UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
________________
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended April 1, 2023
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from ____________ to ____________
Commission File Number: 001-37844
(Exact Name of Registrant as Specified in Its Charter)
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |||||||
| (Address of Principal Executive Offices) | (Zip Code) | |||||||
(919 ) 474-6700
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | ☒ | ||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||
| Emerging Growth Company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of May 12, 2023, there were 62,486,725 shares of Class A common stock outstanding and 15,786,737 shares of Class B common stock outstanding.
| BIOVENTUS INC. | ||||||||
| TABLE OF CONTENTS | ||||||||
Consolidated Condensed Statements of Operations and Comprehensive Loss for the three months ended April 1, 2023 and April 2, 2022 | ||||||||
Consolidated Condensed Balance Sheets as of April 1, 2023 and December 31, 2022 | ||||||||
Consolidated Condensed Statements of Changes in Stockholders’ Equity for the three months ended April 1, 2023 and April 2, 2022 | ||||||||
Consolidated Condensed Statements of Cash Flows for the three months ended April 1, 2023 and April 2, 2022 | ||||||||
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
As used in this Quarterly Report on Form 10-Q, unless expressly indicated or the context otherwise requires, references to "Bioventus," "we," "us," "our," "the Company," and similar references refer to Bioventus Inc. and its consolidated subsidiaries, including Bioventus LLC (“BV LLC”).
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), and Section 27A of the Securities Act of 1933, as amended (Securities Act), concerning our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business operations and financial performance and condition. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements including, without limitation, statements regarding our business strategy, including, without limitation, expectations relating to our acquisitions of Misonix and Bioness, expected expansion of our pipeline and research and development investment, new therapy launches, expected costs related to, and potential future options for, MOTYS, recent dispositions of non-core assets, our operations and expected financial performance and condition, and impacts of the COVID-19 pandemic and inflation. In some cases, you can identify forward-looking statements by terminology such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “potential,” “positioned,” “seek,” “should,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words.
Forward-looking statements are based on management’s current expectations, estimates, forecasts and projections about our business and the industry in which we operate, and management’s beliefs and assumptions are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this Quarterly Report on Form 10-Q may turn out to be inaccurate. Furthermore, if the forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. Important factors that may cause actual results to differ materially from current expectations include, among other things: the risk that previously identified material weaknesses or new material weaknesses could adversely affect our ability to report our results of operations and financial condition accurately and in a timely manner; we might not be able to continue to fund our operations for at least the next twelve months as a going concern; we might not meet certain of our debt covenants under our Credit Agreement and might be required to repay our indebtedness; risks associated with the disposition of our Wound Business and expected impacts on our business; restrictions on operations and other costs associated with our indebtedness; our ability to complete acquisitions or successfully integrate new businesses, products or technologies in a cost-effective and non-disruptive manner; we maintain cash at financial institutions, often in balance that exceed federally insured limits; we are subject to securities class action litigation and may be subject to similar or other litigation in the future, which will require significant management time and attention, result in significant legal expenses and may result in unfavorable outcomes; our ability to maintain our competitive position depends on our ability to attract, retain and motivate our senior management team and highly qualified personnel; we are highly dependent on a limited number of products; our long-term growth depends on our ability to develop, acquire and commercialize new products, line extensions or expanded indications; we may be unable to successfully commercialize newly developed or acquired products or therapies in the United States; demand for our existing portfolio of products and any new products, line extensions or expanded indications depends on the continued and future acceptance of our products by physicians, patients, third-party payers and others in the medical community; the proposed down classification of non-invasive bone growth stimulators, including our Exogen system, by the U.S. Food and Drug Administration (FDA) could increase future competition for bone growth stimulators and otherwise adversely affect the Company’s sales of Exogen; failure to achieve and maintain adequate levels of coverage and/or reimbursement for our products or future products, the procedures using our products, such as our hyaluronic acid (HA) viscosupplements, or future products we may seek to commercialize; pricing pressure and other competitive factors; governments outside the United States might not provide coverage or reimbursement of our products; we compete and may compete in the future against other companies, some of which have longer operating histories, more established products or greater resources than we do; the reclassification of our HA products from medical devices to drugs in the United States by the FDA could negatively impact our ability to market these products and may require that we conduct costly additional clinical studies to support current or future indications for use of those products; our failure to properly manage our anticipated growth and strengthen our brands; risks related to product liability claims; fluctuations in demand for our products; issues relating to the supply of our products, potential supply chain disruptions and the increased cost of parts and components used to manufacture our products due to inflation; our reliance on a limited number of third-party manufacturers to manufacture certain of our products; if our facilities are damaged or become
inoperable, we will be unable to continue to research, develop and manufacture our products; failure to maintain contractual relationships; security breaches, unauthorized disclosure of information, denial of service attacks or the perception that confidential information in our possession is not secure; failure of key information technology and communications systems, process or sites; risks related to international sales and operations; risks related to our debt and future capital needs; failure to comply with extensive governmental regulation relevant to us and our products; we may be subject to enforcement action if we engage in improper claims submission practices and resulting audits or denials of our claims by government agencies could reduce our net sales or profits; the FDA regulatory process is expensive, time-consuming and uncertain, and the failure to obtain and maintain required regulatory clearances and approvals could prevent us from commercializing our products; if clinical studies of our future product candidates do not produce results necessary to support regulatory clearance or approval in the United States or elsewhere, we will be unable to expand the indications for or commercialize these products; legislative or regulatory reforms; our business may continue to experience adverse impacts as a result of the COVID-19 pandemic; risks related to intellectual property matters; and other important factors described in Part I. Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2022, as updated by our subsequent Quarterly Reports on Form 10-Q, and as may be further updated from time to time in our other filings with the SEC. You are urged to consider these factors carefully in evaluating these forward-looking statements. These forward-looking statements speak only as of the date hereof. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Bioventus Inc.
