Bioventus Inc.: Form 10-Q for the period ended Apr 1, 2023

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, 2022 filed with the Securities and Exchange Commission (“SEC”) on March 16, 2022 (“2022 10-K”).

Executive Summary

We are a global medical device company focused on developing and commercializing clinically differentiated, cost efficient and minimally invasive treatments that engage and enhance the body’s natural healing process. We operate our business through two reportable segments, U.S. and International, and our portfolio of products is grouped into three verticals:

• Pain Treatments is comprised of non-surgical joint pain injection therapies as well as peripheral nerve stimulation (“PNS”) 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 and Adjusted EBITDA for the periods presented:

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

Significant transactions

Wound Business

We routinely assess our products and businesses for alignment with our strategic focus and liquidity needs. As a result of this assessment, we decided to sell our Wound Business, specifically, those assets attributable to TheraSkin and Theragenesis (the “Wound Business” or the “Disposal Group”).

We also evaluated the assets of the Wound Business for impairment during the first quarter of 2023. We recorded a $78.6 million impairment ($63.3 million after tax) as a result of this evaluation to reduce the intangible assets of the Disposal Group to their respective fair values.

On May 10, 2023 we entered into a definitive agreement to sell our Wound Business, including TheraSkin and TheraGenesis, for total potential cash consideration of $85.0 million, including $35.0 million at closing, $5.0 million deferred for 18 months and $45.0 million in potential earn-out payments. We expect to net approximately $30.0 million at closing after fees and expenses that will be used to repay existing debt. The sale of the Wound Business is expected to close before the end of May 2023.

CartiHeal

On July 12, 2022, we acquired 100% of CartiHeal (2009) Ltd. (“CartiHeal”), 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 during the third quarter of 2022. The gain was recognized in other income within the consolidated statement of operations and comprehensive loss.

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 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.

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 FDA’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, that provided for deferred payment of the consideration for CartiHeal to be paid in multiple tranches, one of which was $50.0 million due upon the earliest to occur — the publication in a peer-reviewed orthopedic journal of an article that presents the results of the pivotal clinical trial (“First Paper Milestone”) or July 1, 2023.

Pursuant to the CartiHeal Amendment, we agreed to pay interest on each tranche of the Deferred Amount at a rate of 8.0% annually, until such tranche is paid.

The First Paper Milestone under the Option Agreement occurred on February 13, 2023, triggering our obligation to make the first $50.0 million payment, plus applicable interest, under the Option Agreement.

On February 27, 2023, we entered into a settlement agreement (the “Settlement Agreement”) with Elron Ventures Ltd. (“Elron” and together with the Company, the “Parties”) as representative of CartiHeal’s selling securityholders under the Option Agreement collectively, the “Former Securityholders”). Pursuant to the Settlement Agreement, Elron, on behalf of the Former Securityholders, agreed to forbear from initiating any legal action or proceedings relating to non-payment of any obligations arising under the Option Agreement during a period of 30 calendar days (the “Interim Period”) in exchange for (i) a one-time non-refundable amount of $10.0 million and (ii) a one-time non-refundable payment of $0.2 million to Elron to be used in accordance with the expense fund provisions of the Option Agreement. The Interim Period expired on March 29, 2023 and we did not exercise our right to extend the Interim Period. In addition, the Parties mutually released any further claims under the Option Agreement and related transaction documents, including without limitation a release by the Former Securityholders of any rights to enforce the provisions of the Option Agreement or make further monetary claims against us and/or our respective affiliates and representatives.

Upon execution of the Settlement Agreement, we transferred 100% of our shares in CartiHeal to a trustee (the “Trustee”) for the benefit of the Former Securityholders. We had no ownership interest and no voting rights during the Interim Period. We have concluded that upon execution of the Settlement Agreement, the Company ceased to control CartiHeal for accounting purposes, and therefore, have deconsolidated CartiHeal (the “Deconsolidation”, or “Disposal”) effective February 27, 2023. We treated the Disposal as a discontinued operation. The loss upon disposal is estimated to be $60.6 million and was recorded within loss from discontinued operations, net.

