Bioventus Inc.: Form 10-Q for the period ended Oct 1, 2022

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, 2021 filed with the Securities and Exchange Commission (SEC) on March 11, 2022 (2021 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) products to help the patient get back to their normal activities.
• Surgical Solutions is comprised of bone graft substitutes (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) income and Adjusted EBITDA for the periods presented:

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

Strategic transactions

CartiHeal

On July 12, 2022, we acquired 100% of 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. We purchased CartiHeal (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 Milestone 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) 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. The gain was recognized in other income within the consolidated condensed statement of operations and comprehensive (loss) income.

We previously entered into an Option and Equity Purchase Agreement with CartiHeal (Option Agreement) in July 2020. The Option Agreement provided us with an exclusive option to acquire 100% of CartiHeal’s shares (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), 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.

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’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) and Elron Ventures Limited, in its capacity as the shareholder representative.

The Deferred Amount will 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 Paper 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 will pay interest on each tranche of the Deferred Amount at a rate of 8.0% annually, until such tranche is paid. The Sales Milestone Consideration will be payable upon 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, 2023, the Company will need to make the First Paper Milestone payment within ten days of publication.

On July 11, 2022, we further amended our Credit and Guaranty Agreement, dated as of December 6, 2019 and amended on October 29, 2021 (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 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. Refer to Liquidity and Capital Resources—Credit Facilities for further information.

B.O.N.E.S. Trial

We submitted a premarket approval (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. In the scaphoid study analysis plan, the applicable feedback received from FDA in the prior metatarsal submission was applied prospectively and as such we believe this second filing will address 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 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 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 recent acquisitions and our expanded R&D and product development portfolio we inherited with these acquisitions. We incurred $1.8 million and $2.5 million during the three and nine months ended October 1, 2022, respectively, and we expect to incur approximately $4.0 million to $6.0 million exclusively to fulfill our remaining regulatory obligations related to our Phase 2 trial (MOTYS Costs).

Consolidated Appropriations Act

In July 2022, in connection with the Consolidated Appropriations Act, 2021 (CAA), the Centers for Medicare and Medicaid Services (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 2021 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:

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 October 1, 2022 and October 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 and $17,491 in cost of sales and $7,449, $1,885, $13,410 and $5,694 in operating expenses presented in the consolidated condensed statements of operations and comprehensive (loss) income.

(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) The three and nine months ended October 1, 2022 and the three months ended October 2, 2021 include compensation expense resulting from awards granted under the Company’s equity-based compensation plans in effect after its initial public offering (IPO). The nine months ended October 2, 2021 also includes the expense and the change in fair value of the liability-classified awards granted under the compensation plans in effect prior to the Company’s IPO.

(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 due to 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.

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

(j) Other items primarily includes charges associated with strategic transactions, such as potential acquisitions; public company preparation costs, which primarily includes accounting and legal fees; and MOTYS Costs. 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 million during the three and nine months ended October 1, 2022, respectively, and we expect to incur approximately $4.0 million to $6.0 million exclusively to fulfill our remaining regulatory obligations related to our Phase 2 trial (MOTYS Costs).

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) income 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, restructuring and succession charges, equity compensation expense, equity loss in unconsolidated investments, foreign currency impact, 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, including in the table above, to its most directly comparable U.S. GAAP measure.

Net sales

(in thousands, except for percentage)

29

U.S.

Net sales increased $17.1 million, or 17.3%, of which acquisitions contributed $17.3 million. Changes by vertical were: (i) Pain Treatments—($9.0) million due to 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—$12.5 million net sales increase primarily due to acquisitions and net volume growth; and (iii) Surgical Solutions—$13.6 million net sales increase primarily due to acquisitions and volume growth.

International

Net sales increased $2.6 million, or 27.2%, of which acquisitions contributed $3.0 million, partially offset by a decline in sales volume within our Restorative Therapies vertical.

(in thousands, except for percentage)

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.