Consolidated Condensed Statements of Operations and Comprehensive Loss
Three Months Ended April 1, 2023 and April 2, 2022
(Amounts in thousands, except share amounts)
(Unaudited)
| Three Months Ended | |||||||||||
| April 1, 2023 | April 2, 2022 | ||||||||||
| Net sales | $ | $ | |||||||||
Cost of sales (including depreciation and amortization of $ | |||||||||||
| Gross profit | |||||||||||
| Selling, general and administrative expense | |||||||||||
| Research and development expense | |||||||||||
| Restructuring costs | |||||||||||
| Change in fair value of contingent consideration | |||||||||||
| Depreciation and amortization | |||||||||||
| Impairment of assets | |||||||||||
| Operating loss | ( | ( | |||||||||
| Interest expense (income), net | ( | ||||||||||
| Other income | ( | ( | |||||||||
| Other expense (income) | ( | ||||||||||
| Loss before income taxes | ( | ( | |||||||||
| Income tax benefit, net | ( | ( | |||||||||
| Net loss from continuing operations | ( | ( | |||||||||
| Loss from discontinued operations, net of tax | ( | ( | |||||||||
| Net loss | ( | ( | |||||||||
| Loss attributable to noncontrolling interest - continuing operations | |||||||||||
| Loss attributable to noncontrolling interest - discontinued operations | |||||||||||
| Net loss attributable to Bioventus Inc. | $ | ( | $ | ( | |||||||
| Net loss from continuing operations | $ | ( | $ | ( | |||||||
| Other comprehensive loss, net of tax | |||||||||||
| Change in foreign currency translation adjustments | ( | ||||||||||
| Comprehensive loss | ( | ( | |||||||||
| Comprehensive loss attributable to noncontrolling interest - continuing operations | |||||||||||
| Comprehensive loss attributable to noncontrolling interest - discontinued operations | |||||||||||
| Comprehensive loss attributable to Bioventus Inc. | $ | ( | $ | ( | |||||||
| Loss per share of Class A common stock from continuing operations, basic and diluted: | $ | ( | $ | ( | |||||||
| Loss per share of Class A common stock from discontinued operations, basic and diluted: | ( | ( | |||||||||
| Loss per share of Class A common stock, basic and diluted | $ | ( | $ | ( | |||||||
| Weighted-average shares of Class A common stock outstanding, basic and diluted: | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
1
Bioventus Inc.
Consolidated Condensed Balance Sheets as of April 1, 2023 and December 31, 2022 (Unaudited)
(Amounts in thousands, except share amounts)
| April 1, 2023 | December 31, 2022 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Inventory | |||||||||||
| Prepaid and other current assets | |||||||||||
| Assets held for sale | |||||||||||
| Current assets attributable to discontinued operations | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Operating lease assets | |||||||||||
| Investment and other assets | |||||||||||
| Long-term assets attributable to discontinued operations | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Stockholders' Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued liabilities | |||||||||||
| Current portion of long-term debt | |||||||||||
| Other current liabilities | |||||||||||
| Liabilities held for sale | |||||||||||
| Current liabilities attributable to discontinued operations | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt, less current portion | |||||||||||
| Deferred income taxes | |||||||||||
| Contingent consideration | |||||||||||
| Other long-term liabilities | |||||||||||
| Long-term liabilities attributable to discontinued operations | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 11) | |||||||||||
| Stockholders’ Equity | |||||||||||
Preferred stock, $ | |||||||||||
Class A common stock, $ December 31, 2022, December 31, 2022, respectively | |||||||||||
Class B common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Accumulated other comprehensive income (loss) | ( | ||||||||||
| Total stockholders’ equity attributable to Bioventus Inc. | |||||||||||
| Noncontrolling interest | |||||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
2
Bioventus Inc.
Consolidated Condensed Statements of Changes in Stockholders’ Equity
Three Months Ended April 1, 2023 and April 2, 2022
(Amounts in thousands, except share amounts)
(Unaudited)
| Three Months Ended April 1, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||
| Class A Common Stock | Class B Common Stock | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Additional Paid-in Capital | Accumulated other comprehensive (loss) income | Accumulated Deficit | Non- controlling interest | Total Stockholders' equity | |||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common stock for equity plans | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||
| Equity based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Translation adjustment | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance at April 1, 2023 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Three Months Ended April 2, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Class A Common Stock | Class B Common Stock | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Additional Paid-in Capital | Accumulated other comprehensive (loss) income | Accumulated Deficit | Non- controlling interest | Total Stockholders' equity | |||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common stock for equity plans | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Deferred taxes on equity rebalancing | — | — | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||
| Equity based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Tax withholdings on equity compensation awards | — | — | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||
| Translation adjustment | — | — | — | — | — | ( | — | ( | ( | ||||||||||||||||||||||||||||||||||||||
| Balance at April 2, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
Bioventus Inc.
Consolidated Condensed Statements of Cash Flows
Three Months Ended April 1, 2023 and April 2, 2022
(Amounts in thousands) (Unaudited)
| Three Months Ended | |||||||||||
| April 1, 2023 | April 2, 2022 | ||||||||||
| Operating activities: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Less: Loss from discontinued operations, net of tax | ( | ( | |||||||||
| Loss from continuing operations | ( | ( | |||||||||
| Adjustments to reconcile net loss to net cash from operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Provision for expected credit losses | |||||||||||
| Equity based compensation | |||||||||||
| Change in fair value of contingent consideration | |||||||||||
| Change in fair value of interest rate swap | ( | ||||||||||
| Deferred income taxes | ( | ( | |||||||||
| Impairment of assets | |||||||||||
| Foreign currency fluctuations | |||||||||||
| Other, net | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | |||||||||||
| Inventories | ( | ||||||||||
| Accounts payable and accrued expenses | ( | ||||||||||
| Other current and noncurrent assets and liabilities | ( | ( | |||||||||
| Net cash from operating activities - continuing operations | ( | ||||||||||
| Net cash from operating activities - discontinued operations | ( | ||||||||||
| Net cash from operating activities | ( | ||||||||||
| Investing activities: | |||||||||||
| Acquisitions, net of cash acquired | ( | ||||||||||
| Purchase of property and equipment | ( | ( | |||||||||
| Investments and acquisition of distribution rights | ( | ||||||||||
| Net cash from investing activities - continuing operations | ( | ( | |||||||||
| Net cash from investing activities - discontinued operations | ( | ||||||||||
| Net cash from investing activities | ( | ( | |||||||||
| Financing activities: | |||||||||||
| Proceeds from issuance of Class A and B common stock | |||||||||||
| Tax withholdings on equity-based compensation | ( | ||||||||||
| Borrowing on revolver | |||||||||||
| Payment on revolver | ( | ||||||||||
| Debt refinancing costs | ( | ||||||||||
| Payments on long-term debt | ( | ||||||||||
| Other, net | ( | ( | |||||||||
| Net cash from financing activities | |||||||||||
| Effect of exchange rate changes on cash | ( | ||||||||||
| Net change in cash, cash equivalents and restricted cash | ( | ||||||||||
| Cash, cash equivalents and restricted cash at the beginning of the period | |||||||||||
| Cash, cash equivalents and restricted cash at the end of the period | $ | $ | |||||||||
| Supplemental disclosure of noncash investing and financing activities | |||||||||||
| Accounts payable for purchase of property, plant and equipment | $ | $ | |||||||||
4
Bioventus Inc.