Amended 2019 Credit Agreement

On July 11, 2022, we amended our Credit and Guaranty Agreement, dated as of December 6, 2019 (as amended on October 29, 2021, July 11, 2022 and March 31, 2023, the “Amended 2019 Credit Agreement”) in conjunction with the CartiHeal Acquisition to, among other things, provide for an $80.0 million term loan facility (“Term Loan Facility”). On March 31, 2023, we further amended our Amended 2019 Credit Agreement to, among other things, modify certain financial covenant provisions, waive the noncompliance at December 31, 2022 and increase the applicable interest rate. Refer to Liquidity and Capital Resources—Credit Facilities for further information.

B.O.N.E.S. Trial

We submitted a premarket approval (“PMA”) 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. In the scaphoid study analysis plan, the applicable feedback received from the FDA in the prior metatarsal submission was applied prospectively and as such we believe this second filing will address the FDA’s concerns on the study design. Assuming positive outcome with the FDA of the scaphoid review, we would consider resubmitting the metatarsal data at a later date. We can, however, give no assurance that the scaphoid review will be accepted by the FDA or, if accepted, that we will be able to resolve the deficiencies in the PMA supplements identified by the FDA in a timely manner, or at all. Consequently, the FDA’s decision on the PMA supplements might be delayed beyond the time originally anticipated. Moreover, if our responses do not satisfy the FDA’s concerns, the FDA might not approve our PMA supplements seeking to expand the indications for use of EXOGEN in scaphoid and metatarsal fractures as proposed.

MOTYS Update

During the second quarter of 2022, prior to obtaining the results from our Phase 2 trial, we elected to discontinue the development of MOTYS, to focus our resources on other priorities, including the integration of our 2021 and 2022 acquisitions and our expanded R&D and product development portfolio we inherited with these acquisitions. We incurred $0.9 million during the three months ended April 1, 2023, and we expect to incur approximately $5.0 million to $6.0 million exclusively to fulfill our remaining regulatory obligations related to our Phase 2 trial (“MOTYS Costs”). We have incurred $5.2 million since the election to discontinue occurred during the second quarter of 2022.

Consolidated Appropriations Act

In July 2022, in connection with the Consolidated Appropriations Act, 2021 (“CAA”), 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.

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 2022 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:

30

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

(in thousands)

(a) Includes for the three months ended April 1, 2023 and April 2, 2022, respectively, depreciation and amortization of $14,339 and $9,218 in cost of sales and $2,134 and $3,261 in operating expenses presented in the consolidated condensed statements of operations and comprehensive loss.

(b) Includes acquisition and integration costs related to completed acquisitions, amortization of inventory step-up associated with acquired entities, and changes in fair value of contingent consideration.

(c) Costs incurred were the result of adopting restructuring plans to reduce headcount, reorganize management structure, and to consolidate certain facilities.

(d) Includes compensation expense resulting from awards granted under our equity-based compensation plans.

(e) Financial Restructuring costs which include advisory fees and debt amendment related costs.

(f) Represents a non-cash impairment charge for intangible assets attributable to our Wound Business due to our decision to divest the business.

(g) Other items primarily includes charges associated with strategic transactions, such as potential acquisitions or divestitures, incremental one-time consulting costs related to the recertification of certain products to comply with the new and extensive EU MDR requirements, and costs attributable to MOTYS. During the second quarter of 2022, prior to obtaining the results from our Phase 2 trial, we elected to discontinue the development of MOTYS, to focus our resources on other priorities, including the integration of our acquisitions and our expanded R&D and product development portfolio we inherited with these acquisitions. We incurred $0.9 million during the three months ended April 1, 2023 related to MOTYS. We expect to incur approximately $5.0 million to $6.0 million in total to fulfill our remaining regulatory obligations related to our Phase 2 trial. We have incurred $5.2 million since the election to discontinue occurred during the second quarter of 2022.

