Bioventus Inc.: Form 10-Q for the period ended Jul 3, 2021

The following discussion and analysis of Bioventus Inc.’s (sometimes referred to as “we,” “us,” “our” or “Bioventus”) 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 Form 10-Q, as well as our audited consolidated financial statements and related notes as disclosed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 26, 2021 (2020 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 and Joint Preservation includes the legacy osteoarthritis (OA) joint pain treatment and joint preservation products, plus the Peripheral Nerve Stimulation (PNS) products sold previously by Bioness.
• Bone Graft Substitutes (BGS) is comprised of human tissue allograft and synthetic products used primarily in spine surgery; and
• Restorative Therapies includes the legacy minimally invasive fracture treatments, plus the rehabilitation products sold previously by Bioness.

The following table sets forth total net sales, net income and Adjusted EBITDA:

(1) See below under results of operations-Adjusted EBITDA for a reconciliation of net income to Adjusted EBITDA.

Recent Developments

Misonix Acquisition

On July 29, 2021, we entered into the Misonix Merger Agreement to acquire Misonix, Inc., a provider of minimally invasive therapeutic ultrasonic medical devices and regenerative products that enhance clinical outcomes, in a cash-and-stock transaction. The Transaction is expected to close in the fourth quarter of 2021 and is subject to regulatory approvals, the approval of our stockholders, Misonix stockholder approval and customary closing conditions. Misonix is a provider of minimally invasive therapeutic ultrasonic technologies and regenerative medicine.

Misonix stockholders will receive aggregate consideration that values Misonix at approximately $518.0 million on a fully diluted basis, based on the Company’s 7-day weighted average stock price of $16.6284 per share as of July 27, 2021. The Transaction involves both cash and stock consideration based on the election of the Misonix stockholder. Each share of Misonix Common Stock issued and outstanding immediately prior to the Transaction, will be converted into the right to receive either an amount in cash equal to $28.00 or 1.6839 validly issued, fully paid and non-assessable shares of Class A common stock of the Company, $0.001 par value per share, based on the election of the holder. The maximum cash amount payable by the Company will be an amount equal to $10.50 multiplied by the number of outstanding shares of Misonix Common Stock shortly prior to the completion of the Transaction. The Company expects to fund the cash portion of the acquisition with cash on hand and through committed financing provided by Wells Fargo Bank, National Association (Wells Fargo Bank). The number of shares held by Misonix stockholders electing to receive cash will be reduced on a pro rata basis if the cash elected to be received exceeds the maximum cash amount payable and will be paid with stock consideration of 1.6839 of shares of the Company’s Class A common stock.

Bioness Acquisition

On March 30, 2021, we completed the acquisition of Bioness, a global leader in neuromodulation and advanced rehabilitation medical devices through its innovative PNS therapy and premium advanced rehabilitation solutions.

The Bioness acquisition gives Bioventus access into two large and growing markets: PNS and the advanced rehabilitation market, and we estimate their medical devices address total global market opportunities approaching $8 billion per year.

We believe both of these markets offer attractive growth opportunities driven by demographic trends and the need for safe, effective, treatment options for the many patients suffering from post-surgical pain, stroke, multiple sclerosis, traumatic brain injury, spinal cord injury and cerebral palsy.

Bioness advanced rehabilitation solutions have a broad portfolio of offerings, including proprietary electrical stimulation exoskeletal devices for both the upper and lower extremities, robotic gait and fall safety systems, and high-tech, interactive software learning and recovery assessment platforms.

These products play an essential role in helping patients regain mobility due to stroke, traumatic brain injury, multiple sclerosis and osteoarthritis, and are used by physical or occupational therapists in a clinical setting or by the patient at home, with the guidance of a clinician through telemedicine.

Bioness PNS Systems help patients suffering from pain after surgery on an extremity, which affects over 16 million patients each year globally, and addresses the growing need to reduce opioid usage.

Under the Merger Agreement pursuant to which we acquired Bioness (the Bioness Merger Agreement), we paid $48.9 million at the closing of the transaction and agreed to pay up to an additional $43.0 million of discounted contingent consideration related to the achievement of certain key milestones. The acquisition includes the entire portfolio of Bioness products as well as its research and development pipeline. The up-front consideration was funded exclusively through the use of cash on hand.

CartiHeal

On July 15, 2020, we entered into an Option and Equity Purchase Agreement with CartiHeal (2009) Ltd., 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 joint, and its shareholders. The agreement provides us with an exclusive option to acquire 100% of CartiHeal’s shares under certain conditions, or the Call Option, and provides CartiHeal with a put option that would require us to purchase 100% of CartiHeal’s shares under certain conditions, or the Put Option. The Put Option is only exercisable by CartiHeal upon pivotal clinical trial success, including achievement of certain secondary endpoints and FDA approval of the Agili-C device with a label consistent in all respects with pivotal clinical trial success. The pivotal clinical trial’s objective is to demonstrate the superiority of the Agili-C implant over the surgical standard of care, including microfracture and debridement, for the treatment of cartilage or osteochondral defects, in both osteoarthritic knees and knees without degenerative changes.

On August 2, 2021, CartiHeal provided us a statistical report containing the results of the pivotal clinical trial. We are currently reviewing the report to assess if it is consistent with the terms of the agreement and assessing the findings to determine if all required endpoints have been achieved. CartiHeal continues to work toward submitting the final, clinical module of a Modular Premarket Approval Application (PMA) in the fourth quarter of 2021 seeking FDA approval. We have the right to terminate the Call Option and Put Option at any time ending 30 days after receipt of the statistical report from CartiHeal upon payment of a break fee of $30.0 million. If we determine that the results satisfy the requirements of the contract, and elect not to exercise our right to terminate the Call Option and Put Option, we will be required to put $50.0 million into escrow as a deposit towards the purchase price. Consideration for the acquisition of all of the shares of CartiHeal, excluding those we own, pursuant to the Call Option or Put Option would be $314.9 million, all of which would be payable at closing, with an additional $150.0 million payable upon achievement of certain sales milestones related to Agili-C. Such closing would be subject to customary closing conditions. CartiHeal has announced that it expects to submit its PMA application to the FDA later this year.

BONES Trial

We submitted a supplemental PMA 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. We continue to evaluate the FDA’s comments and are initiating discussions with them to address their concerns. We can give no assurance that we will be able to resolve the deficiencies identified by the FDA in a timely manner, or at all. Consequently, the FDA’s decision on the PMA supplement may be delayed beyond the time originally anticipated. Moreover, if our responses do not satisfy the FDA’s concerns, the FDA may not approve our PMA supplement seeking to expand the indications for use of EXOGEN as proposed.

COVID-19 pandemic impact

In 2020, the COVID-19 pandemic spread around the world and in the United States. New variants of the virus have emerged, some of which have shown to be more contagious. The COVID-19 pandemic has had widespread, rapidly evolving and unpredictable impacts on global society, economies, financial markets and business practices. Federal and state governments have implemented measures in an effort to prevent or minimize the spread of the virus, and ongoing effects of the pandemic, including social distancing, travel restrictions, border closures, limitations on public gatherings, mandatory closure or reduced capacity of businesses, work from home, supply chain logistical changes and other measures, which caused global business disruptions and significant volatility in U.S. and international debt and equity markets. 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 and could be further impacted by delays in payments from customers, supply chain interruptions, extended “shelter-in-place” orders or advisories, facility closures or other reasons related to the pandemic. Furthermore, the long-term impact of COVID-19 on our business will depend on many factors, including, but not limited to, the duration and severity of the pandemic, the spread of new variants of the virus, new and ongoing measures taken in response to the pandemic, the availability, adoption and effectiveness of vaccines, the impact on economic activity from the pandemic and actions taken in response and the resulting impact it has on our partners, patients and communities in which we operate, all of which continue to be uncertain. As of the date of this Quarterly Report on Form 10-Q, the extent to which COVID-19 could materially impact the Company’s 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 may 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. For additional information on the risks we may face as a result of COVID-19, refer to Part I, Item 1A. Risk Factors – Our business may continue to experience adverse impacts as a result of the COVID-19 pandemic in our 2020 10-K.

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 2020 10-K.

The following table sets forth components of our condensed consolidated statements of operations as a percentage of net sales for the periods presented:

25

The following table presents a reconciliation of net (loss) income to Adjusted EBITDA for the periods presented:

(in thousands)

(a) Includes for the three months ended July 3, 2021 and June 27, 2020 and the six months ended July 3, 2021 and June 27, 2020, respectively, depreciation and amortization of $5,618, $5,292, $10,854 and $10,599 in cost of sales and $1,852, $1,813, $3,777 and $3,638 presented in the consolidated statements of operations and comprehensive (loss) income with the balance in research and development.