Notes to the unaudited consolidated condensed financial statements
(Amounts in thousands, except unit and share amounts)
1. Organization
The Company
Bioventus Inc. (together with its subsidiaries, the “Company”) was formed as a Delaware corporation for the purpose of facilitating an initial public offering and other related transactions in order to carry on the business of Bioventus LLC and its subsidiaries (“BV LLC”). Bioventus Inc. functions as a holding company with no direct operations, material assets or liabilities other than the equity interest in BV LLC. BV LLC is a limited liability company formed under the laws of the state of Delaware on November 23, 2011 and operates as a partnership. BV LLC commenced operations in May 2012.
On February 16, 2021, the Company completed its initial public offering (“IPO”), which was conducted through what is commonly referred to as an umbrella partnership C Corporation (“UP-C”) structure. The Company has majority interest, sole voting interest and controls the management of BV LLC. As a result, the Company consolidates the financial results of BV LLC and reports a noncontrolling interest representing the interest of BV LLC held by its continuing LLC owner.
The Company is focused on developing and commercializing clinically differentiated, cost efficient and minimally invasive treatments that engage and enhance the body’s natural healing processes. The Company is headquartered in Durham, North Carolina and has approximately 1,040 employees.
Interim periods
The Company reports quarterly interim periods on a 13-week basis within a standard calendar year. Each annual reporting period begins on January 1 and ends on December 31. Each quarter ends on the Saturday closest to calendar quarter-end, with the exception of the fourth quarter, which ends on December 31. The 13-week quarterly periods for fiscal year 2023 end on April 1, July 1 and September 30. Comparable periods for 2022 ended on April 2, July 2 and October 1. The fourth and first quarters may vary in length depending on the calendar year.
Unaudited interim financial information
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Pursuant to these rules and regulations, they do not include all information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments, and the adjustments discussed in Note 1. Organization) considered necessary for a fair statement of the Company’s financial condition and results of operations have been included. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the full year. As such, the information included in this report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. The consolidated balance sheet at December 31, 2022 has been derived from the audited consolidated financial statements of the Company, but does not include all the disclosures required by U.S. GAAP.
Correction of immaterial misstatements
During the quarter ended April 1, 2023 and as part of the balance sheet review process, the Company identified misstatements in its calculation of the carrying amount of noncontrolling interest as it applies to the Company’s complex UP-C tax and ownership structure as prescribed in the amended and restated limited liability company agreement of BV LLC. Specifically, the Company failed to adjust the carrying amount of its noncontrolling interest to reflect changes in ownership interests relating to BV LLC. As a result, the previously issued consolidated financial statements reflect an understatement of noncontrolling interest and an overstatement of additional paid-in capital.
As a result of further research conducted, the Company discovered an additional error related to historical deferred income tax balances. The Company concluded that it had inappropriately calculated deferred income taxes by using an incorrect book basis in its investment of BV LLC during the Company’s IPO, which resulted in an overstatement of deferred tax liabilities, an understatement of noncontrolling interest and an understatement of additional paid-in capital.
5
The statements affected by these errors include the consolidated balance sheets and consolidated statements of stockholders’ and members’ equity issued in the Company’s Annual Report on Form 10-K for the years ended December 31, 2022 and December 31, 2021. There was no impact to any other financial statements for the periods presented. The Company concluded that these misstatements were not material, individually or in the aggregate, as evaluated under the Securities and Exchange Commission Staff Bulletin No. 99, Materiality; No. 108, Considering the Effects of Prior Year Misstatements in Current Year Financial Statements; and Financial Accounting Standards Board ASC 250-10, Accounting Changes and Error Corrections. However, because of the significance of these items, and to facilitate comparison among periods, the Company has decided to revise its previously issued consolidated financial statements on a prospective basis. The Company will correct its prior period presentation for this error in its future 2023 quarterly financial statements included in its Forms 10-Q and 2023 Annual Report on Form 10-K for the period ended December 31, 2023. The adjustments did not have an impact on revenues, total assets or cash flows.
The following are selected line items from our aforementioned impacted financial statements illustrating the effect of the error corrections thereon:
| Consolidated Balance Sheets — December 31, 2022 | As Previously Reported | Adjustments | As Adjusted | ||||||||||||||
| Deferred income taxes (b)(d) | $ | $ | ( | $ | |||||||||||||
| Total liabilities | ( | ||||||||||||||||
| Additional paid-in capital (a)(b)(c) | |||||||||||||||||
| Noncontrolling interest (a)(c) | |||||||||||||||||
| Total stockholders’ equity | |||||||||||||||||
| Consolidated Balance Sheets — December 31, 2021 | As Previously Reported | Adjustments | As Adjusted | ||||||||||||||
| Deferred income taxes (b) | $ | $ | ( | $ | |||||||||||||
| Total liabilities | ( | ||||||||||||||||
| Additional paid-in capital (a)(b) | |||||||||||||||||
| Noncontrolling interest (a) | |||||||||||||||||
| Total stockholders’ equity | |||||||||||||||||
The Company’s consolidated statements of changes in stockholders’ and members equity as of December 31, 2022 and December 31, 2021 have been corrected to reflect the above adjustments. The Company revised the amounts originally reported for the years ended December 31, 2022 and December 31, 2021 for the following items:
(a)Recorded a $65,821
(b)Recorded a $73,867
(c)Reflects the entry as discussed in (a) above and additional rebalancing activity of $2,588
(d)Reflects the entry as discussed in (b) and an additional $1,977
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 Credit and Guaranty Agreement, dated December 6, 2019 (as amended on October 29, 2021, July 11, 2022 and March 31, 2023).