Non-GAAP Financial Measures - Adjusted EBITDA

We present Adjusted EBITDA, a non-GAAP financial measure, because we believe it is a useful indicator that management uses as a measure of operating performance as well as for planning purposes, including the preparation of our annual operating budget and financial projections. We believe that Adjusted EBITDA is useful to our investors because it is frequently used by securities analysts, investors and other interested parties in their evaluation of the operating performance of companies in industries similar to ours. We define Adjusted EBITDA as net loss 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, impairments on goodwill, impairments of assets, restructuring and succession charges, equity compensation expense, financial restructuring costs, and other items. Adjusted EBITDA by segment is comprised of net sales and costs directly attributable to a segment, as well as an allocation of corporate overhead costs primarily based on a ratio of net sales by segment to total consolidated net sales.

Non-GAAP financial measures have limitations as an analytical tool and should not be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with U.S. GAAP. These measures might exclude certain normal recurring expenses. Therefore, these measures might not provide a complete understanding of the Company's performance and should be reviewed in conjunction with the U.S. GAAP financial measures. Additionally, other companies might define their non-GAAP financial measures differently than we do. Investors are encouraged to review the reconciliation of the non-GAAP measure provided in this Quarterly Report on Form10-Q, including in the table above, to its most directly comparable U.S. GAAP measure.

Net sales

(in thousands, except for percentage)

U.S.

Net sales remain consistent with the prior year comparable period. Changes by vertical were: (i) Pain Treatments—$6.9 million decrease due to the decline in our selling price, resulting from the impact of lower reported ASP leading due to lower reimbursement levels, partially offset with an increase in sales volume; (ii) Restorative Therapies—$3.5 million net sales increase due to net volume growth; and (iii) Surgical Solutions—$3.2 million net sales increase due volume growth.

International

Net sales increased $1.9 million, or 14.2%, due to sales volume growth.

Gross profit and gross margin

(in thousands, except for percentage)

U.S.

Gross profit decreased $2.1 million, or 3.1%, primarily due to the decrease in selling price and an increase in amortization in cost of sales. Gross margin was also negatively impacted by 4.0% from inventory step-up amortization of acquisition related assets in 2022 compared with 2023.

International

Gross profit increased $0.3 million, or 4.0%, primarily due to the increase in net sales. Gross margin decreased due to product mix.

Selling, general and administrative expense

(in thousands, except for percentage)

Selling, general and administrative expenses decreased $5.3 million, or 6.1%, primarily due to cost saving initiatives including (i) a decline in compensation related expenses of $4.6 million; (ii) a decrease in equity-based compensation of $2.7 million due to employee turnover and our declining stock price; (iii) a decrease of $1.8 million in other administrative and marketing related costs; (iv) a decrease in travel related expenses of $0.9 million; and (v) a decrease of $0.4 million in corporate and employee health insurance. These increases were partially offset with an increase in consulting expenses of $4.3 million and an increase in audit and legal fees of $1.3 million.

Research and development expenses

(in thousands, except for percentage)

Research and development expense decreased by $3.2 million, or 45.6%, primarily due to: (i) a decrease of $1.3 million in consulting costs; (ii) a decline in $0.9 million in compensation related expenses due to restructuring and cost reduction efforts; (iii) a decrease in equity-based compensation of $0.4 million due to employee turnover and our declining stock price; and (iv) a decline of $0.4 million in supplies expense due to cost reduction efforts.

Restructuring costs

(in thousands, except for percentage)

Restructuring costs for the three months ended April 1, 2023 included costs incurred as a result of an initiative to align the Company’s organizational and management cost structure to improve profitability and cash flow through headcount reduction and cutting third-party related costs. Restructuring costs for the three months ended April 2, 2022 were incurred as a result of restructuring plans for recently acquired businesses to reduce headcount and to reorganize management structure for acquired businesses.

Change in fair value of contingent consideration

(in thousands, except for percentage)

The fair value of contingent consideration during the three months ended April 1, 2023 remained consistent with the prior year comparable period. The activity for both periods relates to contingent consideration associated with the acquisition of Bioness in March 2021.