Gross profit and gross margin

(in thousands, except for percentage)

U.S.

Gross profit increased $4.1 million, or 5.6%, primarily due to the increase in net sales. Gross margin decreased due to product mix including products introduced as a result of acquisitions.

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.

(in thousands, except for percentage)

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

(in thousands, except for percentage)

Selling, general and administrative expenses increased $9.6 million, or 13.7%, primarily due to: (i) an increase in compensation related expenses of $5.5 million, primarily resulting from acquisitions; (ii) an increase in consulting and travel related expenses of $1.9 million; (iii) an increase in insurance expenses of $1.4 million; and (iv) an increase in bad debt expenses of $1.1 million.

(in thousands, except for percentage)

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 million in corporate and employee health insurance primarily resulting from acquisitions.

Research and development expenses

(in thousands, except for percentage)

Research and development expense decreased by $0.3 million, or (5.1%), due to cost reduction efforts implemented in 2022, which was partially offset with an increase from acquisitions.

(in thousands, except for percentage)

Research and development expense increased by $7.2 million, or 60.3%, primarily due to: (i) an increase of $2.2 million in compensation related expenses partially driven by acquisitions; (ii) an increase of $2.6 million in consulting costs; and (iii) an increase in equity-based compensation of $1.7 million, which includes a $1.8 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.

Restructuring costs

Restructuring costs for the three and nine months ended October 1, 2022 and October 2, 2021 were incurred as a result of restructuring plans for recently acquired businesses to reduce headcount, to reorganize management structure and to consolidate certain facilities.

Change in fair value of contingent consideration

(in thousands, except for percentage)

(in thousands, except for percentage)

The changes in fair value of contingent consideration during the three and nine months ended October 1, 2022 compared with the prior year comparable periods resulted from the additional contingent consideration recorded as a result of the CartiHeal Acquisition. The increase 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

(in thousands, except for percentage)

(in thousands, except for percentage)

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 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.

Other (income) expense

(in thousands, except for percentage)

Interest expense, net increased $8.5 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 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. 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.

(in thousands, except for percentage)

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.

Other (income) expense changed $25.2 million due to the $23.7 million fair market value remeasurement gain on the CartiHeal equity investment in 2022 and impairment of our Harbor investment of $1.4 million in the prior year.

Income tax expense (benefit)

(in thousands, except for percentage)

Income tax expense for the three months ended October 1, 2022 and October 2, 2021 was primarily due to changes in our forecasted effective tax rate and in uncertain tax positions.

(in thousands, except for percentage)

(NM = Not Meaningful)

Income tax benefit for the nine months ended October 1, 2022 and October 2, 2021 was primarily due to changes in our forecasted effective rate. The income tax expense for the nine months ended October 2, 2021 was primarily due to capitalized expenses resulting from our IPO.

Noncontrolling interest

(in thousands, except for percentage)

(in thousands, except for percentage)

Subsequent to the IPO and related transactions, we are the sole managing member of BV LLC in which we own 79.6%. 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 20.4% that is owned by the Continuing LLC Owner.

The decline in losses associated with other noncontrolling interest resulted from our deconsolidation of Harbor upon the termination of the Collaboration Agreement 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.

Segment Adjusted EBITDA

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

(in thousands, except for percentage)

U.S.

Adjusted EBITDA decreased $0.2 million, or 1.2%, primarily due to higher gross profit, partially offset with an increase in compensation related charges, consulting and travel related expenses as well as higher public company costs.

International

Adjusted EBITDA decreased $— million, or 2.4%, primarily due acquisitions well as travel and consulting related expenses. These were partially offset with an increase in gross profit resulting from larger net sales.

(in thousands, except for percentage)

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.

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 develop and commercialize new products and further our expansion into international markets.

As discussed below under CartiHeal, additional capital was provided to consummate the CartiHeal Acquisition through the Term Loan Facility, extended to us through the Amended 2019 Credit Agreement, and additional capital will be required to fund the Deferred Amount under the CartiHeal Amendment.

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 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, 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

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.

These conditions and events 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, 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, 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; 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, we terminated our non-designated interest rate swap agreement and subsequently received a settlement of $7.7 million.

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. 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 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 Amended 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. 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).

Cash requirements

Except as provided below under “Contractual obligations” and the previously discussed capital requirements for the CartiHeal Acquisition, there have been no material changes to our future cash requirements as disclosed in Part II. Item 7 of our 2021 10-K.

We enter into contracts in the normal course of business with various third parties for development, collaboration and other services for operating purposes. These contracts 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 Commitments and Contingencies, refer to Part I. Item 1. Notes to the unaudited consolidated condensed financial statements—Note 11. Commitment 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 under the Tax Receivable Agreement (TRA). 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.

We were in compliance with all required financial covenants under the Amended 2019 Credit Agreement as of October 1, 2022.

Other

For information regarding Commitments and Contingencies, refer to Part I. Item 1. Notes to the unaudited consolidated condensed financial statements—Note 11. Commitments and Contingencies—Note 3. Acquisitions and investments of this Quarterly Report on Form 10-Q.

Information regarding cash flows

Cash, cash equivalents and restricted cash as of October 1, 2022 totaled $34.4 million, compared to $99.2 million as of December 31, 2021. The decrease in cash was primarily due to the following:

(in thousands, except for percentage)

NM = Not Meaningful

Operating Activities

Net cash from operating activities decreased $28.7 million, primarily due to completed acquisitions and the resulting integration costs, higher employee compensation, increased operating expenses and a rise in interest payments. These outflows were partially offset by increased collections from higher sales.

Investing Activities

Cash flows used in investing activities increased $50.6 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 million less in other investments and distribution rights.

Financing Activities

Cash flows provided by financing activities decreased $29.5 million, primarily due to the $107.8 million in net proceeds from the issuance of Class A common stock sold during our 2021 IPO. This was partially offset by $79.7 million of proceeds from the issuance of long-term debt in 2022.

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:

(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, there have been no material changes to our contractual obligations as disclosed in our 2021 10-K.

Critical Accounting Estimates

Our discussion of operating results is based upon the unaudited consolidated condensed 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 2021 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.

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 a material weakness in the Company’s internal control over financial reporting our disclosure controls and procedures were not effective as of October 1, 2022. This material weakness in the Company’s internal control over financial reporting and the Company’s remediation efforts are described below.

Material Weakness 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.

The Company’s internal control over financial reporting was 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 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 this Quarterly Report on Form 10-Q. 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, 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.

Remediation Measures

We are designing and implementing new processes and enhanced controls to address the underlying causes of this material weakness, 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.

We believe the actions described above will be sufficient to remediate the identified material weakness and strengthen our internal control over financial reporting. However, the new and enhanced controls have not operated for a sufficient amount of time to conclude that the material weakness has been remediated. We will continue to monitor the effectiveness of these controls and will make any further changes management determines appropriate.

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 except for changes to controls resulting from a system integration related to our acquisition of Misonix, and the material weakness described above.

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,. Risk Factors included in our 2021 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. There have been no material updates to our risk factors presented in our 2021 10-K except for the following:

We have identified a material weakness in our internal control over financial reporting, and we might identify additional material weaknesses in the future that might cause us to fail to meet our reporting obligations or result in material misstatements 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 could be adversely affected.

Our management is responsible for establishing and maintaining adequate internal controls over financial reporting designed 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 effectiveness of our internal controls and to disclose any changes and material weaknesses identified through such evaluation of those internal controls. 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 our annual or interim 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, we have identified a material weakness 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 concluded that our internal control over financial reporting was 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 working to remediate the material weakness, as described in Part I. Item 4. Controls and Procedures, 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 future 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 connection 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 methods in a timely or cost effective manner, or at all, 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 public 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.