If mitigating steps are not taken or are not successful, the Company is at substantial risk of failing its covenants in 2024. A breach of a financial covenant under the Credit and Guaranty Agreement could accelerate repayment of our obligations under the agreement. Refer to Note 4. Financial instruments for further discussion concerning the Company’s long-term debt obligations.
6
The Company is actively pursuing plans to mitigate these conditions and events, such as considering various additional cost cutting measures, and exploring additional divestiture opportunities 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.
As part of efforts to improve its financial condition, on February 27, 2023, the Company reached an agreement to return the assets and liabilities of CartiHeal (2009) Ltd. (“CartiHeal”), a wholly-owned subsidiary of the Company, to its former securityholders. The deconsolidation of CartiHeal relieved deferred consideration liabilities and milestone obligations related to the acquisition of CartiHeal. Refer to Note 3. Acquisitions and divestitures for further information regarding the acquisition and subsequent deconsolidation of CartiHeal. In addition, the Company announced a restructuring plan in December 2022 to align the Company’s organizational and management cost structure to improve profitability and cash flow. Refer to Note 9. Restructuring costs for further information.
Recent accounting pronouncements
The Company is an accelerated public company filer. Therefore, required effective dates for adopting new or revised accounting standards are generally earlier than when emerging growth companies are required to adopt.
2. Balance sheet information
Accounts receivable, net
Accounts receivable, net are amounts billed and currently due from customers. The Company records the amounts due net of allowance for credit losses. Collection of the consideration that the Company expects to receive typically occurs within 30 to 90 days of billing. The Company applies the practical expedient for contracts with payment terms of one year or less which does not consider the effects of the time value of money. Occasionally, the Company enters into payment agreements with patients that allow payment terms beyond one year. In those cases, the financing component is not deemed significant to the contract.
Accounts receivable, net of allowances, consisted of the following as of:
| April 1, 2023 | December 31, 2022 | ||||||||||
Accounts receivable(a) | $ | $ | |||||||||
Less: Allowance for credit losses(b) | ( | ( | |||||||||
| $ | $ | ||||||||||
(a)Other receivables of $350 attributable to CartiHeal was reclassified to current assets attributable to discontinued operations within the December 31, 2022 consolidated balance sheets. Accounts receivable of $5,012 was reclassified into assets held for sale within the April 1, 2023 consolidated condensed balance sheets. Refer to Note 3. Acquisitions and divestitures and Note 14. Discontinued operations for further details regarding assets held for sale and the deconsolidation of CartiHeal.
(b)Allowance for credit losses of $898 was reclassified to assets held for sale within the April 1, 2023 consolidated condensed balance sheets. Refer to Note 3. Acquisitions and divestitures for further details regarding assets held for sale.
Due to the short-term nature of the Company’s receivables, the estimate of expected credit losses is based on aging of the account receivable balances. The allowance is adjusted on a specific identification basis for certain accounts as well as pooling of accounts with similar characteristics. The Company has a diverse customer base with no single customer representing ten percent or more of sales. The Company has one customer representing approximately 11.8 % of the accounts receivable balance as of April 1, 2023. Historically, the Company’s reserves have been adequate to cover credit losses.
7
Changes in credit losses were as follows:
| Three Months Ended | ||||||||||||||
| April 1, 2023 | April 2, 2022 | |||||||||||||
| Beginning balance | $ | ( | $ | ( | ||||||||||
| Provision for losses | ( | ( | ||||||||||||
| Write-offs | ||||||||||||||
| Recoveries | ( | ( | ||||||||||||
| Reclassification to held for sale | ||||||||||||||
| Ending balance | $ | ( | $ | ( | ||||||||||
Inventory
Inventory consisted of the following as of:
| April 1, 2023 | December 31, 2022 | ||||||||||
Raw materials and supplies(a) | $ | $ | |||||||||
Finished goods(b) | |||||||||||
| Gross | |||||||||||
| Excess and obsolete reserves | ( | ( | |||||||||
| $ | $ | ||||||||||
(a)Raw material inventory of $642 attributable to CartiHeal has been reclassified to current assets attributable to discontinued operations within the December 31, 2022 consolidated balance sheets. Refer to Note 3. Acquisitions and divestitures and Note 14. Discontinued operations for further details regarding the deconsolidation of CartiHeal.
(b)Finished goods inventory of $1,481 was reclassified to assets held for sale within the April 1, 2023 consolidated condensed balance sheets. Refer to Note 3. Acquisitions and divestitures for further information.
Prepaid and other current assets
Prepaid and other current assets consisted of the following as of:
| April 1, 2023 | December 31, 2022 | ||||||||||
| Prepaid taxes | $ | $ | |||||||||
Prepaid and other current assets(a) | |||||||||||
| $ | $ | ||||||||||
(a)Prepaid and other current assets of $134 attributable to CartiHeal was reclassified to current assets attributable to discontinued operations within the December 31, 2022 balance sheet. Refer to Note 3. Acquisitions and divestitures and Note 14. Discontinued operations for further details regarding the deconsolidation of CartiHeal.
8
Intangible assets, net
Intangible assets consisted of the following as of:
| April 1, 2023 | December 31, 2022 | ||||||||||
Intellectual property(a)(b)(c) | $ | $ | |||||||||
| Distribution rights | |||||||||||
Customer relationships(b) | |||||||||||
| IPR&D | |||||||||||
| Developed technology and other | |||||||||||
| Total carrying amount | |||||||||||
| Less accumulated amortization: | |||||||||||
Intellectual property(a)(b)(c) | ( | ( | |||||||||
| Distribution rights | ( | ( | |||||||||
Customer relationships(b) | ( | ( | |||||||||
| Developed technology and other | ( | ( | |||||||||
| Total accumulated amortization | ( | ( | |||||||||
| Intangible assets, net before currency translation | |||||||||||
| Currency translation | ( | ( | |||||||||
| $ | $ | ||||||||||
(a)Intellectual property and accumulated depreciation attributable to CartiHeal totaling $410,200 and $11,327 , respectively, were reclassified to long-term assets attributable to discontinued operations within the December 31, 2022 consolidated balance sheets. Refer to Note 3. Acquisitions and divestitures and Note 14. Discontinued operations for further details regarding the deconsolidation of CartiHeal.