Depreciation and amortization

(in thousands, except for percentage)

Depreciation and amortization decreased $1.1 million or 34.6% during the three months ended April 1, 2023 compared with the prior year comparable period. The decrease was primarily due to lower amortization expense in the current year as certain customer relationship assets became fully amortized.

Impairment of assets

Our decision to divest the Wound Business required us to evaluate whether certain of its assets were impaired. We recorded a $78.6 million non-cash impairment charge as a result of this evaluation to reduce the intangible assets to their fair values less costs to sell. The fair value of intangibles of the Wound Business was determined based on the consideration offered for the Wound Business.

Other (income) expense

(in thousands, except for percentage)

(NM = Not Meaningful)

Interest expense (income), net increased $11.2 million due to: (i) an increase in interest of $4.9 million from higher interest rates; (ii) the $3.9 million in interest income resulting from the change in the fair value of our interest rate swap in 2022, which discontinued during the fourth quarter of 2022; (iii) an increase of $1.3 million due to higher margin rates associated with a high leverage ratio; (iv) an increase of $0.6 million for interest on our revolving credit borrowings; and (v) an increase of $0.5 million on the additional debt used to partially fund the acquisition of CartiHeal.

Other income changed $1.2 million due to the receipt of $1.5 million from the settlement of a legal claim.

Income tax benefit, net

(in thousands, except for percentage)

The effective rate decrease during three months ended April 1, 2023 compared to the three months ended April 2, 2022 was primarily due to changes in our forecasted effective rate and a net increase in reserve for uncertain tax positions. The change in the forecasted effective rate for the 2023 compared to 2022 was primarily due to an increase in the valuation allowance applied to our net deferred tax assets.

Noncontrolling interest

(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 79.8%. We have a majority economic interest, the sole voting interest in, and control the management of BV LLC. As a result, we consolidate the financial results of BV LLC and report a noncontrolling interest representing the 20.2% that is owned by the Continuing LLC Owner. Noncontrolling interest activity in 2023 was the result of large losses recorded during the period.

Segment Adjusted EBITDA

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

(in thousands, except for percentage)

U.S.

Adjusted EBITDA increased $9.9 million, or 204.0%, primarily due cost saving initiatives, including a decrease in compensation related charges and declines in administrative and travel expenses as previously discussed.

International

Adjusted EBITDA remained consistent with the prior year.

Liquidity and Capital Resources

Sources of liquidity

Our principal liquidity needs have historically been for acquisitions, working capital, research and development, clinical trials, and capital expenditures. We expect these needs to continue as we carry out our operations, develop and commercialize our existing product candidates and any new products candidates and possibly further our expansion into international markets.

We have implemented previously announced restructuring initiatives to enhance our current financial position and sources of liquidity. These restructuring efforts are expected to result in $9.0 million to $10.0 million in cost savings on an annualized basis upon completion. Refer to Item 1. Financial Information—Notes to the unaudited consolidated condensed financial statements—Note 9. Restructuring costs for further details regarding these cost cutting efforts.

As previously discussed, we entered into a definitive agreement on May 10, 2023 to sell our Wound Business for total potential cash consideration of $85.0 million, including $35.0 million at closing, $5.0 million deferred for 18 months and $45.0 million in potential earn-out payments. We expect to net approximately $30.0 million after fees and expenses that will be used to repay existing debt. The sale of the Wound Business is expected to close before the end of May 2023.

