the Company contributed $0.2 million, for both periods, to its defined benefit pension plans. For the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, the Company contributed $0.5$0.3 million and $0.6$0.4 million, respectively, to its defined benefit pension plans. The Company expects to contribute approximately $0.3$0.4 million to its defined benefit pension plans during the remainder of 2016.2017.
The Company had an underfunded pension liability of approximately $2.5$3.3 million and $2.8$3.0 million, as of SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively, included in the other long term liabilities line item in the consolidated balance sheets.
10. Leases
The Company has noncancelable operating leases for office and warehouse space expiring at various dates through 20212022 and thereafter. Rent expense, which is recorded on a straight-line basis, is estimated to be $1.9$1.8 million for the year ended December 31, 2016.2017. Rent expense was approximately $0.5 million and $0.6 million for both the three months ended SeptemberJune 30, 20162017 and 2015, respectively.2016. Rent expense was approximately $1.4$0.9 million and $1.8$1.0 million for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively.
Future minimum lease payments for operating leases, with initial or remaining terms in excess of one year at SeptemberJune 30, 2016,2017, are as follows:
| Operating | Operating | |||||||
| Leases | Leases | |||||||
| (in thousands) | (in thousands) | |||||||
| 2017 | $ | 1,754 | ||||||
| 2018 | 1,754 | $ | 1,666 | |||||
| 2019 | 1,647 | 1,672 | ||||||
| 2020 | 1,423 | 1,471 | ||||||
| 2021 | 1,216 | 1,107 | ||||||
| 2022 | 1,109 | |||||||
| Thereafter | 3,372 | 1,853 | ||||||
| Net minimum lease payments | $ | 11,166 | $ | 8,878 | ||||
11. Capital Stock
Common Stock
On February 5, 2008, the Company’s Board of Directors adopted a Shareholder Rights Plan and declared a dividend distribution of one preferred stock purchase right for each outstanding share of the Company’s common stock to shareholders of record as of the close of business on February 6, 2008. Initially, these rights will not be exercisable and will trade with the shares of the Company’s common stock. Under the Shareholder Rights Plan, the rights generally will become exercisable if a person becomes an “acquiring person” by acquiring 20% or more of the common stock of the Company or if a person commences a tender offer that could result in that person owning 20% or more of the common stock of the Company. If a person becomes an acquiring person, each holder of a right (other than the acquiring person) would be entitled to purchase, at the then-current exercise price, such number of shares of preferred stock which are equivalent to shares of the Company’s common stock having a value of twice the exercise price of the right. Unless the Board of Directors elects to extend such plan, the Shareholder Rights Plan will expire in February 2018. If the Company is acquired in a merger or other business combination transaction after any such event, each holder of a right would then be entitled to purchase, at the then-current exercise price, shares of the acquiring company’s common stock having a value of twice the exercise price of the right.
| - 10 - |
Preferred Stock
The Company’s Board of Directors has the authority to issue up to 5.0 million shares of preferred stock and to determine the price privileges and other terms of the shares. The Board of Directors may exercise this authority without any further approval of stockholders. As of SeptemberJune 30, 2016,2017, the Company had no preferred stock issued or outstanding.
Employee Stock Purchase Plan (as amended, the “ESPP”)ESPP)
In 2000, the Company approved the ESPP. Under this ESPP, participating employees can authorize the Company to withhold a portion of their base pay during consecutive six-month payment periods for the purchase of shares of the Company’s common stock. At the conclusion of the period, participating employees can purchase shares of the Company’s common stock at 85% of the lower of the fair market value of the Company’s common stock at the beginning or end of the period. Shares are issued under the ESPP for the six-month periods ending June 30 and December 31. Under this plan, 750,000On May 18, 2017, the stockholders of the Company approved an increase of 300,000 shares of common stock in the number of shares available for issuance under the ESPP. Following such amendment, 1,050,000 shares of common stock are authorized for issuance, of which 683,364762,141 shares were issued, as of SeptemberJune 30, 2016. During the nine months ended September 30, 2016 and 2015, the Company issued 39,353 shares and 26,181 shares, respectively, of the Company’s common stock under the ESPP.2017. There were no36,902 and 39,353 shares issued under the ESPP during the threesix months ended SeptemberJune 30, 2017 and 2016, and 2015.respectively.
Stock Option and Equity Incentive Plans
Third Amended and Restated 2000 Stock Option and Incentive Plan (as amended, the “ThirdThird A&R Plan”)Plan)
The Second Amendment to the Third A&R Plan (the “Amendment”)Amendment) was adopted by the Board of Directors on April 3, 2015. Such Amendment was approved by the stockholders at the Company’s 2015 Annual Meeting of Stockholders. Pursuant to the Amendment, the aggregate number of shares authorized for issuance under the Third A&R Plan was increased by 2,500,000 shares to 17,508,929.
Restricted Stock Units with a Market Condition (the “MarketMarket Condition RSU’s”)RSU’s)
On August 3, 2015, the Compensation Committee of the Board of Directors of the Company approved and granted deferred stock awards of Market Condition RSU’s to certain members of the Company’s management team under the Third A&R Plan. The vesting of these Market Condition RSU’s is cliff-based and linked to the achievement of a relative total shareholder return of the Company’s common stock from August 3, 2015 to the earlier of (i) August 3, 2018 or (ii) upon a change of control (measured relative to the Russell 3000 index and based on the 20-day trading average price before each such date). As of SeptemberJune 30, 2016,2017, the target number of these restricted stock units that may be earned is 182,150170,903 shares; the maximum amount is 150% of the target number.
Stock-Based Payment Awards
The Company accounts for stock-based payment awards in accordance with the provisions of FASB ASC 718, which requires it to recognize compensation expense for all stock-based payment awards made to employees and directors including stock options, restricted stock units, Market Condition RSU’s and employee stock purchases related to the ESPP.
The Company adopted ASU 2016-09 as of January 1, 2017. As disclosed in footnote 2, as a result of this adoption, the Company has elected as an accounting policy to account for forfeitures for service based awards as they occur, with no adjustment for estimated forfeitures. The Company recognized as of January 1, 2017, a cumulative effect adjustment of $0.1 million to reduce retained earnings as required under the modified retrospective approach.
Stock option and restricted stock unit activity under the Company’s Third A&R Plan for the ninesix months ended SeptemberJune 30, 20162017 was as follows:
| Stock Options | Restricted Stock Units | Market Condition RSU's | ||||||||||||||||||||||
| Weighted | ||||||||||||||||||||||||
| Stock | Average | Restricted | Market | |||||||||||||||||||||
| Options | Exercise | Stock Units | Grant Date | Condition RSU's | Grant Date | |||||||||||||||||||
| Outstanding | Price | Outstanding | Fair Value | Outstanding | Fair Value | |||||||||||||||||||
| Balance at December 31, 2015 | 5,022,186 | $ | 3.85 | 313,559 | $ | 5.29 | 185,538 | $ | 4.81 | |||||||||||||||
| Granted | 43,000 | 3.10 | 1,095,190 | 2.92 | - | - | ||||||||||||||||||
| Exercised | (374,772 | ) | 2.80 | - | - | - | - | |||||||||||||||||
| Vested (RSUs) | - | - | (276,420 | ) | - | - | - | |||||||||||||||||
| Cancelled / forfeited | (672,166 | ) | 3.87 | (31,782 | ) | 3.87 | (3,388 | ) | 4.81 | |||||||||||||||
| Balance at September 30, 2016 | 4,018,248 | $ | 3.97 | 1,100,547 | $ | 3.15 | 182,150 | $ | 4.81 | |||||||||||||||
| - 11 - |
| Stock Options | Restricted Stock Units | Market Condition RSU's | ||||||||||||||||||||||
| Weighted | ||||||||||||||||||||||||
| Stock | Average | Restricted | Market | |||||||||||||||||||||
| Options | Exercise | Stock Units | Grant Date | Condition RSU's | Grant Date | |||||||||||||||||||
| Outstanding | Price | Outstanding | Fair Value | Outstanding | Fair Value | |||||||||||||||||||
| Balance at December 31, 2016 | 4,096,818 | $ | 3.94 | 1,072,653 | $ | 3.15 | 182,150 | $ | 4.81 | |||||||||||||||
| Granted | 52,500 | 2.96 | 1,286,321 | 2.48 | - | - | ||||||||||||||||||
| Exercised | (5,709 | ) | 2.56 | - | - | - | - | |||||||||||||||||
| Vested (RSUs) | - | - | (430,820 | ) | 3.28 | - | - | |||||||||||||||||
| Cancelled / forfeited | (292,800 | ) | 3.93 | (60,365 | ) | 3.10 | (11,247 | ) | 4.81 | |||||||||||||||
| Balance at June 30, 2017 | 3,850,809 | $ | 3.93 | 1,867,789 | $ | 2.70 | 170,903 | $ | 4.81 | |||||||||||||||
The weighted average fair value of the options granted under the Third A&R Plan during the three months ended SeptemberJune 30, 2017 and 2016 was $1.01 and 2015 was $1.11 and $2.14,$1.48, respectively. The weighted average fair value of the options granted under the Third A&R Plan during the ninesix months ended SeptemberJune 30, 20162017 and 20152016 was $1.21 and $2.21,$1.26, respectively. The following assumptions were used to estimate the fair value, using the Black-Scholes option pricing model, of stock options granted during the three and ninesix months ended SeptemberJune 30, 20162017 and 2015:2016:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
| Volatility | 43.05 | % | 39.47 | % | 41.97 | % | 41.07 | % | ||||||||
| Risk-free interest rate | 1.01 | % | 1.76 | % | 1.29 | % | 1.72 | % | ||||||||
| Expected holding period (in years) | 5.08 | years | 5.25 | years | 5.21 | years | 5.52 | years | ||||||||
| Dividend yield | - | % | - | % | - | % | - | % | ||||||||
The weighted average fair value of the Market Condition RSU’s granted under the Third A&R Plan during the three months ended September 30, 2015 was $4.81. The following assumptions were used to estimate the fair value, using a Monte-Carlo valuation simulation, of the Market Condition RSU’s granted during the three months ended September 30, 2015:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Volatility | 41.30 | % | 42.91 | % | 43.15 | % | 41.39 | % | ||||||||
| Risk-free interest rate | 1.92 | % | 1.40 | % | 1.99 | % | 1.45 | % | ||||||||
| Expected holding period (in years) | 5.14 | years | 5.16 | years | 5.42 | years | 5.27 | years | ||||||||
| Dividend yield | - | % | - | % | - | % | - | % | ||||||||
The Company used historical volatility to calculate the expected volatility for each grant as of the grant date. Historical volatility was determined by calculating the mean reversion of the daily adjusted closing stock price. The risk-free interest rate assumption is based upon observed U.S. Treasury bill interest rates (risk-free) appropriate for the term of the Company’s stock options and Market Condition RSU’s. The expected holding period of stock options represents the period of time options are expected to be outstanding and is based on historical experience. The vesting period ranges from one to four years and the contractual life is ten years. The correlation coefficient, used to value the Market Condition RSU’s, represents the way in which entities move in relation to the Russell 3000 index as a whole.
Stock-based compensation expense related to stock options, restricted stock units, Market Condition RSU’s and the ESPP for the three and ninesix months ended SeptemberJune 30, 20162017 and 20152016 was allocated as follows:
| Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
| September 30, | September 30, | June 30, | June 30, | |||||||||||||||||||||||||||||
| 2016 | 2015 | 2016 | 2015 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
| Cost of revenues | $ | 17 | $ | 18 | $ | 44 | $ | 54 | $ | 17 | $ | 16 | $ | 30 | $ | 27 | ||||||||||||||||
| Sales and marketing | 159 | 149 | 401 | 343 | 156 | 141 | 289 | 242 | ||||||||||||||||||||||||
| General and administrative | 736 | 583 | 2,071 | 1,580 | 598 | 713 | 1,286 | 1,335 | ||||||||||||||||||||||||
| Research and development | 31 | 27 | 80 | 72 | 37 | 29 | 66 | 49 | ||||||||||||||||||||||||
| Total stock-based compensation | $ | 943 | $ | 777 | $ | 2,596 | $ | 2,049 | $ | 808 | $ | 899 | $ | 1,671 | $ | 1,653 | ||||||||||||||||
The Company did not capitalize any stock-based compensation.
Earnings per share
Basic earnings per share is based upon net income divided by the number of weighted average common shares outstanding during the period. The calculation of diluted earnings per share assumes conversion of stock options, restricted stock units and Market Condition RSU’s into common stock using the treasury method. The weighted average number of shares used to compute basic and diluted earnings per share consists of the following:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
| Basic | 34,327,459 | 33,933,327 | 34,156,606 | 33,473,958 | ||||||||||||
| Effect of assumed conversion of employee and director stock options, restricted stock units and Market Condition RSU's | - | - | - | - | ||||||||||||
| Diluted | 34,327,459 | 33,933,327 | 34,156,606 | 33,473,958 | ||||||||||||
| - 12 - |
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Basic | 34,695,176 | 34,127,131 | 34,637,644 | 34,070,241 | ||||||||||||
| Effect of assumed conversion of employee and director stock options, restricted stock units and Market Condition RSU's | - | - | - | - | ||||||||||||
| Diluted | 34,695,176 | 34,127,131 | 34,637,644 | 34,070,241 | ||||||||||||
Excluded from the shares used in calculating the diluted earnings per common share in the above table are options, restricted stock units and Market Condition RSU’s of approximately 5,300,9455,889,501 and 5,640,5365,502,327 shares of common stock for both the three and ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively, as the impact of these shares would be anti-dilutive.
12. Long Term Debt
On August 7, 2009, the Company entered into an Amended and Restated Revolving Credit Loan Agreement related to a $20.0 million revolving credit facility with Bank of America, as agent, and Bank of America and Brown Brothers Harriman & Co as lenders (as amended, the “20092009 Credit Agreement”)Agreement). On March 29, 2013, the Company entered into a Second Amended and Restated Revolving Credit Agreement (as amended, the 2013 Credit Agreement) with Bank of America, as agent, and Bank of America and Brown Brothers Harriman & Co, as lenders that amended and restated the 2009 Credit Agreement. Between September 2011 and June 2016,May 2017, the Company entered into sixa series of amendments that among other things extendeddid the maturity date of the credit facility; reduced interest rates;following:
| · | on September 30, 2011, reduced interest rates to the London Interbank Offered Rate plus 3.0%; |
| · | on March 29, 2013, converted existing loan advances into a term loan in the principal amount of $15.0 million (the 2013 Term Loan), provided a revolving credit facility in the maximum principal amount of $25.0 million (the 2013 Revolving Line) and a delayed draw term loan (the 2013 DDTL) of up to $15.0 million; |
| · | on October 31, 2013, reduced the 2013 DDTL from up to $15.0 million to up to $10.0 million; |
| · | on April 24, 2015, extended the maturity date of the 2013 Revolving Line to March 29, 2018 and reduced the interest rates on the 2013 Revolving Line, 2013 Term Loan and 2013 DDTL; |
| · | on June 30, 2015, amended its quarterly minimum fixed charge coverage financial covenant; |
| · | on March 9, 2016, amended the principal payment amortization of the 2013 Term Loan and 2013 DDTL to five years, as well as amended its quarterly minimum fixed charge coverage financial covenant; and |
| · | on May 2, 2017, entered into a Third Amended and Restated Revolving Credit Agreement (as amended, the Credit Agreement) with Bank of America, as agent, and Bank of America and Brown Brothers Harriman & Co, as lenders that amended and restated the 2013 Credit Agreement. |
The Credit Agreement was entered into to, among other things, consolidate, combine and restate the outstanding indebtedness, on the date of the Credit Agreement, into a term loan (the Term Loan) in the principal amount of $15.0$14.0 million, (the “Term Loan”); providedand also provide for a revolving credit facility in the maximum principal amount of $25.0 million (“revolving line of credit (the Revolving Line”); provided a delayed draw term loan of up to $10.0 million (the “DDTL”); amended the principal payment amortization of theLine). The Term Loan and DDTL to five years, as well as amended the Company’s quarterly minimum fixed charge coverage financial covenant.
The maximum amount available under the Credit Agreement is $50.0 million as borrowings against the DDTL in excess of $10.0 million results in a dollar for dollar reduction in the Revolving Line capacity. The Revolving Line, Term Loan and DDTL each have a maturity date of March 29, 2018.May 1, 2022. Borrowings under the Term Loan and the DDTL accrue interest at a rate based on either the effective London Interbank Offered Rate (LIBOR)LIBOR for certain interest periods selected by the Company, or a daily floating rate based on the British Bankers’ Association (BBA)BBA LIBOR as published by Reuters (or other commercially available source providing quotations of BBA LIBOR), plus in either case, a margin of 2.75%. Additionally, the Revolving Line accrues interest at a rate based on either the effective LIBOR for certain interest periods selected by the Company, or a daily floating rate based on the BBA LIBOR, plus in either case, a margin of 2.25%.
The Company was required to fix the rate of interest on at least 50% of the Term Loan and loans under the DDTL throughRevolving Line evidenced by the purchaseCredit Agreement, or the Loans, are guaranteed by all of interest rate swaps.
In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Interest - ImputationCompany’s direct and indirect domestic subsidiaries, and secured by substantially all of Interest - Simplifying the Presentationassets of Debt Issuance Costs. Under this guidance, debt issuance costs relatedthe Company and the guarantors. The Loans are subject to restrictive covenants under the Credit Agreement, and financial covenants that require the Company and its subsidiaries to maintain certain financial ratios on a recognized debt liability should be presented inconsolidated basis, including a maximum leverage, minimum fixed charge coverage and minimum working capital. Prepayment of the balance sheet as a direct deduction fromLoans is allowed by the carrying amount of that debt liability. The provisions of this guidance are to be applied retrospectively and are effective for interim and annual periods beginning after December 15, 2015. The Company adopted this guidanceCredit Agreement at any time during the nine months ended September 30, 2016.terms of the Loans. The consolidated balance sheet as of December 31, 2015, included in these consolidated financial statements, reflects a restatement to reclassify unamortized deferred financing costs of approximately $0.2 million from other long-term assets to long-term debt. For deferred financing costs paid to secure long-term debt, the Company made a policy election to present such costs as a direct deduction from the debt liabilityLoans also contain limitations on the consolidated balance sheet.Company’s ability to incur additional indebtedness and requires lender approval for acquisitions funded with cash, promissory notes and/or other consideration in excess of $6.0 million and for acquisitions funded solely with equity in excess of $10.0 million.
As of SeptemberJune 30, 20162017 and December 31, 2015,2016, the Company had borrowings net borrowings of $15.0debt issuance costs of $13.2 million and $18.7$13.7 million respectively, outstanding under its Credit Agreement. 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 SeptemberJune 30, 2016,2017, the Company was in compliance with all financial covenants contained in the Credit Agreement, was subject to covenant and working capital borrowing restrictions and had available borrowing capacity under its Credit Agreement of $7.8$5.3 million.
| - 13 - |
As of SeptemberJune 30, 2016,2017, the weighted effective interest rates,rate, net of the impact of the Company’s interest rate swaps,swap, on its Term Loan DDTL and Revolving Line borrowings were 3.96%, 3.60% and 2.77%, respectively.was 4.61%.
As of SeptemberJune 30, 20162017 and December 31, 2015,2016, the Company’s borrowings were comprised of:
| September 30, | December 31, | June 30, | December 31, | |||||||||||||
| 2016 | 2015 | 2017 | 2016 | |||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||
| Long-term debt: | ||||||||||||||||
| Term loan | $ | 5,737 | $ | 6,750 | $ | 13,298 | $ | 5,400 | ||||||||
| DDTL | 4,675 | 5,500 | - | 4,400 | ||||||||||||
| Revolving line | 4,750 | 6,650 | - | 4,050 | ||||||||||||
| Total unamortized deferred financing costs | (120 | ) | (167 | ) | (102 | ) | (104 | ) | ||||||||
| Total debt | 15,042 | 18,733 | 13,196 | 13,746 | ||||||||||||
| Less: current installments | (2,450 | ) | (2,450 | ) | (2,800 | ) | (2,450 | ) | ||||||||
| Current unamortized deferred financing costs | 76 | 86 | 21 | 78 | ||||||||||||
| Long-term debt | $ | 12,668 | $ | 16,369 | $ | 10,417 | $ | 11,374 | ||||||||
13. Derivatives
The Company uses interest-rate-related derivative instruments to manage its exposure related to changes in interest rates on its variable-rate debt instruments. The Company does not enter into derivative instruments for any purpose other than cash flow hedging. The Company does not speculate using derivative instruments.
By using derivative financial instruments to hedge exposures to changes in interest rates, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, the Company is not exposed to the counterparty’s credit risk in those circumstances. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with carefully selected major financial institutions based upon their credit profile.
Market risk is the adverse effect on the value of a derivative instrument that results from a change in interest rates. The market risk associated with interest-rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
The Company assesses interest rate risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company maintains risk management control systems to monitor interest rate risk attributable to both the Company’s outstanding or forecasted debt obligations as well as the Company’s offsetting hedge positions. The risk management control systems involve the use of analytical techniques, including cash flow sensitivity analysis, to estimate the expected impact of changes in interest rates on the Company’s future cash flows.
The Company uses variable-rate London Interbank Offered Rate (LIBOR) debt to finance its operations. The debt obligations expose the Company to variability in interest payments due to changes in interest rates. Management believes that it is prudent to limit the variability of a portion of its interest payments. To meet this objective, management enters into LIBOR based interest rate swap agreements to manage fluctuations in cash flows resulting from changes in the benchmark interest rate of LIBOR. These swaps change the variable-rate cash flow exposure on the debt obligations to fixed cash flows. Under the terms of the interest rate swaps, the Company receives LIBOR based variable interest rate payments and makes fixed interest rate payments, thereby creating the equivalent of fixed-rate debt for the notional amount of its debt hedged. In accordance with its
As disclosed in Note 12, on May 2, 2017, the Company entered into the Credit Agreement the Company was required to fix the rateamend its credit facility with Bank of interest on at least 50%America, as agent, and Bank of its Term LoanAmerica and the DDTL through the purchase of interest rate swaps. On June 5, 2013,Brown Brothers Harriman & Co. as lenders. Immediately after entering into this Credit Agreement, the Company entered into an interest rate swap contract with an originalBank of America with a notional amount of $15.0$14.0 million and a maturitytermination date of March 29, 201830, 2022 in order to hedge the risk of changes in the effective benchmark interest rate (LIBOR) associated with the Company’s Term Loan. On November 29, 2013, the Company entered into a second interest rateThe swap contract with an original notional amount of $5.0 million and a maturity date of March 29, 2018 in order to hedge the risk of changes in the effective benchmark interest rate (LIBOR) associated with the DDTL. The notional amount of the Company’s derivative instruments as of September 30, 2016 was $6.5 million. The Term Loan swap contract effectively converted specific variable-rate debt into fixed-rate debt and fixed the LIBOR rate associated with the Term Loan at 0.96%1.86% plus a bank margin of 2.75%. The DDTL swap contract effectively converted specific variable-rate debt into fixed-rate debt and fixed the LIBOR rate associated with the Term Loan at 0.93% plus a bank margin of 2.75%.The interest rate swaps wereswap was designated as a cash flow hedgeshedge instrument in accordance with ASC 815Derivatives “Derivatives and HedgingHedging”.
| - 14 - |
The notional amount of the Company’s derivative instruments as of June 30, 2017 was $13.3 million.
The following table presents the notional amount and fair value of the Company’s derivative instruments as of SeptemberJune 30, 20162017 and December 31, 2015.2016.
| September 30, 2016 | September 30, 2016 | June 30, 2017 | June 30, 2017 | |||||||||||||||
| Notional Amount | Fair Value (a) | Notional Amount | Fair Value (a) | |||||||||||||||
| Derivatives designated as hedging instruments under ASC 815 | Balance sheet classification | (in thousands) | Balance sheet classification | (in thousands) | ||||||||||||||
| Interest rate swaps | Other liabilities-non current | $ | 6,500 | $ | (16 | ) | Other liabilities-non current | $ | 13,300 | $ | (67 | ) | ||||||
| December 31, 2015 | December 31, 2015 | December 31, 2016 | December 31, 2016 | |||||||||||||||
| Notional Amount | Fair Value (a) | Notional Amount | Fair Value (a) | |||||||||||||||
| Derivatives designated as hedging instruments under ASC 815 | Balance sheet classification | (in thousands) | Balance sheet classification | (in thousands) | ||||||||||||||
| Interest rate swaps | Other liabilities-non current | $ | 9,500 | $ | (10 | ) | Other liabilities-non current | $ | 5,500 | $ | - | |||||||
(a) See Note 1614 for the fair value measurements related to these financial instruments.
All of the Company’s derivative instruments are designated as hedging instruments.
The Company has structured its interest rate swap agreements to be 100% effective and as a result, there was no impact to earnings resulting from hedge ineffectiveness. Changes in the fair value of interest rate swaps designated as hedging instruments that effectively offset the variability of cash flows associated with variable-rate, long-term debt obligations are reported in accumulated other comprehensive income (“AOCI”)(AOCI). These amounts subsequently are reclassified into interest expense as a yield adjustment of the hedged interest payments in the same period in which the related interest affects earnings. The Company’s interest rate swap agreement was deemed to be fully effective in accordance with ASC 815, and, as such, unrealized gains and losses related to these derivatives were recorded as AOCI.
The following table summarizes the effect of derivatives designated as cash flow hedging instruments and their classification within comprehensive loss for the three and ninesix months ended SeptemberJune 30, 20162017 and 2015:2016:
| Derivatives in Hedging Relationships | Amount of gain (loss) recognized in OCI on derivative (effective portion) | Amount of gain (loss) recognized in OCI on derivative (effective portion) | ||||||||||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
| 2016 | 2015 | 2016 | 2015 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
| Interest rate swaps | $ | 11 | $ | (39 | ) | $ | (37 | ) | $ | (110 | ) | $ | (93 | ) | $ | (12 | ) | $ | (89 | ) | $ | (48 | ) | |||||||||
| - 15 - |
The following table summarizes the reclassifications out of accumulated other comprehensive loss for the three and ninesix months ended SeptemberJune 30, 20162017 and 2015:2016:
| Details about AOCI Components | Amount reclassified from AOCI into income (effective portion) | Location of amount | ||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | reclassified from AOCI | ||||||||||||||||
| 2016 | 2015 | 2016 | 2015 | into income (effective portion) | ||||||||||||||
| (in thousands) | ||||||||||||||||||
| Interest rate swaps | $ | 8 | $ | 22 | $ | 31 | $ | 72 | Interest expense | |||||||||
| Details about AOCI Components | Amount reclassified from AOCI into income (effective portion) | Location of amount | ||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | reclassified from AOCI | ||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | into income (effective portion) | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Interest rate swaps | $ | 19 | $ | 10 | $ | 22 | $ | 23 | Interest expense | |||||||||||
As of SeptemberJune 30, 2016, $15,0002017, $62 thousand of deferred losses on derivative instruments accumulated in AOCI are expected to be reclassified to earnings during the next twelve months. Transactions and events expected to occur over the next twelve months that will necessitate reclassifying these derivatives’ losses to earnings include the repricing of variable-rate debt. As a result of entering into the May 2017 interest rate swap contract, the Company unwound its previous interest rate swap contracts, and received an immaterial amount in proceeds. There were no cash flow hedges discontinued during 2016 or 2015.2016.
14. Fair Value Measurements
Fair value measurement is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy is established, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.
Level 3—Unobservable inputs based on the Company’s own assumptions.
The following tables present the fair value hierarchy for those liabilities measured at fair value on a recurring basis:
| Fair Value as of September 30, 2016 | Fair Value as of June 30, 2017 | |||||||||||||||||||||||||||||||
| (In thousands) | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||||
| Interest rate swap agreements | $ | - | $ | 16 | $ | - | $ | 16 | $ | - | $ | (67 | ) | $ | - | $ | (67 | ) | ||||||||||||||
| Fair Value as of December 31, 2015 | ||||||||||||||||
| (In thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Liabilities: | ||||||||||||||||
| Interest rate swap agreements | $ | - | $ | 10 | $ | - | $ | 10 | ||||||||
| Fair Value as of December 31, 2016 | ||||||||||||||||
| (In thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Liabilities: | ||||||||||||||||
| Interest rate swap agreements | $ | - | $ | - | $ | - | $ | - | ||||||||
The Company uses the market approach technique to value its financial liabilities. The Company’s financial liabilities carried at fair value include derivative instruments used to hedge the Company’s interest rate risks. The fair value of the Company’s interest rate swap agreements was based on LIBOR yield curves at the reporting date.
15. Income Tax
Income tax was an approximately $0.8 million expense$81 thousand and a $0.2 million$54 thousand benefit for the three months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. The tax expensebenefit for the three months ended SeptemberJune 30, 20162017 reflects the incremental expensebenefit recorded for the ninesix months ended SeptemberJune 30, 20162017 associated with the actual results for the nine-monthsix-month period, as described below.
As disclosed in footnote 5, during the three months ended September 30, 2016, the Company initiated a plan to sell its German subsidiary, AHN Biotechnologie GmbH. As a result, the Company determined that it was more likely than not that the deferred tax assets at AHN would not be realized and therefore recorded a valuation allowance of $0.6 million to offset deferred tax assets net of deferred tax liabilities. The decision was based on all available evidence, including but not limited to the determination that previous tax planning strategies would no longer be feasible.
| - 16 - |
Discrete items included in the tax expensebenefit for the three months ended SeptemberJune 30, 20162017 included the recordingreversal of an uncertain tax position upon the settlement of a full valuation allowance againstGerman audit, net of additional income tax liability per the net deferred tax assets of AHN, as well as the impact of an enacted tax rate change on the net deferred tax assets of one of the Company’s UK subsidiaries.settlement. Tax benefit for the three months ended SeptemberJune 30, 20152016 included non-deductible acquisition costsforeign currency gains and losses and a return to provision adjustment.
Income tax was an approximately $0.9 million$58 thousand benefit and a $139 thousand expense and $1.4 million benefit for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. The effective income tax rate was (42.9%)3.9% for the ninesix months ended SeptemberJune 30, 2016,2017, compared with 42.3%(11.5%) for the same period in 2015.2016. The tax rates for the ninesix months ended SeptemberJune 30, 20162017 and 20152016 were based on actual results for the nine-monthsix-month period rather than an effective tax rate estimated for the entire year. TheIn 2017 and 2016 the Company determined that using a year-to-date approach resulted in a better estimate of income tax expenseexpense/benefit based on its forecast of pre-tax income,income/loss, the mix of incometaxable income/loss across several jurisdictions with different statutory tax rates, and the impact of the full valuation allowance against U.S. deferred tax assets.
The difference between the Company’s effective tax rate period over period was primarily attributable to higher pre-tax income at certain individual subsidiaries in 2017 versus 2016, despite an overall pre-tax loss in both periods, as well as the mixsettlement of earnings between its domestic and foreign businesses,an uncertain tax position. In addition, both periods included the tax impact of the fullamortization of certain indefinite-lived intangibles which are amortized for tax purposes only, against which a valuation allowance against U.S deferred tax assets recordedis not established.
As disclosed in footnote 2, the Company adopted ASU 2016-09 as of December 31, 2015, andJanuary 1, 2017. As a result, the impactCompany recorded a cumulative increase in retained earnings of a full valuation allowance against the deferred tax assets of one of the Company’s German subsidiaries recorded during the nine months ended September 30, 2016.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. The update requires all deferred income taxes to be presented on the balance sheet as noncurrent. The new guidance is intended to simplify financial reporting by eliminating the requirement to classify deferred taxes between current and noncurrent. The update is effective for fiscal years beginning after December 15, 2016. Early adoption is permitted$0.5 million at the beginning of an interim or annual period. During the nine months ended September 30, 2016, the Company early adopted the new guidance onfirst quarter of 2017 with a prospective basis and has presented allcorresponding increase in deferred tax assets andrelated to the prior years’ unrecognized excess tax benefits. An equal amount of valuation allowance was also recorded against these deferred tax liabilities as noncurrentassets with a corresponding decrease to retained earnings resulting in a net impact of $0. In addition, tax deficiencies related to vested restricted stock units and canceled stock options during the six months ended June 30, 2017 have been recognized in the consolidated balance sheet at September 30, 2016. Prior periods presented in the consolidated financial statements were not retrospectively adjusted.current period’s income statement.
On October 26, 2016, the Company sold the operationsItem 2. Management’s Discussion and Analysis of AHN, a manufacturerFinancial Condition and Results of liquid handling products, located in Nordhausen, Germany, for $1.7 million. The results of operations and financial position of AHN have been reported in the Company’s consolidated statements of operations and balance sheet as of and for the three and nine months ended September 30, 2016. In addition to the impairment loss recorded on the long-lived assets of AHN in the Company’s consolidated statement of operations for the nine months ended September 30, 2016, the Company expects to record a loss on sale in the range of approximately $0.8 million to $1.0 million within operating expenses in the fourth quarter of 2016, due to the allocation of goodwill and transaction costs associated with the sale. As of September 30, 2016, the major classes of assets and liabilities of AHN, which were reported in the Company’s consolidated balance sheet, were comprised of the following:Operations.
| (in thousands) | ||||
| Assets | ||||
| Accounts receivable, net | $ | 349 | ||
| Inventory | 439 | |||
| Property, plant and equipment, net | 954 | |||
| Amortizable intangible assets, net | 205 | |||
| Liabilities | ||||
| Accounts payable and accrued expenses | $ | 198 | ||
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains statements that are not statements of historical fact and are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”)Exchange Act). The forward-looking statements are principally, but not exclusively, contained in “Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 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. Forward-looking statements include, but are not limited to, statements about management’s confidence or expectations, and our plans, objectives, expectations and intentions that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “seek,” “expects,” “plans,” “aim,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “intends,” “think,” “potential,” “objectives,” “optimistic,” “strategy,” “goals,” “sees,” “new,” “guidance,” “future,” “continue,” “drive,” “growth,” “long-term,” “projects,” “develop,” “possible,” “emerging,” “opportunity,” “pursue” and similar expressions intended to identify 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. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Factors that may cause our actual results to differ materially from those in the forward-looking statements include reductions in customers’ research budgets or government funding; domestic and global economic conditions; economic, political and other risks associated with international revenues and operations; currency exchange rate fluctuations; economic and political conditions generally and those affecting pharmaceutical and biotechnology industries; the seasonal nature of purchasing in Europe; our failure to expand into foreign countries and international markets; our failure to realize the expected benefits of facility consolidations; our inability to manage our growth; competition from our competitors; material weakness in our internal control over financial reporting; ineffective disclosure controls and procedures; failure or inadequacy of the our information technology structure; impact of difficulties implementing our enterprise resource planning systems; our failure to identify potential acquisition candidates and successfully close such acquisitions with favorable pricing or integrate acquired businesses or technologies; unanticipated costs relating to acquisitions and known and unknown costs arising in connection with our consolidation of business functions and any restructuring initiatives; our inability to effectively sell spectrophotometer products following the retirement of the GE Healthcare brand; failure of any banking institution in which we deposit our funds or its failure to provide services; our substantial debt and our ability to meet the financial covenants contained in our credit facility; our failure to raise or generate capital necessary to implement our acquisition and expansion strategy; the failure of our spin-off of Biostage, Inc., f/k/a Harvard Apparatus Regenerative Technology, Inc., to qualify as a transaction that is generally tax-free for U.S. federal income tax purposes; the failure of Biostage to indemnify us for any liabilities associated with Biostage’s business; impact of any impairment of our goodwill or intangible assets; our ability to retain key personnel; failure or inadequacy or our information technology structure; rising commodity and precious metals costs; our ability to protect our intellectual property and operate without infringing on others’ intellectual property; exposure to product and other liability claims; global stock market volatility, currency exchange rate fluctuations and regulatory changes caused by the United Kingdom’s likely exit from the European Union; plus other factors described under the heading “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015,2016, or described in our other public filings. Our results may also be affected by factors of which we are not currently aware. We may not update these forward-looking statements, even though our situation may change in the future, unless we have obligations under the federal securities laws to update and disclose material developments related to previously disclosed information.
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Overview
Harvard Bioscience, Inc., a Delaware corporation, is a global developer, manufacturer and marketer of a broad range of scientific instruments, systems and lab consumables used to advance life science for basic research, drug discovery, clinical and environmental testing. Our products are sold to thousands of researchers in over 100 countriesaround the world through our global sales organization, websites, catalogs, and through distributors including Thermo Fisher Scientific Inc., VWR, and other specialized distributors. We have sales and manufacturing operations in the United States, the United Kingdom, Germany, Sweden, Spain, France, Canada, and China.
At the end of 2013 we began a multiple year restructuring program to reduce costs, align global functions, consolidate facilities, and reinvest in key areas such as sales and IT. As part of the reinvestment, we initiated a multiple year plan in 2014 to invest in and implement a new global enterprise resource planning platform. Additionally, during 2014, as part of the restructuring program, we initiated plans to relocate and consolidate the distribution, finance and marketing operations of our Denville Scientific, Inc. subsidiary (“Denville Scientific”) to Charlotte, North Carolina and our Holliston, MA headquarters, and relocate the manufacturing operations of our Biochrom Ltd. subsidiary (“Biochrom”) to our Holliston, MA headquarters. During the first quarter of 2015, we initiated plans to relocate the operations of our subsidiary, Coulbourn Instruments, LLC (“Coulbourn”), to our Holliston, MA headquarters. During the second quarter of 2015, we initiated plans to relocate the operations of HEKA Electronics Incorporated, our HEKA Canada subsidiary (“HEKA Canada”), to HEKA Electronik Dr. Schulze GmbH, our HEKA Germany subsidiary (“HEKA Germany”). Also during the second quarter of 2015, and simultaneously with the HEKA Canada move, we initiated plans to relocate the operations of HEKA Instruments Incorporated, our United States HEKA subsidiary (“HEKA U.S.”, and together with HEKA Canada and HEKA Germany, “HEKA”), to our Holliston, MA headquarters. As of December 31, 2015, these relocation plans had been completed. Additionally, we committed to a restructuring plan on October 27, 2015, which included eliminating certain redundancies as a result of our site consolidations, as well as a realignment of our commercial sales team. We believe the overall restructuring program positions us to stabilize, focus on, and grow the life science business going forward.
During the third quarter of 2015, GE Healthcare informed us of its decision to discontinue the sale of its spectrophotometer products by the end of 2015. This line of products includes the GE brands NanoVue and SimpliNano, which we manufacture and distributed through GE. Since January 1, 2016, we have been selling the NanoVue and SimpliNano spectrophotometers through our own direct sales force and through distribution partners, as well as servicing previously sold products in the field, yielding a new source of revenue and higher gross margins.
During the third quarter of 2016, we initiated plans to sell the operations of our AHN Biotechnologie GmbH subsidiary (“AHN”), located in Nordhausen, Germany. AHN is a manufacturer of liquid handling products which had revenues of $2.5 million in 2015. We concluded the sale of AHN in the fourth quarter of 2016, for cash proceeds of $1.7 million.
Our Strategy
Our vision is to be a world leading life science company that excels in meeting the needs of our customers by providing a wide breadth of innovative products and solutions, while providing exemplary customer service. Our business strategy is to grow our top-line and bottom-line, and build shareholder value through a commitment to:
Components of Operating Income
Revenues. We generate revenues by selling apparatus, instruments, devices and consumables through our distributors, direct sales force, websites and catalogs. Our websites and catalogs serve as the primary sales tools for our Cell and Animal Physiology product line. This product line includes both proprietary manufactured products and complementary products from various suppliers. Our reputation as a leading producer in many of our manufactured products creates traffic to our website, enables cross-selling and facilitates the introduction of new products. We have field sales teams in the U.S., Canada, the United Kingdom, Germany, France, Spain and China. In those regions where we do not have a direct sales team, we use distributors. Revenues from direct sales to end users represented approximately 64% and 67%65% of our revenues for the three months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. For the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, revenues from direct sales to end users represented approximately 63%65% and 64%63% of our revenues, respectively.
Products in our Molecular Separation and Analysis product line are generally sold by distributors, and are typically priced in the range of $5,000-$15,000. They are mainly scientific instruments like spectrophotometers and plate readers that analyze light to detect and quantify a wide range of molecular and cellular processes, or apparatus like gel electrophoresis units. We also use distributors for both our catalog products and our higher priced products, as well as for sales in locations where we do not have subsidiaries or where we have existing distributors in place from acquired businesses. For the three months ended SeptemberJune 30, 20162017 and 2015,2016, approximately 36% and 33%35% of our total revenues, respectively, were derived from sales to distributors. For the ninesix months ended SeptemberJune 30, 2017 and 2016, approximately 35% and 2015, approximately 37% and 36% of our total revenues, respectively, were derived from sales to distributors.
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For the three and ninesix months ended SeptemberJune 30, 2016,2017, approximately 60%62% and 61% of our revenues, respectively, were derived from products we manufacture, approximately 14%, for both periods, were derived from complementary products we distribute in order to provide the researcher with a single source for all equipment needed to conduct a particular experiment, and approximately 26%24% and 25%, respectively, were derived from distributed products sold under our brand names. For the three and ninesix months ended SeptemberJune 30, 2015,2016, approximately 60%63% and 61%62% of our revenues, respectively, were derived from products we manufacture, approximately 12% and 13%14%, respectively, were derived from complementary products we distribute in order to provide the researcher with a single source for all equipment needed to conduct a particular experiment, and approximately 28%25% and 26%24%, respectively, were derived from distributed products sold under our brand names.
For the three months ended SeptemberJune 30, 2017 and 2016, approximately 32% and 2015, approximately 36% and 35%38% of our revenues, respectively, were derived from sales made by our non-United States operations. For the ninesix months ended SeptemberJune 30, 2017 and 2016, approximately 33% and 2015, approximately 38% and 40% of our revenues, respectively, were derived from sales made by our non-United States operations. As discussed later under “Selected Results of Operations”, the decrease in revenues derived by our non-United States operations is primarily attributable to currency translation and the sale of our AHN Biotechnologie GmbH subsidiary (AHN).
Changes in the relative proportion of our revenue sources between direct sales and distribution sales are primarily the result of a different sales proportion of acquired companies and changes in geographic mix.
Cost of revenues. Cost of revenues includes material, labor and manufacturing overhead costs, obsolescence charges, packaging costs, warranty costs, shipping costs and royalties. Our cost of revenues may vary over time based on the mix of products sold. We sell products that we manufacture and products that we purchase from third parties. The products that we purchase from third parties typically have a higher cost of revenues as a percent of revenues because the profit is effectively shared with the original manufacturer. We anticipate that our manufactured products will continue to have a lower cost of revenues as a percentage of revenues as compared with the cost of non-manufactured products for the foreseeable future. Additionally, our cost of revenues as a percent of revenues will vary based on mix of direct to end user sales and distributor sales, mix by product line and mix by geography.
Sales and marketing expenses. Sales and marketing expense consists primarily of salaries and related expenses for personnel in sales, marketing and customer support functions. We also incur costs for travel, trade shows, demonstration equipment, public relations and marketing materials, consisting primarily of the printing and distribution of our catalogs, supplements and the maintenance of our websites. We may from time to time expand our marketing efforts by employing additional technical marketing specialists in an effort to increase sales of selected categories of products. We may also from time to time expand our direct sales organizations in an effort to concentrate on key accounts or promote certain product lines.
General and administrative expenses. General and administrative expense consists primarily of salaries and other related costs for personnel in executive, finance, accounting, information technology and human resource functions. Other costs include professional fees for legal and accounting services, information technology infrastructure, facility costs, investor relations, insurance and provision for doubtful accounts.
Research and development expenses. Research and development expense consists primarily of salaries and related expenses for personnel and spending to develop and enhance our products. Other research and development expense includes fees for consultants and outside service providers, and material costs for prototype and test units. We expense research and development costs as incurred. Grants received from governmental entities related to research projects are accounted for as a reduction in research and development expense over the period of the project. We believe that investment in product development is a competitive necessity and plan to continue to make these investments in order to realize the potential of new technologies that we develop, license or acquire for existing markets.
Restructuring charges. Restructuring charges consist of severance, other personnel-related charges and exit costs related to plans to create organizational efficiencies and reduce operating expenses.
Stock-based compensation expenses. Stock-based compensation expense for the three months ended SeptemberJune 30, 2017 and 2016 and 2015 was $0.9$0.8 million and $0.8$0.9 million, respectively. Stock-based compensation expense for the ninesix months ended SeptemberJune 30, 2017 and 2016 and 2015 was $2.6$1.7 million, and $2.0 million, respectively.for both periods. The stock-based compensation expense related to stock options, restricted stock units, restricted stock units with a market condition and the employee stock purchase plan and was recorded as a component of cost of revenues, sales and marketing expenses, general and administrative expenses and research and development expenses.
Bookings and Backlog
We monitor bookings and backlog as these are indicators of future revenues and business activity levels.
Bookings were $26.3 million and $27.3 million for the three months ended September 30, 2016 and 2015, respectively. Excluding the effects of currency translation, our bookings decreased $0.4 million, or 1.3% from the three months ended September 30, 2015. Bookings were $77.0 million and $81.6 million for the nine months ended September 30, 2016 and 2015, respectively. Excluding the effects of currency translation, our bookings decreased $3.5 million or 4.3%, from the nine months ended September 30, 2015.
Our order backlog was approximately $7.5 million and $8.2 million as of September 30, 2016 and 2015, respectively. Excluding the effects of currency translation, our backlog decreased $0.4 million, or 4.8% from September 30, 2015. We include in backlog only those orders for which we have received valid purchase orders. Purchase orders may be cancelled at any time prior to shipment. Our backlog as of any particular date may not be representative of actual sales for any succeeding period.
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Selected Results of Operations
Three Months Ended SeptemberJune 30, 20162017 compared to Three Months Ended SeptemberJune 30, 20152016
| Three Months Ended | ||||||||||||||||
| June 30, | Dollar | % | ||||||||||||||
| 2017 | 2016 | Change | Change | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Revenues | $ | 25,213 | $ | 26,136 | $ | (923 | ) | -3.5 | % | |||||||
| Cost of revenues | 13,926 | 14,461 | (535 | ) | -3.7 | % | ||||||||||
| Gross margin percentage | 44.8 | % | 44.7 | % | N/A | 0.2 | % | |||||||||
| Sales and marketing expenses | 4,982 | 5,086 | (104 | ) | -2.0 | % | ||||||||||
| General and administrative expenses | 4,404 | 5,236 | (832 | ) | -15.9 | % | ||||||||||
| Research and development expenses | 1,296 | 1,502 | (206 | ) | -13.7 | % | ||||||||||
| Amortization of intangible assets | 604 | 690 | (86 | ) | -12.5 | % | ||||||||||
Revenues
| Three Months Ended | ||||||||||||||||
| September 30, | Dollar | % | ||||||||||||||
| 2016 | 2015 | Change | Change | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Revenues | $ | 25,007 | $ | 25,731 | $ | (724 | ) | -2.8 | % | |||||||
| Cost of revenues | 13,317 | 14,005 | (688 | ) | -4.9 | % | ||||||||||
| Gross margin percentage | 46.7 | % | 45.6 | % | N/A | 2.6 | % | |||||||||
| Sales and marketing expenses | 5,006 | 5,028 | (22 | ) | -0.4 | % | ||||||||||
| General and administrative expenses | 4,800 | 5,005 | (205 | ) | -4.1 | % | ||||||||||
| Research and development expenses | 1,309 | 1,426 | (117 | ) | -8.2 | % | ||||||||||
| Restructuring charges | (17 | ) | 376 | (393 | ) | -104.5 | % | |||||||||
| Amortization of intangible assets | 729 | 666 | 63 | 9.5 | % | |||||||||||
| Impairment charges | 676 | - | 676 | 100.0 | % | |||||||||||
Revenues for the three months ended June 30, 2017 were $25.2 million, a decrease of approximately 3.5%, or $0.9 million, compared to revenues of $26.1 million for the three months ended June 30, 2016.
Excluding the effects of currency translation, primarily from the weakening of the British Pound against the U.S. dollar, our revenues decreased 1.4% or $0.4 million, from the previous year. The remainder of the decline in revenues was due to the loss of approximately $0.6 million in revenues from our AHN subsidiary, following its sale in October 2016. AHN, located in Nordhausen, Germany, was a manufacturer of liquid handling products. Excluding the unfavorable currency translation and the revenue impact of the AHN disposition, revenues grew approximately 1%. This increase was primarily due to solid revenue growth in the U.S. and China, partially offset by continued softness in Europe.
| Reconciliation of Changes In Revenues Compared to the Same Period of the Prior Year | ||||
| For the Three Months Ended | ||||
| June 30, 2017 | ||||
| Organic and AHN change | -1.4 | % | ||
| Foreign exchange effect | -2.1 | % | ||
| Total revenue change | -3.5 | % | ||
Each reporting period, we face currency exposure that arises from translating the results of our worldwide operations to the United States dollar at exchange rates that fluctuate from the beginning of such period. We evaluate our results of operations on both a reported and a foreign currency-neutral basis, which excludes the impact of fluctuations in foreign currency exchange rates. We believe that disclosing this non-GAAP financial information provides investors with an enhanced understanding of the underlying operations of the business. This non-GAAP financial information is used by our management to internally evaluate our operating results. The non-GAAP financial information provided in the table above should be considered in addition to, not as a substitute for, the financial information provided and presented in accordance with accounting principles generally accepted in the United States, or GAAP and may be different than other companies’ non-GAAP financial information.
Cost of revenues
Cost of revenues were $13.9 million for the three months ended June 30, 2017, a decrease of $0.6 million, or 3.7%, compared with $14.5 million for the three months ended June 30, 2016. The decrease in cost of revenues was primarily due to the effect on cost of revenues of the sale of AHN which was approximately $0.4 million and to a lesser extent, the decrease in revenues. Gross profit margin as a percentage of revenues increased slightly to 44.8% for the three months ended June 30, 2017 compared with 44.7% for 2016. The increase in gross profit margin was a result of a change in the mix of distributed or manufactured products sold as well as a lower proportion of fixed charges to sales in comparison to the prior period.
| - 20 - |
Sales and marketing expenses
Sales and marketing expenses were relatively flat, decreasing $0.1 million or 2.0% to $5.0 million for the three months ended June 30, 2017 compared to $5.1 million during the same period in 2016. The decrease was primarily due to currency fluctuation.
General and administrative expenses
General and administrative expenses were $4.4 million for the three months ended June 30, 2017, a decrease of $0.8 million, or 15.9%, compared with $5.2 million for the three months ended June 30, 2016. The decrease was primarily due to forensic investigation costs incurred during the three months ended June 30, 2016, a decrease in consulting fees, and lower stock based compensation expense compared to the same period in 2016.
Research and development expenses
Research and development expenses were $1.3 million for the three months ended June 30, 2017, a decrease of $0.2 million, or 13.7%, compared with $1.5 million for the three months ended June 30, 2016. The decrease in expense was primarily due to an increase in the amount of research grants earned. Research grants are accounted for as a reduction in research and development expense over the period of research performed.
Amortization of intangible assets
Amortization of intangible asset expenses was $0.6 million and $0.7 million for the three months ended June 30, 2017 and 2016, respectively. The decrease in amortization expense was primarily due to the effect of certain long-lived intangible assets becoming fully amortized towards the end of fiscal year 2016, as well as the sale of AHN during October 2016.
Other (expense) income, net
Other (expense) income, net, was expense of $0.5 million and income of $0.1 million for the three months ended June 30, 2017 and 2016, respectively. Included in other (expense) income, net for three months ended June 30, 2017 and 2016 was interest expense of $0.2 million, for both periods. The increase in other expense, net was primarily due to an increase in foreign exchange losses. Currency exchange rate fluctuations included as a component of net loss resulted in approximately $0.3 million in currency losses and $0.3 million in currency gains for the three months ended June 30, 2017 and 2016, respectively.
Income taxes
Income tax was an approximately $81 thousand and $54 thousand benefit for the three months ended June 30, 2017 and 2016, respectively. The tax benefit for the three months ended June 30, 2017 reflects the incremental benefit recorded for the six months ended June 30, 2017 associated with the actual results for the six-month period. Discrete items included in the tax benefit for the three months ended June 30, 2017 included the reversal of an uncertain tax position upon the settlement of a German audit, net of additional income tax liability per the settlement. Tax benefit for the three months ended June 30, 2016 included foreign currency gains and losses and a return to provision adjustment.
We have operations in the UK and several European countries where we historically had material current and deferred income tax balances related to those activities. As such, the UK’s 2016 decision to withdraw from the European Union or the EU could have a material effect on our current and deferred income taxes. In March 2017, the UK initiated, through letter submission to the EU, a formal two-year process to officially withdraw its membership. During this two-year period, the UK and EU member states are expected to negotiate many provisions in the UK bilateral agreements and tax treaties with EU member states as well as EU rules governing the income tax treatment of deferred intercompany profits. The final outcome of these negotiations will not be known until both the EU and the UK approve them and the UK enacts the related changes in its tax laws. EU law will cease to apply in the UK at the end of the two-year process in March 2019, unless the negotiations are extended. The letter submission in March 2017 is an administrative step required to begin the formal withdrawal process and is not considered a tax law enactment under ASC 740. Consequently, we plan to adjust our current and deferred taxes when tax law changes related to UK’s withdrawal from the EU are actually enacted and/or when EU law ceases to apply in the UK.
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Six Months Ended June 30, 2017 compared to Six Months Ended June 30, 2016
| Six Months Ended | ||||||||||||||||
| June 30, | ||||||||||||||||
| 2017 | 2016 | Dollar Change | % Change | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Revenues | $ | 49,369 | $ | 53,099 | $ | (3,730 | ) | -7.0 | % | |||||||
| Cost of product revenues | 26,583 | 28,479 | (1,896 | ) | -6.7 | % | ||||||||||
| Gross margin percentage | 46.2 | % | 46.4 | % | N/A | -0.5 | % | |||||||||
| Sales and marketing expenses | 10,030 | 10,188 | (158 | ) | -1.6 | % | ||||||||||
| General and administrative expenses | 9,610 | 11,184 | (1,574 | ) | -14.1 | % | ||||||||||
| Research and development expenses | 2,581 | 2,927 | (346 | ) | -11.8 | % | ||||||||||
| Amortization of intangible assets | 1,203 | 1,370 | (167 | ) | -12.2 | % | ||||||||||
Revenues
Revenues for the six months ended June 30, 2017 were $49.4 million, a decrease of 7.0%, or $3.7 million, compared to revenues of $53.1 million for the same period in 2016.
Excluding the effects of currency translation, primarily from the weakening of the British Pound against the U.S. dollar, our revenues decreased 4.7%, or $2.5 million from the same period in 2016. Also included in the revenue decline for the quarter is a decrease of $1.3 million, due to the AHN disposition in October 2016. Excluding the unfavorable currency translation and the revenue impact of the AHN disposition, revenues declined by approximately 2%. The decrease was primarily due to continued softness in Europe, partially offset with revenue growth in the U.S. and China for the six months ended June 30, 2017.
| Reconciliation of Changes In Revenues Compared to the Same Period of the Prior Year | ||||
| For the Six Months Ended | ||||
| June 30, 2017 | ||||
| Organic and AHN change | -4.7 | % | ||
| Foreign exchange effect | -2.3 | % | ||
| Total revenue change | -7.0 | % | ||
Each reporting period, we face currency exposure that arises from translating the results of our worldwide operations to the United States dollar at exchange rates that fluctuate from the beginning of such period. We evaluate our results of operations on both a reported and a foreign currency-neutral basis, which excludes the impact of fluctuations in foreign currency exchange rates. We believe that disclosing this non-GAAP financial information provides investors with an enhanced understanding of the underlying operations of the business. This non-GAAP financial information approximates information used by our management to internally evaluate our operating results. The non-GAAP financial information provided belowin the table above should be considered in addition to, not as a substitute for, the financial information provided and presented in accordance with accounting principles generally accepted in the United States, or GAAP.
Revenues
Revenues for the three months ended September 30, 2016 were $25.0 million, a decrease of approximately 2.8%, or $0.7 million, compared to revenues of $25.7 million for the three months ended September 30, 2015.
The decrease in revenues was primarily driven by currency fluctuations. The impact of currency translation amounted to approximately $0.7 million, in lower revenues during the three months ended September 30, 2016.
Cost of revenues
Cost of revenues were $13.3 million for the three months ended September 30, 2016, a decrease of $0.7 million, or 4.9%, compared with $14.0 million for the three months ended September 30, 2015. Gross profit margin as a percentage of revenues increased to 46.7% for the three months ended September 30, 2016 compared with 45.6% for 2015. The increase in gross profit margin was due to the savings associated with the relocation and consolidation of certain facilities in 2015.
Sales and marketing expenses
Sales and marketing expenses were $5.0 million for the three months ended September 30, 2016 which was flat compared to the same period in 2015.
General and administrative expenses
General and administrative expenses were $4.8 million for the three months ended September 30, 2016, a decrease of $0.2 million, or 4.1%, compared with $5.0 million for the three months ended September 30, 2015. The decrease was primarily due to the impact of our restructuring activities as well as currency translation, partially offset by higher stock compensation expense and audit costs.
Research and development expenses
Research and development expenses were $1.3 million for the three months ended September 30, 2016, a decrease of $0.1 million, or 8.2%, compared with $1.4 million for the three months ended September 30, 2015. The decrease in expense was primarily as a result of the impact of currency fluctuations as well as an increase in the amount of research grants earned, which are accounted for as a reduction in research and development expense, quarter over quarter.
Restructuring
Restructuring charges were immaterial for the three months ended September 30, 2016 compared with $0.4 million for the three months ended September 30, 2015. Restructuring charges during the three months ended September 30, 2015 related to plans commenced during the fourth quarter of 2014 and the nine months ended September 30, 2015. The 2014 restructuring plan realigned global operations and included actions to move the Biochrom manufacturing and Denville Scientific distribution operations to Holliston, MA and Charlotte, NC, respectively. The 2015 restructuring plans included actions to move the Coulbourn Instruments’ operations to Holliston, MA and the HEKA Canada operations to HEKA Germany.
Amortization of intangible assets
Amortization of intangible asset expenses was $0.7 million for both the three months ended September 30, 2016 and 2015.
Impairment charges
Impairment charges were $0.7 million for the three months ended September 30, 2016. During the third quarter of 2016, we initiated plans to sell the operations of AHN. As a result of initiating the plan to sell the operations of AHN, we evaluated the long-lived assets for impairment, pursuant to ASC 360-10. Based on the resulting impairment analysis, we recognized an impairment charge of $0.7 million for the three months ended September 30, 2016.
Other expense, net
Other expense, net, was $0.1 million and $0.3 million for the three months ended September 30, 2016 and 2015, respectively. Included in other expense, net for three months ended September 30, 2016 and 2015 was interest expense of $0.1 million and $0.2 million, respectively. The decrease in other expense, net was primarily due to a decrease in interest expense and acquisition related costs, including due diligence. Acquisition related costs for the three months ended September 30, 2016 were immaterial, compared to $0.2 million during the three months ended September 30, 2015. Currency exchange rate fluctuations included as a component of net loss resulted in approximately $0.1 million in currency gains during both the three months ended September 30, 2016 and September 30, 2015.
Income taxes
Income tax was an approximately $0.8 million expense and a $0.2 million benefit for the three months ended September 30, 2016 and 2015, respectively. The tax expense for the three months ended September 30, 2016 reflects the incremental expense recorded for the nine months ended September 30, 2016 associated with the actual results for the nine-month period. Refer to the selected results of operations for the nine months ended September 30, 2016 for further details. Discrete items included in the tax expense for the three months ended September 30, 2016 included the recording of a full valuation allowance against the net deferred tax assets of one of our German subsidiaries, as well as the impact of an enacted tax rate change on the net deferred tax assets of one of our UK subsidiaries. Tax benefit for the three months ended September 30, 2015 included non-deductible acquisition costs and a return to provision adjustment.
Nine Months Ended September 30, 2016 compared to Nine Months Ended September 30, 2015
| Nine Months Ended | ||||||||||||||||
| September 30, | ||||||||||||||||
| 2016 | 2015 | Dollar Change | % Change | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Revenues | $ | 78,106 | $ | 80,294 | $ | (2,188 | ) | -2.7 | % | |||||||
| Cost of product revenues | 41,796 | 44,495 | (2,699 | ) | -6.1 | % | ||||||||||
| Gross margin percentage | 46.5 | % | 44.6 | % | N/A | 4.3 | % | |||||||||
| Sales and marketing expenses | 15,194 | 15,355 | (161 | ) | -1.0 | % | ||||||||||
| General and administrative expenses | 15,984 | 14,758 | 1,226 | 8.3 | % | |||||||||||
| Research and development expenses | 4,236 | 4,888 | (652 | ) | -13.3 | % | ||||||||||
| Restructuring charges | (5 | ) | 487 | (492 | ) | -101.0 | % | |||||||||
| Amortization of intangible assets | 2,099 | 2,137 | (38 | ) | -1.8 | % | ||||||||||
| Impairment charges | 676 | - | 676 | 100.0 | % | |||||||||||
Each reporting period, we face currency exposure that arises from translating the results of our worldwide operations to the United States dollar at exchange rates that fluctuate from the beginning of such period. We evaluate our results of operations on both a reported and a foreign currency-neutral basis, which excludes the impact of fluctuations in foreign currency exchange rates. We believe that disclosing this non-GAAP financial information provides investors with an enhanced understanding of the underlying operations of the business. This non-GAAP financial information approximates information used by our management to internally evaluate our operating results. The non-GAAP financial information provided below should be considered in addition to, not as a substitute for, the financial information provided and presented in accordance with accounting principles generally accepted in the United States, or GAAP.
Revenues
Revenues decreased 2.7%, or $2.2 million to $78.1 million for the nine months ended September 30, 2016 compared to revenues of $80.3 million for the same period in 2015. Excluding the effects of currency translation, our revenues decreased 1.2% from the previous nine months. The decrease was primarily the result of softness in the European funding environment and slower than expected NIH budget funding.
Cost of revenues
Cost of revenues decreased $2.7$1.9 million, or 6.1%6.7%, to $41.8$26.6 million for the ninesix months ended SeptemberJune 30, 20162017 compared with $44.5$28.5 million for the ninesix months ended SeptemberJune 30, 2015.2016. The decrease in cost of revenues was primarily due to the decrease in revenues, including the effect on cost of revenues of the sale of AHN which was approximately $0.9 million. Gross profit margin as a percentage of revenues increased to 46.5%was relatively flat at 46.2% for the ninesix months ended SeptemberJune 30, 20162017 compared with 44.6%46.4% for 2015. The increase in gross profit margin was due to a decrease in purchase accounting fair value step-up charges for inventory recorded in 2015, as well as the savings associated with the relocation and consolidation of certain facilities in 2015.2016.
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Sales and marketing expenses
Sales and marketing expenses decreased $0.2 million, or 1.0%1.6%, to $15.2$10.0 million for the ninesix months ended SeptemberJune 30, 20162017 compared with $15.4$10.2 million for the ninesix months ended SeptemberJune 30, 2015.2016. The decrease was primarily due to currency fluctuation and also included the resulteffect of currency translation.a decrease in sales commissions. Sales commissions decreased due to lower revenues during the six months ended June 30, 2017 in comparison to the same period in 2016.
General and administrative expenses
General and administrative expenses increased $1.2decreased $1.6 million, or 8.3%14.1%, to $16.0$9.6 million for the ninesix months ended SeptemberJune 30, 20162017 compared with $14.8$11.2 million for the ninesix months ended SeptemberJune 30, 2015.2016. The increasedecrease was primarily due to the forensic investigation costs incurred during the ninesix months ended SeptemberJune 30, 2016, relateda decrease in consulting fees, and lower travel costs compared to the previously disclosed embezzlement at one of our subsidiariessame period in 2015 and higher stock compensation expense, partially offset by the impact of our restructuring activities and currency translation.2016.
Research and development expenses
Research and development expenses were $4.2$2.6 million for the ninesix months ended SeptemberJune 30, 2016,2017, a decrease of $0.7$0.3 million, or 13.3%11.8%, compared with $4.9$2.9 million for the ninesix months ended SeptemberJune 30, 2015.2016. The decrease was primarily due to the impact of our restructuring activities, currency translation,a reduction in payroll related costs and an increase in the amount of research grants earned, whichearned. Research grants are accounted for as a reduction in research and development expense over the period over period.
Restructuring
Restructuring charges were immaterial for the nine months ended September 30, 2016 compared with $0.5 million for the nine months ended September 30, 2015. Restructuring charges during the nine months ended September 30, 2015 included additional charges related to a 2014 restructuring plan as well as charges related to two restructuring plans we implemented during the nine months ended September 30, 2015. The 2014 restructuring plan realigned global operations and included actions to move the Biochrom manufacturing and Denville Scientific distribution operations to Holliston, MA and Charlotte, NC, respectively. The 2015 restructuring plans included actions to move the Coulbourn and operations to Holliston, MA and the HEKA Canada operations to HEKA Germany.of research performed.
Amortization of intangible assets
Amortization of intangible asset expenses was $2.1$1.2 million for both the nine months ended September 30, 2016 and 2015.
Impairment charges
Impairment charges were $0.7$1.4 million for the ninesix months ended SeptemberJune 30, 2016. During2017 and 2016, respectively. The decrease in amortization expense was primarily due to the third quartereffect of certain long-lived intangible assets becoming fully amortized towards the end of fiscal year 2016, we initiated plans to sellas well as the operations of AHN. As a result of initiating the plan to sell the operationssale of AHN we evaluated the long-lived assets for impairment, pursuant to ASC 360-10. Based on the resulting impairment analysis, we recognized an impairment charge of $0.7 million for the nine months ended September 30,during October 2016.
Other expense, net
Other expense, net, was $0.2$0.9 million and $1.5$0.1 million for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. The decreaseincrease in other expense, net was primarily due to a decreasean increase in acquisition related costs, including due diligence and deal investigative activities, interest expense, andforeign currency exchange rate fluctuations. Acquisition related costs for the nine months ended September 30, 2016 were immateriallosses as compared to $0.9 million forforeign currency gains in the nine months ended September 30, 2015. Interest expense was $0.5 million for the nine months ended September 30, 2016, compared to $0.6 million in interest expense for the nine months ended September 30, 2015. The decrease in interest expense of $0.1 million was due to lower debt balances as a result of payment of principal.prior period. Currency exchange rate fluctuations included as a component of net loss resulted in approximately $0.4 million in currency losses and $0.2$0.3 million in currency gains during the ninesix months ended SeptemberJune 30, 2017 and 2016, respectively. Interest expense was $0.3 million for both the six months ended June 30, 2017 and 2015, respectively.2016.
Income taxes
Income tax expense was an approximately a $0.9 million expense$58 thousand benefit and a $1.4 million benefit$139 thousand expense for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. The effective income tax rate was (42.9%)3.9% for the ninesix months ended SeptemberJune 30, 2016,2017, compared with 42.3%(11.5%) for the same period in 2015.2016. The tax rates for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively, were based on actual results for the nine-monthsix-month period rather than an effective tax rate estimated for the entire year. We determined that using a year-to-date approach resulted in a better estimate of income tax expense based on our updated forecasts of pre-tax income, mix of income across several jurisdictions with different statutory tax rates as well as the impact of the full valuation allowance against U.S. deferred tax assets.
The difference between our effective tax rate period over period was primarily attributable to the mix of earnings between our domestic and foreign businesseshigher pre-tax income at certain individual subsidiaries in 2017 versus 2016 despite an overall pre-tax loss in both periods, as well as the settlement of an uncertain tax position. In addition, both periods included the tax impact of the fullamortization of certain indefinite-lived intangibles which are amortized for tax purposes only, against which a valuation allowance against U.S.is not established.
We have operations in the UK and several European countries where we historically had material current and deferred income tax assets recorded as of December 31, 2015,balances related to those activities. As such, the UK’s 2016 decision to withdraw from the European Union or the EU could have a material effect on our current and deferred income taxes. In March 2017, the UK initiated, through letter submission to the EU, a formal two-year process to officially withdraw its membership. During this two-year period, the UK and EU member states are expected to negotiate many provisions in the UK bilateral agreements and tax treaties with EU member states as well as EU rules governing the impactincome tax treatment of deferred intercompany profits. The final outcome of these negotiations will not be known until both the EU and the UK approve them and the UK enacts the related changes in its tax laws. EU law will cease to apply in the UK at the end of the two-year process in March 2019, unless the negotiations are extended. The letter submission in March 2017 is an administrative step required to begin the formal withdrawal process and is not considered a full valuation allowance againsttax law enactment under ASC 740. Consequently, we plan to adjust our current and deferred taxes when tax law changes related to UK’s withdrawal from the deferred tax assets of one of our German subsidiaries recorded as of nine months ended September 30, 2016.EU are actually enacted and/or when EU law ceases to apply in the UK.
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Liquidity and Capital Resources
Historically, we have financed our business through cash provided by operating activities, the issuance of common stock, and bank borrowings. Our liquidity requirements arise primarily from investing activities, including funding of acquisitions, and other capital expenditures. As previously discussed, on January 8, 2015, we acquired all of the issued and outstanding shares of HEKA, a manufacturer with operations in Germany and Canada for approximately $4.5 million, net of cash acquired. We funded the acquisition from our existing cash balances by utilizing approximately $5.9 million of our foreign cash on hand.
As of SeptemberJune 30, 2016,2017, we held cash and cash equivalents of $5.3$4.7 million, compared with $6.7$5.6 million at December 31, 2015.2016. As of SeptemberJune 30, 20162017 and December 31, 2015,2016, we had $15.0$13.2 million and $18.7$13.7 million respectively, of borrowings outstanding under our credit facility, net of deferred financing costs. Total debt, net of cash and cash equivalents was $9.7$8.5 million at SeptemberJune 30, 2016,2017, compared to $12.0$8.1 million at December 31, 2015.2016. In addition, we had an underfunded United Kingdom pension liability of approximately $2.5$3.3 million and $2.8$3.0 million at SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively.
As of SeptemberJune 30, 20162017 and December 31, 2015,2016, cash and cash equivalents held by our foreign subsidiaries was $3.1$3.3 million and $5.7$4.5 million, respectively. Funds held by our foreign subsidiaries are not available for domestic operations unless the funds are repatriated. If we planned to or did repatriate these funds, then United States federal and state income taxes would have to be recorded on such amounts. Our reinvestment determination is based on the future operational and capital requirements of our U.S. and non-U.S. operations. As of December 31, 2015, we determined that the assertion of permanent reinvestment at our foreign subsidiaries in Canada and France was no longer appropriate and we repatriated approximately $3.5$3.2 million during the ninesix months ended SeptemberJune 30, 2016. We did not repatriate any funds during the six months ended June 30, 2017. Cash balances did not exceed the level required for normal business operations at our subsidiaries in Canada and France as of June 30, 2017. With no funds available to repatriate, no deferred tax liability was recorded as of that date. The total tax liability associated with the repatriation of undistributed earnings in Canada and France during the six months ended June 30, 2016 was approximately $1.2$1.7 million, however it is anticipated that any taxable income generated by the repatriation will beliability was entirely offset by the use of carried forward net operating losses.foreign tax credits generated from the repatriation. We currently have no plans to repatriate any of our undistributed foreign earnings in any other countries outside of Canada and France. These balances are considered permanently reinvested and will be used for foreign items including foreign acquisitions, capital investments, pension obligations and operations. It is impracticable to estimate the total tax liability, if any, which would be created by the future distribution of these earnings.
We currently intend to retain all of our earnings to finance the expansion and development of our business and do not anticipate paying any cash dividends to holders of our common stock in the near future. As a result, capital appreciation, if any, of our common stock will be a stockholder’s sole source of gain for the near future.
Condensed Cash Flow Statements
(unaudited)
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2017 | 2016 | |||||||
| (in thousands) | ||||||||
| Cash flows from operations: | ||||||||
| Net loss | $ | (1,447 | ) | $ | (1,349 | ) | ||
| Other adjustments to operating cash flows | 3,598 | 3,942 | ||||||
| Changes in assets and liabilities | (2,286 | ) | (2,377 | ) | ||||
| Net cash (used in) provided by operating activities | (135 | ) | 216 | |||||
| Investing activities: | ||||||||
| Additions to property, plant and equipment | (437 | ) | (402 | ) | ||||
| Other investing activities | (39 | ) | (10 | ) | ||||
| Net cash used in investing activities | (476 | ) | (412 | ) | ||||
| Financing activities: | ||||||||
| Net repayments of debt | (552 | ) | (2,625 | ) | ||||
| Other financing activities | (77 | ) | (9 | ) | ||||
| Net cash used in financing activities | (629 | ) | (2,634 | ) | ||||
| Effect of exchange rate changes on cash | 368 | (283 | ) | |||||
| Decrease in cash and cash equivalents | $ | (872 | ) | $ | (3,113 | ) | ||
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| Condensed Cash Flow Statements | ||||||||
| (unaudited) | ||||||||
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2016 | 2015 | |||||||
| (in thousands) | ||||||||
| Cash flows from operations: | ||||||||
| Net loss | $ | (2,987 | ) | $ | (1,899 | ) | ||
| Changes in assets and liabilities | (473 | ) | (3,494 | ) | ||||
| Other adjustments to operating cash flows | 7,116 | 4,334 | ||||||
| Net cash provided by (used in) operating activities | 3,656 | (1,059 | ) | |||||
| Investing activities: | ||||||||
| Additions to property, plant and equipment | (920 | ) | (2,298 | ) | ||||
| Acquisitions, net of cash acquired | - | (4,545 | ) | |||||
| Other investing activities | (34 | ) | 6 | |||||
| Net cash used in investing activities | (954 | ) | (6,837 | ) | ||||
| Financing activities: | ||||||||
| Net repayments of debt | (3,738 | ) | (1,300 | ) | ||||
| Other financing activities | 80 | 1,921 | ||||||
| Net cash (used in) provided by financing activities | (3,658 | ) | 621 | |||||
| Effect of exchange rate changes on cash | (443 | ) | (769 | ) | ||||
| Decrease in cash and cash equivalents | $ | (1,399 | ) | $ | (8,044 | ) | ||
Our operating activities providedused cash of $3.7$0.1 million and used $1.1provided $0.2 million of cash for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. The increasedecrease in net cash flowsflow from operations was primarily due to the effect of a slightly higher net loss and changes in working capital and other adjustments to operating cash flows partially offset by forensic investigation costs incurred during the nine months ended September 30, 2016 related to the previously disclosed embezzlement at one of our subsidiaries in 2015.quarter over quarter.
Our investing activities used cash of $1.0$0.5 million and $6.8$0.4 million for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. Investing activities during the ninesix months ended SeptemberJune 30, 2017 and 2016 primarily included cash used for purchases of property, plant and equipment. Investing activities during the nine months ended September 30, 2015 included cash used for acquisitions net of cash acquired and purchases of property, plant and equipment. Additionally, in January 2015, we acquired HEKA for approximately $4.5 million, net of cash acquired. We spent $0.9 million and $2.3$0.4 million on capital expenditures during both the ninesix months ended SeptemberJune 30, 20162017 and 2015, respectively. The decrease in capital expenditures period over period was due primarily to the capital expenditures for the nine months ended September 30, 2015 related to the capital spend to relocate our Denville distribution business and UK manufacturing operations to North Carolina and Holliston, MA, respectively.2016.
Our financing activities have historically consisted of borrowings and repayments under our revolving credit facility and term loans, payments of debt issuance costs and the issuance of common stock. During the ninesix months ended SeptemberJune 30, 2016,2017, financing activities used cash of $3.7$0.6 million, compared with $0.6$2.6 million of cash providedused by financing activities for the ninesix months ended SeptemberJune 30, 2015.2016. During the ninesix months ended SeptemberJune 30, 2016,2017, we borrowed $3.0$2.0 million under our credit facility, repaid $6.7$2.6 million of debt under our credit facility and term loans and ended the quarter with $15.0$13.2 million of borrowings, net of deferred financing costs of $0.1 million. Net proceedscash paid for tax withholdings from the issuance of common stock for the ninesix months ended SeptemberJune 30, 2016 were2017 was $0.1 million, which related to the exercise of stock options and vesting of restricted stock units. During the ninesix months ended SeptemberJune 30, 2015,2016, we borrowed $4.8$2.0 million under our credit facility, repaid $6.1$4.6 million of debt under our credit facility and term loans and ended with $20.2$16.2 million of borrowings at SeptemberJune 30, 2015. Net proceeds from the issuance2016, net of common stock for the nine months ended September 30, 2015 were $2.0 million, which related to the exercisedeferred financing costs of stock options.$0.1 million.
Borrowing Arrangements
On August 7, 2009, we entered into an Amended and Restated Revolving Credit Loan Agreement related to a $20.0 million revolving credit facility with Bank of America, as agent, and Bank of America and Brown Brothers Harriman & Co as lenders (as amended, the “20092009 Credit Agreement”)Agreement). On March 29, 2013, we entered into a Second Amended and Restated Revolving Credit Agreement (as amended, the 2013 Credit Agreement) with Bank of America, as agent, and Bank of America and Brown Brothers Harriman & Co, as lenders that amended and restated the 2009 Credit Agreement. Between September 2011 and June 2016,May 2017, we entered into sixa series of amendments that among other things extendeddid the maturity date of the credit facility; reduced interest rates;following:
| · | on September 30, 2011, reduced interest rates to the London Interbank Offered Rate plus 3.0%; |
| · | on March 29, 2013, converted existing loan advances into a term loan in the principal amount of $15.0 million (the 2013 Term Loan), provided a revolving credit facility in the maximum principal amount of $25.0 million (the 2013 Revolving Line) and a delayed draw term loan (the 2013 DDTL) of up to $15.0 million; |
| · | on October 31, 2013, reduced the 2013 DDTL from up to $15.0 million to up to $10.0 million; |
| · | on April 24, 2015, extended the maturity date of the 2013 Revolving Line to March 29, 2018 and reduced the interest rates on the 2013 Revolving Line, 2013 Term Loan and 2013 DDTL; |
| · | on June 30, 2015, amended its quarterly minimum fixed charge coverage financial covenant; |
| · | on March 9, 2016, amended the principal payment amortization of the 2013 Term Loan and 2013 DDTL to five years, as well as amended its quarterly minimum fixed charge coverage financial covenant; and |
| · | on May 2, 2017, entered into a Third Amended and Restated Revolving Credit Agreement (as amended, the Credit Agreement) with Bank of America, as agent, and Bank of America and Brown Brothers Harriman & Co, as lenders that amended and restated the 2013 Credit Agreement. |
The Credit Agreement was entered into to, among other things, consolidate, combine and restate the outstanding indebtedness, on the date of the Credit Agreement, into a term loan (the Term Loan) in the principal amount of $15.0$14.0 million, (the “Term Loan”); providedand also provide for a revolving credit facility in the maximum principal amount of $25.0 million (“revolving line of credit (the Revolving Line”); providedLine). The Term Loan and the Revolving Line each have a delayed draw term loanmaturity date of up to $10.0 million (the “DDTL”); amended the principal payment amortization ofMay 1, 2022. Borrowings under the Term Loan and DDTL to five years,accrue interest at a rate based on either the effective LIBOR for certain interest periods selected by us, or a daily floating rate based on the BBA LIBOR as well as amended our quarterly minimum fixed charge coverage financial covenant.published by Reuters (or other commercially available source providing quotations of BBA LIBOR), plus in either case, a margin of 2.75%. Additionally, the Revolving Line accrues interest at a rate based on either the effective LIBOR for certain interest periods selected by us, or a daily floating rate based on the BBA LIBOR, plus in either case, a margin of 2.25%.
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In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Interest - Imputation of Interest - Simplifying the Presentation of Debt Issuance Costs. Under this guidance, debt issuance costs related to a recognized debt liability should be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The provisions of this guidance are to be applied retrospectively and are effective for interim and annual periods beginning after December 15, 2015. We adopted this guidance during the nine months ended SeptemberAt June 30, 2016. The consolidated balance sheet as of December 31, 2015, included in these consolidated financial statements, reflects a restatement to reclassify unamortized deferred financing costs of approximately $0.2 million from other long-term assets to long-term debt. For deferred financing costs paid to secure long-term debt, we have made a policy election to present such costs as a direct deduction from the debt liability on the consolidated balance sheet.
At September 30, 2016,2017, the weighted effective interest ratesrate, net of the impact of our interest rate swap, on the Term Loan DDTL and Revolving Line borrowings were 3.96%, 3.60% and 2.77%, respectively.was 4.61%. The Credit Agreement includes covenants relating to income, debt coverage and cash flow, as well as minimum working capital requirements. The Credit Agreement also contains limitations on our ability to incur additional indebtedness and requires lender approval for acquisitions funded with cash, promissory notes and/or other consideration in excess of $6.0 million and for acquisitions funded solely with equity in excess of $10.0 million. As of SeptemberJune 30, 2016,2017, we were in compliance with all financial covenants contained in the Credit Agreement; we were subject to covenant and working capital borrowing restrictions, and had available borrowing capacity under the Credit Agreement of $7.8$5.3 million.
The Term Loan and loans under the Revolving Line as evidenced by the Credit Agreement, or the Loans, are guaranteed by all of our direct and indirect domestic subsidiaries, and secured by substantially all of our assets and the guarantors. The Loans are subject to restrictive covenants under the Credit Agreement, and financial covenants that require us and our subsidiaries to maintain certain financial ratios on a consolidated basis, including a maximum leverage, minimum fixed charge coverage and minimum working capital. Prepayment of the Loans is allowed by the Credit Agreement at any time during the terms of the Loans. The Loans also contain limitations on our ability to incur additional indebtedness and requires lender approval for acquisitions funded with cash, promissory notes and/or other consideration in excess of $6.0 million and for acquisitions funded solely with equity in excess of $10.0 million.
Our forecast of 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. Based on our current operations and current operating plans, we expect that our available cash, cash generated from current operations and debt capacity will be sufficient to finance current operations, any potential future acquisitions and capital expenditures for the next 12 months and beyond. This may involve incurring additional debt or raising equity capital for our business. Additional capital raising activities will dilute the ownership interests of existing stockholders to the extent we raise capital by issuing equity securities and we cannot guarantee that we will be successful in raising additional capital on favorable terms or at all.
Critical Accounting Policies
The critical accounting policies underlying the accompanying unaudited consolidated financial statements are those set forth in Part II, Item 7 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015,2016, which was filed with the SEC on April 29, 2016.March 17, 2017.
Impact of Foreign Currencies
Our international operations in some instances operate in 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, especially the British pound sterling, the Euro, the Canadian dollar and the Swedish krona.
During the ninesix months ended SeptemberJune 30, 2016, the U.S dollar’s strengthening2017, changes in relation to the British pound sterlingforeign currency exchange rates resulted in an unfavorable translation effect on our consolidated revenues and a neutral effect on our consolidated net loss. Changes in foreign currency exchange rates resulted in an unfavorable effect on revenues of approximately $1.2 million and a favorable effect on expenses of approximately $1.1$1.2 million. During the ninesix months ended SeptemberJune 30, 2015,2016, changes in foreign currency exchange rates resulted in an unfavorable effect on revenues of $3.1$0.5 million and a favorable effect on expenses of $2.8$0.5 million.
The lossgain associated with the translation of foreign equity into U.S. dollars included as a component of comprehensive loss during the three months ended SeptemberJune 30, 2016,2017, was approximately $2.0$2.1 million, compared to a loss of $0.5$1.8 million for the three months ended SeptemberJune 30, 2015. For the nine months ended September 30, 2016, the loss2016. The gain associated with the translation of foreign equity into U.S. dollars included as a component of comprehensive loss during the six months ended June 30, 2017, was approximately $1.4$3.0 million, compared to a loss of $3.3$1.2 million duringfor the same period in 2015.six months ended June 30, 2016.
In addition, currency exchange rate fluctuations included as a component of net loss resulted in approximately $0.1$0.3 million in currency losses and $0.3 million in currency gains during both the three months ended SeptemberJune 30, 2017 and 2016, and 2015.respectively. Currency exchange rate fluctuations included as a component of net loss resulted in approximately $0.4 million in currency losses and $0.2$0.3 million in currency gains during the ninesix months ended SeptemberJune 30, 2016,2017 and 2015,2016, respectively.
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Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09,“Revenue from Contracts with Customers,” a new accounting standard that provides for a comprehensive model to use in the accounting for revenue arising from contracts with customers that will replace most existing revenue recognition guidance within generally accepted accounting principles generally accepted in the United States. Under this standard, revenue will be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. At its July 2015 meeting,We expect to adopt this standard as of January 1, 2018 using the FASB agreedmodified retrospective approach. We are in the process of completing a comprehensive assessment of our contracts concerning any unique customer contract terms or transactions that could have implications to defer the mandatory effective datetiming of ASU 2014-09 one year. Under the one year deferral, the standard will take effect in 2018 for calendar year-end public entities.
In July 2015, the FASB issued ASU 2015-11, Simplifying Measurement of Inventory. The update requires measurement of most inventory “at the lower of cost and net realizable value”, and applies to all entities that recognize inventory within the scope of ASC 330, except for inventory measuredrevenue recognition under the last-in, first-out (LIFO) method ornew guidance. We expect this undertaking will be complete in the retail inventory method (RIM). ASU 2015-11 requires prospective application and represents a change in accounting principle. The update is effective for fiscal years beginning after December 15, 2016. Early adoption is permitted for financial statements that have not been previously issued.second half of 2017.
In February 2016, the FASB issued ASU 2016-02,Leases, which is intended to improve financial reporting about leasing transactions. The update requires a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by lease terms of more than 12 months. The update is effective for fiscal years beginning after December 15, 2018. We are evaluating the requirements of this guidance and have not yet determined the impact of the adoption on its consolidated financial position, results of operations and cash flows, however, assets and liabilities will increase upon adoption for right-of-use assets and lease liabilities. Our future commitments under lease obligations are summarized in Note 10.
In May 2017, the FASB issued ASU 2017-09,Stock compensation (Topic 718): Scope of modification accountingwhich amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The ASU is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. We are evaluating the requirements of this guidance and have not yet determined the impact of the adoption on our consolidated financial position, results of operations and cash flows.
Recently Adopted Accounting Pronouncements
In March 2016, the FASB issued ASU 2016-09,Compensation – Stock Compensation (Topic 718):Improvements to Employee Share-Based Payment Accounting, which simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The update is effective for fiscal years beginning after December 15, 2016 and early adoption is permitted.
In June 2016, the FASB issued ASU 2016-13,Financial Instruments – Credit Losses (Topic 326), Measurement of credit losses on Financial Instruments.The update amends the FASB’s guidance on the impairment of financial instruments. The ASU adds to U.S. GAAP an impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Under the new guidance,standard requires an entity recognizesto recognize all excess tax benefits and tax deficiencies as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
In August 2016, the FASB issued ASU 2016-15,Classification of Certain Cash Receipts and Cash Payments (Topic 230) which amends ASC 230,Statement of Cash Flows to addincome tax benefit or clarify guidance on the classification of certain cash receipts and paymentsexpense in the income statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
We are evaluating the impact of each of ASU 2014-09, ASU 2015-11, ASU 2016-02, ASU 2016-09, ASU 2016-13 and ASU 2016-15 on our consolidated financial statements.
Recently Adopted Accounting Pronouncements
In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest - Simplifying the Presentation of Debt Issuance Costs. Under this guidance, debt issuance costs related to a recognized debt liability should be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The provisions of this guidance are to be applied retrospectively and are effective for interim and annual periods beginning after December 15, 2015. We adopted this guidance during the nine months ended September 30, 2016. The consolidated balance sheet as of December 31, 2015, included in these consolidated financial statements, reflects a restatement to reclassify unamortized deferred financing costs of approximately $0.2 million from other long-term assets to long-term debt. For deferred financing costs paid to secure long-term debt, we have made a policy election to present such costs as a direct deduction from the debt liability on the consolidated balance sheet.
In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. The update eliminates the requirement to retrospectively adjust financial statements for measurement-period adjustments that occur in periods after a business combination. Under the update, measurement-period adjustments are to be calculated as if they were known at the acquisition date, but are recognizeddiscrete items in the reporting period in which they occur, and such tax benefits and tax deficiencies are determined. Additional disclosuresnot included in the estimate of an entity’s annual effective tax rate, applied on a prospective basis. Further, the standard eliminates the requirement to defer the recognition of excess tax benefits until the benefit is realized through a reduction to taxes payable. All excess tax benefits previously unrecognized, along with any valuation allowance, should be recognized on a modified retrospective basis as a cumulative adjustment to retained earnings as of the date of adoption. Under ASU 2016-09, an entity that applies the treasury stock method in calculating diluted earnings per share is required to exclude excess tax benefits and deficiencies from the calculation of assumed proceeds since such amounts are recognized in the income statement. Excess tax benefits should also be classified as operating activities in the same manner as other cash flows related to income taxes on the statement of cash flows, as such excess tax benefits no longer represent financing activities since they are recognized in the income statement, and should be applied prospectively or retrospectively to all periods presented.
We adopted ASU 2016-09 as of January 1, 2017. We recorded a cumulative increase in retained earnings of $0.5 million at the beginning of the first quarter of 2017 with a corresponding increase in deferred tax assets related to the prior years’ unrecognized excess tax benefits. An equal amount of valuation allowance was also recorded against these deferred tax assets with a corresponding decrease to retained earnings resulting in no net impact to retained earnings and deferred tax assets. In addition, tax deficiencies related to vested restricted stock units and canceled stock options during the first quarter of 2017 have been recognized in the current period’s income statement.
ASU 2016-09 also allows an entity to elect as an accounting policy either to continue to estimate the total number of awards for which the requisite service period will not be rendered or to account for forfeitures for service based awards as they occur. An entity that elects to account for forfeitures as they occur should apply the accounting change on a modified retrospective basis as a cumulative effect adjustment to retained earnings as of the date of adoption. We elected as an accounting policy to account for forfeitures for service based awards as they occur, and as a result, we recorded a cumulative effect adjustment of $0.1 million to reduce retained earnings with a corresponding increase in additional paid in capital related to the prior years as required aboutunder the modified retrospective approach. The tax effect of this adjustment, which included the impact on current-period earnings. ASU 2015-16 requires prospective application to adjustments of provisional amounts that occur after the effective date. The updatea valuation allowance was effective for fiscal years beginning after December 15, 2015. We adopted this guidance during the nine months ended September 30, 2016. The adoption of ASU 2015-16 did not have a material impact on our consolidated financial statements.immaterial.
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In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. The update requires all deferred income taxes to be presented on the balance sheet as noncurrent. The new guidance is intended to simplify financial reporting by eliminating the requirement to classify deferred taxes between current and noncurrent. The update is effective for fiscal years beginning after December 15, 2016. Early adoption is permitted at the beginning of an interim or annual period. During the nine months ended September 30, 2016, we early adopted the new guidance on prospective basis and have presented all deferred tax assets and deferred tax liabilities as noncurrent in the consolidated balance sheet at September 30, 2016. Prior periods presented in the consolidated financial statements were not retrospectively adjusted.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The majority of our manufacturing and testing of products occurs in our facilities in the United States, Germany, Sweden and Spain. We sell our products globally through our distributors, direct sales force, websites and catalogs. As a result, our financial results are affected by factors such as changes in foreign currency exchange rates and weak economic conditions in foreign markets.
We collect amounts representing a substantial portion of our revenues and pay amounts representing a substantial portion of our operating expenses in foreign currencies. As a result, changes in currency exchange rates from time to time may affect our operating results.
We are exposed to market risk from changes in interest rates primarily through our financing activities. As of SeptemberJune 30, 2016,2017, we had $15.0$13.2 million outstanding under our Credit Agreement, net of deferred financing costs.
Prior to the Third Amendment, borrowingsAs noted above under the Term Loan and the DDTL accrued interest at a rate basedheading “Borrowing Arrangements”, on either the effective London Interbank Offered Rate (LIBOR) for certain interest periods selected by us, or a daily floating rate based on the BBA LIBOR as published by Reuters (or other commercially available source providing quotations of BBA LIBOR), plus in either case, a margin of 3.0%. Prior to the Third Amendment, the Revolving Line accrued interest at a rate based on either the effective LIBOR for certain interest periods selected by us, or a daily floating rate based on the BBA LIBOR, plus in either case, a margin of 2.5%. We were required to fix the rate of interest on at least 50% of the Term Loan and the DDTL through the purchase of an interest rate swap. The Term Loan and DDTL each have interest payments due at the end of the applicable LIBOR period, or monthly with respect to BBA LIBOR borrowings, and principal payments are due quarterly. The Revolving Line has interest payments due at the end of the applicable LIBOR period, or monthly with respect to BBA LIBOR borrowings. Effective June 5, 2013,May 2, 2017, we entered into anthe Credit Agreement to amend our credit facility with Bank of America, as agent, and Bank of America and Brown Brothers Harriman & Co. as lenders. Immediately after entering into this Credit Agreement, we entered into a new interest rate swap contract with an originalBank of America with a notional amount of $15.0$14.0 million and a maturitytermination date of March 29, 201830, 2022 in order to hedge the risk of changes in the effective benchmark interest rate (LIBOR) associated with our Term Loan. The swap contract converted specific variable-rate debt into fixed-rate debt and fixed the LIBOR rate associated with the Term Loan at 0.96% plus1.86%. The interest rate swap was designated as a bank margincash flow hedge instrument in accordance with ASC 815 “Derivatives and Hedging”. As a result of 3.0%. Effective November 29, 2013, we enteredentering into a secondthe new interest rate swap contract, with an original notional amount of $5.0 million and a maturity date of March 29, 2018 in order to hedgewe unwound the risk of changes in LIBOR associated with a portion of our DDTL. The swap contract converted specific variable-rate debt into fixedprevious interest rate debt and fixed LIBOR associated with half of the DDTL amount at 0.93% plus a bank margin of 3.0%. The notional amount of our derivative instruments as of September 30, 2016 was $6.5 million. These swap contracts, were associated with reducing or eliminating interest rate risk and were designated as cash flow hedge instrumentsreceived an immaterial amount in accordance with ASC 815. We use interest-rate-related derivative instruments to manage our exposure related to changes in interest rates on our variable-rate debt instruments. We do not enter into derivative instruments for any purpose other than cash flow hedging and we do not speculate using derivative instruments.
On April 24, 2015, we entered the Third Amendment which extended the maturity date of the Revolving Line to March 29, 2018 and reduced the interest rate to the London Interbank Offered Rate plus 2.25%, 2.75% and 2.75% on the Revolving Line, Term Loan and DDTL, respectively.proceeds.
As of SeptemberJune 30, 2016,2017, the weighted effective interest rates, net of the impact of our interest rate swaps, on our Term Loan , DDTL and Revolving Line borrowings were 3.96%, 3.60% and 2.77%, respectively.was 4.61%. Assuming no other changes which would affect the margin of the interest rate under our Term Loan, DDTL and Revolving Line,due to interest rate on the Term Loan being fixed at a rate of 1.86% plus a bank margin of 2.75%, there would be no effect of interest rate fluctuations on outstanding borrowings under our Credit Agreement as of SeptemberJune 30, 20162017, over the next twelve months is quantified and summarized as follows:months.
| If compared to the rate as of September 30, 2016 | Interest expense increase | |||
| (in thousands) | ||||
| Interest rates increase by 1% | $ | 71 | ||
| Interest rates increase by 2% | $ | 142 | ||
Item 4. Controls and Procedures.
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.
As required by Rules 13a-15(e) and 15d-15(e) under the Exchange Act, our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of SeptemberJune 30, 2016.2017. Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and our management necessarily was required to apply its judgment in evaluating and implementing our disclosure controls and procedures. Based upon the evaluation described above, our management concluded that our disclosure controls and procedures for the periods covered by this report were not effective, as of SeptemberJune 30, 2016,2017, because of the material weaknesses in internal control over financial reporting described in Part II, Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2015,2016, filed with the SEC on April 29,March 17, 2017 (the 2016 (the “2015 Form 10-K”)10-K). Management has concluded that the material weaknesses that were present at December 31, 20152016 were also present at SeptemberJune 30, 2016.2017.
Notwithstanding the assessment that our internal controls over financial reporting were not effective and that there were material weaknesses as identified in the 20152016 Form 10-K, we believe that our financial statements contained in our Quarterly Report on Form 10-Q for the fiscal quarter ended SeptemberJune 30, 2016,2017, fairly present our financial condition, results of operations and cash flows in all material respects.
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As previously disclosed in the 20152016 Form 10-K, to remediate the material weaknesses described under the subheading “Management’s Report on Internal Control Over Financial Reporting” in Item 9A of the 20152016 Form 10-K, we planhave continued to implement the remediation initiatives described under the subheading “Remediation Plan” in Item 9A of the 20152016 Form 10-K10-K. Specifically, we have implemented a new ERP system at MCS, continue to review authority and reporting lines at MCS, and continue to design and implement additional income tax related controls. We will continue to evaluate the remediation and may in the future implement additional measures.
We continue to take actions and make progress towards remediating the material weaknesses related to our internal control over financial reporting, as described above and in our 2015 Form 10-K. We While improvements have allocated additional resources, both internal and external, as part of our remediation plans and have taken substantial steps in designing and implementing controls to remediate the material weaknesses in our internal controls over financial reporting.However,been made, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15 and 15d-15 under the Exchange Act that occurred during the quarter ended SeptemberJune 30, 20162017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
On April 14, 2017, anticipated representatives for the estate of an individual plaintiff filed a wrongful death complaint with the Suffolk Superior Court, in the County of Suffolk, Massachusetts, against the Company and other defendants, including Biostage, Inc. (f/k/a Harvard Apparatus Regenerative Technology, Inc.), our former subsidiary that was spun off in 2013, as well as another third party. The complaint seeks payment for an unspecified amount of damages and alleges that the plaintiff sustained terminal injuries allegedly caused by products, including synthetic trachea scaffolds and bioreactors, provided by certain of the named defendants and utilized in connection with surgeries performed by third parties in 2012 and 2013. The litigation is at an early stage and the Company intends to vigorously defend this case and has contacted its liability insurance carrier to request defense and indemnification of any losses incurred in connection with this lawsuit. While we believe that such claim is without merit, we are unable to predict the ultimate outcome of such litigation.
To our knowledge, except as set forth below, and except to the extent additional factual information disclosed in this Quarterly Report on Form 10-Q relates to such risk factors, there has been no material changes in the risk factors described in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015, which was filed with the SEC on April 29, 2016, as amended by the risk factors described in “Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the period ended June 30, 2016, which was filed with the SEC on August 4, 2016.March 17, 2017.
Exhibit Index | |
| 10.1(1) | Third Amended and Restated Credit Agreement dated as of May 1, 2017, by and among Harvard Bioscience, Inc. Bank of America, N.A. and Brown Brothers Harriman & Co. |
| 31.1 | Certification of Chief Financial Officer of Harvard Bioscience, Inc., pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | Certification of Chief Executive Officer of Harvard Bioscience, Inc., pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1* | Certification of Chief Financial Officer of Harvard Bioscience, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2* | Certification of Chief Executive Officer of Harvard Bioscience, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101.INS | XBRL Instance Document |
| 101.SCH | XBRL Taxonomy Extension Schema Document |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.LAB | XBRL Taxonomy Extension Labels Linkbase Document |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
| * | This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. |
| (1) | Previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q (filed May 9, 2017) and incorporated by reference thereto. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by undersigned thereunto duly authorized.
Date: NovemberAugust 3, 20162017
| HARVARD BIOSCIENCE, INC. | ||||
| By: | /S/ JEFFREY A. DUCHEMIN | |||
| Jeffrey A. Duchemin | ||||
| Chief Executive Officer | ||||
| By: | /S/ ROBERT E. GAGNON | |||
| Robert E. Gagnon | ||||
| Chief | ||||
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INDEX TO EXHIBITS
| * | This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. |
| (1) | Previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q (filed May 8, 2017) and incorporated by reference thereto. |
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