(b)Net intellectual property and customer relationships of $23,458 and $8,377 , respectively, were reclassified into assets held for sale within the April 1, 2023 consolidated condensed balance sheets. Refer to Note 3. Acquisitions and divestitures for further details regarding assets held for sale.
(c)The Company recorded an impairment loss of $78,615 in the U.S. reporting segment of net intellectual property attributable to a business held for sale. The loss was recorded in impairment of assets within the consolidated condensed statements of operations and comprehensive loss. Refer to Refer to Note 3. Acquisitions and divestitures for further details regarding businesses held for sale.
Estimated amortization expense for intangibles subsequent to reclassifications and impairment for the remainder of 2023 and for the years ended December 31, 2024 through 2027 is expected to be $22,041 , $26,347 , $22,874 , $20,030 and $19,652 , respectively.
Goodwill
Goodwill is evaluated for impairment annually or more frequently if events or changes in circumstances indicate that goodwill might be impaired. The Company assesses goodwill impairment by applying a quantitative impairment analysis comparing the carrying value of the Company’s reporting units to their respective fair values. A goodwill impairment exists if the carrying value of the reporting unit exceeds its fair value.
The Company has two reporting units and assesses impairment based upon qualitative factors and if necessary, quantitative factors. A reporting unit's fair value is determined using the income approach and discounted cash flow models by utilizing Level 3 inputs and assumptions such as future cash flows, discount rates, long-term growth rates, market value and income tax considerations. Specifically, the value of each reporting unit is determined on a stand-alone basis from the perspective of a market participant and represents the price estimated to be received in a sale of the reporting unit in an orderly transaction between market participants at the measurement date. The Company then reconciles the values of all reporting units to the market capitalization of the Company.
9
The Company’s goodwill resides within the International segment, of which $6,297 related to CartiHeal and was reclassified to long-term assets attributable to discontinued operations within the December 31, 2022 consolidated balance sheets. The amount was recorded in discontinued operations, net of tax on the consolidated condensed statements of operations for the three months ended April 1, 2023 as a result of CartiHeal’s deconsolidation. Refer to Note 3. Acquisitions and divestitures and Note 14. Discontinued operations for further details concerning the deconsolidation of CartiHeal.
On November 8, 2022, due to a significant decline in the Company’s Class A common stock price, circumstances became evident that a possible goodwill impairment existed as of the third quarter 2022 balance sheet date. The Company concluded that the carrying value of the U.S. reporting unit exceeded its fair value and recorded a non-cash goodwill impairment charge of $189,197 during the year ended December 31, 2022. There were no accumulated impairment losses prior to the year ended December 31, 2022.
Accrued liabilities
Accrued liabilities consisted of the following as of:
| April 1, 2023 | December 31, 2022 | ||||||||||
| Gross-to-net deductions | $ | $ | |||||||||
Bonus and commission(a) | |||||||||||
| Compensation and benefits | |||||||||||
| Accrued interest | |||||||||||
| Income and other taxes | |||||||||||
Other liabilities(b) | |||||||||||
| $ | $ | ||||||||||
(a)Bonus and commissions of $588 were reclassified into liabilities held for sale within the April 1, 2023 consolidated balance sheets. Refer to Note 3. Acquisitions and divestitures for further details.
(b)Other liabilities attributable to CartiHeal of $384 were reclassified into current liabilities attributable to discontinued operations within December 31, 2022 consolidated balance sheets. Refer to Note 3. Acquisitions and divestitures and Note 14. Discontinued operations for further details.
3. Acquisitions and divestitures
Wound Business
The Company assesses its businesses and products in order to calibrate its strategic focus, enhance liquidity, prioritize investments and allocate capital to its core business units. As a result of this assessment, the Company has committed to a plan to divest certain assets within its Wound Business, specifically those attributable to TheraSkin and Theragenesis (the “Wound Business” or the “Disposal Group”).
The Company has classified the identifiable net assets of the Disposal Group as held for sale. Assets and liabilities determined to be part of the Disposal Group have been recorded as single amounts within the Company’s consolidated financial statements. Assets held for sale are reported at the lower of the carrying amount or fair value less costs to sell, which is expected to occur within one year. The Company has ceased the depreciation and amortization attributable to assets classified as held for sale. Assets and liabilities held for sale are reviewed each reporting period to determine whether existing carrying values are fully recoverable in comparison to estimated fair values less costs to sell.
The Company evaluated the Wound Business for impairment during the first quarter of 2023. The Company recorded a $78,615 ($63,337 after tax) impairment as a result of this evaluation to reduce the intangible assets of the Wound Business to reflect their respective fair values less any costs to sell. The fair value of intangibles of the Wound Business was determined based on the consideration offered for the Wound Business.
10
The carrying amounts of the major classes of assets and liabilities of the Wound Business that were classified as held for sale were as follows:
| April 1, 2023 | |||||
| Carrying amounts of assets classified as held for sale | |||||
Accounts receivable, net of allowance of $ | $ | ||||
| Inventory | |||||
| Property and equipment, net | |||||
| Intangible assets | |||||
| Total assets held for sale | $ | ||||
| Carrying amounts of liabilities classified as held for sale | |||||
| Accounts payable | $ | ||||
| Accrued liabilities | |||||
| Total liabilities held for sale | $ | ||||
CartiHeal (2009) Ltd
On July 12, 2022, the Company completed the acquisition of 100 % of the remaining shares in CartiHeal, a privately held company headquartered in Israel and the developer of the proprietary Agili-C implant for the treatment of joint surface lesions in traumatic and osteoarthritic joints. The Company previously held an equity interest in CartiHeal’s fully diluted shares with a carrying value of $15,768 and $16,771 as of July 12, 2022 and December 31, 2022, respectively. Net equity losses associated with CartiHeal for the three months ended April 2, 2022 totaled $401 , which was included in discontinued operations, net on the consolidated condensed statements of operations and comprehensive loss.