We anticipate that to the extent that we require additional liquidity, we will obtain funding through additional equity financings or the incurrence of other indebtedness or a combination of these potential sources of liquidity. We may explore additional divestiture opportunities for non-core assets to improve our liquidity position, as we recently did with the Wound Business. In addition, we may raise additional funds to finance future cash needs through receivables or royalty financings or corporate collaboration and licensing arrangements. If we raise additional funds by issuing equity securities or convertible debt, our stockholders will experience dilution. The covenants under the Amended 2019 Credit Agreement limit our ability to obtain additional debt financing. Debt financing, if allowed under the Amended 2019 Credit Agreement and if available, would result in increased payment obligations and might involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, or making capital expenditures. If we raise additional funds through collaboration and licensing arrangements with third-parties, 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. 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

The accompanying unaudited consolidated financial statements have been prepared under the going concern basis of accounting, which presumes that the Company’s liquidation is not imminent; however, based on the Company’s current financial position and liquidity sources, including current cash balances, and forecasted future cash flows, the Company is at risk of violating certain of its financial covenants under the Amended 2019 Credit Agreement.

The Company is actively pursuing plans to mitigate these conditions and events, such as considering various additional cost cutting measures, and exploring divestiture opportunities such as the recently announced plan to divest certain assets within its Wound Business; however, there can be no assurances that it is probable these plans will be successfully implemented or that they will successfully mitigate these conditions and events. Therefore, these plans do not alleviate the substantial doubt about the Company’s ability to continue as a going concern.

For example, as a part of efforts to improve our financial condition, on February 27, 2023, we reached an agreement to return the assets and liabilities of CartiHeal (2009) Ltd. (“CartiHeal”), a wholly-owned subsidiary of the Company, to its former securityholders. The deconsolidation of CartiHeal relieved deferred consideration liabilities and milestone obligations related to the acquisition of CartiHeal. See Strategic Transactions – CartiHeal above as well as Item 1. Financial Information—Notes to the unaudited consolidated condensed financial statements—Note 3. Acquisitions and divestitures for further information regarding the acquisition and subsequent deconsolidation of CartiHeal. In addition, we announced a restructuring plan in December 2022 to align our organizational and management cost structure to improve profitability and cash flow. Refer to Item 1. Financial Information—Notes to the unaudited consolidated condensed financial statements—Note 9. Restructuring costs for further information.

If mitigating steps are not taken or are not successful, we are at substantial risk of failing to comply with the financial covenants in the Amended 2019 Credit Agreement in 2024. A breach of a financial covenant under the Amended 2019 Credit Agreement could accelerate repayment of our obligations under the agreement. Refer to Item 1. Financial Information—Notes to the unaudited consolidated condensed financial statements—Note 4. Financial instruments for further discussion concerning the Company’s long-term debt obligations.

Cash requirements

There have been no material changes to our future cash requirements as disclosed in Part II. Item 7 of our 2022 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 generally provide for termination upon notice. Payments due upon cancellation generally consist only of payments for services provided or expenses incurred, including non-cancellable obligations of our service providers, up to the date of cancellation. Certain agreements include contingent events that upon occurrence would require payment. For information regarding commitments and contingencies, refer to Item 1. Financial Information—Notes to the unaudited consolidated condensed financial statements—Note 11. Commitments and contingencies.

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 within the tax receivable agreement (“TRA”) with the Continuing LLC Owner. Under the TRA, we are required to make cash payments to the Continuing LLC Owner equal to 85% of the tax benefits, if any, that we actually realize (or in certain circumstances are deemed to realize), as a result of (1) increases in the tax basis of assets of BV LLC resulting from (a) any future redemptions or exchanges of LLC Interests, and (b) certain distributions (or deemed distributions) by BV LLC and (2) certain other tax benefits arising from payments under the TRA. We expect the amount of the cash payments required to be made under the TRA will be significant. The actual amount and timing of any payments under the TRA will vary depending upon a number of factors, including the timing of redemptions or exchanges by the Continuing LLC Owner, the amount of gain recognized by the Continuing LLC Owner, the amount and timing of the taxable income we generate in the future, and the federal tax rates then applicable. Any payments made by us to the Continuing LLC Owner under the TRA will generally reduce the amount of overall cash flow that might have otherwise been available to us. To the extent that we are unable to make payments under the TRA for any reason, such payments generally will be deferred and will accrue interest until paid; provided, however, that nonpayment for a specified period may constitute a material breach of a material obligation under the TRA and therefore accelerate payments due under the TRA.

