As filed with the Securities and Exchange Commission on July 19, 2016February 10, 2021.
Registration No. 333-212329333-252238
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 to2
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Bioventus Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 3841 | 81-0980861 | ||
| (State or other jurisdiction of incorporation or organization) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification No.) | ||
4721 Emperor Boulevard, Suite 100
Durham, North Carolina 27703
(919) 474-6700
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Anthony P. Bihl IIIKenneth M. Reali
Chief Executive Officer
Bioventus Inc.
4721 Emperor Boulevard, Suite 100
Durham, North Carolina 27703
(919) 474-6700
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Charles K. Ruck, Esq.
Boston, Massachusetts 02116
| Arthur D. Robinson, Esq. Xiaohui (Hui) Lin, Esq.
|
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ¨☐
If this formForm is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨☐
If this formForm is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨☐
If this formForm is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | Accelerated filer | |||||
| Non-accelerated filer | Smaller reporting company | |||||
| Emerging growth company | ☒ | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☒
CALCULATION OF REGISTRATION FEE
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| Title of each class of securities to be registered | Proposed maximum aggregate offering price(1) | Amount of registration fee(2)(3) | ||
Class A Common Stock, $0.001 par value per share | $182,647,044 | $18,392.56 | ||
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The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state or other jurisdiction where the offer or sale is not permitted.
Subject to completion, dated July 19, 2016February 10, 2021
Preliminary prospectus
8,823,5297,350,000 Shares
Class A common stock
This is the initial public offering of shares of Class A common stock of Bioventus Inc. We are selling 8,823,529offering 7,350,000 shares of our Class A common stock.
Prior to this offering, there has been no public market for our Class A common stock. The estimated initial public offering price is between $16.00 and $18.00 per share. We expect to list our Class A common stock on The NASDAQNasdaq Global Market, or NASDAQ,Nasdaq, under the symbol “BIOV”.“BVS.”
We will use the net proceeds that we receive from this offering to purchase from Bioventus LLCnewly-issued common membership interests of Bioventus LLC, which we refer to as the “LLCLLC Interests.” There is no public market for the LLC Interests. The purchase price for thenewly-issued LLC Interests will be equal to the initial public offering price of our Class A common stock, less the underwriting discounts and commissions referred to below. We intend to cause Bioventus LLC to use the net proceeds it receives from us in connection with this offering as described in “Use of proceeds.” Simultaneous with this offering, certain of the indirect owners of membership interests in Bioventus LLC, whom we refer to as “FormerFormer LLC Owners,” will exchange their indirect ownership interests for shares of Class A common stock and certainone other holdersholder of membership interests in Bioventus LLC, whom we refer to as “Continuingthe Continuing LLC Owners,”Owner, will retain theirits membership interests in Bioventus LLC.
We will have two classes of common stock outstanding after this offering: Class A common stock and Class B common stock. Each share of Class A common stock and Class B common stock entitles its holder to one vote on all matters presented to our stockholders generally. AllImmediately following this offering, all of our Class B common stock will be held by the Continuing LLC Owners,Owner, on a one-to-one basis with the number of LLC Interests they own.it owns. Immediately following this offering, the holders of our Class A common stock issued in this offering collectively will hold 37.2%19.5% of the economic interests in us and 26.5%13.5% of the voting power in us, the Former LLC Owners, through their ownership of Class A common stock, collectively will hold 62.8%80.5% of the economic interests in us and 44.8%56.0% of the voting power in us, and the Continuing LLC Owners,Owner, through theirits ownership of all of the outstanding Class B common stock, collectively will hold no economic interest in us and the remaining 28.7%30.5% of the voting power in us. We will be a holding company, and upon consummation of this offering and the application of proceeds therefrom, our principal asset will be the LLC Interests we purchase from Bioventus LLC and acquire from the Former LLC Owners, representing an aggregate 71.3%69.5% economic interest in Bioventus LLC. The remaining 28.7%30.5% economic interest in Bioventus LLC will be owned by the Continuing LLC OwnersOwner through theirits ownership of LLC Interests.
We will be the sole managing member of Bioventus LLC. We will operate and control all of the business and affairs of Bioventus LLC and, through Bioventus LLC and its subsidiaries, conduct our business.
Following this offering, we will be a “controlled company” within the meaning of the corporate governance rules for NASDAQ-listedNasdaq-listed companies. See “Transactions” and “Management—Corporate governance.”
We are an “emerging growth company” as defined under the federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements for future filings. See “Prospectus summary—Implications of being an emerging growth company.”
Per share | Total | |||||||||
Initial public offering price | $ | $ | ||||||||
Underwriting discounts and | $ | $ | ||||||||
Proceeds to us, before expenses | $ | $ | ||||||||
| (1) | See “Underwriting” for additional information regarding underwriting compensation. |
We have granted the underwriters an over-allotment option for a period of 30 days to purchase up to 1,323,5291,102,500 additional shares of Class A common stock.
Investing in shares of our Class A common stock involves risks. See “Risk factors” beginning on page 23.27.
Neither the Securities and Exchange Commission, or the SEC, nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares against payment in New York, New York on , 2016.2021.
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| Canaccord Genuity |
The date of this prospectus is , 2016.2021.
Table of contentsTABLE OF CONTENTS
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| 27 | ||||
Management’s discussion and analysis of financial condition and results of operations |
Material U.S. federal income tax consequences to non-U.S. | ||||
| 245 | ||||
| F-1 |
We have not, and the underwriters have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any related free writing prospectus prepared by or on behalf of us or to which we have referred you.prospectuses. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares of Class A common stock offered hereby, butby this prospectus, and only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus or in any applicable free writing prospectus is current only as of its date, regardless of its time of delivery or any sale of shares of our Class A common stock.date. Our business, financial condition, results of operations, financial condition, and prospects may have changed since that date.
For investors outside the United States: Neither we nor any ofWe have not, and the underwriters have taken any actionnot, done anything that would permit this offering or the possession or distribution of this prospectus or any free writing prospectus in connection with this offering in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who have come into possession of this prospectus in a jurisdiction outside the United States are required tomust inform themselves about, and to observe any restrictions relating to, thisthe offering of the shares of Class A common stock and the distribution of this prospectus.
i
Basis of presentationBASIS OF PRESENTATION
In connection with the closing of this offering, we will effect certain organizational transactions. Unless otherwise stated or the context otherwise requires, all information in this prospectus reflects the consummation of the organizational transactions and this offering, which we refer to collectively as the “Transactions.” See “Transactions” for additional information regarding the Transactions.
As used in this prospectus, unless the context otherwise requires, references to:
“we,” “us,” “our,” the “Company,” “Bioventus,” “Bioventus Inc.” and similar references refer: (i) following the consummation of the Transactions, including this offering, to Bioventus Inc., and, unless otherwise stated, all of its subsidiaries, including Bioventus LLC, which we refer to as “Bioventus LLC,” and, unless otherwise stated, all of its subsidiaries, and (ii) on or prior to the completion of the Transactions, including this offering, to Bioventus LLC and, unless otherwise stated, all of its subsidiaries.
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i
| • | “Continuing LLC |
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| • | “Former LLC Owners”refers to all of the Original LLC Owners (including |
| • | “LLC Interests”refer to the single class ofnewly-issued common membership interests of Bioventus LLC. |
| • | “Original LLC Owners”refer to the direct and certain indirect owners of Bioventus LLC, collectively, prior to the Transactions, including the members of the Voting Group (as defined below). |
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| • | “Voting Group” refers collectively to (i) EW Healthcare Partners, (ii) Continuing LLC Owner and (iii) certain other Original LLC Owners, all of whom will be parties to the Stockholders Agreement as described in |
WeFollowing completion of the Transactions, we will be a holding company and the sole managing member of Bioventus LLC and upon completion of this offering and the application of proceeds therefrom, our principal asset will be LLC Interests of Bioventus LLC.
ii
Bioventus LLC is the predecessor of the issuer, Bioventus Inc., for financial reporting purposes. Bioventus Inc. will be the audited financial reporting entity following this offering. Accordingly, this prospectus contains the following historical financial statements:statements of Bioventus LLC. As we will have no other interest in any operations other than those of Bioventus LLC and its subsidiaries, the historical consolidated financial information included in this prospectus is that of Bioventus LLC and its subsidiaries. As Bioventus Inc. has no business transactions or activities to date and had no assets or liabilities during the periods presented, the historical financial statements of this entity are not included in this prospectus. Following completion of this offering, the reporting entity for purposes of periodic reporting will be Bioventus Inc.
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The unaudited pro forma financial information of Bioventus Inc. presented in this prospectus has been derived by the application of pro forma adjustments to the historical consolidated financial statements of Bioventus LLC and its subsidiaries included elsewhere in this prospectus. These pro forma adjustments give effect to the Acquisition and the Transactions as described in “Transactions,” including the completion of this offering,offering. The unaudited pro forma consolidated balance sheet as of September 26, 2020 gives effect to the Transactions as if all such transactionsthey had occurred on January 1, 2015, in the case of thethat date. The unaudited pro forma consolidated statements of operations data for the year ended December 31, 20152019 and for the three month periodsnine months ended MarchSeptember 26, 2020 and September 28, 2015 and April 2, 2016, and as of April 2, 2016, in2019 have been prepared to illustrate the caseeffects of the unaudited pro forma consolidated balance sheet data.Transactions as if they occurred on January 1, 2019. See “Unaudited pro forma consolidated financial information” for a complete description of the adjustments and assumptions underlying the pro forma financial information included in this prospectus.
ii
Numerical figures included in this prospectus have been subject to rounding adjustments. Accordingly, numerical figures shown as totals in various tables may not be arithmetic aggregations of the figures that precede them.
Trademarks, trade names and service marksTRADEMARKS, TRADE NAMES AND SERVICE MARKS
This prospectus includes our trademarks and trade names that we own or license, such as Bioventus, Cellxtract, Durolane, Exogen, Exponent, GELSYN-3, MOTYS, OsteoAMP, OsteoPlus,Prohesion, PureBone, SAFHS, Signafuse, SUPARTZ FX and our logo. This prospectus also includes trademarks, trade names and service marks that are the property of other organizations. Solely for convenience, trademarks and trade names referred to in this prospectus appear without any “™“™” or “®” symbol, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights to these trademarks, trade names and service marks. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.
Market and industry dataMARKET AND INDUSTRY DATA
Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate is based on information from iData Research, Inc., or iData.iData, and BioMedGPS, provider of SmartTRAK Business Intelligence Solutions. Other information concerning our industry and the markets in which we operate is based on independent industry and research organizations, otherthird-party sources (including industry publications, surveys and forecasts), and management estimates. Management estimates are derived from publicly available information released by independent industry analysts andthird-party sources, as well as data from our internal research, and are based on assumptions made by us upon reviewing such data and our knowledge of such industry and markets which we believe to be reasonable. In addition, projections, assumptions and estimates of the future performance of the industry in which we operate and our future performance are necessarily subject to uncertainty and risk due to a variety of factors, including those described in “Risk factors” and “Special note regardingforward-looking statements.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.
iii
Prospectus summaryPROSPECTUS SUMMARY
The following summary highlights information contained elsewhere in this prospectus. This summary is not complete and may not contain all the information you should consider before investing in our Class A common stock. You should read this entire prospectus carefully, including the risks of investing in our Class A common stock discussed under the heading “Risk factors,” and the financial statements and related notes included elsewhere in this prospectus before making an investment decision.
OverviewBioventus
We are a global medical technologydevice company focused on developing and commercializing innovative and proprietary orthobiologic products for the treatment of patients suffering from a broad array of musculoskeletal conditions. Our products address the growing need for clinically effective,differentiated, cost efficient and minimally invasive solutionstreatments that engage and enhance the body’s natural healing processes. Forprocess. We believe our non-invasive medical device and biologic products play a critical role in supporting the year ended December 31, 2015body’s own healing mechanisms to heal or eliminate the pain caused by orthopedic conditions and problems, which we define as our active healing products. These products address an estimated $6.0 billion market opportunity across osteoarthritic, or OA, joint pain treatment and joint preservation, spinal fusion surgery and bone fractures, each of which is experiencing growth through multiple industry tailwinds, including an aging population, increased participation in sports and active lifestyles and a rise in obesity rates. Our devices are most often used to delay or replace the need for an elective surgical procedure and are focused on reaching patients early on in their treatment paradigm. In 2019, approximately 85% of our $340.1 million in revenues were derived from products associated with non-surgical procedures. Our products are widely reimbursed by both public and private health insurers and are sold in the physician’s office or clinic, in ambulatory surgical centers, or ASCs, and in the hospital setting in the United States and across 37 countries. We have broad commercial reach across our established orthopedic customer base, which is a key strength of the company. We are focused on leveraging this significant customer base and the reach of our commercial organization to continue to grow the company by expanding our market share and product portfolio. This strategy has led to a 7.4% CAGR in revenue since 2016 and during this time period, our revenue has grown from $274.5 million to $340.1 million in 2019.
Our existing portfolio of products is grouped into three months ended April 2, 2016, we generated $253.7 million and $65.4 million of net sales, respectively. We operateverticals based on our business through four reportable segments: Active Healing Therapies—U.S., Active Healing Therapies—International, Surgical and BMP.targeted customer focus:
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| (a) | Durolane, a single injection therapy, was launched in the United States in 2018 and is also marketed outside the United States in more than 30 countries including |
| (b) | GELSYN-3, a three injection therapy, was launched in the United States in 2016; and |
| (c) | SUPARTZ FX, a five injection therapy, |
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(PureBone), bioactive synthetics (Signafuse and Interface), a collagen ceramic matrix |
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We were founded in May 2012, when a group led by Essex Woodlands Health Ventures Inc. acquired a majority stake in the biologics business of Smith & Nephew plc, which included Exogen, exclusive U.S. distribution rights to Supartz and exclusive distribution rights to Durolane outside the United States. Our investors believed that the biologics business would provide a platform from which to build a global leader in the rapidly evolving
orthobiologics market. Since our founding, we have assembled an experienced senior executive team to execute this vision. This team has successfully accomplished the following:
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We currently marketOur expansive direct sales and selldistribution channel across our three verticals provides us with broad and differentiated customer reach, and allows us to serve physicians spanning the orthopedic continuum, including sports medicine, total joint reconstruction, hand and upper extremities, foot and ankle, podiatric surgery, trauma, spine and neurosurgery. Our OA joint pain treatment and joint preservation products and minimally invasive fracture treatment are sold by a direct sales team of approximately 240 in the United States and 29 other countries. Our Exogen system and Supartz FX, which accounted for the majority of our revenue for the year ended December 31, 2015, have regulatory approvals to be marketed and sold in the United States. In addition, we also have regulatory approval to market and sell our Exogen system in key international markets, such as the European Union and Canada. As of April 2, 2016, our sales organization consisted of approximately 23245 internationally. This direct sales team is complemented by approximately 20 account representatives who facilitate account access through integrated delivery networks, or IDNs, group purchasing organizations, or GPOs, and 124payer contracting. Our BGS products are sold by approximately 170 independent distributors in the United States, each with their own independent sales force, supported by our 15 member regionalized sales support team. We market our BGSs primarily to orthopedic spine surgeons and approximately 57 direct sales representativesneurosurgeons for use in the operating room in both the hospital and 12 independent distributors internationally. ASC setting. We believe that our broad customer reach has and will continue to enable strong and durable growth in each of our verticals and provides a significant foundation for future product launches.
In addition to our current portfolio, we have a deep pipeline of new products under development, and we are pursuing the United States,development of line extensions and expanded indications for already marketed products that address a significant market opportunity within our Active Healing Therapies sales organization marketscurrent customer base. On October 29, 2020, we received FDA confirmation indicating its authorization of our productsinvestigational new drug application, or IND, to orthopedists, musculoskeletalbegin a clinical trial for MOTYS, a placental tissue biologic for knee OA for which we ultimately plan to pursue a Biologics License Application, or BLA. We have recently entered into an option and sports medicine physiciansequity purchase agreement with CartiHeal (2009) Ltd., or CartiHeal, which provides us with the option to acquire CartiHeal and podiatrists. Our Surgical sales organizationits Agili-C technology, which we believe is composedthe only off-the-shelf scaffold implant designed to address osteochondral defects in the knee. CartiHeal submitted the non-clinical module of the PMA in January 2021 and expects to submit the final, clinical module of a sales management teamModular PMA in the fourth quarter of 2021 seeking FDA approval of Agili-C, which was granted breakthrough device designation by the FDA in the fourth quarter of 2020 for the treatment of certain knee-joint surface lesions. We have also entered into an exclusive license and development collaboration agreement, or Collaboration Agreement with Harbor Medtech Inc., or Harbor, for purposes of commercializing PROcuff, a rotator cuff tissue repair product, and we anticipate filing a request for 510(k) clearance in either the second or third quarter of 2022. We intend to launch a new flowable version of our OsteoAmp product, or OsteoAmp Flowable, in 2021 that marketscan be used in minimally invasive spine procedures. Additionally, we are currently conducting clinical studies of our surgical products primarilyExogen system pursuant to neurosurgeonsan Investigational Device Exemption, or IDE, from the FDA, and orthopedic spine surgeons. In international markets, we market and sell our Active Healing Therapies through direct sales representativesplan to use data from these studies to seek approval for expanded indications with respect to fresh fractures. We intend to leverage the clinical data from this program to support payer coverage in twelve countries and through independent distributorsthis area. We submitted the PMA supplement for the first proposed label expansion in an additional 17 countries. Our products are typically covered and reimbursed by third-party payors, including government authorities, such as Medicare and Medicaid, managed care providers and private health insurers. December 2020.
We have grown our total net sales from $232.4$319.2 million for the year ended December 31, 20132018 to $242.9$340.1 million for the year ended December 31, 20142019. Our total net sales declined from $242.6 million for the nine months ended September 28, 2019, to $222.6 million for the nine months ended September 26, 2020, related to the Coronavirus Disease 2019, or COVID-19, pandemic. For the years ended December 31, 2019 and to $253.72018 and the nine months ended September 26, 2020 and September 28, 2019, we had net income from continuing operations of $8.1 million $4.4 million, $12.5 million and $2.8 million, respectively. We have also grown our Adjusted EBITDA from $72.2 million for the year ended December 31, 2015, at a compound annual growth rate, or CAGR, of 4.5%. We have grown our total net sales from $53.4 million for the three months ended March 28, 2015,2018 to $65.4 million for the three months ended April 2, 2016, at an annual growth rate of 22.5%. For the years ended December 31, 2013, 2014 and 2015 and the three months ended March 28, 2015 and April 2, 2016, we had net losses of $22.4 million, $12.9 million, $34.1 million, $21.0 million and $6.0 million, respectively. We have grown our Adjusted EBITDA from $32.5$79.2 million for the year ended December 31, 2013 to $36.22019. Our Adjusted EBITDA declined from $48.5 million for the yearnine months ended December 31, 2014 andSeptember 28, 2019 to $42.2$44.3 million for the year ended December 31, 2015, at a CAGR of 14.0%. Also, we have grown our Adjusted EBITDA from $2.3 million for the threenine months ended September 26, 2020, related to the COVID-19 pandemic. The COVID-19 pandemic and the measures imposed to contain the wide spread of the virus disrupted our business beginning in early March 28, 2015,2020 as healthcare systems across the U.S. were forced to $10.7 millionlimit patient visits and elective surgical procedures. The effects of the pandemic began to decrease in late April 2020 and we saw a very strong recovery for our products at the three months ended April 2, 2016, at an annual growth rateend of 365.2%. Adjusted EBITDA is burdened by BMP program coststhe second quarter as restrictions on orthopedic procedures were lifted across the United States and patients also returned to orthopedic offices. See the sections titled “Risk factors” and “Management’s discussion and analysis of $0.7 million, $6.7 millionfinancial condition and $11.3 million,results of operations” for the years ended December 31, 2013, 2014 and 2015, respectively, and $2.5 million and $2.5 million for the three months ended March 28, 2015 and April 2, 2016, respectively.more information. For a reconciliation of net lossincome from continuing operations to Adjusted EBITDA, see Note 32 to the information contained in “—“Prospectus summary—Summary historical and pro forma financial information.data.”
Industry backgroundOur solutions
Market opportunityWe offer a portfolio of active healing products to meet the needs of our orthopedist, musculoskeletal and sports medicine physician, podiatrist, neurosurgeon and orthopedic spine surgeon customers and their patients.
Orthobiologics are used to accelerate the healingOur portfolio of or reduce pain experienced in, bones, joints or damaged musculoskeletal tissue by harnessing the body’s natural healing processes. We believe the current U.S. annual total market opportunity for orthobiologic products is approximately $3.0 billiongrouped into three verticals based on clinical use: (i) OA joint pain treatment and will grow at approximately 4–5% annually forjoint preservation, (ii) BGSs and (iii) minimally invasive fracture treatment.
OA joint pain treatment and joint preservation
Our key OA joint pain treatment and joint preservation products are presented in the next five to seven years. There is additional opportunity outside the
United States, particularly in HA viscosupplementation. These estimates for the U.S. market include non-surgical products, such as long bone growth stimulation and HA viscosupplementation therapies; surgical bone graft substitutes such as allografts, DBMs, synthetics, stem cells, BMPs/growth factors; spinal stimulation; cell therapies and orthopedic cartilage repair products. Market growth is being driven by improving technologies and unaddressed market needs, an aging population, increased incidence of spinal disorders driving the need for spinal fusion surgery and increased incidence of osteoarthritis leading to the need for HA viscosupplementation therapy or surgery.
The chart below summarizes the U.S. orthobiologics market, key product categories and our products in each of those categories:
| U.S current market size (in millions) | 2014–2021 Market CAGR | Primary applications | Bioventus product offerings (1) | |||||||||
Non-surgical | ||||||||||||
Long bone stimulation | $ | 300 | 1.9% | • Fracture repair | • Exogen | |||||||
HA viscosupplementation (2) | $ | 873 | 6.1% | • Alleviation of osteoarthritis pain through single, three or five injection viscosupplementation regimens | • Supartz FX, Durolane+,GelSyn-3* | |||||||
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Subtotal | $ | 1,173 | ||||||||||
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Surgical—Bone graft substitutes | ||||||||||||
Allografts | $ | 132 | (0.9)% | • Spinal fusion, trauma and other bone repair applications | • Purebone | |||||||
DBMs | $ | 365 | 2.3% | • Spinal fusion, trauma and other bone repair applications | • Exponent | |||||||
Synthetics | $ | 361 | 5.7% | • Spinal fusion, trauma and other bone repair applications | • Signafuse, Interface, Osteoplus | |||||||
Stem cells | $ | 178 | 16.9% | • Spinal fusion, trauma and other bone repair applications | • No offerings | |||||||
BMPs/growth factors | $ | 372 | 0.6% | • Spinal fusion, trauma and other bone repair applications | • OsteoAMP | |||||||
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Subtotal | $ | 1,408 | 5.2% | |||||||||
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Other markets | ||||||||||||
Spinal stimulation | $ | 250 | N/A | • Spinal fusion | • No offerings | |||||||
Cell therapy | $ | 143 | 4.0% | • Injectable platelet-rich plasma used for soft tissue repair | • No offerings | |||||||
Orthopedic cartilage repair | $ | 92 | 3.8% | • Autograft-, allograft- and microfracture-based cartilage repair | • No offerings | |||||||
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Subtotal | $ | 485 | ||||||||||
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Total | $ | 3,066 | ||||||||||
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We believe the orthobiologics market is characterized by a set of specific product development, regulatory, sales and marketing and purchasing dynamics that include the following:summary table below:
Product |
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 | Single injection HA viscosupplementation therapy |
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As a result of these factors, we believe there is an opportunity for a company to achieve leadership in the global orthobiologics market by focusing on developing and commercializing a portfolio of clinically validated, cost-effective products for use both in and out of the surgical suite. Additionally, we believe there is room to grow the worldwide orthobiologics market opportunity beyond its current size of approximately $4.5 billion, by developing therapies that are superior to, or have a broader label than, existing bone graft substitutes or HA viscosupplementation therapies.
Our competitive strengths
We believe we have the following competitive strengths:• PMA
• Device approval by Health Canada • CE mark and other registrations(2) |
• Canada • Europe | |||||
 | Three injection HA viscosupplementation therapy | • PMA | • United States | |||
 | Five injection HA viscosupplementation therapy | • PMA | • United States |
We maintain exclusive distribution agreements with respect to Durolane, GELSYN-3 and SUPARTZ FX in the United States. We maintain exclusive distribution agreements and own certain assets with respect to Durolane outside the United States. |
| (2) | Durolane is also approved for marketing in Argentina, Australia, Brazil, Columbia, India, Indonesia, Jordan, Malaysia, Mexico, New Zealand, Russia, Switzerland, Taiwan, Turkey and the United Arab Emirates, or the UAE. |
Bone graft substitutes
Our key bone graft substitution products are presented in the summary table below:
Product | Indications | Regulatory pathway / year | ||
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 | Orthopedic, neurosurgical and | • Section 361 HCT/P / 2009 | ||
 | Posterolateral spine procedures | • 510(k) / 2012 | ||
 | Orthopedic, neurosurgical and reconstructive bone grafting procedures | • Section 361 HCT/P / 2012 | ||
| Synthetic | ||||
 | Standalone posterolateral spine, extremities and pelvis, as well as a bone graft extender in | • 510(k) / 2014 | ||
 | Posterolateral spine when mixed with autograft, extremities and pelvis | • 510(k) / 2011 | ||
 | Posterolateral spine, extremities and pelvis | • 510(k) / 2010 | ||
| Posterolateral spine, extremities and pelvis | • 510(k) / 2020 | ||
Minimally invasive fracture treatment
We offer our Exogen system for the non-invasive treatment of established nonunion fractures and certain fresh fractures:
Product | Description | Regulatory pathway | Region where | |||
 | Ultrasound bone healing system for nonunion fractures and fresh fractures to the tibia and radius(1) | • PMA • Device approval by Health Canada • CE mark and | • United States • Canada • Europe • Japan | |||
| (1) | Our Exogen system is indicated in the United States for the non-invasive treatment of established nonunions, excluding skull and vertebra, and for accelerating the time to a healed fracture for fresh, closed, posteriorly displaced distal radius fractures and fresh, closed or Grade I open long bone fractures in skeletally mature individuals when these fractures are orthopedically managed by closed reduction and cast immobilization. We own our Exogen system and market it both in and outside the United States. |
| (2) | Exogen is also approved for marketing in Australia, Japan, New Zealand, Saudi Arabia, Turkey and the UAE. |
Our strengths
We believe that we have several key strengths that provide us with a competitive advantage:
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| • | Substantial body of peer reviewed clinical evidence. We believe that clinical evidence is critical to demonstrating efficacy, achieving reimbursement coverage and demonstrating the value of medical products. We have invested in building evidence and support for our key offerings and product portfolio. Clinical evidence is vital to physicians as they look to make decisions about which product would best serve their patients. The safety and efficacy of our key offerings within each of our three verticals has been demonstrated by numerous clinical studies, published peer review research and clinical publications. We believe that our significant body of clinical evidence creates a competitive barrier to entry given the time and investment required to amass the amount of published data we have and is an asset that would take years for a competitor to try to replicate. |
| • | Robust free cash flow conversion. We believe that our robust free cash flow conversion and scale enables us to invest in our business in a meaningful way. Over the last four years, we have self-funded all internal research and development and business development efforts. We define free cash flow as net cash provided by operating activities from continuing operations as presented on our consolidated statement of cash flow plus interest expense as presented on our consolidated statement of operations less purchases of property and equipment and other on our consolidated statement of cash flow. Our free cash flow conversion, defined as free cash flow divided by Adjusted EBITDA, was 78% for the year ended December 31, 2019 and 93% from 2018 through September 26, 2020. With $340.1 million in revenues for the year ended December 31, 2019, we also have scale to pursue opportunities to grow our business, including internationally to regions such as China. Our attractive cash generation has and |
will continue to allow us to expand our deep pipeline of products through further internal research and development investment and additional tuck-in acquisitions that leverage our established infrastructure. |
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Our growth strategy
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Summary of risks associated with our business
We are subjectintend to a number of risks, including risks that may prevent us from achieving our business objectives or that may adversely affect our business, financial condition, results of operations and cash flows. You should carefully consider the risks discussed in the section entitled “Risk factors,” includingpursue the following risks, before investing instrategies to continue to grow our Class A common stock:net sales and Adjusted EBITDA:
we are highly dependent on a limited number ofcontinue to expand market share in HA viscosupplementation;
introduce new OA joint pain treatment and joint preservation products;
further develop and commercialize our BGS portfolio;
expand indications for use for our Exogen system;
invest in research and development;
pursue business development opportunities; and
opportunistically grow our international markets.
Recent Developments
Investment and Potential Acquisition
On January 4, 2021, we compete and may competemade a convertible debt investment of $1.5 million, or the Investment, in a medical device company, or the Target, as a part of our exclusive negotiations with the Target regarding the Potential Transaction (as defined below). If the Potential Transaction is not consummated, the Investment will be convertible into equity of the Target at our discretion or upon a change of control of the Target, which would result in approximately 2% equity ownership in the future against other companies, someTarget. This exclusive arrangement allows the parties to explore a possible acquisition of whichthe Target, or the Potential Transaction, for a payment of $35.0 million to be paid at closing with contingent payments of up to $65.0 million to be paid upon achievement of certain key milestones. While still subject to due diligence, we believe the Target’s patent-protected portfolio of FDA-approved products and its product development pipeline are highly complementary to our OA joint pain treatment and joint preservation vertical and would allow us to further leverage our claims processing infrastructure. For the year ended December 31, 2020, the Target generated approximately $40 million in revenue and had loss from operations of approximately $14 million. We expect the Target to be accretive to revenues immediately, and to have longer operating histories, more establisheda positive contribution to combined Company net income excluding purchase accounting and transaction costs by the end of year one post-close. We were recently notified that a minority shareholder of the Target has filed a complaint with the Court of Chancery of the State of Delaware contesting the Potential Transaction, as well as related motions to expedite proceedings and issue a temporary restraining order. We understand that the Target intends to defend the action vigorously, but there can be no assurance that this action will not impact the timing, terms or likelihood of closing of the Potential Transaction. Neither the closing of this offering nor the closing of the Potential Transaction are conditioned upon each other. Any resulting acquisition will be funded through our current cash balance and, if necessary, proceeds from our existing line of credit. We cannot assure that the acquisition will occur on or before a certain time, on the terms described herein, or at all. See “Risk Factors—Risks related to our business—If we choose to acquire or invest in new businesses, products or greater resources than we do, which may prevent us from achieving increased market penetration or improved operating results;
clinical trials of our next-generation BMP product candidates may fail to satisfactorily demonstrate safety and efficacy ortechnologies, we may be unable to obtain regulatory approvalcomplete these acquisitions or to successfully integrate them in a cost-effective and non-disruptive manner.”
Estimated selected preliminary financial results for or successfully commercializethe three months and year ended December 31, 2020
Included below are certain estimated preliminary unaudited financial results for the three months and year ended December 31, 2020 and the corresponding periods of the prior fiscal year. We have provided ranges, rather than specific amounts, for the three months and year ended December 31, 2020 because these results are preliminary and subject to change, and there is a possibility that our next-generation BMP product candidates;
our long-term growth dependsactual results may differ materially from these preliminary estimates. These ranges are based on our abilitythe information available to develop, acquireus as of the date of this prospectus. These estimated preliminary results for the three months and commercialize additional orthobiologic products;
our HCT/P productsyear ended December 31, 2020 are derived from the preliminary internal financial records of Bioventus LLC and are subject to extensive government regulationrevisions based on our procedures and controls associated with the completion of our financial reporting, including all the customary reviews and approvals, and completion by our independent registered public accounting firm of its review of such financial statements for the year ended December 31, 2020. These estimated preliminary results should not be viewed as a substitute for financial statements prepared in accordance with U.S. GAAP. Our independent registered public accounting firm has not conducted a review of, and does not express an opinion or any other form of assurance with respect to, these estimated preliminary results. It is possible that we or our independent registered public accounting firm may identify items that would require us to make adjustments to the preliminary estimates set forth below as we complete our financial statements and that our actual results may differ materially from these preliminary estimates. Accordingly, undue reliance should not be placed on these preliminary estimates. These preliminary estimates are not necessarily indicative of any future period and should be read together with “Risk Factors,” “Special Note Regarding Forward-Looking Statements,” “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our failurefinancial statements and related notes included elsewhere in this prospectus.
| Three Months Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| (unaudited; in millions) | 2020 (Low) | 2020 (High) | 2019 | 2020 (Low) | 2020 (High) | 2019 | ||||||||||||||||||
Statement of operations data: | ||||||||||||||||||||||||
Net sales | $ | 97.5 | $ | 99.5 | $ | 97.6 | $ | 320.1 | $ | 322.1 | $ | 340.1 | ||||||||||||
Net sales, U.S. | $ | 88.9 | $ | 90.6 | $ | 86.8 | $ | 292.9 | $ | 294.6 | $ | 305.1 | ||||||||||||
Net sales, International | $ | 8.6 | $ | 8.9 | $ | 10.7 | $ | 27.1 | $ | 27.4 | $ | 35.1 | ||||||||||||
Net income from continuing operations | $ | 1.5 | $ | 2.0 | $ | 5.3 | $ | 14.0 | $ | 14.5 | $ | 8.1 | ||||||||||||
Other financial data: | ||||||||||||||||||||||||
Adjusted EBITDA(1) | $ | 27.3 | $ | 28.5 | $ | 30.7 | $ | 71.6 | $ | 72.8 | $ | 79.2 | ||||||||||||
| (1) | Adjusted EBITDA, as used herein, is a non-GAAP financial measure that is presented as supplemental disclosure and is fully described in Note 2 to the information contained in “Prospectus summary—Summary historical and pro forma financial data.” Additionally, see below for a reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP measure. |
The following table reconciles net loss to comply with these requirements could cause our business to suffer;Adjusted EBITDA for the three months and year ended December 31, 2019 and December 31, 2020:
| Three Months Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| (unaudited; $ in millions) | 2020 (Low) | 2020 (High) | 2019 | 2020 (Low) | 2020 (High) | 2019 | ||||||||||||||||||
Net income from continuing operations | $ | 1.5 | $ | 2.0 | $ | 5.3 | $ | 14.0 | $ | 14.5 | $ | 8.1 | ||||||||||||
Depreciation and amortization(a) | 6.9 | 6.9 | 7.3 | 28.7 | 28.7 | 30.3 | ||||||||||||||||||
Income tax expense | 0.7 | 1.2 | 0.9 | 1.0 | 1.5 | 1.6 | ||||||||||||||||||
Interest expense | 2.7 | 2.7 | 7.6 | 9.8 | 9.8 | 21.6 | ||||||||||||||||||
Equity compensation(b) | 9.5 | 9.5 | 7.6 | 10.1 | 10.1 | 10.8 | ||||||||||||||||||
we have incurred significant net losses since inception, and we may not be able to achieve or sustain profitability; and
| Three Months Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| (unaudited; $ in millions) | 2020 (Low) | 2020 (High) | 2019 | 2020 (Low) | 2020 (High) | 2019 | ||||||||||||||||||
COVID-19 benefits, net(c) | — | — | — | (4.2 | ) | (4.2 | ) | — | ||||||||||||||||
Succession and transition charges(d) | 0.3 | 0.5 | — | 5.6 | 5.8 | — | ||||||||||||||||||
Restructuring costs(e) | 0.6 | 0.6 | — | 0.6 | 0.6 | 0.6 | ||||||||||||||||||
Foreign currency impact(f) | (0.1 | ) | (0.1 | ) | (0.1 | ) | (0.2 | ) | (0.2 | ) | — | |||||||||||||
Losses associated with debt refinancing(g) | — | — | 0.4 | — | — | 0.4 | ||||||||||||||||||
Other non-recurring costs(h) | 5.2 | 5.2 | 1.7 | 6.1 | 6.1 | 5.8 | ||||||||||||||||||
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Adjusted EBITDA | $ | 27.3 | $ | 28.5 | $ | 30.7 | $ | 71.6 | $ | 72.8 | $ | 79.2 | ||||||||||||
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| (a) | Includes for the years ended December 31, 2019 and 2020 and the three months ended December 31, 2019 and 2020, respectively, depreciation and amortization of $22.4 million, $21.2 million, $5.3 million and $5.1 million in cost of sales and $7.9 million, $7.5 million, $2.1 million and $1.8 million represented in the consolidated statements of operations and comprehensive income (loss) with the balance in research and development. |
| (b) | Represents compensation as well as the change in fair market value resulting from two equity-based compensation plans, the MIP and the Phantom Plan. |
| (c) | Represents income resulting from the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, offset by additional cleaning and disinfecting expenses and contract termination fees for events we were unable to hold. |
| (d) | Primarily represents costs related to the chief executive officer transition. |
| (e) | Represents costs related to a shift from direct to an indirect distribution model in our International business to improve performance. In addition, various international subsidiaries were dissolved and or merged into other Bioventus LLC entities. |
| (f) | Represents realized and unrealized gains and losses from fluctuations in foreign currency and is included in other (income) expense on the consolidated statements of operations and comprehensive income (loss). |
| (g) | Represents charges with our 2019 debt refinancing that were included in selling, general and administrative expense on the consolidated statements of operations and comprehensive income (loss). |
| (h) | Represents charges associated with Bioventus LLC potential strategic transactions such as potential acquisitions or preparing to become a public company, primarily accounting and legal fees, and costs associated to the settlement with the OIG regarding our self-disclosure. See “Risk factors—Risks related to government regulation—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.” |
we have identified material weaknesses in our internal control over financial reporting.
Summary of the transactions
Prior to the consummation of this offering and the organizational transactions described below, the Original LLC Owners arewere the only owners of Bioventus LLC. Bioventus Inc. was incorporated as a Delaware corporation on December 22, 2015 to serve as the issuer of the Class A common stock offered hereby.
In connection with the closing of this offering, we will consummate the following organizational transactions:
we will amend and restate the amended and restated limited liability company agreement of Bioventus LLC, as amended, effective as of the completion of this offering, or the Bioventus LLC Agreement, to, among other things, (i) provide for LLC Interests that will be the single class of common membership interests in Bioventus LLC, (ii) exchange all of the existing membership interests (including profit interests awarded under the Bioventus LLC Management Incentive Plan, or MIP) in Bioventus LLC for LLC Interests and (iii) appoint Bioventus Inc. as the sole managing member of Bioventus LLC;
interests awarded under the Bioventus LLC Management Incentive Plan, or MIP) in Bioventus LLC for LLC Interests and (iii) appoint Bioventus Inc. as the sole managing member of Bioventus LLC; |
we will amend and restate Bioventus Inc.’s certificate of incorporation to, among other things, (i) provide for Class A common stock and Class B common stock, each share of which entitles its holders to one vote per share on all matters presented to Bioventus Inc.’s stockholders and (ii) issue shares of Class B common stock to the Continuing LLC Owners,Owner, on aone-to-one basis with the number of LLC interests they own;Interests it owns;
wethe Former LLC Owners will exchange their indirect ownership interests in Bioventus LLC for shares of Class A common stock, representing (i) approximately 56.0% of the combined voting power of all of Bioventus Inc.’s common stock (or approximately 54.8%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and (ii) approximately 56.0% of the economic interest in the business of Bioventus LLC and its subsidiaries (or approximately 54.8%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock), indirectly through Bioventus Inc.’s ownership of LLC Interests;
Bioventus Inc. will issue 8,823,5297,350,000 shares of our Class A common stock to the purchasers in this offering (or 10,147,0588,452,500 shares of our Class A common stock if the underwriters exercise in full their option to purchase additional shares of Class A common stock);
weBioventus Inc. will use all of the net proceeds from this offering (including any net proceeds received upon exercise of the underwriters’ option to purchase additional shares of Class A common stock) to acquirenewly-issued LLC Interests from Bioventus LLC at a purchase price per interest equal to the initial public offering price per share of Class A common stock, less underwriting discounts and commissions, collectively representing 26.5%13.5% of Bioventus LLC’s outstanding LLC Interests (or 29.3%15.3%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock);
Bioventus LLC will use the proceeds from the sale of LLC Interests to Bioventus Inc. as described in “Use of proceeds;”
the Former LLC Owners will exchange their indirect ownership interests in Bioventus LLC for shares of Class A common stock on aone-to-one basis, representing (i) approximately 44.8% of the combined voting power of all of Bioventus Inc.’s common stock (or approximately 43.0%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and (ii) approximately 44.8% of the economic
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the Phantom Plan will be terminated and the Phantom Plan Participants who are employed as of the date of this offering will receive rights to receive up to 513,1171,351,834 shares of our Class A common stock upon settlement of their awards under the Phantom Plan, with such settlement expected to take place on thebetween twelve month anniversaryand 24 months following the date of termination of the Phantom Plan as described in “Executive compensation—Narrative to summary compensation table—Equity-based compensation—Phantom profits interest units” (settlementcompensation” (which settlement may result in a change in the timing over which compensation expense is recognized as described in “Management’s discussion and analysis of financial condition and results of operations — operations—Components of our results of operations — operations—Selling, general and administrative expenses”expense”), and Bioventus Inc. will receive a corresponding number of LLC Interests from Bioventus LLC upon settlement);settlement;
the Continuing LLC OwnersOwner will continue to own the LLC Interests theyit received in exchange for theirits existing membership interests in Bioventus LLC, which LLC Interests, following this offering, will be redeemable, at theits election, of such members, fornewly-issued shares of Class A common stock on aone-for-one basis or, if Bioventus Inc. and such membersthe Continuing LLC Owner agree, a cash payment equal to a volume weighted average market price of one share of Class A common stock for each LLC Interest redeemed (subject to customary adjustments, including for stock splits, stock dividends and reclassifications) in accordance with the terms of the Bioventus LLC Agreement; provided that, at Bioventus Inc.’s election, Bioventus Inc. may effect a direct exchange of such Class A common stock or such cash (if mutually agreed) for such LLC Interests. Shares of Class B common stock will be cancelled on aone-for-one basis if we, at the election of athe Continuing LLC Owner, redeem or exchange its LLC Interests of such Continuing LLC Owners pursuant to the terms of the Bioventus LLC Agreement; and
Bioventus Inc. will enter into (i) a tax receivable agreement, or the Tax Receivable Agreement, with the Continuing LLC Owners,Owner, (ii) a stockholders agreement, or the Stockholders Agreement, with the Voting Group and (iii) a registration rights agreement, or the Registration Rights Agreement, with the Original LLC Owners.
Upon the consummation of this offering, the Continuing LLC OwnersOwner will own (x) 9,571,76416,534,814 shares of Bioventus’ Class B common stock (which will not have any liquidation or distribution rights), representing approximately 28.7%30.5% of the combined voting power of all of Bioventus’ common stock (or approximately 27.6%29.9%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and (y) 16,534,814 LLC Interests, representing approximately 28.7%30.5% of the economic interest in the business of Bioventus LLC and its subsidiaries (or approximately 27.6%29.9%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock).
Upon consummation of the offering, the purchasers in this offering (i) will own 7,350,000 shares of Class A common stock, representing approximately 13.5% of the combined voting power of all of Bioventus Inc.’s common stock (or 8,452,500 shares of Class A common stock representing approximately 15.3%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock), (ii) will own 19.5% of the economic interest in Bioventus Inc. (or 21.8%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and (iii) through Bioventus Inc.’s ownership of LLC Interests, indirectly will hold (applying the percentages in the preceding clause (ii) to Bioventus Inc.’s percentage economic interest in Bioventus LLC) approximately 13.5% of the economic interest in Bioventus LLC (or 15.3% if the underwriters exercise in full their option to purchase additional shares of Class A common stock). The Former LLC Owners (i) will own 30,347,158 shares of Class A common stock, representing approximately 56.0% of the combined voting power of all of Bioventus Inc.’s common stock (or approximately 54.8%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock), (ii) will own 80.5% of the economic interest in Bioventus Inc. (or 78.2%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and (iii) through Bioventus Inc.’s ownership of LLC Interests, indirectly will hold (applying the percentages in the preceding clause (ii) to Bioventus Inc.’s percentage economic interest in Bioventus LLC) approximately 56.0% of the economic interest in Bioventus LLC (or 54.8%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock).
Immediately following the consummation of this offering, the Continuing LLC Owner will hold all of the issued and outstanding shares of our Class B common stock. The shares of Class B common stock will have no economic rights, and each share will entitle the holder to one vote per share on all matters on which stockholders of Bioventus Inc. are entitled to vote generally. The Continuing LLC Owner will retain its equity interest in Bioventus LLC. Immediately following the consummation of this offering, the investors in this offering and the Former LLC Owners will hold all of the issued and outstanding shares of our Class A common stock. The shares of Class A common stock will entitle the holder to one vote per share on all matters on which stockholders of Bioventus Inc. are entitled to vote generally. The investors in this offering and the Former LLC Owners will indirectly hold economic interest in Bioventus LLC through Bioventus Inc.’s ownership of LLC Interests. Holders of outstanding shares of our Class A common stock and Class B common stock will vote as a single class on all matters on which stockholders are entitled to vote generally, except as otherwise required by law.
Our corporate structure following this offering, as described above, is commonly referred to as an umbrella partnership-C-corporation, or Up-C, structure, which is often used by partnerships and limited liability companies when they undertake an initial public offering of their business. The Up-C structure will allow the Continuing LLC Owner to retain its equity ownership in Bioventus LLC and to continue to realize tax benefits associated with owning interests in an entity that is treated as a partnership, or “passthrough” entity, for U.S. federal income tax purposes following the offering. Investors in this offering will, by contrast, hold their equity ownership in Bioventus Inc., a Delaware corporation that is a domestic corporation for U.S. federal income tax purposes, in the form of shares of Class A common stock. Similarly, the Former LLC Owners will also hold their
equity ownership in Bioventus Inc. in the form of shares of Class A common stock. One of the tax benefits to the Continuing LLC Owner associated with this structure is that future taxable income of Bioventus LLC that is allocated to the Continuing LLC Owner will be taxed on a flow-through basis and therefore will not be subject to corporate taxes at the entity level. Additionally, because the Continuing LLC Owner may redeem or exchange its LLC Interests for newly issued shares of our Class A common stock on a one-for-one basis or, at our option, for cash, the Up-C structure also provides the Continuing LLC Owner with potential liquidity that holders of non-publicly traded limited liability companies are not typically afforded. Bioventus Inc. also expects to benefit from the Up-C structure because, in general, we expect to benefit in the form of cash tax savings in amounts equal to 15% of certain tax benefits, as described above, arising from redemptions or exchanges of the Continuing Owner’s LLC Interests for Class A Common Stock or cash and certain other tax benefits covered by the Tax Receivable Agreement discussed in “Certain relationships and related party transactions—Tax Receivable Agreement.” See “Risk Factors—Risks related to our organizational structure and the Tax Receivable Agreement.”
We refer to the foregoing transactions collectively as the “Transactions.” For more information regarding our structure after the completion of the Transactions, including this offering, see “Transactions.”
Immediately following this offering, Bioventus Inc. will be a holding company and its principal asset will be the LLC Interests it purchases from Bioventus LLC and acquires from the Former LLC Owners. As the sole managing member of Bioventus LLC, weBioventus Inc. will operate and control all of the business and affairs of Bioventus LLC and, through Bioventus LLC and its subsidiaries, conduct our business. Accordingly, weBioventus Inc. will have the sole voting interest in, and control the management of, Bioventus LLC. As a result, we will consolidate Bioventus LLC in our consolidated financial statements and will report anon-controlling interest related to the LLC Interests held by the Continuing LLC OwnersOwner on our consolidated financial statements.
See “Description of capital stock” for more information about our certificate of incorporation and the terms of the Class A common stock and Class B common stock. See “Certain relationships and related party transactions” for more information about (i) the Bioventus LLC Agreement, including the terms of the LLC Interests and the
redemption right of the Continuing LLC Owners;Owner; (ii) the Tax Receivable Agreement; (iii) the Registration Rights Agreement; and (iv) the Stockholders Agreement. Under the Stockholders Agreement, any increase or decrease in the size of our board of directors or any committee, and any amendment to our organizational documents, will in each case require the approval of Essex Woodlands Health Ventures andEW Healthcare Partners, certain other members of the Voting Group and their respective affiliates, for so long as they collectively own at least 10% of the total shares of our Class A common stock owned by them as of the date this offering is consummated, and will also require the approval of Smith & Nephew,Continuing LLC Owner and its affiliates, for so long as Smith & Nephew, collectively ownsInc. and Smith & Nephew (Europe) B.V. and their affiliates own at least 10% of the total shares of our Class A common stock and Class B common stock owned by them as of the date this offering is consummated.
The diagram below depicts our organizational structure immediately prior to giving effect to the Transactions.
| (1) | We plan to redeem all of Mr. Bihl’s Profits Interest Units as described in “Executive Compensation—Narrative to Summary Compensation Table—Severance.” |
| (2) | Refers to all the Original LLC Owners (including EW Healthcare Partners) but excluding the Continuing LLC Owner, the S+N Former LLC Owner and Smith & Nephew (Europe) B.V. |
| (3) | Immediately prior to the consummation of this offering, each of the Former LLC Owners, including Smith & Nephew (Europe) B.V., a wholly-owned indirect Dutch subsidiary of Smith & Nephew plc and the owner of S+N Former LLC Owner, will exchange their indirect ownership interests in Bioventus LLC for shares of Class A common stock and the Former LLC Owners Blockers and S+N Former LLC Owner will merge with and into Bioventus Inc. |
| (4) | Following the consummation of this offering, the Continuing LLC Owner will continue to own the LLC Interests it receives in exchange for its existing membership interests in Bioventus LLC. |
The diagram below depicts our organizational structure after giving effect to the Transactions, including this offering, assuming no exercise by the underwriters of their option to purchase additional shares of Class A common stock.
| (1) | Refers to Smith & Nephew, Inc., a wholly-owned indirect U.S. subsidiary of Smith & Nephew plc, which will continue to own LLC Interests after the Transactions and which may, following the consummation of this offering, exchange its LLC Interests for shares of our Class A common stock or a cash payment (if mutually agreed) as described in “Certain relationships and related party transactions—Bioventus LLC Agreement,” in each case, together with a cancellation of the same number of its shares of Class B common stock. |
| (2) | Refers to all of the Original LLC Owners (including EW Healthcare Partners and Smith & Nephew (Europe) B.V., but excluding the Continuing LLC Owner) who will exchange their indirect ownership interests in Bioventus LLC for shares of our Class A common stock in connection with the consummation of this offering. |
Summary of risks associated with our business
We are subject to several risks, including risks that may prevent us from achieving our business objectives or that may adversely affect our business, results of operations, financial condition, and cash flows. You should
Recent Developments
Selected preliminary financial results forcarefully consider the three months ended July 2, 2016
We estimate that forrisks discussed in the three months ended July 2, 2016:section entitled “Risk factors,” including the following risks, before investing in our Class A common stock:
Net sales will be between $69.6 million and $72.5 million, an increase of approximately 8.0% at the midpointour business may continue to experience adverse impacts as a result of the range as compared to $65.8 million for the three months ended June 27, 2015. The estimated increase in net sales is primarily due to an increase in net sales from our Surgical segment partially attributable to the BioStructures acquisition in the fourth quarter of 2015 as well as higher sales from other surgical products.COVID-19 pandemic;
Net (loss) income will be between $(0.7) million and $1.9 million as compared to net losswe are highly dependent on a limited number of $(4.1) million for the three months ended June 27, 2015. The estimated improvement in our net (loss) income compared to the corresponding period in 2015 is primarily due to an increase in operating income from our Surgical segment driven by increased sales and a lower change in the fair value of contingent consideration. These increases were partially offset by increased BMP expenses.products;
Adjusted EBITDA will be between $12.8 millionour long-term growth depends on our ability to develop, acquire and $15.3 million, which includes $3.2 million of BMP expenses, an increase of 12.8% at the midpoint of the range, as compared to $12.5 million, which includes $2.3 million of BMP expenses, for the three months ended June 27, 2015. The estimated increase in Adjusted EBITDA is primarily due to an increase in operating income from our Surgical segment partially offset by increased BMP expenses.commercialize new products, line extensions or expanded indications;
Net sales for our Active Healing Therapies—U.S. segment willwe may be between $49.0 million and $51.0 million, a slight increase of approximately 0.2% atunable to successfully commercialize newly developed or acquired products or therapies in the midpoint of the range as compared to $49.9 million for the three months ended June 27, 2015.United States;
Net salesdemand for our Active Healing Therapies—International segment will be between $10.0 millionexisting portfolio of products and $10.4 million, a slight decrease of approximately 0.9% atany new products, line extensions or expanded indications depends on the midpoint of the range as compared to $10.3 million for the three months ended June 27, 2015. The estimated decrease in net sales is primarily due to the terminationcontinued and future acceptance of our Russian distributor relationshipproducts by physicians, patients, third-party payers and fluctuationsothers in demand in several markets partially offset by favorable foreign currency translation adjustments.the medical community;
Netour commercial success depends on our ability to differentiate the HA viscosupplementation therapies that we own or distribute from alternative therapies for the treatment of OA;
the proposed down classification of non-invasive bone growth stimulators, including our Exogen system, by the FDA could increase future competition for bone growth stimulators and otherwise adversely affect the Company’s sales of Exogen;
if we are unable to achieve and maintain adequate levels of coverage and/or reimbursement for our Surgical segmentproducts, the procedures using our products, or any future products we may seek to commercialize, the commercial success of these products may be severely hindered;
if we choose to acquire or invest in new businesses, products or technologies, we may be unable to complete these acquisitions or to successfully integrate them in a cost-effective and non-disruptive manner
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, which may prevent us from achieving increased market penetration or improved operating results;
the reclassification of our HA products from medical devices to drugs in the United States by the FDA could negatively impact our ability to market these products and may require that we conduct costly additional clinical studies to support current or future indications for use of those products;
our ability to maintain our competitive position depends on our ability to attract, retain and motivate our senior management team and highly qualified personnel, and our failure to do so could adversely affect our business, results of operations and financial condition;
if our facilities are damaged or become inoperable, we will be between $10.6 millionunable to continue to research, develop and $11.1 million, an increasemanufacture our products and, as a result, our business, results of approximately 93.8% at operations and financial condition may be adversely affected until we are able to secure a new facility;
our products and operations are subject to extensive governmental regulation, and our failure to comply with applicable requirements could cause our business to suffer;
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 midpointFDA 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; our HCT/P products are subject to extensive government regulation and our failure to comply with these requirements could cause our business to suffer;
if clinical studies of our future products 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; and
we may be subject to enforcement action if we engage in improper marketing or promotion of our products, that could lead to costly investigations, fines or sanctions by regulatory bodies, any of which could be costly to our business.
Corporate information
Bioventus Inc., the issuer of the range as compared to $5.6 million for the three months ended June 27, 2015. The estimated increase in net sales is primarily attributable to the BioStructures acquisition.
We include Adjusted EBITDAClass A common stock in this prospectus for the reasons as describedoffering, was incorporated in “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Components of Our Results of Operations—Adjusted EBITDA.” Adjusted EBITDA has certain limitations in that it does not reflect all expense items that affect our results. These and other limitations are described in Footnote 3 to the table under “Prospectus summary—Summary historical and pro forma financial data.” We encourage you to review our financial information in its entirety and not relyDelaware on a single financial measure.
The following table reconciles net loss to Adjusted EBITDA for the three months ended June 27,December 22, 2015 and July 2, 2016:
| Three Months Ended | ||||||||||||
| (Dollars in millions) | June 27, 2015 | July 2, 2016 | ||||||||||
| (unaudited) | Low | High | ||||||||||
Net (loss) income | $ | (4.1 | ) | $ | (0.7 | ) | $ | 1.9 | ||||
Interest expense, net | 3.3 | 3.2 | 3.2 | |||||||||
Income tax expense | 0.8 | 0.6 | 0.6 | |||||||||
Depreciation and amortization(a) | 8.4 | 8.0 | 8.0 | |||||||||
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EBITDA | 8.4 | 11.1 | 13.7 | |||||||||
Non-cash equity compensation(b) | 0.6 | 0.7 | 0.7 | |||||||||
Restructuring costs(c) | 0.4 | – | – | |||||||||
Contingent consideration(d) | 3.1 | (0.6 | ) | (0.6 | ) | |||||||
Other corporate expenses(e) | – | 1.2 | 1.1 | |||||||||
Inventory step up(f) | – | 0.4 | 0.4 | |||||||||
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Adjusted EBITDA | $ | 12.5 | $ | 12.8 | $ | 15.3 | ||||||
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We have provided a range for our preliminary results described above because our financial closing procedures for the three months ended July 2, 2016 are not yet complete. We currently expect that our final results will be within the ranges described above. However, these estimates are preliminary and are based upon our estimates and the information available to management as of the date of this prospectus. Therefore, it is possible that our actual results may differ materially from these estimates due to the completion of our financial closing procedures, final adjustments and other developments which may arise between now and the time our financial results for the three months ended July 2, 2016 are finalized.
Accordingly, you should not place undue relianceconsider information on these preliminary estimates. In addition, the estimated data is not necessarily indicativeour website to be part of our results for the full fiscal year or future period. The preliminary estimated range of unaudited financial data for the three months ended July 2, 2016 included in this prospectus have been prepared by, and are the responsibility of,or in deciding to purchase our management and have not been reviewed or auditedClass A common stock.
or subjected to any other procedures by our independent registered public accounting firm. Accordingly, our independent registered public accounting firm does not express an opinion or any other form of assurance with respect to the preliminary estimated range of unaudited financial data.
Implications of being an emerging growth company
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. These include, but are not limited to:
reduced obligations with respect to financial data, including presenting only two years of audited financial statements and only two years of selected financial data in the registration statement on Form S-1 of which this prospectus is a part;
reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements;
not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act; and
exemptions from the requirements of holding a non-binding advisory vote on executive compensation and the requirement to obtain stockholder approval of any golden parachute payments not previously approved.
We may take advantage of these exemptions until the last day of our fiscal year following the fifth anniversary of the completion of this offering or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company ifupon the earliest to occur of (1) the last day of the fiscal year in which we have more than $1.07 billion in annual gross revenue; (2) the date we qualify as a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, or the Exchange Act; (3) the issuance, in any three-year period, by us of more than $1.0 billion in annual revenue, we are deemed to be a large accelerated filer undernon-convertible debt securities held by non-affiliates; and (4) the ruleslast day of the Securities and Exchange Commission, or SEC, or we issue more than $1.0 billionfiscal year ending after the fifth anniversary of non-convertible debt over a three-year period.our initial public offering. We may choose to take advantage of some, but not all, of the available exemptions. We have taken advantage of certain reduced reporting burdens in this prospectus. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.
In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, or the Securities Act, for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected notHowever, we are choosing to avail ourselves“opt out” of this exemptionsuch extended transition period and, therefore,as a result, we will be subject to the samecomply with new or revised accounting standards as other public companies that are not emergingon the relevant dates on which adoption of such standards is required for non-emerging growth companies.
Corporate information
Bioventus Inc., the issuer Our decision to opt out of the Class A common stock in this offering, was incorporated in Delaware on December 22, 2015. Bioventus LLC was organized in Delaware as a limited liability company in November 23, 2011. Our principal executive offices are located at 4721 Emperor Boulevard, Suite 100, Durham, NC 27703. Our telephone numberextended transition period for complying with new or revised accounting standards is (919) 474-6700. Our corporate website is www.bioventusglobal.com. The information contained on or that can be accessed through our website is not incorporated by reference into this prospectus, and you should not consider information on our website to be part of this prospectus or in deciding to purchase our Class A common stock.
irrevocable.
| Issuer | Bioventus Inc. |
| Class A common stock offered | 7,350,000 shares (or | |
| Underwriters’ option to purchase additional shares of Class A common stock | 1,102,500 shares. | |
Class A common stock to be issued to Former LLC Owners | 30,347,158 shares. | |
Class A common stock to be outstanding immediately after this offering | 37,697,158 shares (or |
| Class B common stock to be outstanding immediately after this offering | 16,534,814 shares, all of which will be owned by the Continuing LLC | |
| Voting Rights | Holders of our Class A common stock and Class B common stock will vote together as a single class on all matters presented to stockholders for their vote or approval, except as otherwise required by law. Each share of Class A common stock and Class B common stock will entitle its holder to one vote per share on all such matters. See “Description of capital stock.” | |
| Voting power held by purchasers in this offering | 13.5% (or | |
| Voting power held by the Former LLC Owners | 56.0% (or | |
| Voting power held by all holders of Class A common stock after giving effect to this offering | 69.5% (or | |
| Voting power held by all holders of Class B common stock after giving effect to this offering | 30.5% (or | |
| Voting power held by the Original LLC Owners after giving effect to this offering | 86.5% (or | |
| Ratio of shares of Class A common stock to LLC Interests | Our amended and restated certificate of incorporation and the Bioventus LLC Agreement will require that we at all times maintain a ratio of one LLC Interest owned by us for each outstanding share of Class A | |
| common stock (subject to certain exceptions for treasury shares and shares underlying certain convertible or exchangeable securities) and Bioventus LLC at all times maintain aone-to-one ratio between the number of shares of Class A common stock issued by us and the number of LLC Interests owned by us, as well as aone-to-one ratio between the number of shares of Class B common stock owned by the Continuing LLC |
| Use of proceeds | We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and commissions and estimated offering expenses, will be approximately | |
We intend to use the net proceeds that we receive from this offering (including any net proceeds from the underwriters’ exercise of their option to purchase |
The net proceeds received by Bioventus LLC |
| Redemption rights of holders of LLC Interests | The Continuing LLC | |
| Continuing LLC Owner agree, a cash payment equal to the volume |
weighted average market price of one share of our Class A common stock for each LLC Interest redeemed (subject to customary adjustments, including for |
| stock splits, stock dividends and reclassifications) in accordance with the terms of the Bioventus LLC Agreement; provided that, at Bioventus Inc.’s election, |
| Registration Rights Agreement | Pursuant to the Registration Rights Agreement, we will, subject to the terms and conditions thereof, agree to register the resale of the shares of our Class A common stock that are issuable to the Continuing LLC | |
| Controlled company | Following this offering we will be a “controlled company” within the meaning of the corporate governance rules of | |
| Dividend policy | We | |
| Tax Receivable Agreement | We will enter into the Tax Receivable Agreement with Bioventus LLC and the Continuing LLC (i) increases in the tax basis of assets of Bioventus LLC resulting from (a) any future redemptions or | |
exchanges of LLC Interests described above under |
| “—The offering—Redemption rights of holders of LLC interests” and (b) certain distributions (or deemed distributions) by Bioventus LLC and (ii) certain other tax benefits |
| stock at the time of each such redemption or exchange, and the amounts and timing of our future taxable income, and may be significantly different from the amounts described in the preceding sentences. See “Certain relationships and related party transactions—Tax Receivable Agreement.” |
| Stockholders Agreement | Pursuant to the Stockholders Agreement, the Voting Group will hold Class A common stock and Class B common stock representing approximately | |
| Reserved Shares Program | At our request, the underwriters have reserved for sale, at the initial public offering price, up to 5% of the shares offered by this prospectus for sale to some of our officers, employees and consultants. If these persons purchase reserved shares, this will reduce the number of shares available for sale to the general public. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus. | |
| Risk Factors | Investing in shares of our Class A common stock involves a high degree of risk. See “Risk factors” for a discussion of factors you should carefully consider before investing in shares of our Class A common stock. | |
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| Nasdaq Global Select Market symbol | “ | |
The number of shares of Class A common stock to be outstanding after this offering is based on the membership interests of Bioventus LLC outstanding as of July 2, 2016,September 26, 2020, and excludes:
2,981,4367,592,476 shares of Class A common stock reserved for issuance under our 20162021 Equity Incentive AwardPlan, or the Plan, as described in “Executive compensation—New incentive arrangements”, consisting of (i) 2,514,2654,561,500 shares of Class A common stock issuable upon the exercise of options that vest between two and four years from the date of this prospectus to purchase, at the initial public offering price, shares of Class A common stock granted to our directors and certain employees, including the named executive officers, in connection with this offering as described in “Executive compensation—Director compensation” and “Executive compensation—New equity awards,” (ii) 360,670 shares of Class A common stock released between one to four years from the date of this prospectus upon meeting vesting requirements of restricted stock units granted on the date of this prospectus to our directors and certain employees, including the named executive officers, in connection with this offering as described in “Executive Compensation—compensation—Director Compensation”compensation” and “Executive Compensation—compensation—New Equity Awards,equity awards,” and (ii) 467,171(iii) 2,670,306 additional shares of Class A common stock reserved for future issuance (exclusive of the additional shares available for issuance under the 2016 Incentive Award Plan pursuant to the annual increase each calendar year beginning in 20172022 and ending in 20262031, as described in “Executive compensation—New incentive arrangements”);
513,1171,351,834 shares of Class A common stock reserved as of the closing date of this offering for future issuance to the PhantomStock Plan Participants upon settlement of their awards as described in “Executive compensation—Narrative to summary compensation table—ElementsEquity-based compensation,” 162,106 of compensation—Equity-based compensation—Phantom profits interest units”;which are unvested and are expected to vest within twelve months of the date of this prospectus;
373,616542,320 shares of Class A common stock reserved for issuance under our Employee Stock Purchase Plan as described in “Executive compensation—New incentive arrangements”; and
9,571,76416,543,814 shares of Class A common stock reserved as of the closing date of this offering for future issuance upon redemption or exchange of LLC Interests by the Continuing LLC Owners.Owner.
Unless otherwise indicated, this prospectus assumes assumes:
the completion of the organizational transactions as described in “Transactions;”
no exercise by the underwriters of their option to purchase additional shares of Class A common stock;
the shares of Class A common stock are offered at $17.00 per share (the midpoint of the price range listed on the cover page of this prospectus). Certain share; and
information presented in this prospectus will vary depending on the initial public offering price in this offering, as well as the number of shares being offered hereby to the public. For example, the amount of shares of Class A common stock reserved for issuance under our 2016 Incentive Award Plan and our Employee Stock Purchase Plan, the amount of shares of Class A common stock issuable upon the exercise of options to purchase shares of Class A common stock granted on the date of this prospectus, and the relative allocation of the shares of common stock issued in the Transactions as among the Continuing LLC Owners, the Former LLC Owners and the Phantom Plan Participants will vary, depending on the initial public offering price in this offering. In addition, the relative allocation of the shares of common stock issued in the Transactions as between the Original LLC Owners and the Phantom Plan Participants, on the one hand, and the investors in this offering, on the other hand, will vary, depending on the initial public offering price in this offering and the number of shares being offered hereby to the public.
Unless otherwise indicated, this prospectus assumes no exercise by the underwriters of their option to purchase additional shares of Class A common stock and no exercise of outstanding options after July 2, 2016.
September 26, 2020.
Notwithstanding the foregoing, to the extent there is an increase in the public offering price, the number of Class A shares outstanding and Class A shares issuable upon redemption of LLC Interests would decrease from the amounts noted herein; to the extent there is a decrease in the public offering price, the number of Class A shares outstanding and Class A shares issuable upon redemption of LLC Interests would increase. However, to the extent there is an increase in the public offering price, the number of Class A shares issuable under awards would increase from the amounts noted herein; to the extent there is a decrease in the public offering price, the number of Class A shares issuable under awards would decrease. A $1.00 increase (decrease) in the assumed initial public offering price of $17.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would result in a net decrease (increase) of approximately 300,000 (three hundred thousand) in the aggregate number of Class A shares outstanding, Class A shares issuable upon redemption of LLC Interests and Class A shares issuable under stock awards. The relative magnitude of the change in Class A shares outstanding and Class A shares issuable upon redemption of LLC Interests decreases as the share price moves further away from the midpoint.
Summary historical and pro forma financial dataSUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following tables present the summary historical and pro forma financial data for Bioventus LLC and its subsidiaries for the periods and at the dates indicated. Bioventus LLC is the predecessor of the issuer, Bioventus Inc., for financial reporting purposes. The summary statements of operations and statement of cash flows data for the years ended December 31, 2013, 20142019 and 20152018 are derived from the Bioventus LLC audited financial statements included elsewhere in this prospectus. The summary statements of operations and statement of cash flows data for the threenine months ended MarchSeptember 26, 2020 and September 28, 2015 and April 2, 2016,2019, and the summary balance sheet data as of April 2, 2016September 26, 2020 are derived from the Bioventus LLC unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, include all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentationstatement of the information set forth herein. You should read this data together with our audited and unaudited financial statements and related notes appearing elsewhere in this prospectus and the information under the captions “Capitalization,” “Selected financial data” and “Management’s discussion and analysis of financial condition and results of operations.” Our historical results are not necessarily indicative of our future results and results of interim periods are not necessarily indicative of results for the entire year.
The summary unaudited pro forma consolidated financial data of Bioventus Inc. presented below have been derived from our unaudited pro forma consolidated financial statements included elsewhere in this prospectus. The summary unaudited pro forma balance sheet data as of April 2, 2016September 26, 2020 give effect to the Acquisition and the Transactions as described in “Transactions”, including the completion of this offering, as if all such transactions had occurred on that date and the summary unaudited pro forma statement of operations data for the year ended December 31, 20152019 and the threenine months ended March 28, 2015 and April 2, 2016September 26, 2020 gives effect to the Transactions, as if all such transactions had occurred on January 1, 2015.2019. The unaudited pro forma financial information includes various estimates which are subject to material change and may not be indicative of what our operations or financial position would have been had this offering and related transactions taken place on the dates indicated, or that may be expected to occur in the future. See “Unaudited pro forma consolidated financial information” for a complete description of the adjustments and assumptions underlying the summary unaudited pro forma consolidated financial data.
The summary historical data of Bioventus Inc. have not been presented as Bioventus Inc. is a newly incorporated entity, has had no business transactions or activities to date and had no assets or liabilities during the periods presented in this section.
| Historical Bioventus LLC | Pro forma Bioventus Inc.(1) | |||||||||||||||||||||||||||||||
Year ended | Three months ended | Year ended | Three months ended | |||||||||||||||||||||||||||||
| (in thousands, except per share and share amounts) | December 31, 2013 | December 31, 2014 | December 31, 2015 | March 28, 2015 | April 2, 2016 | December 31, 2015 | April 2, 2016 | |||||||||||||||||||||||||
Consolidated statements of operations data: | ||||||||||||||||||||||||||||||||
Net sales | $ | 232,375 | $ | 242,893 | $ | 253,650 | $ | 53,362 | $ | 65,402 | $ | 265,824 | $ | 65,402 | ||||||||||||||||||
Cost of sales (including depreciation and amortization of $16,693, $19,622, $22,474, $5,741, and $6,300, respectively) | 71,372 | 75,792 | 74,544 | 16,807 | 19,235 | 80,598 | 19,235 | |||||||||||||||||||||||||
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Gross profit | 161,003 | 167,101 | 179,106 | 36,555 | 46,167 | 185,226 | 46,167 | |||||||||||||||||||||||||
Selling, general and administrative expenses | 150,370 | 147,058 | 148,441 | 37,270 | 40,184 | 160,265 | 41,724 | |||||||||||||||||||||||||
Research and development expenses | 10,936 | 9,465 | 14,747 | 2,966 | 3,718 | 15,176 | 3,766 | |||||||||||||||||||||||||
Change in fair value of contingent consideration | — | 1,590 | 19,493 | 8,971 | 1,301 | 19,493 | 1,301 | |||||||||||||||||||||||||
Restructuring costs | — | — | 2,443 | 1,076 | 172 | 2,443 | 172 | |||||||||||||||||||||||||
Depreciation and amortization | 7,765 | 8,968 | 10,570 | 2,571 | 2,830 | 12,124 | 2,830 | |||||||||||||||||||||||||
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Operating income (loss)(2) | (8,068 | ) | 20 | (16,588 | ) | (16,299 | ) | (2,038 | ) | (24,275 | ) | (3,626 | ) | |||||||||||||||||||
Interest expense | 11,459 | 11,969 | 14,229 | 3,854 | 3,555 | 6,993 | 1,641 | |||||||||||||||||||||||||
Other (income) expense | 713 | (596 | ) | 1,154 | 496 | (147 | ) | 1,120 | (147 | ) | ||||||||||||||||||||||
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Other expense, net | 12,172 | 11,373 | 15,383 | 4,350 | 3,408 | 8,113 | 1,494 | |||||||||||||||||||||||||
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Loss before income taxes | (20,240 | ) | (11,353 | ) | (31,971 | ) | (20,649 | ) | (5,446 | ) | (32,388 | ) | (5,120 | ) | ||||||||||||||||||
Income tax expenses | 2,127 | 1,547 | 2,140 | 369 | 603 | 2,140 | 603 | |||||||||||||||||||||||||
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Net loss | (22,367 | ) | (12,900 | ) | (34,111 | ) | (21,018 | ) | (6,049 | ) | (34,528 | ) | (5,723 | ) | ||||||||||||||||||
Less: Net (loss) income attributable to non-controlling interests | (9,909 | ) | (1,643 | ) | ||||||||||||||||||||||||||||
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Net (loss) income attributable to Bioventus | (24,618 | ) | (4,080 | ) | ||||||||||||||||||||||||||||
Accumulated and unpaid preferred distributions | (3,610 | ) | (3,718 | ) |
| (3,997 | ) | (953 | ) | (1,042 | ) | |||||||||||||||||||||
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Net loss attributable to common unit holders | (25,977 | ) | (16,618 | ) |
| (38,108 | ) | (21,971 | ) | (7,091 | ) | |||||||||||||||||||||
Net loss per common unit, basic and diluted | (5.30 | ) | (3.39 | ) | (7.78 | ) | (4.48 | ) | (1.45 | ) | ||||||||||||||||||||||
Weighted average common units outstanding, basic and diluted | 4,900 | 4,900 | 4,900 | 4,900 | 4,900 | |||||||||||||||||||||||||||
Pro forma weighted average shares of Class A common stock outstanding: | ||||||||||||||||||||||||||||||||
Basic | 23,727,619 | 23,727,619 | ||||||||||||||||||||||||||||||
Diluted | 23,727,619 | 23,727,619 | ||||||||||||||||||||||||||||||
Pro forma net loss per share of Class A common stock outstanding: | ||||||||||||||||||||||||||||||||
Basic | $ | (1.04 | ) | $ | (0.17 | ) | ||||||||||||||||||||||||||
Diluted | $ | (1.04 | ) | $ | (0.17 | ) | ||||||||||||||||||||||||||
Other Financial Data: | ||||||||||||||||||||||||||||||||
Adjusted EBITDA(3)(4) | $ | 32,485 | $ | 36,193 | $ | 42,186 | $ | 2,339 | $ | 10,677 | $ | 45,861 | (5) | $ | 10,677 | |||||||||||||||||
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| (in thousands) | December 31, 2013 | December 31, 2014 | December 31, 2015 | March 28, 2015 | April 2, 2016 | |||||||||||||||||
Consolidated statements of cash flows data: Net cash (used in) provided by: | ||||||||||||||||||||||
Operating activities | $ | 2,749 | $ | 15,109 | $ | 18,920 | $ | (3,821 | ) | $ | 2,162 | |||||||||||
Investing activities | (10,999 | ) | (31,376 | ) | (60,185 | ) | (306 | ) | (6,638 | ) | ||||||||||||
Financing activities | 6,801 | (6,645 | ) | 31,246 | 3,852 | 5,495 | ||||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | (514 | ) | (1,428 | ) | (805 | ) | (470 | ) | 197 | |||||||||||||
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Net (decrease) increase in cash and cash equivalents | $ | (1,963 | ) | $ | (24,340 | ) | $ | (10,824 | ) | $ | (745 | ) | $ | 1,216 | ||||||||
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| Historical Bioventus LLC | Pro forma Bioventus Inc.(1) | |||||||||||||||||||||||
| Year ended | Nine months ended | Year ended | Nine months ended | |||||||||||||||||||||
(in thousands, except per share and | December 31, 2019 | December 31, 2018 | September 26, 2020 | September 28, 2019 | December 31, 2019 | September 26, 2020 | ||||||||||||||||||
Consolidated statements of operations data: | ||||||||||||||||||||||||
Net sales | $ | 340,141 | $ | 319,177 | $ | 222,570 | $ | 242,587 | $ | 340,141 | $ | 222,570 | ||||||||||||
Cost of sales (including depreciation and amortization of $22,399, $20,614, $16,076 and $17,149, respectively) | 90,935 | 84,168 | 62,521 | 66,810 | 90,935 | 62,521 | ||||||||||||||||||
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Gross profit | 249,206 | 235,009 | 160,049 | 175,777 | 249,206 | 160,049 | ||||||||||||||||||
Selling, general and administrative expense | 198,475 | 191,672 | 131,104 | 144,021 | 206,421 | 137,782 | ||||||||||||||||||
Research and development expense | 11,055 | 8,095 | 8,311 | 7,911 | 11,644 | 9,979 | ||||||||||||||||||
Change in fair value of contingent consideration | — | (739 | ) | — | — | — | — | |||||||||||||||||
Restructuring costs | 575 | 1,373 | — | 540 | 575 | — | ||||||||||||||||||
Depreciation and amortization | 7,908 | 8,615 | 5,305 | 5,815 | 7,908 | 5,305 | ||||||||||||||||||
Loss on impairment of intangible assets | — | 489 | — | — | — | — | ||||||||||||||||||
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Operating income | 31,193 | 25,504 | 15,329 | 17,490 | 22,658 | 6,983 | ||||||||||||||||||
Interest expense | 21,579 | 19,171 | 7,095 | 13,935 | 21,014 | 7,883 | ||||||||||||||||||
Other (income) expense | (75 | ) | 226 | (4,539 | ) | 71 | (75 | ) | (4,539 | ) | ||||||||||||||
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Other expense | 21,504 | 19,397 | 2,556 | 14,006 | 20,939 | 3,344 | ||||||||||||||||||
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Income from continuing operations before income taxes | 9,689 | 6,107 | 12.773 | 3,484 | 1,719 | 3,639 | ||||||||||||||||||
Income tax expense | 1,576 | 1,664 | 302 | 684 | 1,576 | 302 | ||||||||||||||||||
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Net income from continuing operations | 8,113 | 4,443 | 12,471 | 2,800 | 143 | 3,337 | ||||||||||||||||||
Loss from discontinued operations, net of tax | 1,815 | 16,650 | — | 1,616 | 1,815 | — | ||||||||||||||||||
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Net income (loss) | 6,298 | (12,207 | ) | 12,471 | 1,184 | (1,672 | ) | 3,337 | ||||||||||||||||
Net (loss) income from continuing operations attributable to noncontrolling interest | (553 | ) | — | (1,164 | ) | (30 | ) | (1,063 | ) | (147 | ) | |||||||||||||
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Net income attributable to Bioventus | 6,851 | (12,207 | ) | 13,635 | 1,214 | $ | (609 | ) | $ | 3,484 | ||||||||||||||
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Accumulated and unpaid preferred distributions | (5,955 | ) | (5,781 | ) | (4,525 | ) | (4,421 | ) | ||||||||||||||||
Net income allocated to participating shareholders | (1,555 | ) | — | (5,225 | ) | — | ||||||||||||||||||
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Net (loss) income attributable to common unit holders | $ | (659 | ) | $ | (17,988 | ) | $ | 3,885 | $ | (3,207 | ) | |||||||||||||
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Net (loss) income per common unit, basic and diluted | $ | (0.13 | ) | $ | (3.67 | ) | $ | 0.79 | $ | (0.65 | ) | |||||||||||||
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Weighted average common units outstanding, basic and diluted | 4,900 | 4,900 | 4,900 | 4,900 | ||||||||||||||||||||
Pro forma weighted average shares of Class A common stock outstanding: | ||||||||||||||||||||||||
Basic | 37,697,158 | 37,697,158 | ||||||||||||||||||||||
Diluted | 37,697,158 | 37,697,158 | ||||||||||||||||||||||
Pro forma net (loss) income per share of Class A common stock outstanding: | ||||||||||||||||||||||||
Basic | $ | (0.2 | ) | $ | 0.09 | |||||||||||||||||||
Diluted | $ | (0.2 | ) | $ | 0.09 | |||||||||||||||||||
Other Financial Data: | ||||||||||||||||||||||||
Adjusted EBITDA(2) | $ | 79,188 | $ | 72,171 | $ | 44,289 | $ | 48,483 | $ | 79,188 | $ | 44,289 | ||||||||||||
| Pro forma Bioventus Inc. | ||||||||
| As of April 2, 2016 | As of April 2, 2016 | |||||||
| (in thousands) | ||||||||
Balance sheet data: | ||||||||
Cash and cash equivalents | $ | 6,166 | $ | 32,493 | ||||
Total assets | 486,264 | 510,591 | ||||||
Total liabilities | 299,962 | 191,900 | ||||||
Accumulated deficit | (97,975 | ) | — | |||||
Total members’/stockholders’ equity | 186,302 | 318,691 | ||||||
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(in thousands) | December 31, 2019 | December 31, 2018 | September 26, 2020 | September 28, 2019 | ||||||||||||
Consolidated statements of cash flows data: | ||||||||||||||||
Net cash provided by (used in): | ||||||||||||||||
Operating activities from continuing operations | $ | 42,545 | $ | 52,310 | $ | 46,752 | $ | 21,329 | ||||||||
Investing activities from continuing operations | (7,912 | ) | (6,061 | ) | (18,961 | ) | (7,348 | ) | ||||||||
Financing activities | (10,951 | ) | (13,256 | ) | (19,691 | ) | (11,640 | ) | ||||||||
Discontinued operations | (1,832 | ) | (7,163 | ) | (228 | ) | (1,663 | ) | ||||||||
Effect of exchange rate changes on cash | (104 | ) | (160 | ) | 86 | 171 | ||||||||||
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Net change in cash and cash equivalents | $ | 21,746 | $ | 25,670 | $ | 7,958 | $ | 849 | ||||||||
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(in thousands) | September 26, 2020 | Pro forma Bioventus Inc.(1) As of September 26, 2020 | ||||||
Balance sheet data: | ||||||||
Cash and cash equivalents | $ | 72,478 | $ | 170,710 | ||||
Total assets | $ | 479,277 | $ | 577,245 | ||||
Total liabilities | $ | 333,938 | $ | 313,629 | ||||
Accumulated deficit | $ | (142,176 | ) | $ | — | |||
Total members’/stockholders’ equity | $ | 145,339 | $ | 263,615 | ||||
| (1) | Gives pro forma effect to the |
| (2) |
EBITDA and Adjusted EBITDA areis not measurementsa measurement of financial performance under U.S. generally accepted accounting principles, or U.S. GAAP or GAAP. EBITDA and Adjusted EBITDA should not be considered in isolation or as substitutesa substitute for a measure of our liquidity or operating performance prepared in accordance with U.S. GAAP and areis not indicative of net lossincome (loss) from continuing operations as determined under U.S. GAAP. In addition, EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. EBITDA, Adjusted EBITDA and other non-GAAP financial measures
have limitations that should be considered before using these measures to evaluate our liquidity or financial performance. Some of these limitations are as follows:
EBITDA and Adjusted EBITDA excludeexcludes certain tax payments that may require a reduction in cash available to us;
EBITDA and Adjusted EBITDA do does not reflect our cash expenditures, or future requirements, for capital expenditures (including capitalized software developmental costs) or contractual commitments;
EBITDA and Adjusted EBITDA do does not reflect changes in, or cash requirements for, our working capital needs;
EBITDA and Adjusted EBITDA do does not reflect the cash requirements necessary to service interest or principal payments on our debt; and
Adjusted EBITDA excludes certain purchase accounting adjustments related to the Acquisition.acquisitions.
In addition, our definition and calculation of EBITDA and Adjusted EBITDA may differ from that of other companies. We compensate for these limitations by relying primarily on our U.S. GAAP results and by using non-GAAP financial measures only supplementally.as a supplement.
The following table presents a reconciliation of net lossincome from continuing operations to EBITDA and Adjusted EBITDA for the periods presented:
| Pro Forma Bioventus Inc. | ||||||||||||||||||||||||||||||||
| Year ended |
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| Year ended | Three months ended | |||||||||||||||||||||||||||
| (in thousands, except per share and share amounts) | December 31, 2013 | December 31, 2014 | December 31, 2015 | March 28, 2015 | April 2, 2016 | December 31, 2015 | April 2, 2016 | |||||||||||||||||||||||||
Net loss | $ | (22,367 | ) | $ | (12,900 | ) | $ | (34,111 | ) | $ | (21,018 | ) | $ | (6,049 | ) | $ | (34,528 | ) | $ | (5,723 | ) | |||||||||||
Interest expense, net | 11,459 | 11,969 | 14,229 | 3,854 | 3,555 | 6,993 | 1,641 | |||||||||||||||||||||||||
Income tax expense | 2,127 | 1,547 | 2,140 | 369 | 603 | 2,140 | 603 | |||||||||||||||||||||||||
Depreciation and amortization(a) | 24,458 | 28,820 | 33,078 | 8,394 | 9,137 | 38,054 | 9,137 | |||||||||||||||||||||||||
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EBITDA | 15,677 | 29,436 | 15,336 | (8,401 | ) | 7,246 | 12,659 | 5,658 | ||||||||||||||||||||||||
Non-cash equity compensation(b) | 576 | 2,355 | 3,325 | 529 | 288 | 9,677 | 1,876 | |||||||||||||||||||||||||
Restructuring costs(c) | — | 1,183 | 2,645 | 1,076 | 172 | 2,645 | 172 | |||||||||||||||||||||||||
Contingent consideration(d) | — | 1,590 | 19,493 | 8,971 | 1,301 | 19,493 | 1,301 | |||||||||||||||||||||||||
Transition costs(e) | 4,690 | — | — | — | — | — | — | |||||||||||||||||||||||||
Other corporate expenses(f) | — | — | 1,107 | — | 1,370 | 1,107 | 1,370 | |||||||||||||||||||||||||
Severance(g) | 4,542 | — | — | — | — | — | — | |||||||||||||||||||||||||
Inventory step-up(h) | — | 1,629 | 280 | 164 | 300 | 280 | 300 | |||||||||||||||||||||||||
Purchased in-processR&D-BMP(i) | 7,000 | — | — | — | — | — | — | |||||||||||||||||||||||||
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Adjusted EBITDA | $ | 32,485 | $ | 36,193 | $ | 42,186 | $ | 2,339 | $ | 10,677 | $ | 45,861 | $ | 10,677 | ||||||||||||||||||
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| Pro Forma Bioventus Inc. | ||||||||||||||||||||||||
| Year ended | Nine Months Ended | Year ended | Nine Months Ended | |||||||||||||||||||||
(in thousands) | December 31, 2019 | December 31, 2018 | September 26, 2020 | September 28, 2019 | December 31, 2019 | September 26, 2020 | ||||||||||||||||||
Net income from continuing operations | $ | 8,113 | $ | 4,443 | $ | 12,471 | $ | 2,800 | $ | 143 | $ | 3,337 | ||||||||||||
Depreciation and amortization(a) | 30,316 | 29,238 | 21,789 | 22,972 | 30,316 | 21,789 | ||||||||||||||||||
Income tax expense | 1,576 | 1,664 | 302 | 684 | 1,576 | 302 | ||||||||||||||||||
Interest expense | 21,579 | 19,171 | 7,095 | 13,935 | 21,014 | 7,883 | ||||||||||||||||||
Equity compensation(b) | 10,844 | 14,325 | 619 | 3,252 | 19,379 | 8,965 | ||||||||||||||||||
COVID-19 benefits, net(c) | — | — | (4,158 | ) | — | — | (4,158 | ) | ||||||||||||||||
Succession and transition charges(d) | — | — | 5,345 | — | — | 5,345 | ||||||||||||||||||
Restructuring costs(e) | 575 | 1,373 | — | 540 | 575 | — | ||||||||||||||||||
Foreign currency impact(f) | 8 | 234 | (58 | ) | 146 | 8 | (58 | ) | ||||||||||||||||
Loss on impairment of intangible assets(g) | — | 489 | — | — | — | — | ||||||||||||||||||
Losses associated with debt refinancing(h) | 367 | — | — | — | 367 | — | ||||||||||||||||||
Change in fair value of contingent consideration(i) | — | (739 | ) | — | — | �� | — | — | ||||||||||||||||
Other non-recurring costs(j) | 5,810 | 1,973 | 884 | 4,154 | 5,810 | 884 | ||||||||||||||||||
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Adjusted EBITDA | $ | 79,188 | $ | 72,171 | $ | 44,289 | $ | 48,483 | $ | 79,188 | $ | 44,289 | ||||||||||||
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| (a) | Includes |
| (b) | Represents |
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| (d) | Primarily represents costs |
| (e) | Represents costs related to a shift from direct to an indirect distribution model in our |
Represents realized and unrealized gains and losses from fluctuations in foreign currency and is included in other (income) expense on the consolidated statements of operations and comprehensive income (loss). |
| (g) | Represents |
| (h) | Represents charges with our 2019 debt refinancing that were included in selling, general and administrative expense on the consolidated statements of operations and comprehensive income (loss). |
| (i) | Represents adjustments to the fair value of contingent consideration liabilities related to a supply agreement resulting from the OsteoAMP acquisition. |
Represents |
Investing in our Class A common stock involves a high degree of risk. These risks include, but are not limited to, those described below, each of which may be relevant to an investment decision. You should carefully consider the risks described below, together with all of the other information in this prospectus, including our financial statements and related notes, before investing in our Class A common stock. The realization of any of these risks could have a significant adverse effect onadversely affect our reputation, business, including our financial condition, results of operations and growth, which we refer to collectively in this section as our business, and ability to accomplish our strategic objectives.financial condition. In that event, the trading price and value of our Class A common stock could decline, and you may lose part or all of your investment.
Risks related to our business
Our business may continue to experience adverse impacts as a result of the COVID-19 pandemic.
In March 2020, the World Health Organization declared the outbreak of COVID-19 to be a pandemic. The COVID-19 pandemic is having widespread, rapidly evolving and unpredictable impacts on global society, economies, financial markets and business practices. Federal and state governments have implemented measures in an effort to contain the virus, including social distancing, travel restrictions, border closures, limitations on public gatherings, work from home and supply chain logistical changes. We remain focused on protecting the health and well-being of our employees, partners and patients while assuring the continuity of our business operations. Furthermore, the long-term impact of COVID-19 on our business will depend on many factors, including, but not limited to, the duration and severity of the pandemic and the impact it has on our partners, patients and communities in which we operate, all of which continue to be uncertain. For example, there has been a decrease in patient visits to hospitals due to risk and fear of exposure to COVID-19, as well as decreases in, or temporary moratoriums on, elective procedures, which may be re-imposed in the future. Our business, results of operations and financial condition have been, and may continue to be, materially impacted due to the decrease in patient visits and elective procedures and any future temporary cessations of elective procedures and could be further impacted by delays in payments from customers, supply chain interruptions, extended “shelter in place” orders or advisories, facility closures or other reasons related to the pandemic.
To the extent the COVID-19 disruptions adversely impact our business, results of operations and financial condition, it may also have the effect of heightening many of the other risks described in “Risk Factors,” including risks relating to our ability to successfully commercialize new developed or acquired products or therapies, consolidation in the healthcare industry, disruptions in the supply or manufacturing of our products or their components, intensified pricing pressure as a result of changes in the purchasing behavior of hospitals and maintenance of our numerous contractual relationships.
We are highly dependent on a limited number of products.
Our Exogen systemOA joint pain treatment and Supartz FXjoint preservation products accounted for 89%54%, 87%49%, 83%, 85%53% and 77%53% of our total revenue for the years ended December 31, 2013, 20142019 and 20152018 and the threenine months ended MarchSeptember 26, 2020 and September 28, 2015 and April 2, 2016,2019, respectively. We expect that sales of our Active Healing Therapiessuch products will continue to account for a majoritysubstantial portion of our revenue, while we continue to expand and develop our product offerings for our Surgical business. Therefore,therefore, our ability to execute our growth strategy and become profitablemaintain profitability will depend upon the continued demand for these products. In addition, our supply and distribution agreements for Durolane, GELSYN-3 and SUPARTZ FX are subject to renewal and their terms end in December 2115, February 2026 and December 2028, respectively. If the termsupply and distribution agreements for any of our distribution agreement for Supartz FX ends in May 2019. If our distribution agreement for Supartz FX isHA viscosupplementation therapies were terminated, our revenue maywould be impaired if we are unable to introduce a product that effectively replaces or improves upon Supartz FX.impaired. If our Exogen system or Supartz FXOA joint pain treatment and joint preservation products fail to maintain their market acceptance for any reason, or if we do not renew our distribution agreement with respect to Supartz FX on commercially reasonable terms or at all, our business, results of operations and financial condition may be adversely affected.
Our long-term growth depends on our ability to develop, acquire and commercialize new products, line extensions or expanded indications. Our industry is highly competitive and subject to rapid change and technological advancements. Therefore, it is important to our business that we continue to introduce new products and/or enhance our existing product offerings through line extensions or expanded indications. Developing, acquiring and commercializing products is expensive, time-consuming and could divert management’s attention away from our existing business. Even if we are successful in developing additional products, the success of any new product offering or enhancements to existing products will depend on several factors, including our ability to: properly identify and anticipate the needs of healthcare professionals and patients; develop and introduce new products, line extensions and expanded indications in a timely manner; distinguish our products from those of our competitors; avoid infringing upon the intellectual property rights of third-parties and maintain necessary intellectual property licenses from third-parties; demonstrate, if required, the safety and efficacy of new products with data from preclinical studies and clinical trials; obtain clearance or approval, if required, from the FDA and other regulatory agencies, for such new products, line extensions and expanded indications, and maintain full compliance with FDA and other regulatory requirements applicable to new devices or products or modifications of existing devices or products; provide adequate training to potential users of our products; receive adequate coverage and reimbursement for our products; and maintain an effective and dedicated sales and marketing team. If we are unsuccessful in developing, acquiring and commercializing new products or enhancing our existing product offerings through line extensions and expanded indications, our ability to increase our net sales may be impaired. Additionally, our research and development efforts may require a substantial investment of time and resources before we are adequately able to determine the commercial viability of a new product, technology, material or other innovation. Such efforts may not result in the development of a viable product. In addition, even if we are able to successfully develop new active healing products, line extensions and expanded indications, these products may not produce sales in excess of the costs of development and they may be rendered obsolete by changing customer preferences or the introduction by our competitors of products embodying new technologies or features. We may be unable to launch and successfully commercialize GelSyn-3.
We plan to launch GelSyn-3, a three injection HA viscosupplementation therapy,newly developed or acquired products or therapies in the United States during the second half of 2016. Even if we are able to launch GelSyn-3, theStates.
The commercial success of GelSyn-3newly acquired or developed products, such as MOTYS, in the United States will depend upon the awareness and acceptance of GelSyn-3such products among the medical community, including physicians and patients. Market acceptance will depend on a number of factors, including, among others:
the perceived advantages and disadvantages of GelSyn-3such products over existing HA viscosupplementation therapies and other competitive treatments for knee osteoarthritis;treatments;
availability of alternative treatments;
inability to secure and maintain adequate coverage, including obtaining a unique reimbursement code;
the extent to which physicians prescribe GelSyn-3;the Company’s products;
the willingness of the target patient population to try new therapies;
the strength of marketing and distribution support and timing of market introduction of GelSyn-3the Company’s new products and competitive products;
publicity concerning GelSyn-3,the Company’s new products, our existing products or competing products and treatments;
pricing and cost effectiveness of GelSyn-3;such new therapies;
the effectiveness of our sales and marketing strategies; and
the willingness of patients to pay out-of-pocket in the absence of third partythird-party reimbursement.
Our efforts to educate the medical community about the benefits of GelSyn-3newly acquired or developed products may require significant resources and we may never be successful. In addition, we may be ineffective at marketing GelSyn-3 to existing patients and customers inIf such a manner that would effectively replace any loss of revenue associated with any discontinuance of our distribution agreement for Supartz FX. If GelSyn-3 doesnewly acquired or developed products do not achieve an adequate level of acceptance by patients and physicians in the United States, our net salesbusiness, results of operations and financial condition may be adversely affected.
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.
We cannot be certain that our existing portfolio of products and any new products, line extensions or expanded indications that we develop will achieve or maintain market acceptance. With respect to our OA joint pain treatment and joint preservation products, third-party payers may be reluctant to continue to cover our HA viscosupplementation therapies at their current prices. Further, new injectable therapies or oral medications may become available that help manage OA joint pain in a more convenient and/or cost effective manner than our HA viscosupplementation therapies. With respect to our BGS products, new allograft, DBMs, synthetics, growth factors, or other enhancements to our existing implants may never achieve broad market acceptance, which can be affected by a lack of clinical acceptance of BGSs and technologies, introduction of competitive treatment options which render BGSs and technologies too expensive or obsolete and difficulty training surgeons in the use of BGSs and technologies. Media reports or other negative publicity concerning both methods of tissue recovery from donors and actual or potential disease transmission from donated tissue may limit widespread acceptance by the medical community of our allografts, growth factor and DBMs, whether directed at these products generally or our products specifically. Unfavorable reports of improper or illegal tissue recovery practices by any participant in the industry, both in the United States and internationally, as well as incidents of improperly processed tissue leading to transmission of disease, may broadly affect the rate of future tissue donation and market acceptance of allograft based technologies by the medical community.
In addition, we believe that even if the medical community generally accepts our existing portfolio of products and any new products, line extensions or expanded indications, acceptance and recommendations by influential members of the medical community will be important to their broad commercial success. If the medical community does not broadly accept our products, we may not remain competitive in the market, which could adversely affect our business, results of operations and financial condition.
Our commercial success depends on our ability to differentiate the HA viscosupplementation therapies that we own or distribute from alternative therapies for the treatment of osteoarthritis.OA.
Our ability to achieve commercial success will, at least in part, depend on our ability to differentiate the HA viscosupplementation therapies that we own or distribute in such a way that physicians and patients will select them. The HA viscosupplementation therapies that we own or distribute could face competition from steroid injections, single injectionother HA viscosupplementation therapies, and a number of combination HA viscosupplementation/steroid therapies and alternate therapies for the treatment of OA, including those currently in development.
We expect that the HA viscosupplementation therapies that we own or distribute will continue to be used primarily after simpleoral analgesics and steroid injections no longer provide adequate pain relief. In addition, the five and three injection HA viscosupplementation therapies that we distribute or plan to distribute face competition from single injection therapies. We expect the three injection market to decline by a projected 3.1% CAGR and the five injection market to decline by a projected 13.6% CAGR from 2019 to 2024. Due to the convenience associated with the single injection treatments, it is expected that these products will continue to capture increasing market share of the HA viscosupplementation therapies market, which may adversely affect our business, results of operations and financial condition.condition to the extent physicians and patients do not select Durolane, our single injection HA viscosupplementation therapy. There are also a number of combination HA viscosupplementation/steroid therapies currently in development. The American Association of Orthopedic Surgeons, or AAOS, since the release of their May 2013 clinical practice guidelines, does not recommend the use of HA for patients with symptomatic knee osteoarthritis because clinicalOA. The evidence for the AAOS recommendation is based on two or more high quality studies have reached inconsistent results on its efficacy.with consistent findings for recommending for or against the intervention. The AAOS recommendation states that practitioners should follow a strong recommendation, such as this one, unless a clear and compelling rationale for an alternative approach is present. In May 2018, the Journal of the AAOS ranked the nonsteroidal anti-inflammatory drug naproxen the most effective in individual knee OA treatment for improving both pain and function. To the extent that any additional therapies receive approval or alternative therapies receive positive support from the American Association of Orthopedic SurgeonsAAOS or other physicians,physician associations, they could reduce the market share represented by HA viscosupplementation therapies for osteoarthritisOA treatment and adversely affect our commercial success.
If we are unable to differentiate the HA viscosupplementation therapies we own or distribute from other therapies, physicians and patients may not be willing to use them or be willing to switch from existing therapies with which they are familiar. Once physicians incorporate a particular treatment into their practice, they may not alter their practice absent compelling clinical evidence of safety and/or effectiveness and/or significant pricing reimbursement advantages.