The Company acquired CartiHeal (the “CartiHeal Acquisition”) for an aggregate purchase price of approximately $315,000 and an additional $135,000 , payable after closing upon the achievement of a certain sales milestone (“Sales Milestone”, or “CartiHeal Contingent Consideration”). The Company paid $100,000 of the aggregate purchase price upon closing consisting of a $50,000 deposit held in trust and $50,000 from a financing arrangement (Refer to Note 4. Financial instruments for further information regarding financing arrangements). The Company also paid approximately $8,622 of CartiHeal’s transaction-related fees and expenses and deferred $215,000 (“Deferred Amount”) of the aggregate purchase price otherwise due at closing.
The Deferred Amount was to be paid in five tranches commencing in 2023 and ending no later than 2027 as follows:
•$50,000 due upon the earliest to occur — the publication in a peer-reviewed orthopedic journal of an article that presents the results of the pivotal clinical trial (“First 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 (as defined below), the Company owed interest on each tranche of the Deferred Amount at a rate of 8.0 % annually, until such tranche is paid. The Sales Milestone was payable upon the achievement of $75,000 in trailing twelve month sales pursuant to the CartiHeal Amendment.
The Company had entered into an Option and Equity Purchase Agreement with CartiHeal (“Option Agreement”) in January 2020 and a subsequent amendment in June 2022 (“CartiHeal Amendment”). The Option Agreement provided the Company with an exclusive option to acquire 100 % of CartiHeal’s shares (“Call Option”), and provided CartiHeal with a put option that would require the Company to purchase 100 % of CartiHeal’s shares under certain conditions. In August 2021, CartiHeal achieved pivotal clinical trial success, as defined in the Option Agreement, for the Agili-C implant. In order to preserve the Company’s Call Option, in accordance with the Option Agreement and upon approval of the Company’s Board of Directors (“BOD”), the Company deposited $50,000 into escrow in August 2021.
11
The First Paper Milestone under the Option Agreement occurred on February 13, 2023, which obligated the Company to make the first $50,000 payment, plus applicable interest, under the Option Agreement. On February 27, 2023, the Company entered into a settlement agreement (the “Settlement Agreement”) with Elron Ventures Ltd. (“Elron” and together with the Company, the “Parties”) as representative of CartiHeal’s selling securityholders under the Option Agreement collectively, the “Former Securityholders”). Pursuant to the Settlement Agreement, Elron, on behalf of the Former Securityholders, agreed to forbear from initiating any legal action or proceedings relating to non-payment of any obligations arising under the Option Agreement during a period of 30 calendar days (the “Interim Period”) in exchange for (i) a one-time non-refundable amount of $10,000 and (ii) a one-time non-refundable payment of $150 to Elron to be used in accordance with the expense fund provisions of the Option Agreement. The Interim Period expired on March 29, 2023 and the Company did not exercise its right to extend the Interim Period. In addition, the Parties mutually released any further claims under the Option Agreement and related transaction documents, including without limitation a release by the Former Securityholders of any rights to enforce the provisions of the Option Agreement or make further monetary claims against the Company and/or its respective affiliates and representatives.
The Company transferred 100 % of its shares in CartiHeal to a trustee (the “Trustee”) for the benefit of the Former Securityholders pursuant to the Settlement Agreement. The Company had no ownership interest and no voting rights during the Interim Period. Accordingly, the Company concluded that upon execution of the Settlement Agreement, the Company ceased to control CartiHeal for accounting purposes, and therefore, deconsolidated CartiHeal effective February 27, 2023. CartiHeal was part of the Company’s international reporting segment. The Company treated the deconsolidation of CartiHeal as a discontinued operation. The loss upon disposal was $60,639 and was recorded within discontinued operations, net within the consolidated condensed statements of operations and comprehensive loss. The loss on disposal is comprised of the book value of CartiHeal’s net assets at the time of disposal, goodwill attributable to CartiHeal and the previously discussed non-refundable payments made to Elron. The Company allowed the Interim Period to expire on March 29, 2023 as the Company was not able to find a financing solution to fund the payment obligations under the Option and Equity Purchase Agreement on terms the Company believed to be favorable to it and its shareholders.
The fair value of consideration for the CartiHeal Acquisition was comprised of the following:
| Cash consideration | $ | ||||
| Transaction related costs | |||||
| Subtotal of cash at closing | |||||
| Deferred Amount | |||||
| Sales Milestone | |||||
Fair value of previously held equity interest(a) | |||||
| Total consideration | $ | ||||
(a) Remeasurement of the Company’s equity method investment in CartiHeal, net of equity losses as a result of the purchase. The remeasurement included a gain of $23,709 calculated as the difference between the fair value and the carrying value of the Company’s investment in CartiHeal at the acquisition date and was recognized in other income during the third quarter of 2022 on the consolidated condensed statements of operations and comprehensive loss. The fair value was based upon: (i) the consideration transferred to members owning 89.97 % of CartiHeal’s fully diluted shares; (ii) calculating the value of CartiHeal’s fully diluted shares based upon the transferred consideration; and (iii) applying the calculated value to the Company’s 10.03 % ownership in CartiHeal’s fully diluted shares at the acquisition date.
12
The Company accounted for the CartiHeal Acquisition using the acquisition method of accounting whereby the total purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on respective fair values. The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date:
| Fair value of consideration | $ | ||||
| Assets acquired and liabilities assumed: | |||||
| Cash and cash equivalents and restricted cash | |||||
| Inventory | |||||
| Prepaid and other current assets | |||||
| Property and equipment | |||||
| Intangibles | |||||
| Investment and other assets | |||||
| Accounts payable | ( | ||||
| Accrued liabilities | ( | ||||
| Other current liabilities | ( | ||||
| Deferred income taxes | ( | ||||
| Other liabilities | ( | ||||
| Net assets acquired | |||||
| Resulting goodwill | $ | ||||
Nearly 100% of the goodwill represents estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized and is attributable to expected revenue growth in new markets. The goodwill was not deductible for tax purposes and $55,295 and $4,999 was allocated to the U.S. and International reporting units, respectively.
CartiHeal’s intangibles consisted of the following:
| Useful Life | Fair Value | ||||||||||
| Intellectual Property - US Segment | $ | ||||||||||
| Intellectual Property - International Segment | |||||||||||
| $ | |||||||||||
The estimated fair value of the acquired CartiHeal intangibles was determined using an income approach, a valuation technique that estimates the fair value of an asset based on market participant expectations of the cash flows that an asset would generate over its remaining useful life. The determination of the useful lives was based upon consideration of market participant assumptions and transaction specific factors.
4. Financial instruments
Long-term debt consisted of the following as of:
| April 1, 2023 | December 31, 2022 | ||||||||||
Amended Term Loan due October 2026 ( | $ | $ | |||||||||
Revolver due October 2025 ( | |||||||||||
| Less: | |||||||||||
| Current portion of long-term debt | ( | ( | |||||||||
| Unamortized debt issuance cost | ( | ( | |||||||||
| Unamortized discount | ( | ( | |||||||||
| $ | $ | ||||||||||
On December 6, 2019, the Company entered into a Credit and Guaranty Agreement (the “2019 Credit Agreement”) that was comprised of a $200,000 term loan (“Original Term Loan”) and a $50,000 revolving facility (the “Revolver”). The Company amended the 2019 Credit Agreement on October 29, 2021 in connection with the Misonix Acquisition in which the Company prepaid $80,000 on the Original Term Loan. The 2019 Credit Agreement, as amended, subsequent to the prepayment, was comprised of a $360,750 term loan (“Term Loan”) and the Revolver.
13
On July 11, 2022, the Company further amended the 2019 Credit Agreement, as amended on October 29, 2021 (the “First Amended 2019 Credit Agreement”), in conjunction with the CartiHeal Acquisition. Pursuant to the First Amended 2019 Credit Agreement, an $80,000 term loan facility (the “July 2022 Term Loan” and, together with the Term Loan, the “Term Loan Facilities”) was extended to the Company to be used for: (i) the financing of the CartiHeal Acquisition; (ii) the payment of related fees and expenses; (iii) repayment of the draws made on the Revolver; and (iv) working capital needs and general corporate purposes of the Company, including without limitation for permitted acquisitions.
The Company was not in compliance with certain financial covenants as of December 31, 2022. As a result, on March 31, 2023 (the “Closing Date”), the Company entered into another amendment to the 2019 Credit Agreement (collectively, with the October 2021 and July 2022 amendments, 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 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 Bioventus LLC’s equity interests, restrictions on acquisitions, investments and certain other payments, limitations on the incurrence of new indebtedness, limitations on transfers, sales and other dispositions of assets of Bioventus LLC and its subsidiaries, as well as limitations on making changes to the business and organizational documents of Bioventus LLC and its subsidiaries. Financial covenant requirements include a maximum debt leverage ratio and an interest coverage ratio. In addition, during the period commencing on the Closing Date and ending upon the satisfaction of certain conditions occurring not prior to the delivery of financial statements of the Company for the fiscal quarter ending June 30, 2024, the Company will be subject to 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.
The Amended 2019 Credit Agreement had deferred financing costs of $3,661 , of which $1,617 were recorded in selling, general and administrative expense within the consolidated condensed statements of operations and comprehensive loss and $2,044 were capitalized on the consolidated condensed balance sheets. There was no loss on debt refinancing and modification as a result of the March 2023 amendment.
As of April 1, 2023, $416,585 was outstanding on the Term Loan Facilities, net of original issue discount of $2,876 and deferred financing costs of $1,251 . Capitalized deferred fees are amortized to interest expense on a straight-line basis over the term of the Term Loan Facilities, which approximates the effective interest method. The Company recorded $223 and $203 for deferred cost amortization in interest expense for the three months ended April 1, 2023 and April 2, 2022, respectively. The Company had $29,000 and no outstanding borrowings on its Revolver as of April 1, 2023 and December 31, 2022, respectively.
The estimated fair value of the Term Loan Facilities was $414,402 as of April 1, 2023. The fair value of these obligations was determined based on the midpoint of the Bloomberg Valuation. This is classified as a Level 2 instruments within the fair value hierarchy.
The Company historically entered into interest rate swap agreements to limit its exposure to changes in the variable interest rate on its long-term debt. The Company had one non-designated interest rate swap agreement that was terminated on October 28, 2022. The Company received $7,738 upon the swap’s termination. The swap was carried at fair value on the balance sheet with changes in fair value recorded as interest income or expense within the consolidated condensed statements of operations and comprehensive loss. Net interest income of $3,924 was recorded related to the change in fair value of the interest rate swap for the three months ended April 2, 2022.
5. Fair value measurements
14
There were no assets measured at fair value on a recurring basis and there were no liabilities valued at fair value using Level 1 inputs. The following table provides information for assets and liabilities measured at fair value on a recurring basis using Level 2 and Level 3 inputs:
| April 1, 2023 | December 31, 2022 | ||||||||||||||||||||||
| Total | Level 3 | Total | Level 3 | ||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
Deferred Amount - Current(a) | $ | $ | $ | $ | |||||||||||||||||||
Deferred Amount - Long Term(a) | |||||||||||||||||||||||
CartiHeal contingent consideration- Sales Milestone(a) | |||||||||||||||||||||||
| Bioness contingent consideration | |||||||||||||||||||||||
| Total liabilities: | $ | $ | $ | $ | |||||||||||||||||||
(a)The Deferred Amount and contingent consideration attributable to CartiHeal have been reclassified to discontinued operations within the December 31, 2022 balance sheet. CartiHeal was fully deconsolidated during the first quarter of 2023. Refer to Note 3. Acquisitions and divestitures and Note 14. Discontinued operations for further details regarding the deconsolidation of CartiHeal.
Deferred Amount
The Deferred Amount that resulted from the CartiHeal Acquisition was calculated based on the total amount payable on each due date for the five payment tranches including applicable interest. As previously discussed, the Company reached a settlement Agreement with the Former Securityholders. Pursuant to the Settlement Agreement, the Company was relieved of the obligations under the Deferred Amount. Refer to Note 3. Acquisitions and divestitures and Note 14. Discontinued operations for further details regarding the deconsolidation of CartiHeal.
Contingent consideration
The Company initially values contingent consideration related to business combinations using a probability-weighted calculation of potential payment scenarios discounted at rates reflective of the risks associated with the expected future cash flows for certain milestones. For other milestones, the Company used a variation of the income approach where revenue was simulated in a risk-neutral framework using Geometric Brownian Motion, a stock price behavior model.
Key assumptions used to estimate the fair value of contingent consideration include projected financial information, market data and the probability and timing of achieving the specific targets. After the initial valuation, the Company generally uses its best estimate to measure contingent consideration at each subsequent reporting period using unobservable Level 3 inputs. As previously discussed, the Company reached a settlement agreement with the Former Securityholders and was relieved of the CartiHeal Contingent Consideration obligations. Refer to Note 3. Acquisitions and divestitures and Note 14. Discontinued operations for further details regarding the deconsolidation of CartiHeal.
Unobservable inputs
A summary of unobservable Level 3 inputs utilized for the above liabilities are as follows:
| Valuation Technique | Unobservable inputs | Range | |||||||||||||||
| Bioness contingent consideration | Discounted cash flow | Payment discount rate | |||||||||||||||
| Payment period | 2024 - 2025 | ||||||||||||||||
Significant changes in these assumptions could result in a significantly higher or lower fair value. The contingent consideration reported in the table above resulted from the acquisition of Bioness on March 30, 2021. Contingent consideration is adjusted quarterly based upon the passage of time or the anticipated success or failure of achieving certain milestones. Changes in contingent consideration related to Bioness totaled $287 and $269 for the three months ended April 1, 2023 and April 2, 2022, respectively, and were recorded as the change in fair value of contingent consideration within the consolidated condensed statements of operations and comprehensive loss. Changes in contingent consideration related to the CartiHeal Acquisition totaled $1,710 for the three months ended April 1, 2023 and is reported within discontinued operations, net within the consolidated condensed statements of operations and comprehensive loss. Pursuant to the Settlement Agreement, the Company was relieved of CartiHeal related obligations. The Company deconsolidated the remaining $68,961 contingent consideration liability as a result. Refer to Note 3. Acquisitions and divestitures for further details regarding the deconsolidation of CartiHeal.
15
6. Equity-based compensation
The Company operates an equity-based compensation plan (the “2021 Plan”), which allows for the issuance of stock options (incentive and nonqualified), restricted stock, dividend equivalents, restricted stock units (“RSUs”), other stock-based awards, and cash awards (collectively, “Awards”). As of April 1, 2023, 11,278,656 shares of Class A common stock were authorized to be awarded and 2,762,266 shares were available for Awards.
Equity-based compensation expense for Awards granted under the 2021 Plan for the three months ended April 1, 2023 and April 2, 2022, totaled $1,718 and $4,731 , respectively. The expense is primarily included in selling, general and administrative expense with a nominal amount in research and development expense on the consolidated condensed statements of operations and comprehensive loss based upon the department of the employee. There were $430 and $1,225 income tax benefit related to this expense for the three months ended April 1, 2023 and April 2, 2022, respectively.
Restricted Stock Units
During the three months ended April 1, 2023, the Company granted time-based RSUs which vest at various dates through January 3, 2027. RSU compensation expense is recognized over the vesting period, which is typically between 1 and 4 years. Unamortized compensation expense related to the RSUs totaled $2,265 at April 1, 2023, and is expected to be recognized over a weighted average period of approximately 2.50 years. A summary of the RSU award activity for the three months ended April 1, 2023 is as follows (number of units in thousands):
| Number of units | Weighted-average grant-date fair value per unit | ||||||||||
| Unvested at December 31, 2022 | $ | ||||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
| Forfeited or canceled | ( | ||||||||||
| Unvested at April 1, 2023 | $ | ||||||||||
Stock Options
During the three months ended April 1, 2023, the Company granted time-based stock options which vest over 2 to 4 years following the date of grant and expire within 10 years. The fair value of time-based stock options is determined using the Black-Scholes valuation model, with such value recognized as expense over the service period, which is typically 2 to 4 years, net of actual forfeitures. A summary of the Company’s assumptions used in determining the fair value of the stock options granted during the three months ended April 1, 2023 is shown in the following table.
| Risk-free interest rate | |||||
| Expected dividend yield | % | ||||
| Expected stock price volatility | |||||
| Expected life of stock options (years) | |||||
The weighted-average grant date fair value of options granted during the three months ended April 1, 2023 was $1.10 per share. The expected term of the options granted is estimated using the simplified method. Expected volatility is based on the historical volatility of the Company’s peers’ common stock. The risk-free interest rate is determined based upon a constant U.S. Treasury security rate with a contractual life that approximates the expected term of the option. Unamortized compensation expense related to the options totaled $9,614 at April 1, 2023, and is expected to be recognized over a weighted average period of approximately 3.78 years.
16
A summary of stock option activity is as follows for the three months ended April 1, 2023 (number of options in thousands):
| Number of options | Weighted-average exercise price | Weighted average remaining contractual term | Aggregate intrinsic value | ||||||||||||||||||||
| Outstanding at December 31, 2022 | $ | ||||||||||||||||||||||
| Granted | |||||||||||||||||||||||
| Forfeited or canceled | ( | ||||||||||||||||||||||
| Outstanding at April 1, 2023 | $ | ||||||||||||||||||||||
| Exercisable and vested at April 1, 2023 | $ | $ | |||||||||||||||||||||
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the market price of the Company’s Class A common stock for options that had exercise prices lower than $1.07 per share, the closing price of the Company’s Class A common stock on March 31, 2023.
Employee Stock Purchase Plan
The Company operates a non-qualified Employee Stock Purchase Plan (“ESPP”), which provides for the issuance of shares of the Company’s Class A common stock to eligible employees of the Company that elect to participate in the plan and purchase shares of Class A common stock through payroll deductions at a discounted price. As of April 1, 2023, the aggregate number of shares reserved for issuance under the ESPP was 1,181,830 . A total of 222,076 shares were issued and $128 of expense was recognized during the three months ended April 1, 2023. A total of 48,993 shares were issued and $158 of expense was recognized during the three months ended April 2, 2022.
7. Stockholders’ equity
Initial Public Offering
On February 16, 2021, the Company closed an IPO of 9,200,000 shares of Class A common stock at a public offering price of $13.00 per share, which includes