Indebtedness

We were not in compliance with certain financial covenants in the Amended 2019 Credit Agreement as of December 31, 2022. As a result, on March 31, 2023 (the “Closing Date”), we entered into another amendment to the Amended 2019 Credit Agreement to, among other things, modify certain financial covenants, waive the noncompliance at December 31, 2022, and to modify interest rates applicable to borrowings under the 2019 Credit Agreement.

The Amended 2019 Credit Agreement, as most recently amended, contains customary affirmative and negative covenants, including those related to financial reporting and notification, restrictions on the declaration or payment of certain distributions on or in respect of our equity interests, restrictions on acquisitions, investments and certain other payments, limitations on the incurrence of new indebtedness, limitations on transfers, sales and other dispositions of our assets, as well as limitations on making changes to the business and organizational documents. Financial covenant requirements include a maximum debt leverage ratio and an interest coverage ratio. In addition, during the period commencing on the Closing Date and ending upon the satisfaction of certain conditions occurring not prior to the delivery of our financial statements for the fiscal quarter ending June 30, 2024, we will be subject to certain additional requirements and covenants, including a requirement to maintain Liquidity (as defined in the Amended 2019 Credit Agreement) of not less than $10,000 as of the end of each calendar month during such period. The Term Loan Facilities will mature on October 29, 2026. The Revolver will mature on October 29, 2025.

During January and February 2023, the Company borrowed $49.0 million on its Revolver for working capital needs. However, on the Closing Date of the March 2023 amendment to the Amended 2019 Credit Agreement, as part of the closing conditions, the Company repaid $20.0 million of these borrowings. Additionally, the Company paid $1.3 million in closing fees, and will be required to pay an additional $0.6 million by December 31, 2023 unless the Total Net Leverage Ratio as at September 30, 2023 is below 5.25 to 1.00.

Refer to Item 1. Financial Information—Notes unaudited consolidated condensed financial statements—Note 1. Organization for further details on the Company’s covenant compliance and Note 4. Financial instruments for further details on the Company’s indebtedness.

Other

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

Information regarding cash flows

Cash, cash equivalents and restricted cash as of April 1, 2023 totaled $47.1 million, compared to $30.2 million as of December 31, 2022. The decrease in cash was primarily due to the following:

(in thousands, except for percentage)

NM = Not Meaningful

Operating Activities

Net cash in operating activities from continuing operations increased $25.7 million, primarily due to lower employee compensation and a net increase in collections. These inflows were partially offset with an increase in inventory purchases and higher interest payments.

Investing Activities

Cash flows used in investing activities decreased $1.1 million, primarily due $1.5 million less in other investments and distribution rights in 2023 partially offset with and an increase of $0.6 million in capital expenditures.

Financing Activities

Cash flows provided by financing activities increased $18.2 million, primarily due to (i) net revolver credit borrowings of $29.0 million compared to $15.0 million in 2022; (ii) no debt payments during the first quarter of 2023 compared to $4.5 million in the first quarter of 2022; and (iii) tax withholdings of $3.4 million in 2022 compared to none in 2023. The increase was partially offset with $2.0 million less proceeds from the issuance of stock and $1.7 million in cash payments attributable to debt refinancing in 2023.

Discontinued Operations

Net cash flows from discontinued operations were primarily the result of $10.2 million in fees used to settle the CartiHeal disposition and $1.4 million in cash held by the CartiHeal entity at the time of disposal.

Off-balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Contractual Obligations

There have been no material changes to our contractual obligations as disclosed in our 2022 10-K.

Critical Accounting Estimates

Our discussion of operating results is based upon the unaudited consolidated condensed financial statements and accompanying notes, which have been prepared in accordance with U.S. GAAP. The preparation of these statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Our estimates are based on our historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in the facts or circumstances underlying these estimates could result in material changes and actual results could differ from these estimates. Our critical accounting estimates are detailed in Item 7 of our 2022 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 of ongoing material weaknesses in the Company’s internal control over financial reporting that are not fully remediated as described below, the Company’s disclosure controls and procedures were not effective as of April 1, 2023.

Material Weaknesses in Internal Control over Financial Reporting

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected and corrected on a timely basis.

Changes in Control Environment

In 2022, the Company did not conduct an effective risk assessment to identify and assess changes in its business processes and internal control environment related to newly acquired companies and multiple information technology (“IT”) system implementations that occurred in 2022. Further, there was a lack of adequate personnel resources in accounting, IT and other support functions to support simultaneous system implementations and business process integrations for acquired companies, implement appropriate controls for acquired companies and to maintain focus on compliance with internal controls for legacy Bioventus processes.

In addition, during 2022, the Company saw an unprecedented level of turnover in roles that drive execution of internal control activities. This turnover, paired with business changes, including those related to acquisitions, resulted in a disruption to the effective completion of control activities across a number of business processes. Further, management identified a gap in control design related to sufficient tracking of control performance to ensure controls operated effectively.

In considering these breakdowns in the control environment, Bioventus determined the associated Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) principles requiring further control and action by management to be:

(a) Control environment - Establishes structure, authority, and responsibility (COSO Principle 3);

(b) Risk assessment – Identifies and analyzes significant change (COSO Principle 9); and

(c) Monitoring – Conducts ongoing and /or separate evaluations (COSO Principle 16).

These ongoing control deficiencies have resulted in certain immaterial restatements of the Company’s financial statements as discussed in this Quarterly Report on Form 10-Q. When considered in the aggregate, they continue to create a reasonable possibility that a material misstatement to the consolidated financial statements will not be prevented or detected on a timely basis. Therefore, management concluded that the deficiencies continue to represent a material weakness in our internal control over financial reporting, and that disclosure controls and procedures were not effective as April 1, 2023.

Remediation Measures

(a) We identified staffing gaps based on employee turnover and integration challenges. Throughout 2022, we hired personnel and temporary resources to backfill positions vacated due to employee turnover and added additional headcount in accounting, finance and IT to expand capacity.

(b) In the fourth quarter of 2022, we engaged third-party consultants to perform an Accounting Transformation & Integration Assessment (“Project Action”). The Project Action team identified priority initiatives to enhance processes and systems to address inadequate processes, including order to cash, procure to pay and related master data processes. Further, Project Action benchmarked resources for the accounting function.

(c) As part of Project Action, we intend to develop mid- to long-term plans to further scale accounting, finance and IT for growth and public company requirements and continue to assess the level of resources that we need. We plan to continue to evaluate retention programs to retain key resources.

(d) We will prioritize key projects and ensure organizational capacity, with only essential IT projects occurring during the year.

(e) We are reinforcing execution rigor and are establishing recurring metrics regarding internal controls in processes, and tracking current performance compared with target performance to provide additional visibility to management and the Audit Committee. We also plan to further utilize our systems to automate the tracking of internal control completion.

(f) We will implement regular internal control certifications by control owners for all key controls.

(g) We will drive additional accountability for control owners by tying a portion of their performance objectives to successful completion of internal controls.

(h) We will increase training on internal controls, public company requirements and rigor through additional training requirements for new and existing control owners and tracking compliance to those training requirements.

(i) We will update and/or develop standard operating procedures to further document process and control performance for use in day-to-day execution and when training new employees.

(j) Further, we plan to implement a new internal control policy that further defines expectations for internal control performance and communication of changes to financially relevant processes. This policy will require management and internal audit approval before process changes or system implementations go-live.

Rebates Accrual Material Weakness

As previously reported, we identified a material weakness related to the Company’s internal controls over financial reporting that were not performed at a sufficient level of precision to ensure that the third quarter 2022 rebates accrual was complete and accurate. The process undertaken to estimate the expected reduction in revenue from rebates was consistent with the Company’s historical practice. However, subsequent to the initial calculation of the third quarter 2022 rebates accrual, an unexpectedly large invoice was received and there were not processes in place to ensure it was reviewed timely in order to update the accrual.