We competeThe proposed down-classification of non-invasive bone growth stimulators, including our Exogen system, by the FDA could increase future competition for bone growth stimulators and otherwise adversely affect the Company’s sales of Exogen.
On August 17, 2020, FDA published a Federal Register notice announcing its proposal to reclassify non-invasive bone growth stimulators, such as Exogen, from Class III medical devices to Class II with special controls. Class III devices are subject to the most stringent regulatory pathway for approval for medical devices requiring, among other things, rigorous clinical studies and pre-approval manufacturing review. Class II devices may competebe cleared for marketing by the FDA under the 510(k) pathway if they are determined to be substantially equivalent to a legally marketed predicate device. The 510(k) clearance process does not always require clinical testing, and is generally less onerous than the premarket approval process applicable to Class III devices. On September 8-9, 2020, the Orthopaedic and Rehabilitation Devices Panel of the FDA Medical Devices Advisory Committee met and discussed FDA’s proposal. The Panel, whose authority is non-binding but nonetheless considered by FDA, ultimately voted in favor of FDA’s proposal to down-classify non-invasive bone growth stimulators.
The FDA has proposed that any final order would become effective 30 days after publication. While FDA has not yet finalized its proposal to down-classify non-invasive bone growth stimulators, should such down-classification occur now or in the future, against other companies, some of which have longer operating histories, more established products or greater resources than we do, which may prevent usface additional competition from achieving increasednew market penetration or improved operating results.
The medical technology industries are characterized by intense competition, subject to rapid change and significantly affected by market activities of industry participants, new product introductions and other technological advancements. We believe that our competitors have historically dedicated and will continue to dedicate significant resources to promote their products or to develop new products for orthobiologics. We have competitors in the United States and internationally, including major medical device and pharmaceutical companies, biotechnology companies and universities and other research institutions.
These companies and other industry participants may develop alternative treatments, products or procedures that compete directly or indirectly with our products. If alternative treatments are, or are perceived to be, superior to our products, sales of our products could be negatively affected and our results of operations could suffer. Our competitors may also develop and patent processes or products earlier than we can or obtain
regulatory clearance or approvals for competing products more rapidly than we can, which could impair our ability to develop and commercialize similar processes or products.
Many of our current and potential competitors are major medical device and pharmaceutical companies that have substantially greater financial, technical and marketing resources than we do, and they may succeed in developing products thatentrants who would render our products obsolete or noncompetitive. It is also possible that our competition will be able to leverage their large market share to set prices at a level belowpursue marketing authorization through the 510(k) clearance pathway instead of the more onerous and burdensome PMA approval process. Class II devices that which is profitable for us.
Some of our competitors enjoy several competitive advantages over us, including:
greater financial, human and other resources for product R&D, sales and marketing and litigation;
significantly greater name recognition;
control of intellectual property and more expansive portfolios of intellectual property rights, which could impact future productsqualify as durable medical equipment under development;
greater experience in obtaining and maintaining regulatory clearances or approvals for products and product enhancements;
established relationships with hospitals and other healthcare providers, physicians, suppliers, customers and third-party payors;
additional lines of products, and the ability to bundle products to offer greater incentives to gain a competitive advantage; and
more established sales, marketing and worldwide distribution networks.
The potential introduction by competitors of products that compete with our existing or planned productsMedicare program may also make it difficult to market or sell our products. In addition, the entry of multiple new productsbe eligible for inclusion in Medicare’s competitive bidding program for durable medical equipment, prosthetics, orthotics and competitors may lead some of our competitors to employ pricing strategies that could adversely affect the pricing of our products and pricing in the market generally.
supplies. As a result our ability to compete successfully will depend on our ability to develop proprietary products that reach the market in a timely manner, receive adequate coverage and reimbursement from third-party payors, and are safer, less invasive and more effective than alternatives available for similar purposes. If we are unable to do so, our sales or marginsof down-classification, Exogen could decrease, which would adversely affect our business.
If clinical trials of our next-generation BMP product candidates fail to satisfactorily demonstrate safety and efficacyface additional competition or we are unable to obtain regulatory approvalcould receive lower reimbursement amounts for or successfully commercialize our next-generation BMP product candidates, our future growth prospects could be adversely affected.
Clinical testing is expensive, is difficult to design and implement, can take many years to complete and is inherently uncertain as to outcome. We expect to commence a Phase 1 clinical trialExogen, all of one of our next-generation BMP product candidates within 18 months. Over the next several years, we expect to increase our R&D expenses significantly for our next-generation BMP product candidates as we undergo clinical trials to demonstrate the safety and efficacy of our product candidates in order to gain regulatory approvals. Such increased R&D expenses on our next-generation BMP product candidates could potentially be multiples of our current R&D expenses on the BMP product candidates. We cannot guarantee that any clinical trials will be conducted as planned or completed on schedule, if at all. Our pre-clinical data are based on animal models, including non-human primate studies, which may not be indicative of results that we will experience in clinical trials with human subjects. The clinical development of our next-generation BMP product candidates is susceptible to the risk of failure inherent at any stage of product development, including failure to demonstrate
efficacy in a clinical trial or across a broad population of patients, the occurrence of adverse events that are severe or medically or commercially unacceptable, failure to comply with protocols or applicable regulatory requirements and determination by the FDA or any comparable foreign regulatory authority that a product candidate may not continue development or is not approvable. Our failure to successfully complete clinical trials of any of our next-generation BMP product candidates and to demonstrate the efficacy and safety necessary to obtain regulatory approval to market any of our next-generation BMP product candidates could adversely affect our future growth prospects.
Our long-term growth depends on our ability to develop, acquirebusiness, results of operations and commercialize additional orthobiologic products.
Our industry is highly competitive and subject to rapid change and technological advancements. Therefore, it is important to our business that we continue to enhance our product offerings and introduce new products. Developing, acquiring and commercializing products is expensive, time-consuming and could divert management’s attention away from our existing orthobiologics business. Even if we are successful in developing additional products, the success of any new product offering or enhancements to existing products will depend on several factors, including our ability to:
properly identify and anticipate the needs of healthcare professionals and patients;
develop and introduce new products or product enhancements in a timely manner;
distinguish our products from those of our competitors;
avoid infringing upon the intellectual property rights of third-parties and maintain necessary intellectual property licenses from third-parties;
demonstrate, if required, the safety and efficacy of new products with data from preclinical studies and clinical trials;
obtain clearance or approval, if required, from the FDA and other regulatory agencies, for such new products or enhancements to existing products, and maintain full compliance with FDA and other regulatory requirements applicable to new devices or products or modifications of existing devices or products;
provide adequate training to potential users of our products;
receive adequate coverage and reimbursement for our products; and
maintain an effective and dedicated sales and marketing team.
If we are unsuccessful in developing, acquiring and commercializing new products, our ability to increase our net sales may be impaired.
Our Surgical business depends on the continued and future acceptance of our bone graft substitutes by the medical community.
New allograft, DBMs, synthetics, BMPs/growth factors, or other enhancements to our existing implants may never achieve broad market acceptance, which can be affected by numerous factors, including lack of clinical acceptance of bone graft substitutes and technologies, introduction of competitive treatment options which render bone graft substitutes and technologies too expensive or obsolete and difficulty training surgeons in the use of bone graft substitutes and technologies.
Market acceptance will also depend on our ability to demonstrate that our existing and new bone graft substitutes and technologies are an attractive alternative to existing treatment options. Our ability to do so will depend on surgeons’ evaluations of the clinical safety, efficacy, ease of use, reliability and cost-effectiveness offinancial condition.
these treatment options and technologies. For example, we believe that some in the medical community have lingering concerns over the risk of disease transmission through the use of allografts.
Media reports or other negative publicity concerning both methods of tissue recovery from donors and actual or potential disease transmission from donated tissue may limit widespread acceptance by the medical community of our allografts, BMPs/growth factor and DBMs, whether directed at these products generally or our products specifically. Unfavorable reports of improper or illegal tissue recovery practices by any participant in the industry, both in the United States and internationally, as well as incidents of improperly processed tissue leading to transmission of disease, may broadly affect the rate of future tissue donation and market acceptance of allograft based technologies by the medical community.
Furthermore, we believe that even if the medical community generally accepts our bone graft substitutes and technologies, acceptance and recommendations by influential members of the medical community will be important to their broad commercial success. If our bone graft substitutes and technologies are not broadly accepted by the medical community, we may not remain competitive in the market.
Our future growth depends on physician awareness of the distinctive characteristics, benefits, safety, clinical efficacy and cost-effectiveness of our products.
We focus our sales, marketing and training efforts on physicians, surgeons and other health care professionals. The acceptance of our products depends in part on our ability to educate physicians as to the distinctive characteristics, benefits, safety, clinical efficacy and cost-effectiveness of our products compared to alternative products, procedures and therapies. We support our sales force and distributors through in-person educational programs and an online medical education platform, among other things. We also produce marketing materials, including materials outlining our products, for our sales and marketing team in a variety of languages using printed, video and multimedia formats. However, we may not be successful in our efforts to educate physicians and surgeons. If physicians or surgeons are not properly trained, they may misuse or ineffectively use our products, which may result in unsatisfactory patient outcomes, patient injury, negative publicity or lawsuits against us. In addition, a failure to educate physicians or surgeons regarding our products may impair our ability to achieve market acceptance of our products.
We have incurred significant net losses since inception, and we may not be able to achieve or sustain profitability.
We have incurred net losses since our inception. For the years ended December 31, 2013, 2014 and 2015 and the three months ended March 28, 2015 and April 2, 2016, we had net losses of $22.4 million, $12.9 million, $34.1 million,$21.0 million and $6.0 million, respectively. As a result of ongoing losses, we had an accumulated deficit of $91.8 million and $98.0 million as of December 31,2015 and April 2, 2016, respectively. Our ability to generate sufficient net sales from our existing products or from any of our products indevelopment or products that we acquire, in order to transition to profitability, is uncertain. Following thisoffering, we expect that our operating expenses will continue to increase as we continue to develop, enhanceand commercialize new products and incur additional operational costs associated with being a public company, such that we may never achieve profitability. Furthermore, even if we do achieve profitability, we may not be able tosustain or increase profitability on an ongoing basis. If we do not achieve profitability, it will be more difficultfor us to finance our business and accomplish our strategic objectives.
Pricing pressure from our competitors or hospitals may affect our ability to sell our products at prices necessary to support our current business strategies.
Medical technology companies, healthcare systems and group purchasing organizations have intensified competitive pricing pressure as a result of industry trends and new technologies. Purchasing decisions are
gradually shifting to hospitals, integrated delivery networks and other hospital groups, with surgeons and other physicians increasingly acting only as “employees.” Because hospitals that typically bill various third-party payors generally purchase our Surgical products, changes in the purchasing behavior of such hospitals or the amount such payors are willing to reimburse our customers for procedures using our products, including those as a result of healthcare reform initiatives, could create additional pricing pressure on us. In addition to these competitive forces, we continue to see pricing pressure as hospitals introduce new pricing structures into their contracts and agreements, including fixed price formulas, capitated pricing and episodic or bundled payments intended to contain healthcare costs. If such trends continue to drive down the prices we are able to charge for our products, our profit margins will shrink, adversely affecting our ability to invest in and grow our business.
Healthcare costs have risen significantly over the past decade, which has resulted in or led to numerous cost reform initiatives by legislators, regulators and third-party payors. Cost reform has triggered a consolidation trend in the healthcare industry to aggregate purchasing power, which may create more requests for pricing concessions in the future. Additionally, group purchasing organizations, independent delivery networks and large single accounts may continue to use their market power to consolidate purchasing decisions for physicians. We expect that market demand, government regulation, third-party coverage and reimbursement policies and societal pressures will continue to change the healthcare industry worldwide, resulting in further business consolidations and alliances among our customers, which may exert further downward pressure on the prices of our products.
If we are unable to achieve and maintain adequate levels of coverage and/or reimbursement for our products, the procedures using our products, or any future products we may seek to commercialize, theirthe commercial success of these products may be severely hindered.
Our products except our Exogen system, are purchased by healthcare providers and customers who typically bill third-party payors,payers, such as government programs, including Medicare and Medicaid, or private insurance plans and healthcare networks, to cover all or a portion of the costs and fees associated with our products. Patients may also be billed for deductibles or co-payments in accordance with third-party payer policies. These third-party payors may in turn bill patients for any deductibles or co-payments. For our Exogen system, we typically bill third-party payors and collect co-payments from patients. These third-party payorspayers and insurers may deny reimbursement if they determine that a device or product provided to a patient or used in a procedure does not meet applicable payment criteria or if the policyholder’s healthcare insurance benefits are limited.
As required by law, the Centers for Medicare and Medicaid Services, or CMS, which administers the Medicare program, has continued efforts to implement a competitive bidding program for selected durable medical equipment, prosthetic and orthotic supplies items paid for by the Medicare program. In this program, Medicare rates are based on bid amounts for certain products in designated geographic areas, rather than the Medicare fee schedule amount. Bone growth stimulation products like our Exogen system are currently exempt from this competitive bidding process, but may be eligible for inclusion if the FDA’s proposed down-classification order becomes effective. We cannot predict which products from any of our businesses may ultimately be affected or whether or when the competitive bidding process may be extended to our businesses.
Limits put on reimbursement by third-party payors,payers, whether foreign or domestic, governmental or commercial, could make it more difficult to buy our products and substantially reduce, or possibly eliminate, patient access to our products. The healthcare industry in the United States has experienced a trend toward cost containment as government and private insurers seek to control rising healthcare costs by imposing lower payment rates and negotiating reduced contract rates with providers. In addition, thereproviders and suppliers.
There is no uniform policy of coverage and reimbursement for our products or procedures using our products among third-party payorspayers in the United States, and coverage and reimbursement for our products and procedures using our products can differ significantly from payorpayer to payor. Payorspayer. Further, these payers regularly review new and existing technologies for possible coverage and can, without notice, deny or reverse coverage for new or existing products and treatments. Third-party payers may not consider our products to be medically necessary or cost-effective for certain indications or off-label uses or for all uses, and as a result, may not provide coverage for the products. For example, Blue Cross Blue Shield Association’s Evidence Street platform issued a report in April 2018 questioning the efficacy of our Exogen system, which resulted in several non-coverage policies being issued by member organizations. Additionally, to the extent that third party payers decide that they are no longer willing to provide reimbursement for physician prescribed off-label uses of Exogen, sales may be negatively impacted. See “Risk factors—Risks related to government regulation—We may be subject to enforcement action if we engage in improper marketing or promotion of our products, and the misuse or off-label use of our products may harm our image in the marketplace, result in injuries that lead to product liability suits or result in costly investigations, fines or sanctions by regulatory bodies if we are deemed to have engaged in the promotion of these uses, any of which could be costly to our business.”
We may also be required to conduct expensive clinical studies to justify coverage and reimbursement and/or the level of reimbursement relative to other therapies. In addition, should governmental authorities continue to enact legislation or adopt regulations that affect third-party coverage and reimbursement, access to our products and coverage by private or public insurers may be reduced. If third-party payorspayers or insurers that currently cover or reimburse our products or the procedures in which they are used limit their coverage or reimbursement in the future, or if other third-party payorspayers or insurers issue similar policies, this could impact our ability to sell our products, force us to lower the price we charge for our products, and adversely affect our business, results of operations and financial condition.
Our ability to market and sell our products could be harmed by future actions by the Centers for Medicare and Medicaid Services, or CMS, (which administers the Medicare program), other government agencies or private payorspayers to diminish payments to healthcare providers. providers and suppliers. For example, the CMS, in its ongoing implementation of the Medicare program, periodically reviews medical study literature to determine how the literature addresses certain procedures and therapies in the Medicare population. The impact that these assessments could have on Medicare or third-party payer coverage determinations for our products is currently unknown, but we cannot provide assurances that the resulting actions will not restrict Medicare or other insurance coverage for our products. In addition, there can be no assurance that we or our distributors will not experience significant coverage or reimbursement impediments in the future related to these or other programs and policies of CMS. Specifically, drug pricing reform legislation and executive orders, which could negatively affect the reimbursement rates paid for HA viscosupplements, have been issued by the White House and have been proposed or enacted by Congress For example, the Consolidated Appropriations Act, 2021, or CAA, was signed into law on December 27, 2020, and will expand price reporting obligations for manufacturers of certain products reimbursed under Medicare Part B beginning, January 1, 2022. CMS could utilize the new pricing information to adjust Medicare payment for these products, which may include HA viscosupplements. We cannot predict how this law will be implemented by CMS, or the extent to which this law, or other proposals that may be enacted in the future, may impact the Medicare payment available for our HA viscosupplements.
Private payorspayers may adopt coverage decisions and payment amounts determined by CMS as guidelines in setting their coverage and reimbursement policies. In addition, for some governmental programs, such as Medicaid, coverage and reimbursement differs from state to state. Medicaid payments to physicians, facilities and other providers are often lower than payments by other third-party payorspayers and some state Medicaid programs may not pay an adequate amount for the procedures performed with our products, if any payment is made at all. If CMS, other government agencies or private payorspayers lower their reimbursement rates, or if any of the proposed drug pricing executive orders or legislative reforms are enacted, the commercial success of our products may be severely hindered.adversely affected.
Our abilitybusiness may be adversely affected if consolidation in the healthcare industry leads to maintaindemand for price concessions or if a GPO, third-party payers or other similar entities exclude us from being a supplier.
Healthcare costs have risen significantly over the past decade, which has resulted in or led to numerous cost reform initiatives by legislators, regulators and third-party payers. Cost reform has triggered a consolidation trend in the healthcare industry to aggregate purchasing power, which may increase requests for pricing concessions or risk vendor exclusion. For example, non-clinical staff at hospitals are increasingly involved in the evaluation of products and product purchasing decisions. In order for us to sell our competitive position depends on our ability to attract, retain and motivate our senior management team and highly qualified personnel, and our failure to do so could have an adverse effect on our results of operations.
We believe that our continued success depends to a significant extent upon the skill, experience and performance of members of our senior management team, who have been critical to the management of our operations and implementation of our strategy,products, we must convince such staff as well as physicians and hospitals that our abilityproducts are attractive alternatives to competing products for use in surgical procedures. Additionally, GPOs, independent delivery networks and large single accounts may continue to attract, retain and motivate additional executive officers, and other key employees and consultants, such as those individuals who are engaged in our R&D efforts. The replacement of any of our key personnel likely would involve significant time and costs anduse their market power to consolidate purchasing decisions for physicians. Third-party payers may significantly delay or preventalso continue to use their market power to reduce the achievement of our business objectives and could therefore have an adverse impact on our business. In addition, we do not carry any “key person” insurance policies that could offset potential loss of service under applicable circumstances.
Competition for experienced employees in the medical technology industry can be intense. To attract, retain and motivate qualified employees, we plan to utilize stock-based incentive awards such as employee stock options. If the value of such stock awards does not appreciate as measured by the performance of the price of our Class A common stock and ceases to be viewed as a valuable benefit, our ability to attract, retain and motivate our employees could be adversely impacted, which could negatively affect our results of operations and/or require us to increase the amount we expend on cash and other forms of compensation.
Governments outside the United States may not provide coverage or reimbursement of our products, which may adversely affect our net sales.
Acceptance of our products in international markets may depend, in part, upon the availability of coverage and reimbursement within prevailing healthcare payment systems. Reimbursement and healthcare payment systems in international markets vary significantly by country, and include both government-sponsored healthcare and private insurance. Our products may not obtain international coverage and reimbursement approvals in a timely manner, if at all, which may require consumers desiring our product to purchase them directly. Third-party coverage and reimbursement for our products or any of our products in development for which we may receive regulatory approval may not be available or adequate in international markets, which could have an adverse impact on our business.
We faceby increasing the risk of product liability claims that could be expensive, divert management’s attention and harm our reputation and business. We may not be able to maintain adequate product liability insurance.
Our business exposes us to the risk of product liability claims that are inherent in the testing, manufacturing and marketing of our products. This risk exists even if a product is cleared or approved for commercial sale by the FDA and manufactured in facilities regulated by the FDA or an applicable foreign regulatory authority. Our products are designed to affect, and any future products will be designed to affect, important bodily functions and processes. Any side effects, manufacturing defects, misuse or abuse associated with our products or our
products in development could result in patient injury or death. The medical technology industry has historically been subject to extensive litigation over product liability claims, and we cannot assure you that we will not face product liability suits. We may be subject to product liability claims if our products or products in development cause, or merely appear to have caused, patient injury or death, even if such injury or death was as a result of supplies or components that are produced by third-party suppliers. Product liability claims may be brought against us by consumers, healthcare providers or others selling or otherwise coming into contact with our products, among others. If we cannot successfully defend ourselves against product liability claims, we will incur substantial liabilities and reputational harm. In addition, regardless of merit or eventual outcome, product liability claims may result in:
costs of litigation;
distraction of management’s attention from our primary business;
the inability to commercialize existing or new products;
decreased demand for our products or, if cleared or approved, products in development;
damage to our business reputation;
product recalls or withdrawals from the market;
withdrawal of clinical trial participants;
substantial monetary awards to patients or other claimants; and
loss of net sales.
While we may attempt to manage our product liability exposure by proactively recalling or withdrawing from the market any defective products, any recall or market withdrawal of our products may delay the supply of those products to our customers and may impact our reputation. We cannot assure you that we will be successful in initiating appropriate market recall or market withdrawal efforts that may be required in the future or that these efforts will have the intended effect of preventing product malfunctions and the accompanying product liability that may result. Such recalls and withdrawals may also be used by our competitors to harm our reputation for product safety or be perceived by patients as a safety risk when considering the use of our products, either of which could have an adverse impact on our business.
In addition, although we have product liability and clinical study liability insurance that we believe is appropriate, this insurance is subject to deductibles and coverage limitations. Our current product liability insurance may not continue to be available to us on acceptable terms, if at all, and, if available, coverage may not be adequate to protect us against any future product liability claims. Ifrebates we are unablerequired to obtain insurance at an acceptable cost or on acceptable terms or otherwise protect against potential product liability claims, we could be exposed to significant liabilities. A product liability claim, recall or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could have an adverse impact on our business.
Fluctuations in the demand for our products or our inability to forecast demand accurately may influence the ability of our suppliers to meet our delivery needs or result in excess product inventory.
We are required by some of our contracts with suppliers of our products to forecast future product demand or meet minimum purchase requirements. Our distribution agreement for Supartz FX is subject to certain annual minimum purchase requirements based on a percentage of our Supartz FX annual forecast and our supply agreement for Durolane is subject to a minimum order volume for each order and purchase amounts are also based in part on forecasts. We will also be subject to certain annual minimum purchase requirements for GelSyn-3 and purchase amounts will be based on rolling forecasts. Our forecasts are based on multiple assumptions of product and market demand, which may cause our estimates to be inaccurate. If we underestimate demand, we may not have adequate supplies and could have reduced control over pricing, availability and delivery schedules with our suppliers, which could prevent us from meeting increased customer
or consumer demand and harm our business. However, if we overestimate our demand, we may have underutilized assets and may experience reduced margins. If we do not accurately align our supplies with demand, our business, financial condition and results of operations may be adversely affected.
We may face issues with respect to the supply of our products or their components, including increased costs, disruptions of supply, shortages, contaminations or mislabeling.
We are dependent on a limited number of suppliers for the supply of products and components used in the manufacturing process of our products. Our top three suppliers provide us with products and components that constituted 46%, 44% and 48% of our total net sales for the years ended December 31, 2013, 2014 and 2015, respectively. For the three month periods ended March 28, 2015 and April 2, 2016, our top two suppliers provide us with products and components that constitute 42% and 38%, respectively, of our total net sales. Our Exogen system undergoes final assembly with components procured from various suppliers, including a transducer, which is a key component that is supplied by a single source supplier. GelSyn-3, Supartz FX and Durolane are supplied by single-source third-party manufacturers. We also have a supply agreement with Advanced Biologics LLC, or Advanced Biologics, through October 2018 to purchase our OsteoAMP product. We may not be able to renew or enter into new contracts with our existing suppliers following the expiration of such contracts on commercially reasonable terms, or at all.
In particular, the success of our Surgical business, which, among other things, markets and developstissue-based bone biologic product will depend on our suppliers continuing to have access to donated human cadaveric tissue, as well as the maintenance of high standards in their processing methodology. The supply of such donors can fluctuate over time. We cannot be certain that our current suppliers who rely on allograft bone tissue, plus any additional sources that our suppliers identify in the future, will be sufficient to meet our product needs. Our dependence on a limited number of third-party suppliers and the challenges that they may face in obtaining adequate supplies of allograft bone tissue involve several risks, including limited control over pricing, availability, quality and delivery schedules. We may be unable to find an alternative supplier in a reasonable time period or on commercially reasonable terms, if at all, which would have a material adverse effect on our business, results of operations and financial condition.
If any of our products or the components used inpay them when our products are alleged or provencovered, which may negatively impact our results. We expect that market demand, government regulation, third-party coverage and reimbursement policies and societal pressures will continue to include quality or product defects, including as a result of improper methods of tissue recovery from donorschange the healthcare industry worldwide, resulting in further business consolidations and disease transmission from donated tissue or illegal harvesting, wealliances among our customers, which may need to find alternate supplies, delay productionexert further downward pressure on the prices of our products, discard or otherwise dispose of our products, or engage in a product recall, all of which may have a materially adverse effect on our business, financial condition and results of operations. If our products or the components in our products are affected by adverse prices or quality or other concerns, we may not be able to identify alternate sources of components or other supplies that meet our quality controls and standards to sustain our sales volumes or on commercially reasonable terms, or at all.products.
We rely on a limited number of third-party manufacturers to manufacture certain of our products.
We have developed in-house assembly capabilities for our Exogen system. Exogen components, Supartz FX, GelSyn-3, Durolane and our Surgical products are generally manufactured by third-party manufacturers. We and our third-party manufacturers are required to comply with the Quality System Regulation, or QSR, which is a set of FDA regulations that establishes current Good Manufacturing Practices, or cGMP, requirements for medical devices and covers the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of such devices. There are a limited number of suppliers and third-party manufacturers that operate under FDA’s QSR requirements and that have the necessary expertise and capacity to manufacture our products or components for our products. As a result, it may be difficult for us to locate manufacturers for our anticipated future needs, and our anticipated growth
could strain the ability of our current suppliers and third-party manufacturers to deliver products, materials and components to us. Upon expiration of our existing agreements with these third-party manufacturers, we may not be able to renegotiate the terms of our agreements with these third-party manufacturers on a commercially reasonable basis, or at all.
If we or our third-party manufacturers fail to maintain facilities in accordance with the FDA’s QSR, the noncomplying party could lose the ability to manufacture our products on a commercial scale. Loss of this manufacturing capability would limit our ability to sell our products, including Supartz FX, Durolane and our Surgical products, which are manufactured by single-source third-party manufacturers. See “Business—Manufacturing and supply.”
The manufacture of our products may not be easily transferable to other sites in the event that any of our third-party manufacturers experience breakdown, failure or substandard performance of equipment, disruption of supply or shortages of, or quality issues with, components of our products and other supplies, labor problems, power outages, adverse weather conditions and natural disasters or the need to comply with environmental and other directives of governmental agencies. From time to time, a third-party manufacturer may experience financial difficulties, bankruptcy or other business disruptions, which could disrupt our supply of finished goods or require that we incur additional expense by providing financial accommodations to the third-party manufacturer or taking other steps to seek to minimize or avoid supply disruption, such as establishing a new third-party manufacturing arrangement with another provider. The loss of any of these third-party manufacturers or the failure for any reason of any of these third-party manufacturers to fulfill their obligations under their agreements with us, including a failure to meet our quality controls and standards, may result in disruptions to our supply of finished goods. We may be unable to locate an additional or alternate third-party manufacturing arrangement that meets our quality controls and standards in a timely manner or on commercially reasonable terms, if at all. If this occurs, our business, financial condition and results of operations will be adversely affected.
If our facilities are damaged or become inoperable, we will be unable to continue to research, develop and manufacture our products and, as a result, there will be an adverse impact on our business until we are able to secure a new facility.
We do not have redundant facilities for the final assembly of our Exogen system. Our other facilities and equipment would be costly to replace and could require substantial lead time to repair or replace. Our facilities may be harmed or rendered inoperable by natural or man-made disasters, including, but not limited to, tornadoes, flooding, fire and power outages, which may render it difficult or impossible for us to perform our research, development, manufacturing and commercialization activities for some period of time. The inability to perform those activities, combined with our limited inventory of supplies, components and finished product, may result in the inability to continue manufacturing or supplying our products during such periods and the loss of customers or harm to our reputation. Although we possess insurance for damage to our facilities and the disruption of our business, this insurance may not be sufficient to cover all of our potential losses and this insurance may not continue to be available to us on acceptable terms, or at all.
If we fail to maintain our numerous contractual relationships, our business, financial condition or results of operations could be adversely affected.
We are party to numerous contracts in the normal course of our business, including our distribution agreement for Supartz FX which has a current term expiring in May 2019. We have contractual relationships with suppliers, distributors and agents, as well as service providers. In the aggregate, these contractual relationships are necessary for us to operate our business. From time to time, we amend, terminate or negotiate our contracts. We may also periodically be subject to, or make claims of breach of contract, or threaten legal action relating to
our contracts. These actions may result in litigation. At any one time, we have a number of negotiations under way for new or amended commercial agreements. We devote substantial time, effort and expense to the administration and negotiation of contracts involved in our business. However, these contracts may not continue in effect past their current term or we may not be able to negotiate satisfactory contracts in the future with current or new business partners, which may adversely affect our business, financial condition or results of operations.
If we are unable to manage, maintain and expand our network of direct sales representatives and independent distributors, we may not be able to generate anticipated sales.
Our operating results are directly dependent upon the sales and marketing efforts of not only our direct sales representatives, but also our independent distributors. If our direct sales representatives or independent distributors fail to adequately promote, market and sell our products, our sales could significantly decrease.
We face significant challenges and risks in managing our geographically dispersed distribution network and retaining the individuals who make up that network. If any of our direct sales representatives were to leave us, or if any of our independent distributors were to cease to do business with us, our sales could be adversely affected. In such a situation, we may need to seek alternative independent distributors or increase our reliance on our direct sales representatives, which may not prevent our sales from being adversely affected. If a direct sales representative or independent distributor were to depart and be retained by one of our competitors, we may be unable to prevent them from helping competitors solicit business from our existing customers, which could further adversely affect our sales. Because of the competition for their services, we may be unable to recruit or retain additional qualified independent distributors or to hire additional direct sales representatives to work with us on favorable or commercially reasonable terms, if at all. Failure to hire or retain qualified direct sales representatives or independent distributors would prevent us from maintaining or expanding our business and generating sales.
If we launch new products or increase our marketing efforts with respect to existing products, we will need to expand the reach of our marketing and sales networks. Our future success will depend largely on our ability to continue to hire, train, retain and motivate skilled direct sales representatives and independent distributors with significant technical knowledge in orthobiologics. New hires require training and take time to achieve full productivity. If we fail to train new hires adequately, or if we experience high turnover in our sales force in the future, we cannot be certain that new hires will become as productive as may be necessary to maintain or increase our sales.
If we are unable to expand our sales and marketing capabilities domestically and internationally, we may not be able to effectively commercialize our products, which would adversely affect our business, results of operations and financial condition.
If we choose to acquire or invest in new businesses, products or technologies, we may be unable to complete these acquisitions or to successfully integrate them in a cost-effective and non-disruptive manner.
Our success depends on our ability to enhance and broaden our product offerings in response to changing customer demands, competitive pressures and advances in technologies. In November 2015, we acquired BioStructures, a proprietary developer and marketer of bioresorbable bone graft products for a broad range of spinal and orthopedic surgical applications. We continue to search for viable acquisition candidates or strategic alliances that would expand our market sector and/or global presence, as well as additional products appropriate for current distribution channels. Accordingly, we may in the future pursue the acquisition of, or joint ventures relating to, new businesses, products or technologies instead of developing them ourselves.
internally. For example, we entered into an Option and Equity PurchaseAgreement with CartiHeal providing for, among other things, an exclusive option to acquire the company under certain terms and conditions as described above. See “Business—Development and Clinical Pipeline—Treatment of Cartilage for Osteochondral defects—CartiHeal (developer of Agili-C) investment and option and equity purchase agreement.” We are also exploring a possible acquisition of a medical device company, referred to herein as the Target. We were recently notified that a minority shareholder of the Target has filed a complaint with the Court of Chancery of the State of Delaware contesting the Potential Transaction, as well as related motions to expedite proceedings and issue a temporary restraining order. We understand that the Target intends to defend the action vigorously, but there can be no assurance that this action will not impact the timing, terms or likelihood of closing of the Potential Transaction. Other risks involving potential future and completed acquisitions and strategic investments involve numerous risks, including:include:
risks associated with conducting due diligence;
problems integrating the purchased technologies, products or business operations;
inability to achieve the anticipated synergies and overpaying for acquisitions or unanticipated costs associated with acquisitions;
invalid net sales assumptions for potential acquisitions;
issues maintaining uniform standards, procedures, controls and policies;
diversion of management’s attention from our core business;
adverse effects on existing business relationships with suppliers, distributors and customers;
risks associated with entering new markets in which we have limited or no experience;
potential loss of key employees of acquired businesses; and
increased legal, accounting and compliance costs.
We compete with other companies for these opportunities, and we may be unable to consummate such acquisitions or joint ventures on commercially reasonable terms, or at all. In addition, acquired businesses may have ongoing or potential liabilities, legal claims (including tort and/or personal injury claims) or adverse operating issues that we fail to discover through due diligence prior to the acquisition. Even if we are aware of such liabilities, claims or issues, we may not be able to accurately estimate the magnitude of the related liabilities and damages. In particular, to the extent that prior owners of any acquired businesses or properties failed to comply with or otherwise violated applicable laws or regulations, failed to fulfill their contractual obligations to their customers, or failed to satisfy legal obligations to employees or third parties, we, as the successor, may be financially responsible for these violations and failures and may suffer reputational harm or otherwise be adversely affected. Acquisitions also frequently result in the recording of goodwill and other intangible assets which are subject to potential impairment in the future that could harm our financial results. If we were to issue additional equity in connection with such acquisitions, this may dilute our stockholders.
Pricing pressure from our competitors or hospitals may affect our ability to sell our products at prices necessary to support our current business strategies.
Medical device companies, healthcare systems and GPOs have intensified competitive pricing pressure as a result of industry trends and new technologies. Purchasing decisions are gradually shifting to hospitals, IDNs and other hospital groups, with surgeons and other physicians increasingly acting only as “employees.” Changes in the purchasing behavior of hospitals or the amount third-party payers are willing to reimburse our customers for procedures using our products, including those as a result of healthcare reform initiatives, could create additional pricing pressure on us. In addition to these competitive forces, we continue to see pricing pressure as hospitals introduce new pricing structures into their contracts and agreements, including fixed price formulas, capitated pricing and episodic or bundled payments intended to contain healthcare costs. If such trends continue to drive down the prices we are able to charge for our products, our profit margins will shrink, adversely affecting our business, results of operations and financial condition.
If we fail to successfully enter into purchasing contracts for our BGS products or engage in contract bidding processes internationally, we may not be able to receive access to certain hospital facilities and our sales may decrease.
In the United States, the hospital facilities where physicians treat patients with our BGS products typically require us to enter into purchasing contracts. The process of securing a satisfactory contract can be lengthy and time-consuming and require extensive negotiations and management time. In certain international jurisdictions, from time to time, certain institutions require us to engage in a contract bidding process in the event that such institutions are considering making purchase commitments that exceed specified cost thresholds, which vary by jurisdiction. These processes are only open at certain periods of time, and we may not be successful in the bidding process. If we do not receive access to hospital facilities through these contracting processes or otherwise, or if we are unable to secure contracts or tender successful bids, our sales may stagnate or decrease and our operating results may be harmed. Furthermore, we may expend significant effort in these time-consuming processes and still may not obtain a purchase contract from such hospitals.
Governments outside the United States may not provide coverage or reimbursement of our products, which may adversely affect our business, results of operations and financial condition.
Acceptance of our products in international markets may depend, in part, upon the availability of coverage and reimbursement within prevailing healthcare payment systems. Reimbursement and healthcare payment systems in international markets vary significantly by country, and include both government-sponsored healthcare and private insurance. Our products may not obtain international coverage and reimbursement approvals in a timely manner, if at all, which may require consumers desiring our products to purchase them directly. Third-party coverage and reimbursement for our products or any of our products in development for which we may receive regulatory approval may not be available or adequate in international markets, which could adversely affect our business, results of operations and financial condition.
Our future growth depends on physician awareness of the distinctive characteristics, benefits, safety, clinical efficacy and cost-effectiveness of our products.
We focus our sales, marketing and training efforts on physicians, surgeons and other health care professionals. The acceptance of our products depends in part on our ability to educate physicians as to the distinctive characteristics, benefits, safety, clinical efficacy and cost-effectiveness of our products compared to alternative products, procedures and therapies. If physicians, surgeons or other healthcare professionals are not properly trained, they may misuse or ineffectively use our products, which may result in unsatisfactory patient outcomes, patient injury, negative publicity or lawsuits against us. In addition, a failure to educate physicians, surgeons or other healthcare professionals regarding our products may impair our ability to achieve market acceptance 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, which may prevent us from achieving increased market penetration or improved operating results.
The medical device industry is characterized by intense competition, subject to rapid change and significantly affected by market activities of industry participants, new product introductions and other technological advancements. We believe that our competitors have historically dedicated and will continue to dedicate significant resources to promote their products or to develop new products. We have competitors in the United States and internationally, including major medical device and pharmaceutical companies, biotechnology companies and universities and other research institutions.
These companies and other industry participants may develop alternative treatments, products or procedures that compete directly or indirectly with our products. If alternative treatments are, or are perceived to be, superior to our products, sales of our products could be adversely affected and our results of operations could suffer. Our competitors may also develop and patent processes or products earlier than we can or obtain regulatory clearance
or approvals for competing products more rapidly than we can, which could impair our ability to develop and commercialize similar processes or products.
Many of our current and potential competitors are major medical device and pharmaceutical companies that have substantially greater financial, technical and marketing resources than we do, and they may succeed in developing products that would render our products obsolete or noncompetitive. It is also possible that our competition will be able to leverage their large market share to set prices at a level below that which is profitable for us.
Some of our competitors enjoy several competitive advantages over us, including:
greater financial, human and other resources for product research and development, sales and marketing and litigation;
significantly greater name recognition;
control of intellectual property and more expansive portfolios of intellectual property rights, which could impact future products under development;
greater experience in obtaining and maintaining regulatory clearances or approvals for products and product enhancements;
established relationships with hospitals and other healthcare providers, physicians, suppliers, customers and third-party payers;
additional lines of products, and the ability to bundle products to offer greater incentives to gain a competitive advantage; and
more established sales, marketing and worldwide distribution networks.
The potential introduction by competitors of products that compete with our existing or planned products may also make it difficult to market or sell our products. In addition, the entry of multiple new products and competitors may lead some of our competitors to employ pricing strategies that could adversely affect the pricing of our products and pricing in the market generally.
As a result, our ability to compete successfully will depend on our ability to develop proprietary products that reach the market in a timely manner, receive adequate coverage and reimbursement from third-party payers, and are safer, less invasive and more effective than alternatives available for similar purposes. If we are unable to do so, our sales or margins could decrease, which would adversely affect our business, results of operations and financial condition.
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.
On December 18, 2018, the FDA published notice in the Federal Register announcing its intention to reconsider the appropriate classification of HA intra-articular products intended for the treatment of pain in OA of the knee. Although HA products intended for this use have previously been regulated as medical devices, in its notice the FDA stated that current published scientific literature supports that HA products achieve their primary intended purpose of treatment of pain in OA of the knee through biological action in the body which would require such products being classified as drugs. The FDA has encouraged organizations intending to submit applications for changes in indications for use, formulation, or route of administration of their HA products to obtain from the FDA an informal or formal classification and jurisdiction determination as a drug or device through a pre-request for designation or request for designation, respectively, prior to submission of such application. However, the FDA to date has taken no action to reclassify HA products from medical devices to drugs, or indicated what the potential ramifications would be for currently marketed HA products if a reclassification were to occur.
We currently market three HA products: Durolane, GELSYN-3 and SUPARTZ FX. If the reclassification of HA products were to occur, the FDA may not allow us to continue to market these products without submitting additional clinical trial data, obtaining approval of a New Drug Application, or NDA, for these products, or
without otherwise complying with new conditions or limitations on how those products are marketed. Clinical testing can take years to complete, can be expensive and carries uncertain outcomes, and there is no guarantee that would be able to successfully obtain and maintain any required regulatory approvals. These new regulatory obligations could result in increased regulation of Durolane, GELSYN-3 and SUPARTZ FX and would subject these products to a new set of regulatory requirements to which they have not been previously subject. These changes could ultimately increase our costs and adversely impact our business, results of operations and financial condition if they were to be implemented. See “Risk factors—Risks related to our business—If we are unable to achieve and maintain adequate levels of coverage and/or reimbursement for our products, the procedures using our products, or any future products we may seek to commercialize, the commercial success of these products may be severely hindered.”
Our ability to maintain our competitive position depends on our ability to attract, retain and motivate our senior management team and highly qualified personnel, and our failure to do so could adversely affect our business, results of operations and financial condition.
We believe that our continued success depends to a significant extent upon the skill, experience and performance of members of our senior management team, who have been critical to the management of our operations and implementation of our strategy, as well as our ability to continue to attract, retain and motivate additional executive officers, and other key employees and consultants, such as those individuals who are engaged in our research and development efforts. The replacement of any of our key personnel likely would involve significant time and costs and may significantly delay or prevent the achievement of our business objectives and could therefore adversely affect our business, results of operations and financial condition. In addition, we do not carry any “key person” insurance policies that could offset potential loss of service under applicable circumstances.
Competition for experienced employees in the medical device industry can be intense. To attract, retain and motivate qualified employees, we may utilize equity-based incentive awards such as employee stock options. If the value of such equity incentive awards does not appreciate as measured by the performance of the price of our Class A common stock and ceases to be viewed as a valuable benefit, our ability to attract, retain and motivate our employees could be adversely impacted, which could adversely affect our business, results of operations and financial condition and/or require us to increase the amount we expend on cash and other forms of compensation.
Since inception, our history of operations has included periods of net losses, and we may not be able to sustain profitability.
For the years ended December 31, 2019 and 2018 and the nine months ended September 26, 2020 and September 28, 2019, we had net income from continuing operations of $8.1 million, $4.4 million, $12.5 million and $2.8 million, respectively. We had an accumulated deficit of $142.2 million and $141.7 million as of September 26, 2020 and December 31, 2019, respectively. Our ability to generate sufficient net sales from our existing products or from any of our products indevelopment or products that we acquire, in order to sustain profitability, is uncertain, and, since inception, our history of operations has previously included periods of net loss. We expect that our operating expenses will continue to increase as we continue to develop, enhanceand commercialize new products and incur additional operational costs associated with being a public company. Furthermore, we may not be able tosustain or increase profitability on an ongoing basis. If we do not achieve sustained profitability, it will be more difficultfor us to finance our business and accomplish our strategic objectives.
If we fail to properly manage our anticipated growth, our business could suffer.
We have been growing steadily in recent periods. We intend to continue to grow and may experience periods of rapid growth and expansion, which could place a significant additional strain on our limited personnel, information technology systems and other resources. In particular, our sales force and distributor network requires significant management, training, financial and other supporting resources. Any failure by us to manage our growth effectively could have an adverse effect on our ability to achieve our development and commercialization goals.
To achieve our revenue goals, we must also successfully increase supply of our products to meet expected customer demand. In the future, we may experience difficulties with yields, quality control, component supply and shortages of qualified personnel, among other problems. These problems could result in delays in product availability and increases in expenses. Any such delay or increased expense could adversely affect our ability to generate revenue.
Future growth will also impose significant added responsibilities on management, including the need to identify, recruit, train and integrate additional employees. In addition, rapid and significant growth will place a strain on our administrative and operational infrastructure.
In order to manage our operations and growth we will need to continue to improve our operational and management controls, reporting and information technology systems and financial internal control procedures. If we are unable to manage our growth effectively, it may be difficult for us to execute our business strategy and our operating results and business could suffer.
We may not be able to strengthen our brand and the brands associated with our products.
We believe that strengthening the Bioventus brand and the brands associated with our products is critical to achieving widespread acceptance of our products, particularly because of the rapidly developing nature of the market for active healing products. Promoting and positioning our brand will depend largely on the success of our marketing efforts and the reliability of our products. Historically, our efforts to build our brand have involved marketing expenses, and it is likely that our future marketing efforts will require us to incur additional expenses. These brand promotion activities may not yield increased sales and, even if they do, any sales increases may not offset the expenses we incur to promote our brand and our products. If we fail to successfully promote and maintain our brand, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand and the brands of our products, our products may not be accepted by healthcare providers, which would cause our sales to decrease and would adversely affect our business, results of operations and financial condition.
We face the risk of product liability claims that could be expensive, divert management’s attention and harm our reputation and business. We may not be able to maintain adequate product liability insurance.
Our business exposes us to the risk of product liability claims that are inherent in the testing, manufacturing and marketing of our products. This risk exists even if a product is cleared or approved for commercial sale by the FDA and manufactured in facilities regulated by the FDA or an applicable foreign regulatory authority. Our products are designed to affect, and any future products will be designed to affect, important bodily functions and processes. Any side effects, manufacturing defects, misuse or abuse associated with our products or our products in development could result in patient injury or death. The medical device industry has historically been subject to extensive litigation over product liability claims, and we cannot assure you that we will not face product liability claims. We may be subject to product liability claims if our products or products in development cause, or merely appear to have caused, patient injury or death, even if such injury or death was as a result of supplies or components that are produced by third-party suppliers. Product liability claims may be brought against us by consumers, healthcare providers or others selling or otherwise coming into contact with our products, among others. If we cannot successfully defend ourselves against product liability claims, we will incur substantial liabilities and reputational harm. In addition, regardless of merit or eventual outcome, product liability claims may result in:
costs of litigation;
distraction of management’s attention from our primary business;
the inability to commercialize existing or new products;
decreased demand for our products or, if cleared or approved, products in development;
damage to our business reputation;
product recalls or withdrawals from the market;
withdrawal of clinical trial participants;
substantial monetary awards to patients or other claimants; and
loss of net sales.
While we may attempt to manage our product liability exposure by proactively recalling or withdrawing from the market any defective products, any recall or market withdrawal of our products may delay the supply of those products to our customers and may impact our reputation. For example, we have in the past instituted a voluntary recall for certain of our products. We cannot assure you that we will be successful in initiating appropriate market recall or market withdrawal efforts that may be required in the future or that these efforts will have the intended effect of preventing product malfunctions and the accompanying product liability that may result. Such recalls and withdrawals may also be used by our competitors to harm our reputation for product safety or be perceived by patients as a safety risk when considering the use of our products, either of which could adversely affect our business, results of operations and financial condition.
In addition, although we have product liability and clinical study liability insurance that we believe is appropriate, this insurance is subject to deductibles and coverage limitations. Our current product liability insurance may not continue to be available to us on acceptable terms, if at all, and, if available, coverage may not be adequate to protect us against any future product liability claims. If we are unable to obtain insurance at an acceptable cost or on acceptable terms or otherwise protect against potential product liability claims, we could be exposed to significant liabilities. A product liability claim, recall or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could adversely affect our business, results of operations and financial condition.
Fluctuations in the demand for our products or our inability to forecast demand accurately may influence the ability of our suppliers to meet our delivery needs or result in excess product inventory.
We are required by some of our contracts with suppliers of our products to forecast future product demand or meet minimum purchase requirements. Our supply agreement for Durolane is subject to a minimum order volume for each order and purchase amounts are based in part on forecasts. We are also subject to certain annual minimum purchase requirements for GELSYN-3 and SUPARTZ FX and purchase amounts are based on rolling annual forecasts. Our forecasts are based on multiple assumptions of product and market demand, which may cause our estimates to be inaccurate. If we underestimate demand, we may not have adequate supplies and could have reduced control over pricing, availability and delivery schedules with our suppliers, which could prevent us from meeting increased customer or consumer demand and harm our business. However, if we overestimate our demand, we may have underutilized assets and may experience reduced margins. If we do not accurately align our supplies with demand and/or fail to meet contractual minimum purchase requirements, our business, results of operations and financial condition may be adversely affected. For example, if we fail to order the minimum order quantity of SUPARTZ FX from Seikagaku Corporation, or SKK, we are obligated to pay SKK a specified fee equal to the number of units needed to meet the minimum order quantity multiplied by a specified percentage of the purchase price.
We may face issues with respect to the supply of our products or their components, including increased costs, disruptions of supply, shortages, contaminations or mislabeling.
We are dependent on a limited number of suppliers for our products and components used in the manufacturing process of our products. Our top three suppliers provide us with products and components that constituted 54%, 49%, 53% and 53% of total net sales for the years ended December 31, 2019 and 2018 and the nine months ended September 26, 2020 and September 28, 2019, respectively. Durolane, GELSYN-3 and SUPARTZ FX are supplied by single-source third-party manufacturers. Our Exogen system undergoes final assembly with components procured from various suppliers, including a transducer, which is a key component that is supplied by a single source supplier. We may not be able to renew or enter into new contracts with our existing suppliers following the expiration of such contracts on commercially reasonable terms, or at all.
In particular, the success of our bone graft substitutions product portfolio, depends on our suppliers continuing to have access to donated human cadaveric tissue, as well as the maintenance of high standards in their processing methodology. The supply of such donors can fluctuate over time. We cannot be certain that our current suppliers who rely on allograft bone tissue, plus any additional sources that our suppliers identify in the future, will be sufficient to meet our product needs. Our dependence on a limited number of third-party suppliers and the challenges that they may face in obtaining adequate supplies of allograft bone tissue involve several risks, including limited control over pricing, availability, quality and delivery schedules. We may be unable to find an alternative supplier in a reasonable time period or on commercially reasonable terms, if at all, which would adversely affect our business, results of operations and financial condition.
If any of our products or the components used in our products are alleged or proven to include quality or product defects, including as a result of improper methods of tissue recovery from donors and disease transmission from donated tissue or illegal harvesting, we may need to find alternate supplies, delay production of our products, discard or otherwise dispose of our products, or engage in a product recall, all of which may adversely affect our business, results of operations and financial condition. If our products or the components in our products are affected by adverse prices or quality or other concerns, we may not be able to identify alternate sources of components or other supplies that meet our quality controls and standards to sustain our sales volumes or on commercially reasonable terms, or at all.
We rely on a limited number of third-party manufacturers to manufacture certain of our products.
Third-party manufacturers generally manufacture Durolane, GELSYN-3, SUPARTZ FX, Exogen components and our bone graft substitutions product portfolio. We have developed in-house assembly capabilities for our Exogen system. We and our third-party manufacturers are required to comply with the Quality System Regulation, or QSR, which is a set of FDA regulations that establishes current Good Manufacturing Practices, or cGMP, requirements for medical devices and covers the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of such devices. Moreover, certain of our products may be re-classified as drugs, and we are planning to seek approval of a product pursuant to the BLA pathway. In each case, such products would be required to comply with the cGMP requirements that apply to drugs and biologics, respectively.
There are a limited number of suppliers and third-party manufacturers that operate under FDA’s QSR requirements and that have the necessary expertise and capacity to manufacture our products or components for our products. As a result, it may be difficult for us to locate manufacturers for our anticipated future needs, and our anticipated growth could strain the ability of our current suppliers and third-party manufacturers to deliver products, materials and components to us. Upon expiration of our existing agreements with these third-party manufacturers, we may not be able to renegotiate the terms of our agreements with these third-party manufacturers on a commercially reasonable basis, or at all.
If we or our third-party manufacturers fail to maintain facilities in accordance with the FDA’s QSR, the noncomplying party could lose the ability to manufacture our products on a commercial scale. Loss of this manufacturing capability would limit our ability to sell our products, including Durolane, GELSYN-3, SUPARTZ FX and our bone graft substitutions product portfolio, which are manufactured by single-source third-party manufacturers. See “Business—Manufacturing and supply.”
The manufacturing of our products may not be easily transferable to other sites in the event that any of our third-party manufacturers experience breakdown, failure or substandard performance of equipment, disruption of supply or shortages of, or quality issues with, components of our products and other supplies, labor problems, power outages, adverse weather conditions and natural disasters or the need to comply with environmental and other directives of governmental agencies. From time to time, a third-party manufacturer may experience financial difficulties, bankruptcy or other business disruptions, which could disrupt our supply of finished goods or require that we incur additional expense by providing financial accommodations to the third-party
manufacturer or taking other steps to seek to minimize or avoid supply disruption, such as establishing a new third-party manufacturing arrangement with another provider. The loss of any of these third-party manufacturers or the failure for any reason of any of these third-party manufacturers to fulfill their obligations under their agreements with us, including a failure to meet our quality controls and standards, may result in disruptions to our supply of finished goods. We may be unable to locate an additional or alternate third-party manufacturing arrangement that meets our quality controls and standards in a timely manner or on commercially reasonable terms, if at all. If this occurs, our business, results of operations and financial condition will be adversely affected.
If our facilities are damaged or become inoperable, we will be unable to continue to research, develop and manufacture our products and, as a result, our business, results of operations and financial condition may be adversely affected until we are able to secure a new facility.
We do not have redundant facilities for the final assembly of our Exogen system. Our other facilities and equipment would be costly to replace and could require substantial lead-time to repair or replace. Our facilities may be harmed or rendered inoperable by natural or man-made disasters, including, but not limited to, tornadoes, flooding, fire and power outages. Such disasters may render it difficult or impossible to manufacture and commercialize our products and conduct our research and development activities for new products, line extensions and expanded indications. The inability to perform those activities, combined with our limited inventory of supplies, components and finished product, may result in the inability to continue manufacturing or supplying our products during such periods and the loss of customers or harm to our reputation. Although we possess insurance for damage to our facilities and the disruption of our business, this insurance may not be sufficient to cover all of our potential losses and this insurance may not continue to be available to us on acceptable terms, or at all.
If we fail to maintain our numerous contractual relationships, our business, results of operations and financial condition could be adversely affected.
We are party to numerous contracts in the normal course of our business, including our supply and distribution agreements for Durolane, which has a current term expiring in December 2115, GELSYN-3, which has a current term expiring in February 2026, and SUPARTZ FX, which has a current term expiring in December 2028. We have contractual relationships with suppliers, distributors and agents, as well as service providers. In the aggregate, these contractual relationships are necessary for us to operate our business. From time to time, we amend, terminate or negotiate our contracts. We may also periodically be subject to, or make claims of breach of contract, or threaten legal action relating to our contracts. These actions may result in litigation. At any one time, wehave a number of negotiations under way for new or amended commercial agreements. We devote substantial time, effort and expense to the administration and negotiation of contracts involved in our business. However, these contracts may not continue in effect past their current term or we may not be able to negotiate satisfactory contracts in the future with current or new business partners, which may adversely affect our business, results of operations and financial condition.
If we are unable to manage, train, maintain and grow our direct sales team and network of independent distributors, we may not be able to generate anticipated sales or we may be subject to regulatory or enforcement action.
Our operating results are directly dependent upon the sales and marketing efforts of not only our direct sales team, but also our independent distributors. If our direct sales team or independent distributors fail to adequately promote, market and sell our products, our sales could significantly decrease.
We face significant challenges and risks in managing our geographically dispersed distribution network and retaining the individuals who make up that network. If any members of our direct sales team were to leave us, or if any of our independent distributors were to cease to do business with us, our sales could be adversely affected.
In such a situation, we may need to seek alternative independent distributors or increase our reliance on our direct sales team, which may not prevent our sales from being adversely affected. If a member of our direct sales team or independent distributor were to depart and be retained by one of our competitors, we may be unable to prevent them from helping competitors solicit business from our existing customers, which could further adversely affect our sales. Because of the competition for their services, we may be unable to recruit or retain additional qualified independent distributors or to hire additional direct sales team members to work with us on favorable or commercially reasonable terms, if at all. Failure to hire or retain qualified members of our direct sales team or independent distributors would prevent us from maintaining or expanding our business and generating sales.
If we launch new products or increase our marketing efforts with respect to existing products, we will need to expand the reach of our marketing and sales networks. Our future success will depend largely on our ability to continue to hire, train, retain and motivate skilled members of our direct sales team and independent distributors with significant technical knowledge in active healing products. New hires require training and take time to achieve full productivity. If we fail to train new hires adequately, or if we experience high turnover in our sales force in the future, we cannot be certain that new hires will become as productive as may be necessary to maintain or increase our sales. Further, if we are unable to adequately train new hires and/or members of our direct sales team, if new hires and/or members of our direct sales team engage in practices such as the promotion of unapproved or off-label uses of our devices or if new hires and/or members of our direct sales team assist with the reimbursement process in a manner that results in false or fraudulent claims for reimbursement being submitted to government or private payers, we may be subject to investigations or regulatory or enforcement actions by governmental authorities or third party payers for reasons such as the promotion of unapproved or off-label uses of our devices, inappropriate actions and involvement in the reimbursement process, or inappropriate completion of reimbursement forms. See “—Risks related to government regulation—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.”
If we are unable to expand our sales and marketing capabilities domestically and internationally, we may not be able to effectively commercialize our products, which would adversely affect our business, results of operations and financial condition.
Actual or attempted breaches of security, unauthorized disclosure of information, denial of service attacks or the perception that personal and/or other sensitive or confidential information in our possession or control is not secure, could result in a material loss of business, substantial legal liability or significant harm to our reputation.
We receive, collect, process, use and store a large amount of information, including personally identifiable, protected health and other sensitive and confidential information. This data is often accessed by us through transmissions over public and private networks, including the Internet. The secure transmission of such information over the Internet and other mechanisms is essential to maintain confidence in our IT systems. Despite the privacy and security measures we have in place to ensure compliance with applicable laws, regulations and contractual requirements, our facilities and systems, and those of our third-party vendors and service providers, are vulnerable to privacy and security incidents including, but not limited to, computer hacking, breaches, acts of vandalism or theft, computer viruses and other malware, including ransomware or other forms of cyber-attack, misplaced or lost data, programming and/or human errors or other similar events. A party, whether internal or external, that is able to circumvent our security systems could, among other things, misappropriate or misuse sensitive or confidential information, user information or other proprietary information, or cause significant interruptions in our operations. Internal or external parties mayhave and will continue to attempt to circumvent our security systems, and we expect that we may in the future experience external attacks on our network, such as, for example, reconnaissance probes, denial of service attempts, malicious software attacks and phishing attacks.
Because the techniques used to circumvent security systems can be highly sophisticated and change frequently, often are not recognized until launched against a target and may originate from less regulated and remote
areas around the world, we may be unable to proactively address all possible techniques or implement adequate preventive measures for all situations. Recent, well-publicized attacks on prominent companies have resulted in the theft of significant amounts of sensitive and personal information and demonstrate the sophistication of the perpetrators and magnitude of the threat posed to companies across the nation, including the health care industry.
If someone is able to circumvent or breach our security systems, they could steal any information located therein or cause interruptions to our operations. Security breaches or attempts thereof could also damage our reputation and expose us to a risk of monetary loss and/or litigation, fines and sanctions. We also face risks associated with security breaches affecting third parties that conduct business with us or our customers and others who interact with our data. While we maintain insurance that covers certain security and privacy breaches, we may not carry appropriate insurance or maintain sufficient coverage to compensate for all potential liability.
We are subject to diverse laws and regulations relating to data privacy and security, including the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, and the EU Data Protection Directive (95/46/EC). Complying with these numerous and complex regulations is expensive and difficult, and failure to comply with any privacy laws or data security laws or any security incident or breach involving the misappropriation, loss or other unauthorized use or disclosure of sensitive or confidential patient or consumer information, whether by us, one of our business associates or another third-party, could have a material adverse effect on our business, reputation, financial condition and results of operations, including but not limited to: material fines and penalties; compensatory, special, punitive, and statutory damages; litigation; consent orders regarding our privacy and security practices; requirements that we provide notices, credit monitoring services and/or credit restoration services or other relevant services to impacted individuals; adverse actions against our licenses to do business; and injunctive relief. Furthermore, these rules are constantly changing; for example, the US-EU Safe Harbor framework has been declared invalid and other methods to permit transfer are now under review. Additionally, the costs incurred to remediate any data security or privacy incident could be substantial.
We cannot assure you that any of our third-party service providers with access to our or our customers and/orcustomers’, suppliers’, trial patients’, and employees’ personally identifiable and other sensitive or confidential information in relation to which we are responsible will maintain appropriate policies and practices regarding data privacy and security in compliance with all applicable lawsnot breach contractual obligations imposed by us, or that they will not experience data security breaches or attempts thereof, which could have a corresponding effect on our business.business including putting us in breach of our obligations under privacy laws and regulations and/or which could in turn adversely affect our business, results of operations and financial condition. While we attempt to address the associated risks by requiring all such third-party providers with data access to sign agreements, including business associate agreements, if necessary, obligating them to takeperforming security measures to protect such data,assessments and detailed due diligence, we cannot assure you that these contractual measures and our own privacy and security-related safeguards will protect us from the risks associated with the third-party processing, storage and transmission of such information.
Failure of a key information technology and communication system, process or site could adversely affect our business.business, results of operations and financial condition.
We rely extensively on information technology and communication systems and software and hardware products, including those of external providers, to conduct business. These systems and software and hardware impact, among other things, ordering and managing components of our products from suppliers, shipping products to customers on a timely basis, processing transactions, coordinating our sales activities across all of our products, summarizing and reporting results of operations, complying with regulatory, legal or tax requirements, data security and other processes necessary to manage our business.
Despite any precautions we may take, our systems and software and hardware could be exposed to damage or interruption from circumstances beyond our control, such as fire, natural disasters, systems failures, power
outages, cyber-attacks, terrorism, energy loss, telecommunications failure, security breaches and attempts thereof, computer viruses and similar disruptions affecting the global Internet. Although we have taken steps to prevent system failures and have back-up systems and procedures to prevent or reduce disruptions, such steps may not prevent an interruption of services and our disaster recovery planning may not be adequate or account for all contingencies. Additionally, our insurance may not adequately compensate us for all losses or failures that may occur. If our systems or software and hardware are damaged or cease to function properly and our business continuity plans do not effectively compensate on a timely basis, we may suffer interruptions in our operations, which could adversely affect our business.business, results of operations and financial condition.
We will need to improve and upgrade our systems and infrastructure as our operations grow in scale in order to maintain the reliability and integrity of our systems and infrastructure. The expansion of our systems and infrastructure will require us to commit substantial financial, operational and technical resources before the volume of our business increases, with no assurance that the volume of business will increase. Any service outages or delays due to the installation of any new or upgraded technology (and customer issues therewith), or
the impact on the reliability of our data from any new or upgraded technology could adversely affect our cash flows, operatingbusiness, results of operations and financial condition.
Our business subjects us to economic, political, regulatory and other risks associated with international sales and operations that could materially adversely affect our business, financial condition or results of operations.operations and financial condition.
Since we sell our products in many different jurisdictions outside the United States, our business is subject to risks associated with conducting business internationally. We anticipate that net sales from international operations will continue to represent a portion of our total net sales. In addition, a number of our third-party manufacturing facilities and suppliers of our products are located outside the United States. Accordingly, our future results could be harmed by a variety of factors, including:
economic weakness, including inflation, or political instability in particular foreign economies and markets;
foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incident to doing business in another country;
customers in some foreign countries potentially having longer payment cycles;
disadvantages of competing against companies from countries that are not subject to U.S. laws and regulations, including the U.S. Foreign Corrupt Practices Act, or FCPA, regulations of the U.S. Office of Foreign Assets Controls, and U.S. anti-money laundering regulations, as well as exposure of our foreign operations to liability under these regulatory regimes;
training of third-parties on our products and the procedures in which they are used;
reduced protection for and greater difficulty enforcing our intellectual property rights;
unexpected changes in tariffs, trade barriers and regulatory requirements, export licensing requirements or other restrictive actions by foreign governments;
difficulty in staffing and managing widespread operations, including compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;
foreign taxes, including withholding of payroll taxes;
workforce uncertainty in countries where labor unrest is more common than in the United States;
international regulators and third-party payorspayers requiring additional clinical studies prior to approving or allowing reimbursement for our products;
complexities associated with managing multiple payorpayer reimbursement regimes, government payorspayers or patient self-pay systems;
production shortages resulting from any events affecting material supply or manufacturing capabilities abroad; and
business interruptions resulting from geopolitical actions, including war and terrorism, global pandemics or natural disasters including earthquakes, typhoons, floods and fires.
In addition, further expansion into new international markets may require significant resources and the efforts and attention of our management and other personnel, which may divert resources from our existing business operations. As we expand our business internationally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our operations outside of the United States.
Failure to comply with the FCPA and laws associated with our activities outside the United States could adversely affect our business, financial condition or results of operations.
We are subject to the FCPA and other anti-bribery legislation around the world. The FCPA generally prohibits covered entities and their intermediaries from engaging in bribery or making other prohibited payments, offers or promises to foreign officials for the purpose of obtaining or retaining business or other advantages. In addition, the FCPA imposes recordkeeping and internal controls requirements on publicly traded corporations and their foreign affiliates, which are intended to, among other things, prevent the diversion of corporate funds to the payment of bribes and other improper payments, and to prevent the establishment of “off books” slush funds from which such improper payments can be made. As we conduct our business in jurisdictions outside of the United States, we face significant risks if we fail to comply with the FCPA and other laws that prohibit improper payments, offers or promises of payment to foreign governments and their officials and political parties by us and other business entities for the purpose of obtaining or retaining business or other advantages. In many foreign countries, particularly in countries with developing economies, it may be a local custom that businesses operating in such countries engage in business practices that are prohibited by the FCPA or other laws and regulations. Although we have implemented a company policy requiring our employees and consultants to comply with the FCPA and similar laws, such policy may not be effective at preventing all potential FCPA or other violations. Although our agreements with our international distributors clearly state our expectations for our distributors’ compliance with U.S. laws, including the FCPA, and provide us with various remedies upon any non-compliance, including the ability to terminate the agreement, we also cannot guarantee our distributors’ compliance with U.S. laws, including the FCPA. Therefore there can be no assurance that none of our employees and agents, or those companies to which we outsource certain of our business operations, have not and will not take actions that violate our policies or applicable laws, for which we may be ultimately held responsible. Any violation of the FCPA and related policies could result in severe criminal or civil sanctions, which could have a material and adverse effect on our business, financial condition or results of operations.
Furthermore, we are subject to the export controls and economic embargo rules and regulations of the United States, including, but not limited to, the Export Administration Regulations and trade sanctions against embargoed countries, which are administered by the Office of Foreign Assets Control within the Department of the Treasury, as well as the laws and regulations administered by the Department of Commerce. These regulations limit our ability to market, sell, distribute or otherwise transfer our products or technology to prohibited countries or persons. A determination that we have failed to comply, whether knowingly or inadvertently, may result in substantial penalties, including fines, enforcement actions, civil and/or criminal sanctions, the disgorgement of profits, the imposition of a court-appointed monitor, as well as the denial of export privileges, and may have an adverse effect on our business, financial condition or results of operations.
We are exposed to foreign currency risks, which may materially adversely affect our business, financial condition or results of operations.operations and financial condition.
Our financial statements are presentedExternal events such as the withdrawal by the United Kingdom from the EU, global pandemics, the ongoing uncertainty regarding actual and potential shifts in U.S. dollars.and foreign trade, economic and other policies and the passage of U.S. taxation reform legislation each have caused, and may continue to cause, significant volatility in currency exchange rates. Because some of our revenue, expenses, assets and liabilities are denominated in foreign currencies, we are subject to exchange rate and currency risks. In preparing our financial statements, which are presented in U.S. dollars, we must convert all non-U.S. dollar financial results to U.S. dollars at varying exchange rates. This may ultimately result in currency gain or loss, the outcome of which we cannot predict. Furthermore, to the extent that we incur expenses or earn revenue in currencies other than in U.S. dollars, any change in the values of those foreign currencies relative to the U.S. dollar could cause our profits to decrease or our products to be less competitive against those of our competitors. To the extent that our current assets denominated in foreign currency are greater or less than our current liabilities denominated in foreign currencies, we face potential foreign exchange exposure.
To minimize such exposures, we have entered, and may in the future enter, into derivative instruments related to forecasted foreign currency transactions or currency hedges from time to time. Losses from changes in the value of the Euro or other foreign currencies relative to the U.S. dollar could materiallyadversely affect our business, financial condition or results of operations.operations and financial condition.
We are subject to differing tax rates in several jurisdictions in which we operate, which may adversely affect our business, results of operations.operations and financial condition.
We have subsidiarieswill be subject to taxes in several countries. Our business outside of the United States is conducted primarily through a subsidiaryand certain foreign jurisdictions. Due to economic and political conditions, tax rates in various jurisdictions, including the United States, may be subject to change. Our future effective tax rates could be affected by changes in the Netherlands. Income taxesmix of earnings in countries with differing statutory tax rates, changes in the Netherlands are imposed on a negotiated percentagevaluation of sales. We have an agreement with the Dutch taxing authorities that is subject to renewal every five years where our subsidiary in the Netherlands will incur, but not have to pay income taxes in years when the subsidiary is operating at a loss. As a result, based on the net sales for the year ended December 31, 2013, we recorded a deferred tax liability of about $0.3 million which is still outstanding at December 31, 2015. If ourassets and liabilities and changes in tax treatment were to change,laws or their interpretation. In addition, we may be subject to additionalincome tax liabilityaudits by various tax jurisdictions. Although we believe our income tax liabilities are reasonably estimated and accounted for in accordance with applicable laws and principles, an adverse resolution by one or penalty, whichmore taxing authorities could have a material impact on the results of our operations
International tariffs applied to goods traded between the United States and China may adversely affect our profitability.
Thebusiness, results of the United Kingdom’s referendum on withdrawal from the European Union may have a negative effect on global economic conditions,operations and financial markets and our business.condition.
In June 2016, a majority of voters in the United Kingdom electedInternational tariffs, including tariffs applied to withdraw from the European Union in a national referendum. The referendum was advisory, and the terms of any withdrawal are subject to a negotiation period that could last at least two years after the government of the United Kingdom formally initiates a withdrawal process. Nevertheless, the referendum has created significant uncertainty about the future relationshipgoods traded between the United KingdomStates and China, may adversely affect our business, results of operations and financial condition. Since the European Union, includingbeginning of 2018, there has been increasing rhetoric, in some cases coupled with respectlegislative or executive action, from several U.S. and foreign leaders regarding the possibility of instituting tariffs against foreign imports of certain materials. More specifically, in March and April of 2018, the U.S. and China have applied tariffs to certain of each other’s exports. The institution of trade tariffs both globally and between the lawsU.S. and regulations that will apply asChina specifically carries the United Kingdom determines which European Union laws to replace or replicate in the eventrisk of a withdrawal. The referendum has also given rise to calls for the governments of other European Union member states to consider withdrawal. These developments, or the perception that any of them could occur, have had and may continue to have a material adverse effect on globaladversely affecting overall economic conditions and the stability of global financial markets, and may significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Any of these factors could depress economic activity and restrict our access to capital,condition, which could have a material adverse effectnegative impact on us as imposition of tariffs could cause an increase in the cost of our products and the components for our products, specifically with respect to our Exogen system, which may adversely affect our business, financial condition and results of operations and reduce the price of our Class A common stock.
Our credit agreements containThe 2019 Credit Agreement contains financial and operating restrictions that may limit our access to credit. If we fail to comply with financial or other covenants in our credit agreements,the 2019 Credit Agreement, we may be required to repay indebtedness to our existing lenders, which may harm our liquidity.
On December 6, 2019, we entered into a $250.0 million credit and guaranty agreement, or the 2019 Credit Agreement, with Wells Fargo Bank National Association, as administrative agent and collateral agent, and a
syndicate of other entities as lenders. As of April 2, 2016,September 26, 2020, we had outstanding indebtedness of $19.5$193.3 million under our term loan (leaving $49.9 million available under our revolving credit facility (leaving availabilityafter giving effect to $0.1 million in an outstanding letter of $20.5 million) and $159.9 millioncredit). We are subject to certain covenants under our term loan facilities (net of unamortized original issue discount and deferred financing costs). Our secured credit facilities contain certain covenants,the 2019 Credit Agreement, including, but not limited to:
a minimum fixed chargeinterest coverage ratio and a maximum debt leverage ratio requirement as defined in theour credit agreements;agreement;
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 the incurrence of new liens on property or assets;
limitations on transfers, sales and other dispositions;
limitations on entering into transactions with affiliates; and
limitations on making any material change in any of our business objectives that could reasonably be expected to have a material adverse effect on the repayment of our credit facilities.agreement.
Such indebtedness could have significant consequences, including:
requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of funding growth, working capital, capital expenditures, investments or other cash requirements;
reducing our flexibility to adjust to changing business conditions or obtain additional financing;
exposing us to the risk of increased interest rates as certain of our borrowings, including borrowings under our term loan, facilities, are at variable rates, making it more difficult for us to make payments on our indebtedness;
restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
subjecting us to restrictive covenants that may limit our flexibility in operating our business; and
limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements and general corporate or other purposes.
In addition, we may not be able to comply with thethese financial covenants described above in the future. In the absence of a waiver from our lenders, any failure by us to comply with these covenants in the future may result in the declaration of an event of default, under our secured credit facilities, which could adversely affect our business, results of operations and financial position. See “Description“Management’s discussion and analysis of indebtedness.financial condition and results of operations—Indebtedness.”
Uncertainty relating to the LIBOR calculation process and potential phasing out of LIBOR in the future may adversely affect our financing costs.
Currently, the 2019 Credit Agreement utilizes the London Interbank Offered Rate, or LIBOR, or various alternative methods set forth in the 2019 Credit Agreement to calculate interest on any borrowings. National and international regulators and law enforcement agencies have conducted investigations into a number of rates or indices known as “reference rates.” Actions by such regulators and law enforcement agencies may result in changes to the manner in which certain reference rates are determined, their discontinuance or the establishment of alternative reference rates. In particular, on July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, or the FCA, which regulates LIBOR, announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. Such announcement indicates
that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. As a result, it appears highly likely that LIBOR will be discontinued or modified by 2021.
At this time, it is not possible to predict the effect that these developments, any discontinuance, modification or other reforms to LIBOR or any other reference rate, or the establishment of alternative reference rates may have on LIBOR, other benchmarks or LIBOR-based debt instruments. Uncertainty as to the nature of such potential discontinuance, modification, alternative reference rates or other reforms could cause the interest rates calculated for the 2019 Credit Agreement to be materially different than expected, which could have a material adverse effect on our financing costs.
Due to the high degree of uncertainty regarding the implementation and impact of the CARES Act and other legislation related to COVID-19, there can be no assurance as to the total amount of financial assistance we will receive or that we will be able to comply with the applicable terms and conditions for retaining such assistance.
On March 27, 2020, the CARES Act was signed into law, which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, and modifications to the net interest deduction limitations. The CARES Act and similar legislation intended to provide assistance related to the COVID-19 pandemic also authorized $175.0 billion in funding to be distributed by the U.S. Department of Health and Human Services, or the HHS, to eligible health care providers. This funding, known as the Provider Relief Fund, is designated to fund eligible healthcare providers’ healthcare-related expenses or lost revenues attributable to COVID-19. On December 27, 2020, the Consolidated Appropriations Act, 2021 was signed into law, which adds $3.0 billion to the Provider Relief Fund. Payments from the Provider Relief Fund are subject to certain eligibility criteria, as well as reporting and auditing requirements, but do not need to be repaid to the U.S. government if recipients comply with the applicable terms and conditions.
In reliance on the CARES Act, we deferred our employer social security payroll tax payments from May 2020 until the remainder of the 2020 calendar year of which, 50% is deferred until December 31, 2021, with the remaining 50% deferred until December 31, 2022. The Company has deferred $1.2 million of payroll tax payments as of September 26, 2020, all of which has been recorded in other long-term liabilities on the condensed consolidated balance sheet. We are in the process of analyzing other provision of the CARES Act to determine the financial impact on our condensed consolidated financial statements.
In April 2020, we received, without request, a $1.2 million payment from the Provider Relief Fund from HHS. We determined that we complied with the conditions to be able to keep and use the funds as reimbursement for health care related expenses and lost revenue attributable to the public health emergency resulting from COVID-19 and submitted to HHS the required attestation to agree to the applicable terms and conditions of the Provider Relief Fund Phase I General Distribution. In July 2020, we applied for and received a second Provider Relief Fund payment totaling $2.9 million, which is subject to the same conditions as the initial payment. The payments were recorded as other income on the condensed consolidated statement of operations and comprehensive income for the nine months ended September 26, 2020.
Due to the high degree of uncertainty regarding the implementation of the CARES Act, the Consolidated Appropriations Act, 2021 and other stimulus legislation, there can be no assurance that the terms and conditions of the Provider Relief Fund or other relief programs will not change or be interpreted in ways that affect our ability to comply with such terms and conditions in the future, which could affect our ability to retain such assistance. We will continue to monitor our compliance with the terms and conditions of the Provider Relief Fund, including demonstrating that the distributions received have been used for healthcare-related expenses or lost revenue attributable to COVID-19. If we are unable to comply with current or future terms and conditions, our ability to retain some or all of the distributions received may be impacted, and we may be subject to actions including payment recoupment, audits and inquiries by governmental authorities, and criminal, civil or administrative penalties.
Our future capital needs are uncertain and we may need to raise additional funds in the future, and such funds may not be available on acceptable terms or at all.
We believe that our current cash and cash equivalents, in combination with the borrowing availability under our credit facility and our expected cash from operations, will be sufficient to meet our projected operating requirements for the foreseeable future. However, we may seek additional funds from public and private stock offerings, borrowings under our existing or new credit facilities or other sources in order to fund future initiatives related to the expansion of our business, which financing may not be available on acceptable or commercially reasonable terms, if at all. For example, pursuant to the Option and Equity Purchase Agreement with CartiHeal and its shareholders, CartiHeal has a put option that would require us to purchase 100% of CartiHeal’s shares for $350 million under certain conditions, or the Put Option. The Put Option is only exercisable by CartiHeal upon pivotal clinical trial success of the Agili-C device and we may terminate the Put Option at any time ending 30 days after receipt by CartiHeal of the statistical report regarding the final results of the pivotal clinical upon payment of $30.0 million to CartiHeal. See “Management’s discussion and analysis of financial condition and results of operations—Strategic transactions—CartiHeal (developer of Agili-C) investment and option and equity purchase agreement.”
Furthermore, if we issue equity or debt securities to raise additional capital, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. In addition, if we raise additional capital through collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to our products, potential products or proprietary technologies, or grant licenses on terms that are not favorable to us. If we cannot raise capital on acceptable terms, we may not be able to develop or enhance our products, execute our business plan, take advantage of future opportunities, or respond to competitive pressures, changes in our supplier relationships, or unanticipated customer requirements. Any of these events could adversely affect our business, results of operations and financial condition.
Risks related to government regulation
The risk factors listed below describe the risks we face related to government regulation. The companies who manufacture or produce certain of the products we distribute face similar risks with respect to government regulation relating to such products. If such suppliers are unable to comply with government regulations, they may not be able to continue to supply us with products, which could have a material adverse effect onadversely affect our business, results of operations and financial condition.
Our products and operations are subject to extensive governmental regulation, and our failure to comply with applicable requirements could cause our business to suffer.
The healthcare industry, and in particular the medical device industry, are regulated extensively by governmental authorities, principally the FDA and corresponding state and foreign regulatory agencies and authorities. The FDA and other U.S. and foreign governmental agencies and authorities regulate and oversee, among other things:
design, development and manufacturing;
testing, labeling, content and language of instructions for use and storage;
clinical trials;
product safety;
marketing, sales and distribution;
premarket clearance and approval;
conformity assessment procedures;
record-keeping procedures;
advertising and promotion;
recalls and other field safety corrective actions;
postmarket surveillance, including reporting of deaths or serious injuries and malfunctions that, if they were to recur, could lead to death or serious injury;
postmarket studies; and
product import and export.
The regulations to which we are subject are complex and have tended to become more stringent over time. Regulatory changes could result in restrictions on our ability to carry on or expand our operations, higher than anticipated costs or lower than anticipated sales.
The failure to comply with applicable regulations could jeopardize our ability to sell our products and result in enforcement actions such as:
administrative or judicially imposed sanctions;
unanticipated expenditures to address or defend such actions;
injunctions, consent decrees or the imposition of civil penalties or fines;
recall or seizure of our products;
total or partial suspension of production or distribution;
refusal to grant pending or future clearances or approvals for our products;
withdrawal or suspension of regulatory clearances or approvals;
clinical holds;
untitled letters or warning letters;
refusal to permit the import or export of our products; and
criminal prosecution of us or our employees.
Any of these sanctions could result in higher than anticipated costs or lower than anticipated sales and harm our reputation, business, financial condition and results of operations.operations and financial condition.
Moreover, governmental authorities outside the United States have become increasingly stringent in their regulation of medical devices, and our products may become subject to more rigorous regulation by non U.S. governmental authorities in the future. U.S. or non-U.S. government regulations may be imposed in the future that adversely affect our business, results of operations and financial condition. The European Commission has harmonized national regulations for the control of medical devices through European Medical Device Directives with which manufacturers must comply. Under these new regulations, manufacturing plants must have received a full Quality Assurance Certification from a “Notified Body” in order to be able to sell products within the member states of the EU. This certification allows manufacturers to stamp the products of certified plants with a “CE” mark. Products covered by European Commission regulations that do not bear the CE mark cannot be sold or distributed within the EU. We have received certification for all of our manufacturing facilities.
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.
In connection with our Exogen system, we submit claims directly to, and receive payments directly from, the Medicare and Medicaid programs and private payers. Therefore, we are subject to extensive government
regulation, including detailed requirements for submitting claims under appropriate codes and maintaining certain documentation, including evidence that all medical necessity requirements are met to support our claims. Billing for our Exogen system is complex, time-consuming and expensive, particularly for items and services provided to government healthcare program beneficiaries, such as Medicare and Medicaid. Reimbursement claims may be adversely affected by improper completion of the Certificate for Medical Necessity form, or CMN, required in connection with Medicare claims for the Exogen system and we may be subject to investigations by governmental authorities or third party payers and required to prove the validity of the claims or the authenticity of the signatures on the CMNs under investigation. Reimbursement claims may also be adversely affected by the promotion of our devices for unapproved or off-label uses or assistance with the reimbursement process that could result in false or fraudulent claims for reimbursement being submitted to government or private payers. Depending on the billing arrangement and applicable law, we bill various payers, all of which may have different prior authorization, patient qualification and medical necessity requirements, as well as patients for any applicable co-payments or co-insurance amounts. In addition, we may also face increased risk in our collection efforts, including potential write-offs of doubtful accounts and long collection cycles, any of which could adversely affect our business, results of operations and financial condition.
We are also required to implement compliance procedures and oversight, train and monitor our employees, appeal coverage and payment denials, and perform internal audits periodically to assess compliance with applicable laws and regulations as well as internal compliance policies and procedures. We are required to report and return any overpayments received from government payers within 60 days of identification and exercise of reasonable diligence to investigate credible information regarding potential overpayments. Failure to identify and return such overpayments exposes the provider or supplier to liability under federal false claims laws. See “Risk Factors—Risks related to government regulation—We are subject to federal, state and foreign laws and regulations relating to our healthcare business, and could face substantial penalties if we are determined not to have fully complied with such laws, which would adversely affect our business, results of operations and financial condition.” Moreover, Medicare contractors and Medicaid agencies periodically conduct pre- and post-payment reviews and other audits of claims and are under increasing pressure to more closely scrutinize healthcare claims and supporting documentation. We may be subject to pre-payment and post-payment reviews, as well as audits of claims in the future. Private payers may from time to time conduct similar reviews and audits. Any third-party payer reviews and audits of our claims could result in material delays in payment, material recoupments, overpayments, claim denials, fines, revocations of billing privileges, bars on re-enrollment in federal or state healthcare programs, cancellation of our agreements or damage to our reputation, any of which would reduce our net sales and profitability.
For example, in July of 2018 we became aware of allegations that certain of our sales personnel may have been completing Section B of the CMN required in connection with Medicare claims for the Exogen system, which, under federal law, must be completed by the physician and/or physician staff. Together with our outside counsel, we initiated an investigation into these allegations, and we determined that the CMN forms for a portion of Medicare claims for the Exogen system were in fact improperly completed by our sales representatives, some of which also failed to meet CMS coverage requirements. As a result of our findings, we made a self-disclosure on November 30, 2018 to the Office of Inspector General of the U.S. Department of Health and Human Services, or the OIG, under the Provider Self-Disclosure Protocol. Our self-disclosure disclosed the extent of our findings relating to the inappropriate completion of CMN forms by our sales personnel and offered to make repayment for such claims which failed to meet CMS coverage requirements and which we submitted to the Medicare program between October 1, 2012 and September 30, 2018, the statutory period applicable to such conduct. The total value of impacted claims was $30.1 million in the aggregate. In October 2019, our outside counsel received a letter from the Office of the United States Attorney in the Middle District of North Carolina, or the USAO, stating that the USAO would be working with the OIG to resolve our self-disclosure. After settlement discussions with the USAO and OIG, on January 25, 2021 we reached an agreement in principle with the USAO and the OIG with respect to the submission of Medicare claims that did not meet CMS coverage requirements and for which our sales representatives completed Section B of the CMN forms. Under that agreement, we understand we will resolve the potential liability related to such claims for $3.6 million, of which $2.4 million has already been paid through our 2019 return of overpayments described below, leaving a net payment to be made of $1.2 million. The
agreement is subject to negotiation of final terms, approval by the parties and execution of a formal settlement agreement reflecting this payment, which is expected to be finalized and executed shortly and which will include releases from associated False Claims Act liability and further Civil Monetary Penalties that are customary in self-disclosures of this type. The settlement amount noted above will be recorded in the consolidated financial statements for the quarter ended December 31, 2020.
In 2019, separate from the self-disclosure described above, as a result of our internal auditing of Exogen Medicare claims, we made repayments to our Medicare Administrative Contractors, or MACs, for overpayments identified during such auditing totaling $7.5 million for the period October 1, 2012 through December 31, 2018. This amount reflected certain Medicare claims for Exogen for which we lacked adequate documentation of medical necessity consistent with Medicare coverage requirements. Similarly, in July of 2020, we made repayments to the MACs of $1.5 million after completing our internal auditing of Exogen Medicare claims for the period beginning January 1, 2019 through December 31, 2019. We maintain a reserve for reimbursement claims related to our Exogen system that may have been processed for payment without adequate medical records support. Our reserve is estimated using an extrapolation of an error rate from a statistical sample, which represents our best estimate as of the date of the financial statements, but because of the uncertainty inherent in such estimates, the ultimate repayment amounts may be materially different.
Until this self-disclosure matter is finally resolved, we cannot assure you that we will not be subject to monetary fines, non-monetary penalties, such as monitoring agreements, as well as requirements to conduct audits and submit reports to HHS. The ultimate outcome of these matters is uncertain and we cannot assure you that the actual fines will not be significantly higher than the prior payments and our currently proposed settlement amount. If all claims were pursued and resolved adversely against us, such fines could aggregate as much as $50 million. In the event of an unfavorable outcome, these contingencies may have a material adverse effect on our business, results of operations and financial condition.
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.
Before we can market or sell a new medical device or other product or a new use of or a claim for or significant modification to an existing medical device in the United States, we must obtain either clearance from the FDA under Section 510(k) of the Federal Food, Drug, and Cosmetic Act, or FDCA,pathway or approval of a PMA, unless an exemption
applies. In the United States, we have obtained 510(k) premarket clearance from the FDA to market products such as Signafuse Bioactive Bone Graft Putty, Interface Bioactive Bone Graft and Signafuse Mineralized Collagen Scaffold. Our Active Healing Therapies,OA joint pain treatment and joint preservation products, including Durolane, GELSYN-3 and SUPARTZ FX, and our Exogen system, Supartz FX and GelSyn-3, have obtained PMA approval. In the 510(k) clearance process, before a device may be marketed, the FDA must determine that a proposed device is “substantially equivalent” to a legally-marketed “predicate” device, which includes a device that has been previously cleared through the 510(k) process, a device that was legally marketed prior to May 28, 1976 (preamendments device), a device that was originally on the U.S. market pursuant to an approved PMA application and later downclassified, or a 510(k)-exempt device. To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. Clinical data are sometimes required to support substantial equivalence. In the PMA process, the FDA must determine that a proposed deviceproduct is safe and effective for itsour intended use based, in part, on extensive data, including, but not limited to, technical, preclinical, clinical trial, manufacturing and labeling data. The PMA process is typically required for devicesproducts that are deemed to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices.
Modifications to products that are approved through a PMA application generally require FDA approval. Similarly, certain modifications made to products cleared through a 510(k) may require a new 510(k) clearance. Both the PMA approval and the 510(k) clearance process can be expensive, lengthy and uncertain. The FDA’s 510(k) clearance process usually takes from three to twelve months, but can last longer. The process of obtaining
a PMA is much more costly and uncertain than the 510(k) clearance process and generally takes from onesix to three years,18 months, or even longer, from the time the application is filed with the FDA. In addition, a PMA generally requires the performance of one or more clinical trials. Despite the time, effort and cost, we cannot assure you that any particular device will be approved or cleared by the FDA. Any delay or failure to obtain necessary regulatory approvals could harm our business.
Any modification to one of our 510(k) cleared products that would constitute a major change in its intended use, or any change that could significantly affect the safety or effectiveness of the device would require us to obtain a new 510(k) marketing clearance and may even, in some circumstances, require the submission of a PMA application, if the change raises complex or novel scientific issues or the product has a new intended use. The FDA requires every manufacturer to make the determination regarding the need for a new 510(k) submission in the first instance, but the FDA may review any manufacturer’s decision. We may make changes to our 510(k)-cleared products in the future that we may determine do not require a new 510(k) clearance or PMA approval. If the FDA disagrees with our decision not to seek a new 510(k) or PMA approval for changes or modifications to existing devices and requires new clearances or approvals, we may be required to recall and stop marketing our products as modified, which could require us to redesign our products, conduct clinical trials to support any modifications, and pay significant regulatory fines or penalties. If there is any delay or failure in obtaining required clearances or approvals or if the FDA requires us to go through a lengthier, more rigorous examination for future products or modifications to existing products than we had expected, our ability to introduce new or enhanced products in a timely manner would be adversely affected, which in turn would result in delayed or no realization of revenue from such product enhancements or new products and could also result in substantial additional costs which could decrease our profitability.
The FDA can delay, limit or deny clearance or approval of a device for many reasons, including:
we may not be able to demonstrate to the FDA’s satisfaction that the product or modification is substantially equivalent to the proposed predicate device or safe and effective for its intended use;
the data from our preclinical studies and clinical trials may be insufficient to support clearance or approval, where required; and
the manufacturing process or facilities we use may not meet applicable requirements.
In addition, the FDA may change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take other actions, which may prevent or delay approval or clearance of our future products under development or impact our ability to modify our currently cleared productor approved products on a timely basis. Even after clearance or approval for our products is obtained, we and the products are subject to extensive postmarket regulation by the FDA, including with respect to advertising, marketing, labeling, manufacturing, distribution, import, export, and clinical evaluation. For example, as a condition of approving a PMA application, the FDA may require some form of post-approval study or post-market surveillance, whereby the applicant conducts a follow-up study or follows certain patient groups for a number of years and makes periodic reports to the FDA on the clinical status of those patients when necessary to protect the public health or to provide additional safety and effectiveness data for the device. The product labeling must be updated and submitted in responsea PMA supplement once results, including any adverse event data from the post-approval study, become available. Failure to industryconduct post-approval studies in compliance with applicable regulations or to timely complete required post-approval studies or comply with other post-approval requirements could result in withdrawal of approval of the PMA, which would harm our business.
We are also required to timely file various reports with regulatory agencies. If these reports are not timely filed, regulators may impose sanctions and healthcare provider concernssales of our products may suffer, and we may be subject to product liability or regulatory enforcement actions, all of which could harm our business. In addition, if we initiate a correction or removal for one of our devices, issue a safety alert, or undertake a field action or recall to reduce a risk to health posed by the device, we may be required to submit a report to the FDA, and in many cases, to other regulatory agencies. Such reports could lead to increased scrutiny by the FDA, other international regulatory agencies and our customers regarding the predictability, consistencyquality and rigorsafety of our devices and to negative publicity, including FDA alerts, press releases, or administrative or judicial actions. Furthermore, the submission of these reports has been and could be used by
competitors against us in competitive situations and cause customers to delay purchase decisions or cancel orders, which would harm our reputation and business.
The FDA and state authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement action by the FDA or state agencies, which may include any of the following sanctions:
adverse publicity, warning letters, untitled letters, fines, injunctions, consent decrees and civil penalties;
repair, replacement, refunds, recalls, termination of distribution, administrative detention or seizures of our products;
operating restrictions, partial suspension or total shutdown of production;
customer notifications or repair, replacement or refunds;
refusing our requests for 510(k) clearance or PMA approvals or foreign regulatory approvals of new products, new intended uses or modifications to existing products;
withdrawals of current 510(k) clearances or PMAs or foreign regulatory approvals, resulting in prohibitions on sales of our products;
FDA refusal to issue certificates to foreign governments needed to export products for sale in other countries; and
criminal prosecution.
Any of these sanctions could also result in higher than anticipated costs or lower than anticipated sales and adversely affect our business, results of operations and financial condition.
In addition, the FDA’s and other regulatory authorities’ policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance as a result of a changing regulatory landscape, we may lose any marketing approvals or clearances that we have already obtained or fail to obtain new marketing approvals or clearances, and we may not be able to achieve or sustain profitability, which would adversely affect our business, prospects, financial condition and results of operations.
We also cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative or executive action, either in the United States or abroad. The results of the 2020 Presidential election may impact our business and industry. Moreover, the Trump administration took several executive actions, including the issuance of a number of Executive Orders, that could impose significant burdens on, or otherwise materially delay, FDA’s ability to engage in routine regulatory and oversight activities such as implementing statutes through rulemaking, issuance of guidance, and review and approval of marketing applications. It is difficult to predict whether or how these executive actions, including the Executive Orders, will be implemented, or whether they will be rescinded or replaced under the Biden administration. The policies and priorities of an incoming administration are unknown and could materially impact the regulatory framework governing our products.
Once obtained, we cannot guarantee that FDA or international product approvals will not be withdrawn or rescinded or that relevant regulatory authorities will not require other corrective action, and any withdrawal, rescission or corrective action could materially affect our business and financial results.
Once obtained, marketing approval can be withdrawn by the FDA or comparable foreign regulatory authorities for a number of reasons, including the failure to comply with ongoing regulatory requirements or the occurrence of unforeseen problems following initial approval. Regulatory authorities could also limit or prevent the manufacture or distribution of our products. Any regulatory limitations on the use of our products or any withdrawal, suspension or rescission of approval by the FDA or a comparable foreign regulatory authority could have a material adverse effect on our business, financial condition, and results of operations.
Legislative or regulatory reforms, including those currently under consideration by FDA, could make it more difficult or costly for us to obtain regulatory clearance or approval of any future products and to manufacture, market and distribute our products after clearance or approval is obtained, which could adversely affect our competitive position and materially affect our business and financial results.
From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulatory clearance or approval, manufacture and marketing of regulated products or the reimbursement thereof. In addition, FDA may change its clearance and approval policies, adopt additional regulations or revise existing regulations, propose new reclassification orders, or take other actions, which may prevent or delay approval or clearance of our future products under development or impact our ability to market or modify our currently cleared products on a timely basis. FDA and foreign regulations depend heavily on administrative interpretation, and we cannot assure you that future interpretations made by the FDA or other regulatory bodies, with possible retroactive effect, will not adversely affect us. Additionally, any changes, whether in interpretation or substance, in existing regulations or policies, or any future adoption of new regulations or policies by relevant regulatory bodies, could prevent or delay approval of our products. In the event our future, or current, products, including HA generally, are classified, or re-classified, as human drugs, combination products, or biologics by the FDA or an applicable international regulatory body, the applicable review process related to such products is typically substantially longer and substantially more expensive than the review process to which they are currently subject as medical devices. In 2018, FDA publicly indicated its intent to consider HA products for certain indications as drugs and has indicated that sponsors of HA products who submit PMAs or PMA supplements for changes in indications for use, formulation or route of administration should obtain an informal or formal classification and jurisdictional determination through a pre-request for determination or request for determination prior to submission. There exists uncertainty with respect to the final interpretation, implementation, and consequences of this development, and this or any other potential regulatory changes in approach or interpretation similar in substance to those mentioned in this paragraph and affecting our products could materially impact our competitive position, business, and financial results.
Moreover, over the last several years, the FDA has proposed reforms to its 510(k) clearance process, and such proposals could include increased requirements for clinical data and a longer review period, or could make it more difficult for manufacturers to utilize the 510(k) clearance process for their products. For example, in November 2018, FDA officials announced forthcoming steps that the FDA initiated an evaluation, and in January 2011,intends to take to modernize the premarket notification pathway under Section 510(k) of the FDCA. Among other things, the FDA announced several proposed actions intendedthat it planned to reformdevelop proposals to drive manufacturers utilizing the 510(k) pathway toward the use of newer predicates. These proposals included plans to potentially sunset certain older devices that were used as predicates under the 510(k) clearance process.pathway, and to potentially publish a list of devices that have been cleared on the basis of demonstrated substantial equivalence to predicate devices that are more than 10 years old. The FDA intends these reform actionsalso announced that it intended to improvefinalize guidance to establish a premarket review pathway for “manufacturers of certain well-understood device types” as an alternative to the efficiency510(k) clearance pathway and transparencythat such premarket review pathway would allow manufacturers to rely on objective safety and performance criteria recognized by the FDA to demonstrate substantial equivalence, obviating the need for manufacturers to compare the safety and performance of their medical devices to specific predicate devices in the clearance process,process.
In May 2019, the FDA solicited public feedback on its plans to develop proposals to drive manufacturers utilizing the 510(k) pathway toward the use of newer predicates, including whether the FDA should publish a list of devices that have been cleared on the basis of demonstrated substantial equivalence to predicate devices that are more than 10 years old. The FDA requested public feedback on whether it should consider certain actions that might require new authority, such as wellwhether to sunset certain older devices that were used as bolster patient safety. In addition, as part ofpredicates under the Food510(k) clearance pathway. These proposals have not yet been finalized or adopted, and Drug Administration Safety and Innovation Act enacted in 2012,the FDA may work with Congress reauthorizedto implement such proposals through legislation. Accordingly, it is unclear the Medical Device User Fee Amendments with various FDA performance goal commitments and enacted several “Medical Device Regulatory Improvements” and miscellaneous reforms,extent to which are further intended to clarify and improve medical device regulation both pre- and post-clearance and approval. Some of theseany proposals, and reformsif adopted, could impose additional regulatory requirements uponon us that could delay our ability to obtain new 510(k) clearances, increase the costs of compliance, or restrict our ability to maintain our current clearances.clearances, or otherwise create competition that may negatively affect our business.
Even after
More recently, in September 2019, the FDA finalized the aforementioned guidance to describe an optional “safety and performance based” premarket review pathway for manufacturers of “certain, well-understood device types” to demonstrate substantial equivalence under the 510(k) clearance pathway, by demonstrating that such device meets objective safety and performance criteria established by the FDA, obviating the need for manufacturers to compare the safety and performance of their medical devices to specific predicate devices in the clearance process. The FDA intends to maintain a list device types appropriate for the “safety and performance based pathway” and develop product-specific guidance documents that identify the performance criteria for each such device type, as well as the testing methods recommended in the guidances, where feasible. The FDA may establish performance criteria for classes of devices for which we or our competitors seek or currently have received clearance, and it is unclear the extent to which such performance standards, if established, could impact our ability to obtain new 510(k) clearances or otherwise create competition that may negatively affect our business.
In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. Any new statutes, regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of any future products or make it more difficult to obtain clearance or approval for, manufacture, market or distribute our products is obtained, we are subject to extensive postmarket regulation by the FDA. For example, the FDA has the power to require us to conduct postmarket studies. These studies can be very expensiveproducts. We cannot determine what effect changes in regulations, statutes, legal interpretation or policies, when and time-consuming to conduct. Failure to complete such studies in a timely manner could resultif promulgated, enacted or adopted may have on our business in the revocation offuture. Such changes could, among other things, require: additional testing prior to obtaining clearance or approval andapproval; changes to manufacturing methods; recall, replacement or discontinuance of our products; or additional record keeping. Additionally, the recall or withdrawalimplementation of the product, which could prevent us from generating sales from that productnew European Medical Device Regulation, or EU MDR, set to take full effect on May 26, 2021 after a one-year postponement due to the COVID-19 pandemic, is expected to change several aspects of the existing regulatory framework in Europe. Specifically, the EU MDR will require changes in the United States. Our failureclinical evidence required for medical devices, post-market clinical follow-up evidence, annual reporting of safety information for Class III products, and bi-annual reporting for Class II products, Unique Device Identification, or UDI, for all products, submission of core data elements to meet strict regulatory requirements could require usa European UDI database prior to pay fines, incurplacement of a device on the market, reclassification of medical devices, and multiple other costs or even close our facilities. We cannot assure you thatlabeling changes. While we will successfully maintain the clearances or approvals we have received or may receivebe able to continue marketing our currently CE-marked products in the future.EEA after the EU MDR enters into full effect and until the associated CE mark certificates expire, acquiring approvals for new products or renewing our existing CE mark certificates once these expire could be more challenging and costly.
Our HCT/P products are subject to extensive government regulation and our failure to comply with these requirements could cause our business to suffer.
In the United States, we sell human tissue-derived bone graft substitutes,BGSs, such as PureBone and OsteoAMP, which are referred to by the FDA as human cells, tissues and cellular or tissue-based products, or HCT/Ps. CertainIn the U.S., we are marketing our HCT/Ps are regulated by the FDA solely underpursuant to Section 361 of the Public Health Service ActPHSA and are referred to21 CFR Part 1271 of FDA’s regulations. We do not manufacture these HCT/P products, but serve as “Sectiona distributor for them. So-called Section 361 HCT/Ps are not currently subject to the FDA requirements to obtain marketing authorizations as long as they meet certain criteria provided in FDA’s regulations. HCT/Ps regulated as “361 HCT/Ps” are currently subject to requirements relating to registering facilities and listing products with the FDA, screening and testing for tissue donor eligibility, current Good Tissue Practices, or cGTP, when processing, storing, labeling and distributing HCT/Ps, including required labeling information, stringent record keeping and adverse event reporting. If we or our suppliers fail to comply with these requirements, we could be subject to FDA enforcement action, including, for example, warning letters, fines, injunctions, product recalls or seizures, and, in the most serious cases, criminal penalties. To be regulated as Section 361 HCT/Ps, these products must meet FDA’s criteria to be considered “minimally manipulated” and intended for “homologous use,” whileamong other requirements. HCT/Ps that do not meet the criteria to be considered Section 361 HCT/Ps are subject to the FDA’s regulatory requirements applicable to medical devices, biologics or biologics.drugs. Device, biologic or drug HCT/Ps must comply both with the requirements exclusively applicable to Section 361 HCT/Ps and, in addition, with other requirements, including requirements for marketing authorization. For example, Section 361 HCT/Ps do not require 510(k) clearance, PMA approval, biologics license application, orapproval of a BLA, or other premarket authorization from FDA before marketing. WeExcept as described below with regard to MOTYS, we believe our HCT/Ps are regulated solely under Section 361 of the PHSA, and therefore, we have not sought or obtained 510(k) clearance, PMA approval, or licensure through a BLA. BLA for such HCT/Ps.
The FDA could disagree with our determination that ourthese human tissue products are Section 361 HCT/Ps and could determine that these products are biologics requiring a BLA or medical devices requiring 510(k) clearance or PMA approval, and could require that we cease marketing such products and/or recall them pending appropriate clearance, approval or licenselicensure from the FDA. For example, the FDA’s Center for Devices and Radiological Health, or CDRH, issued us a letter in March 2016 in which it asserted that OsteoAMP meets the definition of a medical device, and requested that we provide CDRH with information in support of our position that OsteoAMP does not require 510(k) clearance or PMA approval. We provided CDRH with the requested information in support of this position in May 2016 and we have received no further inquiries to date. We believe that CDRH’s assertion is unfounded and inconsistent with a 2011 letter from the FDA concluding that OsteoAMP meets the criteria for regulation solely as a Section 361 HCT/P. However, if the FDA were to disagree, and if we are otherwise unsuccessful in asserting our position, the FDA may then require that we obtain 510(k) clearance or PMA approval and that we cease marketing OsteoAMP and/or recall OsteoAMP unless and until we receive clearance or approval. We estimate that ifIf we werehave to cease marketing OsteoAmp and/or have to recall any of our BGSs products, including OsteoAmp, that our net sales would decrease, which would adversely affect our business, results of operations.
Even though we believe that our HCT/Ps that do not meet the criteria of Section 361 are not subject to premarket approval or review,regulated under Section 351 of the PHSA. Unlike Section 361 HCT/Ps, HCT/Ps regulated as “351” HCT/Ps are subject to donor eligibilitypremarket review and screening, current Good Tissue Practices, or cGTPs, product labeling,approval by the FDA. In November 2017, the FDA released a guidance document entitled “Regulatory Considerations for Human Cells, Tissues, and postmarket reporting requirements. If we or our suppliers failCellular and Tissue—Based Products: Minimal Manipulation and Homologous Use—Guidance for Industry and Food and Drug Administration Staff.” The guidance outlined the FDA’s position that all lyophilized amniotic products are more than minimally manipulated and would therefore require a BLA to complybe lawfully marketed in the United States. The guidance also indicated that the FDA would exercise enforcement discretion, using a risk-based approach, with theserespect to the IND application and pre-market approval requirements wefor certain HCT/Ps for a period of 36 months from the issuance date of the guidance to allow manufacturers to pursue its IND application. Under this approach, FDA indicated that high-risk products and uses could be subject to immediate enforcement action; FDA has not clearly stated what must happen by the end of its enforcement discretion period in order to avoid enforcement (i.e., whether a BLA must be approved by that time, or merely submitted). In July 2020, the FDA extended its period of enforcement discretion to May 31, 2021.
We plan to market MOTYS under the FDA’s policy of enforcement discretion as we pursue marketing authorization under a BLA for the product. We may be required to cease selling MOTYS if the FDA changes the scope of its enforcement discretion or changes the criteria used to assess which products qualify. In addition, following the period of enforcement discretion articulated in FDA’s guidance, we may be required to cease selling MOTYS until such time as we obtain BLA approval or be subject to another enforcement action including,or penalties. We may also be subject to enforcement on the grounds that we are marketing a product at the same time we are investigating that product pursuant to an IND, in violation of FDA’s prohibition on the preapproval promotion of an investigational product. The loss of our ability to market and sell this product could have an adverse impact on our business, results of operations and financial condition. In addition, we expect the cost to manufacture our products will be higher than our other HCT/Ps because of the costs to comply with the more stringent requirements that apply to products regulated as biologics for example, warning letters, fines, injunctions,which a BLA is required (and not just as Section 361 HCT/Ps). These requirements include satisfying cGMP manufacturing standards and performing ongoing product recalls or seizures,testing. If we do receive BLA approval for this product, changes such as adding new indications, manufacturing changes and additional labeling claims, will be subject to further testing requirements and FDA review and approval.
In addition, the FDA may in the most serious cases, criminal penalties.future modify the scope of its enforcement discretion with respect to Section 361 HCT/Ps or change its position on which current or future products qualify as Section 361 HCT/Ps, or determine that some or all of our HCT/P products may not be lawfully marketed under the FDA’s policy of enforcement discretion. Any regulatory changes could have adverse consequences for us and make it more
difficult or expensive for us to conduct our business by requiring pre-market clearance or approval and compliance with additional post-market regulatory requirements with respect to those products.
If clinical studies of our future products 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.
We will likely need to conduct additional clinical studies in the future to support new indications for our products or for clearances or approvals of new product lines, or for the approval of the use of our products in some foreign countries. Clinical testing can take many years, can be expensive and carries uncertain outcomes. The initiation and completion of any of these studies may be prevented, delayed, or halted for numerous reasons. Conducting successful clinical studies requires the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Patient enrollment in clinical trials and completion of patient participation and follow-up depends on many factors, including the size of the patient population, the nature of the trial protocol, the attractiveness of, or the discomforts and risks associated with, the treatments received by enrolled subjects, the availability of appropriate clinical trial investigators and support staff, proximity of patients to clinical sites, patient ability to meet the eligibility and exclusion criteria for participation in the clinical trial and patient compliance. For example, patients may be discouraged from enrolling in our clinical trials if the trial protocol requires them to undergo extensive post-treatment procedures or follow-up to assess the safety and effectiveness of our products or if they determine that the treatments received under the trial protocols are not attractive or involve unacceptable risks or discomforts. Patients may also not participate in our clinical trials if they choose to participate in contemporaneous clinical trials of competitive products. In addition, patients participating in clinical trials may die before completion of the trial or suffer adverse medical events unrelated to investigational products.
For example, in late 2017 we began enrollment for the B.O.N.E.S. clinical study, a uniquely designed trial to further broaden the label of our Exogen system to include a fuller range of bones that may be treated as fresh fractures in predisposed patients at risk of nonunion. The B.O.N.E.S clinical study design includes prospective inclusion of 3,000 Exogen-treated patients presenting certain risk factors observed over the course of 12 months. See “Business—Development and Clinical Pipeline—Exogen clinical data—Ongoing Bioventus-sponsored clinical studies (B.O.N.E.S.).” If we are unable to successfully complete enrollment and conclude the B.O.N.E.S. study, or the data generated from the study does not support these new indications, future demand for our Exogen system may be affected. On October 29, 2020, we received FDA confirmation indicating its authorization of our IND, which will allow us to conduct a clinical trial to support a BLA submission for MOTYS, as well as an additional clinical trial based on a registry of patients who receive MOTYS after our initial commercial launch in the cash pay market. If we are unable to complete enrollment of these trials or if these trials do not support our desired clinical indications for use or show clinical efficacy of the MOTYS product, we may not obtain approval of the BLA and may not be able to continue to sell MOTYS or obtain coverage or reimbursement for the product.
Clinical failure can occur at any stage of testing. Our clinical studies may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical and non-clinical studies in addition to those we have planned. In addition, failure to adequately demonstrate the safety and efficacy of any of our devices would prevent receipt of regulatory clearance or approval and, ultimately, the commercialization of that device or indication for use. Even if our future products are cleared in the United States, commercialization of our products in foreign countries would require approval by regulatory authorities in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from, and greater than, those in the United States, including additional preclinical studies or clinical trials. Any of these occurrences could adversely affect our business, results of operations and financial condition.
Interim, “top-line” and preliminary data from our clinical trials that we announce or publish from time to time may change as more patient data become available and are subject to audit and verification procedures that could result in material changes in the final data.
From time to time, we may publish interim, “top-line” or preliminary data from our clinical trials. Interim, top-line, or preliminary data from clinical trials that we may complete are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data become available. Preliminary, “top-line,” or interim data also remain subject to audit and verification procedures that may result in the final data being materially different from the preliminary data we previously published. As a result, interim, “top-line,” and preliminary data should be viewed with caution until the final data are available. Differences between preliminary, interim, or “top-line” data and final data could significantly harm our business prospects and may cause the trading price of our common stock to fluctuate significantly.
Further, others, including regulatory agencies, may not accept or agree with our assumptions, estimates, calculations, conclusions or analyses or may interpret or weigh the importance of data differently, which could impact the value of the particular program, the approvability or commercialization of the particular product candidate or product and our business in general. In addition, the information we choose to publicly disclose regarding a particular study or clinical trial is based on what is typically extensive information, and you or others may not agree with what we determine is the material or otherwise appropriate information to include in our disclosure, and any information we determine not to disclose may ultimately be deemed significant with respect to future decisions, conclusions, views, activities or otherwise regarding a particular product candidate or our business. If the interim, “top-line,” or preliminary data that we report differ from actual results, or if others, including regulatory authorities, disagree with the conclusions reached, our ability to obtain approval for and commercialize our product candidates, our business, operating results, prospects or financial condition may be harmed.
We may be subject to enforcement action if we engage in improper marketing or promotion of our products, and the misuse or off-label use of our products may harm our image in the marketplace, result in injuries that lead to product liability suits or result in costly investigations, fines or sanctions by regulatory bodies if we are deemed to have engaged in the promotion of these uses, any of which could be costly to our business.
The medical devices that we currently market have been cleared or approved by the FDA and other foreign regulatory bodies for specific treatments. However, we cannot prevent a physician from using our products outside of such cleared or approved indications for use, known as “off-label uses”,off-label uses, when in the physician’s independent professional medical judgment, he or she deems it appropriate.appropriate, and we do not analyze the ordering practices of physicians with respect to off-label uses. In cases where prescriptions of our Exogen system are written for off-label uses, we could be subject to regulatory or enforcement actions if we were determined to have engaged in promotion of our products for off-label uses, or otherwise determined to have made false or misleading statements about our products. There may be increased risk of injury to patients if physicians attempt to use our products off-label. Furthermore, the use of our products for indications other than those cleared or approved by the FDA or any foreign regulatory body may not effectively treat such conditions, which could harm our reputation in the marketplace among physicians and patients.
In addition, physicians may misuse our products or use improper techniques if they are not adequately trained, potentially leading to injury and an increased risk of product liability. If our products are misused or used with improper technique, we may become subject to costly litigation by our customers or their patients. Product liability claims could divert management’s attention from our core business, be expensive to defend and result in sizeable damage awards against us that may not be covered by insurance.
Further, our promotional materials and training methods must comply with FDA and other applicable laws and regulations, including the prohibition of the promotion of off-label use. If the FDA or any foreign regulatory
body determines that our promotional materials or training constitute promotion of an off-label use, itthe FDA could request that we modify our training, or promotional materials or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our business activities to constitute promotion of an off-label use, which could result in significant penalties including,under other statutory authorities, such as laws prohibiting false claims for reimbursement. Such enforcement actions may include, but are not limited to, criminal, civil and administrative penalties, treble damages, fines, disgorgement, exclusion from participation in government healthcare programs, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws and the curtailment or restructuring of our operations.
Our products may cause or contribute to adverse medical events that we are required to report to the FDA, and if we fail to do so, we would be subject to sanctions that could materially harm our business.
Some of our marketed products are subject to Medical Device Reporting, or MDR, obligations, which require that we report to the FDA any incident in which our products may have caused or contributed to a death or serious injury, or in which our products malfunctioned and, if the malfunction were to recur, it could likely cause or contribute to a death or serious injury. The timing of our obligation to report under the MDR regulations is triggered by the date we become aware of the adverse event as well as the nature of the event. We may fail to report adverse events of which we become aware within the prescribed timeframe. We may also fail to recognize that we have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of our products. If we fail to comply with our reporting obligations, the FDA could take action including warning letters, untitled letters, administrative actions, criminal prosecution, imposition of civil monetary penalties, revocation of our device clearances, seizure of our products, or delay in clearance of future products.
We and our third-party manufacturers and suppliers are subject to various governmental regulations related to the manufacturing of our products.
Any product for which we obtain clearance or approval,Our products and the manufacturing processes, reporting requirements, post-approval clinical data and promotional activities for such product,products, will be subject to continued regulatory review, oversight and periodic inspection by the FDA and other domestic and foreign regulatory bodies. In particular, the methods used in, and the facilities used for, the manufacture of the medical device products that we own and distribute that are regulated as medical devices must comply with the FDA’s QSR, which covers the procedures and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of medical devices. The FDA enforces the QSR through periodic announced or unannounced inspections of manufacturing facilities, and both we and our third-party manufacturers and suppliers are subject to such inspections. Similarly, the devices we distribute on behalf of third-party manufacturers that are regulated as Section 361 HCT/Ps must be manufactured in compliance with cGTP requirements and other related requirements. Moreover, should any of our HA products be re-classified as drugs, such products would be required to comply with a different set of manufacturing requirements under FDA’s current Good Manufacturing Practice, or cGMP, requirements for drugs. Similarly, if we are successful in obtaining BLA approval for MOTYS, that product will need to comply with the cGMP requirements for biologics, instead of the cGTP requirements that will apply to the product upon our planned launch of the product as a Section 361 HCT/P. The need to comply with different manufacturing requirements may require us to seek new suppliers.
Failure to comply with applicable FDA requirements, or later discovery of previously unknown problems with our products or the manufacturing processes of our third-party manufacturers and suppliers, including any failure to take satisfactory corrective action in response to an adverse QSRregulatory inspection, can result in, among other things:
administrative or judicially imposed sanctions;
injunctions or the imposition of civil penalties or fines;
recall or seizure of our products;
total or partial suspension of production or distribution;
refusal to grant pending or future clearances or approvals for our products;
withdrawal or suspension of regulatory clearances or approvals;
clinical holds;
untitled letters or warning letters;
refusal to permit the import or export of our products; and
criminal prosecution of us or our employees.
Any of these actions could prevent or delay us from marketing, distributing or selling our products and would likely harm our business. Furthermore, our suppliers may not currently be or may not continue to be in compliance with all applicable regulatory requirements, which could result in our failure to produce our products on a timely basis and in the required quantities, if at all.
Our products may be subject to product recalls. A recall of our products, either voluntarily or at the direction of the FDA or another governmental authority, or the discovery of serious safety issues with our products, could have a significant adverse impact onadversely affect us.
The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in their design or manufacture. The FDA’s authority to require a recall for medical devices must be based on a finding that there is reasonable probability that the device would cause serious injury or death. We may also decide to voluntarily recall our products if certain deficiencies are found. We have in the past instituted a voluntary recall for certain of our products, and we may also chooseare currently undertaking a voluntary Class II recall of certain vials of ultrasound gel that we provide with our Exogen system due to voluntarily recallparticulates, which were microbial in nature, found in the gel. The gel is manufactured by a product if any material deficiency is found.third-party supplier, and we have discontinued the use of that suppliers’ gel and have replaced that gel with that of another manufacturer. We have identified the affected lots and have notified patients to discard gel bottles from those lots. A government-mandated or voluntary recall could occur as a result of an unacceptable risk to health, component failures, malfunctions, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of our products would divert managerial and financial resources and could adversely affect our reputation and business, which could impair our ability to produce our products in a cost-effective and timely manner in order to meet our customers’ demands. We may also be subject to liability claims, be required to bear other costs, or take other actions that may have a negative impact oncould adversely affect our future salesbusiness, results of operations and our ability to generate profits.financial condition.
Companies are required to maintain certain records of recalls and corrections, even if they are not reportable to the FDA. We may initiate voluntary recalls or corrections for our products in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, they could require us to report those actions as recalls and we may be subject to enforcement action.
As we conduct clinical studies designed to generate long-term data on some of our existing products, the data we generate may not be consistent with our existing data and may demonstrate less favorable safety or efficacy. Data we generate may ultimately not be favorable, or could even hurt the commercial prospects for our products.
We are currently collecting and plan to continue collecting long-term clinical data regarding the quality, safety and effectiveness of some of our existing products. The clinical data collected and generated as part of
these studies will further strengthen our clinical evaluation concerning safety and performance of these products. We believe that this additional data will help with the marketing of our products by providing surgeons and physicians with additional confidence in their long-term safety and efficacy. If the results of these clinical studies are negative, these results could reduce demand for our products and significantly reduce our ability to achieve expected net sales. We do not expect to undertake such studies for all of our products and will only do so in the future where we anticipate the benefits will outweigh the costs and risks. For these reasons, surgeons and physicians could be less likely to purchase our products than competing products for which longer-term clinical data are available. Also, we may not choose or be able to generate the comparative data that some of our competitors have or are generating and we may be subject to greater regulatory and product liability risks. If we are unable to or unwilling to collect sufficient long-term clinical data supporting the quality, safety and effectiveness of our existing products, our business, results of operations and financial condition could be adversely affected.
We may rely on third parties to conduct our clinical studies and to assist us with preclinical development and if they fail to perform as contractually required or expected, we may not be able to obtain regulatory clearance or approval for orto commercialize our products.
We have relied upon and may continue to rely onupon third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories to assist in conducting our clinical studies. studies, which must be conducted in accordance with applicable regulations, including those known as good clinical practice, or GCP, and our preclinical development activities. We rely on these parties for execution of our studies, and control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of our clinical studies is conducted in accordance with the applicable protocol, legal, regulatory, and scientific standards, and our reliance on these third parties does not relieve us of our regulatory responsibilities. GCPs are regulations and guidelines enforced by the FDA and other regulatory authorities for products in clinical development. Regulatory authorities enforce these GCPs through periodic inspections of trial sponsors, principal investigators, trial sites, and CROs. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trials comply with GCP regulations. In addition, our clinical trials must be conducted with product produced under applicable manufacturing requirements.
If these third parties fail to successfully carry out their contractual duties, comply with applicable regulatory obligations, including GCP requirements, or meet expected deadlines, or if these third parties must be replaced, or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to clinical protocols or applicable regulatory requirements or for other reasons, our pre-clinical development activities or clinical studies may be extended, delayed, suspended or terminated. Under these circumstances we may not be able to obtain regulatory clearance or approval for, or successfully commercialize, our products on a timely basis, if at all, and our business, results of operations and financial condition may be adversely affected.
If clinical studiesany of our future productsrelationships with these third parties terminate, we may not be able to enter into arrangements with alternative third parties or to do so on commercially reasonable terms. In addition, our third parties are not produce results necessaryour employees, and except for remedies available to support regulatory clearanceus under our agreements with them, we cannot control whether or approval in the United Statesnot they devote sufficient time and resources to our on-going clinical, nonclinical and preclinical programs. Switching or elsewhere,adding additional third parties involves additional cost and requires management time and focus. In addition, there is a natural transition period when a new CRO or other third party vendor commences work. As a result, delays occur, which can materially impact our ability to meet our desired development timelines. Though we carefully manage our relationships with our third party vendors including CROs, there can be no assurance that we will be unable to expand the indications fornot encounter similar challenges or commercialize these products.
We will likely need to conduct additional clinical studiesdelays in the future to support new indications for our products or for clearancesthat these delays or approvals of new product lines, or for the approval of the use of our products in some foreign countries. Clinical testing can take many years, can be expensive and carries uncertain outcomes. The initiation and completion of any of these studies may be prevented, delayed, or halted for numerous reasons. Conducting successful clinical studies requires the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Patient enrollment in clinical trials and completion of patient participation and follow-up depends on many factors, including the size of the patient population, the nature of the trial protocol, the attractiveness of, or the discomforts and risks associated with, the treatments received by enrolled subjects, the availability of appropriate clinical trial investigators and support staff, proximity of patients to clinical sites, patient ability to meet the eligibility and exclusion criteria for
participation in the clinical trial and patient compliance. For example, patients may be discouraged from enrolling in our clinical trials if the trial protocol requires them to undergo extensive post-treatment procedures or follow-up to assess the safety and effectiveness of our products or if they determine that the treatments received under the trial protocols arechallenges will not attractive or involve unacceptable risks or discomforts. Patients may also not participate in our clinical trials if they choose to participate in contemporaneous clinical trials of competitive products. In addition, patients participating in clinical trials may die before completion of the trial or suffer adverse medical events unrelated to investigational products.
Clinical failure can occur at any stage of testing. Our clinical studies may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical and non-clinical studies in addition to those we have planned. Our failure to adequately demonstrate the safety and efficacy of any of our devices would prevent receipt of regulatory clearance or approval and, ultimately, the commercialization of that device or indication for use. Even if our future products are cleared in the United States, commercialization of our products in foreign countries would require approval by regulatory authorities in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from, and greater than, those in the United States, including additional preclinical studies or clinical trials. Any of these occurrences could have ana material adverse impact on our business.business, financial condition and prospects.
Healthcare regulatory reform may affect our ability to sell our products profitably and could have a material adverse effect onadversely affect our business.business, results of operations and financial condition.
In the United States and in certain foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the regulatory and healthcare systems in ways that could prevent or delay marketing approval of our products in development, restrict or regulate post-approval activities of our products and impact our ability to sell our products profitably. In the United States in recent years, new legislation has been proposed and adopted at the federal and state level that is effecting major changes in the healthcare system. In addition, new regulations and interpretations of existing healthcare statutes and regulations are frequently adopted.
In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively, the Affordable Care Act, werewas signed into law. While the goal of healthcare reform is to expand coverage to more individuals, it also involves increased government price controls, additional regulatory mandates and other measures designed to constrain medical costs. The Affordable Care Act substantially changes the way healthcare is financed by both governmental and private insurers, encourages improvements in the quality of healthcare items and services and significantly impacts the medical technologydevice industry. Among other things, the Affordable Care Act:
imposed an annual excise tax of 2.3% on any entity that manufactures or imports prescription drugs, biologic agents and medical devices offered for sale in the United States, which was suspended from January 1, 2016, to December 31, 2017, by the Consolidated Appropriations Act of 2016, but will be reinstated starting January 1, 2018, absent further action;
increased the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program;
created a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected;
extended manufacturers’ Medicaid rebate liability to individuals enrolled in Medicaid managed care organizations;
expanded eligibility criteria for Medicaid programs;
established a new Patient-Centered Outcomes Research Institute to oversee and identify priorities in comparative clinical effectiveness research in an effort to coordinate and develop such research; and
implemented payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models; andmodels.
Since its enactment, there have been judicial and Congressional challenges to certain aspects of the Affordable Care Act, as well as efforts by the former Trump administration to repeal or replace certain aspects of the ACA, and we expect such challenges and amendments to continue. For example, the Tax Cuts and Jobs Act of 2017 includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” On December 14, 2018, a U.S. District Court Judge in the Northern District of Texas, ruled that the individual mandate is a critical and inseverable feature of the Affordable Care Act, and therefore, because it was repealed as part of the U.S. Tax Act, the remaining provisions of the Affordable Care Act are invalid as well. On December 18, 2019, the U.S. Court of Appeals for the 5th Circuit upheld the District Court ruling that the individual mandate was unconstitutional and remanded the case back to the District Court to determine whether the remaining provisions of the Affordable Care Act are invalid as well. On March 2, 2020, the United States Supreme Court granted the petitions for writs of certiorari to review this case, and the Court held oral argument on November 10, 2020. The case is expected to be decided in mid-2021. It is unclear how this decision and other efforts to challenge, repeal or replace the Affordable Care Act will impact the Affordable Care Act or our business. We expect there will be additional challenges and amendments to the Affordable Care Act in the future.
The results of the 2020 U.S. presidential and congressional elections have created an independent payment advisory board thatregulatory uncertainty, including with respect to the U.S. government’s role, in the U.S. healthcare industry. As a result of such
elections, there are renewed and reinvigorated calls for health insurance reform, which could cause significant uncertainty in the U.S. healthcare market, could increase our costs, decrease our revenues or inhibit our ability to sell our products. We cannot predict with certainty what impact any U.S. federal and state health reforms will submit recommendations to Congress to reduce Medicare spending if projected Medicare spending exceeds a specified growth rate.have on us, but such changes could impose new and/or more stringent regulatory requirements on our activities or result in reduced reimbursement for our products, any of which could adversely affect our business, results of operations and financial condition.
In addition, third-party payorspayers regularly update payments to physicians and hospitals where our products are used. For example, on April 16, 2015, President Obama signed into law the Medicare Access and CHIP Reauthorization Act of 2015, or MACRA. Among other things, MACRA, extended existingended the use of the Sustainable Growth Rate Formula, and provided for a 0.5% annual increase in payment rates through June 30, 2015, with a 0.5% update for July 1, 2015 through December 31, 2015, and for each calendar yearunder the Medicare Physician Fee Schedule through 2019, after which there will be a 0%but no annual update each yearfrom 2020 through 2025. MACRA also introduced a merit based incentive bonus program for Medicare physicians beginning in 2019. At this time, it is unclear how the introduction of the merit based incentive program will impact overall physician reimbursement under the Medicare program. In addition, the Budget Control Act of 2011 and the Bipartisan Budget Act of 2015 imposed reductions to Medicare payments to providers of up to 2% per fiscal year, which went into effect on April 1, 2013, and, due to subsequent2013. Subsequent legislative amendments related to the statute, will remain in effectCOVID-19 pandemic suspended this Medicare sequestration payment reduction from May 1, 2020 through 2025 unless additional Congressional action is taken.March 31, 2021, but extended sequestration through 2030. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to several types of providers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These and other payment updates could directly impact the demand for our products or any products we may develop in the future, if cleared or approved.
We expect that the Affordable Care Act, as well as other healthcare reform measures that may be adopted in the future, may result in additional reductions in Medicare and other healthcare funding, more rigorous coverage criteria, new payment methodologies and in additional downward pressure on the price that we receive for any cleared or approved products. Furthermore, we believe that many individuals who have obtained insurance coverage through the health insurance exchanges which arose as a result of the Affordable Care Act have done so with policies that have significantly higher deductibles than policies they may have obtained prior to its enactment. Because the out-of-pocket costs of undergoing a treatmentcertain procedures for patients who have not met their deductible for a given year would be significantly higher than they historically would have been, these patients may be discouraged from undergoing such a treatmentcertain procedures due to the cost. Any reluctance on the part of patients to undergo treatmentprocedures utilizing our products due to cost could impact our ability to expand sales of our products and could adversely impact our business.business, results of operations and financial condition.
Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for cleared or approved products. We cannot be sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our products, if any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent product labeling and postmarketing testing and other requirements.
We may beare subject to federal, state and foreign laws and regulations relating to our healthcare business, and could face substantial penalties if we are determined not to have fully complied with such laws, which would have an adverse impact onadversely affect our business.business, results of operations and financial condition.
We may beBoth in our capacity as a pharmaceutical and medical device manufacturer and/or as a supplier of covered items and services to federal health care program beneficiaries, with respect to which items and services we submit claims for reimbursement from such programs, we are subject to healthcare fraud and abuse regulation and enforcement by federal, state and foreign governments, which could adversely impact our business.business, results of operations and financial condition. Healthcare fraud and abuse and health information privacy and security laws potentially applicable to our operations include:
the federal Anti-Kickback Statute, which applies to our marketing practices, educational programs, pricing and discounting policies and relationships with healthcare providers, by prohibiting, among other things, persons and entities from knowingly and willfully soliciting, receiving, offering or providing remuneration intended to induce or reward, or in return for, either the referral of an individual for, or the purchase, order or recommendation of an item or service reimbursable under a federal healthcare program, such as the Medicare or Medicaid programs. A person or entity does not need to have actual knowledge of this statute or specific intent to violate it to have committed a
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the “Stark Law,” which prohibits a physician from referring Medicare or Medicaid patients to an entity providing “designated health services,” which includes durable medical equipment, if the physician or immediate family member of the physician, has an ownership or investment interest in or compensation arrangement with such entity that does not comply with the requirements of a Stark exception;
the federal civil and criminal false claims laws and civil monetary penalties laws, including the False Claims Act, which impose civil and criminal penalties through governmental, civil whistleblower or qui tam actions, against individuals or entities for, among other things, knowingly presenting, or causing to be presented, claims for payment or approval to the federal government that are false or fraudulent, knowingly making a false statement material to an obligation to pay or transmit money or property to the federal government or knowingly concealing or knowingly and improperly avoiding or decreasing an obligation to pay or transmit money or property to the federal government. Suits filed under the False Claims Act, can be brought by any individual on behalf of the government, known as ‘‘qui tam’’ actions, and such individuals, commonly known as ‘‘whistleblowers,’’ may share in any amounts paid by the entity to the government in fines or settlement. The frequency of filing qui tam actions has increased significantly in recent years, causing greater numbers of pharmaceutical, medical device and other healthcare companies to have to defend a False Claims Act action. When an entity is determined to have violated the False Claims Act, the government may impose civil fines and penalties ranging from $11,665 to $23,331 for each false claim, plus treble damages, and exclude the entity from participation in Medicare, Medicaid and other federal healthcare programs. The government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the false claims statutes;
the federal civil monetary penalties laws, which impose civil fines for, among other things, the offering or transfer of remuneration to a Medicare or state healthcare program beneficiary if the person knows or should know it is likely to influence the beneficiary’s selection of a particular provider, practitioner, or supplier of services reimbursable by Medicare or a state healthcare program, unless an exception applies;
HIPAA and its implementing regulations, which created federal criminal laws that prohibit, among other things, executing or attempting to execute a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation;
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and its implementing regulations, which also imposes certain regulatory and contractual requirements regarding the privacy, security and transmission of personalprotected health information;information, or PHI;
the federal Physician Payments Sunshine Act, which requires manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the government information related to certain payments or other “transfers of value” made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, and, beginning in 2022, physician assistants, nurse practitioners, and other practitioners, and requires applicable manufacturers to report annually to the government ownership and investment interests held by the physiciansproviders described above and their immediate family members and payments or other “transfers of value” to such physician owners;provider owners. Failure to submit required information may result in civil
monetary penalties of $11,766 per failure up to an aggregate of $176,495 per year (or up to an aggregate of $1.177 million per year for “knowing failures”), for all payments, transfers of value or ownership or investment interests that are not timely, accurately, and completely reported in an annual submission, and may result in liability under other federal laws or regulations; |
federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers;
federal government price reporting laws, which require us to calculate and report complex pricing metrics in an accurate and timely manner to government programs, and where the failure to report such prices may expose us to potential liability; and
state and foreign law equivalents of each of the above federal laws and regulations, such as anti-kickback, self-referral, fee-splittingand false claims laws that may apply to items or services reimbursed by any third-party payor,payer, including commercial insurers; state laws that require pharmaceutical and device companies to comply with the industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government or otherwise that restrict payments that may be made to healthcare providers; state laws that require drug and device manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures;expenditures and pricing information; and state and foreign laws governing the privacy and security of certain health information, such as GDPR, which imposes obligations and restrictions on the collection and use of personal data relating to individuals located in the EU (including health data), many of which differ from each other in significant ways and some of which may be more stringent than HIPAA or HITECH.
The risk of ourus being found in violation of these laws and regulations is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. We are unable to predict what additional federal, state or foreign legislation or regulatory initiatives may be enacted in the future regarding our business or the healthcare industry in general, or what effect such legislation or regulations may have on us. Federal, state or foreign governments may impose additional restrictions or adopt interpretations of existing laws that could have a material adverse effect onadversely affect us.
Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available under such laws, it is possible that some of our business activities, including certain sales and marketing practices and financial arrangements with physicians and other healthcare providers, some of whom recommend, use, prescribe or purchase our products, and other customers, could be subject to challenge under one or more of such laws. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from governmental healthcare programs, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, and the curtailment or restructuring of our operations, any of which could adversely impact our business, results of operations and financial condition.
We are subject to governmental regulation and other legal obligations, particularly related to privacy, data protection and information security, and we are subject to consumer protection laws that regulate our marketing practices and prohibit unfair or deceptive acts or practices. Our actual or perceived failure to comply with such obligations could harm our business.
We are subject to diverse laws and regulations relating to data privacy and security, including, in the United States, the federal Health Insurance Portability and Accountability Act of 1996, as amended by HITECH, and the regulations that implement both laws, collectively known as HIPAA, and, in the European Union, or EU, and the European Economic Area, or EEA, Regulation 2016/679, known as the General Data Protection Regulation, or
GDPR. New privacy rules are being enacted in the United States and globally, and existing ones are being updated and strengthened. Complying with these numerous, complex and often changing regulations is expensive and difficult, and failure to comply with any privacy laws or data security laws or any security incident or breach involving the misappropriation, loss or other unauthorized use or disclosure of sensitive or confidential patient or consumer information, whether by us, one of our business associates or another third-party, could adversely affect our business, results of operations and financial condition, including but not limited to: investigation costs, material fines and penalties; compensatory, special, punitive, and statutory damages; litigation; reputational damage; consent orders regarding our privacy and security practices; requirements that we provide notices, credit monitoring services and/or credit restoration services or other relevant services to impacted individuals; adverse actions against our licenses to do business; and injunctive relief. Furthermore, these rules are constantly changing. For example, the California Consumer Privacy Act, or CCPA, took effect on January 1, 2020. The CCPA establishes a new privacy framework for covered businesses and provides new and enhanced data privacy rights to California residents, such as affording consumers the right to access and delete their information and to opt out of certain sharing and sales of personal information. The CCPA imposes severe statutory damages as well as a private right of action for certain data breaches that result in the loss of personal information. This private right of action is expected to increase the likelihood of, and risks associated with, data breach litigation. It remains unclear how various provisions of the CCPA will be interpreted and enforced. The CCPA contains an exemption for medical information governed by the California Confidentiality of Medical Information Act, or CMIA, and for PHI collected by a covered entity or business associate governed by the privacy, security and breach notification rules established pursuant to HIPAA, but the precise application and scope of this exemption is not yet clear, and the law may still apply to certain aspects of our business. The CCPA may lead other states to pass comparable legislation, with potentially greater penalties, and more rigorous compliance requirements relevant to our business, and that may not include exemptions for businesses subject to HIPAA. The effects of the CCPA, and other similar state or federal laws, are potentially significant and may require us to modify our data processing practices and policies and to incur substantial costs and potential liability in an effort to comply with such legislation.
The privacy laws in the EU have been significantly reformed. On May 25, 2018, the GDPR entered into force and became directly applicable in all EU member states. The GDPR implements more stringent operational requirements than its predecessor legislation. For example, the GDPR requires us to make more detailed disclosures to data subjects, requires disclosure of the legal basis on which we can process personal data, makes it harder for us to obtain valid consent for processing, requires the appointment of data protection officers when sensitive personal data, such as health data, is processed on a large scale, provides more robust rights for data subjects, introduces mandatory data breach notification through the EU, imposes additional obligations on us when contracting with service providers and requires us to adopt appropriate privacy governance including policies, procedures, training and data audit. If we do not comply with our obligations under the GDPR, we could be exposed to fines of up to the greater of €20 million or up to 4% of our total global annual revenue in the event of a significant breach. In addition, we may be the subject of litigation and/or adverse publicity, which could adversely affect our business, results of operations and financial condition.
Prior to the effectiveness of the GDPR, the US-EU Safe Harbor framework provided a method which permitted the transfer of personal data to the United States under European privacy law; in 2015 it was declared invalid and replaced with the US-EU Privacy Shield framework, or Privacy Shield. On July 16, 2020, the Court of Justice of the European Union, or CJEU, invalidated Privacy Shield. While the CJEU upheld the adequacy of the standard contractual clauses (a standard form of contract approved by the European Commission as an adequate personal data transfer mechanism, and potential alternative to the Privacy Shield), it made clear that reliance on them alone may not necessarily be sufficient in all circumstances; this has created increasing uncertainty. This recent development will require us to review and amend the legal mechanisms by which we make and/or receive personal data transfers to/in the U.S. As supervisory authorities issue further guidance on personal data export mechanisms, including circumstances where the standard contractual clauses cannot be used, and/or start taking enforcement action, we could suffer additional costs, complaints and/or regulatory investigations or fines, and/or if we are otherwise unable to transfer personal data between and among countries
and regions in which we operate, it could affect the manner in which we provide our services, the geographical location or segregation of our relevant systems and operations, and could adversely affect our financial results.
Additionally starting on January 1, 2021 (following the United Kingdom’s departure from the EU), we will have to comply with the GDPR and the UK GDPR (i.e. the GDPR as implemented into UK law) if we offer services to UK users, monitor their behavior or are established in the United Kingdom. Failure to comply with the UK GDPR can result in fines up to the greater of £17 million (approximately $20 million), or 4% of global revenue. However, the relationship between the United Kingdom and the European Union in relation to certain aspects of data protection law remains unclear. For example, it is unclear what the role of the Information Commissioner’s Office will be following the end of the transitional period. In addition, it is likely that documentation will need to be put in place between UK entities and entities in European member states to ensure adequate safeguards are in place for data transfers, which may result in increased costs with respect to transfers of personal data between the European Union and the UK, which would increase our expenses. We may find it necessary or advantageous to join industry bodies or self-regulatory organizations that impose stricter compliance requirements than those set out in applicable laws, including the GDPR. We may also be bound by contractual restrictions that prevent us from participating in data processing activities that would otherwise be permissible under applicable laws, including the GDPR. Such strategic choices may impact our ability to use and exploit data, and may have an adverse impact on our business.
Failure to comply with the FCPA and laws associated with our activities outside the United States could adversely affect our business, results of operations and financial condition.
We are subject to the FCPA and other anti-bribery legislation around the world. The FCPA generally prohibits covered entities and their intermediaries from engaging in bribery or making other prohibited payments, offers or promises to foreign officials for the purpose of obtaining or retaining business or other advantages. In addition, the FCPA imposes recordkeeping and internal controls requirements on publicly traded corporations and their foreign affiliates, which are intended to, among other things, prevent the diversion of corporate funds to the payment of bribes and other improper payments, and to prevent the establishment of “off books” slush funds from which such improper payments can be made. As we conduct our business in jurisdictions outside of the United States, we face significant risks if we fail to comply with the FCPA and other laws that prohibit improper payments, offers or promises of payment to foreign governments and their officials and political parties by us and other business entities for the purpose of obtaining or retaining business or other advantages. In many foreign countries, particularly in countries with developing economies, it may be a local custom that businesses operating in such countries engage in business practices that are prohibited by the FCPA or other laws and regulations. Although we have implemented a company policy requiring our employees and consultants to comply with the FCPA and similar laws, such policy may not be effective at preventing all potential FCPA or other violations. Although our agreements with our international distributors clearly state our expectations for our distributors’ compliance with U.S. laws, including the FCPA, and provide us with various remedies upon any non-compliance, including the ability to terminate the agreement, we also cannot guarantee our distributors’ compliance with U.S. laws, including the FCPA. Therefore, there can be no assurance that our employees and agents, or those companies to which we outsource certain of our business operations, have not and will not take actions that violate our policies or applicable laws, for which we may be ultimately held responsible. Any violation of the FCPA and related policies could result in severe criminal or civil sanctions, which could adversely affect our business, results of operations and financial condition.
Furthermore, we are subject to the export controls and economic embargo rules and regulations of the United States, including, but not limited to, the Export Administration Regulations and trade sanctions against embargoed countries, which are administered by the Office of Foreign Assets Control within the Department of the Treasury, as well as the laws and regulations administered by the Department of Commerce. These regulations limit our ability to market, sell, distribute or otherwise transfer our products or technology to prohibited countries or persons. A determination that we have failed to comply, whether knowingly or inadvertently, may result in substantial penalties, including fines, enforcement actions, civil and/or criminal
sanctions, the disgorgement of profits, the imposition of a court-appointed monitor, as well as the denial of export privileges, and may adversely affect our business, results of operations and financial condition.
If we fail to meet Medicare accreditation and surety bond requirements or DMEPOS supplier standards, it could negativelyadversely affect our business, operations.results of operations and financial condition.
Our Exogen system is classified by CMS and third-party payorspayers as durable medical equipment. Suppliers of Medicare durable medical equipment, prosthetics, orthotics and supplies, or DMEPOS, must be accredited by an approved accreditation organization as meeting DMEPOS quality standards adopted by CMS and are required to meet surety bond requirements. In addition, Medicare DMEPOS suppliers must comply with Medicare supplier standards in order to obtain and retain billing privileges, including meeting all applicable federal and state licensure and regulatory requirements. CMS periodically expands or otherwise clarifies the Medicare DMEPOS supplier standards, and states periodically change licensure requirements, including licensure rules imposing more stringent requirements on out-of-state DMEPOS suppliers. We believe we are currently are in compliance with these requirements. If we fail to maintain our Medicare accreditation status and/or do not comply with Medicare surety bond or supplier standard requirements or state licensure requirements in the future, or if these requirements are changed or expanded, it could adversely affect our profits andbusiness, results of operations.operations and financial condition.
Audits or denials of our claims by government agencies could reduce our net sales or profits.
In connection with our Exogen system, we submit claims on behalf of patients directly to, and receive payments directly from, the Medicare and Medicaid programs and private payors. Therefore, we are subject to extensive government regulation, including detailed requirements for submitting reimbursement claims under appropriate codes and maintaining certain documentation to support our claims. Medicare contractors and Medicaid agencies periodically conduct pre- and post-payment reviews and other audits of claims and are under increasing pressure to more closely scrutinize healthcare claims and supporting documentation. We may be subject to pre-payment and post-payment reviews, as well as audits of claims in the future. Private payors may from time to time conduct similar reviews and audits. Such reviews and similar audits of our claims could result in material delays in payment, material recoupments, overpayments, or claim denials, or exclusion from participation in the Medicare or Medicaid programs, all of which could reduce our net sales and profitability.
Our operations involve the use of hazardous and toxic materials, and we must comply with environmental, health and safety laws and regulations, which can be expensive, and could have an adverseadversely affect on our business.business, results of operations and financial condition.
We are subject to a variety of federal, state, local and foreign laws and regulations relating to the protection of the environment or of human health and safety, including laws pertaining to the use, handling, storage, disposal and human exposure to hazardous and toxic materials. Liability under environmental laws can be imposed on a joint and several basis (which could result in an entity paying more than its fair share) and without regard to comparative fault, and environmental laws are likely to become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations, which could have an adverseadversely affect on our business.business, results of operations and financial condition.
Our employees, independent distributors, independent contractors, suppliers and other third parties may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could expose us to liability and hurt our reputation.
We are exposed to the risk that our employees, independent distributors, independent contractors, suppliers and others may engage in fraudulent conduct or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to us that violates: (1) FDA laws and regulations, including those laws that require the reporting of true, complete and accurate information to the FDA, (2) manufacturing standards, (3) healthcare fraud and abuse laws, or (4) laws that require the true, complete and accurate reporting of financial information or data. Activities subject to these laws also involve the improper use or misrepresentation of information obtained in the course of clinical trials, creating fraudulent data in our preclinical studies or clinical trials or illegal misappropriation of product, which could result in regulatory sanctions and cause serious harm to our reputation. It is not always possible to identify and deter misconduct by employees and other third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. Additionally, we are subject to the risk that a person or government could allege such fraud or other misconduct, even if none occurred.
If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business and financial results, including, without limitation, the imposition of significant civil, criminal and administrative penalties, damages, monetary fines,
possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, reputational harm, diminished profits and future earnings, and curtailment of our operations, any of which could adversely affect our ability to operate our business, and our results of operations.operations and financial condition.
Risks related to intellectual property matters
The risk factors listed below describe the risks we face related to intellectual property matters. The companies who own certain of the products we distribute face similar risks with respect to intellectual property relating to such products. If such suppliers are unable to protect their intellectual property rights, they may not be able to continue to supply us with products, which could have a material adverse effect onadversely affect our business, results of operations and financial condition.
Protection of our intellectual property rights may be difficult and costly, and our inability to protect our intellectual property could adversely affect our competitive position.
Our success depends significantly on our ability to protect our proprietary rights to the technologies and inventions used in, or embodied by, our products. To protect our proprietary technology, we rely on patent
protection, as well as a combination of copyright, trade secret and trademark laws, as well as nondisclosure, confidentiality and other contractual restrictions in our consulting and employment agreements. These legal means afford only limited protection, however, and may not adequately protect our rights or permit us to gain or keep any competitive advantage. Our existing confidentiality and/or invention assignment agreements with employees, contractors, and others who participate in IP development activities could be breached, or we may not enter into sufficient and adequate agreements with those individuals in the first instance, and we may not have adequate remedies for such breaches. Furthermore, we may be subject to, and forced to defend against, third-party claims of ownership to our intellectual property. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or rights to use, valuable intellectual property. Such an outcome could have a material adverse effect onadversely affect our business.business, results of operations and financial condition. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.
Patents
The process of applying for patent protection itself is time-consuming and expensive and we cannot assure you that all of our patent applications will issue as patents or that, if issued, they will issue in a form that will be advantageous to us. The rights granted to us under our patents, including prospective rights sought in our pending patent applications, may not be meaningful or provide us with any commercial advantage, and they could be opposed, contested, narrowed, or circumvented by our competitors or declared invalid or unenforceable in judicial or administrative proceedings. We may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our R&Dresearch and development output before it is too late to obtain patent protection. As a result, some of our products are not, and in the future may not be, protected by patents. We generally apply for patents in those countries where we intend to make, have made, use, offer for sale, or sell products and where we assess the risk of infringement to justify the cost of seeking patent protection. However, we do not seek protection in all countries where we sell products and we may not accurately predict all the countries where patent protection would ultimately be desirable. If we fail to timely file a patent application in any such country or major market, we may be precluded from doing so at a later date. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories in which we have patent protection but where such protection may not be sufficient to terminate infringing activities. Furthermore, we may not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the rights to patents licensed to us by third-parties. Therefore, these patents and applications may not be prosecuted or enforced in a manner consistent with the best interests of our business. If such licensors fail to maintain such patents, or lose rights to those patents, the rights
we have licensed may be reduced or eliminated, which could also have a material adverse effect onadversely affect our business.business, results of operations and financial condition.
We own numerous issued patents and pending patent applications relating to our technology and products. The rights granted to us under these patents, including prospective rights sought in our pending patent applications, could be opposed, contested or circumvented by our competitors or declared invalid or unenforceable in judicial or administrative proceedings. If any of our patents are challenged, invalidated or legally circumvented by third-parties, and if we do not own other enforceable patents protecting our products, competitors could market products and use processes that are substantially similar to, or superior to, those of ours, and our business will suffer. In addition, the patents we own may not be of sufficient scope or strength to provide us with any meaningful protection or commercial advantage, and competitors may be able to design around our patents or develop products that provide outcomes comparable to those of ours without infringing on our intellectual property rights.
Recent patent reform legislation could increaseEven if our patents are determined by the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act was signed into law. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted, redefine prior art, may affect patent litigation, and switch the U.S. patent system from a “first-to-invent” system to a “first-to-file” system. Under a “first-to-file” system, assuming the other requirements for patentability are met, the first inventor to file a patent application generally will be entitled to the patent on an invention regardless of whether another inventor had made the invention earlier. The U.S. Patent and Trademark Office, or USPTO, recently developed new regulationsforeign patent office, or a court to be valid and proceduresenforceable, they may not be drafted or interpreted sufficiently broadly to govern administration of
prevent others from marketing products and services similar to ours or designing around our patents. For example, third parties may be able to develop products that are similar to ours but that are not covered by the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first-to-file provisions, only became effective on March 16, 2013. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operationclaims of our business. However,patents. Third parties may assert that we or our licensors were not the Leahy-Smith Act and its implementation could increasefirst to make the uncertainties and costs surrounding the prosecution ofinventions covered by our issued patents or pending patent applications and the enforcement or defenseapplications. The claims of our issued patents allor patent applications when issued may not cover our commercial technology or the future products and services that we develop. We may not have freedom to operate unimpeded by the patent rights of others. Third parties may have dominating, blocking or other patents relevant to our technology of which we are not aware. In addition, because patent applications in the United States and many foreign jurisdictions are typically not published until 18 months after the filing of certain priority documents (or, in some cases, are not published until they issue as patents) and because publications in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed patent applications for our technology or our contemplated technology. Any such patent applications may have priority over our patent applications or issued patents, which could require us to obtain rights from third parties to issued patents or pending patent applications covering such technologies to allow us to commercialize our technology. If another party has filed a U.S. patent application on inventions similar to ours, depending on when the timing of the filing date falls under certain patent laws, we may have to participate in a material adverse effect onpriority contest (such as an interference proceeding) declared by the USPTO to determine priority of invention in the United States. There may be prior public disclosures of which we are not aware that could invalidate our businesspatents or a portion of the claims of our patents. Further, we may not develop additional proprietary technologies and, financial condition. even if we do, they may not be patentable.
In addition, patent reform legislation may pass in the future that could lead to additional uncertainties and increased costs surrounding the prosecution, enforcement, and defense of our patents and applications. We may be subject to a third-party preissuance submission of prior art to the USPTO, or become involved in opposition, derivation, reexamination, inter partes review, post-grant review or other patent office proceedings or litigation, in the United States or elsewhere, challenging our patent rights. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow third-parties to commercialize our technology or products and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third-party patent rights.
Moreover, the USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. In addition, periodic maintenance fees on issued patents often must be paid to the USPTO and foreign patent agencies over the lifetime of the patent. While an unintentional lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a
patent or patent application include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. If we fail to maintain the patents and patent applications covering our products or procedures, we may not be able to stop a competitor from marketing products that are the same as or similar to our products, which would have a material adverse effectadversely affect our business, results of operations and financial condition.
Filing, prosecuting and defending patents on our business.products in all countries throughout the world would be prohibitively expensive. The requirements for patentability may differ in certain countries, particularly developing countries, and the breadth of patent claims allowed can be inconsistent. In addition, the laws of some foreign countries may not protect our intellectual property rights to the same extent as laws in the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories in which we have patent protection that may not be sufficient to terminate infringing activities.
Due to differences between foreign and U.S. patent laws, our patented intellectual property rights may not receive the same degree of protection in every jurisdiction in which we obtain patents. Furthermore, we do not have patent rights in certain foreign countries in which a market may exist in the future, and the laws of many foreign countries may not protect our intellectual property rights or provide mechanisms for the enforcement of same to the same extent as the laws of the United States.future. We may need to expend additional resources to protect or defend our intellectual property rights in these countries, and the inability to protect or defend the same could impair our brand or adversely affect the growth of our business internationally. For example, we may not be able to stop a competitor from marketing and selling in foreign countries products that are the same as or similar to our products.
Patents have a limited lifespan, and the protection patents affords is limited. In the United States, if all maintenance fees are timely paid, the natural expiration of a patent is generally 20 years from its earliest U.S. non-provisional filing date. Even if patents covering our products are obtained, once the patent life has expired for patents covering a product, we may be open to competition from competitive products and services. As a result, our patent portfolio may not provide us with sufficient rights to exclude others from commercializing product candidates similar or identical to ours.
Trademarks
We rely on our trademarks as one means to distinguish our products from the products of our competitors, and have registered or applied to register many of these trademarks. However, we may not be able to successfully secure trademark registrations for all such applications. Third-parties may oppose our trademark applications, or otherwise challenge our use of both registered and unregistered trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition and could require us to devote resources to advertising and marketing new brands. Our competitors may infringe our trademarks and we may not have adequate resources to enforce our trademarks. Over the long term, if we are unable to establish name recognition based on our trademarks, then we may not be able to compete effectively and our business, results of operations and financial condition may be adversely affected.
Trade secrets and know-how
We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by consultants, vendors, former employees or current employees, despite the existence generally of confidentiality agreements and other contractual restrictions. Monitoring unauthorized uses and disclosures of our intellectual property is difficult, and we do not know whether the steps we have taken to protect our intellectual property will be effective.
Moreover, our competitors may independently develop equivalent knowledge, methods and know-how. For example, the FDA, as part of its Transparency Initiative, is currently considering whether to make additional
information publicly available on a routine basis, including information that we may consider to be trade secrets or other proprietary information, and it is not clear at the present time how the FDA’s disclosure policies may change in the future, if at all. Our competitors could use any of the information we may be required to disclose by the FDA to develop independently technology similar to those of ours. Competitors could purchase our products and attempt to replicate some or all of the competitive advantages we derive from our development efforts, willfully infringe our intellectual property rights, design around our protected technology or develop their own competitive technologies that fall outside of our intellectual property rights. If our intellectual property is not adequately protected so as to protect our market against competitors’ products and methods, our competitive position could be adversely affected, as could our business.business, results of operations and financial condition.
If we were to enforce a claim that a third-party had illegally obtained, misappropriated or was using our trade secrets, it would be expensive and time consuming, and the outcome would be unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets. If any of the technology or information that we protect as trade secrets were to be independently developed by a competitor, we would have no right to prevent them from using that technology or information to compete with us. Misappropriation or unauthorized disclosure of our trade secrets could impair our competitive position and may have a material adverse effect onadversely affect our business.business, results of operations and financial condition. Additionally, if the steps taken to maintain our trade secrets are deemed inadequate, we may have insufficient recourse against third parties for misappropriating the trade secret.
We depend on certain technologies that are licensed to us. We do not control the intellectual property rights covering these technologies and any loss of our rights to these technologies or the rights licensed to us could prevent us from selling our products, which could adversely impact our business.business, results of operations and financial condition.
We are a party to license agreements under which we are granted rights to intellectual property that is important to our business, and we may need to enter into additional license agreements in the future. For example, we expect that we will be dependent on our licensing arrangements with Pfizer relating to our next-generation BMP product candidates. We rely on these licenses in order to be able to use and sell various proprietary technologies that are material to our business, as well as technologies which we intend to use in our future commercial activities. Our rights to use these technologies and the inventions claimed in the licensed patents are subject to the continuation of and our compliance with the terms of those licenses. Our existing license agreements impose, and we expect that future license agreements will impose on us, various diligence obligations, payment of milestones or royalties and other obligations. If we fail to comply with our obligations under these agreements, or we are subject to a bankruptcy, the licensor may have the right to terminate the license, in which case we would not be able to market products covered by the license, which would adversely affect our business, results of operations and financial condition.
As we have done previously, we may need to obtain licenses from third parties to advance our research or allow commercialization of our products and technologies. We may fail to obtain any of these licenses on commercially reasonable terms, if at all. Even if we are able to obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. In the event that we are not able
to acquire a license, we may be required to expend significant time and resources to develop or license replacement technology. If we are unable to do so, we may be unable to develop or commercialize the affected products and technologies, which could materially harm our business. In addition, the third parties owning such intellectual property rights could seek either an injunction prohibiting our sales, or, with respect to our sales, an obligation on our part to pay royalties or other forms of compensation and damages.
In some cases, we may not have the right to control the prosecution, maintenance, or filing of the patents that are licensed to us, or the enforcement of these patents against infringement by third parties. Some of our patents and patent applications were not filed by us, but were either acquired by us or are licensed from third parties. Thus, these patents and patent applications were not drafted by us or our attorneys, and we did not control or have any input into the prosecution of these patents and patent applications prior to our acquisition of, or our entry into a license with respect to, such patents and patent applications. We cannot be certain that the
drafting or prosecution of the patents and patent applications licensed to us will result or has resulted in valid and enforceable patents. Further, we do not always retain complete control over our ability to enforce our licensed patent rights against third-party infringement. In those cases, we cannot be certain that our licensor will elect to enforce these patents to the extent that we would choose to do so, or in a way that will ensure that we retain the rights we currently have under our license. If our licensor fails to properly enforce the patents subject to our license in the event of third-party infringement, our ability to retain our competitive advantage with respect to our products may be materially and adversely affected.
Licensing of intellectual property is an important part of our business and involves complex legal, business and scientific issues. Disputes may arise between us and our licensors regarding intellectual property that is subject to a license agreement, including:
the scope of rights granted under the license agreement and other interpretation-related issues;
whether and the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the license agreement;
our right to sublicense patent and other rights to third parties under collaborative development relationships;
our diligence obligations with respect to the use of the licensed technology in relation to our development and commercialization of our products and technologies, and what activities satisfy those diligence obligations; and
the ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us and our partners.
In addition, we may become the owner of intellectual property that was obtained through assignments which may be subject to re-assignment back to the original assignor upon our failure to prosecute or maintain such intellectual property, upon our breach of the agreement pursuant to which such intellectual property was assigned, or upon our bankruptcy.
If disputes over intellectual property that we have licensed prevent or impair our ability to maintain our current licensing arrangements on acceptable terms, or if intellectual property is re-assigned back to the original assignor, we may be unable to successfully develop and commercialize the affected products and technologies.
Our intellectual property agreements with third parties may be subject to disagreements over contract interpretation, which could narrow the scope of our rights to the relevant intellectual property or technology.
Certain provisions in our intellectual property agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could affect the scope of our rights to the relevant intellectual property or technology, or affect financial or other obligations under the relevant agreement, either of which could adversely affect our business, results of operations and financial condition.
In addition, while it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who in fact conceives or develops intellectual property that we regard as our own. Our assignment agreements may not be self-executing or may be breached, and we may be forced to bring claims against third parties, or defend claims they may bring against us, to determine the ownership of what we regard as our intellectual property.
We may in the future be a party to patent and other intellectual property litigation and administrative proceedings that could be costly and could interfere with our ability to successfully market our products.
The medical technologydevice industry has been characterized by frequent and extensive intellectual property litigation and is highly competitive. Our competitors or other patent holders may assert that our products and/or the
or the methods employed in our products are covered by their patents or that we are infringing, misappropriating, or misusing their trademark, copyright, trade secret, and/or other proprietary rights.
If our products or methods are found to infringe, we could be prevented from manufacturing or marketing our products. In the event that we become involved in such a dispute, we may incur significant costs and expenses and may need to devote resources to resolving any claims, which would reduce the cash we have available for operations and may be distracting to management and other employees, including those involved in the development of intellectual property. We do not know whether our competitors or potential competitors have applied for, will apply for, or will obtain patents that will prevent, limit or interfere with our ability to make, use, sell, import or export our products. Because patent applications can take many years to issue, third parties may have currently pending patent applications which may later result in issued patents that our products and technologies may infringe, or which such third parties claim are infringed by the use of our products or technologies. There is no guarantee that patents will not issue in the future from currently pending applications that may be infringed by our technology or products. In addition, identification of third-party patent rights that may be relevant to our technology is difficult because patent searching is imperfect due to differences in terminology among patents, incomplete databases, and difficulty in assessing the meaning of patent claims. Moreover, as the medical technologydevice industry expands and more patents are issued in this area, the risk increases that we may be subject to claims of infringement of the patent rights of third parties. We cannot assure you that we will prevail in such actions, or that other actions alleging misappropriation or misuse by us of third-party trade secrets or infringement by us of third-party patents, copyrights, trademarks or other rights or challenging the validity of our patents, copyrights, trademarks or other rights will not be asserted against us. Competing products may also be sold in other countries in which our patent coverage might not exist or be as strong. If we lose a foreign patent lawsuit alleging our infringement of a competitor’s patents, we could be prevented from marketing our products in one or more foreign countries.
We may also initiate litigation against third-parties to enforce our patent and proprietary rights or to determine the scope, enforceability or validity of the proprietary rights of others. Our intellectual property has not been tested in litigation. If we initiate litigation to protect our rights, we run the risk of having our patents and other proprietary rights invalidated, canceled or narrowed, which could undermine our competitive position. Further, if the scope of protection provided by our patents or patent applications or other proprietary rights is threatened or reduced as a result of litigation, it could discourage third parties from entering into collaborations with us that are important to the commercialization of our products.
Litigation relatedWe may be subject to infringement andownership disputes relating to intellectual property, including disputes arising from conflicting obligations of consultants or others who are involved in developing our product. Furthermore, if a license to necessary technology is terminated, the licensor may initiate litigation claiming that our processes or products infringe or misappropriate its patent or other intellectual property claims, with rights and/or withoutthat we breached our obligations under the license agreement, and we and our collaborators would need to defend against such proceedings.
These lawsuits and proceedings, regardless of merit, is unpredictable, can be expensive andare time-consuming and canexpensive to initiate, maintain, defend or settle, and could divert management’sthe time and attention fromof managerial and technical personnel, which could materially adversely affect our core business. Ifbusiness, results of operations and financial condition. Any such claim could also force use to do one or more of the following:
incur substantial monetary liability for infringement or other violations of intellectual property rights, which we lose this kind of litigation,may have to pay if a court decides that the product, service, or technology at issue infringes or violates the third-party’s rights, and if the court finds that the infringement was willful, we could be ordered to pay treble damages and the third-party’s attorneys’ fees;
pay substantial damages to our customers or end users to discontinue use or replace infringing technology with non-infringing technology;
stop manufacturing, offering for sale, selling, using, importing, exporting or licensing the product or technology incorporating the allegedly infringing technology or stop incorporating the allegedly infringing technology into such product, service, or technology;
obtain from the owner of the infringed intellectual property right a license, which may require us to pay substantial damages, treble damagesupfront fees or royalties to sell or use the relevant technology and attorneys’ feeswhich may not be available on commercially reasonable terms, or at all;
redesign our products, services, and technology so they do not infringe or violate the third-party’s intellectual property rights, which may not be possible or may require substantial monetary expenditures and time;
enter into cross-licenses with our competitors, which could weaken our overall intellectual property position;
lose the opportunity to license our technology to others or to collect royalty payments based upon successful protection and assertion of our intellectual property against others;
find alternative suppliers for non-infringing products and technologies, which could be costly and create significant delay; or
relinquish rights associated with one or more of our patent claims, if our claims are held invalid or otherwise unenforceable.
Some of our competitors may be able to sustain the costs of complex intellectual property litigation more effectively than we can because they have substantially greater resources. In addition, intellectual property litigation, regardless of its outcome, may cause negative publicity, adversely impact prospective customers, cause product shipment delays, divert the time, attention and resources of management, or prohibit us from using technologies essential tomanufacturing, marketing or otherwise commercializing our products, services and technology. Any uncertainties resulting from the initiation and continuation of any of which would have a material adverse effect on our business. If relevant patents are upheld as valid and enforceable and we are found to infringe, welitigation could be prevented from selling our products unless we can obtain licenses to use technology or ideas covered by such patents. We do not know whether any necessary licenses would be available to us on satisfactory terms, if at all. If we cannot obtain these licenses, we could be forced to design around those patents at additional cost or abandon the product altogether. As a result,adversely affect our ability to growraise additional funds or otherwise adversely affect our business, results of operations and compete in the market may be harmed.financial condition.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, during the course of this kind of litigation, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If these results are perceived to be negative, the price of our Class A common stock could be adversely affected.
In addition, certain of our agreements with suppliers, distributors, customers and other entities with whom we do business may require us to defend or indemnify these parties to the extent they become involved in infringement claims relating to our technologies or products, or rights licensed to them by us. We could also voluntarily agree to defend or indemnify third parties in instances where we are not obligated to do so if we determine it would be important to our business relationships. If we are required or agree to defend or indemnify any of these third parties in connection with any infringement claims, we could incur significant costs and expenses that could adversely affect our business, operating results orof operation and financial condition.
We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of our competitors or former employers or are in breach of non-competition or non-solicitation agreements with our competitors or former employers.
We could in the future be subject to claims that we or our employees have inadvertently or otherwise used or disclosed alleged trade secrets or other proprietary information of former employers or competitors. In addition, we may in the future be subject to claims that we caused an employee to breach the terms of his or her non-competition or non-solicitation agreement. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and could be a
distraction to management. If our defense to those claims fails, in addition to paying monetary damages, a court could prohibit us from using technologies or features that are essential to our products, if such technologies or features are found to incorporate or be derived from the trade secrets or other proprietary information of the competitors or former employers. An inability to incorporate technologies or features that are important or essential to our products could have an adverse impact onadversely affect our business, results of operations and financial condition, and may prevent us from selling our products. In addition, we may lose valuable intellectual property rights or personnel. Any litigation or the threat thereof may adversely affect our ability to hire employees or contract with independent sales representatives. A loss of key personnel or their work product could hamper or prevent our ability to commercialize our products, which could adversely affect our business, results of operations and financial condition.
Any product candidates that we develop as biologics subject to the BLA pathway may be subject to competition sooner than anticipated.
We expect to submit a BLA to allow for the marketing of MOTYS following the expiration of FDA’s enforcement discretion period for certain HCT/Ps. See “—Risks related to government regulation—Our HCT/P products are subject to extensive government regulation and our failure to comply with these requirements could cause our business to suffer. These products could be subject to significant additional regulatory requirements.” The Biologics Price Competition and Innovation Act of 2009, or BPCIA, was enacted as part of the Affordable Care Act to establish an abbreviated pathway for the approval of biosimilar and interchangeable biological products. The regulatory pathway establishes legal authority for the FDA to review and approve biosimilar biologics, including the possible designation of a biosimilar as “interchangeable” based on its similarity to an approved biologic. Under the BPCIA, an application for a biosimilar product cannot be approved by the FDA until 12 years after the reference product was approved under a BLA. The law is complex and is still being interpreted and implemented by the FDA. As a result, its ultimate impact, implementation, and meaning are subject to uncertainty. While it is uncertain when processes intended to implement BPCIA may be fully adopted by the FDA, any of these processes could have ana material adverse effect on the future commercial prospects for our biological products.
We believe that any of the product candidates we develop that is approved in the United States as a biological product under a BLA should qualify for the 12-year period of exclusivity. However, there is a risk that this exclusivity could be shortened due to congressional action or otherwise, or that the FDA will not consider the subject product candidates to be reference products for competing products, potentially creating the opportunity for generic competition sooner than anticipated. Moreover, the extent to which a biosimilar, once approved, will be substituted for any one of the reference products in a way that is similar to traditional generic substitution for non-biological products is not yet clear, and will depend on a number of marketplace and regulatory factors that are still developing.
In addition, the approval of a biologic product biosimilar to one of our products could have a material adverse impact on our business as it may be significantly less costly to bring to market and may be priced significantly lower than our products.
Intellectual property rights do not necessarily address all potential threats to our business.
Once granted, patents may remain open to invalidity challenges including opposition, interference, re-examination, post-grant review, inter partes review, nullification or derivation action in court or before patent offices or similar proceedings for a given period after allowance or grant, during which time third parties can raise objections against such grant. In the course of such proceedings, which may continue for a protracted period of time, the patent owner may be compelled to limit the scope of the allowed or granted claims thus attacked, or may lose the allowed or granted claims altogether.
In addition, the degree of future protection afforded by our intellectual property rights is uncertain because even granted intellectual property rights have limitations, and may not adequately protect our business, provide a
barrier to entry against our competitors or potential competitors or permit us to maintain our competitive advantage. Moreover, if a third-party has intellectual property rights that cover the practice of our technology, we may not be able to fully exercise or extract value from our intellectual property rights. The following examples are illustrative:
others may be able to develop and/or practice technology that is similar to our technology or aspects of our technology, but that are not covered by the claims of the patents that we own or control, assuming such patents have issued or do issue;
we or our licensors or any future strategic partners might not have been the first to conceive or reduce to practice the inventions covered by the issued patent or pending patent application that we own or have exclusively licensed;
we or our licensors or any future strategic partners might not have been the first to file patent applications covering certain of our inventions;
others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights;
our pending patent applications may not lead to issued patents;
issued patents that we own or exclusively license may not provide us with any competitive advantage, or may be held invalid or unenforceable, as a result of legal challenges by our competitors;
our competitors might conduct research and development activities in countries where we do not have patent rights and then use the information learned from such activities to develop competitive products for sale in our major commercial markets;
third parties performing manufacturing or testing for us using our products or technologies could use the intellectual property of others without obtaining a proper license;
parties may assert an ownership interest in our intellectual property and, if successful, such disputes may preclude us from exercising exclusive rights over that intellectual property;
we may not develop or in-license additional proprietary technologies that are patentable;
we may not be able to obtain and maintain necessary licenses on commercially reasonable terms, or at all; and
the patents of others may adversely affect our business.
Should any of these events occur, they could adversely affect our business, results of operations and financial condition.
Risks related to our companyorganizational structure and our organizational structurethe Tax Receivable Agreement
Our principal asset after the completion of this offering will be our interest in Bioventus LLC, and, accordingly, we will depend on distributions from Bioventus LLC to pay our taxes and expenses, including payments under the Tax Receivable Agreement. Bioventus LLC’s ability to make such distributions may be subject to various limitations and restrictions.
Upon the consummation of this offering, we will be a holding company and will have no material assets other than our ownership of LLC Interests of Bioventus LLC. As such, we will have no independent means of generating net sales or cash flow, and our ability to pay our taxes and operating expenses or declare and pay dividends in the future, if any, will be dependent upon the financial results and cash flows of Bioventus LLC and its subsidiaries and distributions we receive from Bioventus LLC. There can be no assurance that ourBioventus LLC and its subsidiaries will generate sufficient cash flow to distribute funds to us or that applicable state law and contractual restrictions, including negative covenants in our debt instruments, will permit such distributions.
Bioventus LLC will continue to be treated as a partnership for U.S. federal income tax purposes and, as such, generally will not be subject to anyentity-level U.S. federal income tax. Instead, taxable income will be allocated to holders of LLC Interests, including us. Accordingly, we will incur income taxes on our allocable share of any net taxable income of Bioventus LLC. Under the terms of the Bioventus LLC Agreement, Bioventus LLC will be obligated to make tax distributions to holders of LLC Interests, including us, subject to any limitations or restrictions in our debt arrangements. In addition to tax expenses, we will also incur expenses related to our operations, including payments under the Tax Receivable Agreement, which we expect could be significant. See “Certain relationships and related party transactions—Tax Receivable Agreement.” We intend, as its managing
member, to cause Bioventus LLC to make cash distributions to the owners of LLC Interests, including us, in an amount sufficient to (i) fund their or our tax obligations in respect of allocations of taxable income allocated to themfrom Bioventus LLC and (ii) cover our operating expenses, including payments under the Tax Receivable Agreement. However, Bioventus LLC’s ability to make such distributions may be subject to various limitations and restrictions, such as restrictions on distributions that would either violate any contract or agreement to which Bioventus LLC is then a party, including debt agreements, or any applicable law, or that would have the effect of rendering Bioventus LLC insolvent. If we do not have sufficient funds to pay taxes or other liabilities or to fund our operations, we may have to borrow funds, which could materially adversely affect our liquidity and financial condition and subject us to various restrictions imposed by any such lenders. To the extent that we are unable to make payments under the Tax Receivable Agreement 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 Tax Receivable Agreement and therefore accelerate payments due under the Tax Receivable Agreement. See “Certain relationships and related party transactions—Tax Receivable Agreement.” In addition, if Bioventus LLC does not have sufficient funds to make distributions, our ability to declare and pay cash dividends will also be restricted or impaired. See “—“Risk Factors—Risks related to this offering and ownership of our Class A common stock” and “Dividend policy.”
The Tax Receivable Agreement with the Continuing LLC OwnersOwner requires us to make cash payments to themit in respect of certain tax benefits to which we may become entitled, and we expect that the payments we will be required to make could be significant.
Upon the closing of this offering, we will be a party to the Tax Receivable Agreement with the Continuing LLC Owners.Owner. Under the Tax Receivable Agreement, we will be required to make cash payments to the Continuing LLC OwnersOwner 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) the increases in the tax basis of assets of Bioventus LLC resulting from (a) any future redemptions or exchanges of LLC Interests described under “Certain relationships and related party transactions—Bioventus LLC Agreement—LLC Interest Redemption Right,” and (b) certain distributions (or deemed distributions) by Bioventus LLC and (2) certain other tax benefits related to our makingarising from payments under the Tax Receivable Agreement. We expect the amount of the cash payments that we will be required to make under the Tax Receivable Agreement will be significant. The actual amount and timing of any payments under the Tax Receivable Agreement will vary depending upon a number of factors, including the timing of redemptions or exchanges by the holders ofContinuing LLC Interests,Owner, the amount of gain recognized by such holders ofthe Continuing LLC Interests,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 OwnersOwner under the Tax Receivable Agreement 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 timely payments under the Tax Receivable Agreement for any reason, the unpaid amounts will be deferred and will accrue interest until paid by us. Furthermore, our future obligation to make payments under the Tax Receivable Agreement could make us a less attractive target for an acquisition, particularly in the case of an acquirer that cannot use some or all of the tax benefits that are the subject of the Tax Receivable Agreement. Payments under the Tax Receivable Agreement are not conditioned on anythe Continuing LLC Owner’s continued ownership of LLC Interests or our Class A common stock after this offering. For more information, see “Certain relationships and related party transactions—Tax Receivable Agreement.” Assuming no material changes in the relevant tax laws and that we earn sufficient taxable income to realize all tax benefits that are subject to the Tax Receivable Agreement, we expect that the tax savings associated with the purchase of
LLC Interests in connection with this offering, together with future redemptions or exchanges of all remaining LLC Interests owned by the Continuing LLC Owner pursuant to the Bioventus LLC Agreement as described above, would aggregate to approximately $101.0 million over 20 years from the date of this offering based on the assumed initial public offering price of $17.00 per share of our Class A common stock, which is the midpoint of the range set forth on the cover page of this prospectus, and assuming all future redemptions or exchanges would occur one year after this offering. Under such scenario, assuming future payments are made on the date each relevant tax return is due, without extensions, we would be required to pay approximately 85% of such amount, or approximately $85.8 million, over the 20-year period from the date of this offering. The actual amounts we will be required to pay under the Tax Receivable Agreement will depend on, among other things, the timing of subsequent redemptions or exchanges of LLC Interests by the Continuing LLC Owner, the price of our shares of Class A common stock at the time of each such redemption or exchange, and the amounts and timing of our future taxable income, and may be significantly different from the amounts described in the preceding sentence. Additionally, in certain cases such payments may be accelerated or significantly exceed the actual benefits we realize. See “—In certain cases, payments under the Tax Receivable Agreement to the Continuing LLC Owners may be accelerated or significantly exceed the actual benefits we realize in respect of tax attributes subject to the Tax Receivable Agreement.” Our organizational structure, including the Tax Receivable Agreement, confers certain tax benefits upon the Continuing LLC OwnersOwner that may not benefit Class A common stockholders to the same extent as they will benefit the Continuing LLC Owners.Owner.
Our organizational structure, including the Tax Receivable Agreement, confers certain tax benefits upon the Continuing LLC OwnersOwner that may not benefit the holders of our Class A common stock to the same extent as they will benefit the Continuing LLC Owners.Owner. We will enter into the Tax Receivable Agreement with Bioventus
LLC and the Continuing LLC OwnersOwner that will provide for our payment to the Continuing LLC OwnersOwner of 85% of the amount of tax benefits, if any, that we actually realize (or in some circumstances are deemed to realize) as a result of (i) increases in the tax basis of assets of Bioventus LLC resulting from (a) any future redemptions or exchanges of LLC Interests described under “Certain relationships and related party transactions—Bioventus LLC Agreement—LLC Interest Redemption Right,” and (b) certain distributions (or deemed distributions) by Bioventus LLC and (ii) certain other tax benefits related to our makingarising from payments under the Tax Receivable Agreement. Although Bioventus will retain 15% of such tax benefits, this and other aspects of our organizational structure may adversely impact the future trading market for the Class A common stock.
In certain cases, payments under the Tax Receivable Agreement to the Continuing LLC OwnersOwner may be accelerated or significantly exceed the actual benefits we realize in respect of the tax attributes subject to the Tax Receivable Agreement.
The Tax Receivable Agreement provideswill provide that if (i) we materially breach any of our material obligations under the Tax Receivable Agreement, (ii) certain mergers, asset sales, other forms of business combinations or other changes of control were to occur on or before December 31, 20172021 or (iii) we elect an early termination of the Tax Receivable Agreement, then our obligations or our successor’s obligations under the Tax Receivable Agreement to make payments thereunder would be based on certain assumptions, including an assumption that we would have sufficient taxable income to fully utilize all potential future tax benefits that are subject to the Tax Receivable Agreement.Agreement (or, in the case of certain mergers, asset sales, other forms of business combinations or other changes of control occurring after December 31, 2021, that we would have taxable income at least equal to four times the highest taxable income in any of the four fiscal quarters ending prior to the closing date of such transaction (increased by 10% for each taxable year beginning with the second taxable year following such closing date)).
As a result of the foregoing, (i) we could be required to make payments under the Tax Receivable Agreement that are greater than the specified percentage of the actual benefits we ultimately realize in respect of the tax benefits that are subject to the Tax Receivable Agreement and (ii) if we materially breach any of our material obligations under the Tax Receivable Agreement or if we elect to terminate the Tax Receivable
Agreement early, we would be required to make an immediate cash payment equal to the present value of the anticipated future tax benefits that are the subject of the Tax Receivable Agreement, which payment may be made significantly in advance of the actual realization, if any, of such future tax benefits. In these situations, our obligations under the Tax Receivable Agreement could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control. For example, should we elect to terminate the Tax Receivable Agreement immediately following this offering, assuming no material changes in the relevant tax laws or tax rates and that we earn sufficient taxable income to realize all tax potential benefits that are subject to the Tax Receivable Agreement, we estimate that the aggregate of termination payments would be approximately $74.3 million based on the assumed initial public offering price of $17.00 per share of our Class A common stock, which is the midpoint of the range set forth on the cover page of this prospectus and assuming LIBOR were to be 0.36%. There can be no assurance that we will be able to fund or finance our obligations under the Tax Receivable Agreement. We may elect to completely terminate the Tax Receivable Agreement early only with the written approval of a majority of our directors other than any directors that have been appointed or designated by the Continuing LLC Owner or any of such person’s affiliates. See “Certain relationships and related party transactions—Tax ReceivablesReceivable Agreement.”
We may make payments to the Continuing LLC OwnersOwner under the Tax Receivable Agreement that exceed the tax benefits initially claimedactually realized by us in the event that any tax benefits are disallowed by a taxing authority.
Payments under the Tax Receivable Agreement will be based on the tax reporting positions that we determine, and the Internal Revenue Service, or the IRS, or another tax authority may challenge all or part of the tax basis increases, as well as other related tax positions we take, and a court could sustain such challenge. Pursuant to the Tax Receivable Agreement, the Continuing LLC Owners areOwner is required to reimburse us for any cash payments previously made to the Continuing LLC Ownersit under the Tax Receivable Agreement in the event that any tax benefits initially claimedactually realized by us and for which payment has been made to a Continuing LLC Ownerunder the Tax Receivable Agreement are subsequently challenged by a taxing authority and are ultimately disallowed. In addition, but without duplication of any amounts previously reimbursed by anythe Continuing LLC Owner, any excess cash payments made by us to athe Continuing LLC Owner will be netted against any future cash payments that we might otherwise be required to make to suchthe Continuing LLC Owner under the terms of the Tax Receivable Agreement. However, we might not determine that we have effectively made an excess cash payment to athe Continuing LLC Owner for a number of years following the initial time of such payment. Moreover, there can be no assurance that any excess cash payments for which the Continuing LLC Owners haveOwner has a reimbursement obligation under the Tax
Receivable Agreement will be repaid to us. As a result, payments could be made under the Tax Receivable Agreement in excess of the tax savings that we realize in respect of the tax attributes with respect to athe Continuing LLC Owner that are the subject of the Tax Receivable Agreement. See “Certain relationships and related party transactions—Tax Receivable Agreement.”
Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our results of operations and financial condition.
We are subject to taxes by the U.S. federal, state, local and foreign tax authorities, and our tax liabilities will be affected by the allocation of expenses to differing jurisdictions. Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:
changes in the valuation of our deferred tax assets and liabilities;
expected timing and amount of the release of any tax valuation allowances;
tax effects ofstock-based equity-based compensation;
changes in tax laws, regulations or interpretations thereof; or
future earnings being lower than anticipated in countries where we have lower statutory tax rates and higher than anticipated earnings in countries where we have higher statutory tax rates.
In addition, we may be subject to audits of our income, sales and other transaction taxes by U.S. federal, state, local and foreign taxing authorities. Outcomes from these audits could have an adverse effect onadversely affect our operatingbusiness, results of operations and financial condition.
If we were deemed to be an investment company under the Investment Company Act of 1940, as amended, or the 1940 Act, as a result of our ownership of Bioventus LLC, applicable restrictions could make it impractical for us to continue our business as contemplated and could have a material adverse effect onadversely affect our business.business, results of operations and financial condition.
Under Sections 3(a)(1)(A) and (C) of the 1940 Act, a company generally will be deemed to be an “investment company” for purposes of the 1940 Act if (i) it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities or (ii) it engages, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. We do not believe that we are an “investment company,” as such term is defined in either of those sections of the 1940 Act.
As the sole managing member of Bioventus LLC, we will control and operate Bioventus LLC. On that basis, we believe that our interest in Bioventus LLC is not an “investment security” as that term is used in the 1940 Act. However, if we were to cease participation in the management of Bioventus LLC, our interest in Bioventus LLC could be deemed an “investment security” for purposes of the 1940 Act.
We and Bioventus LLC intend to conduct our operations so that we will not be deemed an investment company. However, if we were to be deemed an investment company, restrictions imposed by the 1940 Act, including limitations on our capital structure and our ability to transact with affiliates, could make it impractical for us to continue our business as contemplated and could have a material adverse effect onadversely affect our business.business, results of operations and financial condition.
Bioventus is controlled by the Original LLC Owners, whose interests may differ from those of our public stockholders.
Immediately following this offering and the application of net proceeds from this offering, the Original LLC Owners will control approximately 73.5%86.5% of the combined voting power of our common stock through their
ownership of both Class A common stock and Class B common stock. The Original LLC Owners will, for the foreseeable future, have significantthe ability to substantially influence us through their ownership position over corporate management and affairs, and will be able to control virtually all matters requiring stockholder approval. The Original LLC Owners are able to, subject to applicable law, and the voting arrangements described in “Certain relationships and related party transactions,” elect a majority of the members of our board of directors and control actions to be taken by us and our board of directors, including amendments to our certificate of incorporation and bylaws and approval of significant corporate transactions, including mergers and sales of substantially all of our assets. The directors so elected will have the authority, subject to the terms of our indebtedness and applicable rules and regulations, to issue additional stock, implement stock repurchase programs, declare dividends and make other decisions. It is possible that the interests of the Original LLC Owners may in some circumstances conflict with our interests and the interests of our other stockholders, including you. For example, the Continuing LLC OwnersOwner may have different tax positions from us, especially in light of the Tax Receivable Agreement that could influence theirour decisions regarding whether and when to dispose of assets, whether and when to incur new or refinance existing indebtedness, and whether and when Bioventus should terminate the Tax Receivable Agreement and accelerate its obligations thereunder. In addition, the determination of future tax reporting positions and the structuring of future transactions may take into
consideration thesethe Continuing LLC Owners’Owner’s tax or other considerations, which may differ from the considerations of us or our other stockholders. See “Certain relationships and related party transactions—Tax Receivable Agreement.”
Our amendedRisks related to this offering and restated certificate of incorporation will, to the extent permitted by applicable law, contain provisions renouncing our interest and expectation to participate in certain corporate opportunities identified or presented to certainownership of our Original LLC Owners.Class A common stock
Certain of the Original LLC OwnersWe have identified an ongoing material weakness in our internal control over financial reporting. If we are in the business of makingunable to remediate this material weakness, or advising on investments in companies and these Original LLC owners may hold, and may, from time to timeif we experience additional material weaknesses in the future acquire interestsor otherwise fail to maintain an effective system of internal controls, we may not be able to accurately or timely requirements applicable to public companies, which may adversely affect investor confidence in or provide advice to businesses that directly or indirectly compete with certain portions of our business or the business of our suppliers. Our amended and restated certificate of incorporation will provide that, to the fullest extent permitted by law, none of the Original LLC Owners or any director who is not employed by us, or his or her affiliates will have any duty to refrain from engaging in a corporate opportunity in the same or similar lines of business as us. The Original LLC Owners may also pursue acquisitions that may be complementary to our business, and, as a result, those acquisition opportunities maythe market price of our Class A common stock.
Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP.
Prior to the completion of this offering, we have been a private company with limited accounting personnel and other resources to address our internal control over financial reporting. In connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2018, we identified two material weaknesses in our internal control over financial reporting, one of which had not been remediated by December 31, 2019. A material weakness is a deficiency, or combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be availableprevented or detected on a timely basis.
In connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2019, we determined that we continued to us. Ashave a result, these arrangementsmaterial weakness associated with the proper processing of Exogen reimbursement claims in accordance with regulations and contractual terms related to items we self-reported to the OIG.
We have implemented measures designed to improve our internal control over financial reporting to address the underlying causes of this material weakness. These efforts include:
the augmentation, reorganization and training of our prescription to cash staff, which includes our direct sales team, order management personnel, patient financial services personnel and reimbursement services and accounts receivable personnel, regarding key aspects of regulations and requirements and how to deal with inconsistencies within patient medical records,
realigning executive responsibility for this function to enhance the segregation of duties;
implementation of monthly sales order testing on sampling basis by the Compliance department including a review of medical necessity;
implementation of a third party medical billing review including a review of key regulatory elements;
implementation of an electronic Certificate of Medical Necessity Form to ensure authorized individuals complete the appropriate sections in accordance with Medicare guidelines
established a cross functional governance committee, reporting to an executive steering committee to review and approve the Company’s Exogen Medicare policy and oversee future Exogen policy and process interpretations and changes; and
implementing a checklist to be completed for each Medicare order to ensure compliance with the Company’s policy for Medicare claims and then further automating this checklist.
In addition, we also determined that we had a material weakness associated with the establishment and review of a reimbursement claim reserve for errors related to the determination of medical necessity for Exogen reimbursement claims, which we believe has been remediated.
We cannot assure you that the measures we have taken to date, and actions we may take in the future, will be sufficient to remediate the control deficiencies that led to our material weaknesses in our internal control over financial reporting or that they will prevent or avoid potential future material weaknesses. If we are unable to successfully remediate our existing or any future material weaknesses in our internal control over financial reporting, or identify any additional material weaknesses, the accuracy and timing of our financial reporting may be adversely affected, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange listing requirements, investors may lose confidence in our financial reporting, and the market price of our Class A common stock may decline as a result. We could also become subject to investigations by the SEC or other regulatory authorities, which could require additional financial and management resources.
Failure to establish and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could adversely affect our business financial condition, results of operations or prospects if attractive business opportunitiesand stock price.
We are allocatednot currently required to anycomply with the rules of the OriginalSEC implementing Section 404 of the Sarbanes-Oxley Act and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public company, we will be required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of internal controls over financial reporting. Though we will be required to disclose changes made in our internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the year following our first annual report required to be filed with the SEC. However, as an emerging growth company, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the later of the year following our first annual report required to be filed with the SEC or the date we are no longer an emerging growth company. 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 internal controls and procedures and hiring additional accounting or internal audit staff. Testing and maintaining internal controls can divert our management’s attention from other matters that are important to the operation of our business. Additionally, when evaluating our internal controls over financial reporting, we may identify material weaknesses 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 assert that our internal controls over financial reporting is effective, 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.
We will incur increased costs as a result of becoming a public company and in the administration of our organizational structure.
As a public company, we will incur significant legal, accounting, insurance and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with the Sarbanes-Oxley Act and related rules implemented by the SEC. Following the completion of this offering, we will incur ongoing periodic expenses in connection with the administration of our organizational structure. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. In estimating these costs, we took into account expenses related to insurance, legal, accounting, and compliance activities, as well as other expenses not currently incurred. These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.
The dual class structure of our common stock may adversely affect the trading price or liquidity of our Class A common stock.
The existence of dual classes of our common stock could result in less liquidity for any such class than if there were only one class of our capital stock. In addition, S&P Dow Jones and FTSE Russell have announced changes to their eligibility criteria for inclusion of shares of public companies on certain indices that will exclude companies with multiple classes of shares of common stock from being added to such indices. Several shareholder advisory firms also have announced their opposition to the use of multiple class structures. As a result, the dual class structure of our common stock may prevent the inclusion of our Class A common stock in such indices and may cause shareholder advisory firms to publish negative commentary about our corporate governance practices or otherwise seek to cause us to change our capital structure. Any such exclusion from indices could result in a less active trading market for our Class A common stock. Any actions or publications by shareholder advisory firms critical of our corporate governance practices or capital structure could also adversely affect the value of our Class A common stock.
Immediately following the consummation of this offering, the Continuing LLC Owner will have the right to have its LLC Interests redeemed pursuant to the terms of the Bioventus LLC Agreement, which may dilute the owners of the Class A common stock.
After this offering, we will have an aggregate of 212,302,842 shares of Class A common stock authorized but unissued, including approximately 16,534,814 shares of Class A common stock issuable upon redemption of LLC Interests that will be held by the Continuing LLC Owner. Bioventus LLC will enter into the Bioventus LLC Agreement and, subject to certain restrictions set forth therein and as described elsewhere in this prospectus, the Continuing LLC Owner will be entitled to have its LLC Interests redeemed for shares of our Class A common stock. We also intend to enter into the Registration Rights Agreement pursuant to which the shares of Class A common stock issued to the Continuing LLC Owner upon redemption of its LLC Interests and the shares of Class A common stock issued to the Former LLC Owners insteadin connection with the Transactions will be eligible for resale, subject to certain limitations set forth therein. See “Certain relationships and related party transactions—Registration Rights Agreement.”
We cannot predict the size of future issuances of our Class A common stock or the effect, if any, that future issuances and sales of shares of our Class A common stock may have on the market price of our Class A
common stock. Sales or distributions of substantial amounts of our Class A common stock, including shares issued in connection with an acquisition, or the perception that such sales or distributions could occur, may cause the market price of our Class A common stock to us. See “Description of capital stock—Corporate opportunities.”decline.
We are a “controlled company” within the meaning of The NASDAQ Global MarketNasdaq listing standards and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.
Substantially concurrent with the closing of this offering, the Voting Group, which will hold Class A common stock and Class B common stock representing approximately 72.9%86.5% of the combined voting power of our common stock, intends to enter into the Stockholders Agreement. Pursuant to the terms of the Stockholders Agreement, until such time as Essex Woodlands Health Ventures andEW Healthcare Partners, certain other members of the Voting Group and their respective affiliates own less than 10% of the total shares of our Class A common stock owned by them as of the date this offering is consummated, and Smith & Nephew collectively ownsContinuing LLC Owner and its affiliates own less than 10% of the total shares of our Class A common stock and Class B common stock owned by them as of the date this offering is consummated, or the Stockholders Agreement is otherwise terminated in accordance with its terms, the parties to the Stockholders Agreement will agree to vote their shares of Class A common stock and Class B common stock in favor of the election of the nominees of certain members of the Voting Group to our board of directors upon their nomination by the nominating and corporate governance committee of our board of directors. See “Description of capital stock—“Certain relationships and related party transactions—Stockholders Agreement.”
Because of the Stockholders Agreement and the aggregate voting power over our Class A common stock and Class B common stock held by the parties to the Stockholders Agreement, we are considered a “controlled company” for the purposes of The NASDAQ Global Market.Nasdaq. As such, we are exempt from certain corporate governance requirements of The NASDAQ Global Market,Nasdaq, including (1) the requirement that a majority of the board of directors consist of independent directors, (2) the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors and (3) the requirement that we have a compensation committee that is composed entirely of independent directors. Following this offering, we intend to rely on some or all of these exemptions. As a result, we will not have a majority of independent directors and our compensation and nominating and corporate governance committees will not consist entirely of independent directors. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of The NASDAQ Global Market.Nasdaq.
Ouranti-takeover provisions could prevent or delay a change in control of our Company, even if such change in control would be beneficial to our stockholders.
Provisions of our amended and restated certificate of incorporation and amended and restated bylaws as well as provisions of Delaware law could discourage, delay or prevent a merger, acquisition or other change in control of our Company, even if such change in control would be beneficial to our stockholders. These provisions include:
authorizing the issuance of “blank check” preferred stock that could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt;
establishing a classified board of directors so that not all members of our board of directors are elected at one time;
the removal of directors only for cause;
prohibiting the use of cumulative voting for the election of directors;
limiting the ability of stockholders to call special meetings or amend our bylaws;
requiring all stockholder actions to be taken at a meeting of our stockholders; and
establishing advance notice and duration of ownership requirements for nominations for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.
These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team.
In addition, the Delaware General Corporation Law, or DGCL, to which we are subject, prohibits us, except under specified circumstances, from engaging in any mergers, significant sales of stock or assets or business combinations with any stockholder or group of stockholders who owns at least 15% of our common stock.
We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise adversely affect holders of our Class A common stock, which could depress the price of our Class A common stock.
Our amended and restated certificate of incorporation will authorize us to issue one or more series of preferred stock. Our board of directors will have the authority to determine the preferences, limitations and relative
rights of the shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our stockholders. Our preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our Class A common stock. The potential issuance of preferred stock may delay or prevent a change in control of us, discourage bids for our Class A common stock at a premium to the market price, and materially and adversely affect the market price and the voting and other rights of the holders of our Class A common stock.
The provision of our certificate of incorporation requiring exclusive venue in the Court of Chancery in the State of Delaware for certain types of lawsuits may have the effect of discouraging lawsuits against our directors and officers.
Our amended and restated certificate of incorporation will require, to the fullest extent permitted by law, that (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action asserting a claim against us arising pursuant to any provision of the DGCL or our amended and restated certificate of incorporation or the bylaws or (iv) any action asserting a claim against us governed by the internal affairs doctrine will have to be brought only in the Court of Chancery in the State of Delaware. Although we believe this provision benefits us by providing increased consistency in the application of Delaware law in the types of lawsuits to which it applies, the provision may have the effect of discouraging lawsuits against our directors and officers.
Risks related to this offering and ownership of our Class A common stock
We have identified material weaknesses in our internal control over financial reporting. If we are unable to remediate these material weaknesses, or if we experience additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial condition or results of operations, or comply with the accounting and reporting requirements applicable to public companies, which may adversely affect investor confidence in us and, as a result, the value of our common stock.
In connection with the audit of our consolidated financial statements as of and for the years ended December 31, 2015, 2014 and 2013, we identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis.
Our material weaknesses include the following:
We did not design and maintain an effective control environment with the sufficient number of professionals with an appropriate level of accounting knowledge, training and experience to properly analyze, record and disclose accounting matters commensurate with our accounting and financial reporting requirements. This material weakness contributed to additional material weaknesses in which, specifically, we did not design and maintain effective internal control over:
Accuracy and presentation and disclosure of sales allowances, distributor fees and bad debt expenses;
Cutoff and presentation and disclosures of revenue recognition, including the impact on cost of sales and selling, general and administrative expenses (sales commissions) and sales allowances;
Completeness, accuracy and presentation and disclosure of intangible asset amortization expense, including impact on inventories and cost of sales;
Completeness, accuracy, valuation and presentation and disclosure of the contingent consideration liability related to business combinations;
Completeness, accuracy, and presentation and disclosure of foreign currency transaction and translation gains and losses;
Completeness, existence, accuracy and presentation and disclosure of quarterly income tax provisions and deferred tax accounting;
Completeness, accuracy and presentation and disclosure of the statement of cash flows, specifically as it relates to excess partner distributions, payment of in-kind interest and the impact of foreign currency; and
Accuracy and presentation and disclosure of the financial statements, commensurate with our financial reporting requirements.
These material weaknesses resulted in adjustments to accounts receivable, inventories, goodwill, accrued sales commissions, contingent consideration liabilities, equity, net sales, cost of sales, selling, general and administrative expenses, restructuring costs, depreciation and amortization, foreign currency transaction gains and losses and income tax expense in our consolidated financial statements for the years ended December 31, 2013, 2014 and 2015.
As a public company, we will be required to maintain internal control over financial reporting and to report any material weaknesses in such internal controls. However, neither our management nor an independent registered public accounting firm has ever performed an evaluation of our internal control over financial reporting in accordance with the rules of the SEC because no such evaluation has been required. Had we or our independent registered public accounting firm performed an evaluation of our internal control over financial reporting, additional material weaknesses may have been identified. Further, due to a transition period established by the rules of the SEC for newly public companies, our management will not be required to provide a management report on internal control over financial reporting until our second annual report following this offering, which will be our fiscal year ending December 31, 2017, and our independent registered public accounting firm will not be required to attest to our management report on internal control over financial reporting until we are no longer an EGC.
We have implemented and are still in the process of implementing measures designed to improve our internal control over financial reporting and remediate our material weaknesses, including:
The augmentation and training of our accounting staff, including the appointment of a U.S. Controller at our headquarters in January 2015;
The continued centralization of accounting operations, including the transition of the U.S. accounts receivable, inventory and accounts payables functions to our headquarters during the first half of 2015;
The commissioning of a third-party specialist to provide recommendations for improvement and to assist us in formalizing the documentation of our accounting policies and internal controls; and
The hiring of a Chief Accounting Officer in April 2016.
In addition, during 2016, we plan to review our finance and accounting function to evaluate whether we have a sufficient number of appropriately trained and experienced personnel and plan to add new personnel as we deem necessary.
Although we plan to complete these remediation activities as quickly as possible, we cannot at this time estimate how long the remediation will take or cost to achieve, and our initiatives may not prove to be
successful in remediating these weaknesses and deficiencies. We cannot assure you that the measures we have taken to date, together with any measures we may take in the future, will be sufficient to remediate our material weaknesses in our internal control over financial reporting or to avoid potential future material weaknesses. If the steps we take do not correct the material weaknesses in a timely manner, we will be unable to conclude that we maintain effective internal control over financial reporting, and as a public company, we may have difficulties reporting on a quarterly basis with a review from our independent registered auditors in a timely manner. Accordingly, there could continue to be a reasonable possibility that a material misstatement of our financial statements would not be prevented or detected on a timely basis. As we have not fully completed the updates to our control structure and have not completed our evaluation and testing of these controls, we cannot be certain that these material weaknesses will be fully remediated or that other material weaknesses and any significant deficiencies or internal control deficiencies will not be discovered in the future.
If we are unable to successfully remediate our existing or any future material weaknesses in our internal control over financial reporting, or identify any additional existing material weaknesses, the accuracy and timing of our financial reporting may be adversely affected, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange listing requirements, our reported financial results may be materially misstated, investors may lose confidence in our financial reporting and our stock price may decline as a result. As a result of such failures, we could also become subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, and become subject to litigation from investors and stockholders, which could harm our reputation, business, financial condition and divert financial and management resources from our core business.
Immediately following the consummation of this offering, the Continuing LLC Owners will have the right to have their LLC Interests redeemed pursuant to the terms of the Bioventus LLC Agreement, which may dilute the owners of the Class A common stock.
After this offering, we will have an aggregate of 126,272,381 shares of Class A common stock authorized but unissued, including approximately 9,571,764 shares of Class A common stock issuable upon redemption of LLC Interests that will be held by the Continuing LLC Owners. Bioventus LLC will enter into the Bioventus LLC Agreement and, subject to certain restrictions set forth therein and as described elsewhere in this prospectus, the Continuing LLC Owners will be entitled to have their LLC Interests redeemed for shares of our Class A common stock. We also intend to enter into a Registration Rights Agreement pursuant to which the shares of Class A common stock issued to the Original LLC Owners upon redemption of LLC Interests and the shares of Class A common stock issued to the Former LLC Owners in connection with the Transactions will be eligible for resale, subject to certain limitations set forth therein. See “Certain relationships and related party transactions—Registration Rights Agreement.”
We cannot predict the size of future issuances of our Class A common stock or the effect, if any, that future issuances and sales of shares of our Class A common stock may have on the market price of our Class A common stock. Sales or distributions of substantial amounts of our Class A common stock, including shares issued in connection with an acquisition, or the perception that such sales or distributions could occur, may cause the market price of our Class A common stock to decline.
If you purchase shares of Class A common stock in this offering, you will incur immediate and substantial dilution.
Dilution is the difference between the offering price per share and the pro forma net tangible book value per share of our Class A common stock immediately after the offering. The price you pay for shares of our Class A common stock sold in this offering is substantially higher than our pro forma net tangible book value per share immediately after this offering. If you purchase shares of Class A common stock in this offering, you will incur
immediate and substantial dilution in the amount of $18.75$16.70 per share based upon an assumed initial public offering price of $17.00 per share (the midpoint of the price range listed on the cover page of this prospectus). In addition, you may also experience additional dilution, or potential dilution, upon future equity issuances to investors or to our employees and directors under our stock option plan and any other equity incentive plans we may adopt. As a result of this dilution, investors purchasing shares of Class A common stock in this offering may receive significantly less than the full purchase price that they paid for the stock purchased in this offering in the event of liquidation. See “Dilution.”
We do not know whether a market will develop for our Class A common stock or what the market price of our Class A common stock will be and as a result it may be difficult for you to sell your shares of our Class A common stock.
Before this offering, there was no public trading market for our Class A common stock. If a market for our Class A common stock does not develop or is not sustained, it may be difficult for you to sell your shares of Class A common stock at an attractive price or at all. We cannot predict the prices at which our Class A common stock will trade. It is possible that in one or more future periods our results of operations may be below the expectations of public market analysts and investors and, as a result of these and other factors, the price of our Class A common stock may fall.
If securities analysts do not publish research or reports about our business or if they publish negative evaluations of our Class A common stock, the price of our Class A common stock could decline.
The trading market for our Class A common stock will rely in part on the research and reports that industry or securities analysts publish about us or our business. We do not currently have and may never obtain research coverage by industry or securities analysts. If no or few analysts commence coverage of us, the trading price of our stock would likely decrease. Even if we do obtain analyst coverage, if one or more of the analysts covering our business downgrade their evaluations of our stock, the price of our Class A common stock could decline. If one or more of these analysts cease to cover our Class A common stock, we could lose visibility in the market for our stock, which in turn could cause our Class A common stock price to decline.
We expect that the price of our Class A common stock will fluctuate substantially and you may not be able to sell the shares you purchase in this offering at or above the offering price.
The initial public offering price for the shares of our Class A common stock sold in this offering is determined by negotiation between the representatives of the underwriters and us. This price may not reflect the market price of our Class A common stock following this offering. In addition, the market price of our Class A common stock is likely to be highly volatile and may fluctuate substantially due to many factors, including:
the volume and timing of sales of our products;
the introduction of new products or product enhancements by us or our competitors;
disputes or other developments with respect to our or others’ intellectual property rights;
our ability to develop, obtain regulatory clearance or approval for, and market new and enhanced products on a timely basis;
product liability claims or other litigation;
quarterly variations in our results of operations or those of our competitors;
media exposure of our products or our competitors;
announcement or expectation of additional equity or debt financing efforts;
additions or departures of key personnel;
issuance of new or updated research or reports by securities analysts;
failure to meet or exceed financial estimates and projections of the investment community or that we provide to the public;
changes in governmental regulations or in reimbursement;
changes in earnings estimates or recommendations by securities analysts; and
general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors.
In recent years, the stock markets generally have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may significantly affect the market price of our Class A common stock, regardless of our actual operating performance. These fluctuations may be even more pronounced in the trading market for our Class A common stock shortly following this offering. If the market price of shares of our Class A common stock after this offering does not ever exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment.
In addition, in the past, class action litigation has often been instituted against companies whose securities have experienced periods of volatility in market price. Securities litigation brought against us following volatility in our stock price, regardless of the merit or ultimate results of such litigation, could result in substantial costs, which would hurt our financial condition and operating results and divert management’s attention and resources from our business.
Substantial future sales of our Class A common stock, or the perception in the public markets that these sales may occur, may depress our stock price.
Sales of substantial amounts of our Class A common stock in the public market after this offering, or the perception that these sales could occur, could adversely affect the price of our Class A common stock and could impair our ability to raise capital through the sale of additional shares. Upon the closing of this offering, we will have 23,727,61937,697,158 shares of Class A common stock outstanding (or 25,051,14838,799,657 if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and 9,571,76416,534,814 shares of Class A common stock that would be issuable upon redemption or exchange of LLC Interests authorized but unissued. The shares of Class A common stock offered in this offering will be freely tradable without restriction under the Securities Act, except for any shares of our common stock that may be held or acquired by our directors, executive officers and other affiliates, as that term is defined in the Securities Act, which will be restricted securities under the Securities Act. Restricted securities may not be sold in the public market unless the sale is registered under the Securities Act or an exemption from registration is available.
The remaining outstanding 14,904,09030,347,158 shares of Class A common stock held by the Former LLC Owners will be subject to certain restrictions on sale. We and each of our executive officers and directors and the Original LLC Owners, which collectively will hold 73.5%86.5% of our outstanding capital stock (including shares of Class A common stock issuable upon redemption or exchange of LLC Interests) upon the closing of this offering, have agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any shares of common stock or securities convertible into or exchangeable for (including the LLC Interests), or that represent the right to receive, shares of common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of J.P. Morgan Securities LLC.the representatives on behalf of the underwriters. See “Underwriting.” All of our shares of common stock outstanding as of the date of this prospectus (and shares of Class A common stock issuable upon redemption or exchange of LLC Interests) may be sold in the public market by existing stockholders following the expiration of the applicablelock-up period, subject to applicable limitations imposed under federal securities laws.
We also intend to enter into athe Registration Rights Agreement pursuant to which the shares of Class A common stock issued upon redemption or exchange of LLC Interests held by certain of the Continuing LLC OwnersOwner and
the shares of Class A common stock issued to the Former LLC Owners in connection with the Transactions will be eligible for resale, subject to certain limitations set forth therein. See “Certain relationships and related party transactions—Registration Rights Agreement.”
We intend to file one or more registration statements onForm S-8 under the Securities Act to register all shares of Class A common stock subject to outstanding options and Class A common stock (a) issued or issuable under our stock plans and (b) issuable to the Phantom Plan Participants under the Phantom Plan. Any suchForm S-8 registration statements will automatically become effective upon filing. Accordingly, shares registered
under such registration statements will be available for sale in the open market following the expiration of the applicablelock-up period. We expect that the initial registration statement onForm S-8 will cover 3,868,169 shares of our Class A common stock.
See “Shares eligible for future sale” for a more detailed description of the restrictions on selling shares of our common stock after this offering.
In the future, we may also issue additional securities if we need to raise capital, which could constitute a material portion of ourthen-outstanding shares of common stock.
We have broad discretion over the use of the net proceeds from this offering and it is possible that we will not use them effectively.
We intend to use the net proceeds to us from this offering to purchase 7,350,000 newly-issued LLC Interests (or 8,452,500 LLC Interests if the underwriters exercise in full their option to purchase additional shares of Class A common stock) directly from Bioventus LLC at a purchase price per LLC Interest equal to the initial public offering price per share of Class A common stock less the underwriting discounts and commissions.
As the sole managing member of Bioventus LLC, we intend to cause Bioventus LLC to use such proceeds, after deducting estimated offering expenses, (i) to redeem all of Mr. Bihl’s Profits Interest Units as described in “Executive Compensation—Narrative to Summary Compensation Table—Severance,” (ii) to satisfy the $4.4 million cash entitlement of the Continuing LLC Owner in respect of the EPR Unit held by the Continuing LLC Owner, (iii) to pursue future potential acquisition opportunities, such as the acquisition of all of the shares of CartiHeal in connection with the Call Option (as defined herein) or Put Option (as defined herein), and (iv) for general corporate purposes; however, we cannot specify with any certainty the particular uses of the net proceeds that we will receive from this offering. Our management will have broad discretion in the application of the net proceeds from this offering, including for any of the purposes described in the section titled ‘‘Use of Proceeds,’’ and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. The failure by our management to apply these proceeds effectively could adversely affect our business, results of operations and financial condition. Pending their use, we may invest our proceeds in a manner that does not produce income or that loses value. Our investments may not yield a favorable return to our investors and may negatively impact the price of our Class A common stock.
Taking advantage of the reduced disclosure requirements applicable to “emerging growth companies” may make our Class A common stock less attractive to investors.
The JOBS Act provides that, so long as a company qualifies as an “emerging growth company,” it will, among other things:
be exempt from the provisions of Section 404(b) of theSarbanes-Oxley Act requiring that its independent registered public accounting firm provide an attestation report on the effectiveness of its internal control over financial reporting;
be exempt from the “say on pay” and “say on golden parachute” advisory vote requirements of theDodd-Frank Wall Street Reform and Customer Protection Act, or theDodd-Frank Act;
be exempt from certain disclosure requirements of theDodd-Frank Act relating to compensation of its executive officers and be permitted to omit the detailed compensation discussion and analysis from proxy statements and reports filed under the Securities Exchange Act of 1934, as amended, or the Exchange Act; and
be permitted to provide a reduced level of disclosure concerning executive compensation and be exempt from any rules that may behave been adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotations or a supplement to the auditor’s report on the financial statements.statements or that may be adopted requiring mandatory audit firm rotations.
We are an “emerging growth company,” as defined in the JOBS Act, and we could be an emerging growth company for up to five years following the completion of this offering. For as long as we continue to be an emerging growth company, we may choose to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies. We currently intend to take advantage of the reduced disclosure requirements regarding executive compensation. We have irrevocably elected not to take advantage of the extension of time to comply with new or revised financial accounting standards available under Section 107(b) of the JOBS Act. We could be an emerging growth company for up to five years after this offering.offering and will continue to be an emerging growth company unless our total annual gross revenues are $1.07 billion or more, we have issued more than $1 billion in non-convertible debt in the past three years or we become a “large accelerated filer” as defined in the Exchange Act. If we remain an “emerging growth company” after fiscal 2015,this offering, we may take advantage of other exemptions, including the exemptions from the advisory vote requirements and executive compensation disclosures under theDodd-Frank Act and the exemption from the provisions of Section 404(b) of theSarbanes-Oxley Act. We cannot predict if investors will find our Class A common stock less attractive if we elect to rely on these exemptions, or if taking advantage of these exemptions would result in less active trading or more volatility in the price of our Class A common stock. Also, as a result of our intention to take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us as long as we qualify as an “emerging growth company,” our financial statements may not be comparable to those of companies that fully comply with regulatory and reporting requirements upon the public company effective dates.
We will incur increased costs as a result of becoming a public company and in the administration of our organizational structure.
As a public company, we will incur significant legal, accounting, insurance and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with theSarbanes-Oxley Act and related rules implemented by the SEC. Following the completion of this offering, we will incur ongoing periodic expenses in connection with the administration of our organizational structure. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities moretime-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. In estimating these costs, we took into account expenses related to insurance, legal, accounting, and compliance activities, as well as other expenses not currently incurred. These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.
Failure to establish and maintain effective internal controls in accordance with Section 404 of theSarbanes-Oxley Act could have a material adverse effect on our business and stock price.
We are not currently required to comply with the rules of the SEC implementing Section 404 of theSarbanes-Oxley Act and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public company, we will be required to comply with the SEC’s rules implementing Sections 302 and 404 of theSarbanes-Oxley Act, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. Though we will be required to disclose changes made in our internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the year following our first annual report required to be filed with the SEC. However, as an emerging growth company, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the later of the year following our first annual report required to be filed with the SEC or the date we are no longer an emerging growth company. 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 internal controls and procedures and hiring additional accounting or internal audit staff. Testing and maintaining internal controls can divert our management’s attention from other matters that are important to the operation of our business. Additionally, when evaluating our internal controls over financial reporting, we may identify material weaknesses 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. For example, material weaknesses were identified during fiscal 2014 relating to prior period financial statement close procedures. If we identify any additional 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 assert that our internal controls over financial reporting is effective, 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 negatively 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.
We do not currently expect to pay any cash dividends.
The continued operation and expansion of our business will require substantial funding. Accordingly, weWe do not currently expect to payanticipate declaring or paying any cash dividends on sharesto holders of our Class A common stock.stock in the foreseeable future. We currently intend to retain future earnings, if any, to finance our growth. Any determination to pay cash dividends in the future will be at the sole discretion of our board of directors, subject to limitations under applicable law and may be discontinued at any time. In addition, our ability to pay cash dividends is currently restricted by the terms of our 2019 Credit Agreement. Therefore, you are not likely to receive any dividends on your Class A common stock for the foreseeable future, and the success of an investment in our Class A common stock will depend upon resultsany future appreciation in its value. Consequently, investors may need to sell all or part of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factorstheir holdings of our board of directors deems relevant. We are a holding company, and substantially all ofClass A common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. There is no guarantee that our Class A common stock will appreciate in value or even maintain the price at which our stockholders have purchased our Class A common stock. Investors seeking cash dividends should not purchase our Class A common stock.
In addition, our operations are carried out bycurrently conducted entirely through Bioventus LLC and its subsidiaries. Thereforesubsidiaries and our ability to generate cash to meet our debt service obligations or to make future dividend payments, if any, is highly dependent on the earnings and the receipt of funds from ourBioventus LLC and its subsidiaries via dividends or intercompany loans. Under
Our amended and restated certificate of incorporation will, to the extent permitted by applicable law, contain provisions renouncing our secured credit facilities, Bioventusinterest and expectation to participate in certain corporate opportunities identified or presented to certain of our Original LLC is restricted from paying cash dividends, and we expect these restrictions to continueOwners.
Certain of the Original LLC Owners are in the future.business of making or advising on investments in companies and these Original LLC owners may hold, and may, from time to time in the future, acquire interests in or provide advice to businesses that directly or indirectly compete with certain portions of our business or the business of our suppliers. Our abilityamended and restated certificate of incorporation will provide that, to pay dividendsthe fullest extent permitted by law, none of the Original LLC Owners or any director who is not employed by us or his or her affiliates will have any duty to refrain from engaging in a corporate opportunity in the same or similar lines of business as us. The Original LLC Owners may also be restricted by the terms of any future credit agreement or any future debt or preferred equity securities of ours or of our subsidiaries. In addition, Delaware law may impose requirementspursue acquisitions that may restrictbe complementary to our abilitybusiness, and, as a result, those acquisition opportunities may not be available to pay dividendsus. As a result, these arrangements could adversely affect our business, results of operations, financial condition or prospects if
attractive business opportunities are allocated to any of the Original LLC Owners instead of to us. See “Description of capital stock—Corporate opportunities.”
We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise adversely affect holders of our Class A common stock. Accordingly, if you purchase shares in this offering, realization of a gain on your investment will depend on the appreciation ofstock, which could depress the price of our Class A common stock.
Our amended and restated certificate of incorporation will authorize us to issue one or more series of preferred stock. Our board of directors will have the authority to determine the preferences, limitations and relative rights of the shares of preferred stock which may never occur. Investors seeking cash dividends inand to fix the foreseeable future should not purchasenumber of shares constituting any series and the designation of such series, without any further vote or action by our stockholders. Our preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our Class A common stock. The potential issuance of preferred stock may delay or prevent a change in control of us, discourage bids for our Class A common stock at a premium to the market price, and materially and adversely affect the market price and the voting and other rights of the holders of our Class A common stock.
Anti-takeover provisions in our governing documents and under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management, and depress the market price of our common stock.
Our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain or will contain provisions that could have the effect of rendering more difficult, delaying or preventing an acquisition deemed undesirable by our board of directors. Among others, our amended and restated certificate of incorporation and amended and restated bylaws will include the following provisions:
authorizing the issuance of “blank check” preferred stock that could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt;
establishing a classified board of directors so that not all members of our board of directors are elected at one time;
the removal of directors only for cause;
prohibiting the use of cumulative voting for the election of directors;
limiting the ability of stockholders to call special meetings or amend our bylaws;
requiring all stockholder actions to be taken at a meeting of our stockholders; and
establishing advance notice and duration of ownership requirements for nominations for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.
These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management. As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, or the DGCL, which prevents interested stockholders, such as certain stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations unless (i) prior to the time such stockholder became an interested stockholder, the board approved the transaction that resulted in such stockholder becoming an interested stockholder, (ii) upon consummation of the transaction that resulted in such stockholder becoming an interested stockholder, the interested stockholder owned 85% of the common stock or (iii) following board approval, the business combination receives the approval of the holders of at least two-thirds of our outstanding common stock not held by such interested stockholder. Because we have “opted out” of Section 203 of the DGCL in our amended and restated certificate of incorporation, the statute will not apply to business combinations involving us.
Any provision of our amended and restated certificate of incorporation, amended and restated bylaws or Delaware law that has the effect of delaying, preventing or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock.
Our amended and restated certificate of incorporation will provide that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated certificate of incorporation will provide that, unless we consent to the selection of an alternative forum, the Court of Chancery of the State of Delaware is the sole and exclusive forum for: (a) any derivative action, suit or proceeding brought on our behalf; (b) any action, suit or proceeding asserting a claim of breach of fiduciary duty owed by any of our directors, officers or stockholders to us or to our stockholders; (c) any action, suit or proceeding arising pursuant to any provision of the DGCL, our amended and restated certificate of incorporation or amended bylaws (as either may be amended from time to time); or, (d) any action, suit or proceeding asserting a claim governed by the internal affairs doctrine; provided that the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, results of operations and financial condition.
Special note regarding forward-looking statementsSPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements 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. 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. These forward-looking statements include, but are not limited to, statements about:
the adverse impacts on our business as a result of the COVID-19 pandemic;
our dependence on a limited number of products;
competition against other companies;our ability to develop, acquire and commercialize new products, line extensions or expanded indications;
clinical trialsthe continued and future acceptance of our next-generation BMP product candidates;existing portfolio of products and any new products, line extensions or expanded indications by physicians, patients, third-party payers and others in the medical community;
our ability to differentiate the HA viscosupplementation therapies we own or distribute;distribute from alternative therapies for the treatment of OA;
the proposed down-classification of non-invasive bone growth stimulators, including our Exogen system, by the FDA;
our ability to developachieve and commercialize additional orthobiologic products;maintain adequate levels of coverage and/or reimbursement for our products, the procedures using our products, or any future products we may seek to commercialize;
physician awarenessour ability to complete acquisitions or successfully integrate new businesses, products or technologies in a cost-effective and non-disruptive manner;
competition against other companies;
the negative impact on our ability to market our HA products due to the reclassification of HA products from medical devices to drugs in the United States by the FDA;
our ability to attract, retain and motivate our senior management and qualified personnel;
our ability to continue to research, develop and manufacture our products if our facilities are damaged or become inoperable;
failure to comply with the extensive government regulations related to our products and operations;
enforcement actions if we engage in improper claims submission practices or in improper marketing or promotion of our products;
the FDA regulatory process and our net losses;ability to obtain and maintain required regulatory clearances and approvals;
risk of product liability claims;failure to comply with the government regulations that apply to our HCT/P products;
the continued and future acceptanceclinical studies of any of our bone graft substitutes byfuture products that do not product results necessary to support regulatory clearance or approval in the medical community and the public;
acquisitionUnited States or investment in new businesses, products or technologies;
the FDA regulatory process;
various governmental regulations related to the manufacturing of our products;
healthcare regulatory reform;
the Voting Group’s control of us;elsewhere; and
the other risks identified in this prospectus including, without limitation, those under the sections titled “Risk factors,” “Management’s discussion and analysis of financial condition and results of operations” and “Business.”
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 prospectus 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. Factors that may cause actual results to differ materially from current expectations include, among other things, those described in the section entitled “Risk factors” and elsewhere in this prospectus. Potential investors are urged to consider these factors carefully in evaluating these forward-looking statements. These forward-looking statements speak only as of the date of this prospectus. 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. You should, however, review the factors and risks and other information we describe in the reports we will file from time to time with the SEC after the date of this prospectus.
Use of proceedsUSE OF PROCEEDS
We estimate the net proceeds from this initial public offering of shares of Class A common stock will be approximately $135.6$112.4 million, or $156.5$129.9 million if the underwriters exercise their option to purchase additional shares in full, assuming an initial public offering price of $17.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
Each $1.00 increase (decrease) in the assumed initial public offering price of $17.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us by approximately $8.2$6.8 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of 1,000,000 shares in the number of shares offered by us would increase (decrease) the net proceeds to us by approximately $15.8 million, assuming that the assumed initial public offering price remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
We intend to use the net proceeds to us from this offering to purchase 8,823,5297,350,000 newly-issued LLC Interests (or 8,452,500 LLC Interests if the underwriters exercise in full their option to purchase additional shares of Class A common stock) directly from Bioventus LLC at a purchase price per LLC Interest equal to the initial public offering price per share of Class A common stock less the underwriting discounts and commissions and estimated offering expenses payable thereon.commissions.
We intend to cause Bioventus LLC to use such proceeds (i) to repay all of the outstanding borrowings under our second lien term loan facility, together with a prepayment premium and accrued and unpaid interest thereon, (ii) to repay a $23.5 million promissory note and a $5.0 million deferred payment relating to the Acquisition when due in 2016, (iii) to repay all of the outstanding borrowings under our first lien revolving facility and (iv)(together with any remaining netadditional proceeds used for general corporate purposes.
As of April 2, 2016, we had outstanding indebtedness of $60.0 million under our second lien term loan, which matures on April 10, 2020. The interest rate on borrowings underit may receive if the second lien term loan facility was 11.0% as of April 2, 2016.
As of April 2, 2016 there was $19.5 million outstanding under our revolving credit facility, which matures on October 10, 2019. The interest rate on borrowings under our revolving credit facility was 3.18% as of April 2, 2016.
We will use the net proceeds we receive pursuant to anyunderwriters exercise of the underwriters’their option to purchase additional shares of Class A common stockstock), after deducting estimated offering expenses, (i) to purchaseredeem all of Mr. Bihl’s Profits Interest Units for which he is entitled to receive a payment on or before June 16, 2021 in an amount equal to the greater of (a) $7.71 million and (b) the fair market value of such remaining MIP award as of the date of payment, as well as an additional cash payment of $1.54 million, as described in “Executive Compensation—Narrative to Summary Compensation Table—Severance,” (ii) to satisfy the $4.4 million cash entitlement of the Continuing LLC Interests from BioventusOwner in respect of the EPR Unit held by the Continuing LLC Owner, (iii) to maintainpursue future potential acquisition opportunities, such as theone-to-one ratio between acquisition of all of the number of shares of Class A common stock issued by usCartiHeal in connection with the Call Option or Put Option, and the number of LLC Interests owned by us. We intend to cause Bioventus LLC to use any such proceeds it receives(iv) for general corporate purposes.
As of the date of this prospectus, since we cannot specify with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering, our management will have broad discretion over the use of any net proceeds from this offering that are to be applied for general corporate purposes. Pending the use of the proceeds from this offering, we intend to invest the net proceeds in short-term, interest-bearing, investment grade securities, certificates of deposit or governmental securities.
Dividend policyDIVIDEND POLICY
We do not anticipate declaring or paying any cash dividends to holders of our Class A common stock in the foreseeable future. We currently intend to retain all available funds and any future earnings, for useif any, to finance the growth of our business. If we decide to pay cash dividends in the operationfuture, the declaration and payment of such dividends will be at the sole discretion of our business,board of directors and therefore we do not currently expect to paymay be discontinued at any cash dividends on our Class A common stock.time. Holders of our Class B common stock are not entitled to participate in any dividends declared by our board of directors. AnyIn determining the amount of any future determination to pay dividends, to holders of Class A common stock will be at the discretion of our board of directors will take into account any legal or contractual limitations, our actual and will depend upon many factors, including our results of operations, financial condition,anticipated future earnings, cash flow, debt service and capital requirements restrictions in Bioventus LLC’s debt agreements and other factors that our board of directors deemsmay deem relevant. We are
Upon consummation of this offering, Bioventus Inc. will be a holding company and substantially allwill have no material assets other than its ownership of LLC Interests. The limited liability company agreement of Bioventus LLC that will be in effect at the time of this offering provides that certain distributions to cover the taxes of the Continuing LLC Owner will be made based upon assumed tax rates and other assumptions provided in the limited liability company agreement. See “Certain Relationships and Related Person Transactions—Bioventus Limited Liability Company Agreement.” Additionally, in the event Bioventus Inc. declares any cash dividend, we intend to cause Bioventus LLC to make distributions to Bioventus Inc., in an amount sufficient to cover such cash dividends declared by us. If Bioventus LLC makes such distributions to Bioventus Inc., the Continuing LLC Owner will also be entitled to receive the respective equivalent pro rata distributions in accordance with the percentages of their respective LLC Interests. See “Risk Factors—Risks Related to Our Organizational Structure—Our principal asset after the completion of this offering will be our interest in Bioventus LLC, and, accordingly, we will depend on distributions from Bioventus LLC to pay our taxes and expenses, including payments under the Tax Receivable Agreement. Bioventus LLC’s ability to make such distributions may be subject to various limitations and restrictions.”
In addition, the terms of our operations are carried out byfinancing arrangements, including the 2019 Credit Agreement, contain covenants that may restrict Bioventus LLC and its subsidiaries and therefore we will only be able to pay dividends from funds we receive from Bioventus LLC. Under our credit agreements, Bioventus LLC is currently restricted from paying such distributions, subject to certain distributions, andexceptions. Any financing arrangements that we expect these restrictions to continueenter into in the future which may in turninclude restrictive covenants that limit our ability to pay dividendsdividends. In addition, Bioventus LLC is generally prohibited under Delaware law from making a distribution to a member to the extent that, at the time of the distribution, after giving effect to the distribution, liabilities of Bioventus LLC (with certain exceptions) exceed the fair value of its assets. Subsidiaries of Bioventus LLC are generally subject to similar legal limitations on our Class A common stock. Ourtheir ability to pay dividends may also be restricted by the terms of any future credit agreement or any future debt or preferred equity securities of us or our subsidiaries.make distributions to Bioventus LLC.
Existing organization
Prior to the consummation of this offering and the organizational transactions described below, the Original LLC Owners are the only owners of Bioventus LLC. Bioventus LLC is treated as a partnership for U.S. federal income tax purposes and, as such, generally is not subject to any U.S. federalentity-level income taxes.taxes (with the exception of certain subsidiaries that are subject to entity-level income taxes). Rather, taxable income or loss is included in the U.S. federal income tax returns of Bioventus LLC’s members.
Bioventus Inc. was incorporated as a Delaware corporation on December 22, 2015 to serve as the issuer of the Class A common stock offered hereby.
Transactions
In connection with the closing of this offering, we will consummate the following organizational transactions, which we refer to as the “Transactions”:
we will amend and restate the Bioventus LLC Agreement, to, among other things, (i) provide for LLC Interests that will be the single class of common membership interests in Bioventus LLC, (ii) exchange all of the existing membership interests (including profit interests awarded under our MIP) in Bioventus LLC for LLC Interests and (iii) appoint Bioventus Inc. as the sole managing member of Bioventus LLC;
we will amend and restate Bioventus Inc.’s certificate of incorporation to, among other things, (i) provide for Class A common stock and Class B common stock, each share of which entitles its holders to one vote per share on all matters presented to Bioventus Inc.’s stockholders and (ii) issue shares of Class B common stock to the Continuing LLC Owners,Owner, on aone-to-one basis with the number of LLC Interests they own;it owns;
wethe Former LLC Owners will exchange their indirect ownership interests in Bioventus LLC for 30,347,158 shares of Class A common stock;
Bioventus Inc. will issue 8,823,5297,350,000 shares of our Class A common stock to the purchasers in this offering (or 10,147,0588,452,500 shares of Class A common stock if the underwriters exercise in full their option to purchase additional shares of Class A common stock) in exchange for net proceeds of approximately $139.5$112.4 million (or approximately $160.4$129.9 million if the underwriters exercise in full their option to purchase additional shares of Class A common stock), assuming the shares are offered at $17.00 per share (the midpoint of the price range listed on the cover page of this prospectus), after deducting underwriting discounts and commissions but before offering expenses;
weBioventus Inc. will use all of the net proceeds from this offering (including any net proceeds received upon exercise of the underwriters’ option to purchase additional shares of Class A common stock) to acquirenewly-issued LLC Interests from Bioventus LLC at a purchase price per interest equal to the initial public offering price per share of Class A common stock, less underwriting discounts and commissions, collectively representing 26.5%13.5% of Bioventus LLC’s outstanding LLC Interests (or 29.3%15.3%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock);
Bioventus LLC will use the proceeds from the sale of LLC Interests to Bioventus Inc. as set forth underdescribed in “Use of proceeds;”
the Former LLC Owners will exchange their indirect ownership interests in Bioventus LLC for shares of Class A common stock on aone-to-one basis;
the Phantom Plan will be terminated and the Phantom Plan Participants who are employed as of the date of this offering will receive the rightrights to receive up to 513,1171,351,834 shares of Class A common stock upon settlement of their awards under the Phantom Plan, with such settlement expected to take place on thebetween twelve month anniversaryand 24 months following the date of termination of the Phantom Plan as described in “Executive compensation — Narrative to summary compensation table — Equity-based compensation — Phantom profits interest units” (settlement may result in a change in the
“Executive compensation—Narrative to summary compensation table—Equity-based compensation” (which settlement may result in a change in the timing over which compensation expense is recognized as described in “Management’s discussion and analysis of financial condition and results of |
the Continuing LLC OwnersOwner will continue to own the LLC Interests theyit received in exchange for theirits existing membership interests in Bioventus LLC; and
Bioventus Inc. will enter into (i) the Tax Receivable Agreement with the Continuing LLC Owners,Owner, (ii) the Stockholders Agreement with the Voting Group and (iii) the Registration Rights Agreement with the Original LLC Owners who, upon the consummation of this offering, will own 24,475,85446,881,972 shares of Bioventus’ Class A common stock and Class B common stock (which will not have any liquidation or distribution rights).
Organizational structure following this offering
Immediately following the completion of the Transactions, including this offering:
Bioventus Inc. will be a holding company and the principal asset of Bioventus Inc. will be LLC Interests of Bioventus LLC;
Bioventus Inc. will be the sole managing member of Bioventus LLC and will control the business and affairs of Bioventus LLC and its subsidiaries;
ourBioventus Inc.’s amended and restated certificate of incorporation and the Bioventus LLC Agreement will require that we and Bioventus LLC at all times maintain aone-to-one ratio between the number of shares of Class A common stock issued by us and the number of LLC Interests owned by us, as well as aone-to-one ratio between the number of shares of Class B common stock owned by the Continuing LLC OwnersOwner and the number of LLC Interests owned by the Continuing LLC Owners;Owner;
Bioventus Inc. will own LLC Interests representing 71.3%69.5% of the economic interest in Bioventus LLC (or 72.4%70.1%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock);
the purchasers in this offering (i) will own 8,823,5297,350,000 shares of Class A common stock, representing approximately 26.5%13.5% of the combined voting power of all of Bioventus’Bioventus Inc.’s common stock (or 8,452,500 shares of Class A common stock, representing approximately 29.3%15.3%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock), (ii) will own 37.2%19.5% of the economic interest in Bioventus Inc. (or 40.5%21.8%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and (iii) through Bioventus’Bioventus Inc.’s ownership of LLC Interests, indirectly will hold (applying the percentages in the preceding clause (ii) to Bioventus’Bioventus Inc.’s percentage economic interest in Bioventus LLC) approximately 26.5%13.5% of the economic interest in Bioventus LLC (or 29.3%,15.3% if the underwriters exercise in full their option to purchase additional shares of Class A common stock);
the Former LLC Owners (i) will own 14,904,09030,347,158 shares of Class A common stock, representing approximately 44.8%56.0% of the combined voting power of all of Bioventus’Bioventus Inc.’s common stock (or approximately 43.0%54.8%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock), (ii) will own 62.8%80.5% of the economic interest in Bioventus Inc. (or 59.5%78.2%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and (iii) through Bioventus’Bioventus Inc.’s ownership of LLC Interests, indirectly will hold (applying the percentages in the preceding clause (ii) to Bioventus’Bioventus Inc.’s percentage economic interest in Bioventus LLC) approximately 44.8%56.0% of the economic interest in Bioventus LLC (or 43.0%54.8%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock);
the Continuing LLC OwnersOwner will own (i) LLC Interests, representing 28.7%through its ownership of Class B common stock, approximately 30.5% of the economic interestvoting power in Bioventus Inc. (or approximately 29.9%, if the
underwriters exercise in full their option to purchase additional shares of Class A common stock) and (ii) LLC Interests, representing 30.5% of the economic interest in Bioventus LLC (or 29.9%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock). Following the offering, each LLC Interest held by the Continuing LLC Owner will be redeemable, at its election, for newly-issued shares of Class A common stock on a one-for-one basis or, if Bioventus Inc. and the Continuing LLC Owner agree, a cash payment equal to a volume weighted average market price of one share of Class A common stock for each LLC Interest redeemed (subject to customary adjustments, including for stock splits, stock dividends and reclassifications) in accordance with the terms of the Bioventus LLC Agreement; provided that, at Bioventus Inc.’s election, Bioventus Inc. may effect a direct exchange of such Class A common stock or such cash (if mutually agreed) for such LLC Interests. Shares of Class B common stock will be cancelled on a one-for-one basis if we, at the election of the Continuing LLC Owner, redeem or exchange its LLC Interests pursuant to the terms of the Bioventus LLC Agreement. See “Certain relationships and related party transactions—Bioventus LLC Agreement;” and |
Bioventus Inc. will enter into (i) the Tax Receivable Agreement with the Continuing LLC Owner, (ii) the Stockholders Agreement with the Voting Group and (iii) the Registration Rights Agreement with the Original LLC Owners. Upon the consummation of this offering, the Continuing LLC Owner will own (x) 16,534,814 shares of Bioventus’ Class B common stock (which will not have any liquidation or distribution rights), representing approximately 30.5% of the combined voting power of all of Bioventus Inc.’s common stock (or 27.6%approximately 29.9%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and (ii) through their ownership of Class B common stock, approximately 28.7% of the voting power in Bioventus (or approximately 27.6%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock). Following the offering, each(y) 16,534,814 LLC Interest held by the Continuing LLC Owners will be redeemable, at the election of such members, for, at Bioventus’ option, as determined by Bioventus’ board of directors,newly-issued shares of Class A common stock on aone-for-one basis or a cash payment (if mutually agreed) equal to a volume weighted average market price of one share of Class A common stock for each LLC Interest redeemed (subject to customary adjustments, including for stock splits, stock dividends and reclassifications) in accordance with the terms of the Bioventus LLC Agreement. See “Certain relationships and related party transactions—Bioventus LLC Agreement;” and
the Original LLC Owners collectively (i) will own Class A and Class B common stockInterests, representing approximately 73.5% of the combined voting power of all of Bioventus’ common stock (or approximately 70.7%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and (ii) will own 73.5%30.5% of the economic interest in the business of Bioventus LLC and its subsidiaries (or 70.7%approximately 29.9%, if the underwriters exercise in full their option to purchase additional shares of Class A common stock), representing both a direct interest through the Continuing LLC Owners’Owner’s ownership of LLC Interests and an indirect interest through the Former LLC Owners’ ownership of Class A common stock.
Our corporate structure following this offering, as described above, is commonly referred to as an Up-C structure, which is often used by partnerships and limited liability companies when they undertake an initial public offering of their business. The Up-C structure will allow the Continuing LLC Owner to retain its equity ownership in Bioventus LLC and to continue to realize tax benefits associated with owning interests in an entity that is treated as a partnership, or “passthrough” entity, for U.S. federal income tax purposes following the offering. Investors in this offering will, by contrast, hold their equity ownership in Bioventus Inc., a Delaware corporation that is a domestic corporation for U.S. federal income tax purposes, in the form of shares of Class A common stock. Similarly, the Former LLC Owners will also hold their equity ownership in Bioventus Inc. in the form of shares of Class A common stock. One of the tax benefits to the Continuing LLC Owner associated with this structure is that future taxable income of Bioventus LLC that is allocated to the Continuing LLC Owner will be taxed on a flow-through basis and therefore will not be subject to corporate taxes at the entity level. Additionally, because the Continuing LLC Owner may redeem or exchange its LLC Interests for newly issued shares of our Class A common stock on a one-for-one basis or, at our option, for cash, the Up-C structure also provides the Continuing LLC Owner with potential liquidity that holders of non-publicly traded limited liability companies are not typically afforded. Bioventus Inc. also expects to benefit from the “Up-C” structure because, in general, we expect to benefit in the form of cash tax savings in amounts equal to 15% of certain tax benefits arising from redemptions or exchanges of the Continuing Owner’s LLC Interests for Class A Common Stock or cash and certain other tax benefits covered by the Tax Receivable Agreement discussed in “Certain relationships and related party transactions—Tax Receivable Agreement.” See “Risk Factors—Risks related to our organizational structure and the Tax Receivable Agreement.”
Immediately following this offering, weBioventus Inc. will be a holding company and our principal asset will be the LLC Interests we purchase from Bioventus LLC and acquire from the Former LLC Owners. As the sole managing member of Bioventus LLC, weBioventus Inc. will operate and control all of the business and affairs of
Bioventus LLC and, through Bioventus LLC and its subsidiaries, conduct our business. Accordingly, we will have the sole voting interest in, and control the management of, Bioventus LLC. As a result, weBioventus Inc. will consolidate Bioventus LLC in our consolidated financial statements and will report anon-controlling interest related to the LLC Interests held by the Continuing LLC OwnersOwner on our consolidated financial statements. Bioventus Inc. will have a board of directors and executive officers, but will have no employees. The functions of all of our employees are expected to reside at or under Bioventus LLC.
See “Description of capital stock” for more information about our certificate of incorporation and the terms of the Class A common stock and Class B common stock. See “Certain relationships and related party transactions” for more information about (i) the Bioventus LLC Agreement, including the terms of the LLC Interests and the redemption right of the Continuing LLC Owner; (ii) the Tax Receivable Agreement; (iii) the Registration Rights Agreement; and (iv) the Stockholders Agreement. Under the Stockholders Agreement, any increase or decrease in the size of our board of directors or any committee, and any amendment to our organizational documents, will in each case require the approval of EW Healthcare Partners, certain other members of the Voting Group and their respective affiliates, for so long as they collectively own at least 10% of the total shares of our Class A common stock owned by them as of the date this offering is consummated, and will also require the approval of Smith & Nephew, Inc. and Smith & Nephew (Europe) B.V. and their affiliates, for so long as Continuing LLC Owner and its affiliates own at least 10% of the total shares of our Class A common stock and Class B common stock owned by them as of the date this offering is consummated.
The following diagram showsbelow depicts our organizational structure immediately prior to giving effect to the Transactions.
| (1) | We plan to redeem all of Mr. Bihl’s Profits Interest Units as described in “Executive Compensation—Narrative to Summary Compensation Table—Severance.” |
| (2) | Refers to all the Original LLC Owners (including EW Healthcare Partners) but excluding the Continuing LLC Owner, the S+N Former LLC Owner and Smith & Nephew (Europe) B.V. |
| (3) | Immediately prior to the consummation of this offering, each of the Former LLC Owners, including Smith & Nephew (Europe) B.V., a wholly-owned indirect Dutch subsidiary of Smith & Nephew plc and the owner of S+N Former LLC Owner, will exchange their indirect ownership interests in Bioventus LLC for shares of Class A common stock and the Former LLC Owners Blockers and S+N Former LLC Owner will merge with and into Bioventus Inc. |
| (4) | Following the consummation of this offering, the Continuing LLC Owner will continue to own the LLC Interests it receives in exchange for its existing membership interests in Bioventus LLC. |
The diagram below depicts our organizational structure after giving effect to the Transactions, including this offering, assuming no exercise by the underwriters of their option to purchase additional shares of Class A common stock:
| (1) | Refers to Smith & Nephew, Inc., a wholly-owned indirect U.S. subsidiary of Smith & Nephew plc, which will continue to own LLC Interests after the Transactions and which may, following the consummation of this offering, exchange its LLC Interests for shares of our Class A common stock or a cash payment (if mutually agreed) as described in “Certain relationships and related party transactions—Bioventus LLC Agreement,” in each case, together with a cancellation of the same number of its shares of Class B common stock. |
| (2) | Refers to all of the Original LLC Owners (including EW Healthcare Partners and Smith & Nephew (Europe) B.V., but excluding the Continuing LLC Owner) who will exchange their indirect ownership interests in Bioventus LLC for shares of our Class A common stock in connection with the consummation of this offering. |
The following table sets forth the cash and cash equivalents and capitalization as of April 2, 2016:September 26, 2020:
of Bioventus LLC and its subsidiaries on an actual basis; and
of Bioventus Inc. and its subsidiaries on a pro forma basis to give effect to the Transactions, including our issuance and sale of 8,823,5297,350,000 shares of Class A common stock in this offering at an assumed initial public offering price of $17.00 per share, the midpoint of the price range listed on the cover page of this prospectus, after (i) deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us and (ii) the application of the proceeds from the offering, each as described under “Use of proceeds.”
You should read this information together with the financial statements and related notes appearing elsewhere in this prospectus and the information set forth under the headings “Prospectus summary—Summary historical and pro forma financial data,” “Transactions,” “Use of proceeds,” “Selected financial data,” and “Management’s discussion and analysis of financial condition and results of operations”.
| As of April 2, 2016 | As of September 26, 2020 | |||||||||||||||
| (in thousands, except share and per share data) | Bioventus LLC actual | Bioventus Inc. pro forma(1) | Bioventus LLC actual | Bioventus Inc. pro forma(1) | ||||||||||||
Cash and cash equivalents | $ | 6,166 | $ | 32,493 | $ | 72,478 | $ | 170,710 | ||||||||
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Long-term indebtedness: | ||||||||||||||||
2014 revolver(3) | 19,500 | — | ||||||||||||||
First lien term loan(3) | 102,310 | 102,310 | ||||||||||||||
Second lien term loan(3) | 57,600 | — | ||||||||||||||
Stockholders’ equity (deficit): | ||||||||||||||||
Class A common stock, par value $0.001 per share; no shares authorized, issued and outstanding, actual; 150,000,000 shares authorized, 22,263,466 shares issued and outstanding, Bioventus Inc. pro forma | — | 24 | ||||||||||||||
Class B common stock, par value $0.001 per share; no shares authorized, issued and outstanding, actual; 10,000,000 shares authorized, 11,046,822 shares issued and outstanding, Bioventus Inc. pro forma | — | 10 | ||||||||||||||
Long-term indebtedness: | ||||||||||||||||
Term loan(2) | 195,000 | 195,000 | ||||||||||||||
Stockholders’ equity (deficit): | ||||||||||||||||
Class A common stock, par value $0.001 per share; no shares authorized, issued and outstanding, actual; 250,000,000 shares authorized, 37,697,158 shares issued and outstanding, Bioventus Inc. pro forma | — | 38 | ||||||||||||||
Class B common stock, par value $0.001 per share; no shares authorized, issued and outstanding, actual; 50,000,000 shares authorized, 16,534,814 shares issued and outstanding, Bioventus Inc. pro forma | — | 17 | ||||||||||||||
Preferred stock, $0.001 par value, no shares authorized, issued or outstanding, actual; 10,000,000 shares authorized, no shares issued and outstanding, Bioventus Inc. pro forma | — | — | ||||||||||||||
Members’ equity | 284,837 | — | 285,173 | — | ||||||||||||
Accumulated other comprehensive income (loss) | (560 | ) | — | |||||||||||||
Accumulated other comprehensive income | 222 | — | ||||||||||||||
Additional paid-in capital | 0 | 227,193 | — | 181,067 | ||||||||||||
Accumulated deficit | (97,975 | ) | — | (142,176 | ) | — | ||||||||||
Non-controlling interest in subsidiary | — | 91,464 | 2,120 | 82,494 | ||||||||||||
|
|
|
| |||||||||||||
Total members’ equity, actual; stockholders’ equity, pro forma | 186,302 | 318,691 | ||||||||||||||
Total members’ equity, actual; stockholders’ equity pro forma | 145,339 | 263,615 | ||||||||||||||
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| |||||||||||||
Total capitalization | $ | 365,712 | $ | 421,001 | $ | 338,614 | $ | 458,615 | ||||||||
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| (1) | A $1.00 increase (decrease) in the assumed initial public offering price of $17.00 per share, which is the midpoint of the price range listed on the cover page of this prospectus, would increase (decrease) the pro forma amount of each of cash and cash equivalents, additionalpaid-in capital, total stockholders’ equity and total capitalization by approximately |
| (2) |
| For more information regarding |
The Continuing LLC OwnersOwner will maintain theirits LLC Interests in Bioventus LLC after the Transactions. Because the Continuing LLC Owners doOwner does not own any Class A common stock or have any right to receive distributions from Bioventus, we have presented dilution in pro forma net tangible book value per share after this offering assuming that all of the holders ofContinuing LLC Interests (other than Bioventus)Owner had theirits LLC Interests redeemed or exchanged fornewly-issued shares of Class A common stock on aone-for-one basis (rather than for cash), and the cancellation for no consideration of all of theirits shares of Class B common stock (which are not entitled to distributions from Bioventus)Bioventus Inc.), in order to more meaningfully present the dilutive impact on the investors in this offering. We refer to the assumed redemption or exchange of all LLC Interests owned by the Continuing LLC Owner for shares of Class A common stock as described in the previous sentence as the “Assumed Redemption.” We also note that the effect of the Assumed Redemption is to increase the assumed number of shares of Class A common stock outstanding before the offering, thereby decreasing the pro forma net tangible book value per share before the offering and correspondingly increasing the dilution per share to new Class A common stock investors.
Dilution is the amount by which the offering price paid by the purchasers of the Class A common stock in this offering exceeds the pro forma net tangible book value per share of Class A common stock after the offering. Bioventus LLC’s net tangible book value as of April 2, 2016September 26, 2020 was ($190.5)$(101.1) million. Net tangible book value per share is determined at any date by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of shares of Class A common stock deemed to be outstanding at that date.
If you invest in our Class A common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share and the pro forma net tangible book value per share of our Class A common stock after this offering.
Pro forma net tangible book value per share is determined at any date by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of shares of Class A common stock, after giving effect to the Transactions, including this offering, and the Assumed Redemption. Our pro forma net tangible book value as of April 2, 2016September 26, 2020 would have been approximately ($58.1)$17.1 million, or ($1.75)$0.32 per share of Class A common stock. This amount represents an immediate increase in pro forma net tangible book value of $5.94$2.38 per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of approximately $18.75$16.68 per share to new investors purchasing shares of Class A common stock in this offering. We determine dilution by subtracting the pro forma net tangible book value per share after this offering from the amount of cash that a new investor paid for a share of Class A common stock. The following table illustrates this dilution:
Assumed initial public offering price per share | $ | 17.00 | ||
Pro forma net tangible book value per share as of April 2, 2016 before this offering(1) | (7.69 | ) | ||
Increase per share attributable to investors in this offering | 5.94 | |||
Pro forma net tangible book value per share after this offering | (1.75 | ) | ||
Dilution per share to new Class A common stock investors | $ | 18.75 | ||
| ||||
Assumed initial public offering price per Class A share | $ | 17.00 | ||||||
Pro forma net tangible book value per share as of September 26, 2020 before this offering(1)(2) | $ | (2.06 | ) | |||||
Increase in pro forma net tangible book value per share attributable to investors in this offering | 2.38 | |||||||
|
| |||||||
Pro forma net tangible book value per share after this offering | $ | 0.32 | ||||||
|
| |||||||
Dilution per share to new Class A common stock investors | $ | 16.68 | ||||||
|
|
| (1) | The computation of pro forma net tangible book value per share as of |
Numerator: | ||||||||
Book value of tangible assets | $ | 109.4 | $ | 216,997 | ||||
Less: total liabilities | (297.6 | ) | (313,629 | ) | ||||
|
| |||||||
Pro forma net tangible book value(a) | $ | (188.2 | ) | |||||
Pro forma net tangible book value(a) | $ | (96,632 | ) | |||||
|
| |||||||
Denominator: | ||||||||
Shares of Class A common stock outstanding immediately prior to this offering and after Assumed Redemption | 24,475,854 | 46,881,972 | ||||||
|
| |||||||
Pro forma net tangible book value per share | $ | (7.69 | ) | $ | (2.06 | ) | ||
|
|
| ||||||
| (a) | Gives pro forma effect to the Transactions (other than this offering) and the Assumed Redemption. |
| (2) | The computation of pro forma net tangible book value per share as of September 26, 2020 before this offering and before the Assumed Redemption is set forth below: |
Numerator: | ||||
Book value of tangible assets | $ | 216,997 | ||
Less: total liabilities | (313,629 | ) | ||
|
| |||
Pro forma net tangible book value(a) | $ | (96,632 | ) | |
|
| |||
Denominator: | ||||
Shares of Class A common stock outstanding immediately prior to this offering and prior to any Assumed Redemption | 30,347,158 | |||
|
| |||
Pro forma net tangible book value per share | $ | (3.18 | ) | |
|
|
| (a) | Gives pro forma effect to the Transactions (other than this offering) and excludes the Assumed Redemption. |
If the underwriters exercise their option to purchase additional shares of our Class A common stock in full in this offering, the pro forma net tangible book value after the offering would be ($1.07)$0.62 per share, the increase in pro forma net tangible book value per share to existing stockholders would be $6.21$2.31 and the dilution per share to new investors would be $18.07$16.38 per share, in each case assuming an initial public offering price of $17.00 per share, which is the midpoint of the price range listed on the cover page of this prospectus.
The following table summarizes, as of April 2, 2016September 26, 2020 after giving effect to this offering, the Transactions and the Acquisition the differences between the Original LLC Owners and new investors in this offering with regard to:
the number of shares of Class A common stock purchased from us by investors in this offering and the number of shares issued to the Original LLC Owners after giving effect to the Assumed Redemption,
the total consideration paid to us in cash by investors purchasing shares of Class A common stock in this offering and by the Original LLC Owners, and
the average price per share of Class A common stock that such Original LLC Owners and new investors paid.
The calculation below is based on an assumed initial public offering price of $17.00 per share, which is the midpoint of the price range listed on the cover page of this prospectus, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
| Shares purchased | Total consideration | Average price per share | ||||||||||||||||||
| Number | Percent | Amount | Percent | |||||||||||||||||
Original LLC Owners | 24,475,854 | 73.5% | $ | 281.4 | 65.2% | $ | 11.49 | |||||||||||||
New investors | 8,823,529 | 26.5% | 150.0 | 34.8% | 17.00 | |||||||||||||||
|
| |||||||||||||||||||
Total | 33,299,383 | 100% | $ | 431.4 | 100% | $ | 12.95 | |||||||||||||
| ||||||||||||||||||||
Original LLC Owners New investors Total Shares purchased Total consideration Average price
per share Number Percent Amount Percent 46,881,972 86.5 % $ 281.4 68.5 % $ 5.79 7,350,000 13.5 125.0 31.5 $ 17.00 54,231,972 100 % $ 406.4 100 % $ 7.31
Except as otherwise indicated, the discussion and the tables above assume no exercise of the underwriters’ option to purchase additional shares of Class A common stock. The number of shares of our Class A common stock outstanding after this offering as shown in the tables above is based on the numbermembership interests of sharesBioventus LLC outstanding as of April 2, 2016, after giving effect to the Transactions and the Assumed Redemption,September 26, 2020, and excludes:
2,981,4367,592,476 shares of Class A common stock reserved for future issuance under our 2016 Incentive Awardthe Plan, (asas described in “Executive compensation—New incentive arrangements”),arrangements,” consisting of (i) 2,514,2654,561,500 shares of Class A common stock relatingissuable upon the exercise of options that vest between two and four years from the date of this prospectus to purchase, at the initial public offering price, shares of Class A common stock options granted to our directors and certain employees, including the named executive officers, in connection with this offering, as described in “Executive compensation—Director compensation” and Executive compensation—New equity awards,” (ii) 467,171360,670 shares of Class A common stock released between one to four years from the date of this prospectus upon meeting vesting requirements of restricted stock units granted on the date of this prospectus to our directors and certain employees, including the named executive officers, in connection with this offering as described in “Executive compensation—Director compensation” and “Executive compensation—New equity awards,” and (iii) 2,670,306 additional shares of Class A common stock reserved for future issuance (exclusive of the additional shares available for issuance under the 2016 Incentive Award Plan pursuant to the annual increase each calendar year beginning in 20172022 and ending in 20262031, as described in “Executive compensation—New incentive arrangements”);
513,1171,351,834 shares of Class A common stock expected to be availablereserved as of the closing date of this offering for future issuance to the PhantomStock Plan Participants upon settlement of their awards, as described in “Executive compensation—Narrative to summary compensation table—ElementsEquity-based compensation,” 162,106 of compensation—Equity-based compensation—Phantom profits interests units”;which are unvested and are expected to vest within twelve months of the date of this prospectus;
373,616542,349 shares of Class A common stock reserved for issuance under our Employee Stock Purchase Plan, as described in “Executive compensation—New incentive arrangements”.arrangements;” and
To the extent any of these outstanding options are exercised, and upon the issuance of16,534,814 shares of Class A common stock to Phantom Plan Participants upon settlement of their awards, there will be further dilution to new investors. To the extent all of such outstanding options had been exercised and all settlement shares issued to the Phantom Plan Participantsreserved as of April 2, 2016, the pro forma net tangible book value per share afterclosing date of this offering would be $(1.58), and total dilution per share to new investors would be $18.58, which does not includefor future issuance upon redemption or exchange of LLC Interests by the proceeds from Continuing LLC Owner.
Unless otherwise indicated, this prospectus assumes:
the completion of the organizational transactions as described under “Transactions;”
no exercise of any outstanding options or repurchases of any shares of Class A common stock.
Ifby the underwriters exerciseof their option to purchase additional shares of Class A common stock in full, after giving effect to the Transactions and Assumed Redemption:stock;
the percentage of shares of Class A common stock held by Original LLC Owners will decrease to approximately 70.7%are offered at $17.00 per share (the midpoint of the total numberprice range listed on the cover page of shares of our Class A common stock outstanding after this offering;prospectus); and
no exercise of outstanding options after September 26, 2020.
Notwithstanding the foregoing, to the extent there is an increase in the public offering price, the number of Class A shares held by new investors willoutstanding and Class A shares issuable upon redemption of LLC Interests would decrease from the amounts noted herein; to the extent there is a decrease in the public offering price, the number of Class A shares outstanding and Class A shares issuable upon redemption of LLC Interests would increase. However, to the extent there is an increase in the public offering price, the number of Class A shares issuable under awards would increase from the amounts noted herein; to 10,147,058, or approximately 29.3%the extent there is a decrease in the public offering price, the number of Class A shares issuable under awards would decrease. A $1.00 increase (decrease) in the assumed initial public offering price of $17.00 per share, the midpoint of the totalprice range set forth on the cover page of this prospectus, would result in a net decrease (increase) of approximately 300,000 (three hundred thousand) in the aggregate number of shares of our Class A commonshares outstanding, Class A shares issuable upon redemption of LLC Interests and Class A shares issuable under stock awards. The relative magnitude of the change in Class A shares outstanding after this offering.and Class A shares issuable upon redemption of LLC Interests decreases as the share price moves further away from the midpoint.
Unaudited pro forma consolidated financial informationUNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following statements set forth unaudited pro forma consolidated financial data for Bioventus Inc. as of September 26, 2020, for the nine months ended September 26, 2020 and September 28, 2019 and for the year ended December 31, 2015 and as of April 2, 2016 and for the three months ended March 28, 2015 and April 2, 2016.2019. The unaudited pro forma consolidated balance sheet as of April 2, 2016September 26, 2020 gives effect to the Transactions as if they had occurred on that date. The unaudited pro forma consolidated statements of operations for the fiscal year ended December 31, 20152019 and for the three month periodsnine months ended MarchSeptember 26, 2020 and September 28, 2015 and April 2, 20162019 have been prepared to illustrate the effects of the Acquisition and the Transactions as if they occurred on January 1, 2015.2019. The unaudited pro forma consolidated financial statements have been developed by applying pro forma adjustments to the historical audited consolidated financial statements of Bioventus LLC included elsewhere in this prospectus. Assumptions underlying the pro forma adjustments are described in the accompanying notes, which should be read in conjunction with these unaudited pro forma consolidated financial statements.
Bioventus Inc. was incorporated on December 22, 2015 and has no business transactions, activities, assets or liabilities to date, and therefore its historical financial information is not shown in a separate column in the unaudited pro forma consolidated balance sheet and unaudited pro forma consolidated statement of operations.
The pro forma adjustments related to the Acquisition, which we refer to as Acquisition Adjustments, are described in the notes to the unaudited pro forma consolidated financial information and include those related to the acquisition of BioStructures, LLC on November 24, 2015.
The pro forma adjustments related to the Transactions other than this offering, which we refer to as Reorganization Adjustments, are described in the notes to the unaudited pro forma consolidated financial information, and principally include those transactions as listed within the “Transactions” section of this prospectus.
The pro forma adjustments related to this offering, which we refer to as the Offering Adjustments, are described in the notes to the unaudited pro forma consolidated financial information, and principally include those items listed within “The offering” and “Use of proceeds” sections of this prospectus.
Except as otherwise indicated, the unaudited pro forma consolidated financial information presented assumes no exercise by the underwriters of their option to purchase additional shares of Class A common stock from us.
Bioventus LLC has been, and following the Transactions will continue to be, treated as a partnership for U.S. federal income tax purposes and, as such, is generally not, apart from certain subsidiaries, subject to any U.S. federal entity-level income taxes. Rather, taxable income or loss is included in the U.S. federal income tax returns of Bioventus LLC’s members, including following this offering, Bioventus Inc. Bioventus Inc. will be subject to U.S. federal, state and local income taxestax with respect to ourits allocable share of any taxable income of Bioventus LLC. For the purposes of the unaudited pro forma financial statements, Bioventus Inc. has not recorded pro forma adjustments to income tax expense or deferred income taxestax as it is still analyzing if it is not more likely than not that Bioventus Inc. will be able to realize the benefit from the reorganization.
As described in greater detail under ‘‘Certain“Certain relationships and related party transactions—Tax Receivable Agreement,’’” in connection with the closing of this offering, we will enter into the Tax Receivable Agreement with the Continuing LLC OwnersOwner that will provide for the payment to it by Bioventus Inc. to such persons of 85% of the amount of tax benefits, if any, that Bioventus Inc. actually realizes (or in some circumstances is deemed to realize) as a result of (i) increases in the tax basis of assets of Bioventus LLC resulting from (a) any future redemptions or exchanges of LLC Interests described under “Certain relationships and related party transactions—Bioventus LLC Agreement—LLC Interest Redemption Right,” and (b) certain distributions (or deemed distributions) by Bioventus LLC and (ii) certain other tax benefits
related to our making arising from payments under the Tax Receivable Agreement. Due to the uncertainty in the amount and timing of future redemptions or exchanges of LLC Interests by the Continuing LLC Owners,Owner, the unaudited pro forma consolidated financial information assumes that no redemptions or exchanges of LLC Interests have occurred and therefore no increases in tax basis in Bioventus LLC’s assets or other tax benefits that may be realized thereunder have been assumed in the unaudited pro forma consolidated financial information. However, if all of the Continuing LLC OwnersOwner were to exchange or redeem their all of its
LLC Interests, we would recognize a deferred tax asset of approximately $105.0$101.0 million over 20 years from the date of this offering and a related liability for payments under the Tax Receivable Agreement of approximately $89.3$85.8 million, assuming, among other factors, (i) all exchanges occurred on the same day; (ii) a price of $17.00 per share of Class A common stock (which is the midpoint of the price range set forth on the cover of this prospectus), (iii) a constant corporate tax rate of 38.50%25.0%; (iv) we will have sufficient taxable income to fully utilize the tax benefits; (v) Bioventus LLC is able to fully depreciate or amortize its assets; and (vi) no material changes in tax law. For each 5% increase (decrease) in the amountprice per share of Class A common stock (and therefore the value of the LLC Interests exchanged by the Continuing LLC Owners,Owner), our deferred tax asset would increase (decrease) by approximately $5.0$5.1 million and the related liability for payments under the Tax Receivable Agreement would increase (decrease) by approximately $4.3 million, assuming that the price per share and corporate tax rate remainremains the same. These amounts are estimates and have been prepared for informational purposes only. The actual amount of deferred tax assets and related liabilities that we will recognize will differ based on, among other things, the timing of the redemptions or exchanges, the price of our shares of Class A common stock at the time of the redemptions or exchanges and the tax rates then in effect.
Under the Tax Receivable Agreement, we may elect to terminate the Tax Receivable Agreement early by making an immediate cash payment equal to the present value of all of the tax benefit payments that would be required to be paid by us to the Continuing LLC OwnersOwner under the Tax Receivable Agreement. The calculation of such cash payment would be based on certain assumptions, including, among others (i) that anythe Continuing LLC Owners’Owner’s LLC Interests that have not been exchanged are deemed exchanged, in general, for the market value of our Class A common stock that would be received by suchthe Continuing LLC Owner if such LLC Interests had been exchanged at the time of termination, (ii) we will have sufficient taxable income in each future taxable year to fully realize all potential tax savings, (iii) the tax rates for future years will be those specified in the law as in effect at the time of termination and (iv) certain non-amortizable assets are deemed disposed of within specified time periods. In addition, the present value of such tax benefit payments areis discounted at a rate equal to the lessor of (i) 6.50% per annum, compounded annually and (ii) LIBOR plus 100 basis points. Assuming that the market value of our Class A common stock were to be equal to $17.00, the midpoint of the price range set forth on the cover of this prospectus and that LIBOR were to be 1.23%0.36%, we estimate that the aggregate amount of these termination payments would be approximately $71.9$74.3 million if we were to exercise our termination right immediately following this offering.
The pro forma adjustments are based upon available information and methodologies that are factually supportable and directly related to the Acquisition and the Transactions and are presented for illustrative purposes only. The unaudited pro forma consolidated financial information includes various estimates which are subject to material change and may not be indicative of what our operations or financial position would have been had the Acquisition and the Transactions, including this offering, taken place on the dates indicated, or that may be expected to occur in the future.
The pro forma financial information should be read in conjunction with, “Risk factors,” “Summary historical and unaudited pro forma consolidated financial and other data,” “Management’s discussion and analysis of financial condition and results of operations” and the historical consolidated financial statements and related notes included elsewhere in this prospectus.
Unaudited pro forma consolidated financial information
Bioventus Inc.
Unaudited pro forma consolidated balance sheet
As of April 2, 2016September 26, 2020
(Dollar amounts in thousands)
| Bioventus LLC historical | Reorganization adjustments (note 2) | Offering adjustments (note 3) | Bioventus Inc. pro forma | |||||||||||||||||||||||||||||||||||||
| Bioventus LLC historical | Reorganization adjustments (note 1) | Offering adjustments (note 2) | Bioventus Inc. pro forma | |||||||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||
Current assets: | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 6,166 | $ | 0 | $ | 26,327 | 3c | $ | 32,493 | $ | 72,478 | $ | (15,792 | ) | $ | 114,024 | $ | 170,710 | ||||||||||||||||||||||
Restricted cash | 343 | 343 | ||||||||||||||||||||||||||||||||||||||
Accounts receivable, net | 51,109 | — | — | 51,109 | 80,813 | — | — | 80,813 | ||||||||||||||||||||||||||||||||
Inventories, net | 37,119 | — | — | 37,119 | ||||||||||||||||||||||||||||||||||||
Prepaid expenses and other current assets | 5,248 | — | (2,000 | ) | 3a | 3,248 | ||||||||||||||||||||||||||||||||||
Inventory | 34,705 | — | — | 34,705 | ||||||||||||||||||||||||||||||||||||
Prepaid and other current assets | 5,145 | — | (264 | ) | 4,881 | |||||||||||||||||||||||||||||||||||
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Total current assets | 99,985 | — | 24,327 | 124,312 | 193,141 | (15,792 | ) | 113,760 | 291,109 | |||||||||||||||||||||||||||||||
Property and equipment, net | 8,984 | — | — | | 8,984 | | 5,886 | — | — | 5,886 | ||||||||||||||||||||||||||||||
Goodwill | 58,694 | — | — | 58,694 | 49,800 | — | — | 49,800 | ||||||||||||||||||||||||||||||||
Intangibles assets, net | 318,141 | 318,141 | 196,688 | — | — | 196,688 | ||||||||||||||||||||||||||||||||||
Other assets | 371 | — | — | 371 | ||||||||||||||||||||||||||||||||||||
Deferred tax asset | 89 | — | — | 89 | ||||||||||||||||||||||||||||||||||||
Operating lease assets | 13,906 | — | — | 13,906 | ||||||||||||||||||||||||||||||||||||
Investment and other assets | 19,856 | — | — | 19,856 | ||||||||||||||||||||||||||||||||||||
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Total assets | $ | 486,264 | $ | 0 | 24,327 | $ | 510,591 | $ | 479,277 | $ | (15,792 | ) | $ | 113,760 | $ | 577,245 | ||||||||||||||||||||||||
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Liabilities and members’/stockholders’ equity | Liabilities and members’/stockholders’ equity |
| ||||||||||||||||||||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||||||||||||||||||||||
Accounts payable | $ | 9,819 | $ | 0 | $ | 0 | $ | 9,819 | $ | 8,790 | $ | — | $ | — | $ | 8,790 | ||||||||||||||||||||||||
Accrued liabilities | 30,534 | — | (4,976 | ) | 3c | 25,558 | 73,019 | (1,543 | ) | — | 71,476 | |||||||||||||||||||||||||||||
Note payable | 23,597 | — | (23,597 | ) | 3c | — | ||||||||||||||||||||||||||||||||||
Current portion of contingent consideration | 7,156 | — | — | 7,156 | ||||||||||||||||||||||||||||||||||||
Current portion of long-term debt | 14,375 | — | — | 14,375 | ||||||||||||||||||||||||||||||||||||
Current portion of capital lease obligations | 1,318 | — | — | 1,318 | ||||||||||||||||||||||||||||||||||||
Accrued equity-based compensation | 9,580 | 7,990 | — | 17,570 | ||||||||||||||||||||||||||||||||||||
Long-term debt | 16,250 | — | — | 16,250 | ||||||||||||||||||||||||||||||||||||
Other current liabilities | 4,095 | — | — | 4,095 | ||||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||
Total current liabilities | 86,799 | — | (28,573 | ) | 58,226 | 111,734 | 6,447 | — | 118,181 | |||||||||||||||||||||||||||||||
Long-term debt, less current portion | 145,535 | — | (57,600 | ) | 3c | 87,935 | 177,025 | — | — | 177,025 | ||||||||||||||||||||||||||||||
Long-term revolver | 19,500 | — | (19,500 | ) | 3c | — | ||||||||||||||||||||||||||||||||||
Contingent consideration, less current portion | 31,136 | — | — | 31,136 | ||||||||||||||||||||||||||||||||||||
Capital lease obligations, less current portion | 1,030 | — | — | 1,030 | ||||||||||||||||||||||||||||||||||||
Accrued equity-based compensation, less current portion | 22,086 | (22,086 | ) | — | — | |||||||||||||||||||||||||||||||||||
Deferred income taxes | 3,436 | — | — | 3,436 | ||||||||||||||||||||||||||||||||||||
Other long-term liabilities | 7,313 | (2,389 | ) | 2a | — | 4,924 | 19,657 | (4,669 | ) | — | 14,988 | |||||||||||||||||||||||||||||
Deferred tax liability | 8,649 | — | — | 8,649 | ||||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||
Total liabilities | 299,962 | (2,389 | ) | (105,673 | ) | 191,900 | 333,938 | (20,308 | ) | — | 313,630 | |||||||||||||||||||||||||||||
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Class A Common Stock | — | 15 | 2a | 9 | 3c | 24 | ||||||||||||||||||||||||||||||||||
Class B Common Stock | — | 10 | 2a | 10 | ||||||||||||||||||||||||||||||||||||
Membership equity | 284,837 | (284,837 | ) | 2a | — | — | ||||||||||||||||||||||||||||||||||
Class A common stock, $0.001 par value per share, shares authorized on a pro forma basis, shares issued and outstanding on a pro forma basis | — | 31 | 7 | 38 | ||||||||||||||||||||||||||||||||||||
Class B common stock, $0.001 par value per share, shares authorized on a pro forma basis, shares issued and outstanding on a pro forma basis | — | 17 | — | 17 | ||||||||||||||||||||||||||||||||||||
Members equity | 285,173 | (285,173 | ) | — | — | |||||||||||||||||||||||||||||||||||
Additional paid in capital | — | 97,202 | 2a | 129,991 | 3c | 227,193 | — | 67,313 | 113,753 | 181,066 | ||||||||||||||||||||||||||||||
Accumulated other comprehensive income (loss) | (560 | ) | 560 | 2a | — | — | ||||||||||||||||||||||||||||||||||
Accumulated (deficit) income | (97,975 | ) | 97,975 | 2a | — | — | ||||||||||||||||||||||||||||||||||
Accumulated other comprehensive income | 222 | (222 | ) | — | — | |||||||||||||||||||||||||||||||||||
Accumulated deficit | (142,176 | ) | 142,176 | — | — | |||||||||||||||||||||||||||||||||||
Non-controlling interest in subsidiary | — | 91,464 | 2b | 91,464 | 2,120 | 80,374 | — | 82,494 | ||||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Total members’/stockholders’ equity | 186,302 | 2,389 | 130,000 | 318,691 | 145,339 | 4,516 | 113,760 | 263,615 | ||||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Total liabilities and equity | $ | 486,264 | $ | 0 | $ | 24,327 | $ | 510,591 | ||||||||||||||||||||||||||||||||
Total liabilities and members’/stockholders’ equity | $ | 479,277 | $ | (15,792 | ) | $ | 113,760 | $ | 577,245 | |||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
See Notes to the Unaudited Pro Forma Consolidated Financial Information.
Bioventus Inc.
Unaudited pro forma consolidated statement of operations
For the year ended December 31, 20152019
(Dollar amounts in thousands, except per share amounts)
| Bioventus LLC historical | Historical BioStructures through | Acquisition adjustments (note 1) | Combined pro forma | Reorganization adjustments (note 2) | Offering adjustments (note 3) | Bioventus Inc. pro forma | ||||||||||||||||||||||||||||||||||||||||
Net sales | $ | 253,650 | $ | 12,174 | $ | 0 | $ | 265,824 | $ | 0 | $ | 0 | $ | 265,824 | ||||||||||||||||||||||||||||||||
Cost of sales (including depreciation and amortization) | 74,544 | 2,595 | 3,459 | 1a | 80,598 | — | — | 80,598 | ||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||
Gross profit | 179,106 | 9,579 | (3,459 | ) | 185,226 | — | — | 185,226 | ||||||||||||||||||||||||||||||||||||||
Selling, general and administrative expenses | 148,441 | 6,188 | (525 | ) | 1b | 154,104 | — | 6,161 | 3e | 160,265 | ||||||||||||||||||||||||||||||||||||
Research and development expenses | 14,747 | 238 | — | 14,985 | — | 191 | 3e | 15,176 | ||||||||||||||||||||||||||||||||||||||
Change in fair value of contingent consideration | 19,493 | — | — | 19,493 | — | — | 19,493 | |||||||||||||||||||||||||||||||||||||||
Restructuring costs | 2,443 | — | — | 2,443 | — | — | 2,443 | |||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 10,570 | 37 | 1,517 | 1a | 12,124 | — | — | 12,124 | ||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||
Operating income (loss) | (16,588 | ) | 3,116 | (4,451 | ) | (17,923 | ) | — | (6,352 | ) | (24,275 | ) | ||||||||||||||||||||||||||||||||||
Interest expense | 14,229 | 14 | — | 14,243 | — | (7,250 | ) | 3c | 6,993 | |||||||||||||||||||||||||||||||||||||
Other (income) expense | 1,154 | (34 | ) | — | 1,120 | — | — | 1,120 | ||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||
Other expense, net | 15,383 | (20 | ) | — | 15,363 | — | (7,250 | ) | 8,113 | |||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||
Loss (income) before income taxes | (31,971 | ) | 3,136 | (4,451 | ) | (33,286 | ) | — | 898 | (32,388 | ) | |||||||||||||||||||||||||||||||||||
Income tax expense | 2,140 | — | — | 2,140 | — | — | 2,140 | |||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||
Net (loss) income | (34,111 | ) | 3,136 | (4,451 | ) | (35,426 | ) | 2b | — | 898 | (34,528 | ) | ||||||||||||||||||||||||||||||||||
Less: Net (loss) income attributable to non-controlling interests | — | — | — | — | (10,167 | ) | 2b | 258 | 2b | (9,909 | ) | |||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||
Net (loss) income attributable to Bioventus | $ | (34,111 | ) | $ | 3,136 | $ | (4,451 | ) | $ | (35,426 | ) | $ | 10,167 | $ | 640 | (24,619 | ) | |||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||
Net (loss) income | $ | (34,111 | ) | $ | 3,136 | $ | (4,451 | ) | $ | (35,426 | ) | |||||||||||||||||||||||||||||||||||
Accumulated and unpaid preferred distributions | (3,997 | ) | — | — | (3,997 | ) | ||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||
Net loss attributable to common unit holders | $ | (38,108 | ) | $ | 3,136 | $ | (4,451 | ) | $ | (39,423 | ) | |||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||
Pro forma net (loss) income per share attributable to Bioventus: | ||||||||||||||||||||||||||||||||||||||||||||||
Basic | (1.04 | ) | 3d | |||||||||||||||||||||||||||||||||||||||||||
Diluted | (1.04 | ) | 3d | |||||||||||||||||||||||||||||||||||||||||||
Pro forma weighted average common shares outstanding: | ||||||||||||||||||||||||||||||||||||||||||||||
Basic | 23,727,619 | 3d | ||||||||||||||||||||||||||||||||||||||||||||
Diluted | 23,727,619 | 3d | ||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||
| Bioventus LLC historical | Reorganization adjustments (note 1) | Offering adjustments (note 2) | Bioventus Inc. pro forma | |||||||||||||
Net sales | $ | 340,141 | $ | — | $ | — | $ | 340,141 | ||||||||
Cost of sales (including depreciation and amortization) | 90,935 | — | — | 90,935 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Gross profit | 249,206 | — | — | 249,206 | ||||||||||||
Selling, general and administrative expense | 198,475 | — | 7,946 | 206,421 | ||||||||||||
Research and development expense | 11,055 | — | 589 | 11,644 | ||||||||||||
Restructuring costs | 575 | — | — | 575 | ||||||||||||
Depreciation and amortization | 7,908 | — | — | 7,908 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Operating income | 31,193 | — | (8,535 | ) | 22,658 | |||||||||||
Interest expense | 21,579 | — | (565 | ) | 21,014 | |||||||||||
Other income | (75 | ) | — | — | (75 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Other expense | 21,504 | — | (565 | ) | 20,939 | |||||||||||
|
| �� |
|
|
|
|
| |||||||||
Income from continuing operations before income taxes | 9,689 | — | (7,970 | ) | 1,719 | |||||||||||
Income tax expense | 1,576 | — | — | 1,576 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income from continuing operations | 8,113 | — | (7,970 | ) | 143 | |||||||||||
Less: Net (loss) income from continuing operations attributable to non-controlling interests | (553 | ) | 2,473 | (2,430 | ) | (510 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Net income from continuing operations attributable to Bioventus | $ | 8,666 | $ | (2,473 | ) | $ | (5,540 | ) | $ | 653 | ||||||
|
|
|
|
|
|
|
| |||||||||
Net income from continuing operations attributable to unit holders | $ | 8,666 | ||||||||||||||
Accumulated and unpaid preferred distribution | (5,955 | ) | ||||||||||||||
Net income allocated to participating shareholders | (1,555 | ) | ||||||||||||||
|
| |||||||||||||||
Net income from continuing operations attributable to common unit holders | $ | 1,156 | ||||||||||||||
|
| |||||||||||||||
Pro forma net income from continuing operations per share attributable to Bioventus: | ||||||||||||||||
Basic | $ | 0.02 | ||||||||||||||
Diluted | $ | 0.02 | ||||||||||||||
Pro forma weighted average common shares outstanding: | ||||||||||||||||
Basic | 37,697,158 | |||||||||||||||
Diluted | 37,697,158 | |||||||||||||||
See Notes to the Unaudited Pro Forma Consolidated Financial Information.
Bioventus Inc.
Unaudited pro forma consolidated statement of operations
For the threenine months ended April 2, 2016September 26, 2020
(Dollar amounts in thousands, except per share amounts)
| Bioventus LLC historical | Reorganization adjustments (note 2) | Offering adjustments (note 3) | Bioventus Inc. pro forma | |||||||||||||||||||||||||||||
Net sales | $ | 65,402 | $ | 0 | $ | 0 | $ | 65,402 | ||||||||||||||||||||||||
Cost of sales (including depreciation and amortization) | 19,235 | — | — | 19,235 | ||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Gross profit | 46,167 | — | — | 46,167 | ||||||||||||||||||||||||||||
Selling, general and administrative expenses | 40,184 | — | 1,540 | 3e | 41,724 | |||||||||||||||||||||||||||
Research and development expenses | 3,718 | — | 48 | 3e | 3,766 | |||||||||||||||||||||||||||
Change in fair value of contingent consideration | 1,301 | ��� | — | 1,301 | ||||||||||||||||||||||||||||
Restructuring costs | 172 | — | — | 172 | ||||||||||||||||||||||||||||
Depreciation and amortization | 2,830 | — | — | 2,830 | ||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Operating income (loss) | (2,038 | ) | — | (1,588 | ) | (3,626 | ) | |||||||||||||||||||||||||
Interest expense | 3,555 | — | (1,914 | ) | 3c | 1,641 | ||||||||||||||||||||||||||
Other (income) expense | (147 | ) | — | — | (147 | ) | ||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Other expense, net | 3,408 | — | (1,914 | ) | 1,494 | |||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Loss (income) before income taxes | (5,446 | ) | — | 326 | (5,120 | ) | ||||||||||||||||||||||||||
Income tax expense | 603 | — | — | 603 | ||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Net (loss) income | (6,049 | ) | 2b | — | 326 | (5,723 | ) | |||||||||||||||||||||||||
Less: Net (loss) income attributable to non-controlling interests | — | (1,736 | ) | 2b | 94 | 2b | (1,643 | ) | ||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Net (loss) income attributable to Bioventus | $ | (6,049 | ) | $ | 1,736 | $ | 232 | $ | (4,080 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Net (loss) income | $ | (6,049 | ) | |||||||||||||||||||||||||||||
Accumulated and unpaid preferred distribution | (1,042 | ) | ||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Net (loss) attributable to common unit holders | $ | (7,091 | ) | |||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Pro forma net (loss) income per share attributable to Bioventus: | ||||||||||||||||||||||||||||||||
Basic | (0.17 | ) | 3d | |||||||||||||||||||||||||||||
Diluted | (0.17 | ) | 3d | |||||||||||||||||||||||||||||
Pro forma weighted average common shares outstanding: | ||||||||||||||||||||||||||||||||
Basic | 23,727,619 | 3d | ||||||||||||||||||||||||||||||
Diluted | 23,727,619 | 3d | ||||||||||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||||||
| Bioventus LLC historical | Reorganization adjustments (note 1) | Offering adjustments (note 2) | Bioventus Inc. pro forma | |||||||||||||
Net sales | $ | 222,570 | $ | — | $ | — | $ | 222,570 | ||||||||
Cost of sales (including depreciation and amortization) | 62,521 | — | — | 62,521 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Gross profit | 160,049 | — | — | 160,049 | ||||||||||||
Selling, general and administrative expense | 131,104 | — | 6,678 | 137,782 | ||||||||||||
Research and development expense | 8,311 | — | 1,668 | 9,979 | ||||||||||||
Depreciation and amortization | 5,305 | — | — | 5,305 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Operating income | 15,329 | — | (8,346 | ) | 6,983 | |||||||||||
Interest expense | 7,095 | — | 788 | 7,883 | ||||||||||||
Other income | (4,539 | ) | — | — | (4,539 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Other expense | 2,556 | — | 788 | 3,344 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Income from continuing operations before income taxes | 12,773 | — | (9,134 | ) | 3,639 | |||||||||||
Income tax expense | 302 | — | — | 302 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income from continuing operations | 12,471 | — | (9,134 | ) | 3,337 | |||||||||||
Less: Net (loss) income from continuing operations attributable to non-controlling interests | (1,164 | ) | 3,802 | (2,785 | ) | (147 | ) | |||||||||
|
|
|
|
|
|
|
| |||||||||
Net income from continuing operations attributable to Bioventus | $ | 13,635 | $ | (3,802 | ) | $ | (6,349 | ) | $ | 3,484 | ||||||
|
|
|
|
|
|
|
| |||||||||
Net income from continuing operations attributable to unit holders | $ | 13,635 | ||||||||||||||
Accumulated and unpaid preferred distribution | (4,525 | ) | ||||||||||||||
Net income allocated to participating shareholders | (5,225 | ) | ||||||||||||||
|
| |||||||||||||||
Net income from continuing operations attributable to common unit holders | $ | 3,885 | ||||||||||||||
|
| |||||||||||||||
Pro forma net income from continuing operations per share attributable to Bioventus: | ||||||||||||||||
Basic | $ | 0.09 | ||||||||||||||
Diluted | $ | 0.09 | ||||||||||||||
Pro forma weighted average common shares outstanding: | ||||||||||||||||
Basic | 37,697,158 | |||||||||||||||
Diluted | 37,697,158 | |||||||||||||||
See Notes to the Unaudited Pro Forma Consolidated Financial Information.
Bioventus Inc.
Unaudited pro forma consolidated statement of operations
For the threenine months ended MarchSeptember 28, 20152019
(Dollar amounts in thousands, except per share amounts)
| Bioventus LLC historical | Historical BioStructures through 2015 | Acquisition adjustments (note 1) | Combined pro forma | Reorganization adjustments (note 2) | Offering adjustments (note 3) | Bioventus Inc. pro forma | Bioventus LLC historical | Reorganization adjustments (note 1) | Offering adjustments (note 2) | Bioventus Inc. pro forma | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net sales | $ | 53,362 | $ | 3,099 | $ | 0 | $ | 56,461 | $ | 0 | $ | 0 | $ | 56,461 | $ | 242,587 | $ | — | $ | — | $ | 242,587 | ||||||||||||||||||||||||||||||||||||||||
Cost of sales (including depreciation and amortization) | 16,807 | 603 | 865 | 18,275 | — | — | 18,275 | 66,810 | — | — | 66,810 | |||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gross profit | 36,555 | 2,496 | (865 | ) | 38,186 | — | — | 38,186 | 175,777 | — | — | 175,777 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Selling, general and administrative expenses | 37,270 | 1,453 | — | 38,723 | — | 1,540 | 3e | 40,263 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Research and development expenses | 2,966 | 50 | — | 3,016 | — | 48 | 3e | 3,064 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of contingent consideration | 8,971 | — | — | 8,971 | — | — | 8,971 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Selling, general and administrative expense | 144,021 | — | 9,599 | 153,620 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Research and development expense | 7,911 | — | 1,065 | 8,976 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Restructuring costs | 1,076 | — | — | 1,076 | — | — | 1,076 | 540 | — | — | 540 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 2,571 | 8 | 379 | 2,958 | — | — | 2,958 | 5,815 | — | — | 5,815 | |||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Operating income (loss) | (16,299 | ) | 985 | (1,244 | ) | (16,558 | ) | — | (1,588 | ) | (18,146 | ) | 17,490 | — | (10,664 | ) | 6,826 | |||||||||||||||||||||||||||||||||||||||||||||
Interest expense | 3,854 | 3 | — | 3,857 | — | (1,727 | ) | 3c | 2,130 | 13,935 | — | (14 | ) | 13,921 | ||||||||||||||||||||||||||||||||||||||||||||||||
Other (income) expense | 496 | 21 | — | 517 | — | — | 517 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other expense | 71 | — | — | 71 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other expense, net | 4,350 | 24 | — | 4,374 | — | (1,727 | ) | 2,647 | 14,006 | — | (14 | ) | 13,992 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loss (income) before income taxes | (20,649 | ) | 961 | (1,244 | ) | (20,932 | ) | — | 139 | (20,793 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Income (loss) from continuing operations before income taxes | 3,484 | — | (10,650 | ) | (7,166 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income tax expense | 369 | — | — | 369 | — | — | 369 | 684 | — | — | 684 | |||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) from continuing operations | 2,800 | — | (10,650 | ) | (7,850 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Less: net (loss) income from continuing operations attributable to non-controlling interests | (30 | ) | 854 | (3,248 | ) | (2,424 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net (loss) income | (21,018 | ) | 961 | (1,244 | ) | (21,301 | ) | 2b | — | 139 | (21,162 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Less: Net (loss) income attributable to non-controlling interests | — | — | — | — | (6,113 | ) | 2b | 40 | 2b | (6,073 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) from continuing operations attributable to Bioventus | $ | 2,830 | $ | (854 | ) | $ | (7,402 | ) | $ | (5,426 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net (loss) income attributable to Bioventus | $ | (21,018 | ) | $ | 961 | $ | (1,244 | ) | $ | (21,301 | ) | $ | 6,113 | $ | 99 | (15,088 | ) | |||||||||||||||||||||||||||||||||||||||||||||
Net income from continuing operations attributable to unit holders | $ | 2,830 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accumulated and unpaid preferred distribution | (4,421 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
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| ||||||||||||||||||||||||||||||||||||||||||||||||||
Net (loss) income | $ | (21,018 | ) | $ | 961 | $ | (1,244 | ) | $ | (21,301 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Accumulated and unpaid preferred distributions | (953 | ) | — | — | (953 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income from continuing operations attributable to common unit holders | $ | (1,591 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Net (loss) attributable to common unit holders | $ | (21,971 | ) | $ | 961 | $ | (1,244 | ) | $ | (22,254 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
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Pro forma net (loss) income per share attributable to Bioventus: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pro forma net loss from continuing operations per share attributable to Bioventus: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Basic | (0.64 | ) | 3d | $ | (0.14 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Diluted | (0.64 | ) | 3d | $ | (0.14 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pro forma weighted average common shares outstanding: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Basic | 23,727,619 | 3d | 37,697,158 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Diluted | 23,727,619 | 3d | 37,697,158 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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See Notes to the Unaudited Pro Forma Consolidated Financial Information.
Notes to unaudited pro forma consolidated financial information
(Dollar amounts in thousands)thousands, except for per share amounts)
1. BioStructures acquisition adjustments
On November 24, 2015, Bioventus LLC acquired 100% of the membership interests of BioStructures, LLC, a medical device company focused on developing innovative propriety platforms in bio-resorbable bone graft products for a broad range of spinal surgical applications. The Acquisition has been accounted for using the acquisition method of accounting in accordance with ASC 805, Business Combinations, which requires, among other things, that the assets acquired and liabilities assumed be recognized at their acquisition date fair values, with any excess of the consideration transferred over the estimated fair values of the identifiable net assets acquired recorded as goodwill. The purchase price consisted of cash paid to shareholders on the closing date, a $23,528 note payable to the former BioStructures owners, a $4,960 deferred payment and contingent consideration of up to $4,542 to be paid upon the receipt of certain premarket notification 510(k) clearances with the FDA.
The accounting for the Acquisition is preliminary and subject to change. The final accounting for the business combination may differ materially from that presented in these unaudited pro forma consolidated financial statements. As the valuation work is being completed, any increases or decreases in the fair value of relevant statement of financial position amounts will result in adjustments to the balance sheet and/or statements of operations until the accounting for the business combination is finalized.
The preliminary amounts assigned to identifiable intangible assets and the related amortization expense is as follows (dollar amounts in thousands):
| Intangible asset | Estimated useful life (years) | Preliminary fair value | Amortization expense for the year ended December 31, 2015(ii) | Amortization expense for the three months ended March 28, 2015(iii) | ||||||||||||
Intellectual property | 13 | 45,800 | 3,523 | 881 | ||||||||||||
Distributor relationships | 3 | 4,500 | 1,517 | 379 | ||||||||||||
IPR&D | 23,000 | — | — | |||||||||||||
Trade name | 50 | |||||||||||||||
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Total | 73,350 | 5,040 | 1,260 | |||||||||||||
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Less: BioStructures historical amounts(i) | (64 | ) | (16 | ) | ||||||||||||
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Pro forma adjustment | $ | $ | 4,976 | $ | 1,244 | |||||||||||
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The fair value of the acquired IPR&D will be an indefinite-lived intangible asset. Once the associated product is available for sale, the asset is amortized over its remaining estimated useful life.
The estimated fair value of amortizable intangible assets is expected to be amortized on astraight-line basis over the estimated useful lives. The amortizable lives reflect the periods over which the assets are
expected to provide economic benefit. With other assumptions held constant, a 10% change in the fair value adjustment for amortizable intangible assets would increase annual pro forma amortization by approximately $504. In addition, with other assumptions held constant, a one year increase in the estimated useful lives would decrease annual amortization expense by approximately $631 and a one year decrease in the estimated useful lives would increase amortization expense by approximately $1,052.
2. Reorganization adjustments
The following adjustments are related to the reorganization of the Company as described in the section entitled “Transactions”.
| (a) | As a C-corporation, we will no longer record a members’ equity in the consolidated balance sheet. The preferred units of Bioventus LLC, along with their related preferred return (collectively the liquidation preference) |
| (b) | As described in “Executive Compensation,” with respect to the remaining MIP award, we retained the right to accelerate the redemption of such remaining MIP award and we anticipate accelerating such payments in connection with this offering. |
| (c) | As described in “Transactions”, Bioventus Inc. will become the sole managing member of, own the sole voting interest in, and control the management of Bioventus LLC. As a result, we will consolidate the financial results of Bioventus LLC and will report a non-controlling interest related to the LLC |
The computation of the non-controlling interest following the consummation of this offering is as follows:
| Units | Percentage | Units | Percentage | |||||||||||||
LLC Interests in Bioventus LLC held by Bioventus Inc. | 23,727,619 | 71.3% | 37,697,158 | 69.5 | % | |||||||||||
Non-controlling interest in Bioventus LLC held by Continuing LLC Owners | 9,571,764 | 28.7% | ||||||||||||||
Non-controlling interest in Bioventus LLC held by the Continuing LLC Owner | 16,534,814 | 30.5 | % | |||||||||||||
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| 33,299,383 | 100.0% | 54,231,972 | 100.0 | % | ||||||||||||
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If the underwriters were to exercise their option to purchase additional shares of our Class A common stock, Bioventus Inc. would own 72.4%70.1% of the economic interest of Bioventus LLC and the Continuing LLC OwnersOwner would own the remaining 27.6%29.9% of the economic interest of Bioventus LLC.
In connection with the Transactions, Class B common stock and LLC Interests will be issued to Continuing LLC Owners and their ownership will be presented as non-controlling interest in Bioventus Inc.’s consolidated financial statements. We will contribute all of the net proceeds of this offering (after deducting underwriting commissions and discounts and certain offering expenses) to Bioventus LLC in exchange for LLC Interests equal in number to the shares of 23,727,619 Class A common stock issued, representing a controlling interest.
The balance of the non-controlling interest and total member’s equity as of April 2, 2016September 26, 2020 on a pro forma basis were calculated as follows (in thousands of dollars):follows:
Historical Bioventus LLC equity | $ | 186,302 | $ | 145,339 | ||||
Net adjustments from the reorganization and this offering | 132,389 | 118,276 | ||||||
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| |||||||
Total members’ equity of Bioventus LLC after the Transactions | 318,691 | 263,615 | ||||||
Total Continuing LLC Owners ownership percentage in Bioventus LLC after the Transactions | 28.7% | |||||||
Total Continuing LLC Owner’s ownership percentage in Bioventus LLC after the Transactions | 30.5 | % | ||||||
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Non-controlling interest as of April 2, 2016 on a pro forma basis | 91,464 | |||||||
Non-controlling interest as of September 26, 2020 on a pro forma basis | 80,374 | |||||||
Stockholders’ equity attributable to common stock on a pro forma basis | 227,227 | 183,241 | ||||||
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Total stockholders’ equity at April 2, 2016 on a pro forma basis | $ | 318,691 | ||||||
Total stockholders’ equity at September 26, 2020 on a pro forma basis | $ | 263,615 | ||||||
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The Continuing LLC Owners,Owner, from time to time following the offering, may require Bioventus LLC to redeem or exchange all or a portion of theirits LLC Interests fornewly-issued shares of Class A common stock on aone-for-one basis or, if Bioventus Inc. and such membersthe Continuing LLC Owner agree, a cash payment equal to the volume weighted average market price of one share of our Class A common stock for each LLC Interest redeemed in accordance with the terms of the Bioventus LLC Agreement; provided that, at Bioventus’ election, Bioventus may effect a direct exchange of such Class A common stock or such cash (if mutually agreed) for such LLC Interests. See “Certain relationships and related party transactions—Bioventus LLC Agreement.”
The pro forma net (loss) attributable to non-controlling interest is computed as follows (dollar amounts in thousands):
2. Offering adjustments
| Year ended | Three months ended | |||||||||||||||||||||||
| December 31, 2015 | March 28, 2015 | April 2, 2016 | ||||||||||||||||||||||
| Reorganization | Offering adjustment | Reorganization | Offering adjustment | Reorganization | Offering adjustment | |||||||||||||||||||
Net (loss) income(i) | (35,426 | ) | 898 | (21,301 | ) | 139 | (6,049 | ) | 326 | |||||||||||||||
Non-controlling interests ownership percentage | 28.7% | 28.7% | 28.7% | 28.7% | 28.7% | 28.7% | ||||||||||||||||||
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Net (loss) income attributable to non-controlling interests | (10,167 | ) | 258 | (6,113 | ) | 40 | (1,736 | ) | 94 | |||||||||||||||
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3. Offering related adjustments
| (a) | We have been deferring certain costs in our historical financial statements directly associated with this offering, including certain legal, accounting and other related expenses, which have been recorded in other assets on our consolidated balance sheet. |
| (b) | We estimate that the net proceeds from this offering, after deducting underwriting discounts and commissions but before estimated offering expenses, will be approximately |
full, we estimate that the net proceeds will be approximately |
Assumed initial public offering price per share | $ | 17.00 | $ | 17.00 | ||||
Shares of Class A common stock issued in this offering | 8,823,529 | 7,350,000 | ||||||
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Gross proceeds | $ | 150,000 | $ | 124,950 | ||||
Less: underwriting discounts and commissions | (10,500 | ) | (8,750 | ) | ||||
Less: offering expenses (including amounts previously deferred) | (3,900 | ) | (3,795 | ) | ||||
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Net cash proceeds | $ | 135,600 | $ | 112,405 | ||||
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| (c) | We intend to use the proceeds from this offering to purchase |
| (d) | Pro forma basic net income (loss) from continuing operations per share is calculated by dividing net income (loss) attributable to common stockholders by the number of weighted average Class A common stock outstanding. |
| Year Ended | Three months ended | Year Ended | Nine months ended | |||||||||||||||||||||
| December 31, 2015 | March 28, 2015 | April 2, 2016 | December 31, 2019 | September 26, 2020 | September 28, 2019 | |||||||||||||||||||
Net loss per share, basic and diluted: | ||||||||||||||||||||||||
Net income (loss) from continuing operations per share, basic and diluted: | ||||||||||||||||||||||||
Numerator | ||||||||||||||||||||||||
Net loss | (34,528 | ) | (21,162 | ) | (5,723 | ) | ||||||||||||||||||
Less: Net loss attributable to non-controlling interests | (9,909 | ) | (6,073 | ) | (1,643 | ) | ||||||||||||||||||
Net loss attributable to Class A common stockholders | (24,618 | ) | (15,088 | ) | (4,080 | ) | ||||||||||||||||||
Net income (loss) from continuing operations | $ | 143 | $ | 3,337 | $ | (7,850) | ||||||||||||||||||
Less: Net (loss) income from continuing operations attributable to non-controlling interests | 510 | (147) | (2,424) | |||||||||||||||||||||
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Net income (loss) from continuing operations attributable to Class A common stockholders | $ | 653 | $ | 3,484 | $ | (5,426) | ||||||||||||||||||
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Denominator | ||||||||||||||||||||||||
Shares of Class A common stock issued in this offering | 8,823,529 | 8,823,529 | 8,823,529 | 7,350,000 | 7,350,000 | 7,350,000 | ||||||||||||||||||
Shares of Class A common stock held by the Former LLC Owners | 14,904,090 | 14,904,090 | 14,904,090 | 30,347,158 | 30,347,158 | 30,347,158 | ||||||||||||||||||
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Weighted-average shares of Class A common stock | 23,727,619 | 23,727,619 | 23,727,619 | 37,697,158 | 37,697,158 | 37,697,158 | ||||||||||||||||||
Net loss per share, basic and diluted | $ | (1.04 | ) | (0.64 | ) | (0.17 | ) | |||||||||||||||||
Net income (loss) from continuing operations per share, basic and diluted | $ | 0.02 | $ | 0.09 | $ | (0.14) | ||||||||||||||||||
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In computing the dilutive effect, if any, that the aforementioned exchange would have on earnings per share, we considered that the net income available to holders of Class A common stock would increase due to elimination of the non-controlling interest in consolidated entities associated with the Class B common stock held (including any tax impact).
| (e) | In connection with the Transactions, we intend to grant new |
The pro forma net income (loss) from continuing operations attributable to non-controlling interest is computed as follows by adjustment:
| Year Ended | Nine Months Ended | |||||||||||||||||||||||
| December 31, 2019 | September 26, 2020 | September 28, 2019 | ||||||||||||||||||||||
| Reorganization | Offering adjustment | Reorganization | Offering adjustment | Reorganization | Offering adjustment | |||||||||||||||||||
Net income (loss) from continuing operations | $ | 8,113 | $ | (7,970 | ) | $ | 12,471 | $ | (9,134 | ) | $ | 2,800 | $ | (10,650 | ) | |||||||||
Non-controlling interest ownership percentage | 30.5 | % | 30.5 | % | 30.5 | % | 30.5 | % | 30.5 | % | 30.5 | % | ||||||||||||
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Net income (loss) from continuing operations attributable to non-controlling interests | $ | 2,473 | $ | (2,430 | ) | $ | 3,802 | $ | (2,785 | ) | $ | 854 | $ | (3,248 | ) | |||||||||
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Selected financial dataSELECTED FINANCIAL DATA
The following table presents the selected financial data for Bioventus LLC and its subsidiaries for the periods and at the dates indicated. Bioventus LLC is the predecessor of the issuer, Bioventus Inc., for financial reporting purposes. The selected statements of operations and statement of cash flows data for the years ended December 31, 2013, 20142019 and 20152018 and the selected balance sheet data as of December 31, 20142019 and 20152018 are derived from the Bioventus LLC audited financial statements appearing elsewhere in this prospectus. The selected statements of operations and statement of cash flows data for the threeyears ended December 31, 2017 and 2016 are derived from Bioventus LLC financial statements not appearing in this prospectus. The selected statements of operations and statement of cash flows data for the nine months ended MarchSeptember 26, 2020 and September 28, 2015 and April 2, 2016,2019 and the selected balance sheet data as of April 2, 2016September 26, 2020 are derived from the Bioventus LLC unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, include all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentationstatement of the information set forth herein. You should read this data together with our audited and unaudited financial statements and related notes appearing elsewhere in this prospectus and the information under the captions “Capitalization” and “Management’s discussion and analysis of financial condition and results of operations.” Our historical results are not necessarily indicative of our future results or any other period and results of interim periods are not necessarily indicative of results for the entire year. The selected financial data included in this section are not intended to replace the financial statements and the related notes included elsewhere in this prospectus.
We have elected to present three years of selected financial data as permitted under the reduced disclosure requirements available to emerging growth companies.
| Years Ended December 31, | Nine Months Ended | |||||||||||||||||||||||
(in thousands, except per share and share amounts) | 2019 | 2018 | 2017 | 2016 | September 26, 2020 | September 28, 2019 | ||||||||||||||||||
Net sales | $ | 340,141 | $ | 319,177 | $ | 292,059 | $ | 274,500 | $ | 222,570 | $ | 242,587 | ||||||||||||
Cost of sales (including depreciation and amortization of $22,399, $20,614, $22,296, $22,760, $16,076 and $17,149, respectively) | 90,935 | 84,168 | 82,101 | 80,388 | 62,521 | 66,810 | ||||||||||||||||||
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Gross profit | 249,206 | 235,009 | 209,958 | 194,112 | 160,049 | 175,777 | ||||||||||||||||||
Selling, general and administrative expense | 198,475 | 191,672 | 164,842 | 160,321 | 131,104 | 144,021 | ||||||||||||||||||
Research and development expense | 11,055 | 8,095 | 8,096 | 7,900 | 8,311 | 7,911 | ||||||||||||||||||
Change in fair value of contingent consideration | — | (739 | ) | (10,492 | ) | (4,796 | ) | — | — | |||||||||||||||
Restructuring costs | 575 | 1,373 | 2,313 | — | — | 540 | ||||||||||||||||||
Depreciation and amortization | 7,908 | 8,615 | 9,996 | 11,001 | 5,305 | 5,815 | ||||||||||||||||||
Loss on impairment of intangible assets | — | 489 | 7,200 | 8,750 | — | — | ||||||||||||||||||
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Operating income | 31,193 | 25,504 | 28,003 | 10,936 | 15,329 | 17,490 | ||||||||||||||||||
Interest expense | 21,579 | 19,171 | 18,897 | 15,938 | 7,095 | 13,935 | ||||||||||||||||||
Other (income) expense | (75 | ) | 226 | 448 | 652 | (4,539 | ) | 71 | ||||||||||||||||
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Other expense | 21,504 | 19,397 | 19,345 | 16,590 | 2,556 | 14,006 | ||||||||||||||||||
Income (loss) from continuing operations before income taxes | 9,689 | 6,107 | 8,658 | (5,654 | ) | 12,773 | 3,484 | |||||||||||||||||
Income tax expense (benefit) | 1,576 | 1,664 | (785 | ) | 1,091 | 302 | 684 | |||||||||||||||||
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Net income (loss) from continuing operations | 8,113 | 4,443 | 9,443 | (6,745 | ) | 12,471 | 2,800 | |||||||||||||||||
Loss attributable to noncontrolling interest | 553 | — | — | — | 1,164 | 30 | ||||||||||||||||||
Loss from discontinued operations, net of tax | (1,815 | ) | (16,650 | ) | (8,885 | ) | (11,208 | ) | — | (1,616 | ) | |||||||||||||
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Net income (loss) attributable to unit holders | $ | 6,851 | $ | (12,207 | ) | $ | 558 | $ | (17,953 | ) | $ | 13,635 | $ | 1,214 | ||||||||||
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(in thousands, except per share and share amounts) Net income (loss) from continuing operations attributable to unit holders Accumulated and unpaid preferred distributions Net income allocated to participating shareholders Net income (loss) from continuing operations attributable to common unit holders Loss from discontinued operations, net of tax Net (loss) income attributable to common unit holders Net (loss) income per unit attributable to common unit holders—basic and diluted: Net income (loss) from continuing operations Loss from discontinued operations, net of tax Net (loss) income attributable to common unit holders Weighted average common units outstanding, basic and diluted Years Ended December 31, Nine Months Ended 2019 2018 2017 2016 September
26, 2020 September
28, 2019 $ 8,666 $ 4,443 $ 9,443 $ (6,745 ) $ 13,635 $ 2,830 (5,955 ) (5,781 ) (5,613 ) (5,449 ) (4,525 ) (4,421 ) (1,555 ) — (2,197 ) — (5,225 ) — 1,156 (1,338 ) 1,633 (12,194 ) 3,885 (1,591 ) 1,815 16,650 8,885 11,208 — 1,616 $ (659 ) $ (17,988 ) $ (7,252 ) $ (23,402 ) $ 3,885 $ (3,207 ) $ 0.24 $ (0.27 ) $ 0.33 $ (2.49 ) $ 0.79 $ (0.32 ) 0.37 3.40 1.81 2.29 — 0.33 $ (0.13 ) $ (3.67 ) $ (1.48 ) $ (4.78 ) $ 0.79 $ (0.65 ) 4,900 4,900 4,900 4,900 4,900 4,900
| Years ended December 31, | Three months ended | |||||||||||||||||||||
| (in thousands, except per share and share amounts) | 2013 | 2014 | 2015 | March 28, 2015 | April 2, 2016 | |||||||||||||||||
Net sales | $ | 232,375 | $ | 242,893 | $ | 253,650 | $ | 53,362 | $ | 65,402 | ||||||||||||
Cost of sales (including depreciation and amortization of $16,693, $19,622, $22,474, $5,741, and $6,300, respectively) | 71,372 | 75,792 | 74,544 | 16,807 | 19,235 | |||||||||||||||||
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Gross profit | 161,003 | 167,101 | 179,106 | 36,555 | 46,167 | |||||||||||||||||
Selling, general and administrative expense | 150,370 | 147,058 | 148,441 | | 37,270 | | 40,184 | |||||||||||||||
Research and development expenses | 10,936 | 9,465 | 14,747 | 2,966 | 3,718 | |||||||||||||||||
Change in fair value of contingent consideration | — | 1,590 | 19,493 | 8,971 |
| 1,301 |
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Restructuring costs | — | — | 2,443 | 1,076 | 172 | |||||||||||||||||
Depreciation and amortization | 7,765 | 8,968 | 10,570 | 2,571 | 2,830 | |||||||||||||||||
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Operating income (loss) | (8,068 | ) | 20 | (16,588 | ) | (16,299 | ) | (2,038 | ) | |||||||||||||
Interest expense | 11,459 | 11,969 | 14,229 | 3,854 | 3,555 | |||||||||||||||||
Other (income) expense | 713 | (596 | ) | 1,154 | 496 | (147 | ) | |||||||||||||||
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Other expense, net | 12,172 | 11,373 | 15,383 | 4,350 | 3,408 | |||||||||||||||||
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Loss before income taxes | (20,240 | ) | (11,353 | ) | (31,971 | ) | (20,649 | ) | (5,446 | ) | ||||||||||||
Income tax expense | 2,127 | 1,547 | 2,140 | 369 | 603 | |||||||||||||||||
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Net loss | (22,367 | ) | (12,900 | ) | (34,111 | ) | (21,018 | ) | (6,049 | ) | ||||||||||||
Accumulated and unpaid preferred distributions | (3,610 | ) | (3,718 | ) | (3,992 | ) | (953 | ) | (1,042 | ) | ||||||||||||
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Net loss attributable to common unit holders | $ | (25,977 | ) | $ | (16,618 | ) | $ | (38,108 | ) | $ | (21,971 | ) | $ | (7,091 | ) | |||||||
Net loss per unit, basic and diluted | $ | (5.30 | ) | $ | (3.39 | ) | $ | (7.78 | ) | $ | (4.48 | ) | $ | (1.45 | ) | |||||||
Weighted average common units outstanding, basic and diluted | 4,900 | 4,900 | 4,900 | 4,900 | 4,900 | |||||||||||||||||
Unaudited pro forma net loss per share: | ||||||||||||||||||||||
Net loss per share, basic and diluted | — | — | $ | (1.04 | ) | (0.64 | ) | $ | (0.17 | ) | ||||||||||||
Weighted average shares, basic and diluted | — | — | 23,727,619 | 23,727,619 | 23,727,619 | |||||||||||||||||
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December 31, 2013 December 31, 2014 December 31, 2015 March 28, April 2, Consolidated statement of cash flow data: Net cash (used in) provided by: Operating activities Investing activities Financing activities Effect of exchange rate changes on cash and cash equivalents Net (decrease) increase in cash and cash equivalents (in thousands) Consolidated statement of cash flow data: Net cash provided by (used in): Operating activities from continuing operations Investing activities from continuing operations Financing activities Discontinued operations Effect of exchange rate changes Net change in cash and cash equivalents Years ended Three months ended (in thousands)
2015
2016 $ 2,749 $ 15,109 $ 18,920 $ (3,821 ) $ 2,162 (10,999 ) (31,376 ) (60,185 ) (306 ) (6,638 ) 6,801 (6,645 ) 31,246 3,852 5,495 (514 ) (1,428 ) (805 ) (470 ) 197 $ (1,963 ) $ (24,340 ) $ (10,824 ) $ (745 ) $ 1,216 Years Ended December 31, Nine Months Ended 2019 2018 2017 2016 September
26, 2020 September
28, 2019 $ 42,545 $ 52,310 $ 28,976 $ 37,145 $ 46,752 $ 21,329 (7,912 ) (6,061 ) (6,675 ) (7,949 ) (18,961 ) (7,348 ) (10,951 ) (13,256 ) (10,241 ) (8,961 ) (19,691 ) (11,640 ) (1,832 ) (7,163 ) (9,451 ) (11,716 ) (228 ) (1,663 ) (104 ) (160 ) 1,176 (493 ) 86 171 $ 21,746 $ 25,670 $ 3,785 $ 8,026 $ 7,958 $ 849
| As of | As of | As of December 31, | As of September 26, | |||||||||||||||||||||||
| (in thousands) | December 31, 2014 | December 31, 2015 | April 2, 2016 | 2019 | 2018 | 2020 | ||||||||||||||||||||
Balance sheet data: | ||||||||||||||||||||||||||
Cash and cash equivalents | $ | 15,774 | $ | 4,950 | $ | 6,166 | $ | 64,520 | $ | 42,774 | $ | 72,478 | ||||||||||||||
Total assets | 430,421 | 487,352 | 486,264 | $ | 472,407 | $ | 442,723 | $ | 479,277 | |||||||||||||||||
Total liabilities | 252,932 | 295,014 | 299,962 | $ | 326,790 | $ | 297,456 | $ | 333,938 | |||||||||||||||||
Accumulated deficit | (56,495 | ) | (91,840 | ) | (97,975 | ) | $ | (141,700 | ) | $ | (139,821 | ) | $ | (142,176 | ) | |||||||||||
Total members’ equity | 177,489 | 192,338 | 186,302 | $ | 145,617 | $ | 145,267 | $ | 145,339 | |||||||||||||||||
Management’s discussion and analysis of financial condition and results of operationsMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Risk factors,” “Selected financial data” and our consolidated financial statements and the related notes to those statements included elsewhere in this prospectus. In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Some of the numbers included herein have been rounded for the convenience of presentation. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Risk factors” and elsewhere in this prospectus.prospectus. The following discussion does not give effect to the Transactions. See “Transactions” and “Unaudited pro forma consolidated financial information” included elsewhere in this prospectus for a description of the Transactions and their effect on our historical results of operations.
OverviewExecutive Summary
We are a global medical technologydevice company focused on developing and commercializing innovative and proprietary orthobiologic products for the treatment of patients suffering from a broad array of musculoskeletal conditions. Our products address the growing need for clinically effective,differentiated, cost efficient and minimally invasive solutionstreatments that engage and enhance the body’s natural healing processes. For the year ended December 31, 2015 and three months ended April 2, 2016, we generated $253.7 million and $65.4 million of net sales, respectively.process. We operate our business through fourtwo reportable segments: Active Healing Therapies—segments, U.S., Active Healing Therapies— and International, Surgical and BMP.our portfolio of products is grouped into following three verticals:
Our Active Healing Therapies segments offer two types of non-surgical products: our market-leading, non-invasive
OA joint pain treatment and joint preservation products, which are HA viscosupplementation therapies approved by the FDA through a PMA;
BGSs, which are human tissue allograft and synthetic products used primarily in spine surgery which have either (i) received 510(k) clearance, which is a premarket submission made to the FDA to demonstrate that the device to be marketed is at least as safe and effective, that is, substantially equivalent, to a legally marketed device, or (ii) are regulated solely as Section 361 HCT/Ps, which means they are human cells, tissues and cellular and tissue-based products that do not require a PMA in the United States; and
minimally invasive fracture treatment, which is a FDA-approved Exogen system prescribed for long bone stimulation for fracture healinghealing.
Our U.S. segment offers our full existing portfolio of products. This includes our OA joint pain treatment and hyaluronic acid, orjoint preservation products, which address the entire market for HA viscosupplementation therapieswith offerings for osteoarthritis pain relief. Our Exogen system issingle, three and five injection therapies: (i) Durolane, a U.S. Foodsingle injection therapy, which we launched in the United States in the first half of 2018 and Drug Administration premarket approved, or PMA, product that offers significant advantages over competitors’ long bone stimulation systems, including shorter treatment times, superior nonunion heal rates based onalso market outside the United States in more than 30 countries; (ii) GELSYN-3, a comparisonthree injection therapy, which we have marketed in the United States since the second half of available PMA clinical data2016; and a broader label that is the only label for a long bone growth stimulator for certain fresh fractures. Our two PMA approved HA viscosupplementation therapies are: Supartz(iii) SUPARTZ FX, a five injection therapy, which we markethave marketed in the United States and GelSyn-3, a three injection therapy,since May 2012. Our U.S. segment also offers our BGS products, which we expect to launch in the United States in the second half of 2016. We also market Durolane, a single injection therapy, outside the United States and own certain related assets.
Our Surgical segment offers a portfolio of advanced bone graft substitutes with 510(k) clearance or regulated as HCT/Ps in the United States designed to improveare targeted at improving bone fusion rates following spinal fusion and other orthopedic surgeries. These products include our OsteoAMP allogeneicallograft-derived bone graft with growth factor,factors (OsteoAMP), a range ofDBM (Exponent), cancellous bone in different preparations (PureBone), bioactive synthetics (Signafuse and Interface), a collagen ceramic matrix a demineralized(OsteoMatrix) and two bone matrix, or DBM,marrow isolation systems (CellXtract and allograft comprising demineralized cancellous bone in different preparations. Our development pipeline includes additional bone graft substitute products.
Our BMPExtractor). Further, our U.S. segment is comprised of proprietary next-generation bone morphogenetic protein, or BMP. Our next-generation BMP product candidates are designed to offer at least equivalent efficacy at a lower dose administration and provide a better-controlled release to address the safety concerns associated with Infuse, the current market-leading bone graft. Our pre-clinical data are based on animal models, including non-human primate studies, which may not be indicative of results that we will experience in clinical trials with human subjects. We intend to enter one of our next-generation BMP candidates into Phase 1 clinical trials within 18 months and expect to demonstrate advancement of our product candidates through a number of milestones
over the next two years. However, we cannot determine with certainty the timing of initiation, duration or completion of future clinical trials of our BMP product candidates.
We currently market and sell our products in the United States and 29 other countries. Our Exogen system and Supartz FX, which accounted for the majority of our revenue for the year ended December 31, 2015, have regulatory approvals to be marketed and sold in the United States. In addition, we also have regulatory approval to market and selloffers our Exogen system, in key international markets, such as the European Unionwhich we believe offers significant advantages over electrical based long bone stimulation systems, including documented mechanism of action, shorter treatment times and Canada. As of April 2, 2016,superior nonunion heal rates.
Our International segment offers Durolane, or single injection therapy, OsteoAMP our sales organization consisted of approximately 232 direct sales representativesallograft-derived bone graft with growth factors, and 124 independent distributors in the United States and approximately 57 direct sales representatives and 12 independent distributors internationally. In the United States, our Active Healing Therapies sales organization markets our products to orthopedists, musculoskeletal and sports medicine physicians and podiatrists. Our Surgical sales organization is composed of a sales management team that markets our surgical products primarily to neurosurgeons and orthopedic spine surgeons. In international markets, we market and sell our Active Healing Therapies through direct sales representatives in twelve countries and through independent distributors in an additional 17 countries. Our products are typically covered and reimbursed by third-party payors, including government authorities, such as Medicare and Medicaid, managed care providers and private health insurers. We have grown ourExogen system.
The following table sets forth total net sales, net income from $232.4 million for the year ended December 31, 2013, to $242.9 million for the year ended December 31, 2014continuing operations and to $253.7 million for the year ended December 31, 2015, at a CAGR, of 4.5%. Adjusted EBITDA:
| Years Ended December 31, | Nine Months Ended | |||||||||||||||
(in thousands) | 2019 | 2018 | September 26, 2020 | September 28, 2019 | ||||||||||||
Net sales | $ | 340,141 | $ | 319,177 | $ | 222,570 | $ | 242,587 | ||||||||
Net income from continuing operations | $ | 8,113 | $ | 4,443 | $ | 12,471 | $ | 2,800 | ||||||||
Adjusted EBITDA(1) | $ | 79,188 | $ | 72,171 | $ | 44,289 | $ | 48,483 | ||||||||
| (1) | For a reconciliation of net income from continuing operations to Adjusted EBITDA, see Note 2 to the information contained in “Prospectus summary—Summary historical and pro forma financial information.” |
Strategic transactions
We have grownpursued and continue to pursue business development opportunities that leverage our total net sales from $53.4 million for the three months ended March 28, 2015, to $65.4 million for the three months ended April 2, 2016, at an annual growth rate of 22.5%. For the years ended December 31, 2013, 2014 and 2015 and the three months ended March 28, 2015 and April 2, 2016, we had net losses of $22.4 million, $12.9 million, $34.1 million, $21.0 million and $6.0 million, respectively. We have grown our Adjusted EBITDA from $32.5 million for the year ended December 31, 2013, to $36.2 million for the year ended December 31, 2014 and to $42.2 million for the year ended December 31, 2015 at a CAGR of 14.0%. Also, we have grown our Adjusted EBITDA from $2.3 million for the three months ended March 28, 2015, to $10.7 million for the three months ended April 2, 2016, at an annual growth rate of 365.2%. Adjusted EBITDA is burdened by BMP program costs of $0.7 million, $6.7 million and $11.3 million, for the years ended December 31, 2013, 2014 and 2015, respectively, and $2.5 million and $2.5 million for the three months ended March 28, 2015 and April 2, 2016, respectively. For a reconciliation of net loss to Adjusted EBITDA, see Note 3 to the information contained in “Prospectus summary—Summary historical and pro forma financial information.”
In addition to marketing and selling our existing products, we are engaged in ongoing R&D efforts. Our R&D efforts are focused on our next-generation BMP product candidates as well as bone graft substitutes, including several programs that we recently acquired through our BioStructures acquisition.
Strategic transactions
Since our inception in May 2012, we have engaged in a series of acquisitions and other strategic transactions to grow the business andsignificant customer presence across orthopedics, broaden our product portfolio.portfolio and increase our global footprint. Below is a summary of these transactions.some of our recent transactions:
Collaboration and development agreement for MOTYS
On May 29, 2019, we entered into a collaboration and development agreement, or Development Agreement, with Musculoskeletal Transplant Foundation, Inc., or MTF, to develop an injectable placental tissue product, MOTYS, for use in the OA joint pain treatment. The development and commercialization of the product is anticipated to take place in two stages. In consideration for achieving its development milestones, we paid MTF $1.5 million and are obligated to pay additional payments totaling $0.8 million if certain further milestones are achieved. We began selling MOTYS in the fourth quarter of 2020, subject to the terms of an exclusive commercial supply agreement entered into with MTF on June 18, 2020.
BMP portfolioDevelopment collaboration agreement for PROcuff.
On June 27, 2013,August 23, 2019, we entered into an agreementexclusive Collaboration Agreement with Pfizer for an exclusive, worldwideHarbor, to develop and license to certain parts of Pfizer’s BMP IP portfolio, subject to certain field of use and other restrictions. As part of the license agreement, Pfizer transferred to us certain existing development work for their BMP assets and agreed to undertake certain early-development activities relating to the next-generation BMP product candidates. Pfizer has also agreed to assign to us, upon the first commercial sale of a product containing next-generation BMP, certain IP rights relating to next-generation BMP, though we will continue to license certain material background IP from Pfizer under the agreement. Under the terms of the license agreement, we paid Pfizer an upfront cash milestone payment, which was recorded as an R&D expense in 2013. Additionally, with respect to
our next-generation BMP product candidates, we will be obligated to make cash payments upon Phase I of $3.0 million, Phase II of $5.0 million, Phase III of $10.0 million, the first commercial sale in a major market of $25.0 million and a cash payment of $30.0 million upon achieving annual net sales of a product equal to or greater than $300 million. We will also be obligated to make low double digit percentage royalty payments to Pfizer on sales upon commercialization of any next-generation BMP product covered by the license. Over the next several years, we expect to increase our R&D expenses for our next-generation BMP product candidates as we undergo clinical trials to demonstrate the safety and efficacy of the product.
Durolane. On December 31, 2013, we entered into an agreement with Galderma S.A. and Q-Med AB to acquire the exclusive distribution rights to Durolane outsidecommercialize a woven-suture-collagen composite implant product. Concurrently with the United States. Under the termsexecution of the agreement, we made payments to Galderma S.A. and Q-Med ABpurchased $1.0 million of $19.7 million in 2014 and $5.3 million in 2015, including implicit interest. The agreement included an option for us to acquire certain Durolane assets outside the United States, including the Durolane trademark and product registrations and clinical data. We exercised this option
on November 16, 2015. Prior to exercising this option, we served as the exclusive distributorshares of Durolane in Europe, Canada and Australia.Harbor. As a result of this acquisition, our Durolane cost of sales have decreased significantly, resulting in a higher gross margin for the product.
OsteoAMP. On October 3, 2014, we entered the surgical orthobiologics market with the asset acquisition of the OsteoAMP product line, intellectual property and commercial business from Advanced Biologics for a purchase price of approximately $17.7 million in upfront cash ($10.5 million of which was paid upon closing with the remainder paid in February 2015), plus contingent consideration. This transaction was accounted for using the acquisition method of accounting. The contingent consideration consists of (i) up to $12.0 million for cash earn-out payments upon theHarbor’s achievement of certain milestones, on October 5, 2020, we purchased $1.0 million of additional shares of Harbor. Furthermore, we are obligated to make two additional one-time payments totaling $6.0 million in aggregate upon Harbor’s achievement of (i) receiving regulatory approval and (ii) achieving a certain net sales targets through December 31, 2019, (ii) a royalty on certain future net salestarget. The sole use of OsteoAMP beginning January 1, 2019 and ending December 31, 2023, and (iii) the payment of above-market rate prices for tissue usedproceeds from these investments is for the OsteoAMPdevelopment of the implant product pursuantthat is the subject of our agreement. We intend to negotiate and enter into a definitive supply agreement with Advanced Biologics endingHarbor if and when the product is cleared for marketing by the FDA at a price per unit not to exceed an agreed upon maximum.
CartiHeal (developer of Agili-C) investment and option and equity purchase agreement
On July 15, 2020, we made a $15.0 million equity investment in October 2018. Based on management assumptions for market ratesCartiHeal, a privately-held company headquartered in Israel and future contract revenues, the estimated fair valuedeveloper of the contingent cash consideration payable underproprietary Agili-C implant for the supply agreementtreatment of joint surface lesions in traumatic and osteoarthritic joints. This investment follows the recently completed enrollment and outcome of interim analysis in CartilHeal’s IDE multinational pivotal study for Agili-C. This new round of funding is $20.8 million as of December 31, 2015. We will recognize any subsequent changesexpected to enable CartiHeal to complete all patient follow-up in the fair valueAgili-C study and submit an application for PMA to the FDA. Under the agreement, CartiHeal can secure an additional $5.0 million equity investment from us, if needed, for IDE study completion. We previously made an initial $2.5 million investment in CartiHeal in January 2018 and a subsequent investment of $0.2 million in January 2020.
At the time of closing of the contingent consideration in our consolidated statementsinitial equity investment, we also entered into an Option and Equity Purchase Agreement with CartiHeal and its shareholders, which provides us with an exclusive option to acquire 100% of operations in
CartiHeal’s shares under certain conditions, or the periodCall Option, and provides CartiHeal with a put option that would require us to purchase 100% of CartiHeal’s shares under certain conditions, or the Put Option. The Call Option is exercisable by us upon closing of the change.
BioStructures. On November 24, 2015, we acquired BioStructures, a developer and marketer of a proprietary range of advanced bioactive synthetics and other bone graft substitutes for various spinal and orthopedic surgical applications, as well as a pipeline of bone graft substitute products.investment. The purchase price was $81.4 million,Put Option is only exercisable by CartiHeal upon pivotal clinical trial success, including $48.4 million paid in cash at closing, a $23.5 million note payable to the former BioStructures owners and a deferred payment of $5.0 million, both due on the twelve-month anniversary of the acquisition, and contingent consideration of $4.5 million based on the achievement of certain regulatory milestones. We expect sales from these acquired bone graft substitutessecondary endpoints and FDA approval of the Agili-C device with a label consistent in all respects with pivotal clinical trial success. The pivotal clinical trial’s objective is to increasedemonstrate the superiority of the Agili-C implant over the surgical standard of care, including microfracture and debridement, for the treatment of cartilage or osteochondral defects, in both osteoarthritic knees and knees without degenerative changes. If not previously exercised, the Call Option and the Put Option terminate 45 days following the FDA approval of Agili-C or in the next several years as we grow our Surgical business.
GelSyn-3. On February 9, 2016, we entered into an agreement with IBSA where we obtained the exclusive distribution rights for GelSyn-3 in the United States, as well as an assignmentevent of failure of the pivotal clinical trial. We also have the right to terminate the Call Option and Put Option at any time ending 30 days after receipt from CartiHeal of the statistical report regarding the final results of the pivotal clinical trial upon payment of a break fee of $30.0 million. Consideration for the acquisition of all of the shares of CartiHeal pursuant to the Call Option or Put Option would be $350.0 million, all of which would be payable at closing, with an additional $150.0 million payable upon achievement of certain sales milestones related GelSyn-3 trademark. Under the agreement, IBSA will supplyto GelSyn-3Agili-C. on a purchase order basis, based on the amounts ofGelSyn-3 that we require as set forth in rolling forecasts. We will alsoSuch closing would be subject to certain annual minimum purchase requirements. We are obligated to use commercially reasonable efforts to launch GelSyn-3 and to diligently market GelSyn-3 in the United States.customary closing conditions.
Certain of the foregoing transactions have had a significant impact on our consolidated financial statementsresults of operations for the periods in which they occurred, and they have affected the comparability of these statements for the corresponding comparative periods.
Outlook
We plan to continue to expand our business and to increase our net sales and achieve profitability by executing on the following strategies:
Growcontinue to expand market share in HA viscosupplementation;
introduce new OA joint pain treatment and joint preservation products;
further develop and commercialize our Surgical business by investingBGS portfolio;
expand indications for use for our Exogen system;
invest in our portfolioresearch and expanding our distribution network.development;
Advance our next-generation BMP product candidates.
Grow our Active Healing Therapies business through new product introductions and selling strategies.
Selectively pursue business development opportunities.
Focus on continued Adjusted EBITDA growth.opportunities; and
We expect our Surgical business to be a significant contribution to our growth going forward as we continue to
opportunistically grow our OsteoAMP product at a faster rate than the rest of our business, as well as leverage our recent BioStructures acquisition.international markets.
We expect to face challenges as we execute on our business strategy. Our industry is highly competitive, subject to rapid change and significantly affected by market activities of industry participants, new product introductions and other technological advancements. We believe our experienced management team positions us for success in facing these and other challenges. However, there are a number ofseveral factors affecting our business that are beyond our control. For example,control, such as our ability to successfully introduce new products and line extensions, expand labels, continue to obtain reimbursement for our products at acceptable rates and receive necessary governmental approvals. In addition, we expect that market demand, government regulation, third-party coverage and reimbursement policies and societal pressures will continue to change the healthcare industry worldwide, resulting in further business consolidations and alliances among our customers, which may exert further downward pressure on the prices of our products. For information about additional factors that may affect our outlook, see the “Risk factors” sectionand “Special note regarding forward-looking statements” sections of this prospectus.
COVID-19 Update and Outlook
In March 2020, the World Health Organization declared a global pandemic related to the rapidly growing outbreak of a novel strain of coronavirus known as COVID-19. In the following weeks, many states and counties
across the United States responded by implementing a number of measures designed to prevent its spread, including stay-at-home or shelter-in-place orders, quarantines and closure of all non-essential businesses.
The COVID-19 pandemic has rapidly escalated in the United States, creating significant uncertainty and economic disruption, and leading to record levels of unemployment nationally. Due to the evolving nature of the COVID-19 crisis, we continue to monitor the situation closely and assess the impact on our business. In response to various governmental orders and public health advisories, we have implemented a number of measures to protect the health and safety of our workforce, conserve liquidity and position us to emerge from the current crisis in a healthy financial position. These measures include closing our offices and instituting work-from-home policies with the exception of essential personnel in March 2020. In addition, we temporarily imposed employee salary reductions for our U.S. employees for the month of June 2020 and suspended, until December 31, 2020, a portion of the employer contribution we make under our 401(k) plan. All temporary salary reductions have now been reversed and all salaries have been reinstated to pre-COVID-19 levels. To the extent permitted and in accordance with guidance from public health officials and government agencies, we have begun to reopen our locations and resume normal operations where appropriate. We expect our operations will continue to be impacted throughout 2020, however, the magnitude and duration of the impact is impossible to predict due to:
uncertainties regarding the duration of the COVID-19 pandemic and the length of time over which the disruptions caused by COVID-19 will continue;
the impact of governmental orders and regulations that have been, and may in the future be, imposed in response to the pandemic;
the impact of COVID-19 on our suppliers, manufacturers and other third parties on which we rely;
the deterioration of economic conditions in the United States, as well as record high unemployment levels, which could have an adverse impact on discretionary consumer spending; and
uncertainly regarding the potential for a “second wave” of the COVID-19 crisis to occur later in the year.
The COVID-19 pandemic began to have a material impact on our business during the second quarter of 2020. Since March 2020, various governmental orders and public health advisories, including “shelter-in-place” orders and quarantines, have reduced or prevented patient access to hospitals and physicians. As a result, the number of both elective and non-elective procedures have been reduced and our sales have decreased. As a precautionary measure in March 2020, in response to changing market dynamics and in order to increase our cash position and preserve financial flexibility in view of the uncertainty resulting from the COVID-19 pandemic, we drew down $49.0 million on our revolving credit facility. On September 24, 2020, we repaid all borrowings outstanding under our revolving credit facility.
In addition, we could be further impacted if we begin to see delays in payments from customers, return to more stringent “shelter in place” orders or advisories, facility closures or other reasons related to the pandemic. Despite the COVID-19 pandemic, we had positive cash flows for the nine months ended September 26, 2020, due to a lack of significant delays in payments from customers, decreases in expenses correlating to a decrease in sales, reduction in travel expenses and the institution of various cost cutting measures provided us with positive cash flow during the nine months ended September 26, 2020. However, the extent to which COVID-19 could materially impact our future liquidity is uncertain.
In April 2020, we received $1.2 million in funds from the HHS as part of the CARES Act Provider Relief Fund. We determined we have complied with the CARES Act Provider Relief Fund conditions so that we may use the funds to reimburse for health care related expenses and lost revenues attributable to the public health emergency resulting from COVID-19. An additional $2.9 million was received from the CARES Act Provider Relief Fund in July 2020. We have recognized these payments as other income within our condensed consolidated statement of operations and comprehensive income for the nine months ended September 26, 2020.
Under the CARES Act, we have also taken advantage of the deferral of employer social security payroll tax payments. In April 2020, we began deferring all employer social security payroll tax payments for the remainder of the 2020 calendar year, with 50% of the taxes is deferred until December 31, 2021 and the remaining 50% deferred until December 31, 2022.
We are continuing to evaluate other aspects of the CARES Act, including the use of the employee retention tax credit. The employee retention tax credit provides an additional tax credit to employers that (i) have either fully or partially suspended operations because of government orders associated with COVID-19 or (ii) experience a substantial decline in income but continue to pay employees their wages.
Components of our results of operations
Net sales
We generate net sales from a portfolio of orthobiologicactive healing products that meetserve physicians spanning the needs of our orthopedist, musculoskeletal andorthopedic continuum, including sports medicine, physician, podiatrist, neurosurgeontotal joint reconstruction, hand and orthopedicupper extremities, foot and ankle, podiatric surgery, trauma, spine surgeon customers and their patients.neurosurgery. We operate our business through four operatingreport sales net of contractual allowances, rebates and reportable segments, Active Healing Therapies — U.S., Active Healing Therapies — International, Surgical and BMP. Within our Active Healing Therapies segment in the United States and certain international markets, wereturns.
We sell our OA joint pain treatment and joint preservation products and minimally invasive fracture treatment through our direct sales representativesteam, who manage and maintain the sales relationship with physician practices.healthcare providers, distribution centers or specialty pharmacies. In certain international markets, we also sell our Active Healing Therapies to independent distributors on pre-arranged business terms, who manage or maintain the sales relationship with their physician customers. See Note 152 to our consolidated financial statements for the years ended December 31, 2015, 20142019 and 2013.2018. We recognize revenue at the point in time when control is transferred to the customer, typically, in the case of our OA joint pain treatment and joint preservation products, when these products are shipped to the independent stocking distributorscustomer and, transfer of title to the goods and the risk of loss related to those goods are transferred. Within our Surgical segment in the United States, wecase of our Exogen system, when the patient has accepted the product.
Our BGSs are primarily sold in the U.S. market through independent distributors. We generally consign or loan our BGS products to hospitals so our neurosurgeon and orthopedic spine surgeon customers can use them in procedures. We recognize revenue based upon the date that our consigned products have been usedconsumption in a surgical procedure. Our sales are reported net of customer allowances, rebates and returns.
Cost of sales and gross margin
Our cost of sales primarily consist of costs of products purchased from our third-party suppliers, (which includes the entities whose products we distribute), amortization of intellectual property related to our products, direct labor and allocated overhead associated with the assembly of our Exogen system, excess and obsolete inventory charges, shipping, inspection and related costs incurred in making our products available for sale or
use. In addition, cost of sales includes depreciation related to production as well as amortization of product-related intellectual property and distribution rights associated with commercialized products. Our OA joint pain treatment and joint preservation products and BGS products are generally manufactured by or obtained from third-party suppliers primarily located in Japan, Switzerland, Sweden and the United States. We receive the components for our Exogen system from suppliers and assemble each system in-house at our Cordova, Tennessee facility. In the future, we expect our cost of sales to increase in absolute terms due primarily to increased sales volume.
Gross profit and gross margin
Gross profit consists of net sales less cost of sales. We calculate gross margin as gross profit divided by net sales. Our gross margin has been and will continue to be affected by a variety of factors, including production volumes, costs of products purchased from our third-party suppliers, manufacturing costs, product reliability,mix and implementation over time of cost-reduction strategies. We expect net sales and product mix to vary quarter by quarter and therefore our gross profit will likely fluctuate from quarter to quarter.
Selling, general and administrative expensesexpense
Our selling,Selling, general and administrative or SG&A, expensesexpense primarily consistconsists of salaries, benefits and other related costs, including stock-basedequity-based compensation, for personnel employed in sales, marketing, finance, legal, compliance, administrative, information technology, medical education and training, quality and human resource departments. SG&A expensesSelling, general and administrative expense also includeincludes third-party marketing, supply chain and distribution, information technology, legal, human resources, insurance and facilities expenses. SG&Aexpenses, selling, general and administrative expenses also include commissions, generally based on a percentage of sales, to our direct sales representativesteam and independent distributors. We expect our SG&Aselling, general and administrative expenses will increase in absolute terms with the continued expansion of our sales organization and commercialization of our current and pipeline products. We plan to hire more personnel to support the growth of our business. In addition, as a public company, we will be implementing additional procedures and processes for the purpose of addressingto address the standards and requirements applicable to public companies. We expect to incur additional annual SG&Aselling, general and administrative expenses related to these additional procedures and processes including, among other things, equity-based compensation, increased liability insurance for our directors and officers, director fees, reporting requirements of the SEC, transfer agent fees, hiring additional accounting, legal and administrative personnel, increased auditing and legal fees and similar expenses. We also expect a change in the timing over which compensation expense is recognized as a result of the termination of the Phantom Plan and the receipt by Phantom Plan participants who are employed as of the date of this offering of shares of Class A common stock upon settlement of their awards (or of cash, in the case of participants whose employment terminates prior to this offering), which settlement is expected to take place onbetween the twelve and 24 month anniversary of the date of such termination. However, over time, as we grow our net sales, we expect SG&Aselling, general and administrative expenses to decline slightly as a percentage of net sales.
Research and development expensesexpense
Our R&D expensesResearch and development expense primarily consistconsists of employee compensation, stock-basedequity compensation and related expenses, andas well as contract research organization servicesservice expenses related to clinical trials, primarily related to our next-generation BMP product candidates. Internal R&Dtrials. We expense internal research and development costs are expensed as incurred. R&Dincurred and research and development costs incurred by third parties are expensed as thethey perform contracted work is performed.work. Our R&Dresearch and development expenses may vary substantially from period to period based on the timing of research and development activities. We are focused on internal research and development to broaden our R&D activities. Over the next several years,product portfolio across all verticals, expand our Exogen system product label and undertake clinical research to support commercialization of all of our products. As a result, we expect our research and development expenses to increase our R&D expenses significantly for our next-generation BMP product candidatesto the mid-single digits as a percentage of net sales as we undergointroduce new products, extend existing product lines and expand indications. We see significant opportunity to develop innovative and clinically differentiated products in-house with our experienced research and development team. We are currently funding our B.O.N.E.S. clinical trials to demonstratestudy, which began enrollment in 2018 and is aimed at broadening the safety and efficacy of the product in order to gain regulatory approvals and as we fund clinical trials for other products and develop new products. These increased R&D expenses on our next-generation BMP product candidates could potentially be multipleslabel of our current R&D expenses on the next-generation BMP product candidates. We expectExogen system to incur additional R&D expensesinclude a broader range of $8.0 million over the next three years beginningbones that may be treated as fresh fractures in fiscal 2016 for cash milestone paymentspredisposed patients at risk of nonunion. In addition, we are obligated to pay Pfizer upon the achievement of certain milestones related to our next-generation BMP product candidates. We cannot determine with certainty the timing of initiation, duration or completion costs of future clinical trials of our next-generation BMP product candidates. See “Management’s discussion and analysis of financial condition and results of operations —Strategic Transactions — BMP portfolio.” At this time, due to the inherently unpredictable nature ofplanning preclinical and clinical development, we are unable to estimate with any certainty the costs we will incur or the timelines
we will require in the continued development of our next-generation BMP product candidatesanimal model studies for MOTYS and any other product candidate that we may develop.PROcuff. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations.
Change in fair value of contingent consideration
Our change in fair value of contingent consideration primarily consists of changes in estimated contingent consideration payable to counterparties in connection with certain acquisition and investment transactions. During the periods presented, change in fair value of contingent consideration primarily consisted of income related to adjustments to the fair value of contingent consideration liabilities in connection with a supply agreement resulting from the OsteoAMP acquisition. We initially value contingent consideration using a weighted probability calculation of potential payment scenarios discounted at rates reflective of the risks associated with the expected future cash flows. Key assumptions used to estimate the fair value of contingent consideration include revenue, new business and operating forecasts and the probability of achieving the specific targets. After the initial valuation, we assign 100% probability to our best estimate in each reporting period and recognize a gain or loss in the income statement for fair value adjustments.
Restructuring costs
Restructuring costs primarily consist of inventory write downs and employee severance, legal, consulting and related expensestemporary labor expenses. During the periods presented, restructuring costs were associated with the exit from a distribution agreement with Esaote North America, Inc. for the sale of diagnostic ultrasound machines in the United States. Key assumptions in determining the restructuring costs include the net realizable value of inventory, headcount reductions, as well as terms and payments that may be negotiated to terminate certain contractual obligations. We do not expect to incur further restructuring costs related to this Esaote agreement. Restructuring costs also include the restructuring and relocation of certain U.S. finance functions and headcount reductions in our international business to improve operating efficiency. Key assumptions in determining the restructuring costs include headcount reductions, as well as terms and negotiated payments to terminate certain contractual obligations.
Depreciation and amortization
Depreciation expense primarily consists of depreciation of computer equipment and amortizationsoftware as well as leasehold improvements, furniture, fixtures, machinery and equipment. Amortization expense primarily consists of amortization expense related to intellectual property, customer relationships and other intangible assets.
Loss on impairment of intangible assets
During the periods presented, loss on impairment of intangible assets acquired.primarily consists of the write-off of an intangible asset related to a BGS product we no longer sell. We review intangible assets for recoverability if the facts and circumstances suggest that a potential impairment may have occurred. If this review indicates that carrying values may not be recoverable, we will perform an assessment to determine if an impairment charge is required to reduce carrying values to estimated fair value. We estimate fair value using a discounted value of estimated future cash flows.
Interest expense
Interest expense primarily consists of interest on our firstindebtedness, which currently consists of our term loan and second lienrevolving credit facilities, which we entered into in October 2014. Prior to October 2014, interest expense primarily consisted of interest on a related party note payable,facility, which was repaid in full fromincurred pursuant to the proceeds of our senior secured credit facilities. We expect to use net proceeds from this offering to repay our second lien term loan facility in full.2019 Credit Agreement. We have entered into interest rate swaps in an effort to limit our exposure to changes in the variable interest rate on our first lien term loan. Interest expense includes any fair value gain or losses on these derivatives.swaps. Interest expense also includes the revaluation for the liability related to our Equity Participation Right, or EPR, Unit. The EPR Unit’s entitlement is 0.55% of available distributions arising from a distribution event as defined in the Bioventus LLC Agreement. We expect to use net proceeds from this offering to settle the EPR liability.
Other (income) expense
Other (income) expense primarily consists of foreign currency transaction and remeasurement gains and losses on transactions denominated in currencies other than our functional currency. Our foreign currency transaction and remeasurement gains and losses are primarily relaterelated to foreign currency denominated cash, liabilities and intercompany receivables and payables. In 2014, we entered into a foreign exchange forward contract to hedge against the effect of foreign currency fluctuations on amounts owed in Euros related to the acquisition ofOther (income) expense may also include certain Durolane assets. This contract matured in November 2015 and fair value losses are recorded in other (income) expense.nonrecurring items.
Income tax expense
Bioventus LLC is treated as a partnership for U.S. federal tax purposes. Accordingly, the members include the profits and losses are passed through to the members and includedof Bioventus LLC in their income tax returns. Certain wholly-owned subsidiaries of Bioventus LLC are taxable entities for United StatesU.S. or foreign tax purposes and file tax returns in their local jurisdictions. Income tax expense includes U.S. federal and state and international income taxes.taxes, including certain taxes applicable to Bioventus LLC and U.S. federal income taxes for one of our subsidiaries that is treated as a corporation for U.S. federal tax purposes. Certain items of income and expense items in income tax returns are not reported in income tax returns and financial statements in the same year. Theyear as financial statements. We report the income tax effects of these differences are reported as deferred income taxes. Valuation allowances are provided torecognized reduce the related deferred tax assets to an amount which will, more likely than not, be realized. InterestWe recognize interest and penalties related to unrecognized tax benefits are recognized as a component of income tax expense.
After the consummation of this offering, weBioventus Inc. will become subject to U.S. federal, state and local income taxes at the prevailing corporate tax rates with respect to our allocable share of any taxable income of Bioventus LLC and will be taxed at the prevailing
corporate tax rates.income. In addition to tax expenses, we will be obligated to make payments under the Tax Receivable Agreement, which could be significant. Under theThe Tax Receivable Agreement, we will be obligatedobligate us to pay to the Continuing LLC OwnersOwner 85% of the amount of any realized tax benefits, if any, that we actually realize (or in some circumstances are deemed to realize) as a result ofresulting from (i) increases in the tax basis of assets of Bioventus LLC obtained in theas a result of (a) any future when a Continuingredemptions or exchanges of LLC Owner receives shares of our Class A common stock or, if weInterests described under “Certain relationships and such Continuing LLC Owner agree, cash in connection with an exercise of such Continuing LLC Owner’s right to have common units in related party transactions—Bioventus LLC held by such Continuing Agreement—LLC Owner redeemedInterest Redemption Right,” and (b) certain distributions (or deemed distributions) by Bioventus LLC or, at the election of Bioventus, Inc., directly exchanged and (ii) certain other tax benefits related toarising from our making payments under the Tax Receivable Agreement. For more information, see “Certain relationships and related party transactions—Tax Receivable Agreement.” We intend to cause Bioventus LLC to make distributions in an amount sufficient to allow us to pay our tax obligations, including distributions to fund any ordinary course payments due under the Tax Receivable Agreement. See “Certain relationships and related party transactions—Bioventus LLC Agreement—Distributions.”
Adjusted EBITDA
We usepresent Adjusted EBITDA, a non-GAAP financial measure because we believe it is a useful indicator of our operating performance. Our management uses Adjusted EBITDA principally as a measure of our operating performance and believes that Adjusted EBITDA is useful to our investors because it is frequently used by securities analysts, investors and other interested parties frequently use it in their evaluation of the operating performance of companies in industries similar to ours. Our management also uses Adjusted EBITDA for planning purposes, including the preparation of our annual operating budget and financial projections. We define Adjusted EBITDA is defined as net income (loss) from continuing operations before depreciation and amortization, provision of income taxes and interest expense, and provision for income taxes, adjusted for the impact of certain cash, and non-cash and other items that we do not consider in our evaluation of ongoing operating performance. These items include non-cash equity compensation, change in fair value of contingent consideration, COVID-19 benefits, succession and transition charges, loss on impairment of intangible assets, losses associated with debt refinancing, restructuring costs, contingent consideration, transition costs, severance, purchased in-process R&D,foreign currency impact and OsteoAMP inventory step-up. We have incurred development costs related to our BMP product candidates in each of the past three years, and we expect to incur significant costs related to our BMP product candidates in future periods. Such costs are not added back in the calculation of our Adjusted EBITDA.other non-recurring costs. Adjusted EBITDA by segment is comprised of net sales and costs directly attributable to a segment, as well as an allocation of corporate overhead costs. The allocation of corporate overhead costs is determined based on various methods but wasis primarily based on a ratio of net sales by segment to total consolidated net sales. For more information regarding our calculation of Adjusted EBITDA, including information about its limitations as a tool for analysis, please see footnoteNote 2 to the table under “Prospectus summary—Summary historical and pro forma financial data.”
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 ended on March 28, June 27 and September 26 for the year ended December 31, 2020. As a result, the fourth and first quarters may vary in length depending on the calendar year.
Results offrom continuing operations
Nine months ended September 26, 2020 compared to the nine months ended September 28, 2019
The following table sets forth the components of our condensed consolidated statements of operations in dollars andfrom continuing operations as a percentage of net sales for the periods presented:
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| (in thousands, except for percentages) | March 28, 2015 | April 2, 2016 | ||||||||||||||
Net sales | $ | 53,362 | 100.0% | $ | 65,402 | 100.0% | ||||||||||
Cost of sales (including depreciation and amortization of $5,741 and $6,300, respectively) | 16,807 | 31.5% | 19,235 | 29.4% | ||||||||||||
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Gross profit | 36,555 | 68.5% | 46,167 | 70.6% | ||||||||||||
Selling, general and administrative expenses | 37,270 | 69.8% | 40,184 | 61.4% | ||||||||||||
Research and development expenses | 2,966 | 5.6% | 3,718 | 5.7% | ||||||||||||
Change in fair value of contingent consideration | 8,971 | 16.8% | 1,301 | 2.0% | ||||||||||||
Restructuring costs | 1,076 | 2.0% | 172 | 0.3% | ||||||||||||
Depreciation and amortization | 2,571 | 4.8% | 2,830 | 4.3% | ||||||||||||
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Operating loss | (16,299 | ) | (30.5)% | (2,038 | ) | (3.1)% | ||||||||||
Interest expense | 3,854 | 7.2% | 3,555 | 5.4% | ||||||||||||
Other (income) expense | 496 | 0.9% | (147 | ) | (0.2)% | |||||||||||
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Other expense, net | 4,350 | 8.2% | 3,408 | 5.2% | ||||||||||||
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Loss before income taxes | (20,649 | ) | (38.7)% | (5,446 | ) | (8.3)% | ||||||||||
Income tax expense | 369 | 0.7% | 603 | 0.9% | ||||||||||||
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Net loss | $ | (21,018 | ) | (39.4)% | $ | (6,049 | ) | (9.3)% | ||||||||
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| September 26, 2020 | September 28, 2019 | |||||||
Net sales | 100.0 | % | 100.0 | % | ||||
Cost of sales (including depreciation and amortization) | 28.1 | % | 27.5 | % | ||||
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Gross profit | 71.9 | % | 72.5 | % | ||||
Selling, general and administrative expense | 58.9 | % | 59.4 | % | ||||
Research and development expense | 3.7 | % | 3.3 | % | ||||
Restructuring costs | — | 0.2 | % | |||||
Depreciation and amortization | 2.4 | % | 2.4 | % | ||||
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Operating income | 6.9 | % | 7.2 | % | ||||
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The following table presents a reconciliation of net lossincome from continuing operations to EBITDA and Adjusted EBITDA for the periods presented:
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| (in thousands, except per share and share amounts) | March 28, 2015 | April 2, 2016 | ||||||
Net loss | $ | (21,018 | ) | $ | (6,049 | ) | ||
Interest expense | 3,854 | 3,555 | ||||||
Income tax expense | 369 | 603 | ||||||
Depreciation and amortization(a) | 8,394 | 9,137 | ||||||
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EBITDA | (8,401 | ) | 7,246 | |||||
Non-cash equity compensation(b) | 529 | 288 | ||||||
Restructuring costs(c) | 1,076 | 172 | ||||||
Contingent consideration(d) | 8,971 | 1,301 | ||||||
Other corporate expenses(e) | — | 1,370 | ||||||
Inventory step-up(f) | 164 | 300 | ||||||
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Adjusted EBITDA(g) | $ | 2,339 | $ | 10,677 | ||||
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(in thousands) | September 26, 2020 | September 28, 2019 | ||||||
Net income from continuing operations | $ | 12,471 | $ | 2,800 | ||||
Depreciation and amortization(a) | 21,789 | 22,972 | ||||||
Income tax expense | 302 | 684 | ||||||
Interest expense | 7,095 | 13,935 | ||||||
Equity compensation(b) | 619 | 3,252 | ||||||
COVID-19 benefits, net(c) | (4,158 | ) | — | |||||
Succession and transition charges(d) | 5,345 | — | ||||||
Restructuring costs(e) | — | 540 | ||||||
Foreign currency impact(f) | (58 | ) | 146 | |||||
Other non-recurring costs(g) | 884 | 4,154 | ||||||
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Adjusted EBITDA | $ | 44,289 | $ | 48,483 | ||||
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| (a) | Includes for the nine months ended September 26, 2020 and September 28, 2019 depreciation and amortization |
| (b) | Represents compensation as well as the |
| (c) | Represents income resulting from the CARES Act offset by additional cleaning and disinfecting expenses and contract termination fees for events we were unable to hold. |
| (d) | Primarily represents costs related to the CEO transition. |
| (e) | Represents |
Foreign currency impact represents realized and unrealized gains and losses from fluctuations in foreign currency and is included in other (income) expense on the |
Represents |
Net sales
| Nine Months Ended | Change | |||||||||||||||
| (in thousands, except for percentage) | September 26, 2020 | September 28, 2019 | $ | % | ||||||||||||
U.S. | $ | 204,022 | $ | 218,228 | $ | (14,206 | ) | (6.5 | )% | |||||||
International | 18,548 | 24,359 | (5,811 | ) | (23.9 | )% | ||||||||||
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Net Sales | $ | 222,570 | $ | 242,587 | $ | (20,017 | ) | (8.3 | )% | |||||||
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Results of operationsU.S.
Net sales decreased $14.2 million, or 6.5%, for the threenine months ended April 2, 2016September 26, 2020, compared to the threenine months ended MarchSeptember 28, 20152019. The changes in net sales by vertical are as follows:
| • Minimally invasive fracture treatment | ($12.5) million | |
• OA joint pain treatment and joint preservation | ($5.4) million | |
• BGSs | $3.7 million |
Consolidated results of operations
Minimally invasive fracture treatment decreased primarily due to sales volume declines resulting from the disruption caused by the COVID-19 pandemic. OA joint pain and joint preservation decreased primarily due to more treatments being sold under contracts with major insurers at lower prices partially offset by sales volume growth. These decreases were also offset by sales volume growth within our BGS vertical.
Net salesInternational
Net sales increased $12.0decreased $5.8 million, or 22.6%23.9%, to $65.4 million duringfor the threenine months ended April 2, 2016,September 26, 2020, compared to $53.4 million during the threenine months ended MarchSeptember 28, 2015. The increase was2019, primarily due to an increasea decline in net sales of $6.2 million from our Surgical segment, which was formedorder volumes due to the disruption caused by the acquisition of OsteoAMP in October 2014 and BioStructures in November 2015, and increases in net sales of $4.9 million and $0.9 million in our Active Healing Therapies — U.S. and International segments, respectively.COVID-19 pandemic.
Cost of salesGross profit and gross margin
Cost of sales increased $2.4
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| (in thousands, except for percentage) | September 26, 2020 | September 28, 2019 | $ | % | ||||||||||||
Gross profit | ||||||||||||||||
U.S. | $ | 147,654 | $ | 159,154 | $ | (11,500 | ) | (7.2 | )% | |||||||
International | 12,395 | 16,623 | (4,228 | ) | (25.4 | )% | ||||||||||
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Total | $ | 160,049 | $ | 175,777 | $ | (15,728 | ) | |||||||||
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Gross margin | ||||||||||||
U.S. | 72.4 | % | 72.9 | % | (0.5 | )% | ||||||
International | 66.8 | % | 68.2 | % | (1.4 | )% | ||||||
Total | 71.9 | % | 72.5 | % | (0.6 | )% | ||||||
U.S.
Gross profit decreased $11.5 million, or 14.3%7.2%, to $19.2 million duringfor the threenine months ended April 2, 2016,September 26, 2020, compared to $16.8 million during threethe nine months ended MarchSeptember 28, 2015. The increase was2019, primarily due to higherthe decline in net sales indescribed above.
International
Gross profit decreased $4.2 million, or 25.4%, for the threenine months ended April 2, 2016September 26, 2020, compared to the nine months ended September 28, 2019, primarily due to the decrease in sales from the disruption caused by COVID-19 pandemic. The decline in International gross margin of 1.4 percentage points is primarily due to the increased proportional mix of sales made through distributors compared to our direct sales team.
Selling, general and higher intellectual property amortization which increased $0.6administrative expense
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| (in thousands, except for percentage) | September 26, 2020 | September 28, 2019 | $ | % | ||||||||||||
Selling, general and administrative expense | $ | 131,104 | $ | 144,021 | $ | (12,917 | ) | (9.0 | )% | |||||||
Selling, general and administrative expense declined $12.9 million, or 10.5%9.0%, for the nine months ended September 26, 2020, compared to $6.3the nine months ended September 28, 2019, primarily due to:
• COVID-19 related decreases, including declines in travel and meetings from doing business virtually, lower compensation related expenses as well as various cost-reduction initiatives | $13.4 million | |
• Lower legal and accounting expenses | $4.8 million |
These decreases were partially offset by $5.3 million in succession and transition charges primarily associated with the threetransition to our new Chief Executive Officer in April 2020.
Research and development expense
| Nine Months Ended | Change | |||||||||||||||
| (in thousands, except for percentage) | September 26, 2020 | September 28, 2019 | $ | % | ||||||||||||
Research and development expense | $ | 8,311 | $ | 7,911 | $ | 400 | 5.1 | % | ||||||||
Research and development expense increased $0.4 million, or 5.1%, for the nine months ended April 2, 2016,September 26, 2020, compared to $5.7 million in the threenine months ended MarchSeptember 28, 2015,2019, primarily due to costs relating to the development agreement for MOTYS being almost entirely offset by cost reduction initiatives undertaken as a result of the acquisitionCOVID-19 pandemic.
Restructuring costs
There were no restructuring charges during the nine months ended September 26, 2020. Restructuring charges of BioStructures in November 2015. Gross margin$0.5 million for the threenine months ended April 2, 2016 increasedSeptember 28, 2019 resulted from a reduction in headcount and the closing of offices in certain countries as we shifted to 70.6%, comparedan indirect distribution model in these countries to 68.5%improve the performance of our International operations.
Depreciation and amortization
| Nine Months Ended | Change | |||||||||||||||
| (in thousands, except for percentage) | September 26, 2020 | September 28, 2019 | $ | % | ||||||||||||
Depreciation and amortization | $ | 5,305 | $ | 5,815 | $ | (510 | ) | (8.8 | )% | |||||||
Depreciation and amortization during the nine months ended September 26, 2020 remained consistent with the nine months ended September 28, 2019, as it slightly decreased $0.5 million, or 8.8%.
Other expense (income)
| Nine Months Ended | Change | |||||||||||||||
| (in thousands, except for percentage) | September 26, 2020 | September 28, 2019 | $ | % | ||||||||||||
Interest expense | $ | 7,095 | $ | 13,935 | $ | (6,840 | ) | (49.1 | )% | |||||||
Other (income) expense | $ | (4,539 | ) | $ | 71 | $ | (4,610 | ) | NM | |||||||
Interest expense decreased $6.8 million, or 49.1%, for the threenine months ended March 28, 2015. The increase in gross margin was primarily attributable to the increase in the proportion of net sales derived from our Surgical segment.
Selling, general and administrative expenses
SG&A expenses increased $2.9 million, or 7.8%, to $40.2 million during the three months ended April 2, 2016, compared to $37.3 million during the three months ended March 28, 2015. The increase was primarily attributable to increased sales commissions as a result of higher net sales for the three months ended April 2, 2016 asSeptember 26, 2020, compared to the threenine months ended MarchSeptember 28, 2015. This increase was partially offset by lower SG&A expenses for employee healthcare plan costs in the three months ended April 2, 2016 as compared to the three months ended March 28, 2015.
Research and development expenses
R&D expenses increased $0.8 million, or 26.7%, to $3.7 million during the three months ended April 2, 2016, compared to $3.0 million during the three months ended March 28, 2015. The increase was2019, primarily attributable to increased R&D expenses due to the timing of various studies related to productsdecreased debt interest resulting from refinancing our debt in our Surgical segment during the three months ended April 2, 2016 as compared to the three months ended March 28, 2015.
Change in fair value of contingent consideration
Change in fair value of contingent consideration was $1.3 million during the three months ended April 2, 2016, compared to $9.0 million during the three months ended March 28, 2015. The change in fair value of contingent consideration during the three months ended March 28, 2015 was attributable to an increase in expected
OsteoAMP net sales and our estimate of future cash earn-out payments payable to Advanced Biologics over the term of the supply agreement, as compared to the amounts that we forecasted at the time we completed the OsteoAMP acquisition. During the three months ended April 2, 2016, the change in fair value of contingent consideration related to interest accretion for liabilities recorded at fair value.
Restructuring costs
Restructuring costs decreased $0.9 million, or 82.0%, to $0.2 million, during the three months ended April 2, 2016, compared to $1.1 million during the three months ended March 28, 2015. Restructuring costs in the three months ended March 28, 2015 were primarily attributable to our decision in January 2015 to discontinue sales of a diagnostic ultrasound product and related sales force reorganization,December 2019 as well as the restructuring and relocationdecline in interest rates due to COVID-19. This decrease was partially offset with an increase of certain U.S. finance functions$1.9 million primarily resulting from Memphis, Tennessee to Durham, North Carolina. Restructuring coststhe decline in value of our interest rate swap.
Other income during the nine months ended September 26, 2020 was primarily the result of receiving Provider Relief Fund payments of approximately $4.1 million in the three months ended April 2, 2016 were primarily attributable to a plan to improve operating performance in the international business.
Depreciation and amortization
Depreciation and amortization expense increased $0.3 million, or 11.5%, to $2.8 million during the three months ended April 2, 2016, compared to $2.6 million during the three months ended March 28, 2015. The increase was primarily attributable to amortization of intangible assets associated with the BioStructures acquisition in November 2015.
Interest expense
Interest expense decreased $0.3 million, or 7.7%, to $3.6 million during the three months ended April 2, 2016, compared to $3.9 million during the three months ended March 28, 2015. The decrease was primarily due to lower non-cash interest relatedaggregate pursuant to the amortization of the original issue discount calculated using the effective interest method, partially offset by higher cash interest due to an increase in the LIBOR rate and an increase in the number of calendar days used to calculate interest in 2016 compared to 2015.CARES Act.
Other (income) expense
Other (income) expense improved $0.6 million to an income of $0.1 million during the three months ended April 2, 2016, compared to an expense of $0.5 million during the three months ended March 28, 2015. The increase was attributable to foreign currency fluctuations.
Income tax expense
| Nine Months Ended | Change | |||||||||||||||
| (in thousands, except for percentage) | September 26, 2020 | September 28, 2019 | $ | % | ||||||||||||
Income tax expense | $ | 302 | $ | 684 | $ | (382 | ) | (55.8 | )% | |||||||
Effective tax rate | 2.4 | % | 19.6 | % | (17.2 | )% | ||||||||||
Income tax expense increased $0.2decreased $0.4 million, to $0.6 million duringor 55.8%, for the threenine months ended April 2, 2016,September 26, 2020, compared to $0.4 million during the threenine months ended MarchSeptember 28, 2015. The increase was2019, primarily due to an increasethe change in income from continuing operations before income taxes. Our change in effective tax rate is the result of Bioventus LLC’s pass-through structure for U.S. income tax purposes, while being treated as taxable income of the taxable subsidiaries during the three months ended April 2, 2016 as compared to the three months ended March 28, 2015.
Segment results
The following table sets forth for the periods indicated our net sales by operating segment, with changes in net sales between the specific periods expressed in dollar amountscertain states and as a percentage.
| Three months ended | Change | |||||||||||||||
| (in thousands) | March 28, 2015 | April 2, 2016 | $ | % | ||||||||||||
Active Healing Therapies — U.S. | $ | 40,572 | $ | 45,496 | $ | 4,924 | 12.1% | |||||||||
Active Healing Therapies — International | 7,864 | 8,794 | 930 | 11.8% | ||||||||||||
Surgical | 4,926 | 11,112 | 6,186 | 125.6% | ||||||||||||
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Active Healing Therapies — U.S.
Net sales for our Active Healing Therapies — U.S. segment increased by $4.9 million, or 12.1%, to $45.5 million during the three months ended April 2, 2016, compared to $40.6 million during the three months ended March 28, 2015. The increase was primarily due to four additional selling days in the three months ended April 2, 2016 compared to the three months ended March 28, 2015,various foreign jurisdictions as well as organic growth of both Exogen and Supartz, primarily due to increased volume.for certain subsidiaries.
Active Healing Therapies — InternationalSegment Adjusted EBITDA
Net sales for our Active Healing Therapies — International segment increased by $0.9 million, or 11.8%, to $8.8 million during the three months ended April 2, 2016, compared to $7.9 million during the three months ended March 28, 2015. The increase was primarily due to four additional selling days in the three months ended April 2, 2016 compared to the three months ended March 28, 2015.
Surgical
Net sales for our Surgical segment increased by $6.2 million, or 125.6%, to $11.1 million during the three months ended April 2, 2016, compared to $4.9 million during the three months ended March 28, 2015. The increase was primarily due to organic growth of the OsteoAMP product line of $1.9 million attributable to increased volume and the inclusion of the BioStructures product line sales of $4.3 million for the three months ended April 2, 2016 compared to $0 for the three months ended March 28, 2015.
Adjusted EBITDA for each of our reportable segments wasis as follows:
| Three months ended | Change | |||||||||||||||
| (in thousands) | March 28, 2015 | April 2, 2016 | $ | % | ||||||||||||
Active Healing Therapies — U.S. | $ | 2,173 | $ | 9,006 | $ | 6,833 | 314.5% | |||||||||
Active Healing Therapies — International | 971 | 1,660 | 689 | 71.0% | ||||||||||||
Surgical | 1,686 | 2,546 | 860 | 51.0% | ||||||||||||
BMP expenses | (2,491 | ) | (2,535 | ) | (44 | ) | 1.8% | |||||||||
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| Nine Months Ended | Change | |||||||||||||||
| (in thousands, except for percentage) | September 26, 2020 | September 28, 2019 | $ | % | ||||||||||||
U.S. | $ | 42,800 | $ | 44,406 | $ | (1,606 | ) | (3.6 | )% | |||||||
International | $ | 1,489 | $ | 4,077 | $ | (2,588 | ) | (63.5 | )% | |||||||
Active Healing Therapies — U.S.
Adjusted EBITDA for our Active Healing Therapies — U.S. segment increased by $6.8decreased $1.6 million, or 314.5%3.6%, to $9.0 million during the three months ended April 2, 2016, comparedcomparable time periods. The decline was the result of decreased gross profit, excluding depreciation and amortization in cost of sales, due to $2.2the decrease in sales primarily resulting from the economic impact of COVID-19, which also led to lower expenses resulting from doing business virtually, lower compensation related expenses, as well as various other cost-reduction initiatives.
International
Adjusted EBITDA decreased $2.6 million, or 63.5%, during the three months ended March 28, 2015. This increasecomparable time periods. The decline was the result of decreased gross profit, excluding depreciation and amortization in cost of sales, resulting from the decrease in sales primarily due to higher net sales, lower employee healthcare plan costs and lower marketing costs. These increases were partially offset by higher coststhe economic impact of goods sold and higher sales commissions.
Active Healing Therapies — InternationalCOVID-19,
Adjusted EBITDA for our Active Healing Therapies — International segment increased $0.7 million, or 71.0%, to $1.7 million during the three months ended April 2, 2016, compared to $1.0 million during the three months ended March 28, 2015. This increase was primarily due to higher net sales, which was partially offset by higher costs of goods soldlower expenses resulting from doing business virtually, reduced compensation related expenses and higher sales commissions.various other cost-reduction initiatives.
Surgical
Adjusted EBITDA for our Surgical segment increased $0.9 million, or 51.0%, to $2.5 million during the three monthsYear ended April 2, 2016,December 31, 2019 compared to $1.7 million during the three monthsYear ended March 28, 2015. We acquired the BioStructures product line in November 2015. The three months ended April 2, 2016 was the first
full three months that our Surgical segment was included in operating results for both OsteoAMP and BioStructures. The three months ended March 28, 2015 included operating results from OsteoAMP only.
BMPDecember 31, 2018
BMP expense was flat at $2.5 million during the three months ended April 2, 2016, compared to $2.5 million during the three months ended March 28, 2015.
The following table sets forth the components of our consolidated statements of operations in dollars andfrom continuing operations as a percentage of net sales for the periods presented:
Year ended December 31, | ||||||||||||||||||||||||
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| (in thousands, except for percentages) | 2013 | 2014 | 2015 | |||||||||||||||||||||
Net sales | $ | 232,375 | 100.0% | $ | 242,893 | 100.0% | $ | 253,650 | 100.0% | |||||||||||||||
Cost of sales (including depreciation and amortization of $16,693, $19,622 and $22,474, respectively) | 71,372 | 30.7% | 75,792 | 31.2% | 74,544 | 29.4% | ||||||||||||||||||
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Gross profit | 161,003 | 69.3% | 167,101 | 68.8% | 179,106 | 70.6% | ||||||||||||||||||
Selling, general and administrative expenses | 150,370 | 64.7% | 147,058 | 60.5% | 148,441 | 58.5% | ||||||||||||||||||
Research and development expenses | 10,936 | 4.7% | 9,465 | 3.9% | 14,747 | 5.8% | ||||||||||||||||||
Change in fair value of contingent consideration | — | — | 1,590 | 0.7% | 19,493 | 7.7% | ||||||||||||||||||
Restructuring costs | — | — | — | — | 2,443 | 1.0% | ||||||||||||||||||
Depreciation and amortization | 7,765 | 3.3% | 8,968 | 3.7% | 10,570 | 4.2% | ||||||||||||||||||
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Operating income (loss) | (8,068 | ) | (3.5)% | 20 | 0.0% | (16,588 | ) | (6.5)% | ||||||||||||||||
Interest expense | 11,459 | 4.9% | 11,969 | 4.9% | 14,229 | 5.6% | ||||||||||||||||||
Other (income) expense | 713 | 0.3% | (596 | ) | (0.2)% | 1,154 | 0.5% | |||||||||||||||||
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Other expense, net | 12,172 | 5.2% | 11,373 | 4.7% | 15,383 | 6.1% | ||||||||||||||||||
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Loss before income taxes | (20,240 | ) | (8.7)% | (11,353 | ) | (4.7)% | (31,971 | ) | (12.6)% | |||||||||||||||
Income tax expense | 2,127 | 0.9% | 1,547 | 0.6% | 2,140 | 0.8% | ||||||||||||||||||
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Net loss | $ | (22,367 | ) | (9.6)% | $ | (12,900 | ) | (5.3)% | (34,111 | ) | (13.4)% | |||||||||||||
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| Years Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
Net sales | 100.0 | % | 100.0 | % | ||||
Cost of sales (including depreciation and amortization) | 26.7 | % | 26.4 | % | ||||
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Gross profit | 73.3 | % | 73.6 | % | ||||
Selling, general and administrative expense | 58.3 | % | 60.0 | % | ||||
Research and development expense | 3.3 | % | 2.5 | % | ||||
Change in fair value of contingent consideration | — | (0.2 | )% | |||||
Restructuring costs | 0.2 | % | 0.4 | % | ||||
Depreciation and amortization | 2.3 | % | 2.7 | % | ||||
Loss on impairment of intangible assets | — | 0.2 | % | |||||
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Operating income | 9.2 | % | 8.0 | % | ||||
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The following table presents a reconciliation of net lossincome from continuing operations to EBITDA and Adjusted EBITDA for the periods presented:
| Year ended December 31, | ||||||||||||
| (in thousands, except per share and share amounts) | 2013 | 2014 | 2015 | |||||||||
Net loss | $ | (22,367 | ) | $ | (12,900 | ) | $ | (34,111 | ) | |||
Interest expense, net | 11,459 | 11,969 | 14,229 | |||||||||
Income tax expense | 2,127 | 1,547 | 2,140 | |||||||||
Depreciation and amortization(a) | 24,458 | 28,820 | 33,078 | |||||||||
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EBITDA | 15,677 | 29,436 | 15,336 | |||||||||
Non-cash equity compensation(b) | 576 | 2,355 | 3,325 | |||||||||
Restructuring costs(c) | — | 1,183 | 2,645 | |||||||||
Contingent consideration(d) | — | 1,590 | 19,493 | |||||||||
Transition costs(e) | 4,690 | — | — | |||||||||
Other corporate expense(f) | — | — | 1,107 | |||||||||
Severance(g) | 4,542 | — | — | |||||||||
Inventory step-up(h) | — | 1,629 | 280 | |||||||||
Purchased in-process R&D-BMP(i) | 7,000 | — | — | |||||||||
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Adjusted EBITDA(j) | $ | 32,485 | $ | 36,193 | $ | 42,186 | ||||||
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| Years Ended December 31, | ||||||||
| (in thousands) | 2019 | 2018 | ||||||
Net income from continuing operations | $ | 8,113 | $ | 4,443 | ||||
Depreciation and amortization(a) | 30,316 | 29,238 | ||||||
Income tax expense (benefit) | 1,576 | 1,664 | ||||||
Interest expense | 21,579 | 19,171 | ||||||
Equity compensation(b) | 10,844 | 14,325 | ||||||
Contingent consideration(c) | — | (739 | ) | |||||
Loss on impairment of intangible assets(d) | — | 489 | ||||||
Losses associated with debt refinancing(e) | 367 | — | ||||||
Restructuring costs(f) | 575 | 1,373 | ||||||
Foreign currency impact(g) | 8 | 234 | ||||||
Other non-recurring costs(h) | 5,810 | 1,973 | ||||||
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Adjusted EBITDA | $ | 79,188 | $ | 72,171 | ||||
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| (a) | Includes |
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| (b) | Represents |
| (c) | Represents |
Represents |
| (e) | Represents charges with our 2019 debt refinancing that were included in selling, general and administrative expense on the |
| (f) | Represents costs related to a shift from direct to an indirect distribution model in our International business to improve performance. In addition, various international subsidiaries were dissolved and or merged into other Bioventus LLC |
| (g) | Foreign currency impact represents realized and unrealized gains and losses from fluctuations in foreign currency and is included in other (income) expense on the consolidated statements of |
Represents |
Net sales
| Years Ended December 31, | Change | |||||||||||||||
| (in thousands, except for percentage) | 2019 | 2018 | $ | % | ||||||||||||
U.S. | $ | 305,072 | $ | 282,895 | $ | 22,177 | 7.8 | % | ||||||||
International | 35,069 | 36,282 | (1,213 | ) | (3.3 | )% | ||||||||||
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Net Sales | $ | 340,141 | $ | 319,177 | $ | 20,964 | 6.6 | % | ||||||||
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Results of operationsU.S.
Net sales increased $22.2 million, or 7.8%, for the year ended December 31, 20152019, compared to the year ended December 31, 2014
Consolidated results of operations
Net sales
Net sales increased $10.8 million, or 4.5%, to $253.7 million during the fiscal year ended December 31, 2015, compared to $242.9 million during the fiscal year ended December 31, 2014. The increase was2018, primarily due to an increase of $26.7 million in sales of our treatments for OA joint pain and joint preservation due to multiple large contract wins executed in 2019, partially offset by net price decreases resulting from more products being sold under new contracts with major insurers at lower prices. Net sales from our Surgical segmentalso increased by $11.6 million due to higher sales volume of $21.6 million which was formed by the acquisition of OsteoAMP in October 2014,BGS as we added new distributors. These increases were partially offset by a decrease of $16.1 million in netlower sales of $8.3 million and $2.6 million in our Active Healing Therapies — International and U.S. segments, respectively.minimally invasive fracture treatment.
Cost of sales and gross marginInternational
Cost ofNet sales decreased $1.3 million,$1.2, or 1.7%3.3%, to $74.5 million duringfor the fiscal year ended December 31, 2015, compared to $75.8 million during fiscal year ended December 31, 2014. The decrease was primarily due to higher cost of sales in 2014 resulting from inventory subject to valuation step-up as required by purchase accounting related to the OsteoAMP acquisition, a $1.2 million inventory reserve associated with a plan to no longer sell a diagnostic ultrasound product and lower cost of sales in 2015 resulting from lower costs of Durolane. These decreases were partially offset by higher product intellectual property amortization which increased $2.9 million, or 14.8%, to $22.5 million in the fiscal year ended December 31, 2015, compared to $19.6 million in the fiscal year ended December 31, 2014, primarily as a result of the acquisition of OsteoAMP in October 2014. Gross margin for the fiscal year ended December 31, 2015 increased to 70.7%, compared to 69.3% for the fiscal year ended December 31, 2014. The increase in gross margin was primarily attributable to the increase in the proportion of net sales derived from our Surgical segment.
Selling, general and administrative expenses
SG&A expenses increased $1.4 million, or 0.9%, to $148.4 million during the fiscal year ended December 31, 2015, compared to $147.1 million during the fiscal year ended December 31, 2014. The increase was attributable to $12.7 million of increased SG&A expenses, including sales commissions, related to the inclusion of OsteoAMP for a full year and BioStructures for one month in our consolidated results of operations for 2015. This increase was partially offset by an $7.1 million decrease in SG&A expenses in the Active Healing Therapies — U.S. segment due to lower sales commissions as a result of lower sales2019, compared to the year ended December 31, 2014, a one-time legal settlement and related fees recorded in 2014 pertaining to a pre-acquisition legal matter shared equally with Smith & Nephew, and other cost savings initiatives in 2015. In addition, the Active Healing Therapies — International segment experienced a $4.4 million decrease in SG&A expenses2018, primarily due to cost savings initiativesconversion from direct to indirect sales channels in 2015several markets.
Gross profit and lower sales commissions as a result of lower salesgross margin
| Years Ended December 31, | Change | |||||||||||||||
| (in thousands, except for percentage) | 2019 | 2018 | $ | % | ||||||||||||
Gross profit | ||||||||||||||||
U.S. | $ | 224,957 | $ | 209,415 | $ | 15,542 | 7.4 | % | ||||||||
International | 24,249 | 25,594 | (1,345 | ) | (5.3 | )% | ||||||||||
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Total | $ | 249,206 | $ | 235,009 | $ | 14,197 | ||||||||||
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| Years Ended December 31, | Change | |||||||||||
| 2019 | 2018 | |||||||||||
Gross margin | ||||||||||||
U.S. | 73.7 | % | 74.0 | % | (0.3 | )% | ||||||
International | 69.1 | % | 70.5 | % | (1.4 | )% | ||||||
Total | 73.3 | % | 73.6 | % | (0.3 | )% | ||||||
U.S.
Gross profit increased $15.5 million, or 7.4%, for the year ended December 31, 2019, compared to the year ended December 31, 2014.2018, primarily due to the increase in sales volume. The decline in U.S. gross margin of 0.3 percentage points primarily resulted from the change in mix in products sold as well as higher amortization expense attributed to our products.
International
Gross profit decreased $1.3 million, or 5.3%, for the year ended December 31, 2019, compared to the year ended December 31, 2018, primarily due to the decrease in sales. The decline in International gross margin of 1.4 percentage points is primarily due to the increased proportional mix of sales made through distributors compared to our direct sales team.
Selling, general and administrative expense
| Years Ended December 31, | Change | |||||||||||||||
| (in thousands, except for percentage) | 2019 | 2018 | $ | % | ||||||||||||
Selling, general and administrative expense | $ | 198,475 | $ | 191,672 | $ | 6,803 | 3.5 | % | ||||||||
Selling, general and administrative expense increased $6.8 million, or 3.5%, for the year ended December 31, 2019, compared to the year ended December 31, 2018, due to:
• Increase in strategic transactions and consulting expenses | $4.9 million | |
• Increase in compensation related expenses | $1.2 million |
Research and development expensesexpense
R&D expenses
| Years Ended December 31, | Change | |||||||||||||||
| (in thousands, except for percentage) | 2019 | 2018 | $ | % | ||||||||||||
Research and development expense | $ | 11,055 | $ | 8,095 | $ | 2,960 | 36.6 | % | ||||||||
Research and development expense increased $5.3$3.0 million or 55.8%,36.6% primarily due to $14.7 million during the fiscal year ended December 31, 2015, compared to $9.5 million during the fiscal year ended December 31, 2014. The increase was primarily attributable to increased preclinical costs of $4.6 million associated withDevelopment Agreement for MOTYS and our next-generation BMP product candidates plus other increased R&D expenses of $0.7 million.B.O.N.E.S. clinical study.
Change in fair value of contingent consideration
Change
| Years Ended December 31, | Change | |||||||||||||||
| (in thousands, except for percentage) | 2019 | 2018 | $ | % | ||||||||||||
Change in fair value of contingent consideration | $ | — | $ | (739 | ) | $ | 739 | 100.0 | % | |||||||
There was no change in the fair value of contingent consideration was $19.5 million during the fiscal year ended December 31, 2015, compared to $1.6 million during the fiscal year ended December 31, 2014.in 2019. The change in fair value of contingent consideration duringfor the fiscal year ended December 31, 2015 is attributable to an increase2018 was primarily driven by lower forecasted sales in
expected OsteoAMP net sales and our estimate of future cash earn-out payments payable to Advanced Biologics over the term of the supply agreement, as compared to the amounts that we forecasted at the time we completed the OsteoAMP acquisition.
Restructuring costs
| Years Ended December 31, | Change | |||||||||||||||
| (in thousands, except for percentage) | 2019 | 2018 | $ | % | ||||||||||||
Restructuring costs | $ | 575 | $ | 1,373 | $ | (798 | ) | (58.1 | )% | |||||||
Restructuring costs were $2.4decreased $0.8 million, duringor 58.1%, for the fiscal year ended December 31, 2015. Restructuring costs2019, compared to the year ended December 31, 2018. The charges in 2015 were primarily attributable2019 and 2018 resulted from a reduction in headcount and the closing of offices in certain countries as we shifted to our decisionan indirect distribution model with more of the expense incurred in January 2015 to discontinue sales of a diagnostic ultrasound product and related sales force reorganization. 2015 restructuring costs also include restructuring and relocation of certain U.S. finance functions and headcount reductions in our international business to improve operating efficiency.2018.
Depreciation and amortization
| Years Ended December 31, | Change | |||||||||||||||
| (in thousands, except for percentage) | 2019 | 2018 | $ | % | ||||||||||||
Depreciation and amortization | $ | 7,908 | $ | 8,615 | $ | (707 | ) | (8.2 | )% | |||||||
Depreciation and amortization during 2019 remained consistent with 2018 as it slightly decreased $0.7 million, or 8.2%, during the comparable time periods.
Loss on impairment of intangible assets
During 2018, we decided to stop selling a specific BGS product and fully wrote off the related intangible asset, resulting in an impairment charge of $0.5 million.
Other expense
| Years Ended December 31, | Change | |||||||||||||||
| (in thousands, except for percentage) | 2019 | 2018 | $ | % | ||||||||||||
Interest expense | $ | 21,579 | $ | 19,171 | $ | 2,408 | 12.6 | % | ||||||||
Other (income) expense | $ | (75 | ) | $ | 226 | $ | (301 | ) | NM | |||||||
Interest expense increased $1.6$2.4 million, or 17.9%12.6%, to $10.6 million duringfor the fiscal year ended December 31, 2015,2019, compared to $9.0 million during the fiscal year ended December 31, 2014. The increase was primarily attributable to amortization of intangible assets associated with the OsteoAMP acquisition in October 2014.
Interest expense
Interest expense increased $2.3 million, or 18.9%, to $14.2 million during the fiscal year ended December 31, 2015, compared to $12.0 million during the fiscal year ended December 31, 2014. Interest expense in 2014 was lower2018, primarily due to the December 2019 refinancing resulting in a write-offof various deferred loan costs and discount related to the Smith & Nephew debt in October 2014, which resulted in the elimination of the unamortized loan premium.2016 Credit Agreement.
Other (income) expense
Other (income) expense increased $1.8 million to an expense of $1.2 million during the fiscal year ended December 31, 2015, compared to an income of $(0.6) million during the fiscal year ended December 31, 2014. The increase was attributable to foreign currency fluctuations.
Income tax expense
| Years Ended December 31, | Change | |||||||||||||||
| (in thousands, except for percentage) | 2019 | 2018 | $ | % | ||||||||||||
Income tax expense | $ | 1,576 | $ | 1,664 | $ | (88 | ) | (5.3 | )% | |||||||
Effective tax rate | 16.3 | % | 27.2 | % | (10.9 | )% | ||||||||||
Income tax expense increased $0.6 million to $2.1 million duringremained consistent year over year. Our change in effective tax rate is the fiscal year ended December 31, 2015, compared to $1.5 million during the fiscal year ended December 31, 2014. Incomeresult of Bioventus LLC’s pass-through structure for U.S. income tax expensepurposes, while being treated as taxable in 2014 was lower than 2015 primarily due to a $0.9 million state tax refund received in 2014 related to the move of our headquarters from Tennessee to North Carolina in 2012.certain states and various foreign jurisdictions as well as for certain subsidiaries.
Segment resultsAdjusted EBITDA
The following table sets forth for the periods indicated our net sales by operating segment, with changes in net sales between the specific periods expressed in dollar amounts and as a percentage.
| Year ended December 31, | Change | |||||||||||||||
| (in thousands) | 2014 | 2015 | $ | % | ||||||||||||
Active Healing Therapies — U.S. | $ | 194,568 | $ | 192,014 | $ | (2,554 | ) | (1.2)% | ||||||||
Active Healing Therapies — International | 44,175 | 35,847 | (8,328 | ) | (18.9)% | |||||||||||
Surgical | 4,150 | 25,789 | 21,639 | 521.4% | ||||||||||||
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Active Healing Therapies — U.S.
Net sales for our Active Healing Therapies — U.S. segment decreased by $2.6 million, or 1.2%, to $192.0 million during the fiscal year ended December 31, 2015, compared to $194.6 million during the fiscal year ended
December 31, 2014. The decrease was primarily due to the decision in January 2015 to discontinue sales of a diagnostic ultrasound product which accounted for $3.9 million in net sales in 2014 and $0 in 2015.
Active Healing Therapies — International
Net sales for our Active Healing Therapies — International segment decreased by $8.3 million, or 18.9%, to $35.8 million during the fiscal year ended December 31, 2015, compared to $44.2 million during the fiscal year ended December 31, 2014. The decrease was due to unfavorable foreign currency translation adjustments of $5.7 million, $1.1 million related to the termination of our Russian distributor relationship and $1.5 million due to increased competition for our Exogen system and Durolane and increased pressure from third-party payers on coverage limits.
Surgical
Net sales for our Surgical segment increased by $21.6 million, or 521.4%, to $25.8 million during the fiscal year ended December 31, 2015, compared to $4.2 million during the fiscal year ended December 31, 2014. We acquired OsteoAMP in October 2014, therefore the fiscal year ended December 31, 2015 was the first full year of operating results for our Surgical segment compared to three months in fiscal 2014.
Adjusted EBITDA for each of our reportable segments wasis as follows:
| Year ended December 31, | Change | |||||||||||||||
| (in thousands) | 2014 | 2015 | $ | % | ||||||||||||
Active Healing Therapies — U.S. | $ | 33,466 | $ | 40,161 | $ | 6,695 | 20.0% | |||||||||
Active Healing Therapies — International | 7,778 | 6,743 | (1,035 | ) | (13.3)% | |||||||||||
Surgical | 1,631 | 6,591 | 4,960 | 304.1% | ||||||||||||
BMP expenses | (6,682 | ) | (11,309 | ) | (4,627 | ) | (69.2)% | |||||||||
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| Years Ended December 31, | Change | |||||||||||||||
| (in thousands, except for percentage) | 2019 | 2018 | $ | % | ||||||||||||
U.S. | $ | 71,673 | $ | 67,480 | $ | 4,193 | 6.2 | % | ||||||||
International | $ | 7,515 | $ | 4,691 | $ | 2,824 | 60.2 | % | ||||||||
Active Healing Therapies — U.S.
Adjusted EBITDA for our Active Healing Therapies — U.S. segment increased by $6.7 million,$4.2, or 20.0%6.2%, to $40.2 million during the fiscal year ended December 31, 2015, compared to $33.5 million duringcomparable time periods. The increase was primarily the fiscal year ended December 31, 2014. The netresult of the increase in gross profit, excluding depreciation and amortization in cost of sales, decrease of $2.6 millionresulting from the prior year was offset by lower costs of goods sold, lower sales commissions, SG&A cost savings initiatives and lower legal and professional costs during the fiscal year ended December 31, 2014 relating to the settlement of a pre-acquisition legal matter shared equally with Smith & Nephew.
Active Healing Therapies — International
Adjusted EBITDA for our Active Healing Therapies — International segment decreased $1.0 million, or 13.3%, to $6.7 million during the fiscal year ended December 31, 2015, compared to $7.8 million during the fiscal year ended December 31, 2014. The net sales decrease of $8.3 million from the prior yearincrease in sales. This increase was partially offset by lower cost of goods sold, lower salesthe related increase in commissions, higher compensation expenses, increased consulting and SG&A savings initiatives.legal expenses related to improving certain business processes.
SurgicalInternational
Adjusted EBITDA for our Surgical segment increased $5.0 million,$2.8, or 304.1%60.2%, to $6.6 million during the fiscal year ended December 31, 2015, compared to $1.6 million during the fiscal year ended December 31, 2014. We acquired the OsteoAMP product line in October 2014, therefore the fiscal year ended December 31, 2015 was the first full year of operating results for our Surgical segment compared to three months in fiscal 2014. Additionally, Adjusted EBITDA for fiscal 2015 included one month of operating results from our BioStructures acquisition.
BMP
BMP expense increased $4.6 million to $11.3 million during the fiscal year ended December 31, 2015, compared to $6.7 million during the fiscal year ended December 31, 2014. During 2015, we significantly advanced the program through the design and development of a new protein molecule and advanced related carrier technology that enables a more targeted, controlled release of BMP.
Results of operations for the year ended December 31, 2014 compared to the year ended December 31, 2013
Consolidated results of operations
Net sales
Net sales increased $10.5 million, or 4.5%, to $242.9 million during the fiscal year ended December 31, 2014, compared to $232.4 million during the fiscal year ended December 31, 2013. The increase was attributable to an increase of $8.9 million from our Active Healing Therapies — International segment, partially offset by a decrease of $2.6 million from our Active Healing Therapies — U.S. segment. An increase of $4.2 million was attributable to our Surgical segment that was formed with the acquisition of the OsteoAMP product line in October 2014.
Cost of sales and gross margin
Cost of sales increased $4.4 million, or 6.2%, to $75.8 million during the fiscal year ended December 31, 2014, compared to $71.4 million during the fiscal year ended December 31, 2013.comparable time periods. The increase was primarily attributable to an increasethe result of $2.9 millionthe restructuring that began in amortization expenselate 2018 resulting in 2014 and the inclusion of cost of sales from OsteoAMP, which we acquired in October 2014,lower personnel expenses and a $1.2 million inventory reserve associated with a plandecline in various other costs due to no longer sell a diagnostic ultrasound product.the closure of offices. These increases in Adjusted EBITDA were partially offset by a reductionthe decrease in gross profit, excluding depreciation and amortization in cost of sales, for Durolane as a resultresulting from the decrease in and mix of the acquisition of certain Durolane assets outside the United States in 2013. Gross margin for the fiscal years ended December 31, 2014 and December 31, 2013 were 69.3% and 68.8%, respectively.
Selling, general and administrative expenses
SG&A expenses decreased $3.3 million, or 2.2%, to $147.1 million during the fiscal year ended December 31, 2014, compared to $150.4 million during the fiscal year ended December 31, 2013. The decrease was primarily attributable to lower transition costs of $4.6 million and lower severance costs of $4.5 million. These decreases were partially offset by higher SG&A expenses in 2014, including $1.8 million relating to the OsteoAMP acquisition in October 2014, $1.0 million for a legal settlement and related fees pertaining to a pre-acquisition legal matter shared equally with Smith & Nephew, and higher sales commissions as a result of increased sales in our Active Healing Therapies — International segment. In addition, SG&A expenses were higher in 2014 due to the transitionconversion from direct to a company-operatedindirect sales force arrangementchannels in the International segment from the distribution arrangement with Smith & Nephew established with the spin-out from Smith & Nephew in May 2012. Under the distribution arrangement, Smith & Nephew marketed and sold products outside the United States on our behalf until the completion of the transition to our sales force in 2014.several markets.
Research and development expenses
R&D expenses decreased $1.5 million, or 13.5%, to $9.5 million during the fiscal year ended December 31, 2014, compared to $10.9 million during the fiscal year ended December 31, 2013. In 2013, we paid Pfizer an initial upfront cash payment for an exclusive, worldwide license subject to certain field of use and other restrictions to certain parts of Pfizer’s BMP portfolio, which was recorded as in-process R&D expenses in 2013. Excluding this expense of $7.0 million in 2013, R&D expenses increased by $5.6 million during the fiscal year ended December 31, 2014. This increase was primarily attributable to a $6.0 million increase in R&D expenses related to the development of our BMP product candidates.
Change in fair value of contingent consideration
Change in fair value of contingent consideration was $1.6 million during the fiscal year ended December 31, 2014, compared to $0 during the fiscal year ended December 31, 2013. The change in fair value of contingent consideration during the fiscal year ended December 31, 2014, is attributable to an increase in expected OsteoAMP net sales and our estimate of future cash earn-out payments payable to Advanced Biologics over the term of the supply agreement, as compared to the amounts that we forecasted at the time we completed the OsteoAMP acquisition.
Depreciation and amortization
Depreciation and amortization increased $1.2 million, or 15.5%, to $9.0 million during the fiscal year ended December 31, 2014, compared to $7.8 million during the fiscal year ended December 31, 2013. The increase was primarily attributable to depreciation of fixed assets brought into service in 2014 and amortization of intangible assets associated with the OsteoAMP acquisition in October 2014.
Interest expense
Interest expense increased $0.5 million, or 4.5%, to $12.0 million during the fiscal year ended December 31, 2014, compared to $11.5 million during the fiscal year ended December 31, 2013 primarily due to fluctuations in the amount of our outstanding indebtedness and changes in the applicable interest rate.
Other (income) expense
Other (income) expense improved by $1.3 million, or 184%, to income of $0.6 million during the fiscal year ended December 31, 2014, compared to an expense of $0.7 million during the fiscal year ended December 31, 2013. The improvement was attributable to foreign currency fluctuations.
Income tax expense
Income tax expense decreased $0.6 million, or 27.2%, to $1.5 million during the fiscal year ended December 31, 2014, compared to $2.1 million during the fiscal year ended December 31, 2013. The decrease was primarily due to a $0.9 million state tax refund received in 2014 related to the move of our headquarters from Tennessee to North Carolina in 2012.
Segment results
The following table sets forth for the periods indicated our net sales by operating segment, with changes in net sales between the specific periods expressed in dollar amounts and as a percentage.
| Year ended December 31 | Change | |||||||||||||||
| (in thousands) | 2013 | 2014 | $ | % | ||||||||||||
| (unaudited) | ||||||||||||||||
Active Healing Therapies — U.S. | $ | 197,118 | $ | 194,568 | $ | (2,550 | ) | (1.3)% | ||||||||
Active Healing Therapies — International | 35,257 | 44,175 | 8,918 | 25.3% | ||||||||||||
Surgical | — | 4,150 | 4,150 | NM | ||||||||||||
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Active Healing Therapies — U.S.
Net sales for our Active Healing Therapies — U.S. segment decreased by $2.6 million, or 1.3%, to $194.6 million during the fiscal year ended December 31, 2014, compared to $197.1 million during the fiscal year ended December 31, 2013. The decrease was primarily due to declining sales of the diagnostic ultrasound product to $3.9 million in 2014 from $5.1 million in 2013. Sales of diagnostic ultrasound were discontinued in January 2015.
Active Healing Therapies — International
Net sales for our Active Healing Therapies — International segment increased by $8.9 million, or 25.3%, to $44.2 million during the fiscal year ended December 31, 2014, compared to $35.3 million during the fiscal year ended December 31, 2013. The increase was primarily attributable to the completion of the transition of all of the international assets from Smith & Nephew during 2014. A distribution arrangement with Smith & Nephew was established with the spin-out from Smith & Nephew in May 2012. Under the distribution arrangement, Smith & Nephew marketed and sold products outside the United States on our behalf until the completion of the transition to our sales force in 2014.
Surgical
Net sales for our Surgical segment increased by $4.2 million during the fiscal year ended December 31, 2014, compared to $0 million during the fiscal year ended December 31, 2013 due to the acquisition of OsteoAMP in October 2014, which formed our Surgical business.
Adjusted EBITDA for each of our reportable segments was as follows:
| Year ended December 31, | Change | |||||||||||||||
| (in thousands) | 2013 | 2014 | $ | % | ||||||||||||
Active Healing Therapies — U.S. | $ | 32,557 | $ | 33,466 | $ | 909 | 2.8% | |||||||||
Active Healing Therapies — International | 578 | 7,778 | 7,200 | 1,245.7% | ||||||||||||
Surgical | — | 1,631 | 1,631 | NM | ||||||||||||
BMP expenses | (7,650 | ) | (6,682 | ) | 968 | 12.6% | ||||||||||
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Active Healing Therapies — U.S.
Adjusted EBITDA for our Active Healing Therapies — U.S. segment increased by $0.9 million, or 2.8%, to $33.5 million during the fiscal year ended December 31, 2014, compared to $32.6 million during the fiscal year ended December 31, 2013. The sales decrease of $2.5 million from the prior year was offset by lower costs of goods sold, lower sales commissions, SG&A cost savings initiatives and lower R&D expenses.
Active Healing Therapies — International
Adjusted EBITDA for our Active Healing Therapies — International segment of $7.8 million during the fiscal year ended December 31, 2014, increased by $7.2 million, when compared to $0.6 million during the fiscal year ended December 31, 2013. The increase was primarily attributable to increased sales and earnings related to the transition of all of the intangible assets from Smith & Nephew and the completion of the transition in 2014 from the distribution arrangement with Smith & Nephew to a company-operated sales force arrangement in our International segment. The distribution arrangement with Smith & Nephew was initially established with the spin-out from Smith & Nephew in May 2012. Under the distribution arrangement, Smith & Nephew marketed and sold products outside the United States on our behalf until the completion of the transition to our sales force in 2014. In addition, the acquisition of certain Durolane assets outside the United States resulted in lower cost of goods sold for Durolane in 2014.
Surgical
Adjusted EBITDA for our Surgical segment was $1.6 million during the fiscal year ended December 31, 2014, compared to $0 during the fiscal year ended December 31, 2013. We acquired the OsteoAMP product line in October 2014, therefore there were no Surgical operating results or Adjusted EBITDA during the fiscal year ended December 31, 2013.
BMP
BMP expense decreased $1.0 million, or 12.6%, to $6.7 million during the fiscal year ended December 31, 2014, compared to $7.7 million during the fiscal year ended December 31, 2013. During 2013, we paid Pfizer an upfront cash payment for an exclusive, worldwide license subject to certain field of use and other restrictions to certain parts of Pfizer’s BMP portfolio. Excluding the initial upfront payment, BMP activity increased significantly during 2014, resulting in additional R&D costs of $6.0 million when compared to the fiscal year ended December 31, 2013.
Seasonality and quarterly results of operations data
Our business is seasonal in nature primarily due to the variability of the U.S. healthcare insurance industry. The majority of U.S. healthcare insurance plans renew annually at the beginning of January. As a result of individuals changing insurance companies and the reset of insurance plan deductibles, our quarterly net sales are typically lower in the first quarter of the year and highest in the fourth quarter. Additionally, our results from quarter to quarter may be influenced by a number of factors, including, but not limited to: the number of available selling days, which can be impacted by holidays; the mix of products sold; the geographic mix of where products are sold; the demand for our products and the products of our competitors; the timing of or failure to obtain regulatory approvals or clearances for products; increased competition; the timing of customer orders; inventory write-offs and write-downs; costs, benefits and timing of new product introductions; the availability and cost of components and supplies and fluctuations in foreign currency exchange rates.
The following table sets forth our unaudited quarterly consolidated statements of operations data and other data for each of the nine most recent quarters in the period ended April 2, 2016. We have prepared the quarterly consolidated results of operations data on a consistent basis with the audited consolidated financial statements included elsewhere in this prospectus. In the opinion of management, the quarterly results of operations data reflects all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of this data. The consolidated statements of operations data should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this prospectus. The results of historical periods are not necessarily indicative of results for a full year or for any future period.
| Three months ended | ||||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | March 29, 2014 | June 28, 2014 | September 27, 2014 | December 31, 2014 | March 28, 2015 | June 27, 2015 | September 26, 2015 | December 2015 | April 2, 2016 | |||||||||||||||||||||||||||
Net sales | $ | 50,820 | $ | 61,549 | $ | 60,899 | $ | 69,625 | $ | 53,362 | $ | 65,794 | $ | 63,333 | $ | 71,161 | $ | 65,402 | ||||||||||||||||||
Cost of sales (including depreciation and amortization) | 15,164 | 18,824 | 18,536 | 23,269 | 16,807 | 19,413 | 18,139 | 20,185 | 19,235 | |||||||||||||||||||||||||||
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Gross profit | 35,656 | 42,725 | 42,363 | 46,356 | 36,555 | 46,381 | 45,194 | 50,976 | 46,167 | |||||||||||||||||||||||||||
Selling, general and administrative | 34,609 | 35,211 | 36,927 | 40,311 | 37,270 | 36,909 | 35,272 | 38,990 | 40,184 | |||||||||||||||||||||||||||
R&D expenses | 1,378 | 1,984 | 2,782 | 3,321 | 2,966 | 2,922 | 4,113 | 4,746 | 3,718 | |||||||||||||||||||||||||||
Change in contingent consideration | — | — | — | 1,590 | 8,971 | 3,099 | 1,895 | 5,528 | 1,301 | |||||||||||||||||||||||||||
Restructuring costs | — | — | — | — | 1,076 | 408 | 128 | 831 | 172 | |||||||||||||||||||||||||||
Depreciation and amortization | 2,094 | 2,144 | 2,130 | 2,600 | 2,571 | 2,566 | 2,720 | 2,713 | 2,830 | |||||||||||||||||||||||||||
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Operating | (2,425 | ) | 3,386 | 524 | (1,466 | ) | (16,299 | ) | 477 | 1,066 | (1,832 | ) | (2,038 | ) | ||||||||||||||||||||||
Interest expense | 3,192 | 3,392 | 3,442 | 1,943 | 3,854 | 3,258 | 3,711 | 3,406 | 3,555 | |||||||||||||||||||||||||||
Other (income) expense | (63 | ) | 101 | (891 | ) | 257 | 496 | 523 | 27 | 108 | (147 | ) | ||||||||||||||||||||||||
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Other expense, net | 3,129 | 3,493 | 2,551 | 2,200 | 4,350 | 3,781 | 3,738 | 3,514 | 3,408 | |||||||||||||||||||||||||||
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Loss before income taxes | (5,554 | ) | (107 | ) | (2,027 | ) | (3,666 | ) | (20,649 | ) | (3,304 | ) | (2,672 | ) | (5,346 | ) | (5,446 | ) | ||||||||||||||||||
Income tax expense (benefit) | 362 | 663 | (153 | ) | 675 | 369 | 781 | 258 | 732 | 603 | ||||||||||||||||||||||||||
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Net loss | $ | (5,916 | ) | $ | (770 | ) | $ | (1,874 | ) | $ | (4,341 | ) | $ | (21,018 | ) | $ | (4,085 | ) | $ | (2,930 | ) | $ | (6,078 | ) | (6,049 | ) | ||||||||||
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Liquidity and capital resourcesCapital Resources
Overview
Our principal liquidity needs have historically been for acquisitions, working capital, R&D,research and development, clinical trials, and capital expenditures. We expect these needs to continue as we develop and commercialize new products hire additional direct sales representatives and further our expansion into international markets. Over the next several years, we expect to increase our R&D expenses for our next-generation BMP product candidates as we undergo clinical trials to demonstrate the safety and efficacy of the product. To date, we have funded our operations primarily with cash flow from operations and borrowings under our revolving credit facility.
As of April 2, 2016, we had $6.2 million in cash and cash equivalents and $6.7 million of working capital, compared to $5.0 million and $11.3 million, respectively at December 31, 2015 and compared to $15.8 million and $27.3 million, respectively, on December 31, 2014. As of April 2, 2016, we had outstanding indebtedness of $19.5 million under our
revolving credit facility (leaving availability of $20.5 million) and $163.5 million under our term loan facilities. Accessing availability under our revolving credit facility is subject to compliance with the financial covenants and other customary conditions precedent. Pursuant to the terms of the first lien term loan facilities, we are required to make quarterly payments of between $1.4 million and $5.8 million up to September 2019, with the remaining balance of $40.3 million due on October 10, 2019, the maturity date of the first lien term loan facilities. The aggregate principal amount of $60.0 million under our second lien term facility is due in full on April 10, 2020.
We believe that our existing cash and cash equivalents, borrowing capacity under our revolving credit facility, cash flow from operations and net proceeds from this offering will be sufficient in the aggregateenough to meet our anticipated cash requirements for at least the next twelve months. We may however, require additional liquidity as we continue to execute our business strategy. OurNegative impacts to our liquidity may be negatively impacted as a result ofwould include a decline in sales of our products, including declines due to changes in our
customers’ ability to obtain third-party coverage and reimbursement for procedures that useutilize our products, increased pricing pressures resulting from intensifying competition and cost increases, in addition toas well as general economic and industry factors. We anticipate that to the extent that we require additional liquidity, itwe will be fundedobtain funding through the incurrence of other indebtedness, additional equity financings or a combination of these potential sources of liquidity. In addition, we may raise additional funds to finance future cash needs through receivables or royalty financings or corporate collaboration and licensing arrangements. If we raise additional funds by issuing equity securities or convertible debt, our stockholders will experience dilution. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish valuable rights to our products, future revenue streams or product candidates, or to grant licenses on terms that may not be favorable to us. The covenants under our credit facilitiesagreement limit our ability to obtain additional debt financing. We cannot be certain that additional funding will be available on acceptable terms, or at all. Any failure to raise capital in the future could have a negative impact on our financial condition and our ability to pursue our business strategies.
After the completion of this offering, Bioventus Inc. will be a holding company and will have no material assets other than its ownership of LLC Interests. Bioventus Inc. has no independent means of generating revenue. The limited liability company agreement of Bioventus LLC that will be in effect at the time of this offering provides for the payment of certain distributions to the Continuing LLC Owner and Bioventus Inc. in amounts sufficient to cover the income taxes imposed on such members with respect to the allocation of taxable income from Bioventus LLC as well as to cover Bioventus Inc.’s obligations under the Tax Receivable Agreement. Additionally, in the event Bioventus Inc. declares any cash dividend, we intend to cause Bioventus LLC to make distributions to Bioventus Inc., in an amount sufficient to cover such cash dividends declared by us. Deterioration in the financial condition, earnings, or cash flow of Bioventus LLC and its subsidiaries for any reason could limit or impair their ability to pay such distributions. In addition, the terms of our financing arrangements, including the 2019 Credit Agreement, contain covenants that may restrict Bioventus LLC and its subsidiaries from paying such distributions, subject to certain exceptions. Further, Bioventus LLC is generally prohibited under Delaware law from making a distribution to a member to the extent that, at the time of the distribution, after giving effect to the distribution, liabilities of Bioventus LLC (with certain exceptions), as applicable, exceed the fair value of its assets. Subsidiaries of Bioventus LLC are generally subject to similar legal limitations on their ability to make distributions to Bioventus LLC. See “Dividend Policy” and “Risk Factors—Risks Related to Our Organizational Structure—Our principal asset after the completion of this offering will be our interest in Bioventus LLC, and, accordingly, we will depend on distributions from Bioventus LLC to pay our taxes and expenses, including payments under the Tax Receivable Agreement. Bioventus LLC’s ability to make such distributions may be subject to various limitations and restrictions.” If we do not have sufficient funds to pay taxes or other liabilities or to fund our operations, we may have to borrow funds, which could materially adversely affect our liquidity and financial condition and subject us to various restrictions imposed by any such lenders. To the extent that we are unable to make payments under the Tax Receivable Agreement 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 Tax Receivable Agreement and therefore accelerate payments due under the Tax Receivable Agreement. See “Certain relationships and related party transactions—Tax Receivable Agreement.” In addition, if Bioventus LLC does not have sufficient funds to make distributions, our ability to declare and pay cash dividends will also be restricted or impaired. See “Risk Factors—Risks related to this offering and ownership of our Class A common stock” and “Dividend policy.”
In addition, under the Tax Receivable Agreement, we will be 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 Bioventus LLC resulting from (a) any future redemptions or exchanges of LLC Interests described under “Certain relationships and related party transactions—Bioventus LLC Agreement—LLC Interest Redemption Right,” and (b) certain distributions (or deemed distributions) by Bioventus LLC and (2) certain other tax benefits arising from payments under the Tax Receivable Agreement. We expect the amount of the cash payments that we will be required to make under the Tax Receivable Agreement will be significant. The actual amount and timing of any payments under the Tax Receivable Agreement 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 Tax Receivable Agreement will generally reduce the amount of overall cash flow that might have otherwise been available to us. See “Risk Factors—Risks related to our organizational structure and the Tax Receivable Agreement—The Tax Receivable Agreement with the Continuing LLC Owner requires us to make cash payments to it in respect of certain tax benefits to which we may become entitled, and we expect that the payments we will be required to make could be significant.”
Nine Months Ended September 26, 2020 compared to the Nine Months ended September 28, 2019
Cash and cash equivalents, as of September 26, 2020, totaled $72.5 million compared to $64.5 million at December 31, 2019. The increase in cash was primarily due to the following:
| Nine Months Ended | Change | |||||||||||||||
(in thousands) | September 26, 2020 | September 28, 2019 | $ | % | ||||||||||||
Consolidated statement of cash flow data: | ||||||||||||||||
Net cash provided by (used in): | ||||||||||||||||
Operating activities from continuing operations | $ | 46,752 | $ | 21,329 | $ | 25,423 | 119.2 | % | ||||||||
Investing activities from continuing operations | (18,961 | ) | (7,348 | ) | (11,613 | ) | 158.0 | % | ||||||||
Financing activities | (19,691 | ) | (11,640 | ) | (8,051 | ) | 69.2 | % | ||||||||
Discontinued operations | (228 | ) | (1,663 | ) | 1,435 | (86.3 | )% | |||||||||
Effect of exchange rate changes on cash and cash equivalents | 86 | 171 | (85 | ) | (49.7 | )% | ||||||||||
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Net change in cash and cash equivalents | $ | 7,958 | $ | 849 | $ | 7,109 | NM | |||||||||
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Operating Activities
Cash flows — threefrom operating activities from continuing operations increased $25.4 million during the nine months ended September 26, 2020 compared to the nine months ended September 28, 2019 due to collections on accounts receivables staying strong while selling, general and administrative expenses declined. We experienced lower travel expense payments resulting from the near halting of all travel, a reduction in compensation related expenses due to the decline in sales and increased cash savings from cost cutting measures. We also received stimulus payments from government entities while we purchased less inventory due to the decline in sales. In addition, our interest expense was significantly lower during the nine months ended September 26, 2020 due to the December 2019 refinancing.
Investing Activities
Cash flows used in investing activities increased $11.6 million during the nine months ended September 26, 2020 compared to the nine months ended September 28, 2019 primarily due to the $16.6 million payment in connection with the 2020 CartiHeal investment partially offset by the $6.0 million purchase of distribution rights during the nine months ended September 28, 2019.
Financing Activities
Cash flows used in financing activities increased $8.1 million during the nine months ended September 26, 2020 compared to the nine months ended September 28, 2019 primarily due to the $5.7 million increase in
distribution to members as well as the $2.4 million increase in debt payments.
Credit Facilities
As of September 26, 2020, there had been no material changes to our credit facilities as disclosed in our audited consolidated financial statements for the year ended December 31, 2019. In March 2020, as a precautionary measure and in order to increase our cash position and preserve financial flexibility in view of the uncertainty resulting from the COVID-19 pandemic, we drew down $49.0 million on our revolving credit facility. On September 24, 2020, we repaid all borrowings outstanding under our revolving credit facility.
Other
For information regarding Commitments and Contingencies, see Note 8 to the September 26, 2020 Notes to the Unaudited Condensed Consolidated Financial Statements contained herein.
Year ended December 31, 2019 compared to the Year ended December 31, 2018
| Three months ended | ||||||||
| (in thousands) | March 28, 2015 | April 2, 2016 | ||||||
Net cash (used in) provided by: | ||||||||
Operating activities | $ | (3,821 | ) | $ | 2,162 | |||
Investing activities | (306 | ) | (6,638 | ) | ||||
Financing activities | 3,852 | 5,495 | ||||||
Effect of exchange rate changes on cash and cash equivalents | (470 | ) | 197 | |||||
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Net increase (decrease) in cash and cash equivalents | $ | (745 | ) | $ | 1,216 | |||
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Consolidated statement of cash flow data: | ||||||||||||||||
Net cash provided by (used in): | ||||||||||||||||
Net cash provided by operating activities from continuing operations | $ | 42,545 | $ | 52,310 | $ | (9,765 | ) | (18.7 | )% | |||||||
Net cash used in investing activities from continuing operations | (7,912 | ) | (6,061 | ) | (1,851 | ) | (30.5 | )% | ||||||||
Net cash used in financing activities | (10,951 | ) | (13,256 | ) | 2,305 | 17.4 | % | |||||||||
Net cash used in discontinued operations | (1,832 | ) | (7,163 | ) | 5,331 | 74.4 | % | |||||||||
Effect of exchange rate changes on cash and cash equivalents | (104 | ) | (160 | ) | 56 | 35.0 | % | |||||||||
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Net change in cash and cash equivalents | $ | 21,746 | $ | 25,670 | $ | (3,924 | ) | (15.3 | )% | |||||||
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Net cash provided by operatingOperating activities
Net cash provided by operating activities consists primarily of net loss adjusted for certain non-cash items (including depreciation and amortization, change in fair value of contingent consideration, in-kind interest expense, profits interest compensation, foreign currency adjustments, provisions for doubtful accounts and amortization of debt premium and capitalized loan fees), and the effect of changes in working capital and other activities.
Net cash provided by operating activities increased $6.0 million, or 156.6%, to $2.2from continuing operations decreased $9.8 million during the three monthsyear ended April 2, 2016 compared to net cash used by operating activities of $3.8 million during the three months ended March 28, 2015. For the first three months of 2016, the net loss of $6.0 million as adjusted for aggregate non-cash items of $11.7 million was $5.7 million. This was an improvement of $6.8 million when compared to $(1.1) million in the first three months of 2015, which is comprised of the net loss of $21.0 million as adjusted for aggregate non-cash items of $19.9 million. This improvement was primarily due to improved earnings in the Active Healing Therapies — U.S., Active Healing Therapies – International and Surgical segments. Other elements of net cash provided by operating activities decreased by $0.8 million during the three months ended April 2, 2016December 31, 2019 compared to the same period in the prior year ended December 31, 2018. The decrease was due to the timing of cash receipts and cash payments.payments, including $7.5 million paid to CMS Medicare as reimbursement for overpayments received on claims between October 1, 2012 and December 31, 2018.
Net cash (used in) investingInvesting activities
Net cash (used in) investing activities primarily consists of acquisitions and capital expenditures.
Net cash used in investing activities increased $6.3 million to $6.6 million during the three months ended April 2, 2016 compared to $0.3 million during the three months ended March 28, 2015. The increase in net cash used in investing activities was primarily attributable to the acquisition of the exclusive U.S. distribution rights for GelSyn-3 for $6.0 million in February 2016.
Net cash (used in) provided by financing activities
Net cash (used in) provided by financing activities primarily consists of capital raising activities through equity or debt financing.
Net cash provided by financing activities increased $1.6 million to $5.5 million during the three months ended April 2, 2016, compared to $3.9 million during the three months ended March 28, 2015. The increase in cash provided by financing activities was primarily attributable to a $5.9 million decrease in payments of contingent consideration with respect to our OsteoAMP acquisition, partially offset by increases in principal payments on our senior secured credit facilities and lower net borrowings on our revolving credit facility.
Cash flows — annual
| Years ended | ||||||||||||
| (in thousands) | December 31, 2013 | December 31, 2014 | December 31, | |||||||||
Net cash (used in) provided by: | ||||||||||||
Operating activities | $ | 2,749 | $ | 15,109 | $ | 18,920 | ||||||
Investing activities | (10,999 | ) | (31,376 | ) | (60,185 | ) | ||||||
Financing activities | 6,801 | (6,645 | ) | 31,246 | ||||||||
Effect of exchange rate changes on cash and cash equivalents | (514 | ) | (1,428 | ) | (805 | ) | ||||||
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Net decrease in cash and cash equivalents | $ | (1,963 | ) | $ | (24,340 | ) | $ | (10,824 | ) | |||
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Net cash provided by operating activities
Net cash provided by operating activities consists primarily of net loss adjusted for certain non-cash items (including depreciation and amortization, change in fair value of contingent consideration, in-kind interest expense, profits interest compensation, foreign currency adjustments, provisions for doubtful accounts and amortization of debt premium and capitalized loan fees), and the effect of changes in working capital and other activities.
Net cash provided by operating activities increased $3.8 million, or 25.2%, to $18.9$1.9 million during the year ended December 31, 20152019 compared to $15.1the year ended December 31, 2018 primarily due to a $2.5 million increase in the acquisition of distribution rights.
Financing activities
Net cash used in financing activities decreased $2.3 million during the year ended December 31, 2014. For 2015, the net loss of $34.1 million as adjusted for aggregate non-cash items of $63.7 million was $29.6 million. This was an improvement of $2.5 million when2019 compared to $27.1 million in 2014, which is comprised of the net loss of $12.9 million as adjusted for aggregate non-cash items of $40.0 million. This improvement was primarily due to improved earnings in the Active Healing Therapies — U.S. and Surgical segments partially offset by lower earnings in Active Healing Therapies — International and increased BMP spending. Other elements of net cash provided by operating activities improved by $1.4 million during the fiscal year ended December 31, 2015, compared to the prior year. This improvement was primarily due to a reduction in a liability for paid in-kind interest in 2014 related to debt refinancing. The improvement was partially offset by an increase in accounts receivable and inventories primarily resulting from increased post-acquisition OsteoAMP sales.
Net cash provided by operating activities increased $12.4 million, or 449.6% to $15.1 million during the fiscal year ended December 31, 2014 compared to $2.7 million during the fiscal year ended December 31, 2013. For 2014, the net loss of $12.9 million, as adjusted for aggregate non-cash items of $40.0 million was $27.1 million. This was an improvement of $8.0 million when compared to $19.2 million in 2013, which is comprised of the net loss of $22.4 million as adjusted for aggregate non-cash items of $41.5 million. This improvement was primarily due to the earnings resulting from the OsteoAMP acquisition and increased sales and earnings related to the completion of the transition in 2014 from a distribution arrangement with Smith & Nephew to a company-operated sales force arrangement in our Active Healing Therapies — International segment. The distribution arrangement with Smith & Nephew was initially established with the spin-out from Smith & Nephew in May 2012. Under the distribution arrangement, Smith & Nephew marketed and sold products outside the United States on our behalf until the completion of the transition of our sales force in 2014. Other elements of net cash provided by operating activities improved by $4.4 million during the fiscal year ended December 31, 2015, compared to the prior year. This improvement was primarily due to a reduction in inventories due to working capital initiatives. The improvement was partially offset by the payment of a liability in 2014 related to in-kind interest as a result of debt refinancing.
Net cash (used in) investing activities
Net cash (used in) investing activities primarily consists of acquisitions and capital expenditures.
Net cash used in investing activities increased $28.8 million, or 91.8%, to $60.2 million during the year ended December 31, 2015 compared2018 primarily due to $31.4the receipt of $3.9 million during the year ended December 31, 2014. The increase in net cash used in investing activitiesproceeds from the December 2019 refinancing, which was primarily attributable to a total of $56.8 million paid in 2015 with respect to our BioStructures acquisition and acquisition of certain Durolane assets, compared to a total of $30.2 million paid in 2014 with respect to our OsteoAMP acquisition and acquisition of certain Durolane assets.
Net cash used in investing activities increased $20.4 million, or 185.5%, to $31.4 million for the fiscal year ended December 31, 2014 compared to $11.0 million for the fiscal year ended December 31, 2013. The increase in net cash used in investing activities was primarily attributable to our acquisition of OsteoAMP and certain Durolane assets in fiscal 2014, partially offset by a decrease of $5.4$1.3 million in cash used for the purchase of property and equipment.additional distributions to members.
Net cash (used in) provided by financing activities
Net cash (used in) provided by financing activities primarily consists of capital raising activities through equity or debt financing.
Net cash provided by financing activities increased $37.9 million to $31.2 million during the year ended December 31, 2015, compared to $6.6 million used in financing activities during the year ended December 31,
2014. The increase in cash provided by financing activities was primarily attributable to a $50.0 million capital contribution in connection with the BioStructures acquisition and $8.0 million of net borrowings on our revolving credit facility, partially offset by a $14.6 million increase in payments of contingent consideration with respect to our OsteoAMP acquisition and $5.8 million increase in principal repayments on our senior secured credit facilities.
Net cash used in financing activities increased $13.4 million, or 197.7%, to $6.6 million during the fiscal year ended December 31, 2014, compared to net cash provided by financing activities of $6.8 million in 2013. The change was primarily attributable to payments of $160.0 million on a related party note payable and net repayments of $21.1 million on our revolving credit facility, partially offset by the net proceeds from a borrowing of $170.5 million of cash under our senior secured credit facilities.
Indebtedness
Credit facilities
On October 10, 2014,December 6, 2019, we entered into senior secured credit facilities with JPMorgan Chase Bank, N.A., as administrative agent, and a syndicate of other banks, financial institutions and other entities as lenders. Our senior secured credit facilities arethe 2019 Credit Agreement. The 2019 Credit Agreement is comprised of a $115.0our $200.0 million first lien term loan facility, a $60.0and our $50.0 million second lien term loan facility and a $40.0 million first lien revolving credit facility. All obligations under our senior secured credit facilitiesthe 2019 Credit Agreement are guaranteed by certain of our direct and indirect wholly-ownedwholly owned domestic subsidiaries and secured by substantially all of our and the guarantors’ assets. The first lien term loan and revolving credit facilitiesfacility mature on October 10,December 6, 2024. The 2019 and the second lien term loan facility matures on April 10, 2020. The agreements governing our senior secured credit facilitiesCredit Agreement contains various restrictive covenants, including a quarterly covenant not to exceed a consolidated leverage ratio of 5.003.50 to 1.00 as of December 31, 2014, 4.75 to 1.00 as of December 31, 2015, 4.50 to 1.00 as of December 31, 2016, 4.00 to 1.00 as of December 31, 2017, and 3.65 to 1.00 as of December 31, 2018 and a covenant to maintain a fixed chargean interest coverage ratio of at least 1.25 to 1.00.3.00:1.00 for the prior four consecutive quarters. The leverage ratio and the fixed chargeinterest coverage ratio in our senior secured credit facilitiesratios are based on Consolidated EBITDA as defined in the credit agreements,2019 Credit Agreement, which includes several differences from Adjusted EBITDA as calculated in this prospectus. Consolidated EBITDA as defined in the credit agreements2019 Credit Agreement permits, among other things, the exclusion of (1) certain extraordinary, unusual and/or non-recurring cash expenses, upsome of which are subject to a limit of 15% of EBITDA,an aggregate cap, including but not limited to severance, acquisitions, dispositions, debt refinancing/amendment and initial public offering-related, (2) foreign currency gains/losses recognized in the
statement of operations and (3) franchise, excise and exciseproperty taxes recognized in the statement of operations. Also, the definition of the fixed charge coverage ratio in the credit agreements permits the exclusion of a defined amount of BMP expenses up to a limit of $10.0 million for 2016. The restrictive covenants also include limitations on (1) the declaration or payment of certain distributions on or in respect of our abilityequity interests, (2) restrictions on acquisitions, investments and certain other payments, (3) limitations on the incurrence of new indebtedness, (4) limitations on transfers, sales and other dispositions and (5) limitations on making changes to repurchase shares, to pay cash dividends or to enter into a sale transaction.our business and organizational documents. As of April 2, 2016,September 26, 2020, we were in compliancecomplied with all covenants under our senior secured credit facilitiesthe 2019 Credit Agreement and there were $163.5was $193.3 million of outstanding borrowings under these facilities. Asthe term loan. We have one nominal outstanding letter of April 2, 2016 there was $19.5 million outstanding under our revolving credit facility.credit. We intend to use a portion of the net proceeds from this offering to repay all of the outstanding borrowings under our revolving credit facility.for general corporate purposes. See “Use of Proceeds.proceeds.”
On November 20, 2015 we amended our senior secured credit facilities to enable certain sales and costs related to acquisitions to be included and certain BMP development expenses to be excluded from future covenant calculations, as well as amending certain covenant calculations. We have entered into an amendment to the agreement governing the first lien term loan facility and the first lien revolving credit facility, which will become operative upon the completion of this offering and will permit the consummation of the Transactions. This amendment also provides for a covenant not to exceed a consolidated leverage ratio of 3.50 to 1.00 with the ability for us to request an increase to 4.00 to 1.00 for a period of four consecutive fiscal quarters in connection with certain permitted acquisitions (but no more than two times over the term of the facilities). We intend to use a portion of the net proceeds from this offering to repay our second lien term loan facility in full. See “Use of Proceeds.”
Off-balance sheet arrangements
We do not have any off-balance sheet arrangements.
Contractual obligations
The following table sets out,Our contractual obligations as of December 31, 2015, our contractual obligations due by period.2019 are as follows:
| Payments due by period | ||||||||||||||||||||
| (in thousands) | Less than 1 year | 1-3 Years | 3-5 Years | More than 5 years | Total | |||||||||||||||
Long-term debt obligations(1) | $ | 12,938 | $ | 35,938 | $ | 125,500 | $ | — | $ | 174,376 | ||||||||||
Interest on long-term debt obligations(2) | 10,628 | 19,220 | 9,901 | — | 39,749 | |||||||||||||||
Capital lease obligations(3) | 1,354 | 1,193 | — | — | 2,547 | |||||||||||||||
Operating lease obligations(4) | 3,023 | 4,828 | 1,903 | — | 9,754 | |||||||||||||||
Purchase obligations(5) | 32,109 | 5,500 | 37,609 | |||||||||||||||||
Deferred purchase price(6) | 30,000 | — | — | — | 30,000 | |||||||||||||||
Royalties(7) | 201 | 402 | 402 | 603 | 1,608 | |||||||||||||||
Consulting agreements(8) | 1,556 | — | — | — | 1,556 | |||||||||||||||
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| $ | 91,809 | $ | 67,081 | $ | 137,706 | $ | 603 | $ | 297,199 | |||||||||||
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(in thousands) | Less than 1 year | 1-3 Years | 3-5 Years | More than 5 years | Total | |||||||||||||||
Long-term debt obligations | $ | 10,000 | $ | 30,000 | $ | 160,000 | $ | — | $ | 200,000 | ||||||||||
Interest on long-term debt obligations | 8,477 | 14,270 | 11,212 | — | 33,959 | |||||||||||||||
Operating lease obligations | 1,814 | 3,602 | 3,575 | 7,336 | 16,327 | |||||||||||||||
Purchase obligations | 16,889 | — | — | — | 16,889 | |||||||||||||||
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| $ | 37,180 | $ | 47,872 | $ | 174,787 | $ | 7,336 | $ | 267,175 | |||||||||||
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The table above does not include certain contingent obligations as follows:
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commitments under our multi-year exclusive supply agreements for our OA products except for those amounts that are contractually committed as of December 31, 2019. Our purchase obligations under these supply agreements are generally based upon our forecasted requirements, subject in some cases to a contractual minimum per annum;
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commitments under the Development Agreement with MTF, the Option and Equity Purchase Agreement with CartiHeal and its shareholders and the Collaboration Agreement with Harbor, for which the relevant contingent events requiring a payment under the respective agreements have not yet occurred; and
future milestone payments pursuant to the Development Agreement with MTF, the Option and Equity Purchase Agreement with CartiHeal and its shareholders, the Collaboration Agreement with Harbor and the amended and restated license agreement, or the Q-Med License Agreement, with Q-Med and NSH, as the payment obligations under these agreements are contingent upon future events and we are unable to estimate the timing or likelihood of achieving these milestones or generating future product sales.
Quantitative and qualitative disclosures about market risk
We are exposed to various market risks, which may result in potential losses arising from adverse changes in market rates, such as interest rates and foreign exchange rates. We do not enter into derivatives or other financial instruments for trading or speculative purposes. We use derivative instruments to manage exposures to interest rates and foreign currencies. Derivatives are recorded on the balance sheet at fair value at each balance sheet date. We have elected the fair value method of accounting and do not designate whether the derivative
instrument is an effective hedge of an asset, liability or firm commitment. Changes in the fair values of derivative instruments are recognized in the consolidated statements of operations and comprehensive loss.income (loss) in the period incurred.
Interest rate risk
Our cash and cash equivalents balance as of April 2, 2016September 26, 2020 consisted of demand deposits and institutional money market funds held in U.S. and foreign banks. Cash equivalents consist of highly liquid investment securities with original maturities on the date of purchase of three months or less and can be exchanged for a known amount of cash. We are exposed to the market risk related to fluctuations in interest rates and market prices.prices for our cash equivalents. We are also exposed to interest rate risk in connection with borrowings under our senior secured credit facilities,agreement, which bear interest at a floating rate based on one-month LIBOR plus an applicable borrowing margin. As of April 2, 2016, 1%September 26, 2020, a 1.0% increase in interest rate would result in a $4.0$9.0 million increase in total interest payable over the remaining life of the credit facilitiesagreement in the event we were to draw down the entire capacity of our revolving credit facility. For variable rate debt, interest rate changes generally do not affect the fair value of the debt instrument, but do impact future earnings and cash flows, assuming other factors are held constant. In the ordinary course of business, we may enter into contractual arrangements to reduce our exposure to interest rate risks.
In November 2014,March 2020, we entered into threean interest rate swapsswap agreement, effective November 28, 2014March 26, 2020 and expiring November 30, 2017 in an effortDecember 6, 2024 to limit our exposure to changes in the variable interest rate on its first lienour term loans.loan. The derivative instruments haveinstrument was not been designated as hedges.a hedge.
Foreign exchange risk management
We operate in countries other than the United States,U.S. and therefore, we are exposed to foreign currency risks. We bill most direct sales outside of the United StatesU.S. in local currencies. We expect that the percentage of our sales denominated in foreign currencies will increase in the foreseeable future as we continue to expand into international markets. When sales or expenses are not denominated in U.S. dollars, a fluctuation in exchange rates could affect our net income. We believe that the risk of a significant impact on our operating income from foreign currency fluctuations is minimal. Although we do not currently have any foreign currency hedge,hedges, we
have used foreign exchange forward contracts in the past to protect against the effectimpact of foreign currency fluctuations and may use forward contracts, derivatives or other hedges for foreign exchange risk management purposes in the future.
Effects of inflation
We do not believe that inflation has had a material effect on our results of operations during the periods presented herein.
Related parties
For a description of our related party transactions, see “Certain relationships and related party transactions.”
Recently issued accounting standards
In May 2014,The Company has elected to comply with non-accelerated public company filer effective dates of adoption. Therefore, the U.S.required effective dates for adopting new or revised accounting standards as described below are specific to non-accelerated public company filers, which are generally earlier than when emerging growth companies are required to adopt.
Accounting Pronouncements Recently Adopted
The Financial Accounting Standards Board, or FASB, issued guidanceAccounting Standards Update 2016-13,Financial Instruments-Credit Losses, or ASU 2016-13, in June 2016 that providessignificantly changes accounting for
credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 requires that an entity measure and recognize expected credit losses for financial assets held at amortized cost and replaces the incurred loss impairment methodology in prior GAAP with a comprehensive new revenue recognition modelmethodology that requiresconsiders a companybroad range of information for the estimation of credit losses. The Company adopted ASU 2016-13 on January 1, 2020 prospectively and the adoption did not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued Accounting Standards Update 2018-15,Intangibles-Goodwill and Other-Internal-Use Software, or ASU 2018-15, addressing a customer’s accounting for implementation costs incurred in a cloud computing arrangement, or CCA, that is considered a service contract. Under ASU 2018-15, implementation costs for a CCA should be evaluated for capitalization using the same approach as implementation costs associated with internal-use software. The capitalized implementation costs should be expensed over the term of the hosting arrangement, which includes any reasonably certain renewal periods. Capitalized implementation costs should be assessed for impairment like long-lived assets. The Company adopted ASU 2018-15 on January 1, 2020 prospectively and it had no material impact on the consolidated financial statements.
In August 2018, the FASB issued Accounting Standards Update 2018-13,Fair Value Measurement, or ASU 2018-13, modifying the disclosure requirements on fair value measurements and eliminates the requirement to recognize revenuedisclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. ASU 208-13 modifies certain disclosures related to depictinvestments measured at net asset value and clarifies that companies are to disclose uncertainties in measurements as of the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance alsoreporting date. ASU 2018-13 requires additional disclosure aboutrelated to changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements as well as the nature, amount, timingrange and weighted average, or other quantitative information that would be a more reasonable and rational method, of significant unobservable inputs used to develop Level 3 fair value measurements. The additional disclosures and description of any measurement uncertainty amendments should be applied prospectively for the most recent interim or annual period in the initial year of revenueadoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company adopted ASU 2018-13 on January 1, 2020 and cash flows arising from customer contracts. Thisit did not have a material impact on its consolidated financial statements.
New Accounting Pronouncements Not Yet Adopted
In December 2019, the FASB issued Accounting Standards Update 2019-12,Income Taxes, or ASU 2019-12, which amended the accounting for income taxes. ASU 2019-12 eliminates certain exceptions to the guidance for income taxes related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences as well as simplifying aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for annual and interim periods beginning after December 15, 2017.2020. Early adoption is permitted in interim or annual periods for annual reporting periods beginning after December 15, 2016. We are currently evaluating the impact of this new standard on our consolidatedwhich financial statements have not been made available for issuance. Entities that elect to early adopt the date of adoption, and the transition approach to implement the new guidance.
In February 2015, the FASB issued guidance which changes the analysisamendments in determining whether an entity is considered a variable interest entity, or VIE, and the identificationinterim period should reflect any adjustments as of the primary beneficiarybeginning of the VIE to determine whether the VIE should be included in an entity’s consolidated financial statements. We will adopt the new accounting guidance on January 1, 2016, as required. We do not expect this guidance to have a material effect on our consolidated financial statements.
In April 2015, the FASB issued guidanceannual period that requires debt issuance costs related to a recognized debt liabilityincludes that interim period. Certain amendments are to be presented in the consolidated balance sheet as a direct deduction from the debt liability rather than as an asset. In August 2015, the FASB updated guidance issued in April 2015 related to debt issuance costs to include SEC guidance regarding line-of-credit arrangements. The SEC staff would not object to deferring and presenting debt issuance costs as an asset for line of credit arrangement regardless of whether there is an outstanding balance. We adopted the new accounting guidance early on December 31, 2015 resulting in a reclassification of $2.2 million and $1.8 million in other assets to a reduction of the long-term debt balance at December 31, 2014 and 2015, respectively.
In September 2015, the FASB issued guidance that eliminated the requirement that an acquirer in a business combination account for the measurement-period adjustments retrospectively. The acquirer will recognize the measurement-period adjustment during the period in which the adjustment is determined. We adopted this guidance as of January 1, 2015, with no material effect on our consolidated financial statements.
In November 2015, the FASB issued guidance that requires companies to classify all deferred tax assets and liabilities as noncurrent on the consolidated balance sheet. We adopted the new accounting guidance early on December 31, 2015 resulting in a reclassification of $0.3 million and $0.3 million in current deferred tax liabilities to long term at December 31, 2014 and 2015, respectively.
In February 2016, the FASB issued guidance that requires lessees to put most leases on their balance sheets but recognize expenses on their income statements. It also modifies the classification criteria and the accounting for sales-type and direct financing leases for the lessor. This guidance is effective for annual and interim
periods beginning after December 15, 2018. Early adoption is permitted and must be adopted using a modified retrospective transition. Weapplied prospectively while others are currently evaluating the impact of this new standard on our consolidated financial statements, the date of adoption, and the transition approach to implement the new guidance.
In March 2016, the FASB issued new accounting guidance which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements and the classification of excess tax benefits on the statement of cash flows. The new accounting guidance will be effective for annual reporting periods beginning after December 15, 2016. Early adoption is permitted.retrospective. The Company is currently evaluating the impact of this new accounting guidance on its consolidated financial statements and the date of adoption to implement the new guidance.statements.
Internal control over financial reporting
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. Prior to this offering, we were a private company and we are currently in the process of reviewing, documenting and testing our internal control over financial reporting. In connection with the audit of our consolidated financial statements as of and for the years ended December 31, 2015, 2014 and 2013, we identified material weaknesses in our internal control over financial reporting. See “Risk factors—We have identified material weaknesses in our internal control over financial reporting. If we are unable to remediate these material weaknesses, or if we experience additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial condition or results of operations, or comply with the accounting and reporting requirements applicable to public companies, which may adversely affect investor confidence in us and, as a result, the value of our common stock.”
We have not performed an evaluation of our internal control over financial reporting, such as required by Section 404 of the Sarbanes-Oxley Act, nor have we engaged an independent registered accounting firm to perform an audit of our internal control over financial reporting as of any balance sheet date or for any period reported in our financial statements.
Presently, we are not an accelerated filer, as such term is defined by Rule 12b-2 of the Exchange Act, and therefore, our management is not presently required to perform an annual assessment of the effectiveness of our internal control over financial reporting. This requirement will first apply to our second Annual Report on Form 10-K. Our independent public registered accounting firm will first be required to attest to the effectiveness of our internal control over financial reporting for our Annual Report on Form 10-K for the first year we are no longer an “emerging growth company”.
Critical accounting policies and estimates
The preparation of the consolidated financial statements requires us to make assumptions, estimates and judgments that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities as of the date of the consolidated financial statements, and the reported amounts of sales and expenses during the reporting periods. Certain of our more critical accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. On an ongoing basis, we evaluate our judgments, including those related to inventories, recoverability of long-lived assets and the fair value of our common stock. We use historical experience and other assumptions as the basis for our judgments andin making these estimates. Because future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Any changes in thosethese estimates will be reflected in our consolidated financial statements as they occur. While our significant accounting policies are more fully described in Note 1 to our consolidated financial statements included elsewhere in this prospectus, we believe that the following accounting policies and estimates are most critical to a full understanding and
evaluation of our reported financial results. The critical accounting policies addressed below reflect our most significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue recognition
Sale of products
Product sales directly to the customer areWe derive revenue primarily generated throughfrom the sale of external bone growth stimulators, HA viscosupplementation therapiesour OA joint pain treatment and bone graft substitutes.joint preservation products, BGSs and minimally invasive fracture treatment. We present revenue on a net basis, excluding taxes collected from customers and remitted to governmental authorities, as well as discounts, rebates, certain distribution fees and contractual allowances when recording revenue.
We sell these products directly to healthcare institutions, patients, distributors and dealers. Direct sales accountWe also enter into arrangements with pharmacy and health benefit managers that provide for privately negotiated rebates, chargebacks and discounts with respect to the purchase of our products. We recognize revenue at a point in time upon transfer of control of the promised product to customers in an amount that reflects the consideration we expect to receive in exchange for those products. We exclude from revenues taxes collected from customers and remitted to governmental authorities.
Revenues are recorded at the transaction price, which is determined as the contracted price net of estimates of variable consideration resulting from discounts, rebates, returns, chargebacks, contractual allowances, estimated third-party payer settlements and certain distribution and administration fees offered in our customer contracts and other indirect customer contracts relating to the sale of our products. We establish reserves for the majorityestimated variable consideration based on the amounts earned or eligible for claim on the related sales. Where appropriate, these estimates take into consideration a range of net sales. possible outcomes, which are probability-weighted for relevant factors such as our historical experience, current contractual requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. The amount of variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. We regularly review all reserves and update them at the end of each reporting period as needed. Adjustments arising from the change in estimates of variable consideration were not significant for the years ended December 31, 2019 and 2018.
OA joint pain treatment and joint preservation
Revenue from customers such as healthcare providers, distribution centers or specialty pharmacies is recognized at the point in time when title and risk of loss of the product passescontrol is transferred to the purchaser, once all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the collection of the fees is reasonably assured and (3) the arrangement consideration is fixed or determinable.customer, typically upon shipment.
Product sales to third-party payors are recognized in accordance with specific healthcare accounting guidance. Revenue is reported on a net basis, in consideration of adjustments to the expected cash received. The adjustments include estimates for coverage and insurance adjustments which are based on historical knowledge and are recorded as a reduction to revenue.
Distributor chargebacks
For certain products, we offer chargeback rebates to wholesalers who supply their customers with our products. We have preexisting contracts with established rates with many of the wholesalers’distributors’ customers whothat require the wholesalersdistributors to sell our product at their established rate. Accordingly we record an adjustmentWe offer chargebacks to distributors who supply these customers with our products. We reduce revenue at the time of sale to estimatefor the estimated future chargebacks. We record chargeback basedreserves as a reduction of accounts receivable and base the reserves on the expected value by using probability-weighted estimates of volume of purchases, inventory holdings and historical data of rebateschargebacks requested for each wholesaler. All liabilities associated with charge-backdistributor.
Discounts and rebates are reviewed regularly taking into consideration known market events
We offer retrospective discounts and trendsrebates linked to the volume of purchases which may increase at negotiated thresholds within a contract-buying period. We reduce revenue and record the reserve as well as internal and external historical dataa reduction to accounts receivable for the industryestimated discount and customer.rebate at the most likely amount the customer will earn, based on historical buying trends and forecasted purchases.
Revenue recognitionBone graft substitutes
The majority of our BGS product sales are through consignment inventory with hospitals, where ownership remains with us until the hospital performs a surgery and consumes the consigned inventory. We recognize the revenue when the surgery has been performed. The customer does not have control of the product until the customer consumes it, as we are able to require the return or transfer of the product to a third-party. An unconditional obligation to pay for bone growth stimulatorsthe product does not exist until the customer consumes it.
RevenueMinimally invasive fracture treatment
We recognize revenue from third-party payors,payers, such as governmental agencies, insurance companies or managed care providers, is recognized when a prescription is received,we transfer control of the Exogen system to the patient, benefits have been verified,typically when the patient has accepted the product is provided and the required paperwork is executed. Suchor upon delivery. We record this revenue is recorded at the contracted rate, net of contractual allowances at the time of sale, or an estimated price based on historical data and other available information for non-contracted payers. We record contractual allowances based on probability weighting historical data and collections. We recognize revenue from patients (self-pay and insured patients with coinsurance and deductible responsibilities) based on billed amounts giving effect to any discounts and implicit price concessions. Implicit price concessions represent differences between amounts billed and the information availableamounts we expect to collect from patients, which considers historical collection experience and current market conditions.
Settlements with third-party payers for retroactive revenue adjustments due to audits, reviews or investigations are considered variable consideration and are included in the determination of the estimated transaction price using the most likely outcome method. These settlements are estimated based on the terms of the payment agreement with the payer, correspondence from the payer and historical resultssettlement activity, including an assessment to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustment is subsequently resolved. Estimated settlements are adjusted in future periods as adjustments become known (that is, new information becomes available), or as years are settled or are no longer subject to such audits, reviews and investigations. We are not aware of any claims, disputes or unsettled matters with any payer that would materially affect revenues for which we have not adequately provided for.
Revenue from a patient is negotiated with each individualProduct returns
We estimate the amount of returns and recognized when a prescription is received,reduce revenue in the product is provided andperiod the required paperwork is executed. On occasion,related product is provided to the patient at no cost through our Patient Assistance Program and no revenue is recognized. The full selling priceWe record a liability for expected returns based on probability weighted historical data.
Accounts receivable, net
Accounts receivable, net are amounts billed and currently due from customers. We record the amounts due net of allowance for doubtful accounts. We maintain allowances for credit losses to provide for receivables we do not expect to collect. We base the allowance on an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivables and other information as applicable. Collection of the consideration that we expect to receive typically occurs within 30 to 90 days of billing. We apply 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, we enter into payment agreements with patients that allow payment terms beyond one year. In those cases, the financing component is expectednot deemed significant to be collected unless the contract.
Contract assets
Contract assets consist of unbilled amounts resulting from estimated future royalties from an international distributor that exceeds the amount billed. Contract assets are included in prepaid and other current assets on the consolidated balance sheets.
Contract liabilities
Contract liabilities consist of customer defaultsadvance payments or deposits and deferred revenue. Occasionally for certain international customers, we require payments in advance of shipping product and recognizing revenue resulting in contract liabilities. Contract liabilities are included in accrued liabilities on payment.the consolidated balance sheets.
Revenue recognitionShipping and handling
We classify amounts billed for HA viscosupplementation therapies
Revenue from customers suchshipping and handling as a healthcare provider,component of net sales. The related shipping and handling fees and costs as well as other distribution center or specialty pharmacy is recognized when an order is receivedcosts are included in cost of sales. We have elected to recognize shipping and handling activities that occur after control of the related product is shipped or deliveredtransfers to the customer location. Revenue is recognized at the contracted price.as fulfillment costs and are included in cost of sales.
Contract costs
We offer retrospective discountsapply the practical expedient of recognizing the incremental costs of obtaining contracts as an expense when incurred as the amortization period of the assets that we otherwise would have recognized is one year or less. These incremental costs include our sales incentive programs for the internal sales force and third-party sales agents as the compensation is commensurate with annual sales activities. These costs are linked toincluded in selling, general and administrative expense on the volumeconsolidated statements of purchasesoperations and may increase at negotiated thresholds within a contract buying period. We record an estimated discount and returns allowance based on historical, forecasted or negotiated results, the type of customer, and the specifics of each arrangement.
Revenue recognition for bone graft substitutes
Revenue from customers such as a healthcare provider is recognized when we are notified that a surgery was performed and the consigned inventory was consumed. Revenue is recognized at the contracted price.
Use of Estimatesestimates
The preparation of the consolidated financial statements in conformityaccordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses during the period, as well as disclosuresdisclosure of contingent assets and liabilities, at the date of the financial statements.statements, as well as the reported amounts of revenues and expenses during the period. On an ongoing basis, management evaluates these estimates, including those related to contractual allowances and sales incentives, allowances for doubtful accounts, inventory reserves, goodwill and intangible assets impairment, useful lives of long lived assets, noncontrolling interest, fair value measurements, litigation and contingent liabilities, income taxes, and equity-based compensation. Management bases its estimates on historical experience, future expectations and other relevant assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.those estimates.
Fair value
We record certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sellfrom selling an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy that prioritizes the inputs used to measure fair value is described below. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. Assets and liabilities are categorized based on the lowest level that is significant to the valuation.
The three levels of inputs used to measure fair value are as follows:
Level 1—Quoted prices in active markets for identical assets or liabilities;
Level 2—Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data; and
Level 3—Unobservable inputs that are supported by little or no market data. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
Accounts receivable and allowances
Accounts receivable are amounts due from customers and payors that are recorded at net realizable value for product sold in the ordinary course of business. We maintain a contractual allowance and an allowance for doubtful accounts.
The allowance is offset against revenue for each sale to a contracted and non-contracted payor so that net sales and the resulting accounts receivable are recorded at the estimated determinable price at the time of the sale. When evaluating the adequacy of the contractual allowance, we analyze pricing available for certain products as well as historical results.
The allowance for doubtful accounts is based on the assessment of the collectability of specific customer accounts and the aging of the accounts receivable. When evaluating the adequacy of this allowance, we analyze accounts receivable, historical bad debts, customer concentrations, customer solvency, current economic and geographic trends, and changes in customer payment terms and practices. Changes to the allowance for doubtful accounts are recorded in selling, general and administrative expense in the consolidated statements of operations and comprehensive loss. Our reserve levels have generally been sufficient to cover credit losses.
Inventory
We value our inventory at the lower of cost or market and adjust for the value of inventory that is estimated to be excess, obsolete or otherwise unmarketable. Cost is determined using the first-in, first-out, or FIFO, method. We record allowances for excess and obsolete inventory based on historical and estimated future demand and
market conditions. We plan for the production of our products based on expected market demand and expected product launches. A significant decrease in demand or change in new product launch timing could result in an increase in the amount of excess inventory quantities on hand.
Business combinations
IdentifiableWe record identifiable assets acquired, the liabilities assumed and any noncontrolling interest in thean acquiree resulting from a business combination are recorded at their estimated fair values on the date of the acquisition. Third-partyWe generally have third-party valuations are generally completed for intangible assets in a business combination using a discounted cash flow analysis, incorporating various assumptions. Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired, including the amount assigned to identifiable intangible assets. The most significant estimates and assumptions inherent in a discounted cash flow analysis include the amount and timing of projected future cash flows, the discount rate used to measure the risks inherent in the future cash flows, the assessment of the asset’s life cycle, and the competitive and other trends impacting the asset, including consideration of technical, legal, regulatory, economic and other factors. Each of these factors and assumptions can significantly affect the value of the intangible asset.
Acquired in-process research and development, or IPR&D, is the fair value of projects for which the related products have not received regulatory approval and have no alternative future use and is capitalized as an indefinite-lived intangible asset. Due to inherent uncertainty related to R&D, there is no assurance thatresearch and development, actual results will notcould differ materially from the assumptions used in the discounted cash flow model. Additionally, there are risks including, but not limited to, delay or failure to receive regulatory requirements to conduct clinical trials, required market clearances, or patent issuance, and that the R&Dresearch and development project does not result in a successful commercial product. Development costs incurred after the acquisition are expensed as incurred. Upon receipt of regulatory approval of the related technology or product, the indefinite-lived intangible asset is then accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life. If the R&Dresearch and development project is abandoned, the indefinite-lived asset is charged to expense.
We recognize contingent consideration liabilities resulting from business combinations at estimated fair value on the acquisition date. The contingentContingent consideration liabilities are revalued subsequent to the acquisition date with changes in fair value recognized in earnings. Contingent payments related to acquisitions consist of development, regulatory and commercial milestone payments, and are valued using discounted cash flow techniques. Significant estimates and assumptions required for these valuations include the probability of achieving regulatory approval under specified time frames, product sales projections under various scenarios and discount rates used to calculate the present value of the estimated payments. Changes in the fair value of contingent consideration liabilities result from changes in these estimates and assumptions. Significant judgment
is employed in determining the appropriateness of the estimates and assumptions as of the acquisition date and in post-acquisition periods.
Impairment
We evaluate goodwill and other indefinite-lived intangible assets for impairment annually during the fourth quarter, or more frequently if events or changes in circumstances indicate that the asset might be impaired. We have identified Advance Healing Therapies—Our reporting units are U.S., Advance Healing Therapies— and International and Surgical as our three reporting units andwe analyze each reporting unit separately in our goodwill impairment evaluation. We used independent third-party valuation specialists in 2013, 20142019 and 20152018 to assist management in performing the performanceannual review of goodwill for impairment as well as in April 2020 due to the two step goodwill impairment test for each reporting unit on an annual basis.COVID-19 triggering event. The third partiesspecialists assist management in the determination of fair value of reporting units based upon inputs and assumptions provided by management, which management uses for its impairment assessment. AllWe analyze all other indefinite-lived intangible assets are analyzed qualitatively by management to determine if it is more likely than not for an impairment to exist. If thatwe meet the criteria, is met,we perform a quantitative analysis is performed to determine if an impairment exists.
Goodwill
During the first step of ourOur goodwill impairment testing,process includes applying a quantitative impairment analysis where the estimated fair value of goodwill is compared to the carrying value at the reporting unit level. Fair valuesand compare it to its carrying value (including goodwill). We determine the fair value of theU.S. and International reporting units are estimated using acceptable valuation methods including thebased primarily on an income approach, which incorporates the use of a discounted free cash flow analysis, and the market approach, which incorporates the use of revenue and earnings multiples based on market data.analysis. The discounted free cash flow analyses areis based on significant judgments, including the current operating budgets, estimated long-term growth projections and future forecasts for each reporting unit. FutureWe discount future cash flows are discounted based on a market comparable weighted average cost of capital rate for each reporting unit. The discount rates used in the discounted free cash flow analyses reflect the risks inherent in the expected future cash flows generated by the respective intangible assets. Risks impacting the discount rate include marketMarket risk, industry risk and a small company premium. Bioventus LLCpremium has never triggered step two ofan impact on the goodwill impairment test since the initial acquisition of goodwill in 2012.
If the fairdiscount rate. The value of any of theeach reporting units is less than the carrying value, a second step is performed which compares the implied fair value of the reporting unit’s goodwill to the carrying value. The fair value of the goodwillunit is determined based on a stand-alone basis from the difference betweenperspective of a market participant and represents the fair valueprice we estimate we would receive in a sale of the reporting unit andin an orderly transaction between market participants at the net fair value of the identifiable assets and liabilities of the reporting unit or carrying value of the indefinite-lived intangible asset. If the implied fair value of the goodwill or indefinite-lived intangible assets is less than the carrying value, the difference is recognized as an impairment charge.measurement date. Significant judgments inherent in this analysis include estimating the amount and timing of future cash flows and the selection of appropriate discount rates, royalty rate and long-term growth rate assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit and for some of the reporting units and could result in an impairment charge, which could be material to our financial position and results of operations. There has been no impairment of our goodwill related to our U.S. and International reporting units since our formation.
Other indefinite-lived intangible assets
During the fourth quarter of 2015, in connection with the acquisition of BioStructures, we acquired IPR&D with a preliminary estimated fair value of $23.0 million as of the acquisition date. We will continue to evaluate the acquired IPR&D for impairment on an annual basis and whenever events or circumstances change that would indicate that the carrying amount was impaired.
Equity compensation
We account for equityoperate two equity-based compensation plans, the MIP and Phantom Plan. We issue MIP and Phantom Plan, which requires the measurement and recognition of compensation expense for all equity-based awards madeallows our employees to employees and directors based on estimated fair values on the grant date. Bioventus LLC has issued profit interest units that share in anyour future profit for the company without granting any additional voting rights. Bioventus LLC issued profit interest units through itsAwards granted under the MIP and phantom profits interest units through itscertain Phantom Plan. The MIP units contain a put option that allowPlan awards granted in 2015 and thereafter, or the employee to exercise that option at an amount other than fair value (EBITDA times a fixed multiple). Therefore these units2015 Phantom Plan Units, are classified as a liabilityliability-classified. Those Phantom Plan awards granted from inception in 2012 and until the put option expires. Thegrant of the 2015 Phantom Plan was amended in May 2015. Units, issued prior toor the amendment2012 Phantom Plan Units, are equity-classified, as they do not contain a put option or other features requiring them to be liability-classified. Equity compensation includes compensation expense for all equity awards made to employees that are part of continuing operations and are equity classified.based on estimated fair values as of the grant date for the 2012 Phantom Plan Units issued subsequentand period end fair value for the MIP units and 2015 Phantom Plan Units. We recognize expense for performance-based awards when we expect them to be earned. We recognize timed-based awards over the requisite service period, which is generally the vesting period of the award. We recognize forfeitures as they occur.
We used independent third-party valuation specialists in 2019 and 2018 to assist management in performing the annual valuation of MIP and 2015 Phantom Plan Units, as well as in April 2020 due to the amendment contain a put option and are classified as a liability. Liability awards underCOVID-19
triggering event. The specialists assist management in the MIP and Phantom Plan are marked to fair value at each reporting period.
We estimate thedetermination of fair value of profit interestsawards granted using the Monte Carlo option pricing model. We estimate when and if performance-based awards will be earned. If an award is not considered probable of being earned, no amount of equity-based compensation expense is recognized. If the award is deemed probable of being earned, related equity-based compensation expense is recorded. The fair value of an award ultimately expected to vest is recognized as an expense, net of forfeitures, over the requisite service periods in our consolidated statements of operations, which is generally the vesting period of the award.
The Monte Carlo option pricing model requires the input of certain subjective assumptions and the application of judgment in determining the fair value of the awards. The most significant assumptions and judgments include the expected volatility, risk-free interest rate, the expected dividend yield, and the expected term of the awards. In addition, the recognition of equity-based compensation expense is impacted by our estimated forfeiture rates, which is based on an analysis of historical forfeitures. We will continue to evaluate our forfeiture rate, considering our actual forfeiture experience, analysis of employee turnover and other factors.
The assumptions used in our option pricing modelawards represent management’s best estimates. If factors change and different assumptions are used, our equity-basedequity compensation expense could be materially different in the future. The keymost significant assumptions included in the modeland judgments are as follows:
Expected volatility—We determine the expected price volatility based on the historical volatilities of our peer group, as we do not have a sufficient trading history for our units. Industry peers consist of several public companies in the medical technologydevice industry similar to us in size, stage of life cycle and financial leverage. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own stock price becomes available, or unless circumstances change such that the identified companies are no longer similar to us, in which case, more suitable companies whose share prices are publicly available would be utilized in the calculation.
Time to liquidity event—The amount of time that the awards are expected to be outstanding.
Risk-free interest rate—We basebased the risk-free interest rate on the yield curve ofU.S. Government Constant Maturity Treasury rates for a zero-coupon U.S. Treasury bond with a maturity equalterm corresponding to the expected term of the option on the grant date.Time to Liquidity Event.
Expected dividend yield—We used a dividend rate of zero as we have not previously issued dividends and do not anticipate paying dividends in the foreseeable future. Therefore, we used a dividend rate of zero based on our expectation of additional dividends.
Expected term—The amount of time that the equity-based awards are expected to be outstanding.
The assumptions utilized to determine the fair value of the awards for the years ended December 31 and the three months ended March 28, 2015 and April 2, 2016 are indicated in the following table:
| Year ended December 31, | Three months ended- | Year ended December 31, | ||||||||||||||||||||||||||||||
| 2013 | 2014 | 2015 | March 28, 2015 | April 2, 2016 | 2019 | 2018 | April 30, 2020 | |||||||||||||||||||||||||
Expected dividend yield | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||||||||||||||||||||
Expected volatility | 42.1% | 40.7% | 50.0% | 50% | 50% | 35.0 | % | 30.0 | % | 55.0 | % | |||||||||||||||||||||
Risk-free interest rate | 1.3% | 1.3% | 0.4% | 0.4% | 0.4% | 1.5 | % | 2.7 | % | 0.2 | % | |||||||||||||||||||||
Expected dividend yield | 0% | 0% | 0% | 0% | 0% | |||||||||||||||||||||||||||
Expected term | 5 | 4 | 0.6 | 1.6 | 0.6 | |||||||||||||||||||||||||||
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Time to exit event (in years) | 1.5 | 1.0 | 1.0 | |||||||||||||||||||||||||||||
Additionally,The calculation of the calculationfair value of awards also requires an estimate of fair value of the units underlying our equity-based awards to perform our Monte Carlo calculation. Prior to our initial public offering, in the absence of a public trading market, our Board of Directors determined a reasonable estimate of the then-current fair value of our equity awards for purposes of granting equity-based compensationvalue, based on inputinputs from management and reporting unit valuation reports prepared by an independent third-party valuation specialist. the specialists during the annual goodwill impairment process.
We determined the fair value of our equity utilizing methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants Practice Aid, “Valuation of Privately-Held-Company Equity Securities Issued as Compensation,” which we referCompensation”. Prior to as the AICPA Practice Aid.consummation of this offering, in the absence of a public trading market, our Board of Managers determines a reasonable estimate of the grant date fair value of our equity awards based on input from management and the annual valuation reports prepared by the specialists. In addition, we exercised judgment in evaluating and assessing the foregoing based on several factors including:
the nature and history of our business;
our historical operating and financial results;
the market value of companies that are engaged in a similar business to ours;
the lack of marketability of our common stock;
the price at which shares of our equity instruments have been sold;
the overall inherent risks associated with our business at the time stock option grants or warrantsawards were approved; and
the overall equity market conditions and general economic trends.
WeAfter the closing of this offering, our board of directors will continue to accumulate additional data and use judgment in evaluating each assumptiondetermine the grant date fair value of our equity awards based on a prospective basis. the closing price of our common shares as reported by Nasdaq on the date of the grant.
As of April 2, 2016,September 26, 2020, we had $3.3$8.0 million of unrecognized equity-based compensation expense net of estimated forfeitures, related to profit interest units and phantom profit interest units and that is expected to be recognized over a weighted-average period of four and five1.3 years for the MIP and Phantom Plan, respectively.based on time to vest.
Income taxes
Bioventus LLC is currently a partnership for U.S. federal income tax purposes. As a partnership, taxable income or loss is includablegenerally included in the income tax returns of its members. The CompanyWe also hashave a subsidiary that operates as a C corporationC-corporation that is subject to income tax requirements and international operations that are subject to foreign income tax requirements. Additionally, Bioventus LLC is liable for various other state and local taxes. After consummation of this offering, weAs a corporation, Bioventus Inc. will becomebe subject to U.S. federal, state and local income taxes with respect to our allocable share of any taxable income of Bioventus LLC and will be taxed at the prevailing corporate tax rates.taxes. We recognize the effect of income tax positions only if these positions are more likely than not to be sustained. ChangesWe reflect changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The pro forma consolidated financial statements included in this prospectus do not include a provision for federal income taxes since each of our pro forma statements of operations have a pro forma net loss. InUpon the future, if redemption or exchange of Bioventus LLC Units for shares of our Class A common stock or cash, occurs andwe will determine if we determine that such tax benefits are likely to be realized by us,realize the resulting tax benefits. If we are, we will record (i) a deferred tax asset based on the step-up in basis resulting from the exchange and the then effective income tax rate, (ii) a payable to related party in respect of the corresponding 85% payment under the Tax Receivable Agreement and (iii) a tax benefit based on the net difference between (i) and (ii). As we realize cash tax savings, are realized by us,we will reduce the deferred tax asset will be reduced, and the payments made under the Tax Receivable Agreement will reduce the payable to related party. Further, we will evaluate the likelihood that we will realize the benefit represented by the deferred tax asset and, to the extent that we estimate that it is more likely than not that we will not realize the benefit, we will reduce the carrying amount of the deferred tax asset with a valuation allowance.
Long-lived assets
Property and equipment are stated at cost and are depreciated using the straight-line method over the shorter of the asset’s estimated useful life, or the lease term if related to leased property, as follows in years:
Computer software and hardware | ||||
Leasehold improvements | ||||
Machinery and equipment | ||||
Furniture and fixtures | ||||
| 7 | ||||
Finite-livedWe amortize finite-lived identifiable intangible assets are amortized using the straight-line method over their estimated remaining weighted average useful lives as follows in years:
| Weighted Average Useful Life | ||||
Intellectual property | ||||
Distribution rights | ||||
Customer relationships | ||||
Developed technology | ||||
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We capitalize costs incurred from third-party vendors for software design, configuration, coding and testing and amortizes these costs on a straight-line basis over the estimated useful life of the product, not to exceed three years. We do not capitalize costs that are incurred internally for labor or that are precluded from capitalization in authoritative guidance, such as preliminary project phase costs, planning, oversight, process re-engineering costs, training costs or data conversion costs.
The carrying values of property, equipment intangible and other long-livedfinite lived intangible assets are reviewed for recoverability if the facts and circumstances suggest that a potential impairment may have occurred. If this review indicates that carrying values may not be recoverable, as determined based on undiscounted cash flow projections, we will perform an assessment to determine if an impairment charge is required to reduce carrying values to estimated fair value. There were no events, facts or circumstances for the years ended December 31, 20142019 and 20132018 that resulted in any impairment charges to our property, equipment or finite lived intangible or other long-lived assets.
JOBS Act
We qualify as an “emerging growth company” pursuant to the provisions of the JOBS Act. For as long as we are an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, reduced disclosure obligations relating to the presentation of financial statements in Management’sthe “Management’s discussion and analysis of financial condition and results of operationsoperations” section and exemptions from the requirements of holding advisory “say-on-pay”“say-on-pay” votes on executive compensation and shareholder advisory votes on golden parachute compensation. We have availed ourselves of the reduced reporting obligations and executive compensation disclosure in this prospectus and expect to continue to avail ourselves of the reduced reporting obligations available to emerging growth companies in future filings.
In addition, an emerging growth company can delay its adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we plan to comply with any new or revised accounting standards on the relevant dates on which non-emergingnon- emerging growth companies must adopt such standards. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
We will continue to qualify as an emerging growth company until the earliest of:
The last day of our fiscal year following the fifth anniversary of the date of our IPO;initial public offering;
The last day of our fiscal year in which have annual gross revenues of $1.0$1.07 billion or more;
The date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt;
The date on which we are deemed to be a “large accelerated filer”, which will occur at such time as we (1) have an aggregate worldwide market value of common equity securities held by non-affiliates of $700 million or more as of the last business day of our most recently completed second quarter, (2) have been required to file annual and quarterly reports under the Exchange Act for a period of at least 12 months and (3) have filed at least one annual report pursuant to the Exchange Act.
OrthobiologicsOverview
We are used to accelerate the healing of, or reduce pain experienced in, bones, joints or damaged musculoskeletal tissue by harnessinga 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 processes.process. We believe our non-invasive medical device and biologic products play a critical role in supporting the current U.S. annual totalbody’s own healing mechanisms to heal or eliminate the pain caused by orthopedic conditions and problems, which we define as our active healing products. These products address an estimated $6.0 billion market opportunity for orthobiologic productsacross OA joint pain treatment and joint preservation, spinal fusion surgery and bone fractures, each of which is approximately $3.0 billion and will grow at approximately 4–5% annually for the next five to seven years. There is additional opportunity outside the United States, particularly in HA viscosupplementation. These estimates for the U.S. market include non-surgical products, such as long boneexperiencing growth stimulation and HA viscosupplementation therapies; surgical bone graft substitute products, such as allografts, DBMs, synthetics, stem cells, BMPs/growth factors; spinal stimulation; cell therapies and orthopedic cartilage repair products. Market growth is being driven by improving technologies and unaddressed market needs,through multiple industry tailwinds, including an aging population, increased incidence of spinal disorders drivingparticipation in sports and active lifestyles and a rise in obesity rates. Our devices are most often used to delay or replace the need for spinal fusion surgeryan elective surgical procedure and increased incidenceare focused on reaching patients early on in their treatment paradigm. In 2019, approximately 85% of osteoarthritis leadingour $340.1 million in revenues were derived from products associated with non-surgical procedures. Our products are widely reimbursed by both public and private health insurers and are sold in the physician’s office or clinic, in ASCs, and in the hospital setting in the United States and across 37 countries. We have broad commercial reach across our established orthopedic customer base, which is a key strength of the company. We are focused on leveraging this significant customer base and the reach of our commercial organization to continue to grow the need for HA viscosupplementation therapy or surgery.company by expanding our market share and product portfolio. This strategy has led to a 7.4% CAGR in revenue since 2016 and during this time period, our revenue has grown from $274.5 million to $340.1 million in 2019.
The chart below summarizes the U.S. orthobiologics market, key product categories andOur existing portfolio of products is grouped into three verticals based on our products in each of those categories:targeted customer focus:
| U.S current market size (in millions) | 2014–2021 Market CAGR | Primary applications | Bioventus product offerings (1) | |||||||||
Non-surgical | ||||||||||||
Long bone stimulation | $
| 300
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| 1.9%
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| • Fracture repair
| • Exogen
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HA viscosupplementation (2) | $ | 873 | 6.1% | • Alleviation of osteoarthritis pain through single, three or five injection regimens | • Supartz FX,Durolane+, GelSyn-3* | |||||||
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Subtotal | $ | 1,173 | ||||||||||
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Surgical—Bone graft substitutes |
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Allografts | $ | 132 | (0.9)% | • Spinal fusion, trauma and other bone repair applications | • Purebone | |||||||
DBMs | $ | 365 | 2.3% | • Spinal fusion, trauma and other bone repair applications | • Exponent | |||||||
Synthetics | $ | 361 | 5.7% | • Spinal fusion, trauma and other bone repair applications | • Signafuse, Interface, Osteoplus | |||||||
Stem cells | $ | 178 | 16.9% | • Spinal fusion, trauma and other bone repair applications | • No offerings | |||||||
BMPs/growth factors | $ | 372 | 0.6% | • Spinal fusion, trauma and other bone repair applications | • OsteoAMP | |||||||
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Subtotal | $ | 1,408 | 5.2% | |||||||||
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Other markets | ||||||||||||
Spinal stimulation | $ | 250 | N/A | • Spinal fusion | • No offerings | |||||||
Cell therapy | $ | 143 | 4.0% | • Injectable platelet-rich plasma used for soft tissue repair | • No offerings | |||||||
Orthopedic cartilage repair | $ | 92 | 3.8% | • Autograft-, allograft- and microfracture-based cartilage repair | • No offerings | |||||||
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Subtotal | $ | 485 | ||||||||||
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Total | $ | 3,066 | ||||||||||
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| • | OA Joint Pain Treatment and Joint Preservation.We are the largest pure play orthopedics-focused company in the OA joint pain treatment and joint preservation market. We have been the fastest growing HA participant over the last three years, driving our share to number three by revenue in the U.S. |
Durolane, a single injection therapy, was launched in the United States in 2018 and is also marketed outside the |
| (b) | GELSYN-3, a three injection therapy, was launched in the United States in 2016; and |
| (c) | SUPARTZ FX, a five injection therapy, was launched in the United States in 2001. |
| • | Bone Graft Substitutes. We are the fastest growing participant in the BGSs market and offer a broad portfolio of |
| • | Minimally Invasive Fracture Treatment.Our Exogen system was the number one prescribed device in the bone growth stimulatory market in 2018 (the latest period for which data is available). It has had marketing authorization via a PMA through the FDA for over 25 years. We are the only company to utilize advanced, pulsed ultrasound technology for bone growth in delayed and nonunion fractures in all fracture locations except spine, as well as in fresh fractures of the tibia and radius. Our Exogen |
system offers significant advantages over electrical based long bone stimulation systems, including a documented mechanism of action, shorter treatment times and superior nonunion heal rates. The system is also sold internationally under a CE mark for nonunions and fresh fractures and is the market-leading bone healing treatment in the delayed union and nonunion market in Japan. |
Our expansive direct sales and distribution channel across our three verticals provides us with broad and differentiated customer reach, and allows us to serve physicians spanning the orthopedic continuum, including sports medicine, total joint reconstruction, hand and upper extremities, foot and ankle, podiatric surgery, trauma, spine and neurosurgery. Our OA joint pain treatment and joint preservation products and minimally invasive fracture treatment are sold by a direct sales team of approximately 240 in the United States and approximately 45 internationally. This direct sales team is complemented by approximately 20 account representatives who facilitate account access through IDNs, GPOs and payer contracting. Our BGS products are sold by approximately 170 independent distributors in the United States, each with their own independent sales force, supported by our 15 member regionalized sales support team. We market our BGSs primarily to orthopedic spine surgeons and neurosurgeons for use in the operating room in both the hospital and ASC setting. We believe that our broad customer reach has and will continue to enable strong and durable growth in each of our verticals and provides a significant foundation for future product launches.
In addition to our current portfolio, we have a deep pipeline of new products under development, and we are pursuing the development of line extensions and expanded indications for already marketed products that address a significant market opportunity within our current customer base. On October 29, 2020, we received FDA confirmation indicating its authorization of our IND, allow us to begin a clinical trial for MOTYS, a placental tissue biologic for knee OA for which we ultimately plan to pursue a BLA. We have recently entered into an option and equity purchase agreement with CartiHeal, which provides us with the option to acquire CartiHeal and its OrthobiologicAgili-C technology, which we believe is the only off-the-shelf scaffold implant designed to address osteochondral defects in the knee. CartiHeal submitted the non-clinical module of the PMA in January 2021 and expects to submit the final, clinical module of a Modular PMA in the fourth quarter of 2021 seeking FDA approval of Agili-C, which was granted breakthrough device designation by the FDA in the fourth quarter of 2020 for the treatment of musculoskeletal conditionscertain knee-joint surface lesions. We have also entered into an exclusive Collaboration Agreement with Harbor for purposes of commercializing PROcuff, a rotator cuff tissue repair product, and we anticipate filing a request for 510(k) clearance in either the second or third quarter of 2022. We intend to launch OsteoAmp Flowable in 2021 for use in minimally invasive spine procedures. Additionally, we are currently conducting clinical studies of our Exogen system pursuant to an IDE from the FDA, and we plan to use data from these studies to seek approval for expanded indications with respect to fresh fractures. We intend to leverage the clinical data to support payer coverage in this area. We submitted the PMA supplement for the first proposed label expansion in December 2020.
Long bone stimulationWe have grown our total net sales from $319.2 million for bone fracturesthe year ended December 31, 2018 to $340.1 million for the year ended December 31, 2019. Our total net sales declined from $242.6 million for the nine months ended September 28, 2019, to $222.6 million for the nine months ended September 26, 2020, related to the COVID-19
Fractures, pandemic. For the years ended December 31, 2019 and 2018 and the nine months ended September 26, 2020 and September 28, 2019, we had net income from continuing operations of $8.1 million $4.4 million, $12.5 million and $2.8 million, respectively. We have also known as broken bones, occur when there is a high force or impact put on a bone, most commonlygrown our Adjusted EBITDA from trauma resulting$72.2 million for the year ended December 31, 2018 to $79.2 million for the year ended December 31, 2019. Our Adjusted EBITDA declined from sports injuries, car accidents, falls or from osteoporosis, which is bone weakening due$48.5 million for the nine months ended September 28, 2019 to aging. Immediately following a fracture, patients are treated$44.3 million for the nine months ended September 26, 2020, related to realign the fractured bone ends. If possible or required,COVID-19 pandemic. The COVID-19 pandemic and the affected limb is immobilized using plaster or a splint. In some cases, fractures require surgical fixation with devices like screws, plates, rods and frames. X-rays, CT and MRI imaging are utilizedmeasures imposed to verify alignmentcontain the wide spread of the bonevirus disrupted our business beginning in early March 2020 as healthcare systems across the U.S. were forced to limit patient visits and elective surgical procedures. The effects of the pandemic began to assess progress towards healing.decrease in late April 2020 and we saw a very strong recovery for our products at the end of the second quarter as restrictions on orthopedic procedures were lifted across the United States and patients also returned to orthopedic offices. See the sections titled “Risk factors” and “Management’s discussion and analysis of financial condition and results of operations” for more information.
A fracture is considered
For a fresh fracture during the first seven days after the fracture occurs. After a fracture is treated, new bone tissue beginsreconciliation of net income (loss) from continuing operations to form and connect the broken pieces. With modern treatment methods, most fractures heal spontaneously over the course of several months following injury. However, some fractures fail to heal even when they receive the best surgical or non-surgical treatments. In clinical literature, it is estimated that five to ten percent of all fractures fail to heal, often in patients that have compromised health from old age, obesity, diabetes or smoking. An unhealed fracture can result in continued patient morbidity and require additional treatment. A nonunion is considered to be established when the fracture site shows no visibly progressive signs of healing. Long bone fractures, or fractures in the humerus, ulna, radius, femur, tibia and fibula, can be prone to nonunion, with tibial fractures accounting for the most common long bone nonunions. Mechanical instability due to inadequate immobilization, loss or reduction of adequate blood supplyAdjusted EBITDA, see Note 2 to the fracture siteinformation contained in “Prospectus summary—Summary historical and gapspro forma financial data.”
Our strengths
We believe that we have several key strengths that provide us with a competitive advantage:
| • | Broad customer reach and market access. We believe we have one of the largest sales organizations in the verticals in which we operate, including a direct sales team and distributors, with a dedicated focus on OA joint pain treatment and joint preservation products, BGSs and minimally invasive fracture treatments. We believe that our broad customer reach and market access are key factors contributing to our ability to increase our market share and grow faster than our competitors. Our sales organization has a performance culture built on serving our core orthopedic patient customers and delivering our products to a variety of physicians and care settings. We serve physicians spanning the orthopedic continuum, including sports medicine, total joint reconstruction, hand and upper extremities, foot and ankle, podiatric, trauma and spine. We believe we will continue to be well-positioned in the market given our strong foundation for reimbursement and customer access, coupled with a broad portfolio of clinically differentiated products. |
| • | Differentiated, market leading products across three verticals. We believe our portfolio of complementary, market leading products provides patients and physicians with greater flexibility in tailoring a treatment regime that best fits the patient’s needs and lifestyle. Our products are most often used to delay or replace the need for an elective surgical procedure and are focused on reaching patients early on in their treatment paradigm. In 2019, approximately 85% of our $340.1 million in revenues were associated with non-surgical procedures. We have the only complete one, three and five injection portfolio in the HA viscosupplementation market in the United States, which we believe gives patients the freedom of choice and appeals to the growing preference among providers to interact with a single vendor when accessing a complete portfolio of care. We also offer a comprehensive, clinically effective and cost efficient portfolio of BGSs to meet a broad range of patient needs and procedures. Our products are designed to improve bone fusion rates and avoid the cost and risks associated with autograft following spinal fusion and other orthopedic surgeries, and can be used in conjunction with any orthopedic fixation and spinal fusion implant. Additionally, our Exogen ultrasound bone healing system is the leader in
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| • | Substantial body of peer reviewed clinical evidence. We believe that clinical evidence is critical to demonstrating efficacy, achieving reimbursement coverage and demonstrating the value of medical products. We have invested in building evidence and support for our key offerings and product portfolio. Clinical evidence is vital to physicians as they look to make decisions about which product would best serve their patients. The safety and efficacy of our key offerings within each of our three verticals has been demonstrated by numerous clinical studies, published peer review research and clinical publications. We believe that our significant body of clinical evidence creates a competitive barrier to entry given the time and investment required to amass the amount of published data we have and is an asset that would take years for a competitor to try to replicate. |
| • | Robust free cash flow conversion. We believe that our robust free cash flow conversion and scale enables us to invest in our business in a meaningful way. Over the last four years, we have self-funded all internal research and development and business development efforts. We define free cash flow as net cash provided by operating activities from continuing operations as presented on our consolidated statement of cash flow plus interest expense as presented on our consolidated statement of operations less purchases of property and equipment and other on our consolidated statement of cash flow. Our free cash flow conversion, defined as free cash flow divided by Adjusted EBITDA, was 78% for the year ended December 31, 2019 and 93% from 2018 through September 26, 2020. With $340.1 million in revenues for the year ended December 31, 2019, we also have scale to pursue opportunities to grow |
our business, including internationally to regions such as China. Our attractive cash generation has and will continue to allow us to expand our deep pipeline of products through further internal research and development investment and additional tuck-in acquisitions that leverage our established infrastructure. |
| • | Experienced management team with a track record of value creation.Our senior leadership team has been involved in growing large and mid-cap businesses, including through major acquisitions and integrations, public and private equity company sale transactions and strategic equity investments, as well as the development, approval and launch of new and transformative active healing products. Our team also has extensive operating experience with respect to active healing products, which includes designing clinical trials, working closely with regulatory agencies on identifying the appropriate path to market, successfully commercializing products, including securing managed care, payer or purchasing committee contracts and effectively managing our direct or distributor sales organizations. |
Our growth strategy
We intend to pursue the following strategies to build a market-leading and customer-focused company centered on the OA joint pain treatment and joint preservation, BGSs and minimally invasive fracture treatments, and to continue to grow our net sales and Adjusted EBITDA:
| • | Continue to expand market share in HA viscosupplementation.We intend to increase sales of our HA viscosupplementation therapies and extend our market leadership in this category by building on our unique positioning as the only company to offer a one, three and five injection treatment regimen and by expanding payer coverage, which we have done successfully, increasing the number of lives under contract from 6 million to 48 million between April 2017 and April 2020. This increase in lives, along with our differentiated portfolio and dedicated direct sales team, has allowed us to achieve significant market share gains over the last several years and positioned us as the largest pure play orthopedic-focused company in the U.S. HA viscosupplementation market with a market share of approximately 17%. |
| • | Introduce new OA joint pain treatment and joint preservation products. To expand our offering beyond HA viscosupplementation therapies and build a comprehensive portfolio for the OA joint pain treatment and joint preservation, we are planning to commercially launch a range of new therapies over the next several years, including: |
| (a) | MOTYS. A placental tissue injectable biologic for knee OA, which we began selling in the cash pay market in the fourth quarter of 2020 as a Section 361 HCT/P pursuant to a temporary FDA policy of enforcement discretion. In parallel, we plan to pursue a required BLA premarket approval for this product, which we expect would expand insurance payment alternatives over time. |
| (b) | PROcuff. A bio-inductive collagen implant for regeneration of tendon tissue in the rotator cuff. We expect to file a request for 510(k) clearance in either the second or third quarter of 2022. |
| (c) | Agili-C. An off-the-shelf aragonite implant designed for implantation into osteochondral defects in the knee. We have an option to acquire this technology from CartiHeal upon FDA approval. CartiHeal submitted the non-clinical module of the PMA in January 2021 and expects to submit the final, clinical module of a Modular PMA in the fourth quarter of 2021 seeking FDA approval. |
| • | Further develop and commercialize our BGS portfolio. We intend to grow our presence in the BGS market and expand our reach into the operating room in both ASCs and hospitals. In the near-term, we plan to maintain and selectively expand our profitable product lines by adding to our U.S. distributor base in an effort to reach significantly underpenetrated markets. Over time, we intend to launch product line enhancements and invest in the development of next-generation BGS therapies to continue to grow our market share. Consistent with this strategy, we recently launched the Signafuse Bioactive Strip and anticipate launching the OsteoAmp Flowable in 2021. |
| • | Expand indications for use for our Exogen system.We are focused on generating incremental clinical data and peer-reviewed publications to expand our indications and continue to grow our market leading share. We are currently underway with the B.O.N.E.S. clinical studies, which are aimed at generating data to support label expansion in additional bone types and expanded reimbursement for the treatment of fresh fractures in patients at risk of nonunion due to certain comorbidities, such as diabetes or obesity. We commenced patient enrollment to study three specific bones in 2017 and expect a rolling release of data starting in late 2020. Depending on the results from our studies, we plan to submit a total of three PMA supplements to the FDA, the first of which was submitted in December 2020 seeking approval for the adjunctive treatment of acute and delayed metatarsal fractures to reduce the risk of non-union. We plan to submit the second PMA supplement in the second quarter of 2022 and the third PMA supplement in either the third or fourth quarter of 2023. |
| • | Invest in research and development.We are focused on internal research and development to broaden our portfolio of therapies to manage OA joint pain and joint preservation, expand our Exogen system product label and undertake clinical research to support commercialization of our next-generation of BGS products. We see significant opportunity to develop innovative and clinically differentiated products internally with our qualified research and development team. We rely on a team of 40 highly trained individuals to develop new products, conduct clinical investigations and help educate health care providers using our products. Our research and development team is comprised of 13 members holding PhDs and 18 members with more than 20 years of experience in the medical device industry. We collaborate with academic centers of excellence, leading contract research organizations and other industrial groups to complement and expedite execution of our research and development programs and minimize fixed costs. |
| • | Pursue business development opportunities. Consistent with our track record of partnerships and acquisitions of MOTYS, PROcuff and CartiHeal, we intend to continue to pursue business development opportunities that leverage our significant customer presence across orthopedics, broaden our portfolio and increase our global footprint. We will continue to search for clinically differentiated and cost-effective products and technologies that also balance our portfolio in terms of risk and time to market. |
| • | Opportunistically grow our international markets.We intend to focus our international business on markets where our existing portfolio can maintain profitable growth over time, either through direct or distributor based channels. For example, we launched OsteoAMP in Canada in 2020, where Durolane and Exogen had a market leading presence in 2016. We plan to selectively expand to new markets with Durolane, Exogen and our BGSs and intend to pursue further opportunities in the Asia Pacific markets. In particular, China represents an attractive and exciting market given its large and aging population as well as its rising middle class. We are adding a management team in China and will be creating a legal entity as we seek approval from the China Food and Drug Administration for Durolane, which we believe will be facilitated by the successful completion of our Chinese randomized controlled trial, or RCT. |
Our products
We offer a diverse portfolio of active healing products to serve physicians spanning the orthopedic continuum, including sports medicine, total joint reconstruction, hand and upper extremities, foot and ankle, podiatric surgery, trauma, spine and neurosurgery, in the physician’s office or clinic, ASCs or in the hospital setting.
Our portfolio of products is grouped into three verticals based on clinical use: (i) OA joint pain treatment and joint preservation, (ii) BGSs and (iii) minimally invasive fracture treatment.
OA joint pain treatment and joint preservation
Knee OA is a degenerative condition that is chronic in nature and is characterized by gradual breakdown and destruction of the cartilage in the knee. This condition develops over years and is often found in patients who
exhibit joint malalignment, have had a joint injury, or are overweight. The disease can involve joint inflammation and results in symptoms that include redness, warmth, swelling, stiffness, tenderness, limited range of motion and pain. As the condition advances, the knee joint gradually loses cartilage tissue and the cartilage layer attached to the bone deteriorates to the point where eventually the bone becomes exposed.
Knee OA is one of the five leading causes of disability among U.S. adults with an estimated 14 million individuals in the United States suffering from symptomatic knee OA. The prevalence of knee OA has increased over the past several decades in the United States, in line with the aging population and the growing obesity epidemic. Currently, the U.S. Census Bureau projects that nearly one in five U.S. residents will be aged 65 and older by 2030. As the chances of developing knee OA increase with each decade of life, we expect the number of individuals with knee OA to increase as the U.S. population as a whole becomes older. In addition, the Centers for Disease Control and Prevention, or CDC, estimates that one-third of the U.S. population is considered obese, and studies have shown that nearly two out of every three people who are obese will likely develop symptomatic knee OA in their lifetime. Furthermore, a study in the American Journal of Epidemiology has also shown that obese patients are significantly more likely to develop knee OA than non-obese patients. Accordingly, we believe that the number of individuals suffering from symptomatic knee OA in the United States will continue to grow.
Furthermore, costs due to hospitalizations for total knee replacements in patients with severe knee OA in the United States are estimated to be approximately $300 million$40 billion annually, underscoring the need for non-surgical treatments for this prevalent chronic condition.
Although there is no cure for knee OA, several non-surgical options for treatment exist, such as weight reduction, physiotherapy, physical exercise and braces for functional assistance. Pharmacological therapy is often prescribed for symptoms of pain. Among these therapies are off-the-shelf oral analgesics, such as acetaminophen and nonsteroidal anti-inflammatory drugs, topical nonsteroidal anti-inflammatory drugs and intra-articular corticosteroid injections. Oral nonsteroidal anti-inflammatory drugs have well-known toxicities, with the potential for adverse gastrointestinal effects. Intra-articular corticosteroid injections have been shown to growcause toxic effects in the joint, and a clinical study conducted by 1.9% annually with approximately 90,000 fractures treated with long bone stimulation devices per year.
HA viscosupplementationMcAlindon et al. in 2017 observed that repeated injection of corticosteroids into patients’ knees caused a measurable and significant loss in cartilage tissue. Furthermore, the pain relief provided by intra-articular corticosteroid injections is often short-lived (approximately three months), as observed by Bannuru et al. in a 2009 meta-analysis.
HAis a major component of the extracellular matrix in almost all living tissue whichthat is produced naturally by the human body and is concentrated in the joints, cartilage and skin. HA is a natural lubricant and a major component of synovial fluid and articular cartilage and has an important anti-inflammatory role, causing inhibition of tissue destruction and facilitating tissue healing. Viscosupplementation is a procedure in which HA is injected into the body. Injoint. Within the United States, the FDA has approved the use of HA injections for treatment of pain caused by knee osteoarthritis, as well as other non-orthopedic applications.OA. Outside of the United States, HA viscosupplementation is used for treatment of OA in other orthopedic indicationsjoints in addition to the knee, such as the hip, ankle, shoulder elbow and shoulder, as well as other non-orthopedic applications.small joints.
Knee osteoarthritis is a degenerative condition that is chronic in nature and caused by gradual breakdown and destruction of the cartilage in the knee. This condition develops over years and is often found in patients who have had an infection or injury, or those who are overweight. The disease causes joint inflammation and results in symptoms that include redness, warmth, swelling, stiffness, tenderness, limited range of motion and pain. As the condition advances, the knee joint gradually loses its ability to regenerate cartilage tissue and the cartilage
layer attached to the bone deteriorates to the point where eventually the bone becomes exposed. Knee osteoarthritis is one of the leading causes of disability in people 65 years of age or older, resulting in a major impact on healthcare costs.
Although there is no cure for knee osteoarthritis, several options for conservative treatment exist. These include weight reduction, physiotherapy, physical exercise and braces for functional assistance. Pharmacological therapy is prescribed for pain relief. Among these therapies are ordinary oral analgesics, such as acetaminophen and nonsteroidal anti-inflammatory drugs, topical nonsteroidal anti-inflammatory drugs, and intra-articular corticosteroid injection. However, patients with knee osteoarthritis often have comorbidities such as obesity and hypertension, which precludes the use of such analgesics in these patients. Oral nonsteroidal anti-inflammatory drugs have well-known toxicities and the effects of acetaminophen on knee osteoarthritis symptoms are modest at best. Although intra-articular corticosteroid injection is generally considered to have a positive safety profile, it has been shown to cause a transient increase in blood glucose, which may be a concern for diabetic patients. These injections often provide a relatively short period of effective relief.
The treatment regimen for HA viscosupplementation therapies usually involves a series of injections in the knee, with the number of injections depending on the labellingtype of formulation, the technology used to chemically modify HA to increase its longevity, as well as the preference of the product usedpatient and the patient.physician. Pain relief is usually obtained byexperienced within four to twelve weeks and the effect has been shown to last for up to severalsix months. The safety of viscosupplementation has been established- infrequent potential side effects of knee OA injections include joint swelling and pain. Injection schedules vary from one to five injections and patients are generally advised to repeat the injection schedule if they are satisfied with the previous injection course. In a 2016 study, Bannuru et al. observed multiple cycles of HA viscosupplementation treatment to be safe and effective. A recent2015 study conducted on claims data and published inPLoS ONE has shownshowed that HA injection isinjections are associated with a significant delay in total knee replacement. For example,In the cohort evaluated in this study, patients who received no HA viscosupplementation therapy had a median time-to-total knee replacement of approximately 0.3 years.four months. With
one course of HA viscosupplementation therapy, the median time to total knee replacement increased to more than one year12 months and with more than five courses this number increased to 3.6 years. Thus, the dose-response relationship between the number38 months, suggestive of HA courses and time-to-total knee replacement suggests there is a significant clinical benefit from HA injections. Potential side effects of knee osteoarthritis injections include joint swelling and pain. Among the co-authors of this study was an employee who received a salary from us as well as an employee of one of our major suppliers, Seikagaku Corporation, which also sponsored the research. However, neither we nor Seikagaku Corporation has had any additional role in the study design, data collection and analysis, decision to publish or preparation of the manuscript.
Knee osteoarthritis is one of five leading causes of disability among U.S. adults and costs due to hospitalizations for total knee replacements in patients with severe knee osteoarthritis are estimated to be over $30 billion annually. We estimate that over 21 million adults age 60 or over suffer from knee osteoarthritis. The Centers for Disease Control and Prevention, or CDC, estimates that one-third of the U.S. population is considered obese and studies have shown that nearly two in three people who are obese will likely develop symptomatic knee osteoarthritis in their lifetime. Further, a study in theAmerican Journal of Epidemiology has shown that obese patients were found to have approximately a four to five times greater chance of developing knee osteoarthritis than non-obese patients. Neither we, our employees or our major suppliers were involved in this study.
In 2014,2019, there were approximately 1.6an estimated 2.4 million HA viscosupplementation treatmentsprocedures performed in the United States, with that number expected to grow torepresenting approximately 2.2a $1 billion market size across single, three and five injection treatments. The $476.0 million treatments in 2020. Thesingle injection market has historically grown as each new entrant brings new sales representativesa projected 6.5% CAGR from 2019 to further expand an underpenetrated total addressable market. The HA viscosupplementation therapy market is currently approximately $850–900 million in the United States.2024 driven by economic advantages and greater patient convenience and compliance. The market opportunity for the $405.0 million three injection segmentmarket has steadily grown by 3–5% from 2009a projected CAGR decline of (3.1)% and is projected to grow at this rate through 2021. We intend to launch a three injection therapy, GelSyn-3, in the second half of 2016. The single injection market is growing at 11–15% per year, but the$113.0 million five injection market is slowly declining. Despitehas a projected CAGR decline of (13.6)% from 2019 to 2024. However, we believe the decline for the five injectionmulti-injection treatment market we continuecontinues to consider it abe viable market as we believe there is a pool of physicianspatients that will continue to believeprefer these treatment protocols.
We have the only complete one, three and five injection portfolio in multi-injection treatment
protocols, as well as those patients that simply do not respond to single or three injection treatment courses. The overallthe HA injectionviscosupplementation market in the United States with Durolane, GELSYN-3 and SUPARTZ FX.
Product | Description | Regulatory pathway | Region where marketed(1) | |||
| Single injection HA viscosupplementation therapy | • PMA • Device approval by Health Canada • CE mark and other registrations(2) | • United States • Canada • Europe | |||
| Three injection HA viscosupplementation therapy | • PMA | • United States | |||
| Five injection HA viscosupplementation therapy | • PMA | • United States | |||
| (1) | We maintain exclusive distribution agreements with respect to Durolane, GELSYN-3 and SUPARTZ FX in the United States. We maintain exclusive distribution agreements and own certain assets with respect to Durolane outside the United States. |
| (2) | Durolane is also approved for marketing in Argentina, Australia, Brazil, Columbia, India, Indonesia, Jordan, Malaysia, Mexico, New Zealand, Russia, Switzerland, Taiwan, Turkey and the UAE. |
Single Injection Therapy
Durolaneis a sterile, transparent and viscoelastic gel that is a single injection therapy that is indicated for the symptomatic treatment of OA in the knee in the United States. Durolane is also indicated for the hip, ankle and shoulder, as well as for treatment of other small orthopedic joints outside the United States. Durolane contains high levels of HA and is injected directly into the joints affected by OA to relieve pain and restore lubrication and cushioning. This may improve joint function and help to potentially avoid or delay knee replacement surgery.
Physicians administer Durolane to the affected knee joint in a single injection and it has been observed to provide a benefit for pain reduction in patients with OA in the knee for up to 26 weeks. Durolane’s injection schedule results in economic advantages and greater patient convenience and compliance compared to other HA viscosupplementation therapies which require weekly injections over a period of three to five weeks. For example, we believe that changes in physician visiting patterns, as a result of the COVID-19 pandemic, have led to increased preference for single injection therapies.
Durolane is highly purified and based upon a natural and patented non-animal stabilized HA, or NASHA, expanding use to patients who are allergic to animal derived solutions.
Comparison of major FDA-approved single injection HA viscosupplementation therapies
Product Manufacturer or distributor | Indication | Source and process | Active ingredient / | Duration | ||||
Bioventus | OA of the knee | Non-animalstabilized HA | NASHA / (60 mg) | Six months | ||||
Synvisc-One Sanofi S.A. | OA of the knee | Animal sourced Hylan A and Hylan B polymers | Hylan G-F 20 / (48 mg) | Six months | ||||
Monovisc DePuy Orthopaedics, Inc. | OA of the knee | Non-animal cross-linked sourced HA | 2.2% sodium hyaluronate / (88 mg) | Six months | ||||
Gel-One Zimmer Biomet Holdings, Inc. | OA of the knee | Animal sourced HA | 1.0% sodium hyaluronate /(30 mg) | Three months | ||||
Durolane clinical data
Durolane’s proprietary stabilizing technology substantially extends the amount of time it remains in the joint. Multiple studies have been conducted to determine Durolane’s half-life, which is the amount of time needed for 50% of the injected material to be broken down and excreted from the body.
In one study, Durolane’s half-life in the joint was studied in a rabbit model. Results showed the Durolane remained in the joint with an observable half-life of 32 days, substantially longer than the half-lives of Synvisc and unmodified HA, as determined in comparable studies, which were 1.5 days and less than 1 day, respectively.
The long half-life of Durolane was also observed in the 2002 Lindqvist et al. human study where six healthy volunteers were given a single injection of Durolane that contained a radioactive isotope that could be traced, allowing scientists to measure Durolane’s elimination from the body over time. The results showed a 30-day half-life, indicative of the expected long residence time in the joint due to Durolane’s proprietary stabilizing technology and pre-clinical studies.
In terms of efficacy, Durolane has been directly compared against the main intra-articular therapeutic options available for managing osteoarthritic pain: SUPARTZ FX, a five injection product, Synvisc One, a single injection product and methylprednisolone acetate, an intra-articular corticosteroid.
In a multi-center randomized, blinded, controlled trial of 349 patients with mild-to-moderate knee OA, Durolane was compared with SUPARTZ FX. This 2015 Zhang et al. study concluded that one injection of Durolane was non-inferior to five weekly injections of SUPARTZ FX in terms of pain, stiffness, physical function and global self-assessment.
In an independent, investigator-initiated randomized, controlled study involving 213 patients with mild-to-moderate knee OA, Durolane was further compared to Synvisc-One. After following up with the patients over a span of 12 months following the treatment, the results from this 2013 McGrath et al. study showed that Durolane produced significantly more durable pain relief effects than Synvisc-One, while also providing longer-lasting improvements in range of motion and a reduction in the use of pain medication for study participants.
Greater Reduction in Knee Pain versus Synvisc-One
(n=168)
Mean values +/- standard deviation
In a separate prospective, multi-center, randomized, active-controlled, double-blind, non-inferiority clinical trial with 442 enrolled patients with knee OA, it was observed that single injection Durolane was well tolerated and non-inferior compared to the corticosteroid methylprednisolone acetate at twelve weeks. Methylprednisolone acetate is a steroid injectable formulation used to treat pain and swelling that occurs with OA and other joint disorders. The effect size for pain, physical function and stiffness scores favored Durolane over methylprednisolone acetate from twelve to 26 weeks. The benefit of Durolane was maintained through 26 weeks, while that of methylprednisolone acetate declined during the same period. An additional injection of Durolane at 26 weeks conferred improvements through 52 weeks without increased sensitivity or risk of complications compared to the initial injection. One subset of 31 patients treated with Durlane remained pain free after six months from the first injection and did not elect to receive a second injection.
As of September 26, 2020, over 2 million injections of the Durolane formulation have been safely administered globally since its international launch in 2006. We launched Durolane in the United States in March 2018 and have owned certain Durolane assets outside of the United States relating to trademark, product registrations and clinical data since November 2015.
Three Injection Therapy
GELSYN-3 is an FDA-approved sterile, buffered solution of highly purified sodium hyaluronate that is administered as a three injection HA viscosupplementation therapy. It is indicated for the treatment of pain due to knee OA in patients who have failed to respond adequately to conservative non-pharmacologic therapy and simple analgesics. The solution treats knee OA by providing temporary replacement for the diseased synovial fluid and restoring lubricity of bearing joint surfaces. Physicians administer GELSYN-3 to the affected knee joint once a week for three consecutive weeks. GELSYN-3 provides relief of knee pain and may help delay the need for total knee replacement surgery. GELSYN-3 is derived from bacterial fermentation, is highly purified and does not involve the use of animal products, thereby reducing the potential risk of an immune response following
injection. We currently market GELSYN-3 in the United States. As of September 26, 2020, approximately 750,000 injections of the GELSYN-3 HA formulation have been safely administered in the United States since its launch in 2016.
GELSYN-3 clinical data
The safety and efficacy of GELSYN-3 was assessed in a prospective, multicenter, randomized, controlled, double-blind, non-inferiority pivotal study that enrolled 381 adult patients with knee OA. Patients were randomized to receive three weekly injections of GELSYN-3 or three weekly injections of Synvisc 3, a three injection regimen commercialized in the United States by Sanofi S.A., with follow-up visits scheduled up to 26 weeks. GELSYN-3 was observed to be non-inferior to Synvisc 3 at the 26-week time point.
Five Injection Therapy
SUPARTZ FX is an FDA-approved sterile and viscoelastic solution of HA that is administered as a five injection HA viscosupplementation therapy. It is indicated for the treatment of pain in patients with knee OA who failed to adequately respond to conservative nonpharmacological therapy and simple analgesics. The solution treats knee OA by providing temporary replacement for the diseased synovial fluid and restoring the lubricity of the bearing joint surfaces. Physicians administer SUPARTZ FX to the affected knee joint once a week for five consecutive weeks. SUPARTZ FX may also delay the need for total knee replacement. SUPARTZ FX is derived from HA extracted from certified and veterinary inspected chicken combs. Risks can include general knee pain, warmth and redness or pain at the injection site. We currently market SUPARTZ FX in the United States. As of March 31, 2020, over over 410 million injections of the SUPARTZ FX HA formulation have been safely administered globally since its launch in 1987.
SUPARTZ FX clinical data
In a double blind, randomized, multicenter, parallel group study conducted by Day et al. in 2004 of the effectiveness and tolerance of intra-articular SUPARTZ FX compared to control (saline) treatment for knee OA, it was observed that SUPARTZ FX reduced knee pain in patients during the post-injection period by about 50% from the baseline. Of 240 patients randomized for inclusion in the study, 223 patients were evaluable for the modified intention to treat analysis and the statistically significant difference from the control was apparent after the series of injections was complete. Intra-articular SUPARTZ FX therapy was shown to be more effective than saline in mild to moderate knee OA for the 13-week post injection period of the study.
The safety and efficacy of SUPARTZ FX was observed by Strand et al. in an integrated analysis. This integrated analysis included five separate double-blind, randomized, saline-controlled trials, and included a total of 1,155 patients comparing five weekly injections of SUPARTZ FX versus a saline placebo. The pooled results from this study showed that SUPARTZ FX produced statistically significantly greater reduction from baseline in total Lequesne scores, a measure of overall function including pain. The incidence of adverse events were observed to be minimal and similar in both treatment arms. Furthermore, none of the reported adverse events were observed to be deemed treatment-related suggesting that SUPARTZ FX was safe and well-tolerated.
Comparison of FDA-approved multi-injection HA viscosupplementation therapies
Product Manufacturer or distributor | Indication | Source and | Active ingredient / | Number of per course | Duration | |||||
Bioventus | OA of the knee | Fermented, bacterial derived HA | 0.84% sodium hyaluronate (50.4 mg) | Three | Six months | |||||
Bioventus | OA of the knee | Naturally derived, purified HA | 1.0% sodium hyaluronate (75/125 mg) | Three to Five | Six months | |||||
Synvisc Sanofi S.A. | OA of the knee | Hylan polymers, purified HA | 0.8% Hylan G-F 20 (48 mg) | Three | Six months | |||||
Euflexxa Ferring Pharmaceuticals Inc. | OA of the knee | Fermented, bacterial derived HA | 1.0% sodium hyaluronate (60 mg) | Three | Six months | |||||
Hyalgan Fidia Farmaceutici S.p.A. | OA of the knee | Naturally derived, purified HA | 1.0% sodium hyaluronate (60 mg/100 mg) | Three to Five | Six months | |||||
Genvisc-850 OrthogenRx, Inc. | OA of the knee | Fermented, bacterial derived HA | 1.0% sodium hyaluronate (75/125 mg) | Three to Five | Six months | |||||
Development and Clinical Pipeline
Amniotic tissue products for the treatment of OA
Collaboration and development agreement for MOTYS
On May 29, 2019, we entered into a Development Agreement with MTF to develop an injectable placental tissue product, MOTYS, for use in the OA joint pain treatment and joint preservation.
The development and commercialization of the product will take place in two stages, and we began limited commercialization of MOTYS to a cash pay only market in the fourth quarter of 2020 as a Section 361 HCT/P pursuant to the FDA’s policy of enforcement discretion allowing for marketing without the required BLA approval until May 2021, while in parallel we pursue a BLA pre-market approval for the product. Once approved as a biologic, MOTYS will be eligible for health insurance reimbursement and hence gain access a broader patient population.
Given these products are currently sold in the cash pay market, there is limited industry data available on the current market for amniotic injectables. The approximately $110.7 million U.S. amniotic tissue market for orthopedic, sports and spine applications is estimated to reach approximately $271.3 million in 2023, a projected 25.1% CAGR from 2019 to grow2023. We expect that demographic trends coupled with industry focus, expected positive clinical trial outcomes and potential for future coverage and reimbursement will drive further interest in amniotic tissue products.
We are planning to conduct randomized clinical trials to ultimately support the submission to the FDA of a BLA for the use of MOTYS in the OA joint pain treatment.
Based on our preclinical evidence, we believe the MOTYS formulation holds potential for mitigating OA joint pain while protecting damaged cartilage and promoting anti-catabolic and pro-anabolic events that could ultimately result in delayed disease progression in OA. We have completed extensive in vitro and in vivo studies comparing the effect of MOTYS to the clinical standard of care (steroid injections). MOTYS provided non-inferior pain relief effects to a steroid, but was superior in its effect on cartilage protection and in promotion of new tissue formation.
On October 29, 2020, we received FDA confirmation indicating its authorization of our IND and plan to initiate clinical studies by 6.1% overyear end. Amniotic products have been extensively and safely used in clinical practice, and FDA has granted Regenerative Medicine Advanced Therapy, or RMAT, designation to other amniotic tissue products being investigated for use in OA, which enables an expedited development pathway as well as eligibility for increased and earlier interactions with FDA. We intend to submit a request for RMAT designation for MOTYS in .
Implantable for the periodtreatment of rotator cuff injuries
Development collaboration agreement for PROcuff
On August 23, 2019, we entered into an exclusive Collaboration Agreement with Harbor to develop and license the rights to commercialize a woven-suture-collagen composite implant product, PROcuff, for the regeneration of tendon tissue.
Concurrently with the execution of the agreement, we purchased $1.0 million of shares of Harbor. As a result of Harbor’s achievement of certain milestones, on October 5, 2020, we purchased $1.0 million of additional shares of Harbor.
The sole use of proceeds from 2014—2021.these investments is for the development of the woven-suture-collagen composite implant product and we have the right to purchase the product from Harbor once it is cleared for marketing by the FDA.
According to SmartTRAK Business Intelligence, there will be an estimated 534,000 rotator cuff injuries surgically repaired in the United States in 2020, and at least one quarter of those injuries are in scope for PROcuff technology. The European market, valued at€265.6 million,composite implant could also be used in additional tendon/ligament disorders in other extremities. The number of rotator cuff injuries surgically repaired in the United States is expected to grow to 802,000 procedures by 2024.
We have currently completed a pilot sheep implantation study through a collaboration with a prominent academic investigator. Results indicate that the material is well tolerated, rapidly integrated and promotes the formation of new tendon tissue at the bone tendon interface.
We expect to file a request for 510(k) clearance in either the second or third quarter of 2022. We plan to conduct post-clearance human clinical studies with the composite implant to further demonstrate the safety and efficacy of the product, and facilitate reimbursement.
Treatment of Cartilage for Osteochondral defects
CartiHeal (developer of Agili-C) investment and option and equity purchase agreement
On July 15, 2020, we made a $15.0 million equity investment in CartiHeal, a privately-held company headquartered in Israel and developer of the proprietary Agili-C implant for the treatment of joint surface lesions in traumatic and osteoarthritic joints.
We believe Agili-C is the only product in clinical development in the United States as an off-the-shelf scaffold implant that is designed to regenerate hyaline cartilage and subchondral bone simultaneously. The
associated surgical procedure is similar to osteochondral allograft implantation, but is a single-step process and is easier, faster and more cost-effective. We believe this is the first cartilage repair technology to be tested in trials designed for regulatory approval in the United States in non-OA and OA patients, potentially unlocking applications for millions of patients with knee OA and cartilage defects. We also believe Agili-C will enable the treatment of cartilage lesions in a significant population of OA patients, including those younger, active patients for whom available treatment options are limited. The FDA’s grant of breakthrough device designation in the fourth quarter of 2020 for the treatment of an ICRS grade III or above knee-joint surface lesions(s), with a total treatable area of 1-7cm2, without severe osteoarthritis (Kellgren-Lawrence grade 0-3) is a promising development, as such designation may help patients receive more timely access to Agili-C by expediting its development, assessment and review by the FDA. On January 12, 2021, CMS issued a final rule under which a breakthrough device designation by the FDA also provides a streamlined pathway to national Medicare coverage for a period of four years, beginning as early as the FDA approval for the product. The approximately flat$110.0 million U.S. knee cartilage repair market for 2020 is estimated to reach approximately $197.0 million in 2026, a projected 10% CAGR from 2019 to 2026. We believe Agili-C also has the potential for broader indications for use in other joints, providing entrance into an approximately $1.3 billion global market for cartilage repair products designed to delay or eliminate the need for knee replacements.
In preclinical studies, Agili-C was associated with osteochondral regeneration, good lateral integration and hyaline cartilage formation in critical size defects at 20 months when implanted in a goat, with the implant being fully resorbed between six to 20 months.
The Agili-C implant has been implanted in more than 190 patients outside the United States with follow up of more than four years and is CE marked. The implant is currently being evaluated in a pivotal study pursuant to an IDE filed with the FDA. The trial’s objective is to demonstrate the superiority of the Agili-C implant over the periodsurgical standard of care (microfracture and debridement) for the treatment of cartilage or osteochondral defects, in both osteoarthritic knees and knees without degenerative changes. The study’s protocol design, which is based on feedback from 2014—2021.multiple pre-IDE interactions with the FDA, involves broad inclusionary criteria, such as defect size, age, and etiology, multiple controls, including microfracture and debridement, and multiple pre-planned secondary endpoints. The study has an adaptive design, which allows for a maximum of 500 planned patients, includes multiple interim analyses to estimate sample size needs and includes EU, Israeli and U.S. sites.
Our CartiHeal investment follows the recently completed enrollment and reporting of interim results in CartilHeal’s IDE multinational pivotal study for Agili-C.
This investmentis expected to enable CartiHeal to complete the study, including all patient follow-up, and submit a PMA to the FDA. Under the equity purchase agreement, CartiHeal can secure an additional $5.0 million from us, if needed, for IDE study completion. We previously made an initial $2.5 million investment in CartiHeal in January 2018 and a subsequent investment of $0.2 million in January 2020 as part of prior CartiHeal financing rounds. Any additional investment we make will be subject to customary closing conditions.
We concurrently entered into an Option and Equity Purchase Agreement with CartiHeal and its shareholders, which provides us with an exclusive option to acquire 100% of CartiHeal’s shares, or the Call Option, and provides CartiHeal with a put option that would require us to purchase 100% of CartiHeal’s shares under certain conditions, or the Put Option. The Call Option is exercisable by us upon closing of the investment. The Put Option is only exercisable by CartiHeal upon pivotal clinical trial success, including achievement of certain secondary endpoints and FDA approval of the Agili-C device with a label consistent in all respects with pivotal clinical trial success.
If not previously exercised, the Call Option and the Put Option terminate 45 days following the FDA approval of Agili-C or in the event of failure of the pivotal clinical trial. We also have the right to terminate the Call Option and Put Option at any time ending 30 days after receipt from CartiHeal of the statistical report regarding the final results of the pivotal clinical trial upon payment of a breakup fee of $30.0 million.
Consideration for the acquisition of all of the shares of CartiHeal pursuant to the Call Option or Put Option would be $350.0 million, all of which would be payable at closing, with an additional $150.0 million payable upon achievement of certain sales milestones related to Agili-C.
Bone graft substitutesGraft Substitutes
BGSs in spinal fusion and other procedures
Bone grafting is a surgical procedure used to fuse spinal bones,vertebrae, replace missing bone,bones, fix bones that are damaged from trauma or problem joints, or to facilitate growing bonebones around an implanted device, such as a total knee replacement. The bonebones used in a bone graft can come from a particular patient’s own body, which is referred to as an autograft, or from a donor, which is referred to as an allograft, or can be entirely man-made.man-made, referred to as a synthetic. Most bone grafts are expected to be reabsorbed and replaced as the natural bone heals over a few months.
In some spinal fusion procedures, parts of the spinal bonesvertebrae are removed to facilitate the procedure. The removed bone can be saved and used as the graft, known as a local autograft. The advantages areGiven that it is the patient’s own bone, and thusthe advantage is that it will not be rejected and it avoidseliminates the need to harvest bone from elsewhere in the body. The disadvantage is that there is a limited amount of bone that can be harvested from the small spinal bones, especially as patients getthe patient gets older and their bones tend to thin and weaken.
An autograft can also be harvested from other parts of the patient’s body such as the hip, rib or other areas of the spine. Iliac crest bone taken from a patient’s hip has been considered the preferred bone graft material to promote successful fusion because it is easy to access, provides good quantities of its graft characteristicscortical and because itcancellous bone, has natural curvatures that aid in the creation of grafts and does not carry the risk of rejection or disease transmission. Serious complications include increased risk of subsequent pelvic fracture, peripheral nerve dysfunction causing numbness or weakness and infection. Additional difficulties with the procedure include increased operative time and blood loss and limited supply of bone graft and increased postoperative pain. However, despite these potential adverse events, autograft procedures are still performed regularly with approximately 190,000 performed in the United States in 2014 according to the American Academy of Orthopeadic Surgeons. The major drawback to the use of an autograft is graft-site morbidity and itsassociated major complications such as deep infection, iliac fracture, chronic pain and arterial injury, among others. There is also extra cost associated with autograft bone grafting procedures, which face difficulties and complications such as increased operative time, blood loss, limited supply of bone graft, increased risk of subsequent pelvic fracture, peripheral nerve dysfunction causing numbness or weakness, postoperative pain and infection. Despite these potential adverse events, autograft bone grafting procedures are still performed regularly with approximately 175,000 performed in the United States in 2019.
To avoid the morbidity and cost of harvesting autograft, significant timea number of BGSs have been developed and expense has been dedicated to the development and commercialization of bone graft substitutescommercialized for orthopedic applications. There are several bone graft substitutestypes of BGSs that have been developed and commercialized, including BMPs/growth factors, stem cells, synthetics, DMBsDBMs and allografts.
Different bone graft substitutesBGSs are often combined in a procedure to achieve the key elements of successful bone regeneration, which are:include osteoinduction, osteoconduction and osteogenesis. Osteoinduction refers to the ability of an implant to stimulate bone formation based primarily on soluble growth factor signals. Osteoconduction refers to the ability of an implant to promotefacilitate bone formation based primarily on a physical matrix or scaffold, when placed adjacent to viable bone tissue. Osteogenesis refers to the ability to promotefacilitate new bone formation based primarily on the viable stem cells contained within the bone graft. Bone graft substitutes,BGSs, depending on their design, can be used entirely in place of an autograft or by extending the volume of an autograft by combining it with the bone graft substitute.BGS.
Surgeons utilize bone graft substitutesBGSs in spinal fusion, orthopedic trauma, foot and ankle, hand and wrist, hip and knee and craniomaxillofacial surgeries. Our Surgical products are primarily used in spinal fusion and orthopedic trauma surgeries. Below is a brief description of these applications:
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Allografts. Allograft bone is harvested from cadaveric femora or iliac crests. Depending on the preparation process, allograft exhibits osteoconductive and sometimes osteoinductive properties. The preparation process can leave allograft devoid of many of the growth factors that foster osteoinduction. Allograft lacks osteogenic properties because of the absence of viable stem cells. It comes in a variety of forms including freeze-dried, fresh-frozen, morselized and cancellous chips. There were approximately 230,000 procedures utilizing allograft performed in 2014. Compared to other bone graft substitutes, allograft is less expensive and more readily available.
Demineralized bone matrix. DBM is an allograft material obtained from cadaveric bone that is frozen, freeze-dried and devoid of mineral content as a result of an acid extraction process that isolates type-1 collagen proteins and growth factors, including BMP. The resulting matrix is combined with a variety of carrier materials to produce the ultimate commercial formulation. Though DBM lacks structural strength, it provides osteoconductive and osteoinductive properties, which can make it an effective bone graft substitute for spinal fusion and other orthopedic procedures. The structural matrix consisting of type-1 collagen provides osteoconductive activity. Varying degrees of osteoinductive activity results from the significant variation in relatively small concentrations of growth factors and the carrier materials chosen. DBM has excellent handling characteristics and is available in multiple forms, including putty, gel, powder, fiber, flexible sheets or mixed with cortical chips. The main disadvantage of DBM is the inherently variable osteoinductive properties between products that are present due to the differences in demineralization process, storage, washing procedure, sterilization method and source of the bone among manufacturers. In comparison to standard allograft chips, DBM is more expensive to produce because of demineralization processing, thus commanding a higher average selling price, which is nearly double that of allograft. There were approximately 320,000 procedures involving DBMs in 2014.
Synthetics. Synthetics are produced from ceramics such as hydroxyapatite, beta-tricalcium phosphate and bioactive glass. Synthetics are osteoconductive, biodegradable and non-immunogenic, contain no risk of disease transmission, are readily available in large quantities and are inexpensive to manufacture. Synthetics are neither osteogenic nor osteoinductive. They are designed to have porosity and pore size optimized for bony ingrowth. The rate of resorption is important when considering these products for spinal fusion procedures. Beta-tricalcium phosphate is absorbed over several months and hydroxyapatite is absorbed over the course of years. Bioactive glass is a group of synthetic silicate-based materials, characterized by their bioactivity and their unique bone-bonding properties. Bioactive glass is composed mainly of silica, sodium oxide, calcium oxide and phosphates. The bone-bonding reaction results from a sequence of reactions in the glass and its surface. After long-term implantation, this biological mineral layer is partially replaced with bone. The porosity of
bioactive glass provides a scaffold on which newly-formed bone can be deposited. Synthetics can be fashioned to many different sizes and shapes. A disadvantage of synthetics is that they possess limited shear and compressive strength. There were approximately 275,000 procedures involving synthetics in 2014. The average selling price of synthetics is slightly more than DBM and more than twice the price of an allograft.
Stem cells. Current commercial stem cell bone graft substitutes are obtained from cadaveric cancellous bone, in which selective cell preservation is achieved by tissue processing and washing, with the addition of DBM. The resulting bone graft substitute contains viable multipotent adult stem cells, known as mesenchymal stem cells. Stem cell therapies are usually costly, with the average selling price over six to seven times that of allograft. Despite the increased interest in this space by the academic community and some surgeons, doubts still remain as to whether or not stem cells will emerge as a viable bone graft substitute. We believe there is currently limited clinical data to support their use. There were approximately 75,000 stem cell procedures done in 2014.
BMPs/growth factors. In 1965, Dr. Marshal Urist published his landmark discovery that trace amounts of a discrete protein found in DBM was responsible for the formation of new bone tissue in places it would normally not form. A few years later, Dr. Urist and his fellows termed their discovery as BMP. This protein exhibits osteoinductive activity by influencing mesenchymal stem cells through a complex signaling pathway to stimulate osteoblasts, or the cells that secrete the matrix for bone formation, to produce bone. In order to extract BMP from cadaveric bone, the bone matrix must first undergo demineralization, a process whereby the mineral content has been removed. Processing and sterilization methods applied to allograft tissue vary and can lead to constrained yield amounts of BMP and other growth factors found within the actual collagen matrix. Advances in biochemical techniques and the advent of biotechnology eventually allowed for the ability to produce BMP in greater yields. It was the discovery in 1988 by a team headed by Dr. John Wozney at Genetics Institute, a Cambridge, Massachusetts based biotechnology company, that the human gene BMP-2 protein could be cloned using a recombinant DNA biotechnology process that led to the creation of a commercial BMP product. The recombinant manufacturing process allows for easy reproducibility and consistent purity of large amounts of BMP-2. In 1995, Genetics Institute entered into a partnership with Sofamor Danek Group, Inc., later acquired by Medtronic plc, or Medtronic, for the development and commercialization of recombinant human BMP-2, or rhBMP-2.
In July 2002, the FDA approved rhBMP-2, marketed as Infuse, as a bone graft substitute in conjunction with a device implant for single-level anterior lumbar interbody fusion. In 2003, the FDA approved the use of Infuse with another implant for the same indication. Infuse remains the only FDA approved recombinant BMP on the market. The initial success of Infuse with interbody fusion soon led to significant off-label use. By October 2004, Infuse had annualized sales over $300 million. Although the off-label use of BMP in spinal fusion has been met with radiographic and clinical success, some physicians have raised safety concerns due to reports of rare, but significant complications with its use. Several adverse events from the use of Infuse have been reported in observational clinical studies, including retrograde ejaculation; severe dysphagia, or difficulty in swallowing; ectopic bone formation, or unwanted bone formation occurring in the spinal canal; and potentially, cancer. In 2008, the FDA issued a Public Health Notification to alert clinicians to at least 38 reports received by the agency during the previous four years of serious life-threatening complications associated with the off-label use of Infuse in cervical spine fusion, including swelling of the neck and throat resulting in compression of the airway and other structures. A review of publicly available data suggesting that the risk for adverse events is 10 to 50 times higher than reported in the trial publications raised concerns about the safety of Infuse. These reports have led some clinicians to question the clinical benefits of Infuse relative to patient safety.
In an effort to address this controversy, the Yale University Open Data Access project team invited Medtronic to provide full data from all of its clinical trials of Infuse to allow independent analysis and interpretation. In June 2013, the first two systematic reviews and meta-analyses from this collaboration were reported in theAnnals of
Internal Medicine. The reports had four important findings. First, in aggregate, the data showed that fusion rates with Infuse were similar to those compared to autograft iliac crest bone graft. Second, both Infuse and iliac crest bone graft were associated with similar rates of retrograde ejaculation and neurological complications when used in anterior interbody lumbar fusion or posterolateral lumbar fusion, leading to the conclusion that these complications were not associated with the graft material used. Third, there was clear evidence that Infuse usage leads to high rates of complication in anterior cervical procedures and high rates of ectopic bone formation in posterior lumbar interbody procedures. Fourth, although a statistically significant higher risk of cancer distant from the site of implant of Infuse was observed with the use of Infuse after 24 months, more research was needed to provide more reliable estimates of risk of cancer.
Many of the complications related to the off label use of Infuse can be explained by the uncontrolled release of high doses of the BMP protein at the site of implantation. The average length of time during which BMPs reside at the repair site in solution is extremely short. For this reason, a carrier molecule is required to localize the protein at the site of the repair for the appropriate amount of time. The Infuse formulation delivers BMP-2 in an absorbable collagen sponge placed in an interbody cage for lumbar interbody spine fusions and with the absorbable collagen sponge alone for open tibia fracture repair. Although an absorbable collagen sponge meets many of the requirements for a carrier, release of BMP from the sponge is rapid, particularly in the first 24 hours, as opposed to the more ideal two to three week timeframe required for bone repair in humans. The consequences of rapid and uncontrolled BMP release are associated to some degree with the observations of ectopic bone formation, postoperative soft tissue swelling, transient fluid formation, and transient bone resorption observed with the use of Infuse. Rapid release of higher doses of BMP from non-optimized carriers also results in the potential for higher acute systemic exposure of BMP following implantation, and has been linked to the association of BMPs with a potential increase in cancer risk at distant sites.
Despite safety concerns and an average selling price of eight to ten times that of allograft, Infuse generated sales of approximately $372 million in 2014, significantly more than any other bone graft substitute on the market. In December 2015, Medtronic received FDA PMA supplement approval for three new spinal indications, allowing the marketing of Infuse for use with certain spine implants made of polyetheretherketone in oblique lateral interbody fusion and anterior lumbar interbody fusion procedures. Given the commercial success of Infuse and the willingness of the FDA to expand the product’s on-label indications despite the various published safety concerns, we believe there is significant commercial potential for a new BMP product that addresses the safety concerns surroundingrhBMP-2, while maintaining its clinical efficacy in bone formation.
Allogeneic growth factors. Due to reported adverse events, high cost and complications related to the use of rhBMP-2, surgeons are increasingly looking for a viable alternative. Allogeneic growth factors are allogeneic morphogenic proteins that undergo a novel tissue processing technique, utilizing angiogenic, mitogenic and osteoinductive growth factors within marrow cells to naturally bind them to the bone graft being used. In 2009, our allogenic growth factor, OsteoAMP, was made commercially available by Advanced Biologics. This new allogeneic tissue processing technique has provided a way to access BMPs and other growth factors that are naturally found within bone marrow cells.
Unmet needs / opportunities. We believe the success of stem cells despite limited clinical data, the continued use of autograft despite the morbidity associated with a second procedure and the success of Infuse despite safety issues demonstrate the significant unmet need for highly efficacious products in certain types of surgeries. Therefore, we believe that the addressable market opportunity for bone graft substitutes is potentially significantly larger than the current $1.4 billion market, as highly efficacious and safe products have the potential to convert a number of procedures away from autografts or lower-cost bone substitutes towards higher upfront cost, but more clinically effective alternatives.
Key dynamics in orthobiologics market
We believe the orthobiologics market is characterized by specific product development, regulatory, sales and marketing and purchasing dynamics that include the following:
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Bone graft substitutes | U.S. 2019 | Market | Primary applications | Bioventus product | ||||||||
| Allografts, DBMs and Growth factors | 1,077 | 3.2 | % | Spinal fusion, trauma and other bone repair applications | Purebone, Exponent and OsteoAMP | |||||||
| Synthetics | 534 | 1.5 | % | Spinal fusion, trauma and other bone repair applications | Signafuse, Interface and OsteoMatrix | |||||||
| Stem cells | 395 | 16.1 | % | Spinal fusion, trauma and other bone repair applications | Distributor for other brands | |||||||
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As a result of these factors, we believe there is an opportunity for a company to achieve leadership in the global orthobiologics market by focusingSource: iData US Market report on developing and commercializing a portfolio of clinically validated, cost-effective products for use both in and out of the surgical suite. Additionally, we believe there is room to grow the worldwide orthobiologics market opportunity beyond its current size of approximately $4.5 billion, by developing therapies that are superior to, or have a broader label than, existing bone graft substitutes or HA viscosupplementation therapies.
Overview
We are a global medical technology company focused on developing and commercializing innovative and proprietary orthobiologic products for the treatment of patients suffering from a broad array of musculoskeletal conditions. Our products address the growing need for clinically effective, cost efficient and minimally invasive solutions that enhance the body’s natural healing processes. For the year ended December 31, 2015 and the three months ended April 2, 2016, we generated $253.7 million and $65.4 million of net sales, respectively. We operate our business through four reportable segments: Active Healing Therapies—U.S., Active Healing Therapies—International, Surgical and BMP.
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We were founded in May 2012, when a group led by Essex Woodlands Health Ventures Inc. acquired a majority stake in the biologics business of Smith & Nephew plc, which included Exogen, exclusive U.S. distribution rights to Supartz and exclusive distribution rights to Durolane outside the United States. Our investors believed that as an independent organization, the biologics business would provide a platform from which to build a global leader in the rapidly evolving orthobiologics market. Since our founding, we have assembled an experienced senior executive team to execute this vision. This team has successfully accomplished the following:
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We currently market and sell our products in the United States and 29 other countries. Our Exogen system and Supartz FX, which accounted for the majority of our revenue for the year ended December 31, 2015, have regulatory approvals to be marketed and sold in the United States. In addition, we also have regulatory approval to market and sell our Exogen system in key international markets, such as the European Union and Canada. As of April 2, 2016, our sales organization consisted of approximately 232 direct sales representatives and 124 independent distributors in the United States and approximately 57 direct sales representatives and 12 independent distributors internationally. In the United States, our Active Healing Therapies sales organization markets our products to orthopedists, musculoskeletal and sports medicine physicians and podiatrists. Our Surgical sales organization is composed of a sales management team that markets our surgical products primarily to neurosurgeons and orthopedic spine surgeons. In international markets, we market and sell our Active Healing Therapies through direct sales representatives in twelve countries and through independent distributors in an additional 17 countries. Our products are typically covered and reimbursed by third-party payors, including government authorities, such as Medicare and Medicaid, managed care providers and private health insurers. We do not sell our products through or participate in physician-owned distributorships. We have grown our total net sales from $232.4 million for the year ended December 31, 2013 to $242.9 million for the year ended December 31, 2014 and to $253.7 million for the year ended December 31, 2015, at a compound annual growth rate , or CAGR, of 4.5%. We have grown our total net sales from $53.4 million for the three months ended March 28, 2015, to $65.4 million for the three months ended April 2, 2016, at an annual growth rate of 22.5%. For the years ended December 31, 2013, 2014 and 2015 and the three months ended March 28, 2015 and April 2, 2016, we had net losses of $22.4 million, $12.9 million, $34.1 million, $21.0 million and $6.0 million, respectively. We have grown our Adjusted EBITDA from $32.5 million for the year ended December 31, 2013 to $36.2 million for the year ended December 31, 2014 and to $42.2 million for the year ended December 31, 2015, at a CAGR of 14.0%. Also, we have grown our Adjusted EBITDA from $2.3 million for the three months ended March 28, 2015, to $10.7 million for the three months ended April 2, 2016 at an annual growth rate of 365.2%. Adjusted EBITDA is burdened by BMP program costs of $0.7 million, $6.7 million and $11.3 million, for the years ended December 31, 2013, 2014, and 2015, respectively and $2.5 million and $2.5 million for the three months ended March 28, 2015 and April 2, 2016,
respectively. For a reconciliation of net loss to Adjusted EBITDA, see Note 3 to the information contained in “Prospectus summary—Summary historical and pro forma financial information.”
Additionally, we support our orthobiologics through global surgeon education on topics like approved patient indications, contra-indications and overviews of the features and clinical benefits of our products. For example, we support local, regional and national educational courses to allow surgeons to learn and experience new orthobiologics.
Our competitive strengths
We believe we have the following competitive strengths:
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Our strategy
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Our products
We offer a portfolio of orthobiologic products to meet the needs of our orthopedist, musculoskeletal and sports medicine physician, podiatrist, neurosurgeon and orthopedic spine surgeon customers and their patients. Our current products are organized into two product categories: Active Healing Therapies, for both U.S. and International, and Surgical.
Active Healing Therapies
Our Active Healing Therapies business is comprised of two types of non-surgical products: a non-invasive bone stimulation device and HA viscosupplementation therapies. The HA viscosupplementation therapies that we distribute, own or will launch include Supartz FX, Durolane and GelSyn-3. Our Active Healing Therapies products are presented in the summary table below:
Procedure | Description | Procedures | ||||||
| Allograft Bone Graft Substitutes | - Harvested from cadaveric femoral or iliac crests - Depending on preparation process may exhibit osteoconductive and/or osteoinductive properties - Comes in a variety of forms including freeze-dried, fresh-frozen, morselized and cancellous chips | 249 | ||||||
- Structural matrix consisting of type-1 collagen provides osteoconductive activity and differences in demineralization process provides varying degrees of osteoinductive properties - Effective BGS for - Comes in a variety of forms including putty, gel, powder, fiber, flexible sheets or mixed with cortical chips | 401 | |||||||
| Growth Factors |
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| 118 |
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• 1999 in Canada
• 1996 in Europe
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- Provides access to growth factors that are naturally found within bone marrow cells |
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| Synthetics | - Produced from ceramics such as hydroxyapatite, beta-tricalcium phosphate and bioactive glass - Osteoconductive, biodegradable, non-immunogenic and no risk of disease transmission - Readily available in large quantities and inexpensive to manufacture - Neither osteogenic nor osteoinductive - Designed to have porosity and pore size optimized for bony ingrowth - Can be fashioned in many different sizes and shapes - Possess limited compressive strength | 432 | ||||||
| Stem Cells | - Obtained from cadaveric cancellous bone - Contains viable multipotent stem cells (mesenchymal stem cells) - Exhibits osteoinductive activity through mesenchymal stem cells - | 109 | ||||||
Source: iData US Market report on Orthopedic Biomaterials
Our BGS product portfolio is comprised of clinically efficacious and cost effective bone graft solutions to meet a broad range of patient needs and procedures. Our products are designed to improve bone fusion rates following spinal and other orthopedic surgeries, including trauma and reconstructive foot and ankle procedures. These products include an allograft-derived bone graft with growth factors (OsteoAMP), a DBM (Exponent), cancellous bone in different preparations (PureBone), bioactive synthetics (Signafuse and Interface), a collagen ceramic matrix (OsteoMatrix) and two bone marrow isolation systems (CellXtract and Extractor).
As we build the body of clinical evidence supporting our products, we continue to look for and execute on opportunities to innovate in our BGS portfolio. To meet growing market demand and evolving surgical techniques, we continue to develop product extensions and adjust formulations. For example, we launched OsteoAMP Select in 2019 and we expect to launch OsteoAMP Flowable in 2021. We designed OsteoAMP Flowable to be moldable and easy to use, with a convenient, ready to use syringe.
Product | Indications | Description | Regulatory pathway / | |||
Allograft | ||||||
| Orthopedic, neurosurgical and reconstructive bone grafting procedures | An allogeneic bone graft that is available in multiple formats (fibers, putty, sponge and granules) that is processed with bone marrow cells to maintain the wide array of growth factors present in native bone | • | |||
| Posterolateral spine procedures | Derived from human allograft bone tissue and is combined with a migration-resistant resorbable carrier and formulated into a putty | • | |||
| Orthopedic, neurosurgical and reconstructive bone grafting procedures | 100% cancellous bone with compressible, elastic and sponge-like attributes, offered in filler, block and strip options, as well as mineralized chips | • | |||
| Synthetic | ||||||
| Standalone posterolateral spine, extremities and pelvis, as well as a bone graft extender in the | Bioactive synthetic bone graft substitute comprised of a mixture of calcium phosphate granules and bioglass granules suspended in a resorbable polymer carrier that facilitates handling and delivery of the granule components to fill spaces of missing bone | • | |||
| Posterolateral spine when mixed with autograft, extremities and pelvis | Bioactive synthetic bone graft in | • 510(k) / 2011 | |||
| Posterolateral spine, extremities and pelvis | Next-generation mineralized two-phase calcium phosphate bone void filler comprised of a collagen scaffold designed for optimized intra-operative handling and biologic responsiveness at the defect site | • 510(k) / 2010 | |||
| Posterolateral spine, extremities and pelvis | Next-generation mineralized bone void filler comprised of bioglass and biphasic mineral granules embedded in a collagen scaffold designed for optimized intra-operative handling and biologic responsiveness at the defect site. | • 510(k) / 2020 | |||
Minimally Invasive Fracture Treatment
Bone fractures
Fractures, also known as broken bones, occur when there is a high force or impact put on a bone, most commonly from trauma resulting from sports injuries, car accidents, falls or from osteoporosis, which is bone weakening due to aging. Immediately following a fracture, patients are treated to realign the fractured bone ends. If possible or required, the affected limb is immobilized using plaster or a splint. In some cases, fractures require surgical fixation with devices such as screws, plates, rods and frames. X-rays, CT and MRI imaging are utilized to verify alignment of the bone and to assess progress towards healing.
A fracture is considered a fresh fracture during the first 14 days after the fracture occurs. After a fracture is treated, new bone tissue begins to form and bridge the gap. With modern treatment methods, most fractures heal spontaneously over the course of several months following injury. However, some fractures fail to heal even when they receive the best surgical or non-surgical treatments. This condition may be diagnosed as a nonunion fracture. Nonunions may occur due to mechanical instability of the fracture site, due to inadequate immobilization, poor blood supply, gaps in bone to bone contact, or a number of comorbidities experienced by the patient. In clinical literature, it is estimated that five to ten percent of all fractures fail to heal, often in high impact fractures or in patients that have compromised health from old age, obesity, cardiovascular disorders, arthritis, diabetes or smoking. A nonunion is considered to be established when the fracture site shows no visibly progressive signs of healing. Nonunions have a negative impact on quality of life with symptoms, such as reduced mobility, swelling, pain, tenderness, deformity and difficulty bearing weight.
Long bone stimulation systems
Patients with nonunions may undergo surgery when certain conditions occur, such as an unstable or misaligned fracture, or a larger inter-fragment gap. Some nonunions can be treated non-surgically using bone stimulation devices. We estimate the total long bone stimulation market was approximately $250.0 million in 2019 and that it will continue to grow at a 1.9% CAGR from 2019 to 2024 with the number of fractures treated with long bone stimulation devices to steadily grow from approximately 100,000 fractures treated in 2019 to 113,000 in 2024.
We offer our Exogen ultrasound bone healing system for the non-invasive treatment of established nonunion fractures and certain fresh fractures. Our Exogen system was the number one prescribed device in the bone growth stimulatory market in 2018 (the latest period for which data is available). It has been sold commercially for over 25 years and is the only FDA-approved device on the market for the accelerated healing of fresh, closed posteriorly displaced distal fractures of the radius and fresh, closed or Grade I open long bone fractures.
• 2001
Product |
| Regulatory pathway | Region where marketed(1) | |||||
| Ultrasound bone healing system for nonunion fractures and fresh fractures to the tibia and radius(2) | • PMA | • • CE mark and other registrations(2) | • United States • | ||||
• Europe • Japan | ||||||||
Exogen
| (1) | Our Exogen system is indicated in the United States for the non-invasive treatment of established nonunions, excluding skull and vertebra, and for accelerating the time to a healed fracture for fresh, closed, posteriorly displaced distal radius fractures and fresh, closed or Grade I open long bone fractures in skeletally mature individuals when these fractures are orthopedically managed by closed reduction and cast immobilization. We own our Exogen system and market it both in and outside the United States. |
| (2) | Exogen is also approved for marketing in Australia, Japan, New Zealand, Saudi Arabia, Turkey and the UAE. |
We offer ourOur Exogen system is used to administer treatment in a location of convenience, including at home or work, once daily, for 20 minutes, or as prescribed by the non-invasive treatment of established nonunion fractures and fresh fractures.patient’s physician, for accelerating bone healing. This therapy provides an effective, safe anda cost-effective treatment alternative to surgical intervention for nonunions. Nonunions may occur when the fracture moves too much, has poor blood supply or succumbs to infection. Bone grafts typically provide no inherent stability to the fracture site. Our Exogen system is the only device on the market with PMA approval for the accelerated healing of fresh fractures of the tibia and radius. Bone stimulation devices promote bone healing in difficult to heal fractures or fusions by applying electrical or ultrasonic current to the fracture or fusion site. Electrical stimulation devices can be applied either non-invasively or invasively, while ultrasound bone stimulation devices are only applied non-invasively. Electrical bone growth stimulators utilize treatment coils situated around the fracture or fusion site powered by an external power supply.
Our Exogen system consists of the portable device, a charger, a gel bottle and strap. The device features a transducer at the end of a coiled cord, a color screen, a power button and a mini-USB charging port to allow for recharging the battery. The transducer sends specifically-programmed low-intensity pulsed ultrasound to the fracture site through the skin and soft tissue, with little or no sensation felt by the patient during the treatment. The gel facilitates ultrasound signal transmission through the patient’s skin. Our Exogen system provides an easy to use interface that tracks treatment use and promotes compliance. In a clinical study of our Exogen system, we
observed a 91% patient compliance with the treatment regimen, based on median total time of device usage. An additional support tool for the patient is approved for use by patients aged 18 years or older who are skeletally mature. Exogen Connects, a free smartphone app that provides daily automated treatment reminders and helpful healing information.
Our Exogen system utilizes low-intensity pulsed ultrasound technology to stimulate the body’s natural bone healing process. The ultrasound output intensity of the device is comparable to diagnostic ultrasound intensity levels used in obstetrical
sonogram procedures for fetal monitoring and is typically only one to five percent of the output intensity of conventional therapeutic ultrasound devices used for physical therapy. Some patients report experiencing a tingling sensation at the treatment site. The depth and breadth of ourthe Exogen ultrasound signal enables it to treat superficial and deep indicated fractures. Exogen ultrasound is osteoinductive, which means it stimulates cells to differentiate into osteoblasts, or cells that make new bone. The growth of this new bone helps bridge the gap at the fracture site.
Patients use our Exogen system to administer treatment at home or at work, once daily, for 20 minutes, or as prescribed by their physician, for accelerating bone healing. The system consists of the portable device, a charger, a gel bottle and strap. The device features a transducer at the end of a coiled cord, a color screen, a power button and a mini-USB charging port to allow for recharging the battery. The transducer sends specifically-programmed low-intensity pulsed ultrasound to the fracture site through the skin and soft tissue, with little or no sensation felt by the patient during the treatment. The gel lets the ultrasound signal reach the fracture site through the patient’s skin. Some patients may be sensitive to the ultrasound gel. The strap is adjustable to fit most fracture locations and utilizes a port and cap that holds the transducer down on the treatment site.
Our Exogen system provides an easy to use interface. To begin treatment, a patient holds the device in hand or on a nearby flat surface and presses the button on the device. Following a beep and the appearance of the start-up screen and calendar showing the current month and treatment summary, a 20-minute countdown timer appears on the screen. The device begins the ultrasound treatment. When the countdown timer reaches zero, the device beeps and shows the treatment complete screen, followed by an additional beep at which time the device turns itself off. The device features a built-in treatment-tracking calendar that records completed and missed treatments and displays the patient’s compliance rate to-date. These features, combined with the 20 minute cycle, make treatment compliance convenient for the patient and verifiable for the physician. The device stores and displays treatment history for a period of up to twelve months. Our Exogen system has demonstrated 91% treatment compliance in a clinical study. An additional support tool for the patient is Exogen Connects, a free smartphone app that provides daily automated treatment reminders and helpful healing information.
Clinical
Our Exogen system has demonstrated clinical effectiveness in multiple clinical trials and in case series. However, safety and effectiveness have not been established for individuals lacking skeletal maturity, pregnant or nursing women, patients with cardiac pacemakers, fractures due to bone cancer or patients with poor blood circulation or clotting problems. In a prospective, multicenter, randomized, double-blind, placebo-controlled trial, involving 67 tibial fresh fractures at 16 centers in the United States and Israel, fractures treated with our Exogen system experienced a statistically significant decrease in the time to overall clinical and radiographic healing. Patients treated with our Exogen system experienced healing in 96+-4.9 days, compared with 154+-13.7 days for patients in the control group with a P-Value of 0.001, representing a 38% increase in accelerated healing, a difference of more than eight weeks. In a separate prospective, multicenter, randomized, double-blind, placebo-controlled trial, involving 61 distal radial fresh fractures at 10 centers in the United States and Israel, fractures treated with our Exogen system experienced a statistically significant decrease in the time to fracture union.P-value is a conventional statistical method for measuring the statistical significance of clinical results. A p-value of less than 0.050 is generally considered to represent statistical significance, meaning that there is a less than five percent likelihood that the observed results occurred by chance. Patients treated with our Exogen system experienced healing in 61+-3 days, compared with 98+-5 days for patients in the control group (p<0.0001), representing a 39% increase in accelerated healing, a difference of more than five weeks. Patients in the treatment group also experienced a 53% mean increase in fracture alignment compared with the control group (p<0.01). In a study of challenging, established nonunions, 86% of cases using our Exogen system healed in an average treatment time of 22 weeks. On average, the postfracture period before the start of ultrasound treatment was 61 weeks.
Our Exogen system has been shown to provide significant cost savings over surgery. A published cost effectiveness study analyzed the total costs of treating a pool of 1,000 patients with tibial shaft fractures from initial trauma to union. Cost assumptions included the costs of surgery and recovery, outpatient, workers’ compensation, emergency room, disability costs and the cost of purchasing the Exogen system. The study compared the costs of standard conservative treatment and use of our Exogen system to promote early fracture healing to standard conservative treatment or operative treatment with no use of our Exogen system. The use of our Exogen system resulted in a cost savings of over $15,000 per case, or 40%, due to dramatically lowering the need for secondary procedures and workers’ compensation costs. The conclusion of the analysis was that reduced healing time attributable to the use of our Exogen system could yield substantial costs savings for third-party payors, employers and government agencies, which could realize the savings if patients used our Exogen system. Our Exogen system is effective across a wide range of patients and is the less costly bone stimulation device for conservative treatment of nonunions compared to our competitor’s devices due to its greater probability of treatment success. According to a study by the National Institute for Health and Care Excellence in the United Kingdom, treating nonunion fractures using Exogen demonstrated high rates of fracture healing with an estimated saving of over £1,164 per patient compared to current treatment. Surgical treatment options of nonunions include the use of bone grafts, internal fixation, painful external fixation, or a combination of these options. In most cases, multiple surgeries are required to fully heal a nonunion, which increase the burden to the patient and the healthcare system.
Although we have not conducted direct comparative studies against other bone stimulation device, based on available published data regarding other bone stimulation devices, our Exogen system produces greater rates of bone union and accelerates fresh fractures by 38% in shorter daily treatment periods.
Comparison of U.S. long bone stimulation devices
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HA viscosupplementation offerings
GelSyn-3
GelSyn-3 is a highly purified three injection HA therapy that is FDA premarket approved and indicated for the treatment of pain due to knee osteoarthritis in patients who have failed to respond adequately to conservative non-pharmacologic therapy and simple analgesics. The solution treats knee osteoarthritis by providing temporary replacement for the diseased synovial fluid and restoring lubricity of bearing joint surfaces. Physicians administer GelSyn-3 to the affected knee joint once a week for three consecutive weeks. GelSyn-3 is derived from biofermentation through a highly purified process, which does not involve the use of animal products, thereby reducing the potential risk of an immune response following injection. This process ensures a final low-to-mid molecular weight HA product that consists of non-chemically modified long unbranched chains of natural hyaluronan. We obtained the U.S. distribution rights to GelSyn-3 from IBSA in February 2016 and expect to launch the product in the United States in the second half of 2016. Based on market size estimates from iData, the combined market size for three injection products, such as GelSyn-3, and five injection products, such as Supartz FX, is approximately four times the market size than for Supartz FX alone.
Clinical
The safety and efficacy of GelSyn-3 was assessed in a prospective, multicenter, randomized, controlled, doubleblind, non-inferiority pivotal study that enrolled 381 adult patients with knee osteoarthritis at 23 centers in Europe between November 2007 and July 2009. The safety and efficacy of Gelsyn-3 has not been established in pregnant women, nursing mothers and children. Patients were randomized to receive 2 mL intra-articular injections of GelSyn-3 (also known as Synovial outside the United States) or Synvisc, which is manufactured by Sanofi S.A., once a week for three consecutive weeks, with follow-up visits scheduled for weeks four, twelve and 26. The primary efficacy variable for the study was the Western Ontario McMaster Universities Index, or WOMAC Index, pain subscore at week 26, which was required to meet a delta of 8 mm protocol defined non-inferiority margin from baseline on the 100-mm visual analogue scale format. The WOMAC Index is a standardized and validated methodology consisting of 24 questions to assess pain, stiffness and physical function in patients with knee osteoarthritis. The WOMAC Index is routinely used as a primary endpoint in clinical trials studying the effect of drugs and devices on knee osteoarthritis. Higher scores on the WOMAC Index indicate worse pain, stiffness and functional limitations. A WOMAC Index improvement of 10–20 mm represents the minimum clinically important improvement. Safety variables included adverse events, pain and local tolerability at the injection site and global tolerability as assessed by both patient and investigator.
A total of 380 patients, the intent-to-treat, or ITT, patient population, received at least one intra-articular injection of either GelSyn-3 or Synvisc. At 26 weeks, the 100 mm WOMAC Index pain subscore for ITT patients was 32.9+1.6 for the GelSyn-3 treatment group, compared to 32.2+1.7 for the Synvisc treatment group, corresponding to a between-group mean difference in change from baseline at 26 weeks of 0.7+1.7. The WOMAC Index pain subscore results met the prespecified criteria for non-inferiority. The safety data generated in the study demonstrated that GelSyn-3 injections were well-tolerated and patient/investigator scoring for global tolerability indicated widespread procedural acceptability. One or more adverse events were recorded for some patients, including back pain, joint pain inflammation and headache. There was no statistically significant intergroup difference in the overall incidence of adverse events or in severe, serious or suspected treatment-related adverse events.
Supartz FX
Supartz FX, which we market in the United States, is a sterile and viscoelastic injectable solution that is PMA approved for the treatment of pain in patients with knee osteoarthritis who failed to adequately respond to conservative nonpharmacological therapy and simple analgesics. The solution treats knee osteoarthritis by
providing temporary replacement for the diseased synovial fluid and restoring the lubricity of the bearing joint surfaces. Supartz FX may also delay the need for total knee replacement. Unlike oral analgesics or non-steroidal anti-inflammatory drugs, which affect all parts of the body, Supartz FX specifically targets knee osteoarthritis. The product is made from HA extracted from certified and veterinary inspected chicken combs. Risks can include general knee pain, warmth and redness or pain at the injection site.
Physicians administer Supartz FX solution to affected joints typically once a week in a flexible dosage based on the medical condition of the patient and response to treatment. A local anesthetic is applied to the knee and synovial fluid in the knee joint is removed using a syringe through a process called arthrocentesis. Supartz FX is then injected into the knee space.
The treatment is approved for five weekly injections, which has been shown in a clinical study to relieve pain for up to six months. Some patients may experience benefit with three injections given at weekly intervals. This has been noted in a study in which patients treated with three injections were followed for 90 days. Most patients experience little or no discomfort during the injection. To date, over 300 million injections of the Supartz HA formulation have been safely administered globally.
Clinical
Supartz FX has demonstrated clinical effectiveness in multiple clinical trials to relieve pain, improve mobility and improve patient quality of life. The safety and effectiveness of Supartz FX have not been established in pregnant women, nursing mothers and children. Supartz FX can allow patients to delay costly knee replacement surgery, while controlling pain, potentially allowing patients to maintain active lifestyles. Based on a meta-analysis of available published clinical data of comparisons of common osteoarthritis treatments in theAnnals of Internal Medicine, treatment with HA viscosupplementation therapies, such as Supartz FX, have had the greatest effect size for both pain reduction and function and improvement of the knee compared to treatment without HA viscosupplementation therapies, such as acetaminophen, diclofenac, ibuprofen, naproxen, celecoxib, intra-articular corticosteroids, oral placebo and intra-articular placebo. The most common adverse event occurring in patients treated with Supartz FX is joint pain with no evidence of inflammation.
In clinical studies, adverse events were no more common following treatment with Supartz FX than comparable treatment with saline placebo. In a double blind, randomized, multicenter, parallel group study of the effectiveness and tolerance of intra-articular HA viscosupplementation therapies in knee osteoarthritis, Supartz FX reduced knee pain in patients by 50% from the baseline. Of 240 patients randomized for inclusion in the study, 223 patients were evaluable for the modified intention to treat analysis and the statistically significant difference from the control was apparent after the series of injections was complete. Intra-articular HA viscosupplementation therapies were significantly more effective than saline in mild to moderate knee osteoarthritis for the 13 week post injection period of the study.
In a separate retrospective analysis of 30,978 patients aged 18 to 64 years old undergoing total knee replacement, the median time-to- total knee replacement surgery was 326 days for 22,555 patients that did not undergo HA injections and 908 days for the cohort of 8,423 patients that underwent HA viscosupplementation therapies. Time-to-total knee replacement was defined as the total days from the date of diagnosis of knee osteoarthritis on the patient’s first visit to an orthopedic surgeon to the date of total knee replacement surgery. Those receiving HA viscosupplementation therapies had a median 1.6 years longer time-to-total knee replacement versus those who did not receive HA viscosupplementation therapies, thereby demonstrating positive clinical and economic implications.
Comparison of U.S.-approved multi-injection HA viscosupplementation therapies
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Durolane
Durolane, which we market outside the United States and own certain related assets, is a transparent gel which contains high levels of HA injected directly into joints affected by osteoarthritis to relieve pain, restores lubrication and cushioning which improves joint function and restores quality of life, and helps to potentially avoid or delay hip or knee replacement surgery. Durolane is the only one-time injectable solution indicated for treatment of osteoarthritis in both the knee and hip, as well as for treatment of other orthopedic joints. We believe that Durolane’s injection schedule results in economic advantages and greater patient convenience and compliance compared to other HA viscosupplementation therapies, which require weekly injections over a period of three to five weeks. Durolane is highly purified and based upon a natural, safe and proven, and patented non animal stabilized hyaluronic acid which ensures a reduced risk of impurities and expands use to patients who are allergic to animal derived solutions. Durolane also contains high levels of concentrated HA that extends the half-life of Durolane considerably, whereas the HA in certain other HA viscosupplementation therapies disappears within a few days after the injection. Durolane has not been tested in pregnant or lactating women, or children. Risks associated with Durolane include transient pain, swelling and/or stiffness at the injection site.
Clinical
In a study of 103 patients who received Durolane single injection therapy, the solution demonstrated statistically significant (p<0.001) reductions in pain at three months as compared to the baseline. Furthermore, 80% of these patients reported positive satisfaction with the treatment with minimal adverse events that did not require more than mild analgesics.
A 26-week randomized, double-blind, multicenter study of a single intra-articular knee injection compared the efficacy of Durolane with saline (placebo) in patients with knee osteoarthritis. A total of 346 patients were treated and a favorable reduction in pain with Durolane was observed that generally began by week two and persisted throughout the 26-week protocol. While similar results were observed in the saline group, in the group of patients with localized knee osteoarthritis, there was a significantly greater response rate following treatment with Durolane, starting at six weeks, as compared to patients in the saline group.
In a separate prospective, multi-center, randomized, active-controlled, double-blind, non-inferiority clinical trial with 442 enrolled patients, it was demonstrated that single injection Durolane was well tolerated and non-inferior to the corticosteroid methylprednisolone acetate, or MPA, at twelve weeks. MPA is used to treat pain and swelling that occurs with osteoarthritis and other joint disorders. The effect size for pain, physical function and stiffness scores favored Durolane over MPA from twelve to 26 weeks. The benefit of Durolane was maintained to 26 weeks while that of MPA declined. An injection of Durolane at 26 weeks conferred long-term improvements without increased sensitivity or risk of complications. One subset of 28 patients received an injection of Durolane at the beginning of the study, but chose not to receive a second injection at 26 weeks. Continuing improvement from baseline was observed among these patients, reflecting the fact that they did not feel the need for a second injection.
In a prospective, open-label, three-month pilot study of a single intra-articular injection of Durolane in 31 patients, the response rate in treating osteoarthritis of the hip was 50% at two weeks and 54% at three months. In the extension population of patients returning for re-assessment six to eleven months post-treatment, response rates were 69% and 44% at month three and the extension visit, respectively. The proportion of patients rating their status as good or very good increased from 0% at baseline to 46% at three months.
Comparison of major single injection HA viscosupplementation therapies
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Surgical
Our Surgical business offers a portfolio of advanced bone graft substitutes designed to improve bone fusion rates following spinal and other orthopedic surgeries, including trauma and reconstructive foot and ankle procedures. These products include allogeneic growth factors (OsteoAMP), a range of bioactive synthetics (Signafuse and Interface), a collagen ceramic matrix (Signafuse), a biphasic calcium phosphate synthetic (OsteoPlus), a demineralized bone matrix (Exponent) and allograft demineralized cancellous bone in different preparations (PureBone).
OsteoAMP
OsteoAMP is an allogeneic bone graft designed to provide substantially higher levels of BMP-2 than other human tissue derived bone graft substitutes on the market and with fewer complications than Infuse. We
process OsteoAMP utilizing a novel tissue processing technique in which allograft and its native bone marrow are processed to preserve naturally occurring growth factors that are beneficial to bone growth and remodeling. These important growth factors include: BMP-2; BMP-7; transforming growth factor beta 1, orTGF-b1; acidic fibroblast growth factor, or aFGF; vascular endothelial growth factor, or VEGF; and angiopoietin 1, or ANG1. OsteoAMP is processed so that bone marrow cells containing these growth factors are naturally bound to the cadaver bone in order to make them bioavailable. Surgical preparation of OsteoAMP is similar to other bone graft substitutes in that it is often reconstituted with blood or bone marrow aspirate. OsteoAMP is offered in compressible sponge, putty and granule preparations to meet the varying needs and preferences of our surgeon customers.
Clinical
OsteoAMP demonstrated higher fusion rates in lumbar fusion procedures, fewer adverse events and proved more cost effective as compared to Infuse in a radiographic and economic analysis. In a study comparing 321 patients with Infuse, a dual-arm radiographic analysis was conducted at three clinical sites to evaluate the fusion success rate of OsteoAMP and Infuse in lumbar spine procedures that underwent a TLIF or lateral lumbar interbody fusion intervention. An independent radiologist was blinded to the intervention, product and surgeon information. Patients underwent X-ray and/or computed tomography at standard postoperative follow-up intervals of approximately one, three, six, twelve and 18 months. OsteoAMP produced higher rates of fusion at all time points compared to Infuse (p£0.01). Total time for fusion for OsteoAMP was approximately 38% shorter than that of Infuse (207.9 and 333.9 days, respectively). Radiologic evidence of ectopic bone formation in soft tissues was found in 24.2% of the Infuse cases compared to 5.3% in patients receiving OsteoAMP (p<0.01). The study also analyzed orthobiologic surgical supply costs to ascertain cost differences between OsteoAMP and Infuse. The OsteoAMP arm was 80.5% less expensive per patient and 73.7% less expensive per level than the Infuse arm. There were several potential limitations to the study, including the use of different instrumentation and fixation devices at each surgical center. In addition, the study did not evaluate the clinical outcomes as follow-up computed tomography scans as well as x-rays were used to assess fusion over each time point, and each surgeon’s unique surgical techniques that may have contributed to some differences in the results. The study was conducted by Advanced Biologics, our supplier of OsteoAMP.
The chart below on the left shows the fusion success rate of Infuse compared to OsteoAMP at various timepoints, while the chart below on the right shows the complication rates of Infuse compared to OsteoAMP as it relates to ectopic bone formation:
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We are sponsoring a prospective, nonradomized, noncontrolled, multicenter study of OsteoAMP in instrumented PLIF, that will enroll approximately 120 patients at up to ten centers in the United States. The objective of this clinical study is to evaluate the long-term efficacy of OsteoAMP in patients undergoing an
instrumented PLIF procedure of one or two adjacent motion segments between L1 to S1 in patients suffering from lower back and leg pain. The study will evaluate OsteoAMP in spinal fusion procedures based on fusion results, adverse event rates, and pain and health scores. Enrollment in this study has begun and we expect to complete a 24 month follow-up of all patients in 2019.
Bioactive synthetics
Our bioactive synthetics products offer a portfolio of bone graft substitutes designed to improve bone fusion rates with bioactive and resorbable composites which enhance the body’s bone tissue production to regenerate diseased and missing tissue. When implanted in living tissue, the materials undergo atime-dependent surface modification that results in the formation of a calcium phosphate layer equivalent to bone material to provide an osteoconductive scaffold for the generation of new osseous, or bone, tissue. New bone infiltrates around the composites to allow repair of the defect to be absorbed.
Our bioactive synthetics leverage the science of bioactive glasses, or bioglass, discovered in 1969 which for the first time provided an alternative to inert implant materials to form rapid and stable bonds with host tissues to stimulate osteogenesis with little resistance or rejection in the human body. Many advances have since been made in understanding the mechanisms of bonding to both bone and soft connective tissues. The clinical success of bioinert, bioactive and resorbable implants has been a vital response to the medical needs of the rapidly aging population. The limited mechanical strength of bioglass has resulted in combinations of bioglass with metals or polymers to optimize its characteristics to elicit specific interactions to direct cell proliferation, differentiation and matrix production.
Most recently, since it has been discovered that bioglass behaves like a growth factor to stimulate bone growth, focus has turned to bioglass’ ability to repair the patient’s own bone in a process known as osteostimulation. The bioactive substrates released from bioglass positively affect osteoblasts and stimulate more bone tissue development earlier than other synthetic biomaterials. Numerous clinical studies have demonstrated the stimulation of osteogenic cells by inorganic bioglass to promote bone cell growth. In a retrospective, 88-patient comparative study, bioglass was shown to be as effective as iliac crest grafts, the preferred material for spinal fusion, in achieving fusion in patients with adolescent idiopathic scoliosis.
Signafuse Bioactive Bone Graft Putty
Signafuse is an FDA cleared bioactive synthetic bone graft substitute comprised of a mixture of calcium phosphate granules and bioglass granules suspended in a resorbable polymer carrier that facilitates handling and delivery of the granule components to fill spaces of missing bone. The product is indicated as a bone void filler for standalone use in posterolateral spine fusion procedures without the aid of autologous extenders or enhancers to meet the needs of the surgeon and effectively facilitate structural fusion of the spine. The ratio of certain components in Signafuse’s composition is similar to ratios found to promote attachment and bone formation to produce a stable scaffold that allows sustained bioactivity and osteoconductivity during the healing process. The patented bioactive component is designed for a faster rate of bone fill than bioglass particles with a broader size range. In vitro studies have demonstrated the product’s effective phosphate layer formation on the surface of the implant as early as seven days after application.
Signafuse is preloaded in a syringe applicator and can be combined with autologous bone while maintaining graft integrity. The putty is moldable, which offers superior handling characteristics.
Interface Bioactive Bone Graft
Interface is an FDA cleared bioactive synthetic bone graft in the form of irregular granules of bioglass to repair bone defects. The product is indicated for bony voids or gaps that are not intrinsic to the stability of bone
structures created from traumatic injury to the bone. The product is a bone void filler that resorbs and is replaced with bone during the body’s natural healing process. When implanted in living tissue, the material undergoes a time dependent surface modification resulting in the formation of a calcium phosphate layer, providing an osteoconductive scaffold for the generation of new bone tissue equivalent in composition and structure to the hydroxyapatite found in bone material.
Interface is supplied as irregular synthetic bioglass granules sized from 200–420 microns designed for enhanced performance benefits and faster bone fill compared to glass particles with a broader size distribution. The device is supplied in a single-use vial.
Zimmer Biomet Holdings, Inc. |
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Signafuse Mineralized Collagen Matrix
Signafuse is an FDA cleared next-generation mineralized two-phase calcium phosphate bone void filler comprised of a collagen scaffold designed for optimized intra-operative handling and biologic responsiveness at the defect site. The product comprises a clinically proven mineral component suspended within a woven network of collagen fibers. The 90% porous matrix provides an interconnected structure optimized for the delivery of autogenic bone marrow aspirate and subsequent population of biologic factors essential to the healing process.
Signafuse’s unique composition and structural properties deliver a bone graft that is tailored to support bone bonding and sustained remodeling as the healing process occurs. The product provides superior handling characteristics in both strip and putty forms and is designed to be hydrated with bone marrow aspirate prior to implantation.
Zimmer Biomet Holdings, Inc. | 24 hours | Capacitive coupling | Nonunions | |||||
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Other productsExogen clinical data
We also distribute other products,In a meta-analysis published by Leighton et al. in 2017 studied heal rates of many different fracture nonunions treated with our Exogen system. A total of 13 eligible studies were identified which reported success of treatment with our Exogen system in 1,441 nonunions. Overall, that analysis estimated that 82% of nonunions of at least three months in age treated with our Exogen system successfully healed. Because healing of established nonunion is not expected without treatment, these findings are compelling. Our Exogen system may be most useful in patients for whom surgery is high risk. With an observed overall average nonunion heal rate of at least 80% after treatment with our Exogen system, the study authors concluded that treatment with our Exogen system was comparable to surgical treatment for nonunion.
Additional published evidence supports the efficacy of our Exogen system in treating fracture nonunions. Established fracture nonunions rarely heal without corrective surgery, though nonunion revision surgery is expensive, invasive and the expected heal rate averages approximately 86%. In a study that looked at patient data collected over a four-year period, Zura et al. found that was that the Exogen system enhanced the heal rate among chronic nonunions and even healed fractures that had been nonunion for more than 10 years, without further surgical intervention. Heal rate was 86.2% among patients with fractures that had not healed for at least one year, 82.7% among 98 patients with chronic nonunion of greater than five years duration, and furthermore 12 patients healed after chronic nonunion of greater than 10 years. Therefore, our Exogen system offers a heal rate comparable to surgery, with fewer associated risks and morbidities.
Developmental and clinical pipeline
Ongoing Bioventus-sponsored clinical studies (B.O.N.E.S.)
While currently indicated for the treatment of both established nonunions, excluding skull and vertebrae, and certain types of conservatively managed acute fractures of the tibia and radius, our Exogen system’s use in fracture care management has grown over its 20 year clinical history in both the United States and internationally. The use of our Exogen system for the management of fresh fractures has been the subject of numerous published peer reviewed research articles. The current prescription data indicate that the product’s use in routine practice of fresh fracture management is based on clinician’s determination of medical necessity, in an effort to mitigate risk of progression to fracture nonunion in at-risk patients.
In order to quantify the effectiveness of our Exogen system in mitigating the risk of progression to fracture nonunion, and in an effort to obtain regulatory approval for expanded indications, we are seeking to supplement the body of clinical knowledge in an innovative population-based clinical development program, B.O.N.E.S., which stands for Bioventus Observational Non-interventional Exogen Studies. With enrollment started in late 2017, the B.O.N.E.S. clinical study design includes the parallel conduct of three independent study protocols which, taken together, are designed to prospectively include more than 3,000 Exogen-treated patients presenting with certain risk factors to be observed over the course of 9 to 12 months. Our Exogen system treated patients will be propensity matched to one or more untreated controls extracted from a real-world health claims database provided by Truven Healthcare Analytics, generating a total sample size of at least 6,000 patients. The program involves the concurrent execution of three studies on pre-specified anatomical locations, such as OsteoPlus Synthetic Bone Graft Composite, Exponent Demineralized Bone Matrixthe tibia, scaphoid and PureBone Demineralized Tissue. OsteoPlus Synthetic Bone Graft Composite is a biphasic calcium phosphate synthetic bone graft substitute that mimics the structure of natural cancellous and cortical bone for providing an osteoconductive scaffold with well-defined interconnected porosity for use in spine, extremities and pelvis procedures. Exponent Demineralized Bone Matrix is derived from human allograft bone tissue and is combined with a migration-resistant resorbable carrier and formulated into a putty for providing an osteoconductive scaffold in posterolateral spine procedures. PureBone Demineralized Tissue is derived from trabecular bone with compressible, elastic and sponge-like attributes and is offered in filler, block and strip options to provide an osteoconductive scaffold. We also sell a premium bone marrow aspiration system designed to increase concentrations of stem cells and progenitor cells in marrow aspiration compared to traditional needles.
Development pipeline
Next-generation BMP product candidates in development
We licensed certain next-generation BMP assets from Pfizer in 2013 because we believed there was significant market opportunity for BMP that could be realized. Our development team includes Dr. John Wozney, the scientist who first enabled the cloning of BMP, and Dr. Howard Seeherman, a distinguished BMP scientist, who together, led the development of Infuse. Our team has focused on the development of novel, highly potent BMP proteins and a carefully designed composite matrix carrierfifth metatarsal, with the objective of promoting robust rapid bone formation in the absence of the challenges associated with Infuse.
To date, we have evaluated our BMP product candidates in a number of non-clinical surgical models in multiple species, including non-human primates. In these studies, we found that our BMP product candidates resulted in fusion when used for fibular segmental defect repair, posterolateal spine fusion and interbody spine fusion at a concentration of one-tenth or less of that used with Infuse. As part of the pre-clinical testing to develop our carriers, more than 80 non-human primates were exposed to our BMP protein in trauma and spine implantations. Results in this model, which we believe are highly predictive of clinical performance, demonstrated the localized potency of our BMP protein in promoting rapid, robust bone formation at a significantly lower dose than Infuse. Further confirmatory work in this model is planned for 2016, which we expect will include at least 24 additional non-human primates. However, non-human primate studies may not be indicative of results that we will experience in clinical trials with human subjects. Clinical testing is expensive, is difficult to design and implement, can take many years to complete and is inherently uncertain as to outcome.
Our newly developed composite matrix carrier is designed to enable targeted delivery throughdetermining if the use of fenestrations to provide fluid drainage and tissue ingrowth and a biomimetic, highly porous scaffold intended to facilitate tissue ingrowth. The granule surface is engineered to enhance binding withour Exogen system mitigates risk of fracture nonunion in predisposed patients. Depending on the protein. We developedresults from our carrier technology to circumvent the key carrier challenges faced by other BMP products, including excessive swelling caused by product overdosing in cervical fusion, subsidence, heterotopic bone formation and painful cysts. As a result, we believe our next-generation BMP product candidates have the potential to address a large number of market opportunities more safely and at least as effectively as Infuse.
Initial clinical testing of one of our product candidates will be conducted in a Phase 1/2, adaptive trial of subjects with symptomatic lumbar or lumbosacral degenerative spinal disorder requiring PLIF, a condition for which clinical efficacy of Infuse has previously been established. Trials of single or multi-level primary instrumented PLIF with Infuse have consistently demonstrated radiographic and clinical outcomes at least comparable to that of autograft bone graft, the ideal for spinal fusion procedures. However, the relatively high dose of Infuse generally required to achieve these results has limited the widespread adoption and product commercialization in this indication, largely due to concerns about systemic safety. As a first-in-human trial, our study will be designed conservatively, with an initial lead-in phase in which a limited number of subjects will be enrolled and treated with one or more doses of one of our next-generation BMP product candidates.
We expect to commence a Phase 1 clinical trial within 18 months. If we are able to recruit the necessary number of patients for our Phase 1/2 PLIF clinical trial and perform the planned CT within six months of surgery, we should expect a preliminary read out of the performance of our product in 2019 through the assessment of the Data Safety Monitoring Board. We believe Phase 2 confirmatory data could follow within twelve months of the availability of data for the Phase 1/2 PLIF clinical trial. However, we cannot determine with certainty the timing of initiation, duration or completion of future clinical trials of our BMP product candidates.
After any necessary dose adjustments, the trial will then expand to a larger number of subjects, with the intention of identifying an optimal dose for further study in a definitive, Phase 3 efficacy trial in the same
indication. Further to a similar lead-in phase designed to confirm dosing,studies, we plan to pursue pivotal trialssubmit a total of three PMA supplements to the FDA, the first of which was submitted in December 2020 seeking approval for efficacy confirmationthe adjunctive treatment of acute and delayed metatarsal fractures to reduce the risk of non-union. We plan to submit the second PMA supplement in TLIFthe second quarter of 2022 and open tibial fractures.the third PMA supplement in either the third or fourth quarter of 2023.
We estimateSales and marketing
Our expansive direct sales and distribution channel across our product portfolio provides us with broad and differentiated customer reach, and allows us to serve physicians spanning the addressable market opportunity for our next-generation BMP product candidates is approximately $1.2 billion, which consists of approximately 300,000 procedures annually for PLIF, TLIForthopedic continuum, including sports medicine, total joint reconstruction, hand and open tibia fracturesupper extremities, foot and ankle, podiatric surgery, trauma, spine and neurosurgery. Our products are widely reimbursed by both public and private health insurers and are sold in the physician’s office or clinic, ASCs, and in the hospital setting in the United States and across 37 countries. Our sales team and distributors work directly with our physician customers on a frequent basis, providing us with a significant opportunity to introduce new products and upsell from our current portfolio. We believe our sales organization will provide us with an opportunity to efficiently roll out our deep pipeline and participate in business development opportunities going forward.
Our OA joint pain treatment and joint preservation products and our minimally invasive fracture treatment products are sold by a direct sales team of approximately 240 in the United States and approximately 45
internationally. This direct team is complimented by approximately 20 account representatives who work with our sales team to provide account access through IDNs, GPOs and payer contracting. Our direct sales organization, totaling approximately 305 globally, is supplemented by approximately 35 sales managers. Our sales leaders have considerable experience, with an average of five years of experience. Our BGS products are sold by approximately 170 independent distributors in the United States, each with their own independent sales force, supported by our 15 member regionalized sales support team. We market our BGSs primarily to orthopedic spine proceduressurgeons and neurosurgeons for use in Europe. This market is projectedthe operating room in both the hospital and ASC setting. We believe that our broad customer reach has and will continue to growenable strong and durable growth in each of our verticals and provides a significant foundation for future product launches. We support our sales organization with extensive training to $1.4 billion by 2019help them excel, and the numberwe have a performance culture built on serving our core orthopedic patient customers and delivering our products to a variety of procedures is expected to rise to 360,000 representing CAGRs of 3.5%physicians and 4.0%, respectively.care settings.
The following chart shows the forecasted total addressable procedures by end market for 2014 to 2019:
Forecasted total addressable procedures by end market
Research and clinical operations
We see significant opportunity to develop innovative and clinically differentiated products internally with our experienced research and development team. We are committedfocused on internal research and development to ongoing R&D in bothbroaden our Surgicalportfolio of therapies to manage OA joint pain and Active Healing Therapies business.joint preservation, expand our Exogen system product label and undertake clinical research to support commercialization of our next-generation of BGS products.
As a result, we expect our research and development expense to increase to the mid-single digits as a percentage of net sales as we introduce new products, extend existing product lines and expand indications. As of December 31, 2015,September 26, 2020, our R&Dresearch and development and clinical operations staff included approximately 3040 engineers, scientists and project managers. Our R&D expenses,research and development activities are focused on product development in BGSs, treatments for OA and soft tissue surgery. Our clinical research is focused on running the B.O.N.E.S. and MOTYS clinical programs, as well as continuing to build our body of clinical evidence to demonstrate the efficacy and value of our products through collaborations with prominent academic investigators. Our research and development team is comprised of 13 individuals holding PhDs and 18 individuals with more than 20 years of experience in the medical device industry. We collaborate with academic centers of excellence, leading contract research organizations and other industrial groups to complement and expedite execution of our research and development programs and minimize fixed costs. Research and development expense, including spending on our clinical evidence development efforts, totaled $9.5$11.1 million, $8.1 million and $14.7$8.1 million for the years ended years ended December 31, 20142019, 2018 and 2015,2017, respectively, and $3.0$8.3 million and $3.7$7.9 million for the three month periodsnine months ended MarchSeptember 26, 2020 and September 28, 2015 and April 2, 2016,2019, respectively. Within our Active Healing Therapies business, our current R&D efforts are focused primarily on improving design for ease of use and compliance. Within our Surgical business, our efforts are primarily focused on clinical and preclinical trials for our BMP product candidates, additional clinical and preclinical studies to support our currently marketed portfolio of bone graft substitutes, and development of new formulations of bone graft substitutes.
Competition
The medical technologydevice industry is highly competitive, subject to change and significantly affected by activities of industry participants. Our Exogen system competes with products marked by Orthofix International N.V., Zimmer Biomet Holdings, Inc. and DJO Global Inc.
The multi-injection HA viscosupplementation therapies that we own or distribute compete against Ferring Pharmaceutical Inc.’s Euflexxa, Interpace BioPharma LLC’sFidia Farmaceutici S.p.A.’s Hyalgan, DePuy Orthopaedics, Inc. (Johnson & Johnson)’sJohnson’s) Orthovisc, and Sanofi S.A.’s Synvisc.Synvisc and OrthogenRx Inc.’s GenVisc 850. These products
have faced significant competition from single injection therapies, such as Sanofi S.A.’s Synvisc-One, Zimmer Biomet Holdings, Inc.’s Gel-One and DePuy Orthopaedics, Inc. (Johnson & Johnson)’sJohnson’s) Monovisc. See “Risk factors–Risks related to our business–
Our commercial success depends on our ability to differentiate the HA viscosupplementation therapies that we own or distribute from alternative therapies for the treatment of osteoarthritis.” Our Surgical businessBGS product portfolio competes with products from Medtronic, DePuy Orthopaedics, Inc. (Johnson & Johnson), Stryker Corporation, NuVasive, Inc., SeaSpine, Inc., Alphatec HoldingsOrthofix Medical Inc., Orthofix International N.V., Zimmer Biomet Holdings, Inc. and Globus Medical Inc.
Our Exogen system competes with products marketed by Orthofix Medical Inc., LDR Holding CorporationZimmer Biomet Holdings, Inc. and K2M,DJO Global Inc.
At any time, these or other market participants may develop alternative treatments, products or procedures that compete directly or indirectly with our products. They may also develop and patent processes or products earlier than we can or obtain regulatory clearance or approvals for competing products more rapidly than we can.
See “Risk factors—Risks related to our business—Our commercial success depends on our ability to differentiate the HA viscosupplementation therapies that we own or distribute from alternative therapies for the treatment of OA” and “Risk factors—Risks related to our business—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, which may prevent us from achieving increased market penetration or improved operating results.”
Intellectual property
We strive to protect and enhance the proprietary technologies, inventions and improvements that we believe are important to our business, including seeking, maintaining and defending patent rights, whether developed internally or licensed from third parties. Our policy is to seek to protect our proprietary position by, among other methods, pursuing and obtaining patent protection in the United States and in jurisdictions outside of the United States related to our proprietary technology, inventions and improvements that are important to the development and implementation of our business. We also rely on trademarks, trade secrets and careful monitoring of and contractual obligations with respect to our proprietary information to protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection.
Our success will depend on our ability to obtain and maintain patent and other proprietary protection for commercially important technology, inventions and know-how related to our business, defend and enforce our patents, maintain our licenses to use intellectual property owned by third parties and operate without infringing the valid and enforceable patents and other proprietary rights of third parties. For important factors related to our proprietary technology, inventions and improvements, please see the section entitled “Risk factors—Risks related to intellectual property.”
Patents
We own numerous patents and/or patent applications which relate to our material products, including patents forand/or patent applications with respect to our Exogen system, OsteoAMP and patent applications for OsteoAMP. However,MOTYS. Although in the aggregate our intellectual property is of material importance to our business, we do not consider thembelieve that any single patent is of material importance to the operationour product portfolio. As of November 13, 2020, we owned four issued U.S. patents and two pending U.S. patent applications relating to our business.material products. We also licenseowned nine issued foreign patents relatedand 11 pending foreign patent applications directed to our BMP product candidates. Correspondingmaterial products. Our patents and patent applications which relateas of November 30, 2020 directed to our material products have also been granted or are otherwisesummarized below.
We owned three issued U.S. patents and one issued foreign patent in Australia directed to our Exogen system. The U.S. patents are expected to expire between 2025 and 2029, and the foreign patent is expected to expire in 2025.
We owned one issued U.S. patent, one pending U.S. patent application, eight issued foreign patents, and ten pending foreign patent applications directed to our OsteoAMP product, including foreign patents and patent applications in Europe, Asia, Canada Mexico and Australia. As of April 2, 2016, we owned approximately 24The issued U.S. patents and had applications pending for approximately 6 U.S. patents, and we owned approximately 40patent is expected to expire in 2029. The issued foreign patents are expected to expire in 2029. The pending patent applications, if issued, are expected to expire in 2029, without accounting for potential patent term extensions and hadadjustments.
We also own one pending U.S. patent application and one pending Patent Cooperation Treaty application directed to MOTYS. Patents issuing from these applications, if any, are expected to expire in 2040, without accounting for potential patent term extensions and adjustments. Our patents and pending for approximately 7 foreign patents.patent applications directed to our material products are detailed in the table below.
Country | Application Number | Filing Date | Patent Number | Application | Expected Date | Description | Product | |||||||
AU | 2009324417 | Dec. 13, 2009 | 2009324417 | Issued | Dec. 2029 | Directed to methods of making osteoinductive implants | OsteoAMP | |||||||
AU | 2014259553 | Nov. 14, 2014 | 2014259553 | Issued | Dec. 2029 | Directed to methods of making osteoinductive implants | OsteoAMP | |||||||
AU | 2016213839 | Aug. 11, 2016 | 2016213839 | Issued | Dec. 2029 | Directed to methods of making osteoinductive implants | OsteoAMP | |||||||
CA | 2746668 | Dec. 13, 2009 | 2746668 | Issued | Dec. 2029 | Directed to methods of making osteoinductive implants | OsteoAMP | |||||||
CN | 200980155596.X | Dec. 13, 2009 | 200980155596.X | Issued | Dec. 2029 | Directed to methods of making osteoinductive implants | OsteoAMP | |||||||
CN | 201410413348.3 | Aug. 20, 2014 | 201410413348.3 | Issued | Dec. 2029 | Directed to methods of making osteoinductive implants | OsteoAMP | |||||||
EP | 09832666.3 | Dec. 13, 2009 | Pending | Dec. 2029 | Directed to methods of making osteoinductive implants | OsteoAMP | ||||||||
HK | 15105678.1 | June 16, 2015 | HK1205007 | Issued | Dec. 2029 | Directed to methods of making osteoinductive implants | OsteoAMP | |||||||
IN | 2567/KOLNP/2011 | Dec. 13, 2009 | Pending | Dec. 2029 | Directed to methods of making osteoinductive implants | OsteoAMP | ||||||||
KR | 10-2011-7016270 | Dec. 13, 2009 | 10-1713346 | Issued | Dec. 2029 | Directed to methods of making osteoinductive implants | OsteoAMP | |||||||
US | 15/016072 | Feb. 4, 2016 | 10383974 | Issued | Dec. 2029 | Directed to methods of making osteoinductive implants | OsteoAMP | |||||||
US | 16/459778 | July 2, 2019 | Pending | Dec. 2029 | Directed to methods of making osteoinductive implants | OsteoAMP | ||||||||
GB | 09832666.3 | Dec. 13, 2009 | Pending | Dec. 2029 | Directed to methods of making osteoinductive implants | OsteoAMP | ||||||||
FR | 09832666.3 | Dec. 13, 2009 | Pending | Dec. 2029 | Directed to methods of making osteoinductive implants | OsteoAMP | ||||||||
DE | 09832666.3 | Dec. 13, 2009 | Pending | Dec. 2029 | Directed to methods of making osteoinductive implants | OsteoAMP | ||||||||
IT | 09832666.3 | Dec. 13, 2009 | Pending | Dec. 2029 | Directed to methods of making osteoinductive implants | OsteoAMP |
Country Application Number Filing Date Application Expected Date Description Product CH BE ES PT US AU US US June 2028 US PCT Patent
Number
Status
Expiration 09832666.3 Dec. 13, 2009 Pending Dec. 2029 Directed to methods of making osteoinductive implants OsteoAMP 09832666.3 Dec. 13, 2009 Pending Dec. 2029 Directed to methods of making osteoinductive implants OsteoAMP 09832666.3 Dec. 13, 2009 Pending Dec. 2029 Directed to methods of making osteoinductive implants OsteoAMP 09832666.3 Dec. 13, 2009 Pending Dec. 2029 Directed to methods of making osteoinductive implants OsteoAMP 09/925,193 Aug. 9, 2001 7,429,248 Granted July 2025 Directed to applying ultrasound to tissue using a modal converter having a plurality of angled sides Exogen 2006203281 Aug. 1, 2006 2006203281 Granted Aug. 2025 Directed to treating a neuropathy disease with ultrasound using a specific frequency and pulse rate for the signal Exogen 11/462,271 Aug. 3, 2006 8,048,006 Granted Feb. 2029 Directed to treating a neuropathy disease with ultrasound using a specific frequency and pulse rate for the signal Exogen 12/296,333 April 7, 2007 8,226,582 Granted Directed to applying ultrasound to tissue using a modal converter having an oblique angle and speed of sound similar to human tissue Exogen 17/097,350 Nov. 13, 2020 Pending Nov. 2040 Directed to placental tissue particulates compositions, methods of treating musculoskeletal or orthopedic conditions, methods of treating pain associated with osteoarthritis, kits and methods of making the compositions MOTYS PCT/US20/60393 Nov. 13, 2020 Pending Nov. 2040 Directed to placental tissue particulates compositions, for use in treating musculoskeletal or orthopedic conditions, methods of treating pain associated with osteoarthritis, kits and methods of making the compositions MOTYS
Trademarks
We own registered trademarks for Bioventus, Cellxtract, Durolane, Exogen, Exponent, Gelsyn-3, OsteoAMP, OsteoPlus,Osteofuse, Prohesion, PureBone, SAFHS, and Signafuse in the United States. We own registered trademarks for certain of our products, such as Durolane, outside the United States. We also have several pending U.S. and foreign trademark applications, including for Exogen, OsteoAMP and Durolane.
Trade secrets
We may rely on trade secret law to protect some of our technology, including the processing of tissue for OsteoAMP. Trade secrets, however, can be difficult to protect.
We seek to protect our proprietary technology and manufacturing process, in part, by confidentiality and invention assignment agreements with employees, under which they are bound to assign to us inventions that are made during the term of their employment and relate to our business, unless otherwise excepted.there is an exception. These agreements further prohibit our employees from using, disclosing, or bringing onto the premises any proprietary information belonging to aany third-party. In addition, our consultants, scientific advisors and contractors are required to sign agreements under which they must assign to us any inventions that relate to our business. These agreements also prohibit these third-parties from incorporating into any inventions the proprietary rights of third-parties without informing us. It is our policy to require all employees to document potential inventions and other intellectual property in laboratory notebooks and to disclose inventions to patent counsel.
We also seek to preserve the integrity and confidentiality of our data and trade secrets by taking commercially reasonable efforts to maintain the physical security of our premises and physical and electronic security of our information technology systems.
While we have confidence in these individuals, organizations and systems, agreementsour security measures may be breached, or security measuresmay otherwise prove inadequate to protect the integrity and confidentiality of our data and trade secrets. Further, our agreements may be breached (or not obtained in the first place) and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our consultants, contractors or collaborators use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.
Amended and Restated License agreement with PfizerAgreement for Durolane
In June 2013,December 2016, we entered into an agreementthe Q-Med License Agreement with Pfizer for an exclusive, worldwide licenseQ-Med and NSH. Pursuant to certain parts of Pfizer’s BMP portfolio, subject to certain field of use and other restrictions. The portfolio includes rights to develop, commercialize, make, use and sell products containing next-generation BMP and products containing BMP-2, in each case, for the prevention, treatment, or amelioration of disease in humans and animals. Under the license agreement, we also acquired an option to acquireQ-Med License Agreement, Q-Med granted us an exclusive license under certain intellectual property rights controlled by Q-Med to commercialize, but not to develop or manufacture, Durolane products for BMP-12 products. Pursuantuse in the prevention or treatment of pain due to OA in the license agreement, Pfizer transferredUnited States. For the first ten years of the Q-Med License Agreement, we may not commercialize any single-injection-regimen or dual-injection-regimen products other than Durolane in the United States for use in the prevention or treatment of pain due to us certain existing development work for their BMP assetsosteoarthritis. In connection with the Q-Med License Agreement, we paid Q-Med an upfront fee of $2 million, and agreed to undertakepay up to an aggregate of an additional $8 million upon the achievement of certain early-development activities relating to the next-generation BMP product candidates. Pfizer also manufactures BMP-2regulatory and has agreed to supply it to us pursuant to a separate supply agreement effective June 2013.
During the term of the license agreement, we are obligated to use commercially reasonable efforts to develop and commercialize (i) products containing next-generation BMP and (ii) products containing BMP-2. Upon the first commercial sale of a product containing next-generation BMP, Pfizer will assign to us certain IP rights relating to next-generation BMP, though we will continue to license certain material background IP from Pfizer under the agreement.
In connection with this agreement, we paid Pfizer a one-time, non-creditable, non-refundable license fee.milestones. We also agreed to pay PfizerQ-Med tiered royalties based on our annual net sales of a mid-single digit percentageDurolane, at rates calculated such that the sum of the royalty payable and the supply price we pay for Durolane purchased from Q-Med in the applicable year equals low-to mid- twenty percentages of net sales for BMP-2 and BMP-12 and a low-double digit percentage of net sales for next-generation BMP,Durolane, subject to a specified adjustments. Additionally,floor on such payment. In the event that we are required todo not meet a specified minimum sales requirement we must pay Pfizer certain milestone payments with respectQ-Med a fee equal to the licensed products upon achievement of certain development and commercialization milestones. See “Management’s discussion and analysis of financial condition and results of operations—Strategic Transactions—BMP portfolio.”shortfall.
The termQ-Med License Agreement will remain in effect until the ninety-ninth anniversary of the effective date of the agreement will expire on a country-by-country and product-by-product basis uponunless earlier terminated. If the later of (i)Q-Med Supply Agreement is terminated, the last to expire patent claim covering such product in such country, and (ii) ten years after the first
commercial sale of such product in such country . Eitherterminating party canmay simultaneously terminate the agreement uponQ-Med License Agreement. The Q-Med License Agreement may be terminated earlier by either party in the event of material breach by the other party that remains uncured for 60 days, or in case of bankruptcyby Q-Med if we were to challenge the validity or enforceability of the otherlicensed patents, directly or indirectly through a third party. We can terminate the agreement for any reason (i) with respect to the next-generation BMP product candidates at any time after approximately July 2018, (ii) with respect to BMP-2 at any time after approximately July 2016, and (iii) with respect to BMP-12, if the option is exercised, any time after the three year anniversary of the date we exercise such option, in each case, subject to certain notice obligations.
Exclusive distribution agreement for Supartz FXGELSYN-3
In June 2016, we renewed an agreement with Seikagaku Corporation, or SKK, whereby we obtained promotion and distribution rights, with the right to engage sub-distributors, for Supartz FX in the United States. Under the agreement, SKK supplies to us Supartz FX on a purchase order basis, based on the amounts of Supartz FX we require as set forth in rolling forecasts, and in exchange we pay to SKK a percentage of the average selling price per unit of Supartz FX, subject to certain adjustments. We are subject to certain annual minimum purchase requirements based on a percentage of our Supartz FX annual forecast, and are obligated to commercialize Supartz FX in the United States.
The term of the SKK agreement continues in effect for until May 2019. If we fail to order a minimum quantity of Supartz FX from SKK in any year during the term of the agreement, SKK shall have the right to make our promotion and distribution right non-exclusive, unless we make a payment to SKK equal to the lesser of the purchase price for the shortfall amount or one million dollars.
Either party may terminate the agreement on written notice for the other party’s material breach that remains uncured for sixty days after receipt of prior written notice thereof. SKK may terminate the agreement immediately if we fail to pay undisputed amounts due under the agreement within a certain time of receiving written notice of our nonpayment. Either party may terminate the agreement for the other party’s bankruptcy or insolvency-related events. We may terminate the agreement upon fifteen days written notice if we are enjoined from selling Supartz FX in any part of the United States for at least six months due to patent infringement.
Exclusive distribution agreement for GelSyn-3
In February 2016, we entered into an agreement with IBSA whereunder which we obtained the exclusive distribution rights for GelSyn-3GELSYN-3 in the United States, as well as an assignment of the related GelSyn-3GELSYN-3 trademark. IBSA will maintain the ownership of all regulatory, technical and clinical data, among other information and documentation, concerning GelSyn-3. Under the agreement, IBSA will supply GelSyn-3GELSYN-3 on a purchase order basis, based on the amounts of GelSyn-3GELSYN-3 that we require as set forth in rolling forecasts. We will beare also subject to certain annual minimum purchase requirements. We are obligated to use commercially reasonable efforts to launch GelSyn-3, and we are obligated to diligently market GelSyn-3GELSYN-3 in the United States. Additionally, during the term of the agreement, IBSA may not actively promote certain competing products in the United States.
The term of the IBSA agreement continues in effect for ten years, or until FebruaryMarch 2026. Thereafter, the agreement will be automatically renewed for consecutive five year terms, unless either we or IBSA gives notice of termination at least six months prior to the expiration of the initial term or any renewal term. If we fail to meet at least 50% of the annual minimum purchase requirement in anya given year during the term of the agreement, IBSA will have the rightand do not purchase enough products to either demand payment for a percentage of the purchase price forsatisfy the shortfall amount orfor such year within a specified time after receiving notice from IBSA, IBSA may terminate this agreement upon 30 days prior notice to us.the agreement.
Either party may terminate the agreement on written notice for the other party’s material breach that remains uncured for thirty30 days after receipt of prior written notice. Either party may terminate the agreement upon
written notice for the other party’s bankruptcy or insolvency-related events. IBSA may terminate this
Exclusive distribution agreement upon 30 days prior noticefor SUPARTZ FX
Effective December 22, 2020, we entered into an Amended and Restated Exclusive Distribution Agreement No.2 with SKK, whereby we maintained our exclusive promotion and distribution rights, with the right to engage sub-distributors if approved by SKK, for SUPARTZ FX in the United States. We also received an exclusive license to the trademarks SUPARTZ and SUPARTZ FX in the United States. SKK supplies to us ifSUPARTZ FX on a purchase order basis and in exchange, we pay to SKK an amount in the low thirty percentages of the average selling price per unit of SUPARTZ FX, subject to certain adjustments. We are subject to certain annual minimum purchase requirements based on a mutually agreed upon methodology and are obligated to use our best efforts to commercialize SUPARTZ FX in the United States. If we fail to meet at least 50%order the minimum order quantity of the annual minimum purchase requirementSUPARTZ FX from SKK in any year during the term of the agreement, but notwe must pay SKK a specified fee equal to the number of units needed to meet the minimum order quantity multiplied by a specified percentage of the purchase price.
The term of the SKK agreement continues in effect until December 31, 2028. Either party may terminate the agreement on written notice for the other party’s material breach that cannot be cured, or that otherwise remains uncured for 60 days after receipt of prior written notice thereof, or for the other party’s bankruptcy or insolvency-related events. SKK may terminate the agreement immediately if we cure by issuing purchase orders forfail to pay undisputed amounts due under the agreement within a certain amount withintime of receiving written notice of our nonpayment. We may terminate the 30 day period.agreement upon 15 days written notice if we are enjoined from selling SUPARTZ FX in any part of the United States a specified time period due to patent infringement.
Manufacturing and supply
Our HA viscosupplementation therapies and certain of our surgical products are manufactured exclusively by single-source third-party manufacturers, pursuant to multi-year supply agreements. We work closely with each of our manufacturing partners and provide them with a forecast, which enables them to better capacity plan and sequence their production efficiently. For Durolane, we are subject to minimum order volumes for each order and purchase amounts are also based in part on forecasts. For GELSYN-3, we will be subject to certain annual minimum purchase requirements and purchase amounts based on rolling forecasts. For SUPARTZ FX, we are subject to certain annual minimum purchase requirements based on a percentage of our SUPARTZ FX annual forecast.
For Durolane, in December 2016, we entered into an amended and restated supply agreement, or the Q-Med Supply Agreement, with Q-Med AB, or Q-Med. Under the Q-Med Supply Agreement, Q-Med supplies Durolane products exclusively to us for sale in the United States for use in the in the prevention or treatment of pain due to OA on a purchase order basis, based on the amounts of Durolane we require as set forth in rolling forecasts and we are subject to certain semi-annual minimum purchase requirements based on a percentage of our Durolane forecast.
The term of the Q-Med Supply Agreement continues in effect until the termination of the Q-Med License Agreement. We may terminate the Q-Med Supply Agreement immediately if Q-Med fails to supply a specified
percentage of the aggregate quantities of licensed product required for a specified number of months and does not cure such shortfall within a defined time period and, upon such termination, Q-Med is obligated to grant us, or to a third party reasonably acceptable to us, the right to manufacture Durolane products.
Either party may terminate the Q-Med Supply Agreement upon written notice for the other party’s material breach that remains uncured for 60 days (or 30 days for any payment default) after receipt of prior written notice.
We assemble, inspect, test and package our Exogen system at our facility in Cordova, Tennessee with components supplied by third-party suppliers. Our Exogen system includes a transducer which is a key component that is supplied by a single-source supplier. We perform inspections of these components before use in our manufacturing operations.
Our HA viscosupplementation therapies and certain of our Surgical products, including OsteoAMP, are manufactured exclusively by single-source third-party manufacturers, pursuant to multi-year supply agreements. We work closely with each of our manufacturing partners and provide them with a forecast, which enables them to better capacity plan and sequence their production efficiently. For Supartz FX, we are subject to certain annual minimum purchase requirements based on a percentage of our Supartz FX annual forecast For Durolane, we are subject to minimum order volumes for each order and purchase amounts are also based in part on forecasts. For GelSyn-3, we will be subject to certain annual minimum purchase requirements and purchase amounts will be based on rolling forecasts. We do not have guaranteed minimum orders for OsteoAMP, which are purchased pursuant to purchase orders. We are also subject to a supply agreement with Advanced Biologics to purchase OsteoAMP until October 2018.
We believe our manufacturing operations are in compliance with regulations mandated by the FDA. We are an FDA-registered medical device manufacturer. Our manufacturing facilities and processes are subject to periodic inspections and audits by various federal, state and foreign regulatory agencies. Our facility was last inspected in April 2015 by the FDA and August 2015 by the British Standards Institute, or BSI Group, our Notified Body, and no major nonconformance reports were issued as a result of those inspection.
We intend to maintain sufficient supplies of the products and components from these single-source suppliers in the event that one or more of these suppliers were to encounter certain interruptions in supply. See “Risk factors—Risks related to our business—We rely on a limited number of third-party manufacturers to manufacture certain of our products.”
We believe our manufacturing operations are in compliance with regulations mandated by the FDA. We are an FDA-registered medical device manufacturer. Our manufacturing facilities and processes are subject to periodic inspections and audits by various federal, state and foreign regulatory agencies.
With respect to MOTYS, on June 18, 2020, we entered into a commercial supply agreement with MTF. Under the agreement, MTF will exclusively manufacture and supply MOTYS under cGTPs to us to allow for our limited commercialization that began in the fourth quarter of 2020 under the tissue regulations while we pursue a BLA for the product. MTF is responsible for obtaining and storing all materials, including all tissue materials, required for the manufacture, testing, handling, packaging, labeling, release and delivery of the product to us.
We anticipate entering into an additional supply agreement with MTF if we are able to obtain FDA approval for our BLA and at the appropriate stage of development of the program, when adherence to cGMP manufacturing standards is required for continued regulatory compliance.
Government regulation
Government regulation of medical devices
Our medical devices are subject to regulation by numerous government agencies, including the FDA and comparable foreign agencies. The FDA and other U.S. and foreign governmental agencies regulate, among other things, with respect to medical devices:
design, development and manufacturing;
testing, labeling, content and language of instructions for use and storage;
clinical trials;
product safety;
marketing, sales and distribution;
premarket clearance and approval;
record keeping procedures;
advertising and promotion;
recalls and field safety corrective actions;
postmarket surveillance, including reporting of deaths or serious injuries and malfunctions that, if they were to recur, could lead to death or serious injury;
postmarket approval studies; and
product import and export.
The regulations to which we are subject are complex and have tended to become more stringent over time. Regulatory changes could result in restrictions on our ability to carry on or expand our operations, higher than anticipated costs or lower than anticipated sales.
FDA premarket clearance and approval requirements
Each medical device we seek to commercially distribute in the United States must first receive 510(k) clearance or approval of a PMA application from the FDA, unless specifically exempted by the agency.exempt. The FDA classifies all medical devices into one of three classes. Devices deemed to pose lower risk are categorized as either Class I or Class II. Class II which requiresdevices require the manufacturer to submit to the FDA a 510(k) pre-market notification requesting clearance of the device for commercial distribution in the United States. Some low riskClass I devices are exempted from this requirement. Devices deemed by the FDA to pose the greatest risk, such as life sustaining, life-supporting, orselected implantable devices, or devices deemed not substantially equivalent to a previously 510(k) cleared device, are categorized as Class III, generally requiring submission and approval of a PMA.
510(k) clearance process
To obtain 510(k) clearance, we must submit a premarket notification to the FDA demonstrating the proposed device to be substantially equivalent to a predicate device. A predicate is a previously cleared 510(k) device, a device that was in commercial distribution before May 28, 1976 for which the FDA has not yet called for the submission of PMA applications, or is a device that has been reclassified from Class III to either Class II or I. In rare cases, Class III devices may be cleared throughThe standard review process for 510(k)s is between 30 days to 3 months, dependent upon the type of 510(k) process as described in the prior paragraph. The FDA’s 510(k) clearance process usually takes from three to twelve months from the date the application is submitted and filed with the FDA, but may take significantly longer and clearance is never assured.filing submitted. Although many 510(k) premarket notifications are cleared without clinical data, in some cases, the FDA requires significantmay require clinical data to support substantial equivalence. In reviewing a premarket notification, the FDA may request additional information, including clinical data, which may significantly prolong the review process.process and clearance is never assured.
After a device receives 510(k) clearance, any subsequent modification of the device that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, will requirerequires a new 510(k) clearance or could require PMA. Thesubmission and approval of a PMA application in cases where new indications are sought for which there is no predicate. Non-significant changes are handled via internal documentation by the Company. Each manufacturer must judge the significance of modifications based on algorithms within FDA requires each manufacturer to make this determination initially, but the510(k) guidance documents. FDA may review any such decision and may disagree with a manufacturer’s determination. If the FDA disagrees with a manufacturer’s determination, the FDA may require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or PMA approval is obtained. We have modified aspects of some of our devices since receiving initial regulatory clearance. We concluded that some of those modifications coulddid not significantly affect the safety or efficacy of the device and therefore, that new 510(k) clearances or PMAs were not required. We have also obtained new 510(k) clearances from the FDA for other modifications to our devices. In the future, we may make additional modifications to our products after they
have received FDA clearance or approval and in appropriate circumstances, determine that new clearance or approval is unnecessary. However, the FDA may disagree with our determination and if the FDA requires us to seek 510(k) clearance or submit new PMA applications for any modifications to a previously cleared product, we may be required to cease marketing or recall the modified device until we obtain the required clearance or approval. Under these circumstances, we may also be subject to significant regulatory fines or other penalties. In addition, the FDA is currently evaluating the 510(k) process and may make substantial changes to industry requirements, including which devices are eligible for 510(k) clearance, the ability to rescind previously granted 510(k)s and additional requirements that may significantly impact the process.
We have obtained 510(k) premarket clearance from the FDA for Signafuse Bioactive Bone Graft Putty, Interface Bioactive Bone Graft, Osteomatrix +, and Signafuse Mineralized Collagen Scaffold.
Premarket approval process
A PMA application must be submitted if the medical device is in Class III (although the FDA has the discretion to continue to allow certain pre-amendment Class III devices to use the 510(k) process) or cannot be
cleared through the 510(k) process. A PMA application must be supported by, among other things, extensive technical, preclinical, clinical trials, manufacturing and labeling data to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device.
After a PMA application is submitted and filed, the FDA begins an in-depth review of the submitted information, which typically takes between one and three years, but may take significantly longer.information. The standard review of such application is six months. During this review period, the FDA may request additional information or clarification of information already provided. This can extend the overall review process and typically PMAs take between one to three years in total for approval. Also during the review period, an advisory panel of experts from outside the FDA will usually be convened for a new type of device to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. In addition, the FDA will conduct a pre-approval inspection of the manufacturing facility to ensure compliance with Quality System Regulation, or QSR, which impose elaborate design development, testing, control, documentation and other quality assurance procedures in the design and manufacturing process. The FDA may approve a PMA application with post-approval conditions intended to ensure the safety and effectiveness of the device including, among other things, restrictions on labeling, promotion, sale and distribution and collection of long-term follow-up data from patients in the clinical study that supported approval. Failure to comply with the conditions of approval can result in materially adverse enforcement action, including the loss or withdrawal of the approval. New PMAs or PMA supplements are required for significant modifications to the manufacturing process, labeling of the product and design of a device that is approved through the PMA process. PMA supplements often requirerequires submission of the same type of information as a PMA, except that the supplement is limited to information needed to support any changes from the device covered by the original PMA and maytypically do not require as extensive clinical data or the convening of an advisory panel.Non-significant changes must be reported to the FDA through an annual report filing with the FDA. In review of this report, FDA may disagree with a manufacturer’s determination of the level of significance of the change. If the FDA disagrees with a manufacturer’s determination, the FDA may require the manufacturer to cease marketing and/or recall the modified device until PMA supplement approval is obtained.
Our Exogen system, SupartzDurolane, GELSYN-3, SUPARTZ FX and GelSyn-3,our Exogen bone healing system have obtainedeach been approved through the PMA approval.process.
Clinical trials
A clinical trial is typically required to support a PMA and is sometimes required for a 510(k) premarket notification. In the United States, authorization to conduct a clinical trialstrial generally requirerequires submission of an application for an Investigational Device Exemption, or IDE to the FDA. The IDE application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the investigational protocol is scientifically sound. The IDE application must be approved in advance by the FDA for a specified number of patients, unless the product is deemed a non-significant risk device and eligible for more abbreviated IDE requirements. Clinical trials for a significant risk device may begin once the IDE
application is approved by the FDA as well as the appropriate institutional review boards, or IRBs, at the clinical trial sites and the informed consent of the patients participating in the clinical trial is obtained. After a trial begins, the FDA may place it on hold or terminate it if, among other reasons, it concludes that the clinical subjects are exposed to an unacceptable health risk. Any trials we conduct must be conducted in accordance with FDA regulations as well as other federal regulations and state laws concerning human subject protection and privacy. Moreover, the results of a clinical trial may not be sufficient to obtain clearance or approval of the product.
Pervasive and continuing FDA regulation
After a medical device is placed on the market, numerous FDA regulatory requirements apply, including, but not limited to the following:
Quality System Regulation,QSRs, which requires manufacturers to follow design, testing, control, documentation and other quality assurance procedures during the manufacturing process;
Establishment Registration, which requires establishments involved in the production and distribution of medical devices, intended for commercial distribution in the United States, to register with the FDA;
Medical Device Listing, which requires manufacturers to list the devices they have in commercial distribution with the FDA;
Labeling regulations, which prohibit “misbranded” devices from entering the market, as well as prohibit the promotion of products for unapproved or “off-label”off-label uses and impose other restrictions on labeling;
Postmarket surveillance, including Medical Device Reporting,MDR requirements which requires manufacturers to report to the FDA if their device may have caused or contributed to a death or serious injury, or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur; and
Corrections and Removal Reporting regulations, which require that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FDCAUnited States Federal Food, Drug, and Cosmetic Act that may present a risk to health.
The FDA enforces these requirements by inspection and market surveillance. Failure to comply with applicable regulatory requirements may result in enforcement action by the FDA, which may include one or more of the following sanctions:
untitled letters or warning letters;
fines, injunctions and civil penalties;
mandatory recall or seizure of our products;
administrative detention or banning of our products;
operating restrictions, partial suspension or total shutdown of production;
refusing our request for 510(k) clearanceclearances or PMA approvals for new product versions;
revocation of 510(k) clearanceclearances or PMAsPMA approvals previously granted; and
criminal prosecution and penalties.
International regulation of medical devices
Sales of medical devices outside the United States are subject to foreign government regulations, which vary substantially from country to country. In order to market our products in other countries, we must obtain
regulatory approvals and comply with extensive safety and quality regulations in other countries. The time required to obtain approval by a foreign country may be longer or shorter than that required for FDA approval, and the requirements may differ significantly.
European Union’s regulation of medical devices
The European Union, or EU, has adopted legislation, in the form of directives to be implemented in each Member State, concerning the regulation of medical devices within the European Union. The directives include, among others, the Medical Device Directive (Council Directive 93/42/EEC) that establishes certain requirements, i.e. the essential requirements, with which medical devices must comply before they can be commercialized in the EEA (which is comprised of the Member States of the EU plus Norway, Liechtenstein and Iceland). Under the EU Medical Device Directive, medical devices are classified into four Classes, I, IIa, IIb, and III, with Class I being the lowest risk and Class III being the highest risk. Under the Medical Device Directive, a competent authority is nominated by the government of each Member State to monitor and ensure compliance with the Directive. To demonstrate compliance of their medical devices with the essential requirements, manufacturers must undergo a conformity assessment procedure, which varies according to the type of medical device and its classification. Except for certain types of low risk medical devices (Class Inon-sterile,non-measuring devices), where the manufacturer can issue an EC Declaration of Conformity based on a self-assessment of the conformity of its products with the essential requirements of the Medical Devices Directive, a conformity assessment procedure requires the intervention of an organization accredited by a Member State of the EEA to conduct conformity assessments, a so-called Notified Body. The Notified Body would typically audit and examine the quality system for the manufacture, design and final inspection of the medical devices before issuing a certification demonstrating compliance with the essential requirements. Medical devices that comply with the essential requirements are entitled to bear the CE mark, which is an abbreviation for Conformité Européene or European Conformity. Medical devices properly bearing the CE mark may be commercially distributed throughout the EEA. We have received CE certification from the British Standards Institute, a United Kingdom Notified Body, for conformity with the EU Medical Device Directive allowing us to place the CE mark on our Durolane and Exogen products. Additional premarket approvals in individual EEA countries are sometimes required prior to marketing of a product. Failure to maintain the CE mark would preclude us from selling our products in the EEA, as could failure to comply with the specific requirements of the Member States.
In September 2012, the European Commission published proposals for the revision of the EU regulatory framework for medical devices. The proposal would replace the Medical Devices Directive with a new regulation, or the Medical Devices Regulation. Unlike the Directives that must be implemented into national laws, the Medical Devices Regulation would be directly applicable in all EEA Member States and so is intended to eliminate current national differences in regulation of medical devices. In October 2013, the European Parliament approved a package of reforms to the European Commission’s proposals. Under the revised proposals, only designated “special notified bodies” would be entitled to conduct conformity assessments of high-risk devices. These special notified bodies will need to notify the European Commission when they receive an application for a conformity assessment for a new high-risk device. The European Commission will then forward the notification and the accompanying documents on the device to the Medical Devices Coordination Group, or MDCG, (a new, yet to be created, body chaired by the European Commission, and representatives of Member States) for an opinion.
If finally adopted, the Medical Devices Regulation is expected to enter into force in 2016 and become applicable three years thereafter. The adoption of the Medical Devices Regulation may, however, be materially delayed. In its current form it would, among other things, also impose additional reporting requirements on manufacturers of high risk medical devices, impose an obligation on manufacturers to appoint a “qualified person” responsible for regulatory compliance, and provide for more strict clinical evidence requirements. These new rules and
procedures may result in increased regulatory oversight of certain devices and this may, in turn, increase the costs, time and requirements that need to meet in order to maintain or place such devices on the EEA market.
Further, the advertising and promotion of our products in the EEA is subject to the laws of individual EEA Member States implementing the EU Medical Devices Directive, Directive 2006/114/EC concerning misleading and comparative advertising, and Directive 2005/29/EC on unfair commercial practices, as well as other EEA Member State laws governing the advertising and promotion of medical devices. These laws may limit or restrict the advertising and promotion of our products to the general public and may impose limitations on our promotional activities with healthcare professionals.
Our Exogen system and Durolane, bear the CE mark.
Other countries’ regulation of medical devices
Many other countries have specific requirements for classification, registration and postmarketing surveillance that are independent of the countries already listed. We obtain what we believe are the appropriate clearances for our Exogen system and Durolane and conduct our business in accordance with the applicable laws of each country. This landscape is constantly changing and we could be found in violation if we interpret the laws incorrectly or fail to keep pace with changes. In the event of either of these occurrences, we could be instructed to recall products, cease distribution and/or be subject to civil or criminal penalties.
GovernmentU.S. regulation of HCT/Ps
Our products, including OsteoAMP and PureBone, are regulated as human cells, tissues and cellular and tissue-based products, or HCT/Ps. Section 361 of the Public Health Service Act, or PHSA authorizes the FDA to issue regulations to prevent the introduction, transmission or spread of communicable disease. HCT/Ps regulated as “361”“Section 361” HCT/Ps are subject to requirements relating to registering facilities and listing products with the FDA, screening and testing for tissue donor eligibility, Good Tissue PracticecGTP, when processing, storing, labeling and distributing HCT/Ps, including required labeling information, stringent record keeping and adverse event reporting, among other applicable requirements and laws. Specifically, cGTPs are requirements that govern the methods used in, and the facilities and controls used for, the manufacture of HCT/Ps in a way that prevents the introduction, transmission, or spread of communicable diseases. Section 361 HCT/Ps do not require 510(k) clearance, PMA approval, BLAs, or other premarket authorization from the FDA before marketing. However, to be regulated as a Section 361 HCT/P, the product must, among other things, be “minimally manipulated,” which for structural tissue products means that the manufacturing processes do not alter the original relevant characteristics of the tissue relating to the tissue’s utility for reconstruction, repair, or replacement and for cells or nonstructural tissue products, means that the manufacturing processes do not alter the relevant biological characteristics of cells or tissues. A Section 361 HCT/P must also be intended for “homologous use,” which refers to use in the repair, reconstruction, replacement, or supplementation of a recipient’s cells or tissues with an HCT/P that performs the same basic function or functions in the recipient as in the donor.
We believe our OsteoAMP product is properly regulated as a Section 361 HCT/P and therefore have not sought or obtained 510(k) clearance, PMA approval, or licensure through a BLA. However, the FDA’s CDRH issued us a letter in March 2016 in which it asserted that OsteoAMP meets the definition of a medical device and
requested that we provide CDRH with information in support of our position that OsteoAMP does not require 510(k) clearance or PMA approval. We provided CDRH with the requested information in support of this position in May 2016 and we have received no further inquiries to date. We believe that CDRH’s assertion is unfounded and inconsistent with a 2011 letter from the FDA concluding that OsteoAMP meets the criteria for regulation solely as a Section 361 HCT/P. However, if the FDA were to disagree and if we are otherwise unsuccessful in asserting our position, the FDA may then require that we obtain 510(k) clearance or PMA approval and that we cease marketing OsteoAMP and/or recall OsteoAMP unless and until we receive clearance or approval. We estimate that if we were to cease marketing OsteoAmp and/or recall OsteoAmp that our net sales would decrease, which would adversely affect our results of operations. See “Risk factors – factors—Risks related to government regulation—Our HCT/P products are subject to extensive government regulation and our failure to comply with these requirements could cause our business to suffer.”
HCT/Ps that do not meet the criteria of Section 361 are regulated under Section 351 of the PHSA. Unlike 361 HCT/Ps, HCT/Ps regulated as “351” HCT/Ps are subject to premarket review and/or approval by the FDA, as required.
In November 2017, the FDA released a guidance document entitled “Regulatory Considerations for Human Cells, Tissues, and Cellular and Tissue—Based Products: Minimal Manipulation and Homologous Use—Guidance for Industry and Food and Drug Administration Staff.” The guidance outlined the FDA’s position that all lyophilized amniotic products are more than minimally manipulated and would therefore require a BLA to be lawfully marketed in the United States. The guidance also indicated that the FDA would exercise enforcement discretion, using a risk-based approach, with respect to the IND application and pre-market approval requirements for certain HCT/Ps for a period of 36 months from the issuance date of the guidance to allow manufacturers to pursue its IND application. Under this approach, FDA indicated that high-risk products and uses could be subject to immediate enforcement action. In July 2020, the FDA extended its period of enforcement discretion to May 31, 2021.
We plan to market MOTYS under the FDA’s policy of enforcement discretion as we pursue approval under a BLA for the product. We may be required to cease selling MOTYS if the FDA changes the scope of its enforcement discretion policy or changes the criteria used to assess which products qualify. In addition, following the period of enforcement discretion under the guidance, we may be required to cease selling MOTYS until such time as we obtain BLA approval.
Failure to comply with statutory and regulatory requirements subjects a manufacturer to possible legal or regulatory action, including the seizure or recall of products, injunctions, consent decrees placing significant restrictions on or suspending manufacturing operations and civil and criminal penalties.
GovernmentU.S. regulation of combination productsdrugs and biologics
We expect that certain of our products under developmentMOTYS will be regulated as combination products, which means that they are comprised of two or more different components that, if marketed individually, would be
subject to different regulatory pathways and would require approval of independent marketing applications by the FDA. A combinationFDA as a biological product, however, is assignedor biologic, and we plan to submit a Center withinBLA to the FDA that will have primary jurisdiction over its regulation based on a determinationto allow for the marketing of MOTYS following the combination product’s primary mode of action, which is the single mode of action that provides the most important therapeutic action. In that case, the combination product would be regulated as a drug and subject to the reviewexpiration of the FDA’s Centerenforcement discretion period for Drug Evaluationcertain HCT/Ps. Biologics are regulated under both the FDCA and Research,the PHSA and other federal, state, local and foreign statutes and regulations. We, along with third-party contractors, will be required to navigate the various preclinical, clinical and commercial approval requirements of the governing regulatory agencies of the countries in which we wish to conduct studies or CDER, who will have primary jurisdiction over premarket development.
Government regulationseek approval or licensure of drugsour product candidates.
The process required by the FDA before a drugproduct candidates may be marketed in the United States generally involves the following:
completion of extensive preclinical laboratory tests and animal studies and formulation studiesperformed in complianceaccordance with applicable regulations, including the FDA’s good laboratory practice,Good Laboratory Practice, or GLP, regulations;
submission to the FDA of an investigational new drug application, or IND which must become effective before human clinical trials may begin;
approval by an independent institutional review board, or IRB, or ethics committee at each clinical site before eachthe trial may be initiated;is commenced;
performance of adequate and well-controlled human clinical trials in accordance with good clinical practice, or GCP, requirements to establish the safety and efficacyeffectiveness of the proposed drug candidate and the safety, purity and potency of the proposed biologic product candidate for each indication;its intended purpose;
preparation of and submission to the FDA of a new drug application,an NDA or NDA;BLA after completion of all pivotal clinical trials;
satisfactory completion of an FDA advisory committeeAdvisory Committee review, if applicable;
a determination by the FDA within 60 days of its receipt of a NDA or BLA to file the application for review;
satisfactory completion of an FDApre-approval inspection of the manufacturing facility or facilities at which the proposed product is produced to assess compliance with current good manufacturing practice, or cGMP requirements, and to assure that the facilities, methods and controls are adequate to preserve the drug’s identity, strength, qualityproduct’s safety and purity;effectiveness, and of selected clinical investigation sites to assess compliance with GCPs; and
FDA review and approval of a NDA or BLA to permit commercial marketing of the NDA.product for particular indications for use in the United States.
Preclinical studiesand Clinical Development
PreclinicalPrior to beginning the first clinical trial with a product candidate, we must submit an IND to the FDA. An IND is a request for authorization from the FDA to administer an investigational new drug product to humans. The central focus of an IND submission is on the general investigational plan and the protocol or protocols clinical trials. The IND also includes results of animal and in vitro studies include laboratory evaluationassessing the toxicology, pharmacokinetics, pharmacology and pharmacodynamic characteristics of the product, chemistry, toxicitymanufacturing and formulation, as well as animal studies to assess potential safety and efficacy. An IND sponsor must submit the results of the preclinical tests, together with manufacturingcontrols, or CMC, information, analytical data and any available clinicalhuman data or literature among other things, to support the FDA as partuse of an IND. Some preclinical testingthe investigational product. An IND must become effective before human clinical trials may continue even after the IND is submitted. Anbegin. The IND automatically becomes effective 30 days after receipt by the FDA, unless before that time the FDA, within the 30-day period, raises safety concerns or questions related to one or moreabout the proposed clinical trials and places the clinical trial on a clinical hold.trial. In such a case, the IND may be placed on clinical hold and the IND sponsor and the FDA must resolve any outstanding concerns or questions before the clinical trial can begin. As a result, submissionSubmission of an IND therefore may or may not result in the FDA allowingauthorization to begin a clinical trials to commence.
Clinical trialstrial.
Clinical trials involve the administration of the investigational new drugproduct to human subjects under the supervision of qualified investigators in accordance with GCP requirements,GCPs, which include the requirement that all research subjects provide their informed consent in writing for their participation in any clinical trial.study. Clinical
trials are conducted under protocols detailing, among other things, the objectives of the trial,study, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. A protocolseparate submission to the existing IND must be made for each successive clinical trial conducted during product development and for any subsequent protocol amendments must be submittedamendments. Furthermore, an independent IRB for each site proposing to the FDA as part of the IND. In addition, an IRB at each institution participating inconduct the clinical trial must review and approve the plan for any clinical trial and its informed consent form before it commencesthe clinical trial begins at that institution. Information about certain clinical trialssite, and must be submitted within specific timeframes tomonitor the National Institutes of Health, or NIH, for public dissemination on their www.clinicaltrials.gov website.
Human clinical trials are typically conducted in three sequential phases, which may overlap or be combined:
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Progress reports detailingstudy until completed. Regulatory authorities, the results of the clinical trials must be submitted at least annually to the FDA and more frequently if serious adverse events occur. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, or at all. Furthermore, the FDAIRB or the sponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that the subjects are being exposed to an unacceptable health risk or that the trial is unlikely to meet its stated objectives. Some studies also include oversight by an independent group of qualified experts organized by the clinical study sponsor, known as a data safety monitoring board, which provides authorization for whether or not a study may move forward at designated check points based on access to certain data from the study and may halt the clinical trial if it determines that there is an unacceptable safety risk for subjects or other grounds, such as no demonstration of efficacy. There are also requirements governing the reporting of ongoing preclinical studies and clinical trials and clinical study results to public registries.
For purposes of regulatory approval, human clinical trials are typically conducted in three sequential phases that may overlap or be combined:
| • | Phase 1. The investigational product is initially introduced into patients with the target disease or condition. These studies are designed to test the safety, dosage tolerance, absorption, metabolism and distribution of the investigational product in humans, the side effects associated with increasing doses, and, if possible, to gain early evidence on effectiveness. |
| • | Phase 2. The investigational product is administered to a limited patient population to evaluate the preliminary efficacy, optimal dosages and dosing schedule and to identify possible adverse side effects and safety risks. |
| • | Phase 3. The investigational product is administered to an expanded patient population to further evaluate dosage, to provide statistically significant evidence of clinical efficacy and to further test for safety, generally at multiple geographically dispersed clinical trial sites. These clinical trials are intended to establish the overall risk/benefit ratio of the investigational product and to provide an adequate basis for product approval. |
In some cases, the FDA may require, or companies may voluntarily pursue, additional clinical trials after a product is approved to gain more information about the product. These so-called Phase 4 studies may be made a condition to approval of the NDA or BLA. Concurrent with clinical trials, companies may complete additional animal studies and develop additional information about the biological characteristics of the product candidate, and must finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product candidate and, among other things, must develop methods for testing the identity, strength, quality and purity of the final product, or for biologics, the safety, purity and potency. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the product candidate does not undergo unacceptable deterioration over its shelf life.
During all phases of clinical development, regulatory agencies require extensive monitoring and auditing of all clinical activities, clinical data, and clinical study investigators. The FDA or the sponsor or its data safety monitoring board may suspend a clinical study at any time on various grounds, including a finding that the research subjectsparticipant or participants are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trialstudy at its institution if the clinical trialstudy is not being conducted in accordance with the IRB’s requirements or if the drugproduct candidate has been associated with unexpected serious harm to patients. There are also requirements governing the reporting of ongoing clinical trials and completed clinical trial results to public registries. Sponsors of clinical trials of FDA-regulated products may be required to register and disclose certain clinical trial information, which is publicly available at www.clinicaltrials.gov.
Marketing approvalNDA or BLA Submission and Review
Assuming successful completion of theall required clinical testing in accordance with all applicable regulatory requirements, the results of the preclinicalproduct development, nonclinical studies and clinical studies, together with detailed information relating to the product’s chemistry, manufacture, controls and proposed labeling, among other things,trials are submitted to the FDA as part of ana NDA or BLA requesting approval to market the product for one or more indications. In most cases,The NDA or BLA must include all relevant data available from pertinent preclinical studies and clinical trials, including negative or ambiguous results as well as positive findings, together with detailed information relating to the product’s CMCs and proposed labeling, among other things. The submission of ana NDA is subject toor BLA requires payment of a substantial application user fee. Under the Prescription Drug User Fee Act, or PDUFA, guidelines that are currently in effect,fee to the FDA, unless a waiver or exemption applies. The FDA has a goal of ten months60 days from the date of “filing” of a standard NDA for a new molecular entity to review and act on the submission. This review typically takes twelve months from the date the NDA is submitted to FDA because the FDA has approximately two months to make a “filing” decision.
The FDA also may requireapplicant’s submission of a risk evaluation and mitigation strategy,NDA or REMS, planBLA to ensure thateither issue a refusal to file letter or accept the benefits of the drug outweigh its risks. The REMS plan could include medication guides, physician communication plans, assessment plans, and/NDA or elements to assure safe use, such as restricted distribution methods, patient registries, or other risk minimization tools.
The FDA conducts a preliminary review of all NDAs within the first 60 days after submission, before accepting themBLA for filing, to determine whether they areindicating that it is sufficiently complete to permit substantive review. The FDA may request additional information rather than accept an
Once a NDA for filing. In this event, the application must be resubmitted with the additional information. The resubmitted application is also subject to review before the
FDA accepts it for filing. Once the submission isor BLA has been accepted for filing, the FDA’s goal is to review standard applications within ten months after it accepts the application for filing, or, if the application qualifies for priority review, six months after the FDA begins an in-depth substantive review.accepts the application for filing. In both standard and priority reviews, the review process is often significantly extended by FDA requests for additional information or clarification. The FDA reviews ana NDA or
BLA to determine, among other things, whether the druga product is safe and effective, or safe, pure, and potent, for its intended use, and whether the facility in which it is manufactured, processed, packagedpacked or held meets standards designed to assure and preserve the product’s continuedidentity, safety, strength, quality, potency and purity.
The FDA may refer an application for a novel drug to an advisory committee. An advisory committee is a panel of independent experts, including clinicians and other scientific experts, that reviews, evaluates and provides a recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations ofconvene an advisory committee but it considers such recommendations carefully when making decisions.
to provide clinical insight on application review questions. Before approving ana NDA or BLA, the FDA will typically will inspect the facility or facilities where the product is manufactured. The FDA will not approve an application unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, before approving ana NDA or BLA, the FDA maywill typically inspect one or more clinical trial sites to assure compliance with GCP requirements.
After evaluatingGCPs. If the NDA and all related information, includingFDA determines that the advisory committee recommendation, if any, and inspection reports regarding theapplication, manufacturing process or manufacturing facilities are not acceptable, it will outline the deficiencies in the submission and clinical trial sites,often will request additional testing or information. Notwithstanding the FDA may issue an approval letter, or, in some cases, a complete response letter. A complete response letter generally contains a statement of specific conditions that must be met in order to secure final approval of the NDA and may require additional clinical or preclinical testing in order for FDA to reconsider the application. Even with submission of thisany requested additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval. If and when those conditions have been met to the FDA’s satisfaction,
After the FDA evaluates a NDA or BLA and conducts inspections of manufacturing facilities where the investigational product and/or its drug substance will typicallybe manufactured, the FDA may issue an approval letter or a Complete Response letter. An approval letter authorizes commercial marketing of the drugproduct with specific prescribing information for specific indications.
Even if A Complete Response letter will describe all of the deficiencies that the FDA approveshas identified in the NDA or BLA, except that where the FDA determines that the data supporting the application are inadequate to support approval, the FDA may issue the Complete Response letter without first conducting required inspections, testing submitted product lots and/or reviewing proposed labeling. In issuing the Complete Response letter, the FDA may recommend actions that the applicant might take to place the NDA or BLA in condition for approval, including requests for additional information or clarification, including the potential requirement for additional clinical studies. The FDA may delay or refuse approval of a BLA if applicable regulatory criteria are not satisfied, require additional testing or information and/or require post-marketing testing and surveillance to monitor safety or efficacy of a product.
If regulatory approval of a product itis granted, such approval will be granted for particular indications and may limitentail limitations on the approved indicationsindicated uses for usewhich such product may be marketed. For example, the FDA may approve the NDA or BLA with a Risk Evaluation and Mitigation Strategy, or REMS, to ensure the benefits of the product require that contraindications, warningsoutweigh its risks. A REMS is a safety strategy to manage a known or precautions be included inpotential serious risk associated with a product and to enable patients to have continued access to such medicines by managing their safe use, and could include medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. The FDA also may condition approval on, among other things, changes to proposed labeling or the development of adequate controls and specifications. Once approved, the FDA may withdraw the product labeling,approval if compliance with pre- and post-marketing requirements is not maintained or if problems occur after the product reaches the marketplace. The FDA may require that post-approval studies, includingone or more Phase 4 clinical trials, be conductedpost-market studies and surveillance to further assess a drug’s safety after approval, require testing and surveillance programs to monitor the productproduct’s safety and effectiveness after commercialization, or impose other conditions, including distribution and use restrictions or other risk management mechanisms under a REMS, which can materially affect the potential market and profitability of the product. The FDA may prevent or limit further marketing of athe product based on the results of postmarketingthese post-marketing studies or surveillance programs. After approval, some types of changes to the approved product, such as adding new indications, manufacturing changes, and additional labeling claims, are subject to further testing requirements and FDA review and approval.
Post-approval requirementsPost-Approval Requirements
DrugsAny products manufactured or distributed by us pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including, among other things, requirements relating to recordkeeping,record-keeping, reporting of adverse experiences, periodic reporting, product sampling and distribution, and advertising and promotion and reporting of adverse experiences with the product. After approval, most changes to the approved product, such as adding new indications or other labeling claims, are subject to prior FDA review and approval. There also are continuing annual user fee requirements, for any marketed products and the establishments atunder which such products are manufactured, as well as new application fees for supplemental applications with clinical data.
The FDA may impose a number of post-approval requirements as a condition of approval of an NDA. For example, the FDA may require postmarketing testing, including Phase 4 clinical trials,assesses an annual program fee for each product identified in an approved NDA or BLA. Manufacturers and surveillance to further assess and monitor the product’s safety and effectiveness after commercialization.
In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugstheir subcontractors are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and thesecertain state agencies for compliance with cGMP requirements.cGMPs, which impose certain procedural and documentation requirements upon us and our third-party manufacturers. Changes to the manufacturing process are strictly regulated, and, oftendepending on the significance of the change, may require prior FDA approval before being implemented. FDA regulations
also require investigation and correction of any deviations from cGMP requirementscGMPs and impose reporting and documentation requirements upon the sponsorus and any third-party manufacturers that the sponsorwe may decide to use. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain cGMPcompliance with cGMPs and other aspects of regulatory compliance.
Once an approval is granted, theThe FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in mandatory revisions to the approved labeling to add new safety information; imposition of postmarketpost-market studies or clinical trialsstudies to assess new safety risks; or imposition of distribution restrictions or other restrictions under a REMS program. Other potential consequences include, among other things:
restrictions on the marketing or manufacturing of thea product, complete withdrawal of the product from the market or product recalls;
fines, warning or untitled letters or holds on post-approval clinical trials;studies;
refusal of the FDA to approve pending NDAsapplications or supplements to approved NDAs,applications, or suspension or revocation of existing product approvals;
product seizure or detention, or refusal of the FDA to permit the import or export of products;
consent decrees, corporate integrity agreements, debarment or exclusion from federal healthcare programs;
mandated modification of promotional materials and labeling and the issuance of corrective information;
the issuance of safety alerts, Dear Healthcare Provider letters, press releases and other communications containing warnings or other safety information about the product; or
injunctions or the imposition of civil or criminal penalties.
The FDA strictlyclosely regulates the marketing, labeling, advertising and promotion of productsdrugs and biologics. A company can make only those claims relating to safety and efficacy, purity and potency that are placed onapproved by the market. Drugs may be promoted only for the approved indicationsFDA and in accordance with the provisions of the approved label. However, companies may share truthful and not misleading information that is otherwise consistent with a product’s FDA approved labeling. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses. Failure to comply with these requirements can result in, among other things, adverse publicity, warning letters, corrective advertising and potential civil and criminal penalties. Physicians may prescribe legally available products for uses that are not described in the product’s labeling and a company that is found to have improperly promoted differ from those tested by us and approved by the FDA, but physicians may not submit claims for reimbursement that are false or fraudulent. Such off-label uses are common across medical specialties. Physicians may bebelieve that such off-label uses are the best treatment for many patients in varied circumstances. The FDA does not regulate the behavior of physicians in their choice of treatments. The FDA does, however, restrict manufacturer’s communications on the subject of off-label use of their products.
International regulation of medical devices
Sales of medical devices outside the United States are subject to significant liability.
foreign government regulations, which vary substantially from country to country. In addition,order to the extent we seek approval formarket our products in development in other countries, we would need tomust obtain regulatory approvals and comply with numerous and varying regulatory requirements of such other countries and jurisdictions regarding quality,extensive safety and efficacy that govern, amongquality regulations in other things, clinical trials, manufacturing, marketing authorization, commercial sales, and distribution of our products, regardless of whether or not we have obtained FDA approval for such product. Although many of the issues discussed above with respect to the United States apply similarly in the context of other countries in which we may seek approval, the approval process varies among countries and jurisdictions and can involve different amounts of product testing and additional administrative review periods. For example, in Europe, a sponsor must submit a clinical trial application, or CTA, much like an IND prior to the commencement of human clinical trials. A CTA must be submitted to each national health authority and an independent ethics committee. It is our intent to complete the requisite clinical studies and obtain coverage and reimbursement approval in countries where it makes economic sense to do so.countries. The time required to obtain approval in other countries and jurisdictions might differ fromby a foreign country may be longer or be longershorter than that required for FDA approval and the requirements may differ significantly.
EU regulation of medical devices
The EU has adopted legislation, in the form of directives to obtain FDA approval. Regulatory approvalbe implemented in one country or jurisdiction does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country or jurisdiction may negatively affecteach Member State, concerning the regulatory approval process in other countries.regulation of medical devices within the EU. The directives include, among others, the Medical
Device Directive (Council Directive 93/42/EEC) that establishes certain requirements, such as the essential requirements, with which medical devices must comply before they can be commercialized in the EEA (which is comprised of the Member States of the EU plus Norway, Liechtenstein and Iceland). Under the EU Medical Device Directive, medical devices are classified into four Classes, I, IIa, IIb and III, with Class I being the lowest risk and Class III being the highest risk. Under the Medical Device Directive, a competent authority is nominated by the government of each Member State to monitor and ensure compliance with the Directive. To demonstrate compliance of their medical devices with the essential requirements, manufacturers must undergo a conformity assessment evaluation, which varies according to the type of medical device and its classification. Except for certain types of low risk medical devices (Class I non-sterile, non-measuring devices), where the manufacturer can issue an EC Declaration of Conformity based on a self-assessment of the conformity of its products with the essential requirements of the Medical Devices Directive, a conformity assessment evaluation requires the intervention of an organization accredited by a Member State of the EEA to conduct conformity assessments, a so-called Notified Body. The Notified Body would typically audit and examine the quality system for the manufacture, design and final inspection of the medical devices, along with conducting a technical review of data supporting the device’s safety and efficacy, before issuing a certification demonstrating compliance with the essential requirements. Both the quality system and the product are reviewed and certified. The Company is subject to annual surveillance audits by the Notified Body and must undergo re-certification every 5 years. During these audits, (minor or major) non-conformities to the essential requirement may be issued to the Company. The Company could potentially lose marketing authorization if these non-conformaties are not remediated with the Notified Body. Significant modifications to the quality system or product changes for Class III devices must be submitted to the Notified Body for review prior to implementation. Non-significant changes are subject to review during the annual surveillance audits. Medical devices that comply with the essential requirements are entitled to bear the CE mark, which is an abbreviation for Conformité Européenne or European Conformity. Medical devices properly bearing the CE mark may be commercially distributed throughout the EEA. We have received CE certification from the British Standards Institute, a United Kingdom Notified Body, for conformity with the EU Medical Device Directive allowing us to place the CE mark on Durolane (Class III) and our Exogen bone healing system (Class IIa). Additional PMAs in individual EEA countries are sometimes required prior to marketing of a product. Failure to maintain the CE mark would preclude us from selling our products in the EEA, as could failure to comply with the specific requirements of the Member States.
On April 5, 2017, the European Parliament passed the Medical Devices Regulation, which repeals and replaces the EU Medical Devices Directive. Unlike directives, which must be implemented into the national laws of the EEA Member States, the regulations would be directly applicable without the need for adoption of EEA Member State laws implementing them in all EEA Member States and are intended to eliminate current differences in the regulation of medical devices among EEA Member States. The Medical Devices Regulation, among other things, is intended to establish a uniform, transparent, predictable and sustainable regulatory framework across the EEA for medical devices and in vitro diagnostic devices and ensure a high level of safety and health while supporting innovation.
The Medical Devices Regulation was meant to become applicable three years after publication (in May 2020). However, on April 23, 2020, to take the pressure off EEA national authorities, notified bodies, manufacturers and other actors so they can focus fully on urgent priorities related to the COVID-19 pandemic, the European Council and Parliament adopted Regulation 2020/561, postponing the date of application of the Medical Devices Regulation by one year (to May 2021). Once applicable, the new regulations will among other things:
strengthen the rules on placing devices on the market and reinforce surveillance once they are available;
establish explicit provisions on manufacturers’ responsibilities for the follow-up on the quality, performance and safety of devices placed on the market;
improve the traceability of medical devices throughout the supply chain to the end-user or patient through a unique identification number;
set up a central database to provide patients, healthcare professionals and the public with comprehensive information on products available in the EU; and
strengthen rules for the assessment of certain high-risk devices, such as implants, which may have to undergo an additional check by experts before they are placed on the market.
These new rules and procedures may result in increased regulatory oversight of our devices and this may, in turn, increase the costs, time and requirements that we need to meet in order to maintain or place such devices on the EEA market.
Further, the advertising and promotion of our products in the EEA is subject to the laws of individual EEA Member States implementing the EU Medical Devices Directive, Directive 2006/114/EC concerning misleading and comparative advertising and Directive 2005/29/EC on unfair commercial practices, as well as other EEA Member State laws governing the advertising and promotion of medical devices. These laws may limit or restrict the advertising and promotion of our products to the general public and may impose limitations on our promotional activities with healthcare professionals.
Other countries’ regulation of medical devices
Many other countries have specific requirements for classification, registration and postmarketing surveillance that are independent of the countries already listed. We obtain what we believe are the appropriate clearances for Durolane and our Exogen bone healing system and conduct our business in accordance with the applicable laws of each country. This landscape is constantly changing and we could be found in violation if we interpret the laws incorrectly or fail to keep pace with changes. In the event of either of these occurrences, we could be instructed to recall products, cease distribution and/or be subject to civil or criminal penalties.
Anti-kickback, false claims and other healthcare laws
In addition to FDA restrictions on the marketing of pharmaceutical, biological and medical device products, we are also subject to healthcare regulation and enforcement by the federal government and the states and foreign governments and authorities in the locations in which we conduct our business. These other agencies include, without limitation, the Centers for Medicare and Medicaid Services, or CMS, other divisions of the U.S. Department of Health and Human Services,HHS, the U.S. Department of Justice and individual U.S. Attorney offices within the Department of Justice, as well as state and local governments. Such agencies enforce a variety of laws which include, without limitation, state and federal anti-kickback, fraud and abuse, false claims, data privacy and security and physician payment transparency laws and regulations.
The federal Anti-Kickback Statute prohibits, among other things, any person or entity from knowingly and willfully offering, paying, soliciting or receiving any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, to induce or in return for purchasing, leasing, ordering or arranging for or recommending the purchase, lease or order of any good, facility, item or service reimbursable, in whole or in part, by Medicare, Medicaid or other federal healthcare programs. The term “remuneration” has been broadly interpreted to include anything of value, including cash, improper discounts and free or reduced price items and services. Among other things, the Anti-Kickback Statute has been interpreted to apply to arrangements between pharmaceutical, biotechnology and medical device manufacturers on the one hand and prescribers, purchasers and formulary managers on the other. Although there are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution, the exceptions and safe harbors are drawn narrowly. Practices that involve remuneration that may be alleged to be intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not meet the requirements of a statutory or regulatory exception or safe harbor. Failure to meet all of the requirements of a particular applicable statutory exception or regulatory safe harbor does not make the conduct per se illegal under the Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative review of all of its facts and circumstances. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the Anti-Kickback Statute has been violated. In addition, a person or entity does not need to have actual
knowledge of the statute or specific intent to violate it in order to have committed a violation. Violations are subject to civil monetary penalties up to $100,000 for each violation, plus up to three times the remuneration involved, and may result in criminal fines of up to $100,000 and imprisonment of up to ten years, or exclusion from Medicare, Medicaid or other governmental programs. Further, a claim including items or services resulting from a violation of the federal Anti-Kickback Statute also constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act.
Federal law also includes a provision commonly known as the “Stark Law,” which prohibits a physician from referring Medicare or Medicaid patients to an entity providing “designated health services,” which includes durable medical equipment, if the physician or immediate family member of the physician, has an ownership or investment interest or compensation arrangement with such entity that does not comply with the requirements of a Stark exception. Violation of the Stark Law could result in denial of payment, disgorgement of reimbursements received under a non-compliant arrangement, civil penalties, and exclusion from Medicare, Medicaid or other governmental programs.
The federal false claims and civil monetary penalties laws, including the civil False Claims Act, prohibit, among other things, any person or entity from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment to or approval by the federal government or knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent claim to the federal government. A claim includes “any request or demand” for money or property presented to the U.S. government. Actions under the False Claims Act may be brought by the Attorney General or as a qui tam action by a private individual in the name of the U.S. government. Violations of the False Claims Act can result in very significant monetary penalties and treble damages. The federal government is using the False Claims Act and the accompanying threat of significant liability, in its investigation and prosecution of pharmaceutical, biotechnology and medical device companies throughout the country,country. Manufacturers can be held liable under these laws if they are deemed to “cause” the submission of false or fraudulent claims by for example, in connection with the promotion of products for unapproved or off-label uses and other sales and marketing practices. The government has obtained multi-million and multi-billion dollar settlements under the False Claims Act in addition to individual criminal convictions under applicable criminal statutes. When an entity is determined to have violated the federal civil False Claims Act, the government may impose civil fines and penalties ranging from $11,181 to $22,363 for each false claim, plus treble damages, and exclude the entity from participation in Medicare, Medicaid and other federal healthcare programs. In addition, companies found liable under the False Claims Act have been forced to implement extensive corrective action plans, and have often become subject to consent decrees or corporate integrity agreements, severely restricting the manner in which they conduct their business and imposing ongoing reporting and disclosure obligations.
The federal civil monetary penalties statute imposes penalties against any person or entity that, among other things, is determined to have presented or caused to be presented a claim to a federal health program that the person knows or should know is for an item or service that was not
provided as claimed or is false or fraudulent. Given the significant size of actual and potential settlements, it is expected that governmental authorities will continue to devote substantial resources to investigating healthcare providers’ and manufacturers’ compliance with applicable fraud and abuse laws. For drugs that are covered under Medicare Part B, the manufacturer must report average sales price, or ASP, to CMS on a quarterly basis. Failure to report this information in a timely and accurate manner can lead to substantial civil and criminal penalties and to liability under the False Claims Act.
In July of 2018 we became aware of allegations that certain of our sales personnel may have been completing Section B of the CMN required in connection with Medicare claims for the Exogen system, which, under federal law, must be completed by the physician and/or physician staff.
Together with our outside counsel, we initiated an investigation into these allegations, and we determined that the CMN forms for a portion of Medicare claims for the Exogen system were in fact improperly completed by our sales representatives, some of which also failed to meet CMS coverage requirements. As a result of our findings we made a self-disclosure on November 30, 2018 to the OIG, under the Provider Self-Disclosure
Protocol. Our self-disclosure disclosed the extent of our findings relative to the inappropriate completion of CMN forms by our sales personnel and offered to make repayment for such claims which failed to meet CMS coverage requirements and which we submitted to the Medicare program between October 1, 2012 and September 30, 2018, the statutory period applicable to such conduct. The total value of impacted claims was $30.1 million in the aggregate.
In October 2019, our outside counsel received a letter from the USAO stating that the USAO would be working with the OIG to resolve our self-disclosure. After settlement discussions with the USAO and OIG, on January 25, 2021 we reached an agreement in principle with the USAO and the OIG with respect to the submission of Medicare claims that did not meet CMS coverage requirements and for which our sales representatives completed Section B of the CMN forms. Under that agreement, we understand we will resolve the potential liability related to such claims for $3.6 million, of which $2.4 million has already been paid through our 2019 return of overpayments described below, leaving a net payment to be made of $1.2 million. The agreement is subject to negotiation of final terms, approval by the parties, and execution of a formal settlement agreement reflecting this payment, which is expected to be finalized and executed shortly and which will include releases from associated False Claims Act liability and further Civil Monetary Penalties that are customary in self-disclosures of this type. The settlement amount noted above will be recorded in the consolidated financial statements for the quarter ended December 31, 2020.
See “Risk factors—Risks related to government regulation—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.”
HIPAA created additional federal criminal statutes that prohibit, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payors,payers, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of these statutes or specific intent to violate them in order to have committed a violation.
Also, many states have similar fraud and abuse statutes or regulations that may be broader in scope and may apply regardless of payor,payer, in addition to items and services reimbursed under Medicaid and other state programs.
In addition, a person who offers or transfers to a Medicare or Medicaid beneficiary any remuneration, including waivers of co-payments and deductible amounts (or any part thereof), that the person knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of Medicare or Medicaid payable items or services may be liable for civil monetary penalties of up to $10,000$20,866 for each wrongful act. Moreover, in certain cases, providers who routinely waive copaymentsco-payments and deductibles for Medicare and Medicaid beneficiaries can also be held liable under the Anti-Kickback Statute and civil False Claims Act, which can impose additional penalties associated with the wrongful act. One of the statutory exceptions to the prohibition is non-routine, unadvertised waivers of copaymentsco-payments or deductible amounts based on individualized determinations of financial need or exhaustion of reasonable collection efforts. The Office of Inspector General of the Department of Health and Human ServicesOIG emphasizes, however, that this exception should only be used occasionally to address special financial needs of a particular patient. Although this prohibition applies only to federal healthcare program beneficiaries, the routine waivers of copaymentsco-payments and deductibles offered to patients covered by commercial payers may implicate applicable state laws related to, among other things, unlawful schemes to defraud, excessive fees for services, tortious interference with patient contracts and statutory or common law fraud. To the extent our patient assistance programs are found to be inconsistent with applicable laws, we may be required to restructure or discontinue such programs, or be subject to other significant penalties.
Additionally, there has been a recent trend of increased federal and state regulation of payments made to physicians and certain other healthcare providers. The Patient Protection and Affordable Care Act, as amended by the Health Care and Education and Reconciliation Act, or collectively, the Affordable Care Act, imposed, among other things, new annual reporting requirements through the Physician Payments Sunshine Act for covered manufacturers for certain payments and “transfers of value” provided to physicians and teaching hospitals, and, beginning in 2022, physician assistants, nurse practitioners and other practitioners, as well as ownership and investment interests held by physicianssuch providers and their immediate family members. Failure to submit timely, accurately and completely the required information for all payments, transfers of value and ownership or investment interests may result in civil monetary penalties of up to an aggregate of $150,000$176,495 per year and up to an aggregate of $1$1.177 million per year for “knowing failures.” Covered manufacturers must submit reports by the 90th day of each calendar year. In addition, certain states require implementation of compliance programs and compliance with the industry’s voluntary compliance guidelines
and the relevant compliance guidance promulgated by the federal government, impose restrictions on marketing practices, make periodic public disclosures on sales, marketing, pricing, clinical trials and other activities and/or require tracking and reporting of gifts, compensation and other remuneration or items of value provided to physicians and other healthcare professionals and entities.
These laws impact the kinds of financial arrangements we may have with hospitals, physicians or other potential purchasers of our products. They particularly impact how we structure our sales offerings, including discount practices, customer support, education and training programs, physician consulting, research grants and other arrangements. If our operations are found to be in violation of any of the health regulatory laws described above or any other laws or regulations that apply to us, we may be subject to penalties, including, without limitation, potentially significant criminal, civil and/or administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs, imprisonment, contractual damages, reputational harm, administrative burdens, diminished profits and future earnings and the curtailment or restructuring of our operations.
As a result of our sale or distribution of products in a foreign country, we may be subject to similar foreign laws and regulations, which may include, for instance, applicable postmarketingpost marketing requirements, including safety surveillance, anti-fraud and abuse laws and implementation of corporate compliance programs and reporting of payments or other transfers of value to healthcare professionals.
We participate in state government-managed Medicaid programs as well as certain other qualifying federal and state government programs where discounts and mandatory rebates are provided to participating state and local government entities. In connection with several of these government programs, we are required to report prices to various government agencies. Pricing calculations vary among programs. The calculations are complex and are often subject to interpretation by the reporting entities, government agencies and the courts. Our methodologies for calculating these prices could be challenged under false claims laws or other laws. We could make a mistake in calculating reported prices and required discounts, which could result in retroactive liability to government agencies. Government agencies may also make changes in program interpretations, requirements or conditions of participation, some of which may have implications for amounts previously estimated or paid. If we make these mistakes or if governmental agencies make these changes, we could face, in addition to prosecution under federal and state false claims laws, substantial liability and civil monetary penalties, exclusion of our products from reimbursement under government programs, criminal fines or imprisonment, or prosecutors may impose a Corporate Integrity Agreement, Deferred Prosecution Agreement, or similar arrangement.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003, or the MMA, requires that manufacturers report data to CMS on pricing of covered drugs reimbursed under Medicare Part B. These are generally drugs and biologicals, such as injectable products, that are administered “incident to” a physician service and in general are not self-administered. Effective January 1, 2005, ASP became the basis for reimbursement to physicians and suppliers for drugs and biologicals covered under Medicare Part B, replacing the average wholesale price, or AWP, provided and published by pricing services. In general, we must comply with all reporting requirements for any drug that is separately reimbursable under Medicare. The SupartzSUPARTZ FX product is reimbursed under Medicare Part B and, as a result, we provide ASP data on this product to CMS on a quarterly basis.
Manufacturing requirements
Manufacturers of medical devices are required to comply with FDA manufacturing requirements contained in the FDA’s cGMP set forth in the quality system regulations promulgated under section 520 of the FDCA. cGMP regulations require, among other things, quality control and quality assurance as well as the corresponding
maintenance of records and documentation. Failure to comply with statutory and regulatory requirements subjects a manufacturer to possible legal or regulatory action, including the seizure or recall of products, injunctions, consent decrees placing significant restrictions on or suspending manufacturing operations, and civil and criminal penalties. Adverse experiences with the product must be reported to the FDA and could result in the imposition of marketing restrictions through labeling changes or in product withdrawal. Product approvals may be withdrawn if compliance with regulatory requirements is not maintained or if problems concerning safety or efficacy of the product occur following the approval. We expect to use third-party manufacturers to manufacture our products (other than our Exogen system) for the foreseeable future. We will therefore be dependent on their compliance with these requirements to market our products. We work closely with our third-party manufacturers to assure that our products are in compliance with these regulations.
In the EU, the manufacture of medical devices is subject to good manufacturing practice, or GMP, as set forth in the relevant laws and guidelines of the EU and its Member States. Compliance with GMP is generally assessed by the competent regulatory authorities. Typically, quality system evaluation is performed by a Notified Body, which also recommends to the relevant competent authority for the European Community CE Marking of a device. The competent authority may conduct inspections of relevant facilities, and review manufacturing procedures, operating systems and personnel qualifications. In addition to obtaining approval for each product, in many cases each device manufacturing facility must be audited on a periodic basis by the Notified Body. Further inspections may occur over the life of the product.
Privacy and data protection laws in the United States
The Health Insurance Portability and Accountability Act of 1996,HIPAA and its implementing regulations, as amended by the regulations promulgated pursuant to Health Information Technology for Economic and Clinical Health Act, orthe HITECH Act, which we collectively refer to as HIPAA, contain substantial restrictions and requirements with respect to the use and disclosure of certain individually identifiable health information (referred to as Protected Health Information, or PHI). These restrictions and requirements are set forth in the HIPAA Privacy, Security and Breach Notification Rules.
In some of our operations, such those involving the acceptance of payments, we are a “covered entity” under HIPAA and therefore required to comply with the Privacy, Security and Breach Notification Rules and areis subject to significant civil and criminal penalties for failure to do so. We also provide services to customers that are covered entities themselves and we are required to provide satisfactory written assurances to these customers through written “business associate” agreements that we will provide our services in accordance with HIPAA. Failure to comply with these contractual agreements could lead to loss of customers, contractual liability to our customers, and direct action by the federal government, including penalties.
The Final Rule published by the U.S. Department of Health and Human Services Office for Civil Rights, or OCR, of the Department of Health and Human Services in January 2013 and effective March 23, 2013, modified the HIPAA Privacy, Security, Breach Notification and Enforcement Rules, including revisions/additions made by the HITECH Act. The rule expanded the privacy and security requirements for business associates that create, receive, maintain or transmit protected health informationPHI for or on behalf of covered entities, increased penalties for noncompliance and strengthened requirements for reporting of breaches of unsecured protected health information,PHI, among other changes. The rule also made business associates and their subcontractors directly liable for civil monetary penalties for impermissible uses and disclosures of protected health information. The rule became effective on March 23, 2013, and, with limited exception, covered entities and business associates coveredPHI.
If we were to be found to have breached our obligations under HIPAA, we could be subject to enforcement actions by the rule wereOCR and state health regulators and lawsuits, including class action law suits, by private plaintiffs. In addition, OCR performs compliance audits in order to proactively enforce the HIPAA privacy and security standards. OCR has become an increasingly active regulator and has signaled its intention to continue this trend. OCR has the discretion to impose penalties without being required to complyattempt to resolve violations through informal means; further OCR may require companies to enter into resolution agreements and corrective action plans which impose ongoing compliance requirements. OCR enforcement activity can result in financial liability and reputational harm, and responses to such enforcement activity can consume significant internal resources. In addition to enforcement by OCR, state attorneys general are authorized to bring civil actions under either HIPAA or relevant state laws seeking either injunctions or damages in response to violations that threaten the privacy of state residents. Although we have implemented and maintained policies, processes and a compliance program infrastructure to assist us in complying with most of the applicable requirements by September 23, 2013.these laws and regulations and our contractual obligations, we cannot provide assurance regarding how these laws and regulations will be interpreted, enforced or applied to our operations.
In addition to HIPAA, we must adhere to state patient confidentiality laws that are not preemptedpre-empted by HIPAA, including those that are more stringent than HIPAA requirements.
Numerous other state, federal and foreign laws, including consumer protection laws and regulations, govern the collection, dissemination, use, access to, confidentiality and security of patient health information. In addition, Congress and some states are considering new laws and regulations that further protect the privacy and security of medical records or medical information. With the recent increase in publicity regarding data breaches resulting in improper dissemination of consumer information, manyall states have passed laws regulating the actions that a business must take if it experiences a data breach, such as prompt disclosure to affected customers. Generally, these laws are limited to electronic data and make some exemptions for smaller breaches. Congress has also been considering similar federal legislation relating to data breaches. The FTC and states’ Attorneys General have also brought enforcement actions and prosecuted some data breach cases as unfair and/or deceptive acts or practices under the FTC Act. In addition to data breach notification laws, some states have enacted statutes and rules requiring businesses to reasonably protect certain types of personal information they hold or to otherwise comply with certain specified data security requirements for personal information. For example, the CCPA took effect on January 1, 2020. The CCPA establishes a new privacy framework for covered businesses and provides new and enhanced data privacy rights to California residents, such as affording consumers the right to access and delete their information and to opt out of certain sharing and sales of personal information. The CCPA imposes severe statutory damages as well as a private right of action for certain data breaches that result in the loss of personal information. This private right of action is expected to increase the likelihood of, and risks associated with, data breach litigation. It remains unclear how various provisions of the CCPA will be interpreted and enforced. The CCPA
contains an exemption for medical information governed by the CMIA and for PHI collected by a covered entity or business associate governed by the privacy, security and breach notification rules established pursuant to HIPAA and HITECH, but the precise application and scope of this exemption is not yet clear, and the law may still apply to certain aspects of our business. Additionally, a new privacy law, the California Privacy Rights Act, or the CPRA, was approved by California voters in the November 3, 2020 election. The CPRA generally takes effect on January 1, 2023 and significantly modifies the CCPA, including by expanding consumers’ rights with respect to certain personal information, restricting use of sensitive personal information, which includes health information, and creating a new state agency to oversee implementation and enforcement efforts, potentially resulting in further uncertainty and requiring us to incur additional costs and expenses in an effort to comply. The CCPA and CPRA may lead other states to pass comparable legislation, with potentially greater penalties, and more rigorous compliance requirements relevant to our business, and that may not include exemptions for businesses subject to HIPAA. The effects of the CCPA, and other similar state or federal laws, are potentially significant and may require us to modify our data processing practices and policies and to incur substantial costs and potential liability in an effort to comply with such legislation. As with HIPAA, theseany laws regulating the collection, dissemination, use, access to, confidentiality and security of personal information may apply directly to our business or indirectly by contract when we provide services to other companies. We intend to continue to comprehensively protect all consumer data and to comply with all applicable laws regarding the protection of this data.
Privacy and data protection laws in other jurisdictionsEurope
In the EU, weWe are subject to European laws relating to our and our suppliers’, partners’ and subcontractors’ collection, control, processing and other use of personal data, (i.e.such as data relating to an identifiable living individual).individual, whether that individual can be identified directly or indirectly. We and our suppliers, partners and subcontractors process personal data including in relation to our operations. We process dataemployees, employees of both ourcustomers, trial patients, health care professions and employees and our customers,of suppliers including health and medical information. The data privacy regime in the EU includes the EU Data ProtectionGDPR, the E-Privacy Directive (95/46/(2002/58/EC) regarding the processing of personal data and the free movement of such data, the E-Privacy Directive 2002/58/EC and national laws implementing or supplementing each of them. As each Member State of the EU has transposed the requirements laid down by this Privacy and Data Protection Directive into its own national data privacy regime, the laws therefore differ significantly by jurisdiction. In addition, on December 15, 2015, the European Commission, European Parliament and Council of the EU reached agreement on new data protection rules which will implement significant changes to the current EU data protection regime. Unlike the Privacy and Data Protection Directive, the Regulation has direct effect in each Member State, without the need for further enactment. The Regulation has a two-year implementation period. When implemented, the Regulation will likely strengthen individuals’ rights and impose stricter requirements on companies processing personal data. Prior to its full implementation, we may not be able to accurately assess its full impact on our business.
The requirements includeGDPR requires that personal data mayis only be collected for specified, explicit and legitimatelegal purposes based on legal groundsas set out in the GDPR or local laws and the data may then only be processed in a manner consistent with those purposes. PersonalThe personal data collected and processed must also be adequate, relevant and not excessive in relation to the purposes for which it is collected and processed, it must be secure,held securely, not be transferred outside of the EEA unless certain steps are taken to ensure an adequate level of protection and must not be keptretained for longer than necessary for the purposes for which it was collected. In addition, the GDPR requires companies processing personal data to take certain organizational steps to ensure that they have adequate records, policies, security, training and governance frameworks in place to ensure the protection of collection. Todata subject rights, including as required to respond to complaints and requests from data subjects. In addition, to the extent that we process, controla company processes, controls or otherwise use sensitiveuses ‘special category’ personal data relating to living individuals (for example,(including patients’ health or medical information, genetic information and biometric information), more stringent rules apply, further limiting the circumstances and the manner in which we area company is legally permitted to process that data. Finally, GDPR provides a broad right for EU Member States to create supplemental national laws and they are increasingly adopting different approaches to the role of the parties in clinical trials. Such laws, for example may relate to the processing of health, genetic and biometric data, which could further limit our ability to use and share such data or could cause our costs to increase and harm our business and financial condition.
From January 1, 2021, we are also subject to the UK GDPR, which, together with the amended UK Data Protection Act 2018, retains the GDPR in UK national law. The UK GDPR mirrors the fines under the GDPR, e.g. fines up to the greater of €20 million (£17.5 million) or 4% of global turnover. The relationship between the United Kingdom and the European Union in relation to certain aspects of data protection law remains unclear, and it is unclear how UK data protection laws and regulations will develop in the medium to longer term, and how data transfers to and from the United Kingdom will be regulated in the long term. Currently there is a four to six-month grace period agreed in the EU and UK Trade and Cooperation Agreement, ending 30 June 2021 at the latest, whilst the parties discuss an adequacy decision. However, it is not clear whether (and when) an adequacy decision may be granted by the European Commission enabling data transfers from EU member states to the United Kingdom long term without additional measures. These changes will lead to additional costs and increase our overall risk exposure.
In addition, the United Kingdom’s withdrawal from the European Union means that the United Kingdom will become a “third country” for the purposes of data transfers from the European Union to the United Kingdom following the expiration of the four to six-month personal data transfer thatgrace period (from January 1, 2021) set out in the EU and UK Trade and Cooperation Agreement, unless a relevant adequacy decision is adopted in favor of the United Kingdom (which would allow data transfers without additional measures). These changes may require us to find alternative solutions for the compliant transfer of personal data into the United Kingdom.
We are also subject to evolving European laws on data export and electronic marketing. The rules on data export will apply when we transfer personal data to group companies or third parties outside of the EEA. In particular,For example, in order to process such data, explicit consent to2015, the processing (including any transfer) is usually required from the data subject (being the person to whom the personal data relates). The European Court of Justice hasCJEU ruled that the U.S.-E.U.U.S.-EU Safe Harbor framework, one compliance method by which companies could transfer personal data regarding citizens of the European UnionEU to the United States, was invalid and could no longer be relied upon. The potential impact of this ruling is subjectEuropean and U.S. negotiators agreed in February 2016 to further determination and additional developments, includinga new framework, the recently released legal texts that will form the basis of the EU-US Privacy Shield Framework, a new form offramework, which replaced the Safe Harbor framework. These changes may require usframework, however, on July 16, 2020 the CJEU also invalidated the Privacy Shield framework as a method to find alternative bases for the compliant transfer of personal data from the E.U.EEA to US. While the CJEU upheld the adequacy of the standard contractual clauses (a standard form of contract approved by the European Commission as an adequate personal data transfer mechanism, and potential alternative to the Privacy Shield), it made clear that reliance on them alone may not necessarily be sufficient in all circumstances; this has created uncertainty. These changes will require us to review and amend the legal mechanisms by which we make and/ or receive personal data transfers to/ in the U.S.
We are also subject to evolving EU and UK privacy laws on cookies and e-marketing. In the European Union and the United Kingdom, regulators are increasingly focusing on compliance with requirements in the online behavioral advertising ecosystem, and current national laws that implement the ePrivacy Directive are highly likely to be replaced by an EU regulation known as the ePrivacy Regulation which will significantly increase fines for non-compliance. In the European Union and the United Kingdom, informed consent is required for the placement of a cookie or similar technologies on a user’s device and for direct electronic marketing. The GDPR also imposes conditions on obtaining valid consent, such as a prohibition on pre-checked consents and a requirement to ensure separate consents are sought for each type of cookie or similar technology. While the text of the ePrivacy Regulation is still under development, a recent European court decision and regulators’ recent guidance are driving increased attention to cookies and tracking technologies. If regulators start to enforce the strict approach in recent guidance, this could lead to substantial costs, require significant systems changes, limit the effectiveness of our marketing activities, divert the attention of our technology personnel, adversely affect our margins, increase costs and subject us to additional liabilities.
We are subject to the supervision of local data protection authorities in those jurisdictions where we are established or otherwise subject to applicable law.collecting data from EU residents. We depend on a number of third parties in relation to our provision of our services, a number of which process personal data on our behalf. With each such provider we enter into contractual arrangements to ensure that they only process personal data according to our instructions, and that they have sufficient technical and organizational security measures in place. Where we transfer personal data outside the EEA, we do so in compliance with the relevant data export requirements. As previously described, following the CJEU’s decision to invalidate Privacy Shield, we are now required to review and amend the legal mechanisms by which we make and/or receive personal data transfers to/in the U.S. As supervisory authorities issue further guidance on personal data export mechanisms, including circumstances where the standard contractual clauses cannot be used, and/or start taking enforcement action, we could suffer additional costs, complaints and/or regulatory investigations or fines, and/or if we are otherwise unable to transfer personal data between and among countries and regions in which we operate, it could affect the manner in which we provide our services, the geographical location or segregation of our relevant systems and operations, and could adversely affect our financial results.
We take our data protection obligations seriously, as any improper, unlawful or accidental disclosure, particularly with regardloss, alteration or access to, our customers’personal data, particularly sensitive personal data, such as special category, could negatively impactadversely affect our business and/or our reputation.
We may find it necessary or desirable to join self-regulatory bodies or other privacy-related organizations, particularly relating to biopharmacy and/or scientific research that require compliance with certain rules pertaining to privacy and data security.
There are costs and administrative burdens associated with ongoing compliance with HIPAAGDPR and similar state, federalthe resultant changes in the EU and foreign law requirements.EEA Member States’ national laws and the introduction of the e-Privacy Regulation once it takes effect. Any failure or perceived failure to comply with global privacy laws carries with it the risk of significant penalties and sanctions. These laws at a state, federal or foreign level, or new interpretations, enactments or supplementary forms of these laws, could create liability for us, could impose additional operational requirements on our business, and could affect the manner in which we use and transmit patient information and could increase our cost of doing business. Claims of violations of privacy rights or contractual breaches, even if we are not found liable, could be expensive and time-consuming to defend and could result in adverse publicity that could harm our business.
Coverage and reimbursement
Significant uncertainty exists as to the coverage and reimbursement status of any pharmaceutical, biological or medical device product. In the United States and markets in other countries, patients who are prescribed treatments or undergo procedures for their conditions and the providers performing the services generally rely onthird-party payors payers to reimburse all or part of the associated healthcare costs. Patients are unlikely to use our products unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our products or related procedures. Sales of any products will therefore depend, in part, on the availability of coverage and adequate reimbursement from third-party payors.payers. Third-party payorspayers include government authorities, managed care providers,organizations, private health insurers and other organizations.
The process for determining whether a third-party payorpayer will provide coverage for a product typically is separate from the process for setting the price of such product or for establishing the reimbursement rate that the payorpayer will pay for the product once coverage is approved. Third-party payorspayers may limit coverage to specific products on an approved list, also known as a formulary, which might not include all of the FDA-approved products for a particular indication, or place products at certain formulary levels that result in lower reimbursement levels and higher cost-sharing obligation imposed on patients. A decision by a third-party payorpayer not to cover any of our products or product candidates could reduce physician utilization of such products and adversely affect our products once approved and have a material adverse effect on our sales,business, results of operations and financial condition. Moreover, a third-party payor’spayer’s decision to provide coverage for a product does not imply that an adequate reimbursement rate will be approved. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development. Additionally, coverage and reimbursement for products can differ significantly from payorpayer to payor.payer. One third-party payor’spayer’s decision to cover a particular medical product or service does not ensure that other payorspayers will also provide coverage for the medical product or service, or will provide coverage at an adequate reimbursement rate. As a result, the coverage determination process will often require us to provide scientific and clinical support for the use of our products to each payorpayer separately and can be a time-consuming process.
Third-party payorspayers are increasingly challenging the price and examining the medical necessity and cost-effectiveness of medical products and services, in addition to their safety and efficacy. Third-party payers may not consider our products to be medically necessary or cost-effective for certain indications or for all uses, and as a result, may not provide coverage for our products. In order to obtain and maintain coverage and reimbursement for anyour products and product candidates, we may need to conduct expensive clinical trials in order to demonstrate the medical necessity and cost-effectiveness of such product,products, in addition to the costs
required to obtain regulatory approvals. Our products may not be considered medically necessary or cost-effective. If third-party payorspayers do not consider a product to be cost-effective compared to other available therapies,
they may not cover the product as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow a company to sell itsour products at a profit. Any changes in coverage and reimbursement that further restrictsrestrict coverage of our products or lowerslower reimbursement for procedures using our devices could materially affect our business. See “Risk factors—Risks related to our business—If we are unable to achieve and maintain adequate levels of coverage and/or reimbursement for our products, the procedures using our products, or any future products we may seek to commercialize, the commercial success of these products may be severely hindered.”
Outside of the United States, the pricing of medical devices and prescription pharmaceuticals is subject to governmental control in many countries. For example, in the EU, pricing and reimbursement schemes vary widely from country to country. Some countries provide that products may be marketed only after a reimbursement price has been agreed. Some countries may require the completion of additional studies that compare the cost-effectiveness of a particular therapy to currently available therapies or so called health technology assessments, in order to obtain reimbursement or pricing approval. Other countries may allow companies to fix their own prices for products, but monitor and control prescription volumes and issue guidance to physicians to limit prescriptions. Efforts to control prices and utilization of medical devices and pharmaceutical products could continue as countries attempt to manage healthcare expenditures, especially in light of the severe fiscal and debt crises experienced by many countries in the EU. There can be no assurance that any country that has price controls or reimbursement limitations for medical devices or pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products, if approved in those countries. See “Risk factors—Risks related to our business—Governments outside the United States may not provide coverage or reimbursement of our products, which may adversely affect our business, results of operations and financial condition.”
Exogen reimbursement and order fulfillment
Our Exogen system is classified as durable medical equipment, meaning the product is used by the patient in the home and that the patient and/or insurance company, rather than the physician, is billed for the product. We bill third-party payors,payers, such as private insurance or Medicare, on behalf of our patients and bill the patient for their co-payment obligations and deductibles. We billAn internal team and processexternal consultants assist with billing and processing orders for our Exogen system through a team of approximately 40 employeesand has been trained in verifying case-by-case benefits, obtaining prior authorization and billing and collecting payments from payors.payers. We also have a separate dedicated team of employees that provides customer support services for our Exogen system.
We have strong and established payorpayer relationships, including the largest private payorspayers in the United States. Based on our estimates, we are contracted or enrolled as an in-networka provider with payorspayers covering over 100200 million lives. These contracts allow us to be an in-network provider for patients enabling them to access our Exogen system at a competitive rate and copay comparable to other suppliers and easing our administrative burden in processing at both authorization and when billing. Our Exogen system is reimbursed under HCPCS code E0760.
Healthcare reform
A primary trendCurrent and future legislative proposals to further reform healthcare or reduce healthcare costs may limit coverage for the procedures associated with the use of our products, or result in lower reimbursement for those procedures. The cost containment measures that payers and providers are instituting and the effect of any healthcare reform initiative implemented in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and other third-party payors have attempted to control costs by limiting coverage andfuture could significantly reduce our revenues from the amountsale of reimbursement for particular medical products and services. In recent years, Congress has enacted a numberour products. By way of laws that affect Medicare reimbursement for and coverage of durable medical equipment and durable medical equipment, prosthetics, orthotics and supplies, such as our Exogen system. These laws have included temporary freezes or reductions in Medicare fee schedule updates.
For example, the Affordable Care Act substantially changed healthcare financing and delivery by both governmental and private insurers and significantly impacted the pharmaceutical and medical device
industries. The Affordable Care Act imposed, among other things, subjects biologic products to potential competition by lower-cost biosimilars; addresses a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected; increases the minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program and extends the rebate program to individuals enrolled in Medicaid managed care organizations; establishes a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs coverage under Medicare Part D; subjects drug manufacturers to new annual fees based on pharmaceutical companies’ share of sales to federal healthcare programs; imposes a new federal excise tax on the sale of certain medical devices; created a new Patient Centered Outcomes Research Institutedevices, provided incentives to oversee, identify priorities in, and conductprograms that increase the federal government’s comparative effectiveness research along with funding for such research; implementsand implemented payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models;models. Since its enactment, there have been
judicial and creates an independent payment advisory board thatCongressional challenges to certain aspects of the Affordable Care Act, including the permanent repeal of the federal excise tax on the sale of certain medical devices effective January 1, 2020. We expect there will submit recommendationsbe additional challenges and amendments to reduce Medicare spending if projected Medicare spending exceeds a specified growth rate.the Affordable Care Act in the future.
In addition, other legislative changes have been proposed and adopted in the United States since the Affordable Care Act was enacted. On August 2, 2011, the Budget Control Act of 2011 was signed into law, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several government programs. This includes aggregateincluded reductions to Medicare payments to providers of up to 2% per fiscal year, which went into effect on April 1, 2013 and, due2013. Subsequent legislative amendments related to the Bipartisan Budget Act of 2015, will stay in effectCOVID-19 pandemic suspended this Medicare sequestration payment reduction from May 1, 2020 through 2025 unless additional Congressional action is taken.March 31, 2021, but extended sequestration through 2030. On January 2, 2013, the American Taxpayer Relief Act of 2012, was signed into law, which, among other things, further reduced Medicare payments to several types of providers, including hospitals, imaging centershospitals.
Moreover, payment methodologies may be subject to changes due to healthcare legislation and cancer treatment centers,regulatory initiatives. For example, CMS may develop new payment and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. President Obama signed the Medicare Access and CHIP Reauthorization Act of 2015, or MACRA, on April 16, 2015, which repealed and replaced the Sustainable Growth Rate, or SGR, formula for Medicare payment adjustments to physicians. MACRA provides a solution to the annual interim legislative updates that had previously been necessary to delay or prevent significant reductions to payments under the Physician Fee Schedule. MACRA extended existing payment rates under Protecting Access to Medicare Act of 2014, or PAMA, through June 30, 2015, with a 0.5% update for July 1, 2015, through December 31, 2015 and for each calendar year through 2019, after which there will be a 0% annual update each year through 2025. MACRA also requires CMS, beginning in 2019, to provide incentive payments for physicians and other eligible professionals that participate in alternative paymentdelivery models, such as accountable care organizations, that emphasize quality and valuebundled payment models. In addition, recently there has been heightened governmental scrutiny over the traditional volume-based fee-for-service model. MACRA is still new and the manner in which itmanufacturers set prices for their marketed products, which has resulted in several U.S. Congressional inquiries and proposed and enacted federal legislation designed to, among other things, bring more transparency to drug pricing, reduce the cost of prescription drugs under Medicare and review the relationship between pricing and manufacturer patient programs.
Individual states in the United States have also increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures and, in some cases, designed to encourage importation from other countries and bulk purchasing. In addition, regional healthcare authorities and individual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and which suppliers will be implementedincluded in their prescription drug and other healthcare programs.
In the EU, similar political, economic and regulatory developments have occurred or are being contemplated. In addition to continuing pressure on prices and cost containment measures, legislative developments at the EU or Member State level may result in significant additional requirements or obstacles that may increase operating costs. The delivery of healthcare in the EU, including the establishment and operation of health services and the pricing and reimbursement of medicines, is not certain.almost exclusively a matter for national, rather than EU, law and policy. National governments and health service providers have different priorities and approaches to the delivery of health care and the pricing and reimbursement of products in that context. In general, however, the healthcare budgetary constraints in most EU Member States have resulted in restrictions on the pricing and reimbursement of medicines by relevant health service providers.
We expect that additional foreign, state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products or additional pricing pressure.
EmployeesEmployee and Human Capital Resources
As of April 2, 2016,September 26, 2020, we had approximately 650680 employees, none of whichwhom were covered by collective bargaining agreements. Most of these employees are located in the United States with approximately 13095 located outside the United States. We believe that our relations with our employees are generally good.
We value our employees and regularly benchmark total rewards we provide, such as short and long term compensation, 401(k) contributions, health, welfare and quality of life benefits, paid time off and personal leave, against our industry peers to ensure we remain competitive and attractive to potential new hires. We seek to create a workplace environment that fosters personal and business successes by offering training and
development programs, which further assist our current employees in meeting and exceeding our established standards of performance. Additionally, through our Diversity, Equity and Inclusion Counsel, our employees work directly with our executive management team to address any internal concerns and continuously improve the ways in which we serve our employees and customers.
Facilities
Our principal executive offices occupy approximately 45,853 square feet ofare located on leased office space locatedproperty in Durham, North Carolina. We also occupy approximately 39,800 square feet of leased office and manufacturing space in Cordova, Tennessee. As a result of our acquisition of BioStructures, we also occupy leased space in Newport Beach, California. In addition, our international operations are locatedoccupy leased office spaces in Hoofddorp, Netherlands where we occupy approximately 7,190 square feet of leased office space. We also occupy leased R&D facilities in Boston, Massachusetts.and Mississauga, Canada. We believe that our facilities are sufficient to meet our current needs and that suitable additional space will be available as and when needed on acceptable terms.
Legal proceedings
We are not currently a party to any material legal proceedings. We may at times be involved in litigation and other legal claims in the ordinary course of business. When appropriate in our estimation, we may record reserves in our financial statements for pending litigation and other claims.
Executive officers, key employees and directors
The following table sets forth information regarding the individuals who have agreed to become our executive officers, key employees and directors upon the completion of this offering, as of July 19, 2016:December 31, 2020:
Name | Age | Position(s) | |||||||
Executive Officers | |||||||||
| Chief Executive Officer and Director | ||||||||
| |||||||||
Gregory O. Anglum | Senior Vice President and Chief | ||||||||
| 63 | Chief Commercial Officer | |||||||
| Senior Vice President | ||||||||
Katrina Church | 59 | Senior Vice President and Chief Compliance Officer | |||||||
Alessandra Pavesio | 54 | Senior Vice President and Chief Science Officer | |||||||
Non-Employee Directors | |||||||||
William A. Hawkins | 66 | Director, Chairperson | |||||||
Philip G. Cowdy | Director | ||||||||
| |||||||||
| |||||||||
Guido J. Neels | Director | ||||||||
Guy P. Nohra | Director | ||||||||
David J. Parker | Director | ||||||||
| |||||||||
Martin P. Sutter | Director | ||||||||
Susan M. Stalnecker | 67 | Director | |||||||
The following are biographical summaries and a description of the business experience of those individuals who serve as officers of Bioventus LLC. Upon the consummation of this offering, such individuals will serve in the same capacities at Bioventus Inc. The following also contains biographical summaries and a description of the business experience of those individuals who will serve as directors of Bioventus Inc.
Executive officers and directors
Anthony P. Bihl IIIKenneth M. Reali has served as our Chief Executive Officer since April 2020 and as a managermember of our board of directors since September 2020. Mr. Reali previously served as President and Chief Executive Officer of Clinical Innovations, LLC, a medical device company focused on advancing woman’s healthcare, from June 2015 until its successful sale on February 12, 2020. In this role, Mr. Reali led the company through two successful acquisitions by a private equity firm in October 2017 and later to a leading diagnostic and therapeutic medical technology company in February 2020. Prior to joining Clinical Innovations, LLC, Mr. Reali also served as the President and CEO of Baxano Surgical, Inc., a medical device company, from January 2010 until February 2015, leading its turn-around out of bankruptcy. Mr. Reali also held positions of increasing responsibility at several medical device companies, including Biomet, Inc. (now known as Zimmer Biomet) and Stryker Corporation. Mr. Reali also served as Senior Vice President and General Manager within the Biologics and Clinical Therapies business of Smith & Nephew plc from May 2005 to January 2010, a division which was later spun out to become Bioventus LLC. Mr. Reali has served as a member of the board of managers of Bioventus LLC since December 2013. From June 2011 through June 2012,April 2020. Mr. Bihl was Group President of American Medical Systems Holdings,Reali also currently serves as a subsidiary of Endo Pharmaceuticals. From April 2008 until Endo Pharmaceuticals acquired American Medical Systems Holdings in June 2011, he was Chief Executive Officer and a director of American Medical Systems Holdings, a company engaged in developing and delivering medical technology solutions to physicians treating men’s and women’s pelvic health conditions. From January 2007 to November 2007, Mr. Bihl served as Chief Executive Officer of Siemens Medical Solutions’ Diagnostics Division. From 2004 through 2006, he served as President of the Diagnostics Division of Bayer HealthCare.Prior to that, he served in a number of operations and finance roles at Bayer Healthcare and E.I. DuPont. Mr. Bihl also is chairmanmember of the board of directors of Spectral Diagnostics, Inc.Ossio, Ltd., an orthopedic medical device company, the Advanced Medical Technology Association, or AdvaMed, an American medical device trade association, and DYSIS Medical Ltd., a medical device company that develops products forfocused on the diagnosisnon-invasive, in-vivo detection of cancerous and treatmentpre-cancerous lesions. Mr. Reali also serves on the compensation committee of severe sepsisOssio, Ltd. and septic shock,the ethics and health care compliance committee of AdvaMed. Mr. Reali holds a directorBachelor of Nuvectra Inc. Mr. Bihl received his B.S.Science in Business Administration from Pennsylvania StateValparaiso University.
We believe Mr. Bihl’sReali is qualified to serve on our board of directors because of his vast skills and experience in the medical device industry, his role as our Chief Executive Officer and his extensive knowledge of the Company enable him to make valuable contributions to our board of directors.Company.
David J. Price has served as the Vice President and Chief Financial Officer at Bioventus LLC since October 2012 and was made Senior Vice President and Chief Financial Officer in February 2016. From July 2010 to August 2012 and May 2011 to August 2012, Mr. Price served as the Chief Financial Officer and Chief Operating Officer of EDGAR Online Inc., respectively. From September 2008 to July 2010, Mr. Price served various roles at Cornerstone Therapeutics Inc., including Chief Financial Officer and Executive Vice President of Finance. Prior to that, he served as a Managing Director in the healthcare sector at both Jefferies and Bear Stearns. Mr. Price is a member of the Institute of Chartered Accountants in England and Wales. Mr. Price holds a Bachelor’s of Science Honours Degree in Accounting and Financial Management from Lancaster University (United Kingdom).
Gregory O. Anglum has served as our Senior Vice President and Chief Financial Officer since May 2017. Previously, Mr. Anglum served as our Chief Accounting Officer at Bioventus LLC since April 2016. From September 2014 tofrom April 2016 to May 2017. Prior to joining us, Mr. Anglum wasserved as Chief Financial Officer of Overture Networks, Inc. (now known as ADVA Optical Networking SE), a leading global provider of network functions virtualization, software-defined networking and carrier ethernet solutions for communications networks.telecommunications equipment from September 2015 to April 2016. From December 20132014 to August 2014, heSeptember 2015, Mr. Anglum was Chief Financial Officer at StrikeIron, Inc., a Data-as-a-Service software company. From August 2004 to July 2013,2014, Mr. Anglum was an audit partner at Grant Thornton LLP, or GT, where he also served as leader forof the Raleigh local office from August 2009 through July 20132014 and was ona member of the firm-wide leadership team for the technology industry group. Mr. Anglum helped open the Grant Thornton office in Raleigh in July 2002 asholds a senior manager when he joined that firm after starting his career as a staff auditor at Arthur Andersen LLP in July 1993 and progressing to the role of manager. He is a Certified Public Accountant. Mr. Anglum holds an MastersMaster of Business Administration with a concentration in Accounting from Vanderbilt University’s Owen Graduate School of Management and a Bachelors of Arts in Economics from Vanderbilt University.University and is a Certified Public Accountant.
Jeanne M. FornerisJohn E. Nosenzo has served as our Chief Commercial Officer since February 2017. Prior to joining us, Mr. Nosenzo served as Senior Vice President, Global Customer Operations at Beckman Coulter Diagnostics, a global leader in clinical diagnostics, from September 2011 to February 2017. From May 2010 to September 2011, Mr. Nosenzo was Senior Vice President, Customer Relations Management for Siemens Healthcare (now known as Siemens Healthineers AG), a clinical diagnostic services and therapeutic systems company, where he developed and implemented sales plans for their multi-billion dollar healthcare imaging and healthcare IT commercial organizations. Mr. Nosenzo’s earlier career also includes senior positions at Quest Diagnostics and Bayer Healthcare LLC’s Diagnostics Division (now known as Siemens Healthcare Diagnostics). Mr. Nosenzo currently serves as a member of the board of directors of Spectral Medical Inc. Mr. Nosenzo holds a Master of Business Administration in marketing and management from Adelphi University and received his Bachelor of Science in pharmacy from St. John’s University.
Anthony D’Adamio has served as Vice President, Strategy and General Counsel at Bioventus LLC since May 2012 and was made Senior Vice President, Strategy and General Counsel in February 2016. From February 2010 to November 2011, Ms. Forneris served asour Senior Vice President and General Counsel since August 2017. Previously, Mr. D’Adamio was General Counsel and Secretary at American Medical Systems Holdings Inc. FromSiemens Healthcare (now known as Siemens Healthineers AG) from January 2010 to August 2017 and served as Deputy General Counsel and Secretary of Siemens Healthcare Diagnostics from January 2007 to February 2010, sheJanuary 2010. Prior to that, Mr. D’Adamio was Senior Counsel within the Diagnostics Division of Bayer Healthcare LLC (now known as Siemens Healthcare Diagnostics) from January 2001 to December 2006. Mr. D’Adamio began his legal career at the law firm of Bond, Schoeneck & King before taking corporate legal positions with companies within the health insurance, pharmaceutical and biotechnology industries, including Group Health Incorporated, Quest Diagnostics and Covance Inc. Mr. D’Adamio holds a Juris Doctor, cum laude, from Howard University School of Law and a Bachelor of Arts from the State University of New York at Binghamton.
Katrina Church has served as Vice Presidentour Chief Compliance Officer since August 2020. Prior to joining us, Ms. Church served in corporate counsel and compliance roles within the Merz Group of Strategic Investmentscompanies, most recently as Global Compliance Officer for the Cardiac Rhythm Disease Management Division of Medtronic.Merz Pharma GmbH & Co KGaA, a privately-held pharmaceutical company, from March 2015 to August 2020. From July 2000June 1998 to December 2006,2008, Ms. Forneris served asChurch was Executive Vice President and SeniorGeneral Counsel of Connetics Corporation, a specialty pharmaceutical company that was acquired by Stiefel Laboratories, Inc. in 2008. Ms. Church began her career as an attorney at Hopkins & Carley, a San Jose-based law firm. In 2020, Ms. Church was nominated for several industry awards for compliance training and received the Cardiac Rhythm Disease Management Division2020 Women in Compliance Award for “Most Impactful Compliance Training Programme of Medtronic.the Year” and the Brandon Hall 2020 Gold Medal for Excellence in Training. Ms. FornerisChurch holds a Juris Doctor from New York University School of Law and a Bachelor of Arts in PoliticalComparative Literature, magna cum laude, from Duke University.
Alessandra Pavesio has served as our Senior Vice President and Chief Science Officer since August 2013. Previously, Ms. Pavesio managed the Boston University Coulter Translational Partnership, a foundation-
sponsored research program designed to enhance clinical impact and Historywealth creation through the development and transfer of innovative intellectual properties from Macalester Collegeuniversity laboratories to commercial practice, from January 2012 to July 2013. From January 2010 to December 2011, Ms. Pavesio was Vice President of Research & Development at Anika Therapeutics, Inc., an integrated orthopedic medicines company. Prior to that, Ms. Pavesio served as Director of Research and Development at Fidia Advanced Biopolymers, s.r.l. (now known as Anika Therapeutics, Inc.), from May 1991 to December 2009. Ms. Pavesio is the co-author of numerous peer reviewed publications and more than 15 patented inventions on hyaluronan based and biologics technologies. In the European Union, she has also served as chairperson of international regenerative medicine technology platforms and government advisory councils on innovation. Ms. Pavesio holds a Juris DoctorateMaster’s degree in Medicinal Chemistry, magna cum laude, from the University of Minnesota.Turin in Italy.
Henry C. Tung, M.D.has served as Vice President, Bioventus and General Manager, Bioventus Surgical at Bioventus LLC since October 2014 and was made Senior Vice President, Bioventus and President, Bioventus Surgical in February 2016. Dr. Tung previously served as Vice President and Managing Director of the International Headquarters of Bioventus. From 2009 to May 2012, he led strategic planning and business development for the Biologics Division of S&N. From February 2005 to 2008, he served as Corporate Vice President Global Surgical and President of North America Surgical for Bausch & Lomb, where he managed its medical device business. From 2000 to February 2005, he served as Vice President, New Business Development at Boston Scientific Corporation. Dr. Tung received his Master of Business Administration from Northwestern University’s Kellogg Graduate School of Management, his medical degree from the University of California School of Medicine, and his bachelor’s degree from Stanford University.Non-employee directors
Non-employee directors
Philip G. CowdyWilliam A. Hawkins has served as a managermember of our board of directors since September 2020 and was appointed Chairperson of our board of directors in September 2020. Mr. Hawkins is a Senior Advisor to EW Healthcare Partners, a leading private equity firm investing in life sciences. From October 2011 to July 2015, Mr. Hawkins served as President and Chief Executive Officer of Immucor, Inc., a leading provider of transfusion and transplantation diagnostic products worldwide. Prior to that, Mr. Hawkins served in positions of increasing responsibility at Medtronic, Inc., a prominent medical technology company, from January 2002 to June 2011, most recently serving as its Chief Executive Officer from November 2007 to June 2011. Mr. Hawkins served as President and Chief Executive Officer of Novoste Corporation, a global leader in the field of vascular brachytherapy, from 1988 to 2002 and has also held several senior leadership positions at American Home Products (now known as Wyeth, LLC), Johnson & Johnson, Guidant Corp. and Eli Lilly and Co. Mr. Hawkins has served as a member of the board of managers of Bioventus LLC since January 20122016. Mr. Hawkins also currently serves on the board of directors of Avanos Medical, Inc., a public medical technology company; Biogen Inc. and MiMedx Group Inc., each a public biopharmaceutical company; and Asklepios BioPharmaceutical, Inc., Baebies, Inc., Cirtec Medical Corp., Immucor, Inc. and Virtue Labs, LLC, each a privately-held life science company. Mr. Hawkins was elected to the Duke University Board of Trustees in 2011 and currently serves as its Vice Chairman. Mr. Hawkins is also Chair of the Duke University Health System board of director and a member of the audit committeeboard of Bioventus LLC.directors of the North Carolina Biotechnology Center and the Focused Ultrasound Foundation Society. Mr. Hawkins holds a Master of Business Administration from the University of Virginia Darden School of Business and received a Bachelor of Science in electrical and biomedical engineering from Duke University.
We believe Mr. Hawkins is qualified to serve on our board of directors because of his experience in and knowledge of the life science industry.
Philip G. Cowdy has served as a member of our board of directors since September 2020. Mr. Cowdy is the Chief Business Development and Corporate Affairs Officer for Smith & Nephew plc. Since joining Smith & Nephew plc in June 2008, he has also served as Executive Vice President of Business Development and Corporate Affairs, Head of Corporate Affairs and Strategic Planning, for Smith & Nephew, a global medical technology business. Since joining Smith & Nephew in 2008, he
has also served as Group Director of Corporate Affairs and Director of Investor Relations. Prior to joining Smith & Nephew plc, Mr. Cowdy served as a Senior Director at Deutsche Bank for 13 years, providing corporate finance and equity capital markets advice to a variety of UK-based companies. Mr. Cowdy is currently a member of the board of managers of Bioventus LLC, which he has served on from January 2012 to October 2017 and again from July 2018, and he has served as a member of the Audit, Compliance and Quality Committee. Mr. Cowdy received his Bachelor of Science in Natural Sciences atfrom Durham University (UK). and is a qualified chartered accountant.
We believe Mr. Cowdy’sCowdy is qualified to serve on our board of directors because of his experience in the industry, and his knowledge of Bioventus will enable him to make valuable contributions to our board of directors.
William A. Hawkins has served as a manager of the board of managers of Bioventus LLC since January 2016. From October 2011 to July 2015, Mr. Hawkins served as President and CEO of Immucor, a leading provider of transfusion and transplantation diagnostic products worldwide. From August 2007 to April 2011, Mr. Hawkins served as Chairman and CEO of Medtronic, Inc., a prominent global company in medical technology and services, which he joined in January 2002. Previously, he served as President and CEO of Novoste Corp. Mr. Hawkins has also held senior leadership positions at American Home Products, Johnson & Johnson, Guidant Corp. and Eli Lilly and Company. Mr. Hawkins currently serves on the board of directors of Halyard Health, Inc., a public medical technology company, and Immucor, Inc., a private medical diagnostics company. Mr. Hawkins received a Bachelor of Science in electrical and biomedical engineering from Duke University and a Masters of Business Administration from the Darden School of Business, University of Virginia.
We believe Mr. Hawkins’finance experience, in and knowledge of the life science industry will enable him to make valuable contributions to our board of directors.
Michael R. Minogue has served as a manager of the board of managers of Bioventus LLC since June 2016. From 2004 to the present, Mr. Minogue has served as Chief Executive Officer, President and Chairman of Abiomed Inc., a public company that manufactures cardiac support, recovery, and replacement devices. Previously, Mr. Minogue spent eleven years at GE Healthcare, a subsidiary of General Electric, where he holds three patents and developed expertise in sales, marketing, product development and software/service operations around diagnostic imaging and treatment of cancer and cardiovascular disease. Mr. Minogue also currently serves on the board of directors for the Advanced Medical Technology Association, a medical device trade association, and as Chairman of the Medical Device Industry Consortium, a public private partnership with the industry, government and non-profits. Mr. Minogue is also one of the co-founders and Chairman of the MedTech and BioTech Veterans Program, a non-profit organization that helps military veterans network with industry mentors to discover career opportunities in the life sciences industries. Mr. Minogue received his Bachelor of Science degree in Engineering Management from the United States Military Academy at West Point and his Master of Business Administration from the University of Chicago.
We believe Mr. Minogue’s experience working in the industry and his knowledge of the medical device industry will enable him to make valuable contributions to our board of directors.Company.
Guido J. Neels has served as a managermember of theour board of managers of Bioventus LLCdirectors since May 2012.September 2020. Mr. Neels has been with Essex Woodlands since August 2006, where he is now a Venturean Operating Partner. Prior to joining Essex
Woodlands, Mr. Neels served in a variety of management positions at Guidant Corporation, a developer of cardiovascular medical products. From July 2004 until retiring in November 2005, Mr. Neels served as Guidant’s Chief Operating Officer, where he was responsible for the global operations of Guidant’s four operating units: Cardiac Rhythm Management, Vascular Intervention, Cardiac Surgery and Endovascular Solutions. From December 2002 to July 2004, Mr. Neels served as Guidant’s Group Chairman, Office of the President, responsible for worldwide sales operations, corporate communications, corporate marketing, investor relations and government relations. In January 2000, Mr. Neels was named Guidant’s President, Europe, Middle East, Africa and Canada. In addition, Mr. Neels served as Guidant’s Vice President, Global Marketing, Vascular Intervention, from 1996 to 2000 and as Guidant’s General Manager, Germany and Central Europe, from 1994 to 1996. Mr. Neels has served as a member of the board of managers of Bioventus LLC since May 2012. Mr. Neels also currently serves on the board of directors of 480 Biomedical, Inc., Oraya Therapeutics, Inc., Arsenal
Medical, Inc., EndGenitor Technologies,Axogen, Inc. and White Pine Medical LLC, all privately held medical device companies, and Christel House International,also is a not-for-profit organization. He also servesmember of its compensation committee. Mr. Neels previously served on the board of directors of Endologix, where he servesInc. from December 2010 to June 2019 and on the board’s compensation and nominating and governance committees.board of directors of Entellus Medical from November 2009 to February 2018, each of which is a public company. Mr. Neels hasholds a business engineering degree from the University of Leuven in Belgium and a MastersMaster in Business Administration from the Stanford University Graduate School of Business.Business and received his Business Engineering degree from the University of Leuven in Belgium.
We believe that Mr. Neels’Neels is qualified to serve on our board of directors because of his experience in the industry, familiarity with serving on the boards of public companies and his knowledge of Bioventus will enable him to make valuable contributions to our board of directors.business.
Guy P. Nohrahas served as a managermember of theour board of managers of Bioventus LLCdirectors since May 2012 and serves as the Chair of the Compensation Committee of Bioventus LLC.September 2020. In March 1996, Mr. Nohra co-founded Alta Partners, a life sciences venture capital firm, and he has since been involved in the funding and development of numerous medical technology and life sciences companies. Mr. Nohra is currently a member of the board of managers of Bioventus LLC, which he has served on since May 2012, and serves as the Chair of the Compensation Committee. Mr. Nohra currently serves as a member of the boards of directors of several private life sciences companies, includingCarbylan Biosurgery, USGI Medical, Vertiflex,including Bionure, Inc., Sanifit Therapeutics S.A. and ZS Pharma, and is the Chairman of the Board of USGI Medical and ZS Pharma.Spiral Therapeutics, Inc. He also previously served on the board of directors of thevarious public companies, including ATS Medical, Device Manufacturing Association (MDMA) from 2003 to 2013.Inc., Cutera, Inc., AcelRx Pharmaceuticals, Inc., and ZS Pharma, as well as several private companies, including Carbylan Biosurgery, Inc., Cerenis Therapeutics, Coapt Systems, Paracor Medical, Inc. and PneumRx. Mr. Nohra holds a Master in Business Administration from the University of Chicago and received ahis Bachelor of Arts in History from Stanford University and a Masters in Business Administration from the University of Chicago.University.
We believe Mr. Nohra is qualified to serve on our board because of his extensive experience in the life sciences industry, his investment and development experience, and his service as a director of other life sciences companies.
David J. Parker has served as a managermember of our board of directors since September 2020. Mr. Parker has been a General Partner at Ampersand Capital Partners since November 2010, a private equity firm with $800.0 million of capital under management, which he joined in September 1994. Prior to joining Ampersand Capital Partners, Mr. Parker served as a management consultant at Bain & Company and Mercer Management Consulting, where he provided strategy and operations consulting services to clients in the healthcare, transportation, consumer products and telecommunications sectors. Mr. Parker is currently a member of the board of managers of Bioventus LLC, which he has served on since May 2012, and serves as the Chair ofon the Audit, Compliance and Quality and Compliance Committee. Since 2010, Mr. Parker has been Partner and General Partner at Ampersand Capital Partners after joining Ampersand Capital Partners in 1994. From November 2007 to October 2010, Mr. Parker served as the Chief Financial Officer and Executive Vice President of Victory Pharma, Inc. From January 1997 to December 1997, he served as a Vice President of Corporate Development at Novel Experimental Technology. Mr. Parker has servedalso currently serves as a director of Accuratus Lab Services, Inc.Genome Diagnostics B.V., BPA Holding Corporation, CutisPharma, Inc., Eaton Veterinary Pharmaceutical, Inc., Gyros Holding ABor GenDx, MedPharm Ltd. And Tjoapack Holdings B.V. Mr. Parker also serves on the remuneration committees of both GenDx and Protein Technologies, Inc.MedPharm and the audit committee of GenDx. Mr. Parker holds a Masters inMaster of Business Administration in Finance from The Wharton School of the University of Pennsylvania and areceived his Bachelor of Arts in Government and Economics from Dartmouth College.
We believe Mr. Parker is qualified to serve on our board because of his extensive experience in the life sciences industry, his finance and investment experience, and his service as a director of other life sciences companies.
Cyrille Y. N. Petit has served as a manager of the board of managers of Bioventus LLC since November 2012. From May 2012, Mr. Petit has served as Chief Corporate Development Officer and President of Global Business Services of Smith & Nephew PLC. Prior to that,Mr. Petit spent the previous 15 years of his career with General Electric Company, where he held progressively senior positions beginning with GE Capital, GE Healthcare and ultimately as the General Manager of Global Business Development of the Transportation Division. Mr. Petit’s career began in investment banking at BNP Paribas and Goldman Sachs. Mr. Petit holds a Master of Arts in Finance from the HEC School of Management in Paris, France.
We believe Mr. Petit’s experience in the life sciences industry and his business development expertise led to the conclusion that he should serve as a director of our board of directors.
Martin P. Sutterhas served as a managermember of theour board of managers of Bioventus LLCdirectors since May 2012.September 2020. Mr. Sutter is one of the two founding managing directorsManaging Directors of EW Healthcare Partners (previously known as Essex Woodlands,Woodlands), one of the oldest and largest life sciences/sciences and healthcare focused venture capital firms, with nearly $3 billion under management. Mr. Sutter was a founder of Essex Woodlands Health Ventures Inwhich he formed in 1994. Mr. Sutter has more than 30 years of management experience in operations, marketing, finance and venture capital. Mr. Sutter has served as a member of the board of managers of Bioventus LLC since May 2012. Mr. Sutter also currently serves on the board of directors of
QSpex Technologies, Inc. and Abiomed, Inc., a publicpublicly traded biopharmaceutical company, MiMedx Group, Inc., a publicly traded medical devices company, and Prolacta Biosciences, Inc., a privately held life sciences company. Mr. Sutter has also previously served on the board of directors of Tissue Tech, Inc., Suneva Medical, Inc. and QSpex Technologies, Inc. Mr. Sutter currently serves on the compensation and nominating and governance committees of both Abiomed, Inc. and MiMedx Group, Inc. Mr. Sutter holds a Master of Business Administration from the University of Houston and received his Bachelor of Science from Louisