UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
________________
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended OctoberApril 1, 20222023
OR
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☐ | 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: 001-37844
BIOVENTUS INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware | | 81-0980861 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
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4721 Emperor Boulevard, Suite 100 | | |
Durham, North Carolina | | 27703 |
(Address of Principal Executive Offices) | | (Zip Code) |
(919) 474-6700
(Registrant’s Telephone Number, Including Area CodeCode)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Class A Common Stock, $0.001 par value per share | BVS | The Nasdaq Global Select Market |
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. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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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 ☐ No ☒
As of November 16, 2022,May 12, 2023, there were 61,951,85862,486,725 shares of Class A common stock outstanding and 15,786,737 shares of Class B common stock outstanding.
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| BIOVENTUS INC. | |
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| TABLE OF CONTENTS | |
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
As used in this Quarterly Report on Form 10-Q, unless expressly indicated or the context otherwise requires, references to "Bioventus," "we," "us," "our," "the Company," and similar references refer to Bioventus Inc. and its consolidated subsidiaries, including Bioventus LLC (BV LLC)(“BV LLC”).
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), and Section 27A of the Securities Act of 1933, as amended (Securities Act), concerning our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business operations and financial performance and condition. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements including, without limitation, statements regarding our business strategy, including, without limitation, expectations relating to our recent acquisitions of Misonix Bioness and CartiHeal,Bioness, expected expansion of our pipeline and research and development investment, new therapy launches, expected costs related to, and potential future options for, MOTYS, recent dispositions of non-core assets, our operations and expected financial performance and condition, and impacts of the COVID-19 pandemic and inflation. In some cases, you can identify forward-looking statements by terminology such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “potential,” “positioned,” “seek,” “should,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words.
Forward-looking statements are based on management’s current expectations, estimates, forecasts and projections about our business and the industry in which we operate, and management’s beliefs and assumptions are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this Quarterly Report on Form 10-Q may turn out to be inaccurate. Furthermore, if the forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. Important factors that may cause actual results to differ materially from current expectations include, among other things: the risk that thepreviously identified material weakness we identifiedweaknesses or a new material riskweaknesses could adversely affect our ability to report our results of operations and financial condition accurately and in a timely manner; our ability to complete acquisitions or successfully integrate new businesses, such as CartiHeal, products or technologies in a cost-effective and non-disruptive manner; we might not be able to continue to fund our operations for at least the next twelve months as a going concern; we might not meet certain of our debt covenants under our Credit Agreement and might be required to repay our indebtedness; risks associated with the disposition of our Wound Business and expected impacts on our business; restrictions on operations and other costs associated with our indebtedness; our ability to complete acquisitions or successfully integrate new businesses, products or technologies in a cost-effective and non-disruptive manner; we might notmaintain cash at financial institutions, often in balance that exceed federally insured limits; we are subject to securities class action litigation and may be ablesubject to fundsimilar or other litigation in the remainder of the deferred consideration for the acquisition of CartiHeal as it becomes due;future, which will require significant management time and attention, result in significant legal expenses and may result in unfavorable outcomes; our business may continueability to experience adverse impacts as a result of the COVID-19 pandemic;maintain our competitive position depends on our ability to attract, retain and motivate our senior management team and highly qualified personnel; we are highly dependent on a limited number of products; our long-term growth depends on our ability to develop, acquire and commercialize new products, line extensions or expanded indications; we may be unable to successfully commercialize newly developed or acquired products or therapies in the United States; demand for our existing portfolio of products and any new products, line extensions or expanded indications depends on the continued and future acceptance of our products by physicians, patients, third-party payers and others in the medical community; the proposed down classification of non-invasive bone growth stimulators, including our Exogen system, by the U.S. Food and Drug Administration (FDA) could increase future competition for bone growth stimulators and otherwise adversely affect the Company’s sales of Exogen; failure to achieve and maintain adequate levels of coverage and/or reimbursement for our products or future products, the procedures using our products, such as our hyaluronic acid (HA) viscosupplements, or future products we may seek to commercialize, such as our recently acquired Agili-C product;commercialize; pricing pressure and other competitive factors; governments outside the United States might not provide coverage or reimbursement of our products; we compete and may compete in the future against other companies, some of which have longer operating histories, more established products or greater resources than we do; the reclassification of our HA products from medical devices to drugs in the United States by the FDA could negatively impact our ability to market these products and may require that we conduct costly additional clinical studies to support current or future indications for use of those products; our ability to maintain our competitive position depends on our ability to attract, retain and motivate our senior management team and highly qualified personnel; our failure to properly manage our anticipated growth and strengthen our brands; risks related to product liability claims; fluctuations in demand for our products; issues relating to the supply of our products, potential supply chain disruptions and the increased cost of parts and components used to manufacture our products due to inflation; our reliance on a limited number of third-party manufacturers to manufacture certain of our products; if our facilities are damaged or become
inoperable, we will be unable to continue to research, develop and manufacture our products; failure to maintain contractual relationships; security breaches, unauthorized disclosure of information, denial of service attacks or the perception that confidential information in our possession is not secure; failure of key information technology and communications systems, process or sites; risks related to international sales and operations; risks related to our debt and future capital needs; failure to comply with extensive governmental regulation relevant to us and our products; we may be subject to enforcement action if we engage in improper claims submission practices and resulting audits or denials of our claims by government agencies could reduce our net sales or profits; the FDA regulatory process is expensive, time-consuming and uncertain, and the failure to obtain and maintain required regulatory clearances and approvals could prevent us from commercializing our products; if clinical studies of our future productsproduct candidates do not produce results necessary to support regulatory clearance or approval in the United States or elsewhere, we will be unable to expand the indications for or commercialize these products; legislative or regulatory reforms; our business may continue to experience adverse impacts as a result of the COVID-19 pandemic; risks related to intellectual property matters; and other important factors described in Part I. Item 1A. Risk Factors in our 2021 Annual Report on Form 10-K for the year ended December 31, 2022, as updated by our subsequent Quarterly Reports on Form 10-Q, this Quarterly Report on Form 10-Q, and as may be further updated from time to time in our other filings with the SEC. You are urged to consider these factors carefully in evaluating these forward-looking statements. These forward-looking statements speak only as of the date hereof. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.
PART I. FINANCIAL INFORMATION
Item 1. Financial StatementsStatements.
Bioventus Inc.
Consolidated condensed statementsCondensed Statements of operationsOperations and comprehensive (loss) incomeComprehensive Loss
Three Months Ended April 1, 2023 and nine months ended October 1,April 2, 2022 and October 2, 2021
(Amounts in thousands, except share amounts)
(Unaudited)
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| Three Months Ended | | Nine Months Ended |
| October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 |
Net sales | $ | 128,662 | | | $ | 108,890 | | | $ | 386,283 | | | $ | 300,484 | |
Cost of sales (including depreciation and amortization of $11,331, $6,637, $30,233 and $17,491, respectively) | 44,127 | | | 29,821 | | | 129,392 | | | 85,546 | |
Gross profit | 84,535 | | | 79,069 | | | 256,891 | | | 214,938 | |
Selling, general and administrative expense | 79,194 | | | 69,636 | | | 254,938 | | | 173,372 | |
Research and development expense | 5,840 | | | 6,153 | | | 19,134 | | | 11,936 | |
Restructuring costs | 575 | | | 1,798 | | | 2,159 | | | 1,798 | |
Change in fair value of contingent consideration | 3,142 | | | 651 | | | 3,684 | | | 1,292 | |
Depreciation and amortization | 7,442 | | | 1,878 | | | 13,392 | | | 5,655 | |
Impairment of goodwill | 189,197 | | | — | | | 189,197 | | | — | |
Impairment of variable interest entity assets | — | | | — | | | — | | | 5,674 | |
Operating (loss) income | (200,855) | | | (1,047) | | | (225,613) | | | 15,211 | |
Interest expense, net | 9,894 | | | 1,347 | | | 10,922 | | | 152 | |
Other (income) expense | (23,272) | | | 757 | | | (22,350) | | | 2,821 | |
Other (income) expense | (13,378) | | | 2,104 | | | (11,428) | | | 2,973 | |
(Loss) income before income taxes | (187,477) | | | (3,151) | | | (214,185) | | | 12,238 | |
Income tax (benefit) expense, net | (41,779) | | | (882) | | | (45,667) | | | 759 | |
Net (loss) income | (145,698) | | | (2,269) | | | (168,518) | | | 11,479 | |
Loss attributable to noncontrolling interest | 37,453 | | | 1,198 | | | 41,744 | | | 8,260 | |
Net (loss) income attributable to Bioventus Inc. | $ | (108,245) | | | $ | (1,071) | | | $ | (126,774) | | | $ | 19,739 | |
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Net (loss) income | $ | (145,698) | | | $ | (2,269) | | | $ | (168,518) | | | $ | 11,479 | |
Other comprehensive loss, net of tax | | | | | | | |
Change in foreign currency translation adjustments | (723) | | | (366) | | | (1,912) | | | (1,225) | |
Comprehensive loss | (146,421) | | | (2,635) | | | (170,430) | | | 10,254 | |
Comprehensive loss attributable to noncontrolling interest | 37,600 | | | 1,300 | | | 42,137 | | | 8,182 | |
Comprehensive (loss) income attributable to Bioventus Inc. | $ | (108,821) | | | $ | (1,335) | | | $ | (128,293) | | | $ | 18,436 | |
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Loss per share of Class A common stock, basic and diluted(1): | $ | (1.76) | | | $ | (0.03) | | | $ | (2.07) | | | $ | (0.15) | |
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Weighted-average shares of Class A common stock outstanding, basic and diluted(1): | 61,674,254 | | | 41,837,581 | | 61,208,941 | | 41,816,706 |
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(1) Per share information for the nine months ended October 2, 2021 represents loss per share of Class A common stock and weighted-average shares of Class A common stock outstanding from February 16, 2021 through October 2, 2021, the period following Bioventus Inc.'s initial public offering and related transactions described in Note 1. Organization and Note 8. Earnings per share within the Notes to the unaudited condensed consolidated financial statements. |
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| | | Three Months Ended |
| | | | | April 1, 2023 | | April 2, 2022 |
Net sales | | | | | $ | 119,059 | | | $ | 117,290 | |
Cost of sales (including depreciation and amortization of $14,339, $9,218, respectively) | | | | | 45,140 | | | 41,588 | |
Gross profit | | | | | 73,919 | | | 75,702 | |
Selling, general and administrative expense | | | | | 80,858 | | | 86,124 | |
Research and development expense | | | | | 3,771 | | | 6,928 | |
Restructuring costs | | | | | 317 | | | 577 | |
Change in fair value of contingent consideration | | | | | 287 | | | 269 | |
Depreciation and amortization | | | | | 2,129 | | | 3,254 | |
Impairment of assets | | | | | 78,615 | | | — | |
Operating loss | | | | | (92,058) | | | (21,450) | |
Interest expense (income), net | | | | | 9,694 | | | (1,550) | |
Other income | | | | | (1,588) | | | (363) | |
Other expense (income) | | | | | 8,106 | | | (1,913) | |
Loss before income taxes | | | | | (100,164) | | | (19,537) | |
Income tax benefit, net | | | | | (146) | | | (5,132) | |
Net loss from continuing operations | | | | | (100,018) | | | (14,405) | |
Loss from discontinued operations, net of tax | | | | | (74,429) | | | (401) | |
Net loss | | | | | (174,447) | | | (14,806) | |
Loss attributable to noncontrolling interest - continuing operations | | | | | 20,360 | | | 3,529 | |
Loss attributable to noncontrolling interest - discontinued operations | | | | | 14,937 | | | — | |
Net loss attributable to Bioventus Inc. | | | | | $ | (139,150) | | | $ | (11,277) | |
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Net loss from continuing operations | | | | | $ | (100,018) | | | $ | (14,405) | |
Other comprehensive loss, net of tax | | | | | | | |
Change in foreign currency translation adjustments | | | | | 657 | | | (682) | |
Comprehensive loss | | | | | (99,361) | | | (15,087) | |
Comprehensive loss attributable to noncontrolling interest - continuing operations | | | | | 20,226 | | | 3,669 | |
Comprehensive loss attributable to noncontrolling interest - discontinued operations | | | | | 14,937 | | | — | |
Comprehensive loss attributable to Bioventus Inc. | | | | | $ | (64,198) | | | $ | (11,418) | |
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Loss per share of Class A common stock from continuing operations, basic and diluted: | | | | | $ | (1.28) | | | $ | (0.18) | |
Loss per share of Class A common stock from discontinued operations, basic and diluted: | | | | | (0.96) | | | (0.01) | |
Loss per share of Class A common stock, basic and diluted | | | | | $ | (2.24) | | | $ | (0.19) | |
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Weighted-average shares of Class A common stock outstanding, basic and diluted: | | | | | 62,124,752 | | 60,484,969 |
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The accompanying notes are an integral part of these consolidated financial statements.
Bioventus Inc.
Consolidated condensed balance sheetsCondensed Balance Sheets as of OctoberApril 1, 2022 (Unaudited)2023 and December 31, 20212022 (Unaudited)
(Amounts in thousands, except share amounts)
| | | October 1, 2022 | | December 31, 2021 | | April 1, 2023 | | December 31, 2022 |
Assets | Assets | | | | Assets | | | |
Current assets: | Current assets: | | Current assets: | |
Cash and cash equivalents | Cash and cash equivalents | $ | 34,359 | | | $ | 43,933 | | Cash and cash equivalents | $ | 47,102 | | | $ | 30,186 | |
Restricted cash | 23 | | | 5,280 | | |
| Accounts receivable, net | Accounts receivable, net | 132,185 | | | 124,963 | | Accounts receivable, net | 118,544 | | | 136,295 | |
Inventory | Inventory | 76,952 | | | 61,688 | | Inventory | 87,953 | | | 84,766 | |
Prepaid and other current assets | Prepaid and other current assets | 27,563 | | | 27,239 | | Prepaid and other current assets | 17,192 | | | 18,551 | |
Assets held for sale | | Assets held for sale | 37,873 | | | — | |
Current assets attributable to discontinued operations | | Current assets attributable to discontinued operations | — | | | 2,777 | |
Total current assets | Total current assets | 271,082 | | | 263,103 | | Total current assets | 308,664 | | | 272,575 | |
| Restricted cash, less current portion | — | | | 50,000 | | |
Property and equipment, net | Property and equipment, net | 26,643 | | | 22,985 | | Property and equipment, net | 36,556 | | | 27,456 | |
Goodwill | Goodwill | 15,359 | | | 147,623 | | Goodwill | 7,462 | | | 7,462 | |
Intangible assets, net | Intangible assets, net | 1,055,601 | | | 695,193 | | Intangible assets, net | 516,039 | | | 639,851 | |
Operating lease assets | Operating lease assets | 16,304 | | | 17,186 | | Operating lease assets | 16,063 | | | 16,690 | |
Deferred tax assets | — | | | 481 | | |
Investment and other assets | Investment and other assets | 13,033 | | | 29,291 | | Investment and other assets | 2,620 | | | 2,621 | |
Long-term assets attributable to discontinued operations | | Long-term assets attributable to discontinued operations | — | | | 405,994 | |
Total assets | Total assets | $ | 1,398,022 | | | $ | 1,225,862 | | Total assets | $ | 887,404 | | | $ | 1,372,649 | |
| Liabilities and Stockholders' Equity | Liabilities and Stockholders' Equity | | Liabilities and Stockholders' Equity | |
Current liabilities: | Current liabilities: | | Current liabilities: | |
Accounts payable | Accounts payable | $ | 19,075 | | | $ | 16,915 | | Accounts payable | $ | 32,828 | | | $ | 36,697 | |
Accrued liabilities | Accrued liabilities | 116,890 | | | 131,473 | | Accrued liabilities | 115,769 | | | 111,570 | |
Accrued equity-based compensation | — | | | 10,875 | | |
Current portion of long-term debt | Current portion of long-term debt | 31,302 | | | 18,038 | | Current portion of long-term debt | 41,320 | | | 33,056 | |
Current portion of deferred consideration | 117,615 | | | — | | |
| Other current liabilities | Other current liabilities | 3,491 | | | 3,558 | | Other current liabilities | 4,273 | | | 3,607 | |
Liabilities held for sale | | Liabilities held for sale | 1,873 | | | — | |
Current liabilities attributable to discontinued operations | | Current liabilities attributable to discontinued operations | — | | | 119,087 | |
Total current liabilities | Total current liabilities | 288,373 | | | 180,859 | | Total current liabilities | 196,063 | | | 304,017 | |
| Long-term debt, less current portion | Long-term debt, less current portion | 393,102 | | | 339,644 | | Long-term debt, less current portion | 404,265 | | | 385,010 | |
Deferred income taxes | Deferred income taxes | 159,300 | | | 133,518 | | Deferred income taxes | 351 | | | 2,248 | |
Deferred consideration | 71,923 | | | — | | |
| Contingent consideration | Contingent consideration | 81,914 | | | 16,329 | | Contingent consideration | 17,718 | | | 17,431 | |
Other long-term liabilities | Other long-term liabilities | 24,264 | | | 21,723 | | Other long-term liabilities | 28,645 | | | 22,810 | |
Long-term liabilities attributable to discontinued operations | | Long-term liabilities attributable to discontinued operations | — | | | 228,911 | |
Total liabilities | Total liabilities | 1,018,876 | | | 692,073 | | Total liabilities | 647,042 | | | 960,427 | |
| Commitments and contingencies (Note 11) | Commitments and contingencies (Note 11) | | Commitments and contingencies (Note 11) | |
| Stockholders’ Equity: | | |
Stockholders’ Equity | | Stockholders’ Equity | |
Preferred stock, $0.001 par value, 10,000,000 shares authorized, 0 shares issued | Preferred stock, $0.001 par value, 10,000,000 shares authorized, 0 shares issued | | Preferred stock, $0.001 par value, 10,000,000 shares authorized, 0 shares issued | |
Class A common stock, $0.001 par value, 250,000,000 shares authorized as of October 1, 2022 and December 31, 2021, 61,777,875 and 59,548,504 shares issued and outstanding as of October 1, 2022 and December 31, 2021, respectively | 64 | | | 59 | | |
Class B common stock, $0.001 par value, 50,000,000 shares authorized, 15,786,737 shares issued and outstanding as of October 1, 2022 and December 31, 2021 | 16 | | | 16 | | |
Class A common stock, $0.001 par value, 250,000,000 shares authorized as of April 1, 2023 and December 31, 2022, 62,507,917 and 62,063,014 shares issued and outstanding as of April 1, 2023 and December 31, 2022, respectively | | Class A common stock, $0.001 par value, 250,000,000 shares authorized as of April 1, 2023 and December 31, 2022, 62,507,917 and 62,063,014 shares issued and outstanding as of April 1, 2023 and December 31, 2022, respectively | 63 | | | 62 | |
Class B common stock, $0.001 par value, 50,000,000 shares authorized, 15,786,737 shares issued and outstanding as of April 1, 2023 and December 31, 2022 | | Class B common stock, $0.001 par value, 50,000,000 shares authorized, 15,786,737 shares issued and outstanding as of April 1, 2023 and December 31, 2022 | 16 | | | 16 | |
Additional paid-in capital | Additional paid-in capital | 478,033 | | | 465,272 | | Additional paid-in capital | 492,475 | | | 490,576 | |
Accumulated deficit | Accumulated deficit | (133,376) | | | (6,602) | | Accumulated deficit | (304,456) | | | (165,306) | |
Accumulated other comprehensive (loss) income | (1,340) | | | 179 | | |
Accumulated other comprehensive income (loss) | | Accumulated other comprehensive income (loss) | 413 | | | (110) | |
Total stockholders’ equity attributable to Bioventus Inc. | Total stockholders’ equity attributable to Bioventus Inc. | 343,397 | | | 458,924 | | Total stockholders’ equity attributable to Bioventus Inc. | 188,511 | | | 325,238 | |
Noncontrolling interest | Noncontrolling interest | 35,749 | | | 74,865 | | Noncontrolling interest | 51,851 | | | 86,984 | |
Total stockholders’ equity | Total stockholders’ equity | 379,146 | | | 533,789 | | Total stockholders’ equity | 240,362 | | | 412,222 | |
Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | $ | 1,398,022 | | | $ | 1,225,862 | | Total liabilities and stockholders’ equity | $ | 887,404 | | | $ | 1,372,649 | |
The accompanying notes are an integral part of these consolidated financial statements.
Bioventus Inc.
Consolidated condensed statementsCondensed Statements of changesChanges in stockholders’ and members’ equityStockholders’ Equity
Three Months Ended April 1, 2023 and nine months ended October 1,April 2, 2022 and October 2, 2021
(Amounts in thousands, except share amounts)
(Unaudited)
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Three Months Ended October 1, 2022 |
| Class A Common Stock | | Class B Common Stock | | | | | | | | | | |
| Shares | Amount | | Shares | Amount | | Additional Paid-in Capital | | Accumulated other comprehensive (loss) income | | Accumulated Deficit | | Non- controlling interest | | Total Stockholders' equity |
Balance at July 2, 2022 | 61,656,499 | | $ | 64 | | | 15,786,737 | | $ | 16 | | | $ | 473,796 | | | $ | (764) | | | $ | (25,131) | | | $ | 72,209 | | | $ | 520,190 | |
Issuance of Class A common stock for equity plans | 121,376 | | — | | | — | | — | | | 482 | | | — | | | — | | | — | | | 482 | |
Net (loss) income | — | | — | | | — | | — | | | — | | | — | | | (108,245) | | | (37,453) | | | (145,698) | |
Equity based compensation | — | | — | | | — | | — | | | 3,755 | | | — | | | — | | | 893 | | | 4,648 | |
Deconsolidation of noncontrolling interest | — | | — | | | — | | — | | | — | | | — | | | — | | | 247 | | | 247 | |
Translation adjustment | — | | — | | | — | | — | | | — | | | (576) | | | — | | | (147) | | | (723) | |
Balance at October 1, 2022 | 61,777,875 | | $ | 64 | | | 15,786,737 | | $ | 16 | | | $ | 478,033 | | | $ | (1,340) | | | $ | (133,376) | | | $ | 35,749 | | | $ | 379,146 | |
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Three Months Ended April 1, 2023 |
| Class A Common Stock | | Class B Common Stock | | | | | | | | | | |
| Shares | Amount | | Shares | Amount | | Additional Paid-in Capital | | Accumulated other comprehensive (loss) income | | Accumulated Deficit | | Non- controlling interest | | Total Stockholders' equity |
Balance at December 31, 2022 | 62,063,014 | | $ | 62 | | | 15,786,737 | | $ | 16 | | | $ | 490,576 | | | $ | (110) | | | $ | (165,306) | | | $ | 86,984 | | | $ | 412,222 | |
Issuance of Class A common stock for equity plans | 444,903 | | 1 | | | — | | — | | | 360 | | | — | | | — | | | (277) | | | 84 | |
Net loss | — | | — | | | — | | — | | | — | | | — | | | (139,150) | | | (35,297) | | | (174,447) | |
Equity based compensation | — | | — | | | — | | — | | | 1,539 | | | — | | | — | | | 307 | | | 1,846 | |
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Translation adjustment | — | | — | | | — | | — | | | — | | | 523 | | | — | | | 134 | | | 657 | |
Balance at April 1, 2023 | 62,507,917 | | $ | 63 | | | 15,786,737 | | $ | 16 | | | $ | 492,475 | | | $ | 413 | | | $ | (304,456) | | | $ | 51,851 | | | $ | 240,362 | |
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Three Months Ended October 2, 2021 |
| Class A Common Stock | | Class B Common Stock | | | | | | | | | | |
| Shares | Amount | | Shares | Amount | | Additional Paid-in Capital | | Accumulated other comprehensive (loss) income | | Accumulated Deficit | | Non- controlling interest | | Total Stockholders' equity |
Balance at July 3, 2021 | 41,062,652 | | $ | 41 | | | 15,786,737 | | $ | 16 | | | $ | 146,199 | | | $ | 468 | | | $ | (5,167) | | | $ | 77,807 | | | $ | 219,364 | |
Effect of Organizational Transactions | — | | — | | | — | | — | | | 7,437 | | | — | | | — | | | — | | | 7,437 | |
Issuance of Class A common stock for equity plans | 34,640 | | — | | | — | | — | | | 417 | | | — | | | — | | | — | | | 417 | |
Distribution to Controlling LLC Owner | — | | — | | | — | | — | | | — | | | — | | | — | | | (24) | | | (24) | |
Net loss | — | | — | | | — | | — | | | — | | | — | | | (1,071) | | | (1,198) | | | (2,269) | |
Equity based compensation | — | | — | | | — | | — | | | 4,427 | | | — | | | — | | | 1,511 | | | 5,938 | |
Translation adjustment | — | | — | | | — | | — | | | — | | | (264) | | | — | | | (102) | | | (366) | |
Balance at October 2, 2021 | 41,097,292 | | $ | 41 | | | 15,786,737 | | $ | 16 | | | $ | 158,480 | | | $ | 204 | | | $ | (6,238) | | | $ | 77,994 | | | $ | 230,497 | |
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Three Months Ended April 2, 2022 |
| Class A Common Stock | | Class B Common Stock | | | | | | | | | | |
| Shares | Amount | | Shares | Amount | | Additional Paid-in Capital | | Accumulated other comprehensive (loss) income | | Accumulated Deficit | | Non- controlling interest | | Total Stockholders' equity |
Balance at December 31, 2021 | 59,548,504 | | $ | 59 | | | 15,786,737 | | $ | 16 | | | $ | 473,318 | | | $ | 179 | | | $ | (6,602) | | | $ | 140,686 | | | $ | 607,656 | |
Issuance of Class A common stock for equity plans | 1,808,766 | | 3 | | | — | | — | | | 4,729 | | | — | | | — | | | (2,652) | | | 2,080 | |
Deferred taxes on equity rebalancing | — | | — | | | — | | — | | | (1,977) | | | — | | | — | | | — | | | (1,977) | |
Net loss | — | | — | | | — | | — | | | — | | | — | | | (11,277) | | | (3,529) | | | (14,806) | |
Equity based compensation | — | | — | | | — | | — | | | 3,943 | | | — | | | — | | | 946 | | | 4,889 | |
Tax withholdings on equity compensation awards | — | | — | | | — | | — | | | (3,352) | | | — | | | — | | | — | | | (3,352) | |
Translation adjustment | — | | — | | | — | | — | | | — | | | (542) | | | — | | | (140) | | | (682) | |
Balance at April 2, 2022 | 61,357,270 | | $ | 62 | | | 15,786,737 | | $ | 16 | | | $ | 476,661 | | | $ | (363) | | | $ | (17,879) | | | $ | 135,311 | | | $ | 593,808 | |
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Nine Months Ended October 1, 2022 |
| Class A Common Stock | | Class B Common Stock | | | | | | | | | | |
| Shares | Amount | | Shares | Amount | | Additional Paid-in Capital | | Accumulated other comprehensive (loss) income | | Accumulated Deficit | | Non- controlling interest | | Total Stockholders' equity |
Balance at December 31, 2021 | 59,548,504 | | $ | 59 | | | 15,786,737 | | $ | 16 | | | $ | 465,272 | | | $ | 179 | | | $ | (6,602) | | | $ | 74,865 | | | $ | 533,789 | |
Issuance of Class A common stock for equity plans | 2,229,371 | | 5 | | | — | | — | | | 4,734 | | | — | | | — | | | — | | | 4,739 | |
Net loss | — | | — | | | — | | — | | | — | | | — | | | (126,774) | | | (41,744) | | | (168,518) | |
Equity based compensation | — | | — | | | — | | — | | | 11,379 | | | — | | | — | | | 2,774 | | | 14,153 | |
Deconsolidation of noncontrolling interest | — | | — | | | — | | — | | | — | | | — | | | — | | | 247 | | | 247 | |
Tax withholdings on equity compensation awards | — | | — | | | — | | — | | | (3,352) | | | — | | | — | | | — | | | (3,352) | |
Translation adjustment | — | | — | | | — | | — | | | — | | | (1,519) | | | — | | | (393) | | | (1,912) | |
Balance at October 1, 2022 | 61,777,875 | | $ | 64 | | | 15,786,737 | | $ | 16 | | | $ | 478,033 | | | $ | (1,340) | | | $ | (133,376) | | | $ | 35,749 | | | $ | 379,146 | |
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Nine Months Ended October 2, 2021 |
| | | Class A Common Stock | | Class B Common Stock | | | | | | | | | | |
| Members’ Equity | | Shares | Amount | | Shares | Amount | | Additional Paid-in Capital | | Accumulated other comprehensive (loss) income | | Accumulated Deficit | | Non- controlling Interest | | Total Stockholders' and Members’ Equity |
Balance at December 31, 2020 | $ | 144,160 | | | — | | $ | — | | | — | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 144,160 | |
Prior to Organizational Transactions: |
Refund from members | 123 | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | 123 | |
Equity-based compensation | (39) | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (39) | |
Net income | 25,977 | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | 25,977 | |
Other comprehensive loss | (1,507) | | | — | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (1,507) | |
Effect of Organizational Transactions | (168,714) | | | 31,838,589 | | 32 | | | 15,786,737 | | 16 | | | 41,060 | | | — | | | — | | | 79,119 | | | (48,487) | |
Subsequent to Organizational Transactions: |
Initial public offering, net of offering costs | — | | | 9,200,000 | | 9 | | | — | | — | | | 106,441 | | | — | | | — | | | — | | | 106,450 | |
Issuance of Class A common stock for equity plans | — | | | 58,703 | | — | | | — | | — | | | 731 | | | — | | | — | | | — | | | 731 | |
Distribution to Continuing LLC Owner | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | (215) | | | (215) | |
Net loss | — | | | — | | — | | | — | | — | | | — | | | — | | | (6,238) | | | (8,260) | | | (14,498) | |
Deconsolidation of variable interest entity | — | | | — | | — | | | — | | — | | | — | | | — | | | — | | | 3,746 | | | 3,746 | |
Equity based compensation | — | | | — | | — | | | — | | — | | | 10,248 | | | — | | | — | | | 3,526 | | | 13,774 | |
Other comprehensive income | — | | | — | | — | | | — | | — | | | — | | | 204 | | | — | | | 78 | | | 282 | |
Balance at October 2, 2021 | $ | — | | | 41,097,292 | $ | 41 | | | 15,786,737 | $ | 16 | | | $ | 158,480 | | | $ | 204 | | | $ | (6,238) | | | $ | 77,994 | | | $ | 230,497 | |
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The accompanying notes are an integral part of these consolidated financial statements.
Bioventus Inc.