The Company reassessed open rebates accruals and the approach for calculating the rebate accruals based on this invoice. The Company revised its estimation methodology resulting in a decrease of revenue of $8.4 million. This adjustment was recorded subsequent to the earnings release but prior to the filing of the Company’s Quarterly Report on Form 10-Q for the third quarter of 2022. Further, this change in revenue projection related to the rebates accrual adjustment for 2022 and cascading effect on future revenue projections materially impacted the Company’s evaluation of its ability to meet debt covenants in its Amended 2019 Credit Agreement, resulting in liquidity and going concern disclosures in the Company’s Quarterly Report on Form 10-Q for the third quarter of 2022.

Remediation Measures

We have designed and implemented new processes and enhanced controls to address the underlying causes of the material weakness related to the rebates accrual, including:

• Reassessing open rebates accruals and changing the estimation method for calculating the rebates accruals, including enhancing the precision of the controls;
• Implementing enhanced controls and status tracking to ensure that rebates invoices from third-party payers are received and reviewed timely; and
• Increasing rigor of documenting key conversations with payers.

The Company is in the process of implementing enhanced procedures to ensure the completeness and accuracy of key reports and information used in the rebates accrual and further enhancing the precision of supporting documentation for control performance.

We believe the actions described with respect to our control environment and rebates accrual processes will be sufficient to remediate the identified material weaknesses and strengthen our internal control over financial reporting. However, the new and enhanced controls have not all been fully implemented and/or have not operated for a sufficient amount of time to conclude that our material weaknesses have been fully remediated. We will continue to implement and monitor the effectiveness of our controls and will make any further changes management determines appropriate.

Notwithstanding the identified material weaknesses above, the Chief Executive Officer and Chief Financial Officer believe that the financial statements and related financial information included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our balance sheets, statements of operations and comprehensive (loss) income, statement of changes in stockholders’ equity and statements of cash flows as of and for the periods presented.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the first quarter of 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting except for changes to controls resulting from the material weaknesses 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 2022 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. Except for such additional information and the updated risk factor set forth below, we believe there have been no other material changes in our risk factors from those disclosed in our 2022 10-K.

Failure to establish and maintain effective financial controls could cause us to have material weaknesses and financial misstatements due to error, which could adversely affect our business and stock price.

We are required to comply with the SEC’s rules implementing Sections 302, 404 and 906 of the Sarbanes-Oxley Act of 2002, which require management to certify financial and other information in our quarterly and annual reports, provide quarterly and annual management reports on the effectiveness of disclosure controls and procedures, and provide annual management reports on the effectiveness of internal controls over financial reporting. Though we are required to disclose changes made in our internal controls and procedures on a quarterly basis and assess internal controls over financial reporting on an annual basis, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal controls over financial reporting pursuant to Section 404 until we are no longer an emerging growth company pursuant to the provisions of the JOBS Act. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating.

To comply with the requirements of being a public company, we have undertaken various actions, and may need to take additional actions, such as implementing new financial controls and procedures and hiring additional accounting or internal audit staff. We cannot assure you that the measures we have taken to date, and actions we may take in the future, will be sufficient to prevent or avoid financial misstatements due to error or material weaknesses (such as those described in this Quarterly Report on Form 10-Q). In addition, our previously identified material weaknesses in financial controls related to our control environment and accounting for rebates from third-party payers have not been fully remediated. If we cannot fully remediate our ongoing material weaknesses or we identify any additional material weaknesses in the future, the accuracy and timing of our financial reporting may be adversely affected. Testing and maintaining financial controls can also divert our management’s attention from other matters that are important to the operation of our business. Ineffective disclosure controls and procedures or internal control over financial reporting could cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our Class A common stock.

Additionally, when evaluating our financial controls, we may identify material weaknesses in our internal controls that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404. If we identify any material weaknesses in our internal controls over financial reporting or are unable to comply with the requirements of Section 404 in a timely manner, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal controls over financial reporting once we are no longer an emerging growth company, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A common stock could be adversely affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.