(b) The three and six months ended July 3, 2021 primarily includes equity-based compensation expense (income) resulting from awards granted under the Company’s current equity based compensation plan (2021 Plan) and compensation costs. The six months ended July 3, 2021 also includes the change in fair market value of accrued equity-based compensation related to the BV LLC Phantom Profits Interest Plan (Phantom Plan) due to expected pricing with our IPO. Equity compensation expenses for the three and six months ended June 27, 2020 represents compensation from the Company’s management incentive plan and Phantom Plan as well as the change in fair market value of accrued equity-based compensation related to the plans due to the impact of the COVID-19 pandemic on our business.

(c) Represents income resulting from the CARES Act offset by additional cleaning and disinfecting expenses and contract termination fees for canceled events.

(d) Primarily represents costs related to the CEO transition.

(e) Foreign currency impact represents realized and unrealized gains and losses from fluctuations in foreign currency and is included within other expense (income) in the consolidated statements of operations and comprehensive (loss) income.

(f) Represents costs incurred to acquire and integrate Bioness.

(g) Amortization of the inventory step-up associated with the Bioness acquisition.

(h) Represents CartiHeal equity investment losses.

(i) Represents change in fair value of contingent consideration resulting from the Bioness Acquisition.

(j) Represents loss on impairment of Harbor’s long-lived assets and the Company’s investment in Harbor.

(k) Other non-recurring costs primarily includes charges associated with strategic transactions, such as potential acquisitions and public company preparation costs, primarily accounting and legal fees.

We present Adjusted EBITDA, a non-GAAP financial measure, because we believe it is a useful indicator of our operating performance. Our management uses Adjusted EBITDA principally as a measure of our operating performance and believes that Adjusted EBITDA is useful to our investors because it is frequently used by securities analysts, investors and other interested parties frequently use it in their evaluation of the operating performance of companies in industries similar to ours. Our management also uses Adjusted EBITDA for planning purposes, including the preparation of our annual operating budget and financial projections. We define Adjusted EBITDA as net (loss) income before depreciation and amortization, provision of income taxes and interest expense, 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 equity compensation, change in fair value of contingent consideration, Bioness acquisition costs, succession and transition charges, loss on impairment of intangible assets, losses associated with debt refinancing, foreign currency impact and other non-recurring costs. 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. The allocation of corporate overhead costs is determined based on various methods but is primarily based on a ratio of net sales by segment to total consolidated net sales.

Net sales

(in thousands, except for percentage)

(in thousands, except for percentage)

Three months ended July 3, 2021 compared to June 27, 2020

U.S.

Net sales increased $45.5 million, or 85.6%. The changes in net sales by vertical are as follows:

Revenue increased primarily due to volume growth as revenue in 2020 was negatively affected by the economic impact of the COVID-19 pandemic. The Bioness acquisition contributed $9.4 million in additional sales primarily within the Pain Treatments and Joint Preservation vertical.

International

Net sales increased $6.3 million, or 129.5%, primarily due to sales volume growth as revenue in 2020 was negatively affected by the economic impact of the COVID-19 pandemic. The Bioness acquisition contributed $2.5 million in additional sales, a majority of which was reported within our Pain Treatments and Joint Preservation vertical.

Six months ended July 3, 2021 compared to June 27, 2020

U.S.

Net sales increased $48.1 million, or 38.4%. The changes in net sales by vertical are as follows:

Revenue increased primarily due to volume growth as revenue in 2020 was negatively affected by the economic impact of the COVID-19 pandemic. The Bioness acquisition contributed $9.4 million in additional sales primarily within the Pain Treatments and Joint Preservation vertical.

International

Net sales increased $6.8 million, or 59.4%, primarily due to sales volume growth as revenue in 2020 was negatively affected by the economic impact of the COVID-19 pandemic. The Bioness acquisition contributed $2.5 million in additional sales, a majority of which was reported within our Pain Treatments and Joint Preservation vertical.

Gross profit and gross margin

(in thousands, except for percentage)

27

(in thousands, except for percentage)

Three months ended July 3, 2021 compared to June 27, 2020

U.S.

Gross profit increased $31.5 million, or 84.3%, primarily due to the increase in net sales. Gross margin remained consistent with the prior year comparable period.

International

Gross profit increased $4.5 million, or 148.2%, primarily due to the increase in net sales. Gross margin increased due to product mix.

Six months ended July 3, 2021 compared to June 27, 2020

U.S.

Gross profit increased $33.4 million, or 37.1%, primarily due to the increase in net sales. Gross margin remained consistent with the prior year comparable period.

International

Gross profit increased $4.9 million, or 64.3%, primarily due to the increase in net sales. Gross margin increased slightly due to product mix.

Selling, general and administrative expense

(in thousands, except for percentage)

(in thousands, except for percentage)

Three months ended July 3, 2021 compared to June 27, 2020

Selling, general and administrative expenses increased $28.5 million, or 70.4%, primarily due to the impact of the COVID-19 pandemic on our business in 2020 as well as the Bioness Acquisition. The increases were primarily in the following areas:

28

Six months ended July 3, 2021 compared to June 27, 2020

Selling, general and administrative expenses increased $22.9 million, or 28.4%, primarily due to the impact of the COVID-19 pandemic on our business in 2020 as well as the Bioness Acquisition. The increases were primarily in the following areas:

These increases were partially offset by a higher change in fair value of our accrued equity-based compensation resulting in an increased net recovery of expense compared to the prior year of $15.6 million. The change in fair value for 2021 was due to adjustments to reflect the difference between the expected pricing from the pending IPO and the actual offering price. The change in fair value for 2020 was due to the impact of the COVID-19 pandemic on our business.

Research and development expenses

(in thousands, except for percentage)

(in thousands, except for percentage)

Three months ended July 3, 2021 compared to June 27, 2020

Research and development expense increased by $2.2 million, or 86.3%, partially due to our cost reduction efforts implemented during 2020 as a result of the COVID-19 pandemic as well as the Bioness acquisition. In addition, compensation related expenses increased $0.7 million and equity compensation increased $0.5 million.

Six months ended July 3, 2021 compared to June 27, 2020

Research and development expense increased by $1.0 million, or 22.0%, partially due to our cost reduction efforts implemented during 2020 as a result of the COVID-19 pandemic as well as the Bioness acquisition. In addition, compensation related expenses increased $1.0 million and equity compensation, excluding the change in fair value discussed below, increased $0.9 million. These increases were partially offset by a higher change in fair value of our accrued equity-based compensation resulting in an increased net recovery of expense totaling $1.8 million. The change in fair value during 2021 was due to adjustments to reflect the difference between the expected pricing from the pending IPO and the actual offering price. The change in fair value during 2020 was due to the impact of the COVID-19 pandemic on our business.

Change in fair value of contingent consideration

The $0.6 million change in fair value of Bioness Acquisition contingent consideration during the three and six months ended July 3, 2021 resulted from the change in present value of discounted cash flows due to the passage of time.

Depreciation and amortization

(in thousands, except for percentage)

(in thousands, except for percentage)

Depreciation and amortization remained consistent with the three and six months ended June 27, 2020.

Impairment of variable interest entity assets

The Company terminated the Harbor Collaboration Agreement on June 8, 2021 which resulted 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 Note 3. Business combinations and investments within the Notes to the Unaudited Condensed Consolidated Financial statements of Part 1, Item 1. Financial Statements of this Form 10-Q for further details concerning the impairment and deconsolidation of Harbor.

Other (income) expense

(in thousands, except for percentage)

(in thousands, except for percentage)

NM = Not meaningful

Three months ended July 3, 2021 compared to June 27, 2020

Interest expense decreased $1.2 million primarily due to the change in the fair value of our interest rate swap resulting in decreased interest expense of $0.7 million.

Other expense increased $3.0 million primarily due to the impairment of our Harbor investment of $1.4 million and $0.4 million in net losses related to our equity investment in CartiHeal. In addition, we had other income in 2020 resulting from a $1.2 million Provider Relief Fund payment under the Coronavirus Aid, Relief and Economic Security Act (CARES Act).

Six months ended July 3, 2021 compared to June 27, 2020

Interest (income) expense changed $6.4 million. In conjunction with our IPO, we settled our equity participation right (EPR) liability resulting in interest income of $2.8 million. In addition, the change in the fair value of our interest rate swap resulted in interest income of $1.3 million during 2021 compared to interest expense of $2.0 million in 2020.

Other expense increased $3.3 million primarily due to the impairment of our Harbor investment of $1.4 million and $0.9 million in net losses related to our equity investment in CartiHeal. In addition, we had other income in 2020 resulting from a $1.2 million Provider Relief Fund payment under the CARES Act.

Income tax expense

(in thousands, except for percentage)

(in thousands, except for percentage)

30

Income tax expense increased for the three and six months ended July 3, 2021 and June 27, 2020 primarily due to the increase in our effective tax rate related to the change in structure resulting from our IPO and associated Up C partnership structure as well as the impact of non-deductible stock option expense during 2021.

Noncontrolling interest

Subsequent to the IPO and Transactions, we are the sole managing member of BV LLC in which we own 72.2%. 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-controlling interest representing the 27.8% which is owned by the Continuing LLC Owner.

We stopped consolidating Harbor upon the termination of the Collaboration Agreement, as we ceased being the primary beneficiary because we no longer had the power to direct Harbor’s significant activities. Prior to the deconsolidation, our partial ownership and exclusive Collaboration Agreement with Harbor resulted in loss attributable to noncontrolling interest through June 8, 2021. The $5.0 million increase for both the three and six months ended July 3, 2021 and June 27, 2020 is primarily due to the $5.7 million impairment on Harbor’s long-lived asset balances.

Segment Adjusted EBITDA

Adjusted EBITDA for each of our reportable segments is as follows:

(in thousands, except for percentage)

(in thousands, except for percentage)

Three months ended July 3, 2021 compared to June 27, 2020

U.S.

Adjusted EBITDA increased $9.7 million or 130.5% primarily due to a $31.5 million increase in gross profit resulting from higher sales. This increase was partially offset by the increase in compensation related charges of $15.1 million as previously discussed as well as higher public company costs.

International

Adjusted EBITDA increased $3.2 million primarily due to a $4.5 million increase in gross profit resulting from higher sales. This increase was partially offset by the increase in compensation related charges of $1.0 million previously discussed.

Six months ended July 3, 2021 compared to June 27, 2020

U.S.

Adjusted EBITDA increased $6.0 million or 28.3% primarily due a $33.4 million increase in gross profit resulting from the increase in sales. This increase was partially offset by the increase in compensation related charges of $21.3 million previously discussed as well as higher public company costs.

International

Adjusted EBITDA increased $3.8 million primarily due to a $4.9 million increase in gross profit resulting from the increase in sales. This increase was partially offset by the increase in compensation related charges of $1.1 million previously discussed.

Liquidity and Capital Resources

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 develop and commercialize new products and further our expansion into international markets. We believe that our existing cash and cash equivalents, borrowing capacity under our revolving credit facility, cash flow from operations, and net proceeds from our IPO will be enough to meet our anticipated cash requirements for at least the next twelve months. We may require additional liquidity as we continue to execute our business strategy. Negative impacts to our liquidity would include a decline in sales of our products, including declines due to changes in our customers’ ability to obtain third-party coverage and reimbursement for procedures that utilize our products, increased pricing pressures resulting from intensifying competition and cost increases, as well as general economic and industry factors. We anticipate that to the extent that we require additional liquidity, we will obtain funding through the incurrence of other indebtedness, additional equity financings or a combination of these potential sources of liquidity. 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. Debt financing, if available, would result in increased fixed payment obligations and may 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, it may be necessary to relinquish valuable rights to our products, future revenue streams or product candidates, or to grant licenses on terms that may not be favorable to us. The covenants under our 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 could have a negative impact on our financial condition and our ability to pursue our business strategies.

Misonix Acquisition

For information regarding our recently announced acquisition of Misonix, see above under “Recent Developments.”

Initial Public Offering

On February 16, 2021, in connection with our IPO, we issued and sold 9,200,000 shares of our Class A common stock at a price to the public of $13.00 per share, resulting in gross proceeds to us of approximately $119.6 million, before deducting the underwriting discount, commissions and estimated offering expenses payable by us.

We are a holding company and have no material assets other than our ownership of LLC Interests and no independent means of generating revenue. The limited liability company agreement of BV LLC provides for the payment of certain distributions to the Continuing LLC Owner and us in amounts sufficient to cover the income taxes imposed on such members with respect to the allocation of taxable income from BV LLC as well as to cover our obligations under the Tax Receivable Agreement (the TRA). Additionally, in the event we declare any cash dividend, we intend to cause BV LLC to make distributions to us, in an amount sufficient to cover such cash dividends declared by us. Deterioration in 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, including the 2019 Credit Agreement, contain covenants that may restrict BV LLC and its subsidiaries from paying such distributions, subject to certain exceptions. Further, BV LLC is generally prohibited under Delaware law from making a distribution to a member to the extent that, at 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. If we do not have sufficient funds to pay taxes or other liabilities or to fund our operations, we may have to borrow funds, which could materially adversely affect our liquidity and financial condition and subject us to various restrictions imposed by any such lenders. 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.

In addition, 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.

Cash, cash equivalents and restricted cash as of July 3, 2021 totaled $138.1 million compared to $86.8 million as of December 31, 2020. The increase in cash was primarily due to the following:

(in thousands)

NM = Not Meaningful

Operating Activities

Net cash from operating activities decreased $26.2 million, primarily due to the following:

• Compensation and annual incentive plan payments increased $14.9 million during 2021;
• Completed and potential acquisition expenses increased in 2021 as well as other nonrecurring costs of $8.3 million;
• Larger net settlements in 2021 with the sole MIP awardee of $4.3 million;
• Tax payments increased $5.9 million during 2021;
• Larger directors and officers annual insurance premiums in 2021 for $4.6 million;
• Settlement of our EPR liability for $3.3 million occurred in 2021 and;
• Higher inventory purchases during 2021 of $2.9 million.

The above uses of cash were partially offset by:

• An increase of $21.4 million in net collections during 2021, primarily due to the economic impact of COVID-19 during 2020.

Investing Activities

Cash flows used in investing activities increased $48.1 million, primarily due to the $45.8 million acquisition of Bioness as well as $1.6 million in capital expenditures.

Financing Activities

Cash flows provided by financing activities increased $64.0 million, primarily due to the $107.8 million in net proceeds from the issuance of Class A common stock sold during our IPO and a $9.9 million decrease in net partner distributions. These increases were partially offset with no draws on our revolving credit facility compared to prior year draw of $49.0 million and a $5.0 million increase in debt payments due to the timing of our quarter ends and the scheduled escalation in quarterly principal payments.

Credit Facilities

There have been no material changes to our outstanding indebtedness or the terms of and available borrowing capacity under our credit facilities as disclosed in our 2020 10-K. We were in compliance with all required financial covenants as of July 3, 2021.

In connection with the Misonix Transaction, the Company entered into a debt commitment letter with Wells Fargo Bank, effective July 29, 2021. Wells Fargo Bank has committed to provide a senior secured term loan facility (Term Loan Facility) in the aggregate principal amount of up to $262.0 million plus, at the Company’s election, an amount sufficient to fund any original issue discount or upfront fees, subject to customary closing conditions. The Term Loan Facility stipulates a prepayment of $80.0 million on the existing Term Loan under the 2019 Credit Agreement.

The proceeds of the Term Loan Facility would be available through a single draw on the closing date of the Transaction and shall be used (i) to finance the Transaction; (ii) pay related fees, premiums and expenses and (iii) for working capital needs and general corporate purposes of the Company, including without limitation for permitted acquisitions. The Term Loan Facility would have a three year term that would bear interest at either the base rate as prescribed in the Term Loan under the 2019 Credit Agreement or the Eurodollar rate, and, in each case, plus an applicable margin.

Other

For information regarding Commitments and Contingencies, refer to Note 9. Commitments and contingencies and Note 3. Business combinations and investments to the Notes to the Unaudited Condensed Consolidated Financial statements of Part 1, Item 1. Financial Statements of this Form 10-Q.

Off-balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Contractual Obligations

We acquired leases as part of the Bioness Acquisition, which resulted in increases to contractual lease commitments previously disclosed in our 2020 10-K of $489, $808, $775, $776 and $638 for the years ended December 31, 2021, 2022, 2023, 2024 and 2025, respectively. In addition, see above under “Recent Developments –Misonix Acquisition” for a description of contractual obligations under the Merger Agreement that are subject to regulatory approvals, stockholder approvals and other customary closing conditions. Other than the foregoing, there have been no material changes to our contractual obligations s disclosed in our 2020 10-K.

Critical Accounting Estimates

Our discussion of operating results is based upon the unaudited condensed consolidated financial statements and accompanying notes. 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 critical accounting estimates are detailed in Item 7 of our 2020 10-K, except for the following:

Contingent 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. Key assumptions used to estimate the fair value of contingent consideration include revenue and the probability of achieving the specific targets. After the initial valuation, the Company will use its best estimate to measure contingent consideration at each subsequent reporting period. Gains and losses are recorded with selling, general and administrative expenses within the consolidated statements of operations and comprehensive (loss) income.

Recently Issued Accounting Pronouncements

Refer to Note 1. Organization, in the Notes to the Unaudited Condensed Consolidated Financial statements of Part 1, Item 1. Financial Statements of this Form 10-Q for detailed information regarding the status of recently issued accounting pronouncements.

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 our disclosure controls and procedures were effective at the reasonable assurance level as of July 3, 2021.

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 report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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 under the heading Risk Factors included in our 2020 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. The below update to our Risk Factors as those presented in our 2020 10-K results from the potential acquisition of Misonix.

Risks Related to the Proposed Acquisition of Misonix

We are subject to various risks related to the proposed acquisition of Misonix.

We have entered into a merger agreement with Misonix pursuant to which we have agreed to acquire Misonix. The risks, contingencies and other uncertainties that could result in the failure of the proposed acquisition to be completed or, if completed, that could have a material adverse effect on our business, financial condition or results of operations following the proposed acquisition, and any anticipated benefits of the proposed acquisition, include:

• the failure to obtain necessary stockholder approvals for the share issuance and the adoption of the merger agreement;
• the failure to satisfy required closing conditions or complete the proposed acquisition in a timely manner or at all;
• the effect of the announcement of the proposed acquisition on each company’s ability to retain and hire key personnel, maintain business relationships, and on operating results and the businesses generally;
• the ability of Misonix to pursue alternatives to the proposed acquisition with us pursuant to the merger agreement;
• the diversion of our management’s attention from our core business as we work to take all steps necessary to close the transaction and integrate Misonix’s business into ours;
• the issuance of additional equity in connection with the acquisition may dilute our stockholders and the uncertainties related to the potential impact of the proposed acquisition on our stock price;
• the inability to achieve the anticipated synergies and our incurrence of significant transaction related costs in connection with the proposed acquisition that are, and will be, incurred regardless of whether the proposed acquisition is completed; and
• the occurrence of any event giving rise to the right to terminate the merger agreement.

Our future results following the proposed acquisition will suffer if we do not effectively manage the expanded operations or successfully integrate the businesses of Misonix.

Our future success will depend, in part, upon our ability to manage the expanded business, including challenges related to the management and monitoring of new operations and associated increased costs and complexity associated with the acquisition of Misonix and other acquisitions. If we are not able to successfully complete integrations in an efficient and effective manner, the anticipated benefits of these acquisitions may not be realized fully, or at all, or may take longer to realize than expected, and the value of our common stock may be affected adversely. An inability to realize the full extent of the anticipated benefits of the proposed acquisitions, as well as any delays encountered in the integration processes, could have an adverse effect upon on our business, financial condition or results of operations. In addition, the actual integrations may result in additional and unforeseen expenses, including increased legal, accounting and compliance costs.

Failure to complete the proposed acquisition may negatively impact our share price, the future business and our financial results.

If the proposed acquisition is not completed on a timely basis, our and Misonix ongoing businesses may be adversely affected. If the proposed acquisition is not completed at all, we will be subject to a number of risks, including the following:

• being required to pay costs and expenses relating to the transactions, such as legal, accounting, financial advisory and printing fees; and
• time and resources committed by our management to matters relating to the proposed acquisition could otherwise have been devoted to pursuing other beneficial opportunities.

If the proposed acquisition is not completed, the price of our common stock may decline to the extent that the current market price reflects a market assumption that the proposed acquisition will be completed and that the related benefits will be realized, or a market perception that the proposed acquisition was not completed due to an adverse change in our business.