Consolidated condensed statementsCondensed Statements of cash flowsCash Flows
Nine months ended OctoberThree Months Ended April 1, 20222023 and OctoberApril 2, 20212022
(Amounts in thousands)
(Unaudited)
| | | Nine Months Ended | | Three Months Ended |
| | October 1, 2022 | | October 2, 2021 | | April 1, 2023 | | April 2, 2022 |
Operating activities: | Operating activities: | | | | Operating activities: | | | |
Net (loss) income | $ | (168,518) | | | $ | 11,479 | | |
Adjustments to reconcile net (loss) income to net cash from operating activities: | | |
Net loss | | Net loss | $ | (174,447) | | | $ | (14,806) | |
Less: Loss from discontinued operations, net of tax | | Less: Loss from discontinued operations, net of tax | (74,429) | | | (401) | |
Loss from continuing operations | | Loss from continuing operations | (100,018) | | | (14,405) | |
Adjustments to reconcile net loss to net cash from operating activities: | | Adjustments to reconcile net loss to net cash from operating activities: | |
Depreciation and amortization | Depreciation and amortization | 43,643 | | | 23,185 | | Depreciation and amortization | 16,473 | | | 12,479 | |
Provision (recovery) for expected credit losses | 3,874 | | | (138) | | |
Equity-based compensation from 2021 Stock Incentive Plan | 14,153 | | | 13,735 | | |
Profits interest plan, liability-classified and other equity awards compensation | — | | | (24,356) | | |
Provision for expected credit losses | | Provision for expected credit losses | 1,079 | | | 1,152 | |
Equity based compensation | | Equity based compensation | 1,846 | | | 4,889 | |
Change in fair value of contingent consideration | Change in fair value of contingent consideration | 3,684 | | | 1,292 | | Change in fair value of contingent consideration | 287 | | | 269 | |
Change in fair value of interest rate swap | Change in fair value of interest rate swap | (6,418) | | | (1,391) | | Change in fair value of interest rate swap | — | | | (3,924) | |
Deferred income taxes | Deferred income taxes | (47,154) | | | (1,703) | | Deferred income taxes | (2,664) | | | (17,018) | |
Change in fair value of Equity Participation Rights | — | | | (2,774) | | |
Impairment of goodwill | 189,197 | | | — | | |
Impairments related to variable interest entity | — | | | 7,043 | | |
Revaluation gain on previously held equity interest in CartiHeal | (23,709) | | | — | | |
Unrealized loss on foreign currency fluctuations | 2,926 | | | 1,224 | | |
Impairment of assets | | Impairment of assets | 78,615 | | | — | |
Foreign currency fluctuations | | Foreign currency fluctuations | 747 | | | 44 | |
Other, net | Other, net | 166 | | | 407 | | Other, net | 224 | | | 203 | |
Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | | Changes in operating assets and liabilities: | |
Accounts receivable | Accounts receivable | (12,840) | | | (13,149) | | Accounts receivable | 13,162 | | | 4,416 | |
Inventories | Inventories | (8,621) | | | 1,496 | | Inventories | (5,294) | | | 326 | |
Accounts payable and accrued expenses | Accounts payable and accrued expenses | (10,947) | | | 7,247 | | Accounts payable and accrued expenses | 2,331 | | | (7,915) | |
Other current and noncurrent assets and liabilities | Other current and noncurrent assets and liabilities | 1,783 | | | (13,723) | | Other current and noncurrent assets and liabilities | (2,129) | | | (1,535) | |
Net cash from operating activities - continuing operations | | Net cash from operating activities - continuing operations | 4,659 | | | (21,019) | |
Net cash from operating activities - discontinued operations | | Net cash from operating activities - discontinued operations | (2,169) | | | — | |
Net cash from operating activities | Net cash from operating activities | (18,781) | | | 9,874 | | Net cash from operating activities | 2,490 | | | (21,019) | |
Investing activities: | Investing activities: | | Investing activities: | |
Acquisition of CartiHeal, net of cash acquired | (104,841) | | | — | | |
Acquisition of Bioness, net of cash acquired | — | | | (46,790) | | |
Acquisitions, net of cash acquired | | Acquisitions, net of cash acquired | — | | | (236) | |
Purchase of property and equipment | Purchase of property and equipment | (6,639) | | | (4,568) | | Purchase of property and equipment | (3,560) | | | (2,960) | |
Investments and acquisition of distribution rights | Investments and acquisition of distribution rights | (1,478) | | | (11,124) | | Investments and acquisition of distribution rights | — | | | (1,478) | |
Other | (75) | | | — | | |
| Net cash from investing activities - continuing operations | | Net cash from investing activities - continuing operations | (3,560) | | | (4,674) | |
Net cash from investing activities - discontinued operations | | Net cash from investing activities - discontinued operations | (11,506) | | | — | |
Net cash from investing activities | Net cash from investing activities | (113,033) | | | (62,482) | | Net cash from investing activities | (15,066) | | | (4,674) | |
Financing activities: | Financing activities: | | Financing activities: | |
Proceeds from issuance of Class A common stock sold in initial public offering, net of underwriting discounts and offering costs | — | | | 107,777 | | |
Proceeds from issuance of Class A and B common stock | Proceeds from issuance of Class A and B common stock | 4,739 | | | 747 | | Proceeds from issuance of Class A and B common stock | 84 | | | 2,080 | |
Tax withholdings on equity-based compensation | Tax withholdings on equity-based compensation | (3,352) | | | — | | Tax withholdings on equity-based compensation | — | | | (3,352) | |
Borrowing on revolver | Borrowing on revolver | 25,000 | | | — | | Borrowing on revolver | 49,000 | | | 15,000 | |
Payment on revolver | Payment on revolver | (25,000) | | | — | | Payment on revolver | (20,000) | | | — | |
Proceeds from the issuance of long-term debt, net of issuance costs | 79,659 | | | — | | |
Debt refinancing costs | | Debt refinancing costs | (1,668) | | | — | |
Payments on long-term debt | Payments on long-term debt | (13,528) | | | (11,250) | | Payments on long-term debt | — | | | (4,509) | |
Distributions to members | — | | | (183) | | |
Other, net | Other, net | (4) | | | (28) | | Other, net | (36) | | | (14) | |
Net cash from financing activities | Net cash from financing activities | 67,514 | | | 97,063 | | Net cash from financing activities | 27,380 | | | 9,205 | |
Effect of exchange rate changes on cash | Effect of exchange rate changes on cash | (531) | | | (377) | | Effect of exchange rate changes on cash | 461 | | | (71) | |
Net change in cash, cash equivalents and restricted cash | Net change in cash, cash equivalents and restricted cash | (64,831) | | | 44,078 | | Net change in cash, cash equivalents and restricted cash | 15,265 | | | (16,559) | |
Cash, cash equivalents and restricted cash at the beginning of the period | Cash, cash equivalents and restricted cash at the beginning of the period | 99,213 | | | 86,839 | | Cash, cash equivalents and restricted cash at the beginning of the period | 31,837 | | | 99,213 | |
Cash, cash equivalents and restricted cash at the end of the period | Cash, cash equivalents and restricted cash at the end of the period | $ | 34,382 | | | $ | 130,917 | | Cash, cash equivalents and restricted cash at the end of the period | $ | 47,102 | | | $ | 82,654 | |
Supplemental disclosure of noncash investing and financing activities | Supplemental disclosure of noncash investing and financing activities | | | | Supplemental disclosure of noncash investing and financing activities | | | |
Accrued member distributions | $ | — | | | $ | 123 | | |
Accounts payable for purchase of property, plant and equipment | Accounts payable for purchase of property, plant and equipment | $ | 1,270 | | | $ | 612 | | Accounts payable for purchase of property, plant and equipment | $ | — | | | $ | 76 | |
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The accompanying notes are an integral part of these consolidated financial statements.
Bioventus Inc.
Notes to the unaudited consolidated condensed financial statements
(Amounts in thousands, except unit and share amounts)
1. Organization
The Company
Bioventus Inc. (together with its subsidiaries, the Company)“Company”) was formed as a Delaware corporation for the purpose of facilitating an initial public offering (IPO) and other related transactions in order to carry on the business of Bioventus LLC and its subsidiaries (BV LLC)(“BV LLC”). Bioventus Inc. functions as a holding company with no direct operations, material assets or liabilities other than the equity interest in BV LLC. BV LLC is a limited liability company formed under the laws of the state of Delaware on November 23, 2011 and operates as a partnership. BV LLC commenced operations in May 2012.
On February 16, 2021, the Company completed its initial public offering (“IPO”), which was conducted through what is commonly referred to as an umbrella partnership C Corporation (“UP-C”) structure. The Company has majority interest, sole voting interest and controls the management of BV LLC. As a result, the Company consolidates the financial results of BV LLC and reports a noncontrolling interest representing the interest of BV LLC held by its continuing LLC owner.
The Company is focused on developing and commercializing clinically differentiated, cost efficient and minimally invasive treatments that engage and enhance the body’s natural healing processes. The Company is headquartered in Durham, North Carolina and has approximately 1,1601,040 employees.
Initial Public Offering
On February 16, 2021, the Company closed an IPO of 9,200,000 shares of Class A common stock at a public offering price of $13.00 per share, which includes 1,200,000 shares issued pursuant to the underwriters' over-allotment option. The Company received $111,228 in proceeds, net of underwriting discounts and commissions of $8,372, which was used to purchase newly-issued membership interests from BV LLC at a price per interest equal to the IPO price of $13.00. The Company also incurred offering expenses totaling $4,778 in addition to the underwriting discounts and commissions. Offering expenses of $1,327 were paid in 2020 and $3,451 were paid in 2021. The Company is the sole managing member of, has a majority economic interest in, has the sole voting interest in, and controls the management of BV LLC. As a result, the Company consolidates the financial results of BV LLC and reports a non-controlling interest for the interest not held by the Company.
IPO Transactions
In connection with the IPO, the Company completed the following transactions (Transactions).
•Amended and restated the limited liability company agreement of BV LLC (BV LLC Agreement), to, among other things, (i) provide for a new single class of common membership interests in BV LLC (LLC Interests); (ii) exchange all of the existing membership interests in BV LLC (Original BV LLC Owners) for new LLC Interests; and (iii) appoint Bioventus Inc. as the sole managing member of BV LLC. Refer to Note 7. Stockholders’ equity for further information.
•Amended and restated the Bioventus Inc. certificate of incorporation to, among other things, (i) provide for an increase in the authorized shares of Class A common stock; (ii) provide for Class B common stock with voting rights but no economic interest, which shares were issued to the Original BV LLC Owners on a one-for-one basis with the number of LLC Interests they owned; and (iii) provide for undesignated preferred stock. Refer to Note 7. Stockholders’ equity for further information.
•Acquired, by merger, ten entities that were Original BV LLC Owners (Former LLC Owners), for which the Company issued 31,838,589 shares of Class A common stock as merger consideration (IPO Mergers). The only assets held by the Former LLC Owners were 31,838,589 LLC Interests and a corresponding number of shares of Class B common stock. Upon consummation of the IPO Mergers, the 31,838,589 shares of Class B common stock were canceled, and the Company recognized the 31,838,589 LLC Interests at carrying value, as the IPO Mergers are considered to be a recapitalization transaction.
The financial statements for periods prior to the IPO and Transactions have been adjusted to combine the previously separate entities for presentation purposes. Prior to the Transactions, Bioventus Inc. had no operations.
Interim periods
The Company reports quarterly interim periods on a 13-week basis within a standard calendar year. Each annual reporting period begins on January 1 and ends on December 31. Each quarter ends on the Saturday closest to calendar quarter-end, with the exception of the fourth quarter, which ends on December 31. The 13-week quarterly periods for fiscal year 2023 end on April 1, July 1 and September 30. Comparable periods for 2022 endended on April 2, July 2 and October 1. Comparable periods for 2021 ended on April 3, July 3 and October 2. The fourth and first quarters may vary in length depending on the calendar year.
Unaudited interim financial information
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP)(“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Pursuant to these rules and regulations, they do not include all information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments)adjustments, and the adjustments discussed in Note 1. Organization) considered necessary for a fair statement of the Company’s financial condition and results of operations have been included. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the full year. As such, the information included in this report should be read in conjunction with the Company’s 2021 Annual Report on Form 10-K.10-K for the year ended December 31, 2022. The consolidated balance sheet at December 31, 20212022 has been derived from the audited consolidated financial statements of the Company, but does not include all the disclosures required by U.S. GAAP.
Correction of immaterial misstatements
During the quarter ended April 1, 2023 and as part of the balance sheet review process, the Company identified misstatements in its calculation of the carrying amount of noncontrolling interest as it applies to the Company’s complex UP-C tax and ownership structure as prescribed in the amended and restated limited liability company agreement of BV LLC. Specifically, the Company failed to adjust the carrying amount of its noncontrolling interest to reflect changes in ownership interests relating to BV LLC. As a result, the previously issued consolidated financial statements reflect an understatement of noncontrolling interest and an overstatement of additional paid-in capital.
As a result of further research conducted, the Company discovered an additional error related to historical deferred income tax balances. The Company concluded that it had inappropriately calculated deferred income taxes by using an incorrect book basis in its investment of BV LLC during the Company’s IPO, which resulted in an overstatement of deferred tax liabilities, an understatement of noncontrolling interest and an understatement of additional paid-in capital.
The statements affected by these errors include the consolidated balance sheets and consolidated statements of stockholders’ and members’ equity issued in the Company’s Annual Report on Form 10-K for the years ended December 31, 2022 and December 31, 2021. There was no impact to any other financial statements for the periods presented. The Company concluded that these misstatements were not material, individually or in the aggregate, as evaluated under the Securities and Exchange Commission Staff Bulletin No. 99, Materiality; No. 108, Considering the Effects of Prior Year Misstatements in Current Year Financial Statements; and Financial Accounting Standards Board ASC 250-10, Accounting Changes and Error Corrections. However, because of the significance of these items, and to facilitate comparison among periods, the Company has decided to revise its previously issued consolidated financial statements on a prospective basis. The Company will correct its prior period presentation for this error in its future 2023 quarterly financial statements included in its Forms 10-Q and 2023 Annual Report on Form 10-K for the period ended December 31, 2023. The adjustments did not have an impact on revenues, total assets or cash flows.
The following are selected line items from our aforementioned impacted financial statements illustrating the effect of the error corrections thereon:
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Consolidated Balance Sheets — December 31, 2022 | As Previously Reported | | Adjustments | | As Adjusted |
Deferred income taxes (b)(d) | $ | 74,138 | | | $ | (71,890) | | | $ | 2,248 | |
Total liabilities | 1,032,317 | | | (71,890) | | | 960,427 | |
Additional paid-in capital (a)(b)(c) | 481,919 | | | 8,657 | | | 490,576 | |
Noncontrolling interest (a)(c) | 23,751 | | | 63,233 | | | 86,984 | |
Total stockholders’ equity | 340,332 | | | 71,890 | | | 412,222 | |
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Consolidated Balance Sheets — December 31, 2021 | As Previously Reported | | Adjustments | | As Adjusted |
Deferred income taxes (b) | $ | 133,518 | | | $ | (73,867) | | | $ | 59,651 | |
Total liabilities | 692,073 | | | (73,867) | | | 618,206 | |
Additional paid-in capital (a)(b) | 465,272 | | | 8,046 | | | 473,318 | |
Noncontrolling interest (a) | 74,865 | | | 65,821 | | | 140,686 | |
Total stockholders’ equity | 533,789 | | | 73,867 | | | 607,656 | |
The Company’s consolidated statements of changes in stockholders’ and members equity as of December 31, 2022 and December 31, 2021 have been corrected to reflect the above adjustments. The Company revised the amounts originally reported for the years ended December 31, 2022 and December 31, 2021 for the following items:
(a)Recorded a $65,821 decrease to additional paid-in capital and a corresponding increase to noncontrolling interest. This action effectively rebalanced equity appropriately between the Company and its noncontrolling interests according to their respective BV LLC ownership interests.
(b)Recorded a $73,867 decrease to deferred income tax balances and an increase to additional paid in capital to reflect the correction of an error that occurred during the calculation of deferred taxes at the Company’s IPO.
(c)Reflects the entry as discussed in (a) above and additional rebalancing activity of $2,588 relating to the issuance of Class A common stock for equity plans during the year ended December 31, 2022.
(d)Reflects the entry as discussed in (b) and an additional $1,977 increase to deferred income tax balances and a reduction to additional paid in capital to reflect the deferred tax impact during the year ended December 31, 2022.
Going Concernconcern
The accompanying unaudited consolidated financial statements have been prepared under the going concern basis of accounting, which presumes that the Company’s liquidation is not imminent; however, based on the Company’s current financial position and liquidity sources, including current cash balances, and forecasted future cash flows, the Company is at risk of not being able to make the two initial Deferred Payments for the CartiHeal transaction, each in the principal sum of $50 million, due under the terms of the amended Option and Equity Purchase Agreement no later than July 2023 and September 2023, respectively, which may result in a cross default under the Amendment No. 3 to the Credit and Guaranty Agreement entered into with the Company’s lenders at the time of the CartiHeal transaction. In addition, should the Company fail to meet certain financial thresholds established in the Credit Agreement, the Company may be at risk of violating certain of its financial covenants under that agreement. the Credit and Guaranty Agreement, dated December 6, 2019 (as amended on October 29, 2021, July 11, 2022 and March 31, 2023).
If any of the financial covenantsmitigating steps are not met,taken or ifare not successful, the Company is otherwise deemed to beat substantial risk of failing its covenants in default2024. A breach of its othera financial covenant under the Credit and Guaranty Agreement could accelerate repayment of our obligations under that agreement, the aggregate outstanding principal amounts become due and payableagreement. Refer to our lenders. Considering current liquidity sources, the Company would not be able to make the Deferred Payments due in connection with the CartiHeal transaction or repayNote 4. Financial instruments for further discussion concerning the Company’s total outstandinglong-term debt balance in the eventobligations.
The Company is actively pursuing plans to mitigate these conditions and events, such as considering various additional cost cutting measures, and exploring additional divestiture opportunities for non-core assets, considering seeking temporary covenant waivers from our lenders, and pursuing strategic options with respect to the CartiHeal transaction such as attemptingthe recently announced plan to renegotiate the timing of the CartiHeal Deferred Payments or exiting that agreement by transferring back to the former CartiHeal owners all of the share capital, intellectual property and otherdivest certain assets of CartiHeal acquired in the transaction pursuant to the escrow and pledge agreements entered into as part of the CartiHeal acquisition if such measures fail;within its Wound Business; however, there can be no assurances that it is probable these plans will be successfully implemented or that they will successfully mitigate these conditions and events. Therefore, these plans do not alleviate the substantial doubt about the Company’s ability to continue as a going concern.
As part of efforts to improve its financial condition, on February 27, 2023, the Company reached an agreement to return the assets and liabilities of CartiHeal (2009) Ltd. (“CartiHeal”), a wholly-owned subsidiary of the Company, to its former securityholders. The deconsolidation of CartiHeal relieved deferred consideration liabilities and milestone obligations related to the acquisition of CartiHeal. Refer to Note 3. Acquisitions and divestitures for further information regarding the acquisition and subsequent deconsolidation of CartiHeal. In addition, the Company announced a restructuring plan in December 2022 to align the Company’s organizational and management cost structure to improve profitability and cash flow. Refer to Note 9. Restructuring costs for further information.
Recent accounting pronouncements
The Company has elected to comply with non-acceleratedis an accelerated public company filer effective dates of adoption.filer. Therefore, the required effective dates for adopting new or revised accounting standards are generally earlier than when emerging growth companies are required to adopt.
2. Balance sheet information
Cash, cash equivalents and restricted cash
A summary of cash and cash equivalents and restricted cash is as follows:
| | | | | | | | | | | |
| October 1, 2022 | | December 31, 2021 |
Cash and cash equivalents | $ | 34,359 | | | $ | 43,933 | |
Restricted cash | | | |
Current | 23 | | | 5,280 | |
Noncurrent | — | | | 50,000 | |
| $ | 34,382 | | | $ | 99,213 | |
As of December 31, 2021, current restricted cash consisted of an escrow deposit with a financial institution for the purpose of paying a Paycheck Protection Program loan acquired as part of a business combination. This loan was forgiven during the second quarter of 2022.
As of December 31, 2021, noncurrent restricted cash consisted of an escrow deposit with a financial institution for the acquisition of CartiHeal (2009) Ltd. Refer to Note 3. Acquisitions and investments for further information.
Accounts receivable, net
Accounts receivable, net are amounts billed and currently due from customers. The Company records the amounts due net of allowance for credit losses. Collection of the consideration that the Company expects to receive typically occurs within 30 to 90 days of billing. The Company applies the practical expedient for contracts with payment terms of one year or less which does not consider the effects of the time value of money. Occasionally, the Company enters into payment agreements with patients that allow payment terms beyond one year. In those cases, the financing component is not deemed significant to the contract.
Accounts receivable, net of allowances, consisted of the following as of:
| | | October 1, 2022 | | December 31, 2021 | | April 1, 2023 | | December 31, 2022 |
Accounts receivable(a) | Accounts receivable(a) | $ | 138,029 | | | $ | 128,365 | | Accounts receivable(a) | $ | 125,945 | | | $ | 143,317 | |
Less: Allowance for credit losses(b) | Less: Allowance for credit losses(b) | (5,844) | | | (3,402) | | Less: Allowance for credit losses(b) | (7,401) | | | (7,022) | |
| | $ | 132,185 | | | $ | 124,963 | | | $ | 118,544 | | | $ | 136,295 | |
(a)Other receivables of $350 attributable to CartiHeal was reclassified to current assets attributable to discontinued operations within the December 31, 2022 consolidated balance sheets. Accounts receivable of $5,012 was reclassified into assets held for sale within the April 1, 2023 consolidated condensed balance sheets. Refer to Note 3. Acquisitions and divestitures and Note 14. Discontinued operations for further details regarding assets held for sale and the deconsolidation of CartiHeal.
(b)Allowance for credit losses of $898 was reclassified to assets held for sale within the April 1, 2023 consolidated condensed balance sheets. Refer to Note 3. Acquisitions and divestitures for further details regarding assets held for sale.
Due to the short-term nature of itsthe Company’s receivables, the estimate of expected credit losses is based on aging of the account receivable balances. The allowance is adjusted on a specific identification basis for certain accounts as well as pooling of accounts with similar characteristics. The Company has a diverse customer base with no single customer representing ten percent or more of sales. The Company has one customer representing approximately 11.6%11.8% of the accounts receivable balance as of OctoberApril 1, 2022.2023. Historically, the Company’s reserves have been adequate to cover credit losses.
Changes in credit losses were as follows:
| | | Three Months Ended | | Nine Months Ended | | | | Three Months Ended |
| | October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 | | | | April 1, 2023 | | April 2, 2022 |
Beginning balance | Beginning balance | $ | (5,292) | | | $ | (3,019) | | | $ | (3,402) | | | $ | (3,990) | | Beginning balance | | | $ | (7,022) | | | $ | (3,402) | |
(Provision) recovery | (1,369) | | | (221) | | | (3,874) | | | 138 | | |
Provision for losses | | Provision for losses | | | (1,079) | | | (1,152) | |
Write-offs | Write-offs | 1,082 | | | 243 | | | 1,907 | | | 927 | | Write-offs | | | 286 | | | 369 | |
Recoveries | Recoveries | (265) | | | (65) | | | (475) | | | (137) | | Recoveries | | | (484) | | | (69) | |
Reclassification to held for sale | | Reclassification to held for sale | | | 898 | | | — | |
Ending balance | Ending balance | $ | (5,844) | | | $ | (3,062) | | | $ | (5,844) | | | $ | (3,062) | | Ending balance | | | $ | (7,401) | | | $ | (4,254) | |
Inventory
Inventory consisted of the following as of:
| | | October 1, 2022 | | December 31, 2021 | | April 1, 2023 | | December 31, 2022 |
Raw materials and supplies(a) | Raw materials and supplies(a) | $ | 17,380 | | | $ | 12,213 | | Raw materials and supplies(a) | $ | 24,729 | | | $ | 19,133 | |
Finished goods(b) | Finished goods(b) | 60,812 | | | 50,805 | | Finished goods(b) | 65,461 | | | 67,484 | |
Gross | Gross | 78,192 | | | 63,018 | | Gross | 90,190 | | | 86,617 | |
Excess and obsolete reserves | Excess and obsolete reserves | (1,240) | | | (1,330) | | Excess and obsolete reserves | (2,237) | | | (1,851) | |
| | $ | 76,952 | | | $ | 61,688 | | | $ | 87,953 | | | $ | 84,766 | |
(a)Raw material inventory of $642 attributable to CartiHeal has been reclassified to current assets attributable to discontinued operations within the December 31, 2022 consolidated balance sheets. Refer to Note 3. Acquisitions and divestitures and Note 14. Discontinued operations for further details regarding the deconsolidation of CartiHeal.
(b)Finished goods inventory of $1,481 was reclassified to assets held for sale within the April 1, 2023 consolidated condensed balance sheets. Refer to Note 3. Acquisitions and divestitures for further information.
Prepaid and other current assets
Prepaid and other current assets consisted of the following as of:
| | | October 1, 2022 | | December 31, 2021 | | April 1, 2023 | | December 31, 2022 |
Prepaid taxes | Prepaid taxes | $ | 4,492 | | | $ | 12,236 | | Prepaid taxes | $ | 4,400 | | | $ | 4,442 | |
Prepaid and other current assets(a) | Prepaid and other current assets(a) | 23,071 | | | 15,003 | | Prepaid and other current assets(a) | 12,792 | | | 14,109 | |
| | $ | 27,563 | | | $ | 27,239 | | | $ | 17,192 | | | $ | 18,551 | |
(a)Prepaid and other current assets of $134 attributable to CartiHeal was reclassified to current assets attributable to discontinued operations within the December 31, 2022 balance sheet. Refer to Note 3. Acquisitions and divestitures and Note 14. Discontinued operations for further details regarding the deconsolidation of CartiHeal.
Intangible assets, net
Intangible assets consisted of the following as of:
| | | | | | | | | | | |
| April 1, 2023 | | December 31, 2022 |
Intellectual property(a)(b)(c) | $ | 676,549 | | | $ | 790,049 | |
Distribution rights | 61,325 | | | 61,325 | |
Customer relationships(b) | 57,950 | | | 67,450 | |
IPR&D | 5,500 | | | 5,500 | |
Developed technology and other | 13,998 | | | 13,998 | |
Total carrying amount | 815,322 | | | 938,322 | |
Less accumulated amortization: | | | |
Intellectual property(a)(b)(c) | (188,094) | | | (187,767) | |
Distribution rights | (45,563) | | | (44,319) | |
Customer relationships(b) | (57,950) | | | (58,842) | |
Developed technology and other | (6,587) | | | (6,276) | |
Total accumulated amortization | (298,194) | | | (297,204) | |
Intangible assets, net before currency translation | 517,128 | | | 641,118 | |
Currency translation | (1,089) | | | (1,267) | |
| $ | 516,039 | | | $ | 639,851 | |
(a)Intellectual property and accumulated depreciation attributable to CartiHeal totaling $410,200 and $11,327, respectively, were reclassified to long-term assets attributable to discontinued operations within the December 31, 2022 consolidated balance sheets. Refer to Note 3. Acquisitions and divestitures and Note 14. Discontinued operations for further details regarding the deconsolidation of CartiHeal.
(b)Net intellectual property and customer relationships of $23,458 and $8,377, respectively, were reclassified into assets held for sale within the April 1, 2023 consolidated condensed balance sheets. Refer to Note 3. Acquisitions and divestitures for further details regarding assets held for sale.
(c)The Company recorded an impairment loss of $78,615 in the U.S. reporting segment of net intellectual property attributable to a business held for sale. The loss was recorded in impairment of assets within the consolidated condensed statements of operations and comprehensive loss. Refer to Refer to Note 3. Acquisitions and divestitures for further details regarding businesses held for sale.
Estimated amortization expense for intangibles subsequent to reclassifications and impairment for the remainder of 2023 and for the years ended December 31, 2024 through 2027 is expected to be $22,041, $26,347, $22,874, $20,030 and $19,652, respectively.
Goodwill
Goodwill is evaluated for impairment annually or more frequently if events or changes in circumstances indicate that goodwill might be impaired. The Company assesses goodwill impairment by applying a quantitative impairment analysis comparing the carrying value of the Company’s reporting units to their respective fair values. A goodwill impairment exists if the carrying value of the reporting unit exceeds its fair value.
The Company has two reporting units and assesses impairment based upon qualitative factors and if necessary, quantitative factors. A reporting unit's fair value is determined using the income approach and discounted cash flow models by utilizing Level 3 inputs and assumptions such as future cash flows, discount rates, long-term growth rates, market value and income tax considerations. Specifically, the value of each reporting unit is determined on a stand-alone basis from the perspective of a market participant and represents the price estimated to be received in a sale of the reporting unit in an orderly transaction between market participants at the measurement date. The Company then reconciles the values of all reporting units to the market capitalization of the Company.
The Company’s goodwill resides within the International segment, of which $6,297 related to CartiHeal and was reclassified to long-term assets attributable to discontinued operations within the December 31, 2022 consolidated balance sheets. The amount was recorded in discontinued operations, net of tax on the consolidated condensed statements of operations for the three months ended April 1, 2023 as a result of CartiHeal’s deconsolidation. Refer to Note 3. Acquisitions and divestitures and Note 14. Discontinued operations for further details concerning the deconsolidation of CartiHeal.
On November 8, 2022, due to a significant decline in the Company’s Class A common stock price, circumstances became evident that a possible goodwill impairment existed as of the third quarter 2022 balance sheet date.
The Company concluded that the carrying value of the U.S. reporting unit exceeded its fair value. The Companyvalue and recorded preliminarya non-cash goodwill impairment chargescharge of $189,197 within the U.S. reporting unit for both the three and nine months ended October 1, 2022. The impairment was recorded within impairment of goodwill on the consolidated condensed statements of operations and comprehensive (loss) income.
Changes in the carrying amounts of goodwill by reportable segment during the nine monthsyear ended October 1, 2022 are as follows:
| | | | | | | | | | | | | | | | | |
| U.S. | | International | | Consolidated |
Balance at December 31, 2021 | $ | 138,863 | | | $ | 8,760 | | | $ | 147,623 | |
Additions | 55,295 | | | 6,599 | | | 61,894 | |
Deconsolidation of noncontrolling interest | (494) | | | — | | | (494) | |
Purchase accounting adjustments | (4,467) | | | — | | | (4,467) | |
Impairment of goodwill | (189,197) | | | — | | | (189,197) | |
Balance at October 1, 2022 | $ | — | | | $ | 15,359 | | | $ | 15,359 | |
Additions were the result of the acquisition of CartiHeal (2009) Ltd. and purchase accounting adjustments stem from changes in the preliminary fair values of assets acquired and liabilities assumed in previous acquisitions. Refer to Note 3. Acquisitions and investments for further details concerning acquisitions and fair value changes.December 31, 2022. There were no accumulated goodwill impairment losses as ofprior to the year ended December 31, 2021.2022.
Accrued liabilities
Accrued liabilities consisted of the following as of:
| | | October 1, 2022 | | December 31, 2021 | | April 1, 2023 | | December 31, 2022 |
Gross-to-net deductions | Gross-to-net deductions | $ | 74,409 | | | $ | 67,945 | | Gross-to-net deductions | $ | 66,557 | | | $ | 71,227 | |
Bonus and commission(a) | Bonus and commission(a) | 8,464 | | | 23,342 | | Bonus and commission(a) | 9,462 | | | 9,179 | |
Compensation and benefits | Compensation and benefits | 10,372 | | | 10,665 | | Compensation and benefits | 6,843 | | | 11,428 | |
Accrued interest | | Accrued interest | 6,210 | | | 217 | |
Income and other taxes | Income and other taxes | 2,299 | | | 8,139 | | Income and other taxes | 4,496 | | | 2,572 | |
Other liabilities | 21,346 | | | 21,382 | | |
Other liabilities(b) | | Other liabilities(b) | 22,201 | | | 16,947 | |
| | $ | 116,890 | | | $ | 131,473 | | | $ | 115,769 | | | $ | 111,570 | |
(a)Bonus and commissions of $588 were reclassified into liabilities held for sale within the April 1, 2023 consolidated balance sheets. Refer to Note 3. Acquisitions and divestitures for further details.
(b)Other liabilities attributable to CartiHeal of $384 were reclassified into current liabilities attributable to discontinued operations within December 31, 2022 consolidated balance sheets. Refer to Note 3. Acquisitions and divestitures and Note 14. Discontinued operations for further details.
3. Acquisitions and divestitures
Wound Business
The Company assesses its businesses and products in order to calibrate its strategic focus, enhance liquidity, prioritize investments and allocate capital to its core business units. As a result of this assessment, the Company has committed to a plan to divest certain assets within its Wound Business, specifically those attributable to TheraSkin and Theragenesis (the “Wound Business” or the “Disposal Group”).
The Company has classified the identifiable net assets of the Disposal Group as held for sale. Assets and liabilities determined to be part of the Disposal Group have been recorded as single amounts within the Company’s consolidated financial statements. Assets held for sale are reported at the lower of the carrying amount or fair value less costs to sell, which is expected to occur within one year. The Company has ceased the depreciation and amortization attributable to assets classified as held for sale. Assets and liabilities held for sale are reviewed each reporting period to determine whether existing carrying values are fully recoverable in comparison to estimated fair values less costs to sell.
The Company evaluated the Wound Business for impairment during the first quarter of 2023. The Company recorded a $78,615 ($63,337 after tax) impairment as a result of this evaluation to reduce the intangible assets of the Wound Business to reflect their respective fair values less any costs to sell. The fair value of intangibles of the Wound Business was determined based on the consideration offered for the Wound Business.
The carrying amounts of the major classes of assets and liabilities of the Wound Business that were classified as held for sale were as follows:
| | | | | |
| April 1, 2023 |
Carrying amounts of assets classified as held for sale | |
Accounts receivable, net of allowance of $898 | $ | 4,114 | |
Inventory | 1,481 | |
Property and equipment, net | 443 | |
Intangible assets | 31,835 | |
Total assets held for sale | $ | 37,873 | |
| |
Carrying amounts of liabilities classified as held for sale | |
Accounts payable | $ | 1,285 | |
Accrued liabilities | 588 | |
Total liabilities held for sale | $ | 1,873 | |
CartiHeal (2009) Ltd
On July 12, 2022, the Company completed the acquisition of 100% of the remaining shares in CartiHeal, (2009) Ltd. (CartiHeal), a privately held company headquartered in Israel and the developer of the proprietary Agili-C implant for the treatment of joint surface lesions in traumatic and osteoarthritic joints. The Company previously held an equity interest in CartiHeal’s fully diluted shares with a carrying value of $15,768 and $16,771 as of July 12, 2022 and December 31, 2021,2022, respectively. Net equity losses associated with CartiHeal for the three months ended October 1,April 2, 2022 and October 2, 2021 and the nine months ended October 1, 2022 and October 2, 2021, totaled $322, $419, $1,003 and $1,320, respectively,$401, which arewas included in other (income) expensediscontinued operations, net on the consolidated condensed statements of operations and comprehensive (loss) income.
The Company acquired CartiHeal (CartiHeal Acquisition)(the “CartiHeal Acquisition”) for an aggregate purchase price of approximately $315,000 and an additional $135,000, becoming payable after closing upon the achievement of a certain sales milestone (Sales Milestone,(“Sales Milestone”, or CartiHeal“CartiHeal Contingent Consideration)Consideration”). The Company paid $100,000 of the aggregate purchase price upon closing consisting of a $50,000 deposit held in trust and $50,000 from a financing arrangement (Refer to Note 4. Financial instruments for further information regarding financing arrangements). The Company also paid approximately $8,622 of CartiHeal’s transaction-related fees and expenses and deferred $215,000 (Deferred Amount)(“Deferred Amount”) of the aggregate purchase price otherwise due at closing.
The Deferred Amount willwas to be paid in five tranches commencing in 2023 and ending no later than 2027 as follows:
•$50,000 due upon the earliest to occur — the publication in a peer-reviewed orthopedic journal of an article that presents the results of the pivotal clinical trial (First(“First Paper Milestone)Milestone”) or July 1, 2023;
•$50,000 due upon the earliest to occur — the implantation of Agili-C devices in 100 patients in the United States or September 1, 2023;
•$25,000 due upon the earliest to occur — the publication in a peer-reviewed orthopedic journal of an article that presents any new or additional clinical data subsequent to the First Paper Milestone with respect to Agili-C (Second(“Second Paper Milestone)Milestone”) or January 1, 2025;
•$25,000 due upon the earliest to occur — the publication in a peer-reviewed orthopedic journal of an article that presents any new or additional clinical data subsequent to the First and Second Paper Milestone with respect to Agili-C or January 1, 2026; and
•$65,000 due upon the earliest to occur — obtaining a U.S. Category 1 Current Procedural Terminology (CPT)(“CPT”) code from Centers for Medicare and Medicaid Services (CMS)(“CMS”) for Agili-C or January 1, 2027.
Pursuant to the CartiHeal Amendment (as defined below), the Company will payowed interest on each tranche of the Deferred Amount at a rate of 8.0% annually, until such tranche is paid. The Sales Milestone will bewas payable upon the achievement of $75,000 in trailing twelve month sales pursuant to the CartiHeal Amendment.
The Company had entered into an Option and Equity Purchase Agreement with CartiHeal (Option Agreement)(“Option Agreement”) in January 2020 and a subsequent amendment in June 2022 (CartiHeal Amendment)(“CartiHeal Amendment”). The Option Agreement provided the Company with an exclusive option to acquire 100% of CartiHeal’s shares (Call Option)(“Call Option”), and provided CartiHeal with a put option that would require the Company to purchase 100% of CartiHeal’s shares under certain conditions. In August 2021, CartiHeal achieved pivotal clinical trial success, as defined in the Option Agreement, for the Agili-C implant. In order to preserve the Company’s Call Option, in accordance with the Option Agreement and upon approval of the Company’s Board of Directors (BOD)(“BOD”), the Company deposited $50,000 into escrow in August 20212021.
The First Paper Milestone under the Option Agreement occurred on February 13, 2023, which obligated the Company to make the first $50,000 payment, plus applicable interest, under the Option Agreement. On February 27, 2023, the Company entered into a settlement agreement (the “Settlement Agreement”) with Elron Ventures Ltd. (“Elron” and together with the Company, the “Parties”) as representative of CartiHeal’s selling securityholders under the Option Agreement collectively, the “Former Securityholders”). Pursuant to the Settlement Agreement, Elron, on behalf of the Former Securityholders, agreed to forbear from initiating any legal action or proceedings relating to non-payment of any obligations arising under the Option Agreement during a period of 30 calendar days (the “Interim Period”) in exchange for (i) a one-time non-refundable amount of $10,000 and (ii) a one-time non-refundable payment of $150 to Elron to be used in accordance with the expense fund provisions of the Option Agreement. The Interim Period expired on March 29, 2023 and the Company did not exercise its right to extend the Interim Period. In addition, the Parties mutually released any further claims under the Option Agreement and related transaction documents, including without limitation a release by the Former Securityholders of any rights to enforce the provisions of the Option Agreement or make further monetary claims against the Company and/or its respective affiliates and representatives.
The Company transferred 100% of its shares in CartiHeal to a trustee (the “Trustee”) for the potential acquisitionbenefit of the Former Securityholders pursuant to the Settlement Agreement. The Company had no ownership interest and no voting rights during the Interim Period. Accordingly, the Company concluded that upon execution of the Settlement Agreement, the Company ceased to control CartiHeal for accounting purposes, and therefore, deconsolidated CartiHeal effective February 27, 2023. CartiHeal was part of the Company’s international reporting segment. The Company treated the deconsolidation of CartiHeal whichas a discontinued operation. The loss upon disposal was included in restricted cash on$60,639 and was recorded within discontinued operations, net within the consolidated balance sheetscondensed statements of operations and comprehensive loss. The loss on disposal is comprised of the book value of CartiHeal’s net assets at December 31, 2021.the time of disposal, goodwill attributable to CartiHeal and the previously discussed non-refundable payments made to Elron. The Company allowed the Interim Period to expire on March 29, 2023 as the Company was not able to find a financing solution to fund the payment obligations under the Option and Equity Purchase Agreement on terms the Company believed to be favorable to it and its shareholders.
The fair value of consideration for the CartiHeal Acquisition iswas comprised of the following:
| | | | | |
Cash consideration | $ | 100,000 | |
Transaction related costs | 8,622 | |
Subtotal of cash at closing | 108,622 | |
Deferred Amount | 183,400 | |
Sales Milestone | 61,901 | |
Fair value of previously held equity interest(a) | 39,477 | |
Total consideration | $ | 393,400 | |
(a) Remeasurement of the Company’s equity method investment in CartiHeal, net of equity losses as a result of the purchase. The remeasurement included a gain of $23,709 calculated as the difference between the fair value and the carrying value of the Company’s investment in CartiHeal at the acquisition date and was recognized in other income for three and nine months endedduring the third quarter of 2022 on the consolidated condensed statements of operations and comprehensive (loss) income.loss. The fair value was based upon: (i) the consideration transferred to members owning 89.97% of CartiHeal’s fully diluted shares; (ii) calculating the value of CartiHeal’s fully diluted shares based upon the transferred consideration; and (iii) applying the calculated value to the Company’s 10.03% ownership in CartiHeal’s fully diluted shares at the acquisition date.
The Company accounted for the CartiHeal Acquisition using the acquisition method of accounting whereby the total purchase price was preliminary allocated to tangible and intangible assets acquired and liabilities assumed based on respective fair values. The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the acquisition date:
| | | | | |
Fair value of consideration | $ | 393,400 | |
Assets acquired and liabilities assumed: | |
Cash and cash equivalents and restricted cash | 3,781 | |
Inventory | 642 | |
Prepaid and other current assets | 552 | |
Property and equipment | 259 | |
Intangibles | 408,600410,200 | |
Investment and other assets | 727 | |
Accounts payable | (18) | |
Accrued liabilities | (459) | |
Other current liabilities | (171) | |
Deferred income taxes | (79,863) | |
Other liabilities | (2,544) | |
Net assets acquired | 331,506333,106 | |
Resulting goodwill | $ | 61,89460,294 | |
As of October 1, 2022, the purchase price allocation for the CartiHeal Acquisition was preliminary in nature and subject to completion. Adjustments to the current fair value estimates in the above table may occur as the process conducted for various valuations and assessments is finalized, including intangible assets, tax liabilities and other working capital accounts. Nearly 100% of the goodwill represents estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized and is attributable to expected revenue growth in new markets. The goodwill iswas not expected to be deductible for tax purposes and $55,295 and $6,599$4,999 was allocated to the U.S. and International reporting units, respectively. The Company incurred $1,307 and $3,976 in acquisition costs related to CartiHeal during the three and nine months ended October 1, 2022, respectively.
CartiHeal’s intangibles consistsconsisted of the following:
| | | | | | | | | | | |
| Useful Life | | Fair Value |
Intellectual Property - US Segment | 20 years | | $ | 351,500 | |
Intellectual Property - International Segment | 8 years | | 57,10058,700 | |
| | | $ | 408,600410,200 | |
The estimated fair value of the acquired CartiHeal intangibles was determined using an income approach, a valuation technique that estimates the fair value of an asset based on market participant expectations of the cash flows that an asset would generate over its remaining useful life. The determination of the useful lives was based upon consideration of market participant assumptions and transaction specific factors. The aggregate amortization expense related to acquired intangible assets is $6,178 for the remainder of 2022 and $24,713 annually for the years 2023 through 2026.
Misonix, Inc.
On October 29, 2021, in order to broaden its portfolio, the Company acquired 100% of the capital stock of Misonix, Inc. (Misonix) in a cash-and-stock transaction (the Misonix Acquisition). Misonix manufactures minimally invasive surgical ultrasonic medical devices used for precise bone sculpting, removal of soft and hard tumors and tissue debridement, primarily in the areas of neurosurgery, orthopedic surgery, plastic surgery, wound care and maxillo-facial surgery. Misonix also exclusively distributes skin allografts and wound care products used to support healing of wounds. The fair value of the consideration for the Misonix Acquisition comprised the following:
| | | | | | | | | | | | | | | | | |
| Common Shares | | Price per Share(a) | | Amount |
Cash | | | | | $ | 182,988 | |
Bioventus Class A shares | 18,340,790 | | | $ | 14.97 | | | 274,562 | |
Value of Misonix options settled in Bioventus options | | | | | 27,636 | |
Merger consideration | | | | | 485,186 | |
Other cash consideration | | | | | 40,130 | |
Total Misonix consideration | | | | | $ | 525,316 | |
(a)Closing price of the Company’s Class A common stock as of October 28, 2021.
The Company accounted for the Misonix Acquisition using the acquisition method of accounting whereby the total purchase price was preliminarily allocated to tangible and intangible assets acquired and liabilities assumed based on respective fair values. The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date:
| | | | | |
Fair value of consideration | $ | 525,316 | |
Assets acquired and liabilities assumed: | |
Cash and cash equivalents | 7,126 | |
Accounts receivable | 13,301 | |
Inventory | 23,428 | |
Prepaid and other current assets | 419 | |
Property and equipment, net | 10,280 | |
Intangible assets | 486,500 | |
Operating lease assets | 1,049 | |
Deferred tax assets | 6,448 | |
Other assets | 77 | |
Accounts payable and accrued liabilities | (16,888) | |
Other current liabilities | (589) | |
Deferred income taxes | (94,012) | |
Other liabilities | (1,351) | |
Net assets acquired | 435,788 | |
Resulting goodwill | $ | 89,528 | |
Nearly 100% of the goodwill represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The factors contributing to the recognition of goodwill are based on several strategic and synergistic benefits that are expected to be realized from the Misonix Acquisition. The goodwill is not tax deductible and was allocated to the U.S. reporting unit for purposes of the evaluation for any future goodwill impairment. Changes in the preliminary purchase price allocation during the six months ended July 2, 2022 related to a deferred tax asset recognition of $6,448 and a reduction in inventory and property and equipment, net of $1,292 and 291, respectively.
The following table summarizes the preliminary fair values of identifiable intangible assets and their useful lives:
| | | | | | | | | | | |
| Useful Life (in years) | | Fair Value |
Intellectual property | 15 - 20 years | | $ | 477,000 | |
Customer relationships | 12 years | | 9,500 | |
| | | $ | 486,500 | |
The preliminary fair value of the Misonix intellectual property was determined using a variation of the income approach or the multi-period excess earnings method, with projected earnings discounted at a rate of 12.0%. The preliminary fair value of the customer relationship asset was determined using the income approach or the profit-split method, with projected cash flow discounted at a rate of 12.0%. The determination of the useful lives was based upon consideration of market participant assumptions and transaction specific factors.
Bioness, Inc.
On March 30, 2021, the Company acquired 100% of the capital stock of Bioness, Inc. (Bioness Acquisition) for $48,933 in cash and future contingent consideration payments. Bioness, Inc. (Bioness) is a global leader in neuromodulation and advanced rehabilitation medical devices through its innovative peripheral nerve stimulation therapy and premium advanced rehabilitation solutions.
Contingent consideration is comprised of future earn-out payments contingent upon the achievement of certain research and development projects as well as sales milestones related to Bioness products. The Bioness Acquisition Agreement includes maximum earn-out payments of $65,000 as follows:
•$15,000 for obtaining FDA approval for U.S. commercial distribution of a certain product for certain indications on or before June 30, 2022;
•$20,000 for meeting net sales targets for certain implantable products over a three year period ending on June 30, 2025 at the latest;
•Up to $10,000 for meeting net sales milestones for certain implantable products over a three year period ending on June 30, 2025 at the latest; and
•$20,000 for maintaining Centers for Medicare & Medicaid Services coverage and reimbursement for certain products at specified levels as of December 31, 2024.
In December 2021, it became clear that the $15,000 FDA approval milestone would not be met, therefore, was assigned no value and was recorded as a measurement period adjustment. As of December 31, 2021, the maximum contingent earn-out payment decreased to $50,000 as a result.
Consolidated Pro Forma Results
The results of operations of Bioness, acquired March 30, 2021, Misonix, acquired October 29, 2021 and CartiHeal, acquired July 12, 2022, have been included in the accompanying consolidated financial statements since their respective acquisition dates. Net losses of CartiHeal included in the nine months ended October 1, 2022 since the acquisition date were $6,812. There are no net sales attributable to CartiHeal in the nine months ended October 1, 2022.
Revenue and earnings for the operations of Bioness, Misonix and CartiHeal as if the companies were acquired on January 1, 2021, are as follows:
| | | | | | | | | | | |
| Nine Months Ended | | Nine Months Ended |
| October 1, 2022 | | October 2, 2021 |
Net sales | $ | 386,283 | | | $ | 367,669 | |
Net loss | $ | (171,002) | | | $ | (50,742) | |
The historical consolidated financial information of the Company, Misonix and Bioness have been adjusted in the pro forma information to give effect to pro forma events that are (1) directly attributable to both the Misonix and Bioness acquisitions, (2) factually supportable and (3) expected to have a continuing impact on the combined results. The unaudited pro forma results include adjustments to reflect the inventory step-up amortization, the incremental intangible asset amortization to be incurred based on the valuations of the assets acquired, transaction costs that would have been incurred in the prior period, vesting of equity-based compensation that was accelerated due to the Misonix Acquisition, adjustments to financing costs to reflect the new capital structure as well as the income tax effect and the noncontrolling interest impact of these adjustments. These pro forma amounts are not necessarily indicative of the results that would have been obtained if the acquisitions had occurred prior to the beginning of the period presented or that may occur in the future, and do not reflect future synergies, integration costs, or other such costs or savings.
Investments
VIE
The Company had a fully diluted 8.8% ownership of Harbor Medtech Inc.’s (Harbor) Series C Preferred Stock and an exclusive Collaboration Agreement with Harbor, which resulted in the consolidation of Harbor. The Company terminated the Collaboration Agreement on June 8, 2021, which resulted in the deconsolidation of Harbor and the recognition of a $5,674 impairment of Harbor’s long-lived assets. The impairment was recorded within impairment of variable entity assets for the nine months ended October 2, 2021 in the consolidated condensed statements of operations and comprehensive (loss) income, of which $5,176 was attributable to the non-controlling interest. An additional impairment of $1,369, representing the Company’s remaining investment balance in Harbor, was recorded within other (income) expense for the nine months ended October 2, 2021 in the consolidated condensed statements of operations and comprehensive (loss) income. The Company continues to have license rights to certain technology obtained from Harbor and is continuing product development initiated under the Collaboration Agreement.
4. Financial instruments
Long-term debt consisted of the following as of:
| | | October 1, 2022 | | December 31, 2021 | | April 1, 2023 | | December 31, 2022 |
Amended Term Loan due October 2026 (5.80% at October 1, 2022) | $ | 427,222 | | | $ | 360,750 | | |
| Amended Term Loan due October 2026 (9.19% at April 1, 2023) | | Amended Term Loan due October 2026 (9.19% at April 1, 2023) | $ | 420,712 | | | $ | 420,712 | |
Revolver due October 2025 (9.28% at April 1, 2023) | | Revolver due October 2025 (9.28% at April 1, 2023) | 29,000 | | | — | |
Less: | Less: | | Less: | |
Current portion of long-term debt | Current portion of long-term debt | (31,302) | | | (18,038) | | Current portion of long-term debt | (41,320) | | | (33,056) | |
Unamortized debt issuance cost | Unamortized debt issuance cost | (1,425) | | | (1,687) | | Unamortized debt issuance cost | (1,251) | | | (1,338) | |
Unamortized discount | Unamortized discount | (1,393) | | | (1,381) | | Unamortized discount | (2,876) | | | (1,308) | |
| | $ | 393,102 | | | $ | 339,644 | | | $ | 404,265 | | | $ | 385,010 | |
On December 6, 2019, the Company entered into a Credit and Guaranty Agreement (the “2019 Credit Agreement”) that was comprised of a $200,000 term loan (“Original Term Loan”) and a $50,000 revolving facility (the “Revolver”). The Company amended the 2019 Credit Agreement on October 29, 2021 in connection with the Misonix Acquisition in which the Company prepaid $80,000 on the Original Term Loan. The 2019 Credit Agreement, as amended, subsequent to the prepayment, was comprised of a $360,750 term loan (“Term Loan”) and the Revolver.
On July 11, 2022, the Company further amended the 2019 Credit and Guaranty Agreement, dated as of December 6, 2019, as amended on October 29, 2021 (the “First Amended 2019 Credit Agreement)Agreement”), in conjunction with the CartiHeal Acquisition. Pursuant to the First Amended 2019 Credit Agreement, an $80,000 term loan facility (Term(the “July 2022 Term Loan” and, together with the Term Loan, Facility)the “Term Loan Facilities”) was extended to the Company to be used for: (i) the financing of the CartiHeal Acquisition; (ii) the payment of related fees and expenses; (iii) repayment of $25,000the draws made on the Revolver; and (iv) working capital needs and general corporate purposes of the Company, including without limitation for permitted acquisitions. The Term Loan and Term Loan Facility (together, Amended Term Loan) will mature on October 29, 2026 (Maturity).
The Company may elect either the secured overnightwas not in compliance with certain financial rate (SOFR) or base interest rate options for all borrowingscovenants as of December 31, 2022. As a result, on March 31, 2023 (the “Closing Date”), the Company entered into another amendment to the 2019 Credit Agreement (collectively, with the October 2021 and July 12, 2022 which includes any outstanding balancesamendments, the “Amended 2019 Credit Agreement”) to, among other things, modify certain financial covenants, waive the noncompliance at December 31, 2022, and to modify interest rates applicable to borrowings under the Term Loan, Term Loan Facility and the Revolver. Initial SOFR loans and base rate loans had a margin of 3.25% and 2.25%, respectively, subsequent to July 12, 2022.
The Term Loan Facility had an original issue discount of $240 and deferred financing costs of $101. Scheduled principal payments increased due to the Term Loan Facility compared to the scheduled payments in the Company’s 2021 Annual Report on Form 10-K. Additional scheduled principal payments of the Term Loan Facility, which commenced on September 30, 2022, are as follows with the final payment of $50,000 at Maturity:
| | | | | |
Remainder of 2022 | $ | 2,000 | |
2023 and 2024 | $ | 12,000 | |
2025 and 2026 | $ | 16,000 | |
2019 Credit Agreement.The Amended 2019 Credit Agreement requirescontains customary affirmative and negative covenants, including those related to financial reporting and notification, restrictions on the declaration or payment of certain distributions on or in respect of Bioventus LLC’s equity interests, restrictions on acquisitions, investments and certain other payments, limitations on the incurrence of new indebtedness, limitations on transfers, sales and other dispositions of assets of Bioventus LLC and its subsidiaries, as well as limitations on making changes to the business and organizational documents of Bioventus LLC and its subsidiaries. Financial covenant requirements include a maximum debt leverage ratio and an interest coverage ratio. In addition, during the period commencing on the Closing Date and ending upon the satisfaction of certain conditions occurring not prior to the delivery of financial statements of the Company for the fiscal quarter ending June 30, 2024, the Company will be subject to comply with financialcertain additional requirements and other covenants.covenants, including a requirement to maintain Liquidity (as defined in the Amended 2019 Credit Agreement) of not less than $10,000 as of the end of each calendar month during such period. The Term Loan Facilities will mature on October 29, 2026. The Revolver will mature on October 29, 2025.
The Amended 2019 Credit Agreement had deferred financing costs of $3,661, of which $1,617 were recorded in selling, general and administrative expense within the consolidated condensed statements of operations and comprehensive loss and $2,044 were capitalized on the consolidated condensed balance sheets. There was no loss on debt refinancing and modification as a result of the March 2023 amendment.
As of April 1, 2023, $416,585 was outstanding on the Term Loan Facilities, net of original issue discount of $2,876 and deferred financing costs of $1,251. Capitalized deferred fees are amortized to interest expense on a straight-line basis over the term of the Term Loan Facilities, which approximates the effective interest method. The Company complied with all covenants as of Octoberrecorded $223 and $203 for deferred cost amortization in interest expense for the three months ended April 1, 2022.2023 and April 2, 2022, respectively. The RevolverCompany had $29,000 and no outstanding borrowings on its Revolver as of OctoberApril 1, 20222023 and none at December 31, 2021.2022, respectively.
The estimated fair value of the Amended Term Loan under the Amended 2019 Credit AgreementFacilities was $414,402 as of OctoberApril 1, 2022 was $413,702.2023. The fair value of these obligations was determined using a discounted cash flow model based on current market interest rates available to the Company. These inputs are corroborated by observable market data for similar obligations and aremidpoint of the Bloomberg Valuation. This is classified as a Level 2 instruments within the fair value hierarchy.
The Company entershistorically entered into interest rate swap agreements to limit its exposure to changes in the variable interest rate on its long-term debt. The Company hashad one non-designated interest rate swap agreement and has no other active derivatives.that was terminated on October 28, 2022. The Company received $7,738 upon the swap’s termination. The swap iswas carried at fair value on the balance sheet (Refer to Note 5. Fair value measurements) with changes in fair value recorded as interest income or expense within the consolidated condensed statements of operations and comprehensive (loss) income.loss. Net interest income of $2,222 and $81$3,924 was recorded related to the change in fair value of the interest rate swap for the three months ended October 1, 2022 and OctoberApril 2, 2021, respectively. Net interest income of $6,418 and $1,391 was recorded related to the change in fair value of the interest rate swap for the nine months ended October 1, 2022 and October 2, 2021, respectively.
The notional amount of the swap totaled $100,000, or 23.4% of the Term Loan outstanding principal at October 1, 2022. The swap locked in the variable portion of the interest rate on the $100,000 notional at 0.64%.
5. Fair value measurements
The process for determining fair value has not changed from that described in the Company’s 2021 Annual Report on Form 10-K.10-K for the year ended December 31, 2022.
There were no assets measured at fair value on a recurring basis and there were no liabilities valued at fair value using Level 1 inputs. The following table provides information for assets and liabilities measured at fair value on a recurring basis using Level 2 and Level 3 inputs:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| October 1, 2022 | | December 31, 2021 |
| Total | | Level 2 | | Level 3 | | Total | | Level 2 | | Level 3 |
Assets: | | | | | | | | | | | |
Interest rate swap | $ | 7,546 | | | $ | 7,546 | | | $ | — | | | $ | 1,128 | | | $ | 1,128 | | | $ | — | |
Liabilities: | | | | | | | | | | | |
Deferred Amount - Current | $ | 117,615 | | | $ | — | | | $ | 117,615 | | | $ | — | | | $ | — | | | $ | — | |
Deferred Amount - Long Term | 71,923 | | | — | | | 71,923 | | | — | | | — | | | — | |
CartiHeal contingent consideration- Sales Milestone | 64,765 | | | — | | | 64,765 | | | — | | | — | | | — | |
Bioness contingent consideration | 17,149 | | | — | | | 17,149 | | | 16,329 | | | — | | | 16,329 | |
Total liabilities: | $ | 271,452 | | | $ | — | | | $ | 271,452 | | | $ | 16,329 | | | $ | — | | | $ | 16,329 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| April 1, 2023 | | December 31, 2022 |
| Total | | | | Level 3 | | Total | | | | Level 3 |
Liabilities: | | | | | | | | | | | |
Deferred Amount - Current(a) | $ | — | | | | | $ | — | | | $ | 117,615 | | | | | $ | 117,615 | |
Deferred Amount - Long Term(a) | — | | | | | — | | | 79,269 | | | | | 79,269 | |
CartiHeal contingent consideration- Sales Milestone(a) | — | | | | | — | | | 67,251 | | | | | 67,251 | |
Bioness contingent consideration | 17,718 | | | | | 17,718 | | | 17,431 | | | | | 17,431 | |
Total liabilities: | $ | 17,718 | | | | | $ | 17,718 | | | $ | 281,566 | | | | | $ | 281,566 | |
Interest rate swap
(a)The Company values interest rate swaps using discounted cash flows. Forward curvesDeferred Amount and volatility levels are usedcontingent consideration attributable to estimate future cash flows that are not certain. These are determined using observable market inputs when available and based on estimates when not available. The fair value of the swap was recorded in the Company’s consolidated condensed balance sheets within prepaid and other current assets. Changes in fair value are recognized as interest income or expenseCartiHeal have been reclassified to discontinued operations within the consolidated condensed statementsDecember 31, 2022 balance sheet. CartiHeal was fully deconsolidated during the first quarter of operations2023. Refer to Note 3. Acquisitions and comprehensive (loss) income.divestitures and Note 14. Discontinued operations for further details regarding the deconsolidation of CartiHeal.
Deferred Amount
The Deferred Amount resultingthat resulted from the CartiHeal Acquisition was calculated based on the total amount payable on each due date for the five payment tranches including applicable interest as described ininterest. As previously discussed, the Company reached a settlement Agreement with the Former Securityholders. Pursuant to the Settlement Agreement, the Company was relieved of the obligations under the Deferred Amount. Refer to Note 3. Acquisitions and investmentsdivestitures .and Note 14. Discontinued operations for further details regarding the deconsolidation of CartiHeal.
Bioness & CartiHeal contingentContingent consideration
The Company initially values contingent consideration related to business combinations using a probability-weighted calculation of potential payment scenarios discounted at rates reflective of the risks associated with the expected future cash flows for certain milestones. For other milestones, the Company used a variation of the income approach where revenue was simulated in a risk-neutral framework using Geometric Brownian Motion, a stock price behavior model.
Key assumptions used to estimate the fair value of contingent consideration include projected financial information, market data and the probability and timing of achieving the specific targets as discussed in Note 3. Acquisitions and investments.targets. After the initial valuation, the Company generally uses its best estimate to measure contingent consideration at each subsequent reporting period using unobservable Level 3 inputs.
Note 3. Acquisitions and divestitures and Note 14. Discontinued operations for further details regarding the deconsolidation of CartiHeal. Unobservable inputs
A summary of unobservable Level 3 inputs utilized for the above liabilities are as follows:
| | | | | | | | | | | | | | | | | |
| Valuation Technique | | Unobservable inputs | | Range |
CartiHeal Deferred Amount | Discounted cash flow | | Payment discount rate | | 14.4% - 15.5% | |
| | | Payment Period | | 2022 - 2027 |
CartiHeal contingent consideration - Sales Milestone | Discounted cash flow | | Payment discount rate | | 14.0% - 15.6% |
| | | Payment Period | | 2022 - 2029 |
| | | | | |
Bioness contingent consideration | Discounted cash flow | | Payment discount rate | | 6.4% - 6.8% |
| | | Payment period | | 2024 - 2025 |
Significant changes in these assumptions could result in a significantly higher or lower fair value. The contingent consideration reported in the table above table resulted from the acquisition of Bioness Acquisition on March 30, 2021 and the CartiHeal Acquisition on July 12, 2022.2021. Contingent consideration is adjusted quarterly based upon the passage of time or the anticipated success or failure of achieving certain milestones. Changes in contingent consideration related to the Bioness Acquisition totaled $278$287 and $820$269 for the three and nine months ended OctoberApril 1, 2023 and April 2, 2022, respectively, and $651 and $1,292 for the three and nine months ended October 2, 2021, respectively, were recorded as the change in fair value of contingent consideration within the consolidated condensed statements of operations and comprehensive (loss) income.loss. Changes in contingent consideration related to the CartiHeal Acquisition totaled $2,864$1,710 for the three and nine months ended October 2, 2021.
Management incentive plan (MIP)April 1, 2023 and liability-classified awards
BV LLC had operated two equity-based compensation plans, the management incentive plan (MIP) and the BV LLC Phantom Profits Interest Plan (Phantom Plan and, together with the MIP, the Plans), which were terminated on February 11, 2021 in connection with the Company’s IPO. Awards granted under the MIP Plan and the 2015 Phantom Units were liability-classified and the 2012 Phantom Units were equity-classified. Prior to the IPO and during the nine months ended October 2, 2021, the Company settled the remaining 183,078 units with the sole MIP awardee for $10,802. No awards under the Plans were granted post-IPO and the Phantom Plan awards were settled 12 months following the termination. Vested awardees whose BV LLC employment terminated prior to the IPO had their awards settled in March 2022 for $10,413, which was included in accrued equity-based compensation on the consolidated balance sheets at December 31, 2021. Awardees that were active BV LLC employees at the IPO were entitled to receive an aggregate of 798,422 shares of Class A common stock. In February 2022, awardees received 538,203 shares of Class A common stock, of which 260,219 shares were withheld to satisfy employee payroll taxes.
6. Equity-based compensation
Terminated plans
Prior to the IPO, BV LLC operated two equity-based compensation plans, the MIP and the Phantom Plan, which were terminated on February 11, 2021 in conjunction with the IPO. Prior to the Plans’ termination, during the nine months ended October 2, 2021, (i) the Company granted 90,000 Phantom Plan units; (ii) there were no MIP awards granted; (iii) 900 Phantom Plan units were forfeited; and (iv) other Phantom Units were redeemed for $479. Compensation expense related to the Phantom Plan totaled $829 for the nine months ended October 2, 2021. This amount excludes the $25,185 decrease in fair market value of accrued equity-based compensation due to adjustments to reflect the difference between the expected pricing from the pending IPO and the actual offering price, of which $1,777 was recorded in research and development expenseis reported within discontinued operations, net within the consolidated condensed statements of operations and comprehensive (loss) income loss. Pursuant to the Settlement Agreement, the Company was relieved of CartiHeal related obligations. The Company deconsolidated the remaining $68,961 contingent consideration liability as a result. Refer to Note 3. Acquisitions and divestitures for further details regarding the nine months ended October 2, 2021.deconsolidation of CartiHeal.
6. Equity-based compensation
The Company operates an equity-based compensation plan (2021 Plan)(the “2021 Plan”), which allows for the issuance of stock options (incentive and nonqualified), restricted stock, dividend equivalents, restricted stock units (RSUs)(“RSUs”), other stock-based awards, and cash awards (collectively, Awards)“Awards”). As of OctoberApril 1, 2022, 11,873,7842023, 11,278,656 shares of Class A common stock were authorized to be awarded and 2,182,9352,762,266 shares were available for Awards.
Equity-based compensation expense for Awards granted under the 2021 Plan for the three months ended OctoberApril 1, 2023 and April 2, 2022, totaled $1,718 and October 2, 2021 and the nine months ended October 1, 2022 and October 2, 2021, totaled $4,512, $5,799, $13,765 and $13,521,$4,731, respectively. The expense is primarily included in selling, general and administrative expense with a nominal amount in research and development expense on the consolidated condensed statements of operations and comprehensive (loss) incomeloss based upon the classificationdepartment of the employee. There were $23$430 and $2,313$1,225 income tax benefit related to this expense for the three and nine months ended OctoberApril 1, 2023 and April 2, 2022, respectively. There was no income tax benefit related to equity-based compensation expense for the three and nine months ended October 2, 2021.
Restricted Stock Units
During the three and nine months ended OctoberApril 1, 2022,2023, the Company granted time-based RSUs which vest at various dates through September 6, 2026.January 3, 2027. RSU compensation expense is recognized over the vesting period, which is typically between 1 and 4 years. Unamortized compensation expense related to the RSUs totaled $11,195$2,265 at OctoberApril 1, 2022,2023, and is expected to be recognized over a weighted average period of approximately 2.982.50 years. A summary of the RSU award activity for the ninethree months ended OctoberApril 1, 20222023 is as follows (number of units in thousands):
| | | Number of units | | Weighted-average grant-date fair value per unit | | Number of units | | Weighted-average grant-date fair value per unit |
Unvested at December 31, 2021 | 1,024 | | | $ | 14.41 | | |
Unvested at December 31, 2022 | | Unvested at December 31, 2022 | 1,189 | | | $ | 11.96 | |
Granted | Granted | 1,233 | | | 10.79 | | Granted | 39 | | | 2.78 | |
Vested | Vested | (746) | | | 14.75 | | Vested | (223) | | | 12.77 | |
Forfeited or canceled | Forfeited or canceled | (249) | | | 7.09 | | Forfeited or canceled | (100) | | | 12.66 | |
Unvested at October 1, 2022 | 1,262 | | | $ | 12.10 | | |
Unvested at April 1, 2023 | | Unvested at April 1, 2023 | 905 | | | $ | 11.29 | |
Stock Options
During the ninethree months ended OctoberApril 1, 2022,2023, the Company granted time-based stock options which vest over 2 to 4 years following the date of grant and expire within 10 years. The fair value of time-based stock options is determined using the Black-Scholes valuation model, with such value recognized as expense over the service period, which is typically 2 to 4 years, net of actual forfeitures. A summary of the Company’s assumptions used in determining the fair value of the stock options granted during the ninethree months ended OctoberApril 1, 20222023 is shown in the following table.
| | | | | |
Risk-free interest rate | 1.8% - 3.4%3.9% |
Expected dividend yield | — | % |
Expected stock price volatility | 33.2% - 34.2%35.2% |
Expected life of stock options (years) | 6.25 |
The weighted-average grant date fair value of options granted during the ninethree months ended OctoberApril 1, 20222023 was $4.57$1.10 per share. The expected term of the options granted is estimated using the simplified method. Expected volatility is based on the historical volatility of the Company’s peerspeers’ common stock. The risk-free interest rate is determined based upon a constant U.S. Treasury security rate with a contractual life that approximates the expected term of the option. Unamortized compensation expense related to the options totaled $15,044$9,614 at OctoberApril 1, 2022,2023, and is expected to be recognized over a weighted average period of approximately 3.173.78 years.
A summary of stock option activity is as follows for the ninethree months ended OctoberApril 1, 20222023 (number of options in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of options | | Weighted-average exercise price | | Weighted average remaining contractual term | | Aggregate intrinsic value |
Outstanding at December 31, 2021 | 8,364 | | | $ | 11.16 | | | | | |
Granted | 2,571 | | | 12.28 | | | | | |
Exercised | (512) | | | 6.69 | | | | | |
Forfeited or canceled | (798) | | | 12.79 | | | | | |
Outstanding at October 1, 2022 | 9,625 | | | 11.57 | | | 7.90 years | | $ | 2,187 | |
Exercisable and vested at October 1, 2022 | 4,065 | | | $ | 9.81 | | | 6.55 years | | $ | 2,187 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of options | | Weighted-average exercise price | | Weighted average remaining contractual term | | Aggregate intrinsic value |
Outstanding at December 31, 2022 | 8,910 | | | $ | 11.65 | | | | | |
Granted | 22 | | | 2.61 | | | | | |
| | | | | | | |
| | | | | | | |
Forfeited or canceled | (636) | | | 12.61 | | | | | |
Outstanding at April 1, 2023 | 8,296 | | | 11.56 | | | 7.44 years | | $ | — | |
Exercisable and vested at April 1, 2023 | 5,026 | | | $ | 10.87 | | | 6.74 years | | $ | — | |
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the market price of the Company’s Class A common stock for options that had exercise prices lower than $7.00$1.07 per share, the closing price of the Company’s Class A common stock on September 30, 2022.March 31, 2023.
Employee Stock Purchase Plan
The Company operates a non-qualified Employee Stock Purchase Plan (ESPP)(“ESPP”), which provides for the issuance of shares of the Company’s Class A common stock to eligible employees of the Company that elect to participate in the plan and purchase shares of Class A common stock through payroll deductions at a discounted price. As of OctoberApril 1, 2022,2023, the aggregate number of shares reserved for issuance under the ESPP was 275,372.1,181,830. A total of 69,334 and 172,153222,076 shares were issued and $136 and $388$128 of expense was recognized during the three and nine months ended OctoberApril 1, 2022, respectively.2023. A total of 34,640 and 58,70348,993 shares were issued and $139 and $214$158 of expense was recognized during the three and nine months ended OctoberApril 2, 2021.2022.
7. Stockholders’ equity
Initial Public Offering
On February 16, 2021, the Company closed an IPO of 9,200,000 shares of Class A common stock at a public offering price of $13.00 per share, which includes 1,200,000 shares issued pursuant to the underwriters' over-allotment option. In connection with the IPO, the Company completed the following transactions (“Transactions”).
•Amended and restated the limited liability company agreement of BV LLC (“BV LLC Agreement”), to, among other things, (i) provide for a new single class of common membership interests in BV LLC (“LLC Interests”); (ii) exchange all of the existing membership interests in BV LLC (“Original BV LLC Owners”) for new LLC Interests; and (iii) appoint Bioventus Inc. as the sole managing member of BV LLC.
•Amended and restated the Bioventus Inc. certificate of incorporation to, among other things, (i) provide for an increase in the authorized shares of Class A common stock; (ii) provide for Class B common stock with voting rights but no economic interest, which shares were issued to the Original BV LLC Owners on a one-for-one basis with the number of LLC Interests they owned; and (iii) provide for undesignated preferred stock.
•Acquired, by merger, ten entities that were Original BV LLC Owners (“Former LLC Owners”), for which the Company issued 31,838,589 shares of Class A common stock as merger consideration (“IPO Mergers”). The only assets held by the Former LLC Owners were 31,838,589 LLC Interests and a corresponding number of shares of Class B common stock. Upon consummation of the IPO Mergers, the 31,838,589 shares of Class B common stock were canceled, and the Company recognized the 31,838,589 LLC Interests at carrying value, as the IPO Mergers are considered to be a recapitalization transaction.
Amendment and restatement of certificate of incorporation
On February 16, 2021, the Company amended and restated its certificate of incorporation to, among other things, provide for: (i) the authorization of 250,000,000 shares of Class A common stock with a par value of $0.001 per share; (ii) the authorization of 50,000,000 shares of Class B common stock with a par value of $0.001 per share; (iii) the authorization of 10,000,000 shares of undesignated preferred stock that may be issued from time to time by the BOD in one or more series; and (iv) the establishment of a classified BOD, divided into three classes, each of whose members will serve for staggered three-year terms.
Holders of Class A and Class B common stock are entitled to one vote per share and, except as otherwise required, will vote together as a single class on all matters on which stockholders generally are entitled to vote. Holders of Class B common stock are not entitled to receive dividends and will not be entitled to receive any distributions upon the liquidation, dissolution or winding up of the Company. Shares of Class B common stock may only be issued to the extent necessary to maintain the one-to-one ratio between the number of LLC Interests and the number of shares of Class B common stock held by the ContinuingSmith & Nephew, Inc. (the “Continuing LLC Owner.Owner”). Shares of Class B common stock are transferable only together with an equal number of LLC Interests. Shares of Class B common stock will be canceled on a one-for-one basis upon the redemption or exchange of any outstanding LLC Interests.
The Company must, at all times, maintain a one-to-one ratio between the number of outstanding shares of Class A common stock and the number of LLC Interests owned by the Company.
BV LLC recapitalization
As described in Note 1. Organization, on February 16, 2021, the Company amended and restated the BV LLC Agreement to, among other things, (i) provide for the new LLC Interests; (ii) exchange all of the then-existing membership interests of the Original BV LLC Owners for new LLC Interests; and (iii) appoint Bioventus Inc. as the sole managing member of BV LLC.
The BV LLC Agreement also provides that holders of LLC Interests may, from time to time, require the Company to redeem all or a portion of their LLC Interests for newly-issued shares of Class A common stock on a one-for-one basis. The Company may elect to settle any such redemption in shares of Class A common stock or in cash.
The amendment also requires that the Company, at all times, maintain (i) a one-to-one ratio between the number of outstanding shares of Class A common stock and the number of LLC Interests owned by the Company and (ii) a one-to-one ratio between the number of shares of Class B common stock owned by the Continuing LLC Owner and the number of LLC Interests owned by the Continuing LLC Owner.
Noncontrolling interest
In connection with any redemption, the Company will receive a corresponding number of LLC Interests, increasing its ownership interest in BV LLC. Future redemptions of LLC Interests will result in a change in ownership and reduce the amount recorded as noncontrolling interest and increase additional paid-in capital. There were no redemptions during the ninethree months ended OctoberApril 1, 20222023 or during the year ended December 31, 2021.2022. The following table summarizes the ownership interest in BV LLC as of OctoberApril 1, 20222023 and December 31, 20212022 (number of units in thousands):
| | | October 1, 2022 | | December 31, 2021 | | April 1, 2023 | | December 31, 2022 |
| | LLC Interests | | Ownership % | | LLC Interests | | Ownership % | | LLC Interests | | Ownership % | | LLC Interests | | Ownership % |
Number of LLC Interests owned | Number of LLC Interests owned | | | | | | | | Number of LLC Interests owned | | | | | | | |
Bioventus Inc. | Bioventus Inc. | 61,778 | | | 79.6 | % | | 59,548 | | | 79.0 | % | Bioventus Inc. | 62,508 | | | 79.8 | % | | 62,063 | | | 79.7 | % |
Continuing LLC Owner | Continuing LLC Owner | 15,787 | | | 20.4 | % | | 15,787 | | | 21.0 | % | Continuing LLC Owner | 15,787 | | | 20.2 | % | | 15,787 | | | 20.3 | % |
Total | Total | 77,565 | | | 100.0 | % | | 75,335 | | | 100.0 | % | Total | 78,295 | | | 100.0 | % | | 77,850 | | | 100.0 | % |
8. Earnings per share
The following table sets forth the computation of basic and diluted loss per share of Class A common stock for the periods presented (amounts in thousands, except share and per share data):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Three Months Ended | | | | |
| October 1, 2022 | | October 2, 2021 | | Nine Months Ended October 1, 2022 | | February 16, 2021 through October 2, 2021 |
Numerator: | | | | | | | |
Net loss | $ | (145,698) | | | $ | (2,269) | | | $ | (168,518) | | | $ | (14,498) | |
Net loss attributable to noncontrolling interests | 37,453 | | | 1,198 | | | 41,744 | | | 8,260 | |
Net loss attributable to Bioventus Inc. Class A common stockholders | $ | (108,245) | | | $ | (1,071) | | | $ | (126,774) | | | $ | (6,238) | |
| | | | | | | |
Denominator: | | | | | | | |
Weighted-average shares of Class A common stock outstanding - basic and diluted | 61,674,254 | | | 41,837,581 | | | 61,208,941 | | | 41,816,706 | |
| | | | | | | |
Net loss per share of Class A common stock, basic and diluted | $ | (1.76) | | | $ | (0.03) | | | $ | (2.07) | | | $ | (0.15) | |
| | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended |
| | | | | April 1, 2023 | | April 2, 2022 |
Numerator: | | | | | | | |
Net (loss) income from continuing operations, net of tax | | | | | $ | (100,018) | | | $ | (14,405) | |
Net loss attributable to noncontrolling interests — continuing operations | | | | | 20,360 | | | 3,529 | |
Net loss attributable to Bioventus Inc. Class A common stockholders — continuing operations | | | | | $ | (79,658) | | | $ | (10,876) | |
| | | | | | | |
Numerator: | | | | | | | |
Net (loss) income from discontinued operations, net of tax | | | | | $ | (74,429) | | | $ | (401) | |
Net loss attributable to noncontrolling interests — discontinued operations | | | | | 14,937 | | | — | |
Net loss attributable to Bioventus Inc. Class A common stockholders — discontinued operations | | | | | $ | (59,492) | | | $ | (401) | |
| | | | | | | |
Denominator: | | | | | | | |
Weighted-average shares of Class A common stock outstanding - basic and diluted | | | | | 62,124,752 | | | 60,484,969 | |
| | | | | | | |
Net loss per share of Class A common stock from continuing operations, basic and diluted | | | | | $ | (1.28) | | | $ | (0.18) | |
Net loss per share of Class A common stock from discontinued operations, basic and diluted | | | | | (0.96) | | | (0.01) | |
Net loss per share of Class A common stock, basic and diluted | | | | | $ | (2.24) | | | $ | (0.19) | |
Shares of Class B common stock do not share in the losses of the Company and are therefore not participating securities. As such, separate presentation of basic and diluted losses per share of Class B common stock under the two-class method has not been presented.
The following number of weighted-average potentially dilutive shares as of OctoberApril 1, 20222023 and OctoberApril 2, 20212022 were excluded from the calculation of diluted loss per share because the effect of including such potentially dilutive shares would have been antidilutive upon conversion:
| | | Three Months Ended | | | | Three Months Ended |
| | October 1, 2022 | | October 2, 2021 | | Nine Months Ended October 1, 2022 | | February 16, 2021 through October 2, 2021 | | | April 1, 2023 | | April 2, 2022 |
LLC Interests held by Continuing LLC Owner(a) | LLC Interests held by Continuing LLC Owner(a) | 15,786,737 | | | 15,786,737 | | | 15,786,737 | | | 15,786,737 | | LLC Interests held by Continuing LLC Owner(a) | | 15,786,737 | | | 15,786,737 | |
Stock options | Stock options | 8,186,264 | | | 4,657,637 | | | 7,488,407 | | | 4,624,655 | | Stock options | | 8,517,045 | | | 8,757,706 | |
RSUs | RSUs | 910,521 | | | 961,429 | | | 605,212 | | | 838,818 | | RSUs | | 1,070,105 | | | 462,404 | |
Unvested shares of Class A common stock | — | | | 26,946 | | | — | | | 30,530 | | |
Total | Total | 24,883,522 | | | 21,432,749 | | | 23,880,356 | | | 21,280,740 | | Total | | 25,373,887 | | | 25,006,847 | |
(a)Class A Shares reserved for future issuance upon redemption or exchange of LLC Interests by the Continuing LLC Owner.
9. Restructuring costs
Restructuring costs are not allocated to the Company’s reportable segments as they are not part of the segment performance measures regularly reviewed by management. These charges are included in restructuring costs in the consolidated condensed statements of operations and comprehensive (loss) income.loss. Liabilities associated from restructuring costs are recorded in accrued liabilities on the consolidated balance sheets.
The Company announced a restructuring plan in December 2022 (the “2022 Restructuring Plan”) that is intended to align the Company’s organizational and management cost structure to improve profitability and cash flow. The Company expects to incur $4,000 to $5,000 of pre-tax costs under the 2022 Restructuring Plan primarily consisting of employee severance and additional expenses for third-party and other related costs. Pre-tax charges recognized during the three months ended April 1, 2023 and the year ended December 31, 2022 totaled $262 and $4,581, respectively.
The Company adopted restructuring plans for businesses acquired to reduce headcount, reorganize management structure and consolidate certain facilities during the second half of 2021 (the 2021“2021 Acquisition Restructuring Plan)Plan”) and during the first quarter of 2022 (the 2022“2022 Acquisition Restructuring Plan)Plan”). The Company planned total pre-tax charges for the 2021 Acquisition Restructuring Plan and 2022 Acquisition Restructuring Plan are $3,500 and $2,300, respectively. There was nominal activity related to be $3,500, of which $92 and $692 was recognized in the three and nine months ended October 1, 2022, respectively, and $1,798 was recorded2021 Acquisition Restructuring Plan during the three and nine months ended October 2, 2021. Expected pre-tax charges related to the 2022 Restructuring Plan is $2,300, of which $483April 1, 2023 and $1,467 was$377, $719 and $2,487 recognized during the three and nine months ended OctoberApril 2, 2022, and the years ended December 31, 2022 and 2021, respectively. The 2021 Acquisition Restructuring Plan is essentially completed. Costs incurred attributable to the 2022 Acquisition Restructuring Plan totaled $84, $200 and $1,479 during the three months ended April 1, 2023 and April 2, 2022, and the year ended December 31, 2022, respectively.
The Company’s restructuring charges and payments for plans related to businesses recently acquired comprised of the following:
| | | Employee severance and temporary labor costs | | Other charges | | Total | | Employee severance and temporary labor costs | | Other charges | | Total |
Balance at December 31, 2021 | $ | 1,400 | | | $ | 136 | | | $ | 1,536 | | |
Balance at December 31, 2022 | | Balance at December 31, 2022 | $ | 3,760 | | | $ | — | | | $ | 3,760 | |
Expenses incurred | Expenses incurred | 2,159 | | | — | | | 2,159 | | Expenses incurred | 125 | | | 192 | | | 317 | |
Payments made | Payments made | (2,574) | | | (136) | | | (2,710) | | Payments made | (1,653) | | | (192) | | | (1,845) | |
Balance at October 1, 2022 | $ | 985 | | | $ | — | | | $ | 985 | | |
Balance at April 1, 2023 | | Balance at April 1, 2023 | $ | 2,232 | | | $ | — | | | $ | 2,232 | |
10. Income taxes
As a result of the Transactions, Bioventus Inc. became the sole managing member of BV LLC, which is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, BV LLC is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by BV LLC is passed through to and included in the taxable income or loss of its members, including the Company following the Transactions, on a pro rata basis. Bioventus Inc. is subject to U.S. federal income taxes, in addition to state and local income taxes with respect to its allocable share of any taxable income of BV LLC following the Transactions. The Company also is subject to taxes in foreign jurisdictions.
The tax provision for interim periods is determined using an estimate of the Company's annual effective tax rate, adjusted for discrete items, if any, that arise during the period. Each quarter, the Company updates its estimate of its annual effective tax rate, and if the estimated annual effective tax rate changes, the Company makes a cumulative adjustment in such period. The quarterly tax provision, and estimate of the Company's annual effective tax rate, are subject to variation due to several factors, including variability in pre-tax income (or loss), the mix of jurisdictions to which such income relates, changes in how the Company conducts business, and tax law developments.
For the three months ended OctoberApril 1, 20222023 and OctoberApril 2, 2021 and the nine months ended October 1, 2022, and October 2, 2021, the Company's effective tax rate was 22.3%, 28.0%, 21.3%0.1% and 6.2%26.3%, respectively. The decrease for the three months ended OctoberApril 1, 20222023 was primarily due to changes in our forecasted effective rate and a net increase in reserve for uncertain tax positions. The change in the forecasted effective rate for the ninethree months ended OctoberApril 1, 20222023 compared to ninethree months ended OctoberApril 2, 20212022 was primarily due to changesan increase in the valuation allowance applied to our forecasted effective rate, compared to capitalized expenses resulting from the Company’s IPO in 2021.net deferred tax assets.
Tax Receivable Agreement
The Company expects to obtain an increase in the share of the tax basis of the assets of BV LLC when LLC Interests are redeemed or exchanged by the Continuing LLC Owner and other qualifying transactions. This increase in tax basis may have the effect of reducing the amounts that the Company would otherwise pay in the future to various tax authorities. The increase in tax basis may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
On February 16, 2021, the Company entered into a tax receivable agreement (TRA)(“TRA”) with the Continuing LLC Owner that provides for the payment by the Company to the Continuing LLC Owner of 85% of the amount of tax benefits, if any, that the Company actually realizes as a result of (i) increases in the tax basis of assets of BV LLC resulting from any redemptions or exchanges of LLC Interests or any prior sales of interests in BV LLC; and (ii) certain other tax benefits related to our making payments under the TRA.
The Company will maintain a full valuation allowance against deferred tax assets related to the tax attributes generated as a result of redemptions of LLC Interests or exchanges described above until it is determined that the benefits are more-likely-than-not to be realized. As of OctoberApril 1, 2022,2023, the Continuing LLC Owner had not exchanged LLC Interests for shares of Class A common stock and therefore the Company had not recorded any liabilities under the TRA.
11. Commitments and contingencies
Leases
The Company leases its office facilities as well as other property, vehicles and equipment under operating leases. The Company also leases certain office equipment under nominal finance leases. The remaining lease terms range from 1 month to 610 years.
The components of lease cost were as follows:
| | | Three Months Ended | | Nine Months Ended | | | Three Months Ended |
| | October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 | | | April 1, 2023 | | April 2, 2022 |
Operating lease cost | Operating lease cost | $ | 1,238 | | | $ | 885 | | | $ | 3,544 | | | $ | 2,499 | | Operating lease cost | | $ | 1,069 | | | $ | 1,126 | |
Short-term lease cost(a) | Short-term lease cost(a) | 190 | | | 153 | | | 518 | | | 482 | | Short-term lease cost(a) | | 206 | | | 183 | |
| Financing lease cost: | | Financing lease cost: | | | | |
Amortization of finance lease assets | | Amortization of finance lease assets | | 235 | | | 9 | |
Interest on lease liabilities | | Interest on lease liabilities | | 137 | | | 1 | |
Total lease cost | Total lease cost | $ | 1,428 | | | $ | 1,038 | | | $ | 4,062 | | | $ | 2,981 | | Total lease cost | | $ | 1,647 | | | $ | 1,319 | |
(a)Includes variable lease cost and sublease income, which are immaterial.
Supplemental cash flow information and non-cash activity related to operating leases were as follows:
| | | Nine Months Ended | | Three Months Ended |
| | October 1, 2022 | | October 2, 2021 | | April 1, 2023 | | April 2, 2022 |
Cash paid for amounts included in measurement of lease liabilities: | | Cash paid for amounts included in measurement of lease liabilities: | | | |
Operating cash flows from operating leases | Operating cash flows from operating leases | $ | 3,515 | | | $ | 2,598 | | Operating cash flows from operating leases | $ | 1,100 | | | $ | 1,254 | |
Operating cash flows from financing leases | | Operating cash flows from financing leases | $ | 90 | | | $ | 1 | |
Financing cash flows from finance leases | | Financing cash flows from finance leases | $ | 37 | | | $ | 13 | |
| Right-of-use assets obtained in exchange for operating lease obligations | $ | 2,494 | | | $ | — | | |
| Right-of-use assets obtained in exchange for lease obligations: | | Right-of-use assets obtained in exchange for lease obligations: | |
Operating lease obligations | | Operating lease obligations | $ | 225 | | | $ | — | |
Financing lease obligations | | Financing lease obligations | $ | 9,141 | | | $ | — | |
Supplemental balance sheet and other information related to operating leases were as follows:
| | | October 1, 2022 | | December 31, 2021 | | April 1, 2023 | | December 31, 2022 |
Operating lease assets(a) | Operating lease assets(a) | $ | 16,304 | | $ | 17,186 | Operating lease assets(a) | $ | 16,063 | | $ | 16,690 |
| Operating lease liabilities- current(b) | Operating lease liabilities- current(b) | $ | 3,434 | | $ | 3,504 | Operating lease liabilities- current(b) | $ | 3,854 | | $ | 3,552 |
Operating lease liabilities- noncurrent(b) | Operating lease liabilities- noncurrent(b) | 14,157 | | 15,038 | Operating lease liabilities- noncurrent(b) | 13,455 | | 14,355 |
Total operating lease liabilities | Total operating lease liabilities | $ | 17,591 | | $ | 18,542 | Total operating lease liabilities | $ | 17,309 | | $ | 17,907 |
| Property, plant and equipment - net (finance leases) | | Property, plant and equipment - net (finance leases) | $ | 9,034 | | $ | 128 |
| Finance lease liabilities - current | | Finance lease liabilities - current | $ | 419 | | $ | 55 |
Finance lease liabilities - noncurrent | | Finance lease liabilities - noncurrent | 6,602 | | 76 |
Total financing lease liabilities | | Total financing lease liabilities | $ | 7,021 | | $ | 131 |
| Weighted average remaining lease term (years) for leases | | Weighted average remaining lease term (years) for leases | |
Operating leases | | Operating leases | 4.6 | | 4.8 |
Finance leases | | Finance leases | 10.0 | | 2.4 |
| Weighted average remaining lease term (years) | | |
Weighted average remaining lease term (years) for operating leases | 5.0 | | 5.6 | |
| Weighted average discount rate for operating leases | 4.6 | % | | 4.7 | % | |
| Weighted average discount rate for leases | | Weighted average discount rate for leases | |
Operating leases | | Operating leases | 4.6 | % | | 4.8 | % |
Finance leases | | Finance leases | 8.0 | % | | 3.3 | % |
(a)Operating lease assets totaling $618 attributable to CartiHeal was reclassified to long-term assets attributable to discontinued operations within the December 31, 2022 consolidated balance sheets. Refer to Note 3. Acquisitions and divestitures and Note 14. Discontinued operations for further details regarding the deconsolidation of CartiHeal.
(b)Operating lease liabilities-current totaling $176 and operating lease liabilities-noncurrent of $442 were reclassified into current liabilities attributable to discontinued operations and long-term liabilities attributable to discontinued operations, respectively, within the December 31, 2022 consolidated balance sheets. Refer to Note 3. Acquisitions and divestitures and Note 14. Discontinued operations for further details regarding the deconsolidation of CartiHeal.
Governmental and legal contingencies
In the normal course of business, the Company periodically becomes involved in various claims and lawsuits, and governmental proceedings and investigations that are incidental to theits business. The Company accrues a liability when a loss is considered probable and the amount can be reasonably estimated. When a material loss contingency is reasonably possible but not probable, the Company does not record a liability, but instead discloses the nature and amount of the claim, and an estimate of the possible loss or range of loss, if such an estimate can be made. Legal fees are expensed as incurred. With respect to governmental proceedings and investigations, like other companies in the industry, the Company is subject to extensive regulation by national, state and local governmental agencies in the U.S.United States and in other jurisdictions in which the Company and its affiliates operate. As a result, interaction with governmental agencies is ongoing. The Company’s standard practice is to cooperate with regulators and investigators in responding to inquiries.
The Company is presently unable to predict the duration, scope, or result of the followingthese matters. As such, the Company is presently unable to develop a reasonable estimate of a possible loss or range of losses, if any, related to these matters. While the Company intends to defend these matters vigorously, the outcome of such litigation or any other litigation is necessarily uncertain, areis not within the Company’s complete control and might not be known for extended periods of time. In the opinion of management, the outcome of any existing claims and legal or regulatory proceedings, other than the specific matters described below, if decided adversely, is not expected to have a material adverse effect on the Company's business, financial condition, results of operations, or cash flows.
Bioventus shareholder litigation
On January 12, 2023, the Company and certain of its current and former directors and officers were named as defendants in a putative class action lawsuit filed in the Middle District of North Carolina, Ciarciello v. Bioventus, Inc., No. 1:23– CV – 00032-CCE-JEP (M.D.N.C. 2023). The complaint asserts violations of Sections 10(b) and 20(a) of the Exchange Act and of Sections 11 and 15 of the Securities Act and generally alleges that the Company failed to disclose certain information regarding rebate practices, its business and financial prospects, and the sufficiency of internal controls regarding financial reporting. The complaint seeks damages in an unspecified amount. On April 12, 2023, the Court appointed Wayne County Employees’ Retirement System as lead plaintiff. The lead plaintiff’s amended consolidated complaint is due to be filed with the Court on June 12, 2023. Defendants’ motion to dismiss the amended consolidated complaint is due on July 17, 2023. The Company believes the claims alleged lack merit and intends to defend itself vigorously. The outcome of the litigation is not presently determinable, and any loss is neither probable nor reasonably estimable.
Bioness Patent Litigationpatent litigation
On June 15, 2022, the Company, through its subsidiary Bioness, filed a lawsuit in the United States District Court for the Eastern District of Virginia against Aretech, LLC (“Aretech”) alleging infringement by Aretech of various patents related the Bioness’ Vector Gait and Safety Support System®. On August 8, 2022, Aretech filed an answer to the lawsuit denying infringement and asserting various affirmative defenses and counterclaims to the Bioness complaint. Bioness filed a motion to dismiss the defendant’s counterclaims on September 28, 2022. In response to Bioness’ motion to dismiss the counterclaims, on October 19, 2022, Aretech filed an amended answer and counterclaims. The Company is currently reviewingOn November 16, 2022, Bioness filed a partial motion to dismiss certain of the amendmentsamended counterclaims. On January 23, 2023, the court granted-in-part Bioness’ motion dismissing Aretech’s antitrust and planinventorship-related counterclaims, but allowed certain of Aretech’s counterclaims to aggressively defend its patentsproceed. On March 23, 2023, the parties entered into a settlement and license agreement that resolved all claims in the litigation. The agreement also provides cross licenses to the parties for certain of their respective patents relevant to the claims asserted in the litigation.
Misonix stockholder
On September 15, 2021, a purported stockholder of Misonix filed an action in the United States District Court for the Eastern District of New York, captioned Stein v. Misonix, Inc., et al., Case No. 2:21-cv-05127 (E.D.N.Y.) (the Stein Complaint)“Stein Complaint”). The Stein Complaint named Misonix and members of its board of directors as defendants. The Stein Complaint was dismissed on April 6, 2022. On September 16, 2021, a purported stockholder of Misonix filed an action in the United States District Court for the Southern District of New York, captioned Ciccotelli v. Misonix, Inc. et al., Case No. 1:21-cv-07773 (S.D.N.Y.) (the Ciccotelli Complaint)“Ciccotelli Complaint”) against Misonix, members of its board of directors, the Company, and its subsidiaries, Merger Sub I and Merger Sub II, as defendants. Plaintiff voluntarily dismissed the Ciccotelli Complaint on November 10, 2021. On October 12, 2021, another purported stockholder of Misonix filed an action in the United States District Court for the Eastern District of New York, captioned Rubin v. Misonix, Inc. et al., Case No. 1:21-cv-05672 (S.D.N.Y.) (the Rubin Complaint)“Rubin Complaint”) and on October 15, 2021, another purported stockholder of Misonix filed an action in the United States District Court for the Southern District of New York, captioned Taylor v. Misonix, Inc. et al., Case No. 1:21-cv-08513 (S.D.N.Y.) (the Taylor Complaint)“Taylor Complaint”). The Rubin Complaint and the Taylor Complaint name Misonix and members of its board of directors as defendants. Plaintiffs voluntarily dismissed the Rubin and Taylor Complaints on January 21, 2022 and February 18, 2022, respectively.
The complaints asserted claims under Section 14(a) and Section 20(a) of the Exchange Act and SEC Rule 14a-9, challenging the adequacy of disclosures in the proxy statement/prospectus filed with the SEC on September 8, 2021 or the Definitive Proxy Statement filed with the SEC on September 24, 2021, regarding Misonix and/or Bioventus’ projections and J.P. Morgan’s financial analysis. The complaints had sought, among other relief, (i) injunctive relief preventing the parties from proceeding with the merger; (ii) rescission in the event that the merger is consummated; and (iii) an award of costs, including attorneys’ and experts’ fees.
Misonix former distributor
On March 23, 2017, Misonix’s former distributor in China, Cicel (Beijing) Science & Technology Co., Ltd., filed a lawsuit against Misonix and certain of its officers and directors in the United States District Court for the Eastern District of New York. The complaint alleged that Misonix improperly terminated its contract with the former distributor. The complaint sought various remedies, including compensatory and punitive damages, specific performance and preliminary and post judgment injunctive relief, and asserted various causes of action, including breach of contract, unfair competition, tortious interference with contract, fraudulent inducement, and conversion. On October 7, 2017, the court granted Misonix’s motion to dismiss each of the tort claims asserted against Misonix, and also granted the individual defendants’ motion to dismiss all claims asserted against them. On January 23, 2020, the Courtcourt granted Cicel’s motion to amend its complaint, to include claims for alleged defamation and theft of trade secrets in addition to the breach of contract claim. Discovery in the matter ended on August 5, 2021. On January 20, 2022, the Courtcourt granted Misonix’s summary judgment motion on Cicel’s breach of contract and defamation claims. Cicel’s motion for reconsideration of the Court’scourt’s summary judgment ruling in Misonix’s favor was dismissed by the Court on April 29, 2022. On July 18, 2022, Cicel voluntarily dismissed the remaining claim for trade secret theft and stated its intention tolater filed an appeal the Court’s January 20, 2022 ruling on the breach of contract and defamation claims to the United States Court of Appeals.Appeals for the Second Circuit. The Company believes that it has various legal and factual defenses to these claims and intends to vigorously defend anythe appeal of the lower court’s summary judgment rulings in its favor.
Bioness shareholder
Prior to closing the Bioness Acquisition, Bioness had been named as a defendant in a lawsuit, for which the Company is indemnified under the indemnification provisions contained in the Bioness Merger Agreement. The case relates to an action brought in February 2021 in the Delaware State Court of Chancery by a former minority shareholder and director of Bioness, seeking a temporary restraining order contesting the acquisition of Bioness. While the complaint to block the Bioness acquisition was dismissed by the court, a separate action was brought against the Company under the indemnification provisions of the Bioness Certificate of Incorporation to recover attorney fees and other expenses totaling approximately $2,400$3,000 incurred by the director and shareholder in connection with the dismissed case.matter.
On August 19, 2021, the court issued a ruling granting, in part, plaintiff’s motion for summary judgment, awarding plaintiff attorney’s fees and related expenses incurred in connection with performance of the plaintiff’s directorial duties, and denying fees and expenses incurred in a non-director capacity. In its ruling, the Court’scourt’s order also directed the parties to agree upon a process that will govern the payment of and challenges to plaintiff’s payment requests and required Bioness to pay 50% of the demanded amount into escrow if more than 50% of the total invoiced amount was in dispute. Pursuant to the court’s order, to date, Bioness has paid approximately $1,200$1,300 into escrow. On November 1, 2022, at a hearing before Delaware State Court of Chancery, the court ruled in favor of the former Bioness director awarding attorney’s fees in connection with the underlying pre-merger litigation and the advancement action in the amounts claimed, less approximately $50. We are currently evaluatingOn December 23, 2022, Bioness and the plaintiff entered into a settlement agreement resolving the matter for the aggregate sum of $2,500 payable to the plaintiff. The settlement was satisfied by releasing the $1,300 previously paid by Bioness and held in escrow and by an appealadditional payment of $1,200. Pursuant to the court’s ruling.indemnification obligations under the Bioness Merger Agreement, this subsequent payment was made on behalf of Bioness on December 28. 2022, by the selling majority shareholder under that agreement. The Company subsequently recovered the $1,300 paid into escrow from the selling Bioness shareholders pursuant an indemnification request under the Bioness Merger Agreement. An order dismissing the case was entered by the court on January 27, 2023.
On February 8, 2022, the above referenced minority shareholder of Bioness filed another action in the Delaware State Court of Chancery in connection with ourthe Company’s acquisition of Bioness. This action names the former Bioness directors, the Alfred E. Mann Trust (Trust), which was the former majority shareholder of Bioness, the trustees of the Trust and Bioventus as defendants. The complaint alleges, among other things, that the individual directors, the Trust, and the trustees breached their fiduciary duty to the plaintiff in connection with their consideration and approval of ourthe Company’s transaction. The complaint also alleges that wethe Company aided and abetted the other defendants in breaching their fiduciary duties to the plaintiff and that wethe Company breached the Merger Agreement by failing to pay the plaintiff its pro rata share of the merger consideration. We believeThe Company believes that we areit is indemnified under the indemnification provisions contained in the Bioness Merger Agreement for these claims. On July 20, 2022, wethe Company filed a motion to dismiss all claims made against usit on various grounds, as did all the other named defendants in the suit. A hearing on Bioness’ and other the defendant’s motions was held before the Court of Chancery on January 19, 2023. The Court has not yet ruled on any of these motions. We also believeCompany believes that there are various legal and factual defenses to the claims plaintiff made against us and intend to defend ourselves vigorously. On April 27, 2023, the Court issued an order which, among other things, dismissed Bioventus from the case.
Other matters
On November 10, 2021, the Company entered into an asset purchase agreement for an HA product and made an upfront payment of $853. An additional payment of $853 was made in 2022 upon the transfer of certain seller customer data. If the Company is able to obtain a Medical Device Regulation Certification for the product, $1,707 will be paid to the seller within five days. The Company is required to pay royalties through 2026 of 5.0% on the first $569 in sales and 2.5% thereafter.
On August 23, 2019, the Company was assigned a third-party license on a product currently in development and the Company is subject to a 3% royalty on certain commercial sales, or a nominal minimum amount per quarter, beginning in 2023.quarter.
On May 29, 2019, the Company and the Musculoskeletal Transplant Foundation, Inc. d/b/a MTF Biologics (MTF), entered into a collaboration and development agreement to develop one or more products for orthopedic application to be commercialized by the Company and supplied by MTF (the Development Agreement). The first phase has been completed, but during the second quarter of 2022, the Company elected to discontinue the development of MOTYS, the initial product candidate under development. On October 21, 2022, the Company provided notice to MTF of termination of the Development Agreement and the related cGTP Commercial Supply Agreement with MTF for MOTYS, effective December 20, 2022.
On December 9, 2016, the Company entered into an amended and restated license agreement for the exclusive U.S. distribution and commercialization rights of a single injection osteoarthritis (OA) product with the supplier of the Company’s single injection OA product for the non-U.S. market. The agreement requires the Company to meet annual minimum purchase requirements and pay royalties on net sales. Royalties related to this agreement during the three months ended OctoberApril 1, 2023 and April 2, 2022 totaled $2,321 and October 2, 2021 and nine months ended October 1, 2022 and October 2, 2021 totaled $3,813, $3,677, $11,228 and $9,602,$3,332, respectively. These royalties are included in cost of sales within the consolidated condensed statements of operations and comprehensive (loss) income.loss.
As part of a supply agreement entered on February 9, 2016 for the Company’s three injection OA product, the Company is subject to annual minimum purchase requirements for 10 years. After the initial 10 years, the agreement will automatically renew for an additional 5 years unless terminated by the Company or the seller in accordance with the agreement.
As part of a supply agreement for the Company’s five injection OA product that was amended and restated on December 22, 2020, the Company is subject to annual minimum purchase requirements for 8 years.
The Company has an exclusive license agreement for bioactive bone graft putty. The Company is required to pay a royalty on all commercial sales revenue from the licensed products with a minimum annual royalty payment through 2023, the date the agreement will expire, upon the expiration of the patent held by the licensor. These royalties are included in cost of sales on the consolidated condensed statements of operations and comprehensive (loss) income.loss.
From time to time, the Company causes letters of credit (LOCs)(“LOCs”) to be issued to provide credit support for guarantees, contractual commitments and insurance policies. The fair values of the LOCs reflect the amount of the underlying obligation and are subject to fees payable to the issuers, competitively determined in the marketplace. As of OctoberApril 1, 20222023 and December 31, 2021,2022, the Company had one LOC outstanding for a nominal amount.
The Company currently maintains insurance for risks associated with the operation of its business, provision of professional services and ownership of property. These policies provide coverage for a variety of potential losses, including loss or damage to property, bodily injury, general commercial liability, professional errors and omissions and medical malpractice. The Company is self-insured for health insurance covering most of its employees located in the United States. The Company maintains stop-loss insurance on a “claims made” basis for expenses in excess of $200 per member per year.
12. Revenue recognition
Our policies for recognizing sales have not changed from those described in the Company’s 2021 Annual Report on Form 10-K.10-K for the year ended December 31, 2022. The Company attributes net sales to external customers to the U.S. and to all foreign countries based on the legal entity from which the sale originated. The following table presents the Company’s net sales disaggregated by major products (Vertical) within each segment as follows:
| | | Three Months Ended | | Nine Months Ended | | | Three Months Ended |
| | October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 | | | April 1, 2023 | | April 2, 2022 |
U.S. | U.S. | | | | | | | | U.S. | | | | |
Pain Treatments | Pain Treatments | $ | 47,010 | | | $ | 55,963 | | | $ | 152,939 | | | $ | 144,879 | | Pain Treatments | | $ | 40,995 | | | $ | 47,874 | |
Restorative Therapies | Restorative Therapies | 38,096 | | | 25,634 | | | 102,475 | | | 71,489 | | Restorative Therapies | | 32,488 | | | 28,946 | |
Surgical Solutions | Surgical Solutions | 31,182 | | | 17,565 | | | 91,265 | | | 56,014 | | Surgical Solutions | | 30,495 | | | 27,261 | |
Total U.S. net sales | Total U.S. net sales | 116,288 | | | 99,162 | | | 346,679 | | | 272,382 | | Total U.S. net sales | | 103,978 | | | 104,081 | |
| International | International | | International | | |
Pain Treatments | Pain Treatments | 5,090 | | | 4,672 | | | 15,128 | | | 13,990 | | Pain Treatments | | 5,331 | | | 4,179 | |
Restorative Therapies | Restorative Therapies | 4,047 | | | 4,841 | | | 13,930 | | | 13,318 | | Restorative Therapies | | 5,614 | | | 5,414 | |
Surgical Solutions | Surgical Solutions | 3,237 | | | 215 | | | 10,546 | | | 794 | | Surgical Solutions | | 4,136 | | | 3,616 | |
Total International net sales | Total International net sales | 12,374 | | | 9,728 | | | 39,604 | | | 28,102 | | Total International net sales | | 15,081 | | | 13,209 | |
| Total net sales | Total net sales | $ | 128,662 | | | $ | 108,890 | | | $ | 386,283 | | | $ | 300,484 | | Total net sales | | $ | 119,059 | | | $ | 117,290 | |
13. Segments
The Company’s two reportable segments are U.S. and International. The Company’s products are primarily sold to orthopedists, musculoskeletal and sports medicine physicians, podiatrists, neurosurgeons and orthopedic spine surgeons, as well as to their patients. The Company does not disclose segment information by asset as the Chief Operating Decision Maker does not review or use it to allocate resources or to assess the operating results and financial performance. Segment adjusted EBITDA is the segment profitability metric reported to the Company’s Chief Operating Decision Maker for purposes of decisions about allocation of resources to, and assessing performance of, each reportable segment.
The following table presents segment adjusted EBITDA reconciled to (loss) incomeloss before income taxes:
| | | Three Months Ended | | Nine Months Ended | | | Three Months Ended |
| | October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 | | | April 1, 2023 | | April 2, 2022 |
Segment adjusted EBITDA | Segment adjusted EBITDA | | | | | | | | Segment adjusted EBITDA | | | | |
U.S. | U.S. | $ | 19,543 | | | $ | 19,782 | | | $ | 43,467 | | | $ | 46,929 | | U.S. | | $ | 14,712 | | | $ | 4,839 | |
International | International | 1,496 | | | 1,533 | | | 7,614 | | | 5,343 | | International | | 2,239 | | | 2,333 | |
Interest expense, net | (9,894) | | | (1,347) | | | (10,922) | | | (152) | | |
Interest (expense) income, net | | Interest (expense) income, net | | (9,694) | | | 1,550 | |
Depreciation and amortization | Depreciation and amortization | (18,780) | | | (8,522) | | | (43,643) | | | (23,185) | | Depreciation and amortization | | (16,473) | | | (12,479) | |
Acquisition and related costs | Acquisition and related costs | (6,319) | | | (5,914) | | | (20,292) | | | (14,044) | | Acquisition and related costs | | (1,175) | | | (7,978) | |
Remeasurement gain on equity method investment | 23,709 | | | — | | 23,709 | | | — | |
Restructuring and succession charges | Restructuring and succession charges | (575) | | | (1,798) | | | (2,847) | | | (2,142) | | Restructuring and succession charges | | (317) | | | (577) | |
Equity compensation | Equity compensation | (4,648) | | | (5,938) | | | (14,153) | | | 10,621 | | Equity compensation | | (1,846) | | | (4,889) | |
Equity loss in unconsolidated investments | (322) | | | (419) | | | (1,003) | | | (1,320) | | |
Foreign currency impact | (581) | | | (17) | | | (1,122) | | | 47 | | |
Impairment of goodwill | (189,197) | | | — | | | (189,197) | | | — | | |
Impairments related to variable interest entity | — | | | — | | | — | | | (7,043) | | |
CartiHeal divestiture and debt restructuring | | CartiHeal divestiture and debt restructuring | | (5,330) | | | — | |
Impairment of assets | | Impairment of assets | | (78,615) | | | — | |
Other items | Other items | (1,909) | | | (511) | | | (5,796) | | | (2,816) | | Other items | | (3,665) | | | (2,336) | |
(Loss) income before income taxes | $ | (187,477) | | | $ | (3,151) | | | $ | (214,185) | | | $ | 12,238 | | |
Loss before income taxes | | Loss before income taxes | | $ | (100,164) | | | $ | (19,537) | |
14. Discontinued operations
On February 27, the Company reached a Settlement Agreement with the Former Securityholders of CartiHeal that resulted in the transfer of 100% of Company’s shares in CartiHeal to a Trustee. Refer to Note 3. Acquisitions and divestitures for further details concerning the CartiHeal Settlement Agreement and its deconsolidation from the Company’s financial statements. CartiHeal had no sales for the three months ended April 1, 2023 and year ended December 31, 2022.
The following table summarizes CartiHeal’s major classes of assets and liabilities as reported on the consolidated condensed balance sheets as of December 31, 2022 as the balances were fully deconsolidated as of April 1, 2023:
| | | | | |
| December 31, 2022 |
Carrying amounts of major classes of assets included as part of discontinued operations | |
Cash | $ | 1,628 | |
Restricted cash | 23 | |
Other receivables | 350 | |
Inventory | 642 | |
Prepaid and other current assets | 134 | |
Property and equipment, net | 191 | |
Goodwill | 6,297 | |
Intangible assets, net | 398,873 | |
Operating lease assets | 618 | |
Other assets | 15 | |
Total assets | $ | 408,771 | |
| |
Carrying amounts of major liabilities included as part of discontinued operations | |
Accounts payable | $ | 852 | |
Accrued liabilities | 384 | |
Current portion of deferred consideration | 117,615 | |
Other current liabilities | 236 | |
Deferred income taxes | 79,863 | |
Deferred consideration | 79,269 | |
Contingent consideration | 67,251 | |
Other long-term liabilities | 2,528 | |
Total liabilities | $ | 347,998 | |
The following table summarizes the major income and expense line items of these discontinued operations, as reported in the consolidated statements of operations for the three months ended April 1, 2023 and April 2, 2022:
| | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | | | April 1, 2023 | | April 2, 2022 |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Selling, general and administrative expense | | | | | $ | 1,728 | | | $ | — | |
Research and development expense | | | | | 396 | | | — | |
Change in fair value of contingent consideration(a) | | | | | 1,710 | | | — | |
Depreciation and amortization(a) | | | | | 4,264 | | | — | |
Operating loss from discontinued operations | | | | | (8,098) | | | — | |
Interest expense (income), net | | | | | 4,889 | | | — | |
Other expense(b) | | | | | 61,442 | | | 401 | |
Other expense | | | | | 66,331 | | | 401 | |
| | | | | | | |
| | | | | | | |
Net loss | | | | | (74,429) | | | (401) | |
Loss attributable to noncontrolling interest | | | | | 14,937 | | | — | |
Net loss attributable to Bioventus Inc. | | | | | $ | (59,492) | | | $ | (401) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
(a)Depreciation and amortization and the change in fair value of contingent consideration represents the significant operating non-cash items of discontinued operations.
(b)Other expense includes the $60,639 loss on deconsolidation, of which $10,150 was attributable to non-refundable payments.
15. Subsequent events
On October 28, 2022,April 4, 2023, Mr. Reali resigned as a director and officer of the Company, terminatedand Mr. Anthony P. Bihl III was appointed as Interim Chief Executive Officer of the Company and as a Class III director of the Company, effective April 5, 2023. Mr. Bihl succeeds Mr. Reali as the Company’s principal executive officer.
On April 6, 2023, the Company repaid $15,000 on its non-designated interest rate swaprevolving credit facility.
On May 10, 2023 the Company entered into a definitive agreement to sell its Wound Business, including TheraSkin and subsequently received a settlementTheraGenesis, for total potential cash consideration of $7,738.$85,000, including $35,000 at closing, $5,000 deferred for 18 months and $45,000 in potential earn-out payments. The Company expects to net approximately $30,000 at closing after fees and expenses that will be used to repay existing debt. The sale of the Wound Business is expected to close approximately one week before the end of May 2023.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsOperations.
The following discussion and analysis of Bioventus Inc.’s (sometimes referred to as “we,” “us,” “our,” “Bioventus” or “the Company”) financial condition and results of operations should be read in conjunction with the “Special Note Regarding Forward-Looking Statements” and our unaudited consolidated condensed financial statements and related notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 20212022 filed with the Securities and Exchange Commission (SEC)(“SEC”) on March 11,16, 2022 (2021 10-K)(“2022 10-K”).
Executive Summary
We are a global medical device company focused on developing and commercializing clinically differentiated, cost efficient and minimally invasive treatments that engage and enhance the body’s natural healing process. We operate our business through two reportable segments, U.S. and International, and our portfolio of products is grouped into three verticals:
•Pain Treatments is comprised of non-surgical joint pain injection therapies as well as peripheral nerve stimulation (PNS)(“PNS”) products to help the patient get back to their normal activities.
•Surgical Solutions is comprised of bone graft substitutes (BGS)(“BGS”) to fuse and grow bones, improve results following spinal and other orthopedic surgeries as well as minimally invasive ultrasonic medical devices used for precise bone sculpting, removing tumors and tissue debridement, in various surgeries.
•Restorative Therapies is comprised of a bone healing system, skin allografts and products used to support healing of wounds as well as devices designed to help patients regain leg or hand function due to stroke, multiple sclerosis or other central nervous system disorders.
As further discussed below, there are conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern. In light of this, the Company is actively pursuing plans to mitigate these conditions and events; however, there can be no assurances that it is probable these plans will be successfully implemented or that they will successfully mitigate these conditions and events.
For additional information, see Going Concern section below and Part II. Item 1A. Risk Factors.
The following table sets forth total net sales, net (loss) incomeloss and Adjusted EBITDA for the periods presented:
| | | Three Months Ended | | Nine Months Ended | | | Three Months Ended |
| | October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 | | | April 1, 2023 | | April 2, 2022 |
Net sales | Net sales | $ | 128,662 | | | $ | 108,890 | | | $ | 386,283 | | | $ | 300,484 | | Net sales | | $ | 119,059 | | | $ | 117,290 | |
Net (loss) income | $ | (145,698) | | | $ | (2,269) | | | $ | (168,518) | | | $ | 11,479 | | |
Net loss from continuing operations | | Net loss from continuing operations | | $ | (100,018) | | | $ | (14,405) | |
Adjusted EBITDA(1) | Adjusted EBITDA(1) | $ | 21,039 | | | $ | 21,315 | | | $ | 51,081 | | | $ | 52,272 | | Adjusted EBITDA(1) | | $ | 16,951 | | | $ | 7,172 | |
Loss per share - basic and diluted | $ | (1.76) | | | $ | (0.03) | | | $ | (2.07) | | | $ | (0.15) | | |
Loss per Class A common stock, basic and diluted: | | Loss per Class A common stock, basic and diluted: | | |
Continuing operations | | Continuing operations | | $ | (1.28) | | | $ | (0.18) | |
Discontinued operations | | Discontinued operations | | (0.96) | | | (0.01) | |
Loss per Class A common stock, basic and diluted | | Loss per Class A common stock, basic and diluted | | $ | (2.24) | | | $ | (0.19) | |
(1)See below under results of operations-Adjusted EBITDA for a reconciliation of net (loss) incomeloss to Adjusted EBITDA.
StrategicSignificant transactions
Wound Business
We routinely assess our products and businesses for alignment with our strategic focus and liquidity needs. As a result of this assessment, we decided to sell our Wound Business, specifically, those assets attributable to TheraSkin and Theragenesis (the “Wound Business” or the “Disposal Group”).
We also evaluated the assets of the Wound Business for impairment during the first quarter of 2023. We recorded a $78.6 million impairment ($63.3 million after tax) as a result of this evaluation to reduce the intangible assets of the Disposal Group to their respective fair values.
On May 10, 2023 we entered into a definitive agreement to sell our Wound Business, including TheraSkin and TheraGenesis, for total potential cash consideration of $85.0 million, including $35.0 million at closing, $5.0 million deferred for 18 months and $45.0 million in potential earn-out payments. We expect to net approximately $30.0 million at closing after fees and expenses that will be used to repay existing debt. The sale of the Wound Business is expected to close before the end of May 2023.
CartiHeal
On July 12, 2022, we acquired 100% of CartiHeal (2009) Ltd. (CartiHeal)(“CartiHeal”), a privately held company headquartered in Israel and the developer of the proprietary Agili-C implant for the treatment of joint surface lesions in traumatic and osteoarthritic joints. We purchased CartiHeal (CartiHeal Acquisition)(“CartiHeal Acquisition”) for an aggregate purchase price of approximately $315.0 million and an additional $135.0 million, becoming payable after closing upon the achievement of a certain sales milestone (Sales(“Sales Milestone Consideration)Consideration”). We paid $100.0 million of the aggregate purchase price upon closing, consisting of a $50.0 million escrow deposit and $50.0 million from a financing arrangement. We also paid approximately $8.6 million of CartiHeal’s transaction-related fees and expenses and deferred $215.0 million (Deferred Amount)(“Deferred Amount”) of the aggregate purchase price otherwise due at closing until the earlier of the achievement of certain milestones or the occurrence of certain installment payment dates. We recognized a gain of $23.7 million due to the change in fair value of our equity method investment in CartiHeal as a result of the purchase.purchase during the third quarter of 2022. The gain was recognized in other income within the consolidated condensed statement of operations and comprehensive (loss) income.loss.
We previously entered into an Option and Equity Purchase Agreement with CartiHeal (Option Agreement)(“Option Agreement”) in July 2020. The Option Agreement provided us with an exclusive option to acquire 100% of CartiHeal’s shares (Call Option)(“Call Option”), and provided CartiHeal with a put option that would require us to purchase 100% of CartiHeal’s shares under certain conditions. In August 2021, CartiHeal achieved pivotal clinical trial success, as defined in the Option Agreement, for the Agili-C implant. In order to preserve the our Call Option, in accordance with the Option Agreement and upon approval of the Board of Directors (BOD)(“BOD”), we deposited $50.0 million into escrow in August 2021 for the potential acquisition of CartiHeal, which was included in restricted cash on the consolidated balance sheet at December 31, 2021.CartiHeal.
In April 2022, we exercised our Call Option to acquire all of the remaining shares of CartiHeal, excluding shares we already owned. Our decision to exercise the Call Option followed the U.S. Food and Drug Administration’sFDA’s March 29, 2022 premarket approval of CartiHeal’s Agili-C implant. On June 17, 2022, the Company entered into an amendment to the Option Agreement with CartiHeal (CartiHeal Amendment)(“CartiHeal Amendment”) and Elron Ventures Limited, in its capacity as the shareholder representative.
The Deferred Amount willrepresentative, that provided for deferred payment of the consideration for CartiHeal to be paid in fivemultiple tranches, commencing in 2023 and ending no later than 2027 as follows:
•$50,000one of which was $50.0 million due upon the earliest to occur — the publication in a peer-reviewed orthopedic journal of an article that presents the results of the pivotal clinical trial (First(“First Paper Milestone)Milestone”) or July 1, 2023;
•$50,000 due upon the earliest to occur — the implantation of Agili-C devices in 100 patients in the United States or September 1, 2023;
•$25,000 due upon the earliest to occur — the publication in a peer-reviewed orthopedic journal of an article that presents any new or additional clinical data subsequent to the First Paper Milestone with respect to Agili-C (Second Paper Milestone) or January 1, 2025;
•$25,000 due upon the earliest to occur — the publication in a peer-reviewed orthopedic journal of an article that presents any new or additional clinical data subsequent to the First and Second Paper Milestone with respect to Agili-C or January 1, 2026; and
•$65,000 due upon the earliest to occur — obtaining a U.S. Category 1 Current Procedural Terminology (CPT) code from Centers for Medicare and Medicaid Services (CMS) for Agili-C or January 1, 2027.
Pursuant to the CartiHeal Amendment, we willagreed to pay interest on each tranche of the Deferred Amount at a rate of 8.0% annually, until such tranche is paid.
The SalesFirst Paper Milestone Consideration will be payable uponunder the achievement of $75.0 million in trailing twelve month sales pursuant to the CartiHeal Amendment. In August 2022, CartiHeal submitted the results of the pivotal clinical trial for publication in a peer-reviewed orthopedic journal. Preliminary feedback from the publisher was received in November 2022 and the paper is being revised for resubmission to the publisher. We cannot project if or when the CartiHeal submission will be accepted for publication. If published prior to July 1,Option Agreement occurred on February 13, 2023, the Company will needtriggering our obligation to make the First Paper Milestonefirst $50.0 million payment, plus applicable interest, under the Option Agreement.
On February 27, 2023, we entered into a settlement agreement (the “Settlement Agreement”) with Elron Ventures Ltd. (“Elron” and together with the Company, the “Parties”) as representative of CartiHeal’s selling securityholders under the Option Agreement collectively, the “Former Securityholders”). Pursuant to the Settlement Agreement, Elron, on behalf of the Former Securityholders, agreed to forbear from initiating any legal action or proceedings relating to non-payment of any obligations arising under the Option Agreement during a period of 30 calendar days (the “Interim Period”) in exchange for (i) a one-time non-refundable amount of $10.0 million and (ii) a one-time non-refundable payment of $0.2 million to Elron to be used in accordance with the expense fund provisions of the Option Agreement. The Interim Period expired on March 29, 2023 and we did not exercise our right to extend the Interim Period. In addition, the Parties mutually released any further claims under the Option Agreement and related transaction documents, including without limitation a release by the Former Securityholders of any rights to enforce the provisions of the Option Agreement or make further monetary claims against us and/or our respective affiliates and representatives.
Upon execution of the Settlement Agreement, we transferred 100% of our shares in CartiHeal to a trustee (the “Trustee”) for the benefit of the Former Securityholders. We had no ownership interest and no voting rights during the Interim Period. We have concluded that upon execution of the Settlement Agreement, the Company ceased to control CartiHeal for accounting purposes, and therefore, have deconsolidated CartiHeal (the “Deconsolidation”, or “Disposal”) effective February 27, 2023. We treated the Disposal as a discontinued operation. The loss upon disposal is estimated to be $60.6 million and was recorded within ten days of publication.loss from discontinued operations, net.
Amended 2019 Credit Agreement
On July 11, 2022, we further amended our Credit and Guaranty Agreement, dated as of December 6, 2019 and(as amended on October 29, 2021, (as amended,July 11, 2022 and March 31, 2023, the Amended“Amended 2019 Credit Agreement)Agreement”) in conjunction with the CartiHeal Acquisition. PursuantAcquisition to, the Amended 2019 Credit Agreement,among other things, provide for an $80.0 million term loan facility (Term Loan Facility) was extended to us for: (i) the financing of the CartiHeal Acquisition; (ii) the payment of related fees and expenses; and (iii) working capital needs and general corporate purposes of the Company, including without limitation for permitted acquisitions. The (“Term Loan Facility will mature on October 29, 2026.Facility”). On March 31, 2023, we further amended our Amended 2019 Credit Agreement to, among other things, modify certain financial covenant provisions, waive the noncompliance at December 31, 2022 and increase the applicable interest rate. Refer to Liquidity and Capital Resources—Credit Facilities for further information.
B.O.N.E.S. Trial
We submitted a premarket approval (PMA)(“PMA”) supplement to the FDA in December 2020 seeking approval of an expanded indication for EXOGEN, specifically, for the adjunctive treatment of acute and delayed metatarsal fractures to reduce the risk of non-union. This PMA supplement was based on and supported by clinical data in metatarsal fractures from the ongoing B.O.N.E.S. study. In April 2021, we received a letter from the FDA identifying certain deficiencies in the PMA supplement that must be addressed before the FDA can complete its review of the PMA supplement. The deficiencies include concerns about the data and endpoints from the B.O.N.E.S. study, and requests for re-analyses of certain data and provision of other information to support the findings. In December 2021, we completed the follow-up of all patients in the scaphoid B.O.N.E.S. study. In October 2022, we elected to withdraw our PMA submission on metatarsal fractures. Presently, we are in the process of finalizing our PMA supplement for the scaphoid indication and believe it will be ready for submission in the fourth quarter of 2022.indication. In the scaphoid study analysis plan, the applicable feedback received from the FDA in the prior metatarsal submission was applied prospectively and as such we believe this second filing will address the FDA’s concerns on the study design. Assuming positive outcome with the FDA of the scaphoid review, we would consider resubmitting the metatarsal data at a later date. We can, however, give no assurance that the scaphoid review will be accepted by the FDA or, if accepted, that we will be able to resolve the deficiencies in the PMA supplements identified by the FDA in a timely manner, or at all. Consequently, the FDA’s decision on the PMA supplements might be delayed beyond the time originally anticipated. Moreover, if our responses do not satisfy the FDA’s concerns, the FDA might not approve our PMA supplements seeking to expand the indications for use of EXOGEN in scaphoid and metatarsal fractures as proposed.
MOTYS Update
During the second quarter of 2022, prior to obtaining the results from our Phase 2 trial, we elected to discontinue the development of MOTYS, to focus our resources on other priorities, including the integration of our recent2021 and 2022 acquisitions and our expanded R&D and product development portfolio we inherited with these acquisitions. We incurred $1.8 million and $2.5$0.9 million during the three and nine months ended OctoberApril 1, 2022, respectively,2023, and we expect to incur approximately $4.0$5.0 million to $6.0 million exclusively to fulfill our remaining regulatory obligations related to our Phase 2 trial (MOTYS Costs)(“MOTYS Costs”). We have incurred $5.2 million since the election to discontinue occurred during the second quarter of 2022.
Consolidated Appropriations Act
In July 2022, in connection with the Consolidated Appropriations Act, 2021 (CAA)(“CAA”), the Centers for Medicare and Medicaid Services (CMS)(“CMS”) began utilizing new pricing information the Company reported to it pursuant to the newly adopted reporting obligations to adjust the Medicare payment to healthcare providers using our Durolane and Gelsyn-3 products.
COVID-19 pandemic impact
Our business, results of operations and financial condition have been and may continue to be, materially impacted by fluctuations in patient visits and elective procedures and any future temporary cessations of elective procedures as a result of the COVID-19 pandemic and could be further impacted by delays in payments from customers, supply chain interruptions, “shelter-in-place” orders or advisories, facility closures or other reasons related to the pandemic. As of the date of this Quarterly Report on Form 10-Q, the extent to which COVID-19 could materially impact our financial conditions, liquidity or results of operations is uncertain.
To the extent COVID-19 disruptions continue to adversely impact our business, results of operations and financial condition, it might also have the effect of heightening risks relating to our ability to successfully commercialize newly developed or acquired products or therapies, consolidation in the healthcare industry, intensified pricing pressure as a result of changes in the purchasing behavior of hospitals and maintenance of our numerous contractual relationships.
Results of Operations
For a description of the components of our results of operations, refer to Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 20212022 10-K.
The following table sets forth components of our condensed consolidated condensed statements of operations as a percentage of net sales for the periods presented:
| | | Three Months Ended | | Nine Months Ended | | | Three Months Ended |
| | October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 | | | April 1, 2023 | | April 2, 2022 |
Net sales | Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | Net sales | | 100.0 | % | | 100.0 | % |
Cost of sales (including depreciation and amortization) | Cost of sales (including depreciation and amortization) | 34.3 | % | | 27.4 | % | | 33.5 | % | | 28.5 | % | Cost of sales (including depreciation and amortization) | | 37.9 | % | | 35.5 | % |
Gross profit | Gross profit | 65.7 | % | | 72.6 | % | | 66.5 | % | | 71.5 | % | Gross profit | | 62.1 | % | | 64.5 | % |
Selling, general and administrative expense | Selling, general and administrative expense | 61.6 | % | | 64.0 | % | | 66.0 | % | | 57.7 | % | Selling, general and administrative expense | | 67.9 | % | | 73.4 | % |
Research and development expense | Research and development expense | 4.5 | % | | 5.7 | % | | 5.0 | % | | 4.0 | % | Research and development expense | | 3.2 | % | | 5.9 | % |
Restructuring costs | Restructuring costs | 0.4 | % | | 1.7 | % | | 0.6 | % | | 0.6 | % | Restructuring costs | | 0.3 | % | | 0.5 | % |
Change in fair value of contingent consideration | Change in fair value of contingent consideration | 2.4 | % | | 0.6 | % | | 1.0 | % | | 0.4 | % | Change in fair value of contingent consideration | | 0.2 | % | | 0.2 | % |
Depreciation and amortization | Depreciation and amortization | 5.8 | % | | 1.7 | % | | 3.5 | % | | 1.9 | % | Depreciation and amortization | | 1.8 | % | | 2.8 | % |
Impairment of goodwill | 147.0 | % | | — | % | | 49.0 | % | | — | % | |
Impairment of variable interest entity assets | — | % | | — | % | | — | % | | 1.9 | % | |
Operating (loss) income | (156.0 | %) | | (1.1 | %) | | (58.6 | %) | | 5.0 | % | |
Impairment of assets | | Impairment of assets | | 66.0 | % | | — | % |
Operating loss | | Operating loss | | (77.3 | %) | | (18.3 | %) |
The following table presents a reconciliation of net (loss) incomeloss to Adjusted EBITDA for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands) | October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 |
Net (loss) income | $ | (145,698) | | | $ | (2,269) | | | $ | (168,518) | | | $ | 11,479 | |
Interest expense, net | 9,894 | | | 1,347 | | | 10,922 | | | 152 | |
Income tax expense (benefit) | (41,779) | | | (882) | | | (45,667) | | | 759 | |
Depreciation and amortization(a) | 18,780 | | | 8,522 | | | 43,643 | | | 23,185 | |
Acquisition and related costs(b) | 6,319 | | | 5,914 | | | 20,292 | | | 14,044 | |
Remeasurement gain on equity method investment(c) | (23,709) | | | — | | | (23,709) | | | — | |
Restructuring and succession charges(d) | 575 | | | 1,798 | | | 2,847 | | | 2,142 | |
Equity compensation(e) | 4,648 | | | 5,938 | | | 14,153 | | | (10,621) | |
Equity loss in unconsolidated investments(f) | 322 | | | 419 | | | 1,003 | | | 1,320 | |
Foreign currency impact(g) | 581 | | | 17 | | | 1,122 | | | (47) | |
Impairment of goodwill(h) | 189,197 | | | — | | | 189,197 | | | — | |
Impairments related to variable interest entity(i) | — | | | — | | | — | | | 7,043 | |
Other items(j) | 1,909 | | | 511 | | | 5,796 | | | 2,816 | |
Adjusted EBITDA | $ | 21,039 | | | $ | 21,315 | | | $ | 51,081 | | | $ | 52,272 | |
| | | | | | | | | | | | | | | |
| | | Three Months Ended |
(in thousands) | | | | | April 1, 2023 | | April 2, 2022 |
Net loss from continuing operations | | | | | $ | (100,018) | | | $ | (14,405) | |
Interest expense (income), net | | | | | 9,694 | | | (1,550) | |
Income tax benefit, net | | | | | (146) | | | (5,132) | |
Depreciation and amortization(a) | | | | | 16,473 | | | 12,479 | |
Acquisition and related costs(b) | | | | | 1,175 | | | 7,978 | |
Restructuring and succession charges(c) | | | | | 317 | | | 577 | |
Equity compensation(d) | | | | | 1,846 | | | 4,889 | |
Financial restructuring costs(e) | | | | | 5,330 | | | — | |
Impairment of assets(f) | | | | | 78,615 | | | — | |
Other items(g) | | | | | 3,665 | | | 2,336 | |
Adjusted EBITDA | | | | | $ | 16,951 | | | $ | 7,172 | |
(a)Includes for the three months ended OctoberApril 1, 20222023 and OctoberApril 2, 2021 and the nine months ended October 1, 2022, and October 2, 2021, respectively, depreciation and amortization of $11,331, $6,637, $30,233$14,339 and $17,491$9,218 in cost of sales and $7,449, $1,885, $13,410$2,134 and $5,694$3,261 in operating expenses presented in the consolidated condensed statements of operations and comprehensive (loss) income.loss.
(b)Includes acquisition and integration costs related to completed acquisitions, amortization of inventory step-up associated with acquired entities, and changes in fair value of contingent consideration.
(c)Represents the gain on remeasurement of the Company’s equity method investment in CartiHeal based upon the fair value of consideration transferred for the CartiHeal Acquisition.
(d)Costs incurred during the three and nine months ended October 1, 2022 were the result of adopting acquisition related restructuring plans to reduce headcount, reorganize management structure, and to consolidate certain facilities. Costs incurred during the corresponding periods in 2021 were primarily related to executive transitions.
(e)(d)The three and nine months ended October 1, 2022 and the three months ended October 2, 2021 includeIncludes compensation expense resulting from awards granted under the Company’sour equity-based compensation plans in effect after its initial public offering (IPO). The nine months ended October 2, 2021 also includes the expenseplans.
(e)Financial Restructuring costs which include advisory fees and the change in fair value of the liability-classified awards granted under the compensation plans in effect prior to the Company’s IPO.debt amendment related costs.
(f)Represents CartiHeal equity investment losses.
(g)Includes realized and unrealized gains and losses from fluctuations in foreign currency.
(h)Represents a non-cash impairment charge for intangible assets attributable to our Wound Business due to our decision to divest the recent decline in the Company’s market capitalization subsequent to its previously announced financial results for the three and nine months ended October 1, 2022.business.
(i)Represents the loss on impairment of Harbor Medtech Inc.’s (Harbor) long-lived assets and the Company’s investment in Harbor.
(j)(g)Other items primarily includes charges associated with strategic transactions, such as potential acquisitions; public company preparationacquisitions or divestitures, incremental one-time consulting costs which primarily includes accountingrelated to the recertification of certain products to comply with the new and legal fees;extensive EU MDR requirements, and MOTYS Costs.costs attributable to MOTYS. During the second quarter of 2022, prior to obtaining the results from our Phase 2 trial, we elected to discontinue the development of MOTYS, to focus our resources on other priorities, including the integration of our recent acquisitions and our expanded R&D and product development portfolio we inherited with these acquisitions. We incurred $1.8 million and $2.5$0.9 million during the three and nine months ended OctoberApril 1, 2022, respectively, and we2023 related to MOTYS. We expect to incur approximately $4.0$5.0 million to $6.0 million exclusivelyin total to fulfill our remaining regulatory obligations related to our Phase 2 trial (MOTYS Costs).trial. We have incurred $5.2 million since the election to discontinue occurred during the second quarter of 2022.
Non-GAAP Financial Measures - Adjusted EBITDA
We present Adjusted EBITDA, a non-GAAP financial measure, because we believe it is a useful indicator that management uses as a measure of operating performance as well as for planning purposes, including the preparation of our annual operating budget and financial projections. We believe that Adjusted EBITDA is useful to our investors because it is frequently used by securities analysts, investors and other interested parties in their evaluation of the operating performance of companies in industries similar to ours. We define Adjusted EBITDA as net (loss) incomeloss from continuing operations before depreciation and amortization, provision of income taxes and interest expense (income), net, adjusted for the impact of certain cash, non-cash and other items that we do not consider in our evaluation of ongoing operating performance. These items include acquisition and related costs, remeasurement gains and losses on investments, impairments on goodwill, impairments of assets, restructuring and succession charges, equity compensation expense, equity loss in unconsolidated investments, foreign currency impact,financial restructuring costs, and other items. Adjusted EBITDA by segment is comprised of net sales and costs directly attributable to a segment, as well as an allocation of corporate overhead costs primarily based on a ratio of net sales by segment to total consolidated net sales.
Non-GAAP financial measures have limitations as an analytical tool and should not be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with U.S. GAAP. These measures might exclude certain normal recurring expenses. Therefore, these measures might not provide a complete understanding of the Company's performance and should be reviewed in conjunction with the U.S. GAAP financial measures. Additionally, other companies might define their non-GAAP financial measures differently than we do. Investors are encouraged to review the reconciliation of the non-GAAP measure provided in this report,Quarterly Report on Form10-Q, including in the table above, to its most directly comparable U.S. GAAP measure.
Net sales
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Change |
(in thousands, except for percentage) | October 1, 2022 | | October 2, 2021 | | $ | | % |
U.S. | | | | | | | |
Pain Treatments | $ | 47,010 | | | $ | 55,963 | | | (8,953) | | | (16.0 | %) |
Restorative Therapies | 38,096 | | | 25,634 | | | 12,462 | | | 48.6 | % |
Surgical Solutions | 31,182 | | | 17,565 | | | 13,617 | | | 77.5 | % |
Total U.S. net sales | 116,288 | | | 99,162 | | | 17,126 | | | 17.3 | % |
| | | | | | | |
International | | | | | | | |
Pain Treatments | $ | 5,090 | | | $ | 4,672 | | | 418 | | | 8.9 | % |
Restorative Therapies | 4,047 | | | 4,841 | | | (794) | | | (16.4 | %) |
Surgical Solutions | 3,237 | | | 215 | | | 3,022 | | | NM |
Total International net sales | 12,374 | | | 9,728 | | | 2,646 | | | 27.2 | % |
| | | | | | | |
Total net sales | $ | 128,662 | | | $ | 108,890 | | | $ | 19,772 | | | 18.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Change |
(in thousands, except for percentage) | April 1, 2023 | | April 2, 2022 | | $ | | % |
U.S. | | | | | | | |
Pain Treatments | $ | 40,995 | | | $ | 47,874 | | | $ | (6,879) | | | (14.4 | %) |
Restorative Therapies | 32,488 | | | 28,946 | | | 3,542 | | | 12.2 | % |
Surgical Solutions | 30,495 | | | 27,261 | | | 3,234 | | | 11.9 | % |
Total U.S. net sales | 103,978 | | | 104,081 | | | (103) | | | (0.1 | %) |
| | | | | | | |
International | | | | | | | |
Pain Treatments | 5,331 | | | 4,179 | | | 1,152 | | | 27.6 | % |
Restorative Therapies | 5,614 | | | 5,414 | | | 200 | | | 3.7 | % |
Surgical Solutions | 4,136 | | | 3,616 | | | 520 | | | 14.4 | % |
Total International net sales | 15,081 | | | 13,209 | | | 1,872 | | | 14.2 | % |
| | | | | | | |
Total net sales | $ | 119,059 | | | $ | 117,290 | | | $ | 1,769 | | | 1.5 | % |
U.S.
Net sales increased $17.1 million, or 17.3%, of which acquisitions contributed $17.3 million.remain consistent with the prior year comparable period. Changes by vertical were: (i) Pain Treatments—($9.0)$6.9 million decrease due to more treatments being sold under contractsthe decline in our selling price, resulting from the impact of lower reported ASP leading due to lower reimbursement levels, partially offset with major insurers at lower prices and price competition within the osteoarthritic joint pain treatment market;an increase in sales volume; (ii) Restorative Therapies—$12.53.5 million net sales increase primarily due to acquisitions and net volume growth; and (iii) Surgical Solutions—$13.63.2 million net sales increase primarily due to acquisitions and volume growth.
International
Net sales increased $2.6$1.9 million, or 27.2%14.2%, of which acquisitions contributed $3.0 million, partially offset by a decline in sales volume within our Restorative Therapies vertical.
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended | | Change |
(in thousands, except for percentage) | October 1, 2022 | | October 2, 2021 | | $ | | % |
U.S. | | | | | | | |
Pain Treatments | $ | 152,939 | | | $ | 144,879 | | | $ | 8,060 | | | 5.6 | % |
Restorative Therapies | 102,475 | | | 71,489 | | | 30,986 | | | 43.3 | % |
Surgical Solutions | 91,265 | | | 56,014 | | | 35,251 | | | 62.9 | % |
Total U.S. net sales | 346,679 | | | 272,382 | | | 74,297 | | | 27.3 | % |
| | | | | | | |
International | | | | | | | |
Pain Treatments | 15,128 | | | 13,990 | | | 1,138 | | | 8.1 | % |
Restorative Therapies | 13,930 | | | 13,318 | | | 612 | | | 4.6 | % |
Surgical Solutions | 10,546 | | | 794 | | | 9,752 | | | NM |
Total International net sales | 39,604 | | | 28,102 | | | 11,502 | | | 40.9 | % |
| | | | | | | |
Total net sales | $ | 386,283 | | | $ | 300,484 | | | $ | 85,799 | | | 28.6 | % |
U.S.
Net sales increased $74.3 million, or 27.3%, of which acquisitions contributed $58.5 million. Changes by vertical were: (i) Pain Treatments—$8.1 million net sales increase due to volume growth, partially offset with more treatments being sold under contracts with major insurers at lower prices and price competition within the osteoarthritic joint pain treatment market; (ii) Restorative Therapies—$31.0 million net sales increase due to acquisitions and net volume growth; and (iii) Surgical Solutions—$35.3 million net sales increase due to acquisitions and volume growth.
International
Net sales increased $11.5 million, or 40.9%, due to acquisitions. Net sales also slightly increased due to sales volume growth as sales during the first quarter of 2021 were negatively affected by the economic impact of the COVID-19 pandemic.growth.
Gross profit and gross margin | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Change |
(in thousands, except for percentage) | October 1, 2022 | | October 2, 2021 | | $ | | % |
U.S. | $ | 76,624 | | | $ | 72,571 | | | $ | 4,053 | | | 5.6 | % |
International | 7,911 | | | 6,498 | | | 1,413 | | | 21.7 | % |
Total | $ | 84,535 | | | $ | 79,069 | | | $ | 5,466 | | | 6.9 | % |
| | | Three Months Ended | | | Three Months Ended | | Change |
| October 1, 2022 | | October 2, 2021 | | Change | | |
(in thousands, except for percentage) | | (in thousands, except for percentage) | April 1, 2023 | | April 2, 2022 | | $ | | % |
U.S. | U.S. | 65.9 | % | | 73.2 | % | | (7.3 | %) | | U.S. | $ | 65,506 | | | $ | 67,616 | | | $ | (2,110) | | | (3.1 | %) |
International | International | 63.9 | % | | 66.8 | % | | (2.9 | %) | | International | 8,413 | | | 8,086 | | | 327 | | | 4.0 | % |
Total | Total | 65.7 | % | | 72.6 | % | | (6.9 | %) | | Total | $ | 73,919 | | | $ | 75,702 | | | $ | (1,783) | | | (2.4 | %) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| April 1, 2023 | | April 2, 2022 | | Change | | | | | | |
U.S. | 63.0 | % | | 65.0 | % | | (2.0 | %) | | | | | | |
International | 55.8 | % | | 61.2 | % | | (5.4 | %) | | | | | | |
Total | 62.1 | % | | 64.5 | % | | (2.4 | %) | | | | | | |
U.S.
Gross profit increased $4.1decreased $2.1 million, or 5.6%3.1%, primarily due to the decrease in selling price and an increase in amortization in cost of sales. Gross margin was also negatively impacted by 4.0% from inventory step-up amortization of acquisition related assets in 2022 compared with 2023.
International
Gross profit increased $0.3 million, or 4.0%, primarily due to the increase in net sales. Gross margin decreased due to product mix including products introduced as a result of acquisitions.mix.
International
Gross profit increased $1.4 million, or 21.7%, primarily due to the increase in net sales. Gross margin decreased due to product mix including products introduced as a result of acquisitions.
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended | | Change |
(in thousands, except for percentage) | October 1, 2022 | | October 2, 2021 | | $ | | % |
U.S. | $ | 231,571 | | | $ | 196,000 | | | $ | 35,571 | | | 18.1 | % |
International | 25,320 | | | 18,938 | | | 6,382 | | | 33.7 | % |
Total | $ | 256,891 | | | $ | 214,938 | | | $ | 41,953 | | | 19.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended | | |
| October 1, 2022 | | October 2, 2021 | | Change | | | | | | |
U.S. | 66.8 | % | | 72.0 | % | | (5.3 | %) | | | | | | |
International | 63.9 | % | | 67.4 | % | | (3.5 | %) | | | | | | |
Total | 66.5 | % | | 71.5 | % | | (5.0 | %) | | | | | | |
U.S.
Gross profit increased $35.6 million, or 18.1%, primarily due to the increase in net sales. Gross margin decreased due to product mix including products introduced as a result of acquisitions. Gross margin was also negatively impacted by 1.0% from inventory step-up amortization of acquisition related assets in 2022 compared with the prior year.
International
Gross profit increased $6.4 million, or 33.7%, primarily due to the increase in net sales. Gross margin decreased due to product mix including products introduced as a result of acquisitions.
Selling, general and administrative expense
| | | Three Months Ended | | Change | | Three Months Ended | | Change |
(in thousands, except for percentage) | (in thousands, except for percentage) | October 1, 2022 | | October 2, 2021 | | $ | | % | (in thousands, except for percentage) | April 1, 2023 | | April 2, 2022 | | $ | | % |
Selling, general and administrative expense | Selling, general and administrative expense | $ | 79,194 | | | $ | 69,636 | | | $ | 9,558 | | | 13.7 | % | Selling, general and administrative expense | $ | 80,858 | | | $ | 86,124 | | | $ | (5,266) | | | (6.1 | %) |
Selling, general and administrative expenses increased $9.6decreased $5.3 million, or 13.7%6.1%, primarily due to:to cost saving initiatives including (i) an increasea decline in compensation related expenses of $5.5$4.6 million; (ii) a decrease in equity-based compensation of $2.7 million primarily resulting from acquisitions; (ii) an increasedue to employee turnover and our declining stock price; (iii) a decrease of $1.8 million in consultingother administrative and marketing related costs; (iv) a decrease in travel related expenses of $1.9 million; (iii) an increase in insurance expenses of $1.4$0.9 million; and (iv) an increase in bad debt expenses(v) a decrease of $1.1 million.
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended | | Change |
(in thousands, except for percentage) | October 1, 2022 | | October 2, 2021 | | $ | | % |
Selling, general and administrative expense | $ | 254,938 | | | $ | 173,372 | | | $ | 81,566 | | | 47.0 | % |
Selling, general and administrative expenses increased $81.6 million, or 47.0%, primarily due to: (i) an increase in compensation related expenses of $34.6 million, primarily resulting from acquisitions; (ii) an increase in equity-based compensation of $23.1 million, which includes a $23.4 million decrease in fair market value during 2021 of accrued equity-based compensation resulting from the difference between the pricing from the pending IPO and the actual offering price; (iii) an increase in consulting and travel related expenses of $10.7 million; (iv) an increase of $4.0 million in bad debt expenses; and (v) an increase of $3.4$0.4 million in corporate and employee health insurance primarily resulting from acquisitions.insurance. These increases were partially offset with an increase in consulting expenses of $4.3 million and an increase in audit and legal fees of $1.3 million.
Research and development expenses
| | | Three Months Ended | | Change | | Three Months Ended | | Change |
(in thousands, except for percentage) | (in thousands, except for percentage) | October 1, 2022 | | October 2, 2021 | | $ | | % | (in thousands, except for percentage) | April 1, 2023 | | April 2, 2022 | | $ | | % |
Research and development expense | Research and development expense | $ | 5,840 | | | $ | 6,153 | | | $ | (313) | | | (5.1 | %) | Research and development expense | $ | 3,771 | | | $ | 6,928 | | | $ | (3,157) | | | (45.6 | %) |
Research and development expense decreased by $0.3$3.2 million, or (5.1%), due to cost reduction efforts implemented in 2022, which was partially offset with an increase from acquisitions.
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended | | Change |
(in thousands, except for percentage) | October 1, 2022 | | October 2, 2021 | | $ | | % |
Research and development expense | $ | 19,134 | | | $ | 11,936 | | | $ | 7,198 | | | 60.3 | % |
Research and development expense increased by $7.2 million, or 60.3%45.6%, primarily due to: (i) an increasea decrease of $2.2$1.3 million in consulting costs; (ii) a decline in $0.9 million in compensation related expenses partially driven by acquisitions; (ii) an increase of $2.6 million in consulting costs;due to restructuring and cost reduction efforts; (iii) an increasea decrease in equity-based compensation of $1.7$0.4 million which includesdue to employee turnover and our declining stock price; and (iv) a $1.8decline of $0.4 million decrease in fair market value during 2021 of accrued equity-based compensation resulting from the difference between the pricing from the pending IPO and the actual offering price.supplies expense due to cost reduction efforts.
Restructuring costs
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Change |
(in thousands, except for percentage) | April 1, 2023 | | April 2, 2022 | | $ | | % |
Restructuring costs | $ | 317 | | | $ | 577 | | | $ | (260) | | | (45.1 | %) |
Restructuring costs for the three and nine months ended OctoberApril 1, 20222023 included costs incurred as a result of an initiative to align the Company’s organizational and Octobermanagement cost structure to improve profitability and cash flow through headcount reduction and cutting third-party related costs. Restructuring costs for the three months ended April 2, 20212022 were incurred as a result of restructuring plans for recently acquired businesses to reduce headcount and to reorganize management structure and to consolidate certain facilities.for acquired businesses.
Change in fair value of contingent consideration
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Change |
(in thousands, except for percentage) | October 1, 2022 | | October 2, 2021 | | $ | | % |
Change in fair value of contingent consideration | $ | 3,142 | | | $ | 651 | | | $ | 2,491 | | | NM |
| | | Nine Months Ended | | Change | | Three Months Ended | | Change |
(in thousands, except for percentage) | (in thousands, except for percentage) | October 1, 2022 | | October 2, 2021 | | $ | | % | (in thousands, except for percentage) | April 1, 2023 | | April 2, 2022 | | $ | | % |
Change in fair value of contingent consideration | Change in fair value of contingent consideration | $ | 3,684 | | | $ | 1,292 | | | $ | 2,392 | | | 185.1 | % | Change in fair value of contingent consideration | $ | 287 | | | $ | 269 | | | $ | 18 | | | 6.7 | % |
The changes in fair value of contingent consideration during the three and nine months ended OctoberApril 1, 20222023 remained consistent with the prior year comparable period. The activity for both periods relates to contingent consideration associated with the acquisition of Bioness in March 2021.
Depreciation and amortization
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Change |
(in thousands, except for percentage) | April 1, 2023 | | April 2, 2022 | | $ | | % |
Depreciation and amortization | $ | 2,129 | | | $ | 3,254 | | | $ | (1,125) | | | (34.6 | %) |
Depreciation and amortization decreased $1.1 million or 34.6% during the three months ended April 1, 2023 compared with the prior year comparable periods resulted from the additional contingent consideration recorded as a result of the CartiHeal Acquisition.period. The increasedecrease was partially offset with not meeting the $15,000 FDA approval milestone related to the Bioness Acquisition, thereby decreasing the amount of contingent consideration owed. Fair value changes involving contingent consideration represent changes in the present value of discounted cash flows due to the passage of time.
Depreciation and amortization
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Change |
(in thousands, except for percentage) | October 1, 2022 | | October 2, 2021 | | $ | | % |
Depreciation and amortization | $ | 7,442 | | | $ | 1,878 | | | $ | 5,564 | | | NM |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended | | Change |
(in thousands, except for percentage) | October 1, 2022 | | October 2, 2021 | | $ | | % |
Depreciation and amortization | $ | 13,392 | | | $ | 5,655 | | | $ | 7,737 | | | 136.8 | % |
Depreciation and amortization increased during three and nine months ended October 1, 2022 compared with the prior year comparable periods primarily due to acquisitions, partially offset by lower amortization expense in the current year as certain customer relationship assets became fully amortized.
Impairment of goodwill
We incurred a $189.2 million non-cash impairment charge due to the recent decline in our market capitalization subsequent to our previously announced financial results for the three and nine months ended October 1, 2022.
Impairment of variable interest entity assets
We terminated the Collaboration Agreement with Harbor on June 8, 2021 resulting in a $5.7 million impairment on Harbor’s long-lived asset balances, of which $5.2 million was recorded in loss attributable to noncontrolling interest. Refer to Part I. Item 1. Notes to the unaudited consolidated condensed financial statements—Note 3. Acquisitions and investments of this Quarterly Report on Form 10-Q for further details concerning the impairment and deconsolidation of Harbor.
Impairment of assets
Our decision to divest the Wound Business required us to evaluate whether certain of its assets were impaired. We recorded a $78.6 million non-cash impairment charge as a result of this evaluation to reduce the intangible assets to their fair values less costs to sell. The fair value of intangibles of the Wound Business was determined based on the consideration offered for the Wound Business.
Other (income) expense
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Change |
(in thousands, except for percentage) | October 1, 2022 | | October 2, 2021 | | $ | | % |
Interest expense, net | $ | 9,894 | | | $ | 1,347 | | | $ | 8,547 | | | NM |
Other (income) expense | $ | (23,272) | | | $ | 757 | | | $ | (24,029) | | | NM |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Change |
(in thousands, except for percentage) | April 1, 2023 | | April 2, 2022 | | $ | | % |
Interest expense (income), net | $ | 9,694 | | | $ | (1,550) | | | $ | 11,244 | | | NM |
Other income | $ | (1,588) | | | $ | (363) | | | $ | (1,225) | | | NM |
(NM = Not Meaningful)
Interest expense (income), net increased $8.5$11.2 million due to: (i) an increase of $6.1 million for interest on the Deferred Amount related to the CartiHeal Acquisition; (ii) an increase of $1.1 million for interest associated with our October 2021 debt refinancing; (iii) an increase in interest of $1.0$4.9 million due tofrom higher interest rates; (iv) an increase of $1.2(ii) the $3.9 million on the additional debt used to partially fund the CartiHeal Acquisition; (v) an increase of $1.1 million due to higher margin rates. These changes were partially offset by $2.1 million of interest income from the change in the fair value of our interest rate swap.
Other (income) expense changed $24.0 million due to the $23.7 million fair market value remeasurement gain on the CartiHeal equity investment in 2022.
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended | | Change |
(in thousands, except for percentage) | October 1, 2022 | | October 2, 2021 | | $ | | % |
Interest expense, net | $ | 10,922 | | | $ | 152 | | | $ | 10,770 | | | NM |
Other (income) expense | $ | (22,350) | | | $ | 2,821 | | | $ | (25,171) | | | NM |
Interest expense (income), net increased $10.8 million due to: (i) an increase of $6.1 million for interest on the Deferred Amount related to the CartiHeal Acquisition; (ii) an increase of $2.9 million for interest associated with our October 2021 debt refinancing; (iii) an increase in interest of $1.4 million due to higher interest rates; (iv) an increase of $1.2 million on the additional debt used to partially fund the CartiHeal Acquisition; (v) an increase of $1.1 million due to higher margin rates; and (vi) the settlement of our equity participation right (EPR) liability in 2021 resulting in interest income of $2.8 million. These changes were partially offset by a $5.0 million increase in interest income resulting from the change in the fair value of our interest rate swap.swap in 2022, which discontinued during the fourth quarter of 2022; (iii) an increase of $1.3 million due to higher margin rates associated with a high leverage ratio; (iv) an increase of $0.6 million for interest on our revolving credit borrowings; and (v) an increase of $0.5 million on the additional debt used to partially fund the acquisition of CartiHeal.
Other (income) expenseincome changed $25.2$1.2 million due to the $23.7receipt of $1.5 million fair market value remeasurement gain onfrom the CartiHeal equity investment in 2022 and impairmentsettlement of our Harbor investment of $1.4 million in the prior year.a legal claim.
Income tax expense (benefit)benefit, net
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Change |
(in thousands, except for percentage) | October 1, 2022 | | October 2, 2021 | | $ | | % |
Income tax expense (benefit) | $ | (41,779) | | | $ | (882) | | | $ | (40,897) | | | NM |
Effective tax rate | 22.3 | % | | 28.0 | % | | | | (5.7) | % |
Income tax expense for | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Change |
(in thousands, except for percentage) | April 1, 2023 | | April 2, 2022 | | $ | | % |
Income tax benefit, net | $ | (146) | | | $ | (5,132) | | | $ | 4,986 | | | NM |
Effective tax rate | 0.1 | % | | 26.3 | % | | | | (26.2) | % |
The effective rate decrease during three months ended April 1, 2023 compared to the three months ended October 1,April 2, 2022 and October 2, 2021 was primarily due to changes in our forecasted effective tax rate and a net increase in reserve for uncertain tax positions. | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended | | Change |
(in thousands, except for percentage) | October 1, 2022 | | October 2, 2021 | | $ | | % |
Income tax (benefit) expense | $ | (45,667) | | | $ | 759 | | | $ | (46,426) | | | NM |
Effective tax rate | 21.3 | % | | 6.2 | % | | | | 15.1 | % |
(NM = Not Meaningful)
Income tax benefit The change in the forecasted effective rate for the nine months ended October 1,2023 compared to 2022 and October 2, 2021 was primarily due to changesan increase in the valuation allowance applied to our forecasted effective rate. The incomenet deferred tax expense for the nine months ended October 2, 2021 was primarily due to capitalized expenses resulting from our IPO.
Noncontrolling interest
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Change |
(in thousands, except for percentage) | October 1, 2022 | | October 2, 2021 | | $ | | % |
Continuing LLC Owner | $ | 37,341 | | | $ | 1,198 | | | $ | 36,143 | | | NM |
Other noncontrolling interest | 112 | | | — | | | 112 | | | NM |
Total | $ | 37,453 | | | $ | 1,198 | | | $ | 36,255 | | | |
| | | Nine Months Ended | | Change | | Three Months Ended | | Change |
(in thousands, except for percentage) | (in thousands, except for percentage) | October 1, 2022 | | October 2, 2021 | | $ | | % | (in thousands, except for percentage) | April 1, 2023 | | April 2, 2022 | | $ | | % |
Continuing LLC Owner | Continuing LLC Owner | $ | 41,297 | | | $ | 2,595 | | | $ | 38,702 | | | 1491.4 | % | Continuing LLC Owner | $ | 35,297 | | | $ | 3,411 | | | $ | 31,886 | | | NM |
Other noncontrolling interest | Other noncontrolling interest | 447 | | | 5,665 | | | (5,218) | | | (92.1 | %) | Other noncontrolling interest | — | | | 118 | | | (118) | | | (100.0 | %) |
Total | Total | $ | 41,744 | | | $ | 8,260 | | | $ | 33,484 | | | Total | $ | 35,297 | | | $ | 3,529 | | | $ | 31,768 | | |
Subsequent to the IPO and related transactions, we are the sole managing member of BV LLC in which we own 79.6%79.8%. We have a majority economic interest, the sole voting interest in, and control the management of BV LLC. As a result, we consolidate the financial results of BV LLC and report a non-controllingnoncontrolling interest representing the 20.4%20.2% that is owned by the Continuing LLC Owner.
The decline Noncontrolling interest activity in 2023 was the result of large losses associated with other noncontrolling interest resulted from our deconsolidation of Harbor upon the termination of the Collaboration Agreementrecorded during the second quarter of 2021 in which we incurred a $5.7 million impairment charge. We ceased being the primary beneficiary upon termination as we no longer had the power to direct Harbor’s significant activities.period.
Segment Adjusted EBITDA
Adjusted EBITDA for each of our reportable segments is as follows:
| | | Three Months Ended | | Change | | Three Months Ended | | Change |
(in thousands, except for percentage) | (in thousands, except for percentage) | October 1, 2022 | | October 2, 2021 | | $ | | % | (in thousands, except for percentage) | April 1, 2023 | | April 2, 2022 | | $ | | % |
U.S. | U.S. | $ | 19,543 | | | $ | 19,782 | | | $ | (239) | | | (1.2 | %) | U.S. | $ | 14,712 | | | $ | 4,839 | | | $ | 9,873 | | | 204.0 | % |
International | International | $ | 1,496 | | | $ | 1,533 | | | $ | (37) | | | (2.4) | % | International | $ | 2,239 | | | $ | 2,333 | | | $ | (94) | | | (4.0) | % |
U.S.
Adjusted EBITDA decreased $0.2increased $9.9 million, or 1.2%204.0%, primarily due to higher gross profit, partially offset with an increasecost saving initiatives, including a decrease in compensation related charges consultingand declines in administrative and travel related expenses as well as higher public company costs.previously discussed.
International
Adjusted EBITDA decreased $— million, or 2.4%, primarily due acquisitions well as travel and consulting related expenses. These were partially offsetremained consistent with an increase in gross profit resulting from larger net sales.
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended | | Change |
(in thousands, except for percentage) | October 1, 2022 | | October 2, 2021 | | $ | | % |
U.S. | $ | 43,467 | | | $ | 46,929 | | | $ | (3,462) | | | (7.4 | %) |
International | $ | 7,614 | | | $ | 5,343 | | | $ | 2,271 | | | 42.5 | % |
U.S.
Adjusted EBITDA decreased $3.5 million, or 7.4%, primarily due to an increase in compensation related charges of previously discussed as well as higher public company costs, partially offset by an increase in gross profit.
International
Adjusted EBITDA increased $2.3 million, or 42.5%, primarily due to an increase in gross profit resulting from larger net sales. This increase was partially offset by acquisitions, consulting, travel related expenses and compensation related charges.the prior year.
Liquidity and Capital Resources
Sources of liquidity
Our principal liquidity needs have historically been for acquisitions, working capital, research and development, clinical trials, and capital expenditures. We expect these needs to continue as we carry out our operations, develop and commercialize our existing product candidates and any new products candidates and possibly further our expansion into international markets.
We have implemented previously announced restructuring initiatives to enhance our current financial position and sources of liquidity. These restructuring efforts are expected to result in $9.0 million to $10.0 million in cost savings on an annualized basis upon completion. Refer to Item 1. Financial Information—Notes to the unaudited consolidated condensed financial statements—Note 9. Restructuring costs for further details regarding these cost cutting efforts.
As previously discussed, below under CartiHeal, additional capital was providedwe entered into a definitive agreement on May 10, 2023 to consummate the CartiHeal Acquisition through the Term Loan Facility, extendedsell our Wound Business for total potential cash consideration of $85.0 million, including $35.0 million at closing, $5.0 million deferred for 18 months and $45.0 million in potential earn-out payments. We expect to us through the Amended 2019 Credit Agreement,net approximately $30.0 million after fees and additional capitalexpenses that will be requiredused to fundrepay existing debt. The sale of the Deferred Amount underWound Business is expected to close before the CartiHeal Amendment.end of May 2023.
We anticipate that to the extent that we require additional liquidity, we will obtain funding through additional equity financings or the incurrence of other indebtedness additional equity financings or a combination of these potential sources of liquidity. We may explore additional divestiture opportunities for non-core assets to improve our liquidity position, as we recently did with the Wound Business. In addition, we may raise additional funds to finance future cash needs through receivables or royalty financings or corporate collaboration and licensing arrangements. If we raise additional funds by issuing equity securities or convertible debt, our stockholders will experience dilution. The covenants under the Amended 2019 Credit Agreement limit our ability to obtain additional debt financing. Debt financing, if allowed under the Amended 2019 Credit Agreement and if available, would result in increased payment obligations and might involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, or making capital expenditures. If we raise additional funds through collaboration and licensing arrangements with third parties,third-parties, it might be necessary to relinquish valuable rights to our products, future revenue streams or product candidates, or to grant licenses on terms that might not be favorable to us. The covenants under the Amended 2019 Credit Agreement limit our ability to obtain additional debt financing. We cannot be certain that additional funding will be available on acceptable terms, or at all. Any failure to raise capital in the future might have a negative impact on our financial condition and our ability to pursue our business strategies.
Going Concern
BasedThe accompanying unaudited consolidated financial statements have been prepared under the going concern basis of accounting, which presumes that the Company’s liquidation is not imminent; however, based on the Company’s current financial position and liquidity sources, including current cash balances, and forecasted future cash flows, the Company is at risk of not being able to make the two initial Deferred Payments for the CartiHeal transaction, each in the principal sum of $50 million, due under the terms of the amended Option and Equity Purchase Agreement no later than July 2023 and September 2023, respectively, which may result in a cross default under the Amendment No. 3 to the Credit and Guaranty Agreement entered into with the Company’s lenders at the time of the CartiHeal transaction. In addition, should the Company fail to meet certain financial thresholds established in the Credit Agreement, the Company may be at risk of violating certain of its financial covenants under that agreement. If any of the financial covenants are not met, or if the Company is otherwise deemed to be in default of its other obligations under that agreement, the aggregate outstanding principal amounts become due and payable to our lenders. Considering current liquidity sources, the Company would not be able to make the Deferred Payments due in connection with the CartiHeal transaction or repay the Company’s total outstanding debt balance in the event of a default.Amended 2019 Credit Agreement.
These conditions and events raise substantial doubt about the Company’s ability to continue as a going concern. In light of this, theThe Company is actively pursuing plans to mitigate these conditions and events, such as considering various additional cost cutting measures, and exploring divestiture opportunities for non-coresuch as the recently announced plan to divest certain assets considering seeking temporary covenant waivers from our lenders, pursuing strategic options with respect to the CartiHeal transaction, attempting to renegotiate the timing of the CartiHeal Deferred Payments or exiting that agreement by transferring back to the former CartiHeal owners all of the share capital, intellectual property and other assets of CartiHeal acquired in the transaction pursuant to the escrow and pledge agreements entered into as part of the CartiHeal acquisition if such measures fail;within its Wound Business; however, there can be no assurances that it is probable these plans will be successfully implemented or that they will successfully mitigate these conditions and events. Therefore, these plans do not alleviate the substantial doubt about the Company’s ability to continue as a going concern.
For additional information, see Part II. Item 1A. Risk Factors.
Interest rate swap
On October 28, 2022,example, as a part of efforts to improve our financial condition, on February 27, 2023, we terminated our non-designated interest rate swapreached an agreement to return the assets and subsequently receivedliabilities of CartiHeal (2009) Ltd. (“CartiHeal”), a settlementwholly-owned subsidiary of $7.7 million.
Initial public offering
On February 16, 2021, in connection with our IPO, we issuedCartiHeal relieved deferred consideration liabilities and sold 9,200,000 shares of our Class A common stock at a pricemilestone obligations related to the publicacquisition of $13.00 per share, resultingCartiHeal. See Strategic Transactions – CartiHeal above as well as Item 1. Financial Information—Notes to the unaudited consolidated condensed financial statements—Note 3. Acquisitions and divestitures for further information regarding the acquisition and subsequent deconsolidation of CartiHeal. In addition, we announced a restructuring plan in gross proceedsDecember 2022 to usalign our organizational and management cost structure to improve profitability and cash flow. Refer to Item 1. Financial Information—Notes to the unaudited consolidated condensed financial statements—Note 9. Restructuring costs for further information.
If mitigating steps are not taken or are not successful, we are at substantial risk of approximately $119.6 million, before deducting the underwriting discount, commissions and estimated offering expenses payable by us. Bioventus Inc. is a holding company and has no material assets other than the ownership of LLC Interests and has no independent means of generating revenue. Deterioration infailing to comply with the financial condition, earnings, or cash flow of BV LLC and its subsidiaries for any reason could limit or impair their ability to pay such distributions. In addition, the terms of our financing arrangements, includingcovenants in the Amended 2019 Credit Agreement contain covenants that may restrict BV LLC and its subsidiaries from paying such distributions, subjectin 2024. A breach of a financial covenant under the Amended 2019 Credit Agreement could accelerate repayment of our obligations under the agreement. Refer to certain exceptions. Further, BV LLC is generally prohibited under Delaware law from making a distribution to a member Item 1. Financial Information—Notes to the extent that, atunaudited consolidated condensed financial statements—Note 4. Financial instruments for further discussion concerning the time of the distribution, after giving effect to the distribution, liabilities of BV LLC (with certain exceptions), as applicable, exceed the fair value of its assets. Subsidiaries of BV LLC are generally subject to similar legal limitations on their ability to make distributions to BV LLC. Bioventus Inc., as the managing member, causes BV LLC to make cash distributions to the owners of LLC Interests in an amount sufficient to (i) fund tax obligations in respect of allocations of taxable income from BV LLC; and (ii) cover Bioventus Inc. operating expenses, including payments under the Tax Receivable Agreement (TRA).Company’s long-term debt obligations.
Cash requirements
Except as provided below under “Contractual obligations” and the previously discussed capital requirements for the CartiHeal Acquisition, thereThere have been no material changes to our future cash requirements as disclosed in Part II. Item 7 of our 20212022 10-K.
We enter into contracts in the normal course of business with various third partiesthird-parties for development, collaboration and other services for operating purposes. These contracts generally provide for termination upon notice. Payments due upon cancellation generally consist only of payments for services provided or expenses incurred, including non-cancellable obligations of our service providers, up to the date of cancellation. Certain agreements include contingent events that upon occurrence would require payment. For information regarding Commitmentscommitments and Contingencies,contingencies, refer to Part I. Item 1. Financial Information—Notes to the unaudited consolidated condensed financial statements—Note 11. CommitmentCommitments and contingencies in of this Quarterly Report on Form 10-Q for further information regarding other matters..
Tax Receivable Agreement
The BV LLC Agreement provides for the payment of certain distributions to the Continuing LLC Owner in amounts sufficient to cover the income taxes imposed with respect to the allocation of taxable income from BV LLC as well as obligations underwithin the Tax Receivable Agreement (TRA).tax receivable agreement (“TRA”) with the Continuing LLC Owner. Under the TRA, we are required to make cash payments to the Continuing LLC Owner equal to 85% of the tax benefits, if any, that we actually realize (or in certain circumstances are deemed to realize), as a result of (1) increases in the tax basis of assets of BV LLC resulting from (a) any future redemptions or exchanges of LLC Interests, and (b) certain distributions (or deemed distributions) by BV LLC and (2) certain other tax benefits arising from payments under the TRA. We expect the amount of the cash payments required to be made under the TRA will be significant. The actual amount and timing of any payments under the TRA will vary depending upon a number of factors, including the timing of redemptions or exchanges by the Continuing LLC Owner, the amount of gain recognized by the Continuing LLC Owner, the amount and timing of the taxable income we generate in the future, and the federal tax rates then applicable. Any payments made by us to the Continuing LLC Owner under the TRA will generally reduce the amount of overall cash flow that might have otherwise been available to us. To the extent that we are unable to make payments under the TRA for any reason, such payments generally will be deferred and will accrue interest until paid; provided, however, that nonpayment for a specified period may constitute a material breach of a material obligation under the TRA and therefore accelerate payments due under the TRA.
CartiHeal
As disclosed under Strategic Transactions—CartiHeal, we exercised the Call Option in April 2022 for the acquisition of all the remaining shares of CartiHeal, excluding shares we already own, for approximately $315.0 million. An additional $135.0 million is payable contingent upon the achievement of $75.0 million in trailing twelve month sales. Pursuant to the CartiHeal Amendment, we deferred $215.0 million of the aggregate purchase price otherwise due at closing until the earlier of the achievement of certain milestones and the occurrence of certain installment payment dates. The first two milestones, each of which are $50.0 million, will be paid no later than the end of the third quarter of 2023. The next two milestones, each of which are $25.0 million, will be paid by the end of 2024 and 2025, respectively. The final milestone of $65.0 million is to be paid by 2027. As discussed above, we are currently exploring plans to improve our liquidity position in order to fund Deferred Amount payable in connection with the CartiHeal Acquisition; however, given our current liquidity position, we are at risk of failing to make the Deferred Payments. For additional information, see Part II. Item 1A. Risk Factors.
Credit Facilities
Our Credit and Guaranty Agreement, dated as of December 6, 2019, and as amended on October 29, 2021 (the 2019 Credit Agreement) consisted of a $360.8 million term loan (Term Loan) and a $50.0 million revolving credit facility (Revolver). On July 11, 2022, we amended the 2019 Credit Agreement (as amended, the Amended 2019 Credit Agreement) in conjunction with the CartiHeal Acquisition. Pursuant to the Amended 2019 Credit Agreement, an $80.0 million term loan facility (Term Loan Facility) was extended to us to be used for: (i) the financing of the CartiHeal Acquisition; (ii) the payment of related fees and expenses; and (iii) working capital needs and general corporate purposes, including without limitation for permitted acquisitions. The Term Loan Facility will mature on October 29, 2026. We may elect either the secured overnight financial rate (SOFR) or base interest rate options for all borrowings as of July 12, 2022, which includes any outstanding balances under the Term Loan, Term Loan Facility and Revolver. Initial SOFR loans and base rate loans had a margin of 3.25% and 2.25%, respectively, subsequent to July 12, 2022.Indebtedness
We were not in compliance with all requiredcertain financial covenants underin the Amended 2019 Credit Agreement as of December 31, 2022. As a result, on March 31, 2023 (the “Closing Date”), we entered into another amendment to the Amended 2019 Credit Agreement to, among other things, modify certain financial covenants, waive the noncompliance at December 31, 2022, and to modify interest rates applicable to borrowings under the 2019 Credit Agreement.
The Amended 2019 Credit Agreement, as most recently amended, contains customary affirmative and negative covenants, including those related to financial reporting and notification, restrictions on the declaration or payment of certain distributions on or in respect of our equity interests, restrictions on acquisitions, investments and certain other payments, limitations on the incurrence of new indebtedness, limitations on transfers, sales and other dispositions of our assets, as well as limitations on making changes to the business and organizational documents. Financial covenant requirements include a maximum debt leverage ratio and an interest coverage ratio. In addition, during the period commencing on the Closing Date and ending upon the satisfaction of certain conditions occurring not prior to the delivery of our financial statements for the fiscal quarter ending June 30, 2024, we will be subject to certain additional requirements and covenants, including a requirement to maintain Liquidity (as defined in the Amended 2019 Credit Agreement) of not less than $10,000 as of the end of each calendar month during such period. The Term Loan Facilities will mature on October 1, 2022.29, 2026. The Revolver will mature on October 29, 2025.
During January and February 2023, the Company borrowed $49.0 million on its Revolver for working capital needs. However, on the Closing Date of the March 2023 amendment to the Amended 2019 Credit Agreement, as part of the closing conditions, the Company repaid $20.0 million of these borrowings. Additionally, the Company paid $1.3 million in closing fees, and will be required to pay an additional $0.6 million by December 31, 2023 unless the Total Net Leverage Ratio as at September 30, 2023 is below 5.25 to 1.00.
Refer to Item 1. Financial Information—Notes unaudited consolidated condensed financial statements—Note 1. Organization for further details on the Company’s covenant compliance and Note 4. Financial instruments for further details on the Company’s indebtedness.
Other
For information regarding Commitments and Contingencies, refer to Part I. Item 1. Financial Information—Notes to the unaudited consolidated condensed financial statements—Note 11. Commitments and Contingencies—Note 3. Acquisitions and investmentsdivestitures of this Quarterly Report on Form 10-Q.
Information regarding cash flows
Cash, cash equivalents and restricted cash as of OctoberApril 1, 20222023 totaled $34.4$47.1 million, compared to $99.2$30.2 million as of December 31, 2021.2022. The decrease in cash was primarily due to the following:
| | | Nine Months Ended | | Change | | Three Months Ended | | Change |
(in thousands, except for percentage) | (in thousands, except for percentage) | October 1, 2022 | | October 2, 2021 | | $ | | % | (in thousands, except for percentage) | April 1, 2023 | | April 2, 2022 | | $ | | % |
Cash flows from continuing operations: | | Cash flows from continuing operations: | | | | | | | |
Net cash from operating activities | Net cash from operating activities | $ | (18,781) | | | $ | 9,874 | | | $ | (28,655) | | | NM | Net cash from operating activities | $ | 4,659 | | | $ | (21,019) | | | $ | 25,678 | | | (122.2 | %) |
Net cash from investing activities | Net cash from investing activities | (113,033) | | | (62,482) | | | (50,551) | | | 80.9 | % | Net cash from investing activities | (3,560) | | | (4,674) | | | 1,114 | | | (23.8 | %) |
Net cash from financing activities | Net cash from financing activities | 67,514 | | | 97,063 | | | (29,549) | | | (30.4 | %) | Net cash from financing activities | 27,380 | | | 9,205 | | | 18,175 | | | 197.4 | % |
Net cash from discontinued operations | | Net cash from discontinued operations | (13,675) | | | — | | | (13,675) | | | NM |
Effect of exchange rate changes on cash | Effect of exchange rate changes on cash | (531) | | | (377) | | | (154) | | | 40.8 | % | Effect of exchange rate changes on cash | 461 | | | (71) | | | 532 | | | NM |
Net change in cash, cash equivalents and restricted cash | Net change in cash, cash equivalents and restricted cash | $ | (64,831) | | | $ | 44,078 | | | $ | (108,909) | | | NM | Net change in cash, cash equivalents and restricted cash | $ | 15,265 | | | $ | (16,559) | | | $ | 31,824 | | | (192.2 | %) |
NM = Not Meaningful
Operating Activities
Net cash fromin operating activities decreased $28.7from continuing operations increased $25.7 million, primarily due to completed acquisitions and the resulting integration costs, higherlower employee compensation increased operating expenses and a risenet increase in interest payments.collections. These outflowsinflows were partially offset by increased collections fromwith an increase in inventory purchases and higher sales.interest payments.
Investing Activities
Cash flows used in investing activities increased $50.6decreased $1.1 million, primarily due to the $104.8 million acquisition of CartiHeal and an increase of $2.1 million in capital expenditures, partially offset by the $46.8 million acquisition of Bioness in 2021 and $9.6$1.5 million less in other investments and distribution rights.rights in 2023 partially offset with and an increase of $0.6 million in capital expenditures.
Financing Activities
Cash flows provided by financing activities decreased $29.5increased $18.2 million, primarily due to the $107.8(i) net revolver credit borrowings of $29.0 million compared to $15.0 million in net2022; (ii) no debt payments during the first quarter of 2023 compared to $4.5 million in the first quarter of 2022; and (iii) tax withholdings of $3.4 million in 2022 compared to none in 2023. The increase was partially offset with $2.0 million less proceeds from the issuance of Class A common stock sold during our 2021 IPO. This was partially offsetand $1.7 million in cash payments attributable to debt refinancing in 2023.
Discontinued Operations
Net cash flows from discontinued operations were primarily the result of $10.2 million in fees used to settle the CartiHeal disposition and $1.4 million in cash held by $79.7 millionthe CartiHeal entity at the time of proceeds from the issuance of long-term debt in 2022.disposal.
Off-balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Contractual Obligations
Increases to our contractual obligations compared to amounts disclosed in our 2021 10-K includes the following:
| | | | | | | | | | | | | | | | | |
| Remainder of 2022 | | 2023 and thereafter | | Total |
Long-term debt(a) | $ | 2,000 | | | $ | 78,000 | | | $ | 80,000 | |
Interest payments on long-term debt obligations(a) | 6,800 | | | 76,039 | | | 82,839 | |
Deferred Amount(b) | — | | | 215,000 | | | 215,000 | |
Interest on Deferred Amount(b) | — | | | 43,599 | | | 43,599 | |
| $ | 8,800 | | | $ | 412,638 | | | $ | 421,438 | |
(a)On July 11, 2022, our Term Loan was extended for an additional $80.0 million. Interest rates have increased as a result of the Term Loan extension and rising interest rates. Refer to Part I. Item 1. Notes to the unaudited consolidated condensed financial statements—Note 4. Financial instruments in this Quarterly Report on Form 10-Q for further information regarding long-term debt.
(b)On July 12, 2022, we acquired CartiHeal for $315.0 million, of which $215.0 million was deferred with an annual interest rate of 8.0% and payable either upon the of achievement of certain milestones or specified dates. Refer to Part I. Item 1. Notes to the unaudited consolidated condensed financial statements in this Quarterly Report on Form 10-Q for further information regarding the Deferred Amount.
Except as discussed above, thereThere have been no material changes to our contractual obligations as disclosed in our 20212022 10-K.
Critical Accounting Estimates
Our discussion of operating results is based upon the unaudited consolidated condensed financial statements and accompanying notes.notes, which have been prepared in accordance with U.S. GAAP. The preparation of these statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Our estimates are based on our historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in the facts or circumstances underlying these estimates could result in material changes and actual results could differ from these estimates. Our critical accounting estimates are detailed in Item 7 of our 20212022 10-K and we have no material changes from such disclosures.
Recently Issued Accounting Pronouncements
There were no recently issued accounting pronouncements that are expected to materially impact our financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
There have been no material changes to our market risks as disclosed in our 20212022 10-K.
Item 4. Controls and Procedures.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, because aof ongoing material weaknessweaknesses in the Company’s internal control over financial reporting ourthat are not fully remediated as described below, the Company’s disclosure controls and procedures were not effective as of OctoberApril 1, 2022. This material weakness in the Company’s internal control over financial reporting and the Company’s remediation efforts are described below.2023.
Material WeaknessWeaknesses in Internal Control over Financial Reporting
The Company’s management, including our Chief Executive Officer and Chief Financial Officer, identified a material weakness related to the Company’s internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected and corrected on a timely basis.
Changes in Control Environment
In 2022, the Company did not conduct an effective risk assessment to identify and assess changes in its business processes and internal control environment related to newly acquired companies and multiple information technology (“IT”) system implementations that occurred in 2022. Further, there was a lack of adequate personnel resources in accounting, IT and other support functions to support simultaneous system implementations and business process integrations for acquired companies, implement appropriate controls for acquired companies and to maintain focus on compliance with internal controls for legacy Bioventus processes.
In addition, during 2022, the Company saw an unprecedented level of turnover in roles that drive execution of internal control activities. This turnover, paired with business changes, including those related to acquisitions, resulted in a disruption to the effective completion of control activities across a number of business processes. Further, management identified a gap in control design related to sufficient tracking of control performance to ensure controls operated effectively.
In considering these breakdowns in the control environment, Bioventus determined the associated Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) principles requiring further control and action by management to be:
(a)Control environment - Establishes structure, authority, and responsibility (COSO Principle 3);
(b)Risk assessment – Identifies and analyzes significant change (COSO Principle 9); and
(c)Monitoring – Conducts ongoing and /or separate evaluations (COSO Principle 16).
These ongoing control deficiencies have resulted in certain immaterial restatements of the Company’s financial statements as discussed in this Quarterly Report on Form 10-Q. When considered in the aggregate, they continue to create a reasonable possibility that a material misstatement to the consolidated financial statements will not be prevented or detected on a timely basis. Therefore, management concluded that the deficiencies continue to represent a material weakness in our internal control over financial reporting, and that disclosure controls and procedures were not effective as April 1, 2023.
Remediation Measures
(a)We identified staffing gaps based on employee turnover and integration challenges. Throughout 2022, we hired personnel and temporary resources to backfill positions vacated due to employee turnover and added additional headcount in accounting, finance and IT to expand capacity.
(b)In the fourth quarter of 2022, we engaged third-party consultants to perform an Accounting Transformation & Integration Assessment (“Project Action”). The Project Action team identified priority initiatives to enhance processes and systems to address inadequate processes, including order to cash, procure to pay and related master data processes. Further, Project Action benchmarked resources for the accounting function.
The(c)As part of Project Action, we intend to develop mid- to long-term plans to further scale accounting, finance and IT for growth and public company requirements and continue to assess the level of resources that we need. We plan to continue to evaluate retention programs to retain key resources.
(d)We will prioritize key projects and ensure organizational capacity, with only essential IT projects occurring during the year.
(e)We are reinforcing execution rigor and are establishing recurring metrics regarding internal controls in processes, and tracking current performance compared with target performance to provide additional visibility to management and the Audit Committee. We also plan to further utilize our systems to automate the tracking of internal control completion.
(f)We will implement regular internal control certifications by control owners for all key controls.
(g)We will drive additional accountability for control owners by tying a portion of their performance objectives to successful completion of internal controls.
(h)We will increase training on internal controls, public company requirements and rigor through additional training requirements for new and existing control owners and tracking compliance to those training requirements.
(i)We will update and/or develop standard operating procedures to further document process and control performance for use in day-to-day execution and when training new employees.
(j)Further, we plan to implement a new internal control policy that further defines expectations for internal control performance and communication of changes to financially relevant processes. This policy will require management and internal audit approval before process changes or system implementations go-live.
Rebates Accrual Material Weakness
As previously reported, we identified a material weakness related to the Company’s internal controlcontrols over financial reporting wasthat were not performed at a sufficient level of precision to ensure that the third quarter 2022 rebates accrual was complete and accurate. The process undertaken to estimate the expected reduction in revenue from rebates was consistent with the Company’s historical practice. However, subsequent to the initial calculation of the third quarter 2022 rebates accrual, an unexpectedly large invoice was received and there were not processes in place to ensure it was reviewed timely in order to update the accrual.
The Company reassessed open rebates accruals and the approach for calculating the rebate accruals based on this invoice. The Company revised its estimation methodology resulting in a decrease of revenue of $8.4 million. This adjustment was recorded subsequent to the earnings release but prior to the filing of thisthe Company’s Quarterly Report on Form 10-Q.10-Q for the third quarter of 2022. Further, this change in revenue projection related to the rebates accrual adjustment for 2022 and cascading effect on future revenue projections materially impacted the Company’s evaluation of its ability to meet debt covenants in its Amended 2019 Credit Agreement, resulting in liquidity and going concern disclosures in the Company’s Quarterly Report on Form 10-Q.
Notwithstanding the identified material weakness, management believes that the Financial Statements and related financial information included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our balance sheets, statements of operations and comprehensive (loss) income, statement of changes in stockholders’ and members’ equity and statements of cash flows as of and for the periods presented.third quarter of 2022.
Remediation Measures
We are designinghave designed and implementingimplemented new processes and enhanced controls to address the underlying causes of thisthe material weakness related to the rebates accrual, including:
•Reassessing open rebates accruals and changing the estimation method for calculating the rebates accruals, including enhancing the precision of the controls;
•Implementing enhanced controls and status tracking to ensure that rebates invoices from third-party payers are received and reviewed timely; and
•Increasing rigor of documenting key conversations with payers.
The Company is in the process of implementing enhanced procedures to ensure the completeness and accuracy of key reports and information used in the rebates accrual and further enhancing the precision of supporting documentation for control performance.
We believe the actions described abovewith respect to our control environment and rebates accrual processes will be sufficient to remediate the identified material weaknessweaknesses and strengthen our internal control over financial reporting. However, the new and enhanced controls have not all been fully implemented and/or have not operated for a sufficient amount of time to conclude that theour material weakness hasweaknesses have been fully remediated. We will continue to implement and monitor the effectiveness of theseour controls and will make any further changes management determines appropriate.
Notwithstanding the identified material weaknesses above, the Chief Executive Officer and Chief Financial Officer believe that the financial statements and related financial information included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our balance sheets, statements of operations and comprehensive (loss) income, statement of changes in stockholders’ equity and statements of cash flows as of and for the periods presented.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarterly period covered by this reportfirst quarter of 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting except for changes to controls resulting from a system integration related to our acquisition of Misonix, and the material weaknessweaknesses described above.
PART II. OTHER INFORMATION
Item 1. Legal ProceedingsProceedings.
On January 12, 2023, the Company and certain of its current and former directors and officers were named as defendants in a putative class action lawsuit filed in the Middle District of North Carolina, Ciarciello v. Bioventus, Inc., No. 1:23– CV – 00032-CCE-JEP (M.D.N.C. 2023). The complaint asserts violations of Sections 10(b) and 20(a) of the Exchange Act and of Sections 11 and 15 of the Securities Act and generally alleges that the Company failed to disclose certain information regarding rebate practices, its business and financial prospects, and the sufficiency of internal controls regarding financial reporting. The complaint seeks damages in an unspecified amount. On April 12, 2023, the Court appointed Wayne County Employees’ Retirement System as lead plaintiff. The lead plaintiff’s amended consolidated complaint is due to be filed with the Court on June 12, 2023. Defendants’ motion to dismiss the amended consolidated complaint is due on July 17, 2023. The Company believes the claims alleged lack merit and intends to defend itself vigorously. The outcome of the litigation is not presently determinable, and any loss is neither probable nor reasonable estimable.
On June 15, 2022, the Company, through its subsidiary Bioness, filed a lawsuit in the United States District Court for the Eastern District of Virginia against Aretech, LLC (“Aretech”) alleging infringement by Aretech of various patents related to our Vector Gait and Safety Support System®System®. On August 8, 2022, Aretech filed an answer to the lawsuit denying infringement and asserting various affirmative defenses and counterclaims to the Bioness complaint. Bioness filed a motion to dismiss the defendant’s counterclaims on September 28, 2022. In response to Bioness’ motion to dismiss the counterclaims, on October 19, 2022, Aretech filed an amended answer and counterclaims. We are currently reviewingOn November 16, 2022, Bioness filed a partial motion to dismiss certain of the amendmentsamended counterclaims. On January 23, 2023, the court granted-in-part Bioness’s motion dismissing Aretech’s antitrust and planinventorship-related counterclaims, but allowed certain of Aretech’s counterclaims to aggressively defend our patentsproceed. On March 23, 2023, the parties entered into a settlement and license agreement that resolved all claims in the litigation.
On March 23, 2017, Misonix’s former distributor in China, Cicel (Beijing) Science & Technology Co., Ltd., filed a lawsuit against Misonix and certain of its officers and directors in the United States District Court for the Eastern District of New York. The complaint alleged that Misonix improperly terminated its contract with the former distributor. The complaint sought various remedies, including compensatory and punitive damages, specific performance and preliminary and post judgment injunctive relief, and asserted various causes of action, including breach of contract, unfair competition, tortious interference with contract, fraudulent inducement, and conversion. On October 7, 2017, the court granted Misonix’s motion to dismiss each of the tort claims asserted against Misonix, and also granted the individual defendants’ motion to dismiss all claims asserted against them. On January 23, 2020, the Courtcourt granted Cicel’s motion to amend its complaint, to include claims for alleged defamation and theft of trade secrets in addition to the breach of contract claim. Discovery in the matter ended on August 5, 2021. On January 20, 2022, the Courtcourt granted Misonix’s summary judgment motion on Cicel’s breach of contract and defamation claims. Cicel’s motion for reconsideration of the Court’scourt’s summary judgment ruling in Misonix’s favor was dismissed by the Courtcourt on April 29, 2022. On July 18, 2022, Cicel voluntarily dismissed the remaining claim for trade secret theft and stated its intention tolater filed an appeal in the Court’s January 20, 2022 ruling on the breach of contract and defamation claims to theUnited States Court of Appeals.Appeals for the Second Circuit. We believe that we have various legal and factual defenses to these claims and intend to vigorously defend anythe appeal of the lower court’s summary judgement rulings in our favor.
Prior to the closing of our acquisition of Bioness, Bioness had been named as a defendant in a lawsuit, for which we are indemnified under the indemnification provisions contained in the Bioness Merger Agreement. The case relates to an action brought in February 2021 in the Delaware State Court of Chancery by a former minority shareholder and director of Bioness, seeking a temporary restraining order contesting our acquisition of Bioness. While the complaint to block the Bioness acquisition was dismissed by the court, a separate action was brought against the Company under the indemnification provisions of the Bioness Certificate of Incorporation to recover approximately $2.4$3.0 million in attorney fees and other expenses incurred by the director and shareholder in connection with the dismissed case.matter.
On August 19, 2021, the court issued a ruling granting, in part, plaintiff’s motion for summary judgment, awarding plaintiff attorney’s fees and related expenses incurred in connection with performance of the plaintiff’s directorial duties, and denying fees and expenses incurred in a non-director capacity. In its ruling, the Court’scourt’s order also directed the parties to agree upon a process that will govern the payment of and challenges to plaintiff’s payment requests and required Bioness to pay 50% of the demanded amount into escrow if more than 50% of the total invoiced amount was in dispute. Pursuant to the court’s order, to date, Bioness has paid approximately $1.2$1.3 million into escrow. On November 1, 2022, at a hearing before Delaware State Court of Chancery, the court ruled in favor of the former Bioness director awarding attorney’s fees in connection with the underlying pre-merger litigation and the advancement action in the amounts claimed, less approximately $50,000. We are currently evaluating$0.1 million. On December 23, 2022, Bioness and the plaintiff entered into a settlement agreement resolving the matter for the aggregate sum of $2.5 million payable to the plaintiff. The settlement was satisfied by releasing the $1.3 million previously paid by Bioness and held in escrow and by an appealadditional payment of $1.2 million. Pursuant to the court’s ruling.indemnification obligations under the Bioness Merger Agreement, this subsequent payment was made on behalf of Bioness on December 28. 2022, by the selling majority shareholder under that agreement. The Company subsequently recovered the $1.3 million paid into escrow from the selling Bioness shareholders pursuant an indemnification request under the Bioness Merger Agreement. An order dismissing the case was entered by the court on January 27, 2023.
On February 8, 2022, the above referenced minority shareholder of Bioness filed another action in the Delaware State Court of Chancery in connection with our acquisition of Bioness. This action names the former Bioness directors, the Alfred E. Mann Trust (Trust), which was the former majority shareholder of Bioness, the trustees of the Trust and Bioventus as defendants. The complaint alleges, among other things, that the individual directors, the Trust, and the trustees breached their fiduciary duty to the plaintiff in connection with their consideration and approval of our transaction. The complaint also alleges that we aided and abetted the other defendants in breaching their fiduciary duties to the plaintiff and that we breached the Merger Agreement by failing to pay the plaintiff its pro rata share of the merger consideration. We believe that we are indemnified under the indemnification provisions contained in the Bioness Merger Agreement for these claims. On July 20, 2022, we filed a motion to dismiss all claims made against us on various grounds, as did all the other named defendants in the suit. TheA hearing on the Bioness and other defendant’s motions was held before the Court has not yet ruledof Chancery on any of these motions.January 19, 2023. We also believe that there are various legal and factual defenses to the claims plaintiff made against us and intend to defend ourselves vigorously. On April 27, 2023, the Court issued an order which, among other things, dismissed Bioventus from the case.
On September 15, 2021, a purported stockholder of Misonix filed an action in the United States District Court for the Eastern District of New York, captioned Stein v. Misonix, Inc., et al., Case No. 2:21-cv-05127 (E.D.N.Y.) (the Stein Complaint). The Stein Complaint named Misonix and members of its board of directors as defendants. The Stein Complaint was dismissed on April 6, 2022. On September 16, 2021, a purported stockholder of Misonix filed an action in the United States District Court for the Southern District of New York, captioned Ciccotelli v. Misonix, Inc. et al., Case No. 1:21-cv-07773 (S.D.N.Y.) (the Ciccotelli Complaint) against Misonix, members of its board of directors, the Company, and its subsidiaries, Merger Sub I and Merger Sub II, as defendants. Plaintiff voluntarily dismissed the Ciccotelli Complaint on November 10, 2021. On October 12, 2021, another purported stockholder of Misonix filed an action in the United States District Court for the Eastern District of New York, captioned Rubin v. Misonix, Inc. et al., Case No. 1:21-cv-05672 (S.D.N.Y.) (the Rubin Complaint) and on October 15, 2021, another purported stockholder of Misonix filed an action in the United States District Court for the Southern District of New York, captioned Taylor v. Misonix, Inc. et al., Case No. 1:21-cv-08513 (S.D.N.Y.) (the Taylor Complaint). The Rubin Complaint and the Taylor Complaint name Misonix and members of its board of directors as defendants. Plaintiffs voluntarily dismissed the Rubin and Taylor Complaints on January 21, 2022 and February 18, 2022, respectively.
Each of the complaints relating to the Misonix Acquisition asserted claims under Section 14(a) and Section 20(a) of the Exchange Act and SEC Rule 14a-9, challenging the adequacy of disclosures in the proxy statement/prospectus filed with the SEC on September 8, 2021 or the Definitive Proxy Statement filed with the SEC on September 24, 2021, regarding Misonix and/or Bioventus’ projections and J.P. Morgan’s financial analysis. The complaints sought, among other relief, (i) injunctive relief preventing the parties from proceeding with the merger; (ii) rescission in the event that the merger is consummated; and (iii) an award of costs, including attorneys’ and experts’ fees.
On April 28, 2023, Bioventus LLC was named as a defendant in a lawsuit filed in the Durham, North Carolina, Superior Court, Donald Auman v. Bioventus LLC. The complaint alleges that the plaintiff suffered a methicillin-resistant staphylococcus aureus (MRSA) infection in his left leg after using the coupling gel supplied by the Company for use with its Exogen bone healing device. The complaint also alleges that the Exogen gel used by the plaintiff was the subject of the Company’s recall in December 2020, at which time the Company initiated a voluntary recall of certain lots of the gel supplied by a third-party manufacturer due to concerns that they may have had microbial contamination. The Company is evaluating the allegations in the complaint and intends to defend itself vigorously.
Please refer to Part I. Item 1.1—Financial Information— Notes to the unaudited consolidated condensed financial statements—Note 11. Commitments and Contingencies of this Quarterly Report on Form 10-Q for information pertaining to legal proceedings. In addition, we are party to legal proceedings incidental to our business. While our management currently believes the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on our consolidated condensed financial statements, litigation is subject to inherent uncertainties. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on our financial condition and results of operations.
Item 1A. Risk FactorsFactors.
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors and other cautionary statements described in Part I. Item 1A,.1A. Risk Factors included in our 20212022 10-K, which could materially affect our businesses, financial condition, or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or future results. ThereExcept for such additional information and the updated risk factor set forth below, we believe there have been no other material updates tochanges in our risk factors presentedfrom those disclosed in our 2021 10-K except for the following:2022 10-K.
Failure to establish and maintain effective financial controls could cause us to have material weaknesses and financial misstatements due to error, which could adversely affect our business and stock price.
We have identified a material weaknessare required to comply with the SEC’s rules implementing Sections 302, 404 and 906 of the Sarbanes-Oxley Act of 2002, which require management to certify financial and other information in our quarterly and annual reports, provide quarterly and annual management reports on the effectiveness of disclosure controls and procedures, and provide annual management reports on the effectiveness of internal controls over financial reporting. Though we are required to disclose changes made in our internal controlcontrols and procedures on a quarterly basis and assess internal controls over financial reporting on an annual basis, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal controls over financial reporting pursuant to Section 404 until we are no longer an emerging growth company pursuant to the provisions of the JOBS Act. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating.
To comply with the requirements of being a public company, we have undertaken various actions, and may need to take additional actions, such as implementing new financial controls and procedures and hiring additional accounting or internal audit staff. We cannot assure you that the measures we mighthave taken to date, and actions we may take in the future, will be sufficient to prevent or avoid financial misstatements due to error or material weaknesses (such as those described in this Quarterly Report on Form 10-Q). In addition, our previously identified material weaknesses in financial controls related to our control environment and accounting for rebates from third-party payers have not been fully remediated. If we cannot fully remediate our ongoing material weaknesses or we identify any additional material weaknesses in the future, that might cause us to fail to meet our reporting obligations or result in material misstatementsthe accuracy and timing of our financial statements. If we fail to remediate any material weaknesses or if we otherwise fail to establish and maintain effective control over financial reporting our ability to accurately and timely report our financial results couldmay be adversely affected.
Our management is responsible for establishing Testing and maintaining adequate internalfinancial controls over financial reporting designedcan also divert our management’s attention from other matters that are important to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Our management is likewise required, on a quarterly basis, to evaluate the effectivenessoperation of our internalbusiness. Ineffective disclosure controls and to disclose any changes and material weaknesses identified through such evaluation of those internal controls. A material weakness is a deficiency,procedures or a combination of deficiencies, in internal control over financial reporting such that there iscould cause investors to lose confidence in our reported financial and other information, which would likely have a reasonable possibility that a material misstatementnegative effect on the trading price of our annual or interimClass A common stock.
Additionally, when evaluating our financial statements will not be prevented or detected and corrected on a timely basis.
As described elsewhere in this Quarterly Report on Form 10-Q,controls, we have identified amay identify material weaknessweaknesses in our internal control over financial reporting related to the accounting for rebates from third-party payers. As a result of this material weakness, our management has concludedcontrols that our internal control over financial reporting waswe may not effective as of October 1, 2022. This material weakness resulted in a reduction to revenue of $8.4 million. For a discussion of management’s consideration of the material weakness identified, see Part I. Item 4. Controls and Procedures included in this Quarterly Report on Form 10-Q.
Although management is workingbe able to remediate in time to meet the material weakness, as described in Part I. Item 4. Controls and Procedures,applicable deadline imposed upon us for compliance with the requirements of Section 404. If we cannot provide assurance that these measures will be sufficient to remediate the material weakness that has been identified or prevent future material weaknesses or significant deficiencies from occurring.
We might identify futureany material weaknesses in our internal controls over financial reporting and we might be unable to accurately report our financial results, or report them within the timeframes required by law or stock exchange regulations. We cannot provide assurance that our existing material weakness will be remediated or that additional material weaknesses will not exist or otherwise be discovered, any of which could adversely affect our reputation, financial condition and results of operations.
There are doubts about our ability to continue as a going concern and if we are unable to continue our business, our common stock might have little or no value.
We are subject to certain covenants under our Credit and Guaranty Agreement dated December 6, 2019 (as amended, the Credit Agreement), including, but not limited to, a minimum interest coverage ratio and a maximum debt leverage ratio requirement as defined in the Credit Agreement. As described in Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Quarterly Report on Form 10-Q, the Company has identified substantial doubt about its ability to make the two initial Deferred Payments for the CartiHeal transaction, each in the principal sum of $50 million, due under the terms of the amended Option and Equity Purchase Agreement no later than July 2023 and September 2023, respectively, which might result in a cross default under the Credit Agreement. In addition, should our future cash flows fail to meet certain thresholds established in the Credit Agreement, we might be at risk of violating the covenants regarding the minimum interest coverage ratio and the maximum debt leverage ratio requirement under the Credit Agreement. If any of the financial covenants are not met, or if we are otherwise deemed to be in default of our other obligations under the Credit Agreement, the lenders of the notes are permitted under the Credit Agreement to accelerate the debt. Considering our current liquidity sources, we would not be able to make the Deferred Payments due in connectioncomply with the CartiHeal transaction or repay our total outstanding debt balance under the Credit Agreement in the event of a default. These conditions and events raise substantial doubt about our ability to continue as a going concern. In light of this, we are actively pursuing plans to mitigate these conditions and events, such as considering various cost cutting measures, exploring divestiture opportunities for non-core assets, considering seeking temporary covenant waivers from our lenders, pursuing strategic options with respect to the CartiHeal transaction such as attempting to renegotiate the timing of the Deferred Payments or exiting that agreement by transferring back to the former CartiHeal owners all of the share capital, intellectual property and other assets of CartiHeal acquired in the transaction pursuant to the escrow and pledge agreements entered into as part of the CartiHeal acquisition if such measures fail; however, there can be no assurances that it is probable these plans will be successfully implemented or that they will successfully mitigate these conditions and events. Therefore, these plans do not alleviate the substantial doubt about our ability to continue as a going concern. See Part I. Item 1. Notes to the unaudited consolidated condensed financial statements—Note 1. Organization—Going Concern of this Quarterly Report on Form 10-Q for additional information.
Our Credit Agreement contains financial and other covenants. If we fail to comply with any of these covenants, we might be required to repay the indebtedness, which would significantly harm our liquidity and our operations.
We are subject to certain covenants under the Credit Agreement, including, but not limited to, a minimum interest coverage ratio and a maximum debt leverage ratio requirement as defined in the Credit Agreement. As described in Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Quarterly Report on Form 10-Q, the Company has identified substantial doubt about its ability to make the deferred payments for the CartiHeal transaction when due under the terms of the Option and Equity Purchase Agreement, as amended, which might result in a cross default under the Credit Agreement. In addition, should our future cash flows fail to meet certain thresholds established in the Credit Agreement, we might be at risk of violating the covenants regarding the minimum interest coverage ratio and the maximum debt leverage ratio requirement under the Credit Agreement. If any of the financial covenants are not met, or if we are otherwise deemed to be in default of our other obligations under the Credit Agreement, a majority of the lenders of the notes are permitted under the Credit Agreement to accelerate the debt. Considering our current liquidity sources, we would not be able to make the deferred payments due in connection with the CartiHeal transaction or repay our total outstanding debt balance under the Credit Agreement in the event of a default.
In the absence of a waiver from or other satisfactory arrangement with our lenders, the failure by us to comply with these covenants and the resulting declaration of an event of default would adversely affect our business, results of operations and financial position.
We might be unable to make deferred payments due under our Option Agreement with CartiHeal.
In April 2022, we exercised our option to acquire all of the remaining shares of CartiHeal, excluding shares already owned by us, for approximately $315.0 million. An additional $135.0 million is payable contingent upon the achievement of $75.0 million in trailing twelve-month sales. Pursuant to the CartiHeal Option and Equity Purchase Agreement, as amended, we deferred $215.0 million of the aggregate purchase price otherwise due at closing until the earlier of the achievement of certain milestones and the occurrence of certain installment payment dates. The first two milestones, each of which are $50.0 million, are to be paid no later than the end of the third quarter of 2023. The next two milestones, each of which are $25.0 million, are to be paid by the end of 2024 and 2025, respectively. The final milestone of $65.0 million is to be paid by 2027.
Given our cash position at October 1, 2022, we are at risk of not being able to make the deferred payments for the CartiHeal transaction when due, which would cause a breach of the CartiHeal Option Agreement. The breach would require the payment of the remaining amounts due, less certain payroll payments, as well as trigger a default under the related escrow and pledge agreements. In addition, the failure to make the required deferred payments for the CartiHeal transaction might result in a cross default under the Credit Agreement. Any of these failures would adversely affect our business, results of operations and financial position. If such an event occurs, we might be forced to curtail our operations or to cease operations entirely, either of which could cause our stockholders to lose some or all of their investment.
Regulatory reforms, such as the EU Medical Devices Regulation, could limit our ability to market and distribute our products after clearance, approval or certification is obtained and make it more difficult or costly for us to obtain regulatory clearance, approval or certification of any future products, which could adversely affect our competitive position and materially affect our business and financial results.
The EU Medical Devices Regulation, which became effective in May 2021, was adopted with the aim of ensuring better protection of public health and patient safety. Among other things, the EU Medical Devices Regulation (MDR) imposed changes in the clinical evidence for medical devices, post-market clinical follow-up evidence, annual reporting of safety information for Class III products, and bi-annual reporting for Class II products, Unique Device Identification (UDI) for all products, submission of core data elements to a European UDI database prior to placement of a device on the market, reclassification of medical devices, and multiple other labeling changes.
While we are able to continue marketing our currently CE-marked products in the Europe after the effective date of the EU MDR until the associated CE mark certificates expire, securing renewals of our existing CE mark certificates to allow for continued marketing of the product after CE mark expiration or obtaining certifications for new products requires the performance of certain conformity assessment procedures by a notified body. Notified bodies are independent organizations designated by EU member states which are responsible for, among other things, auditing and examining a product’s technical dossiers and the manufacturers’ quality system. If satisfied that the relevant product conforms to the relevant essential requirements, the notified body issues a certificate of conformity, which allows the manufacturer to place the CE mark on the device and for it to be marketed throughout the EU. Given the additional requirements of the MDR, the renewal of our existing CE mark certificates once they expire or obtaining certifications for new products could be more challenging, time consuming and costly.
For example, technical documentation for certain of our products requiring recertification, such as our L300 GO® Foot Drop System and our single injection HA treatment Durolane®, have been submitted to our notified body. While we are actively engaged with our notified body to renew the CE marks for these and our other products, CE mark renewals for these products are still pending. Our inability to timely review and obtain CE mark certificates for these and other of our products could prohibit their distribution and marketing in EU member states, which would adversely affect our business, prospects, financial condition and results of operations.
Recent environmental regulatory actions regarding medical device sterilization facilities could result in disruptions in the supply of certain of our products and could adversely affect our business, results of operations and financial condition.
Our disposable products that are used with our neXus® Ultrasonic Surgical Aspirator System require sterilization using ethylene oxide prior to sale. Ethylene oxide sterilization is a common and scientifically proven sterilization method that is widely used in the medical device industry. We contract with third party sterilizers to perform this service. Concerns about unsafe levels of ethylene oxide emissions in the air around some sterilization facilities have resulted in certain state environmental protection agency actions against those facilities that have impacted medical device manufacturers’ ability to use the ethylene oxide process to sterilize their devices. For example, recently the operations of certain of our contracted sterilization providers were temporarily suspended by the supplier as a voluntary response to a state environmental agency investigation. While such actions have not disrupted our ability to supply products and the previously shut down facilities have been permitted to resume certain operations after implementation of increased emissions controls, it is uncertain as to whether these facilities will be shut down again for environmental, health and safety concerns, or whether any other sterilization facilities we may contract with in the future will be required to shut down for environmental, health and safety concerns, especially given the increased scrutiny on the use and emission of ethylene oxide for sterilization. To the extent that our third party sterilizers are unable to sterilize our products, whether due to these regulatory or other limitations (such as capacity, reductions in operations, or availability of materials for sterilization), we may be unable to transition to other third party sterilizers, sterilizer locations or sterilization methodsSection 404 in a timely or cost effective manner, or at all,if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal controls over financial reporting once we are no longer an emerging growth company, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A common stock could be adversely affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could have a material adverse impact on our results of operations and financial condition.
If we are unable to fund the remainder of the deferred consideration for the CartiHeal Acquisition as it becomes due, we will be subject to penalty interest payment and might lose the assets we acquired in the CartiHeal Acquisition.
On April 4, 2022, we exercised our Call Option to acquire CartiHeal, excluding the ownership interest already owned by us, for approximately $315.0 million with an additional approximately $135.0 million payable contingent upon the achievement of $75.0 million in trailing twelve-month sales. Pursuant to the CartiHeal Amendment entered into on June 17, 2022, we deferred $215.0 million of upfront consideration otherwise payable to CartiHeal stockholders at the closing of the CartiHeal Acquisition. We closed the acquisition on July 12, 2022 with an upfront payment of $100.0 million, funded through the $50.0 million previously deposited in escrow and an extension of an $80.0 million Term Loan Facility under the Amended 2019 Credit Agreement. We are required to pay the Deferred Amount in five tranches commencing in 2023 and ending no later than 2027, upon the earlier of the achievement of certain milestones and the occurrence of such installment payment dates. Interest on each tranche of the Deferred Amount is accrued at a rate of 8.0% annually until such tranche becomes due and payable and is paid, subject to a penalty interest at a rate of 10.0% per annum if we are unable to pay the amount when due and payable. Our obligation to pay the Deferred Amount also is secured by a first ranking fixed pledge of all of the share capital and intellectual property of CartiHeal and a first ranking floating pledge of all of the assets acquired in the CartiHeal Acquisition.
We expect to fund the Deferred Amount with cash on hand, in combination with the borrowing availability under our credit facility and our expected cash from operations. However, in the event our expected cash from operations together with the borrowing availability under our credit facility are not sufficient, we might require additional capital. If we were to seek additional funds from publicfinancial and private stock offerings, borrowings under our existing or new credit facilities or other sources in order to fund the Deferred Amount under the CartiHeal Amendment and other future initiatives related to the expansion of our business, such financing might not be available on acceptable or commercially reasonable terms, if at all. Such alternative sources of borrowing might be subject to the approval of the requisite lenders under our credit facilities, which we might not be able to secure under reasonable terms.
Furthermore, if we issue equity or debt securities to raise additional capital, our existing stockholders might experience dilution, and the new equity or debt securities might have rights, preferences and privileges senior to those of our existing stockholders. In addition, if we raise additional capital through collaboration, licensing or other similar arrangements, it might be necessary to relinquish valuable rights to our products, potential products or proprietary technologies, or grant licenses on terms that are not favorable to us.
If we cannot fund any tranche of the Deferred Amount as such tranche becomes due, such unfunded amount will thereafter bear interest at a penalty rate of 10.0% per annum (as opposed to 8.0%) until paid, and CartiHeal’s former security holders will be entitled to enforce the pledge agreements securing our obligation to pay such Deferred Amounts when due and payable pursuant to the CartiHeal Amendment. If such events were to occur, it could adversely affect our results of operations, financial condition and business.management resources.
Item 2. Unregistered Sales of Equity Securities and Use of ProceedsProceeds.
Recent Sales of Unregistered Securities
There were no sales of unregistered securities during the three months ended OctoberApril 1, 2022.2023.
Item 3. Defaults Upon Senior SecuritiesSecurities.
Not Applicable
Item 4. Mine Safety Disclosures
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits
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Exhibit No. | | Description | | Form | | File No. | | Exhibit | | Filing Date | ` | Filed / Furnished Herewith |
10.1^ | | | | | | | | | | | | * |
| | | | 10-K | | 001-37844 | | 10.8 (d) | | 3/16/2023 | | |
10.3 | | | | | | | | | | | | * |
10.4^ | | | | 8-K | | 001-37844 | | 10.1 | | 7/12/20224/5/2023 | | |
10.5^ | | | | 8-K/A | | 001-37844 | | 10.1 | | 4/11/2023 | | |
| | | | | | | | | | | | * |
| | | | | | | | | | | | * |
| | | | | | | | | | | | ** |
101.INS | | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | | | | | | | | | *** |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | | | | | | | | | *** |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | | | *** |
101.DEF | | Inline XBRL Extension Definition Linkbase Document | | | | | | | | | | *** |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | | | *** |
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Exhibit No. | | Description | | Form | | File No. | | Exhibit | | Filing Date | ` | Filed / Furnished Herewith |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | | | *** |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | | | | | | | | | *** |
* Filed herewith
** Furnished herewith
*** Submitted electronically herewith
^ Indicates management contract or compensatory plan
SIGNATURE
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 the undersigned duly authorized.
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| | BIOVENTUS INC. |
| | |
November 21, 2022May 16, 2023 | | /s/ Mark L. Singleton |
Date | | Mark L. Singleton |
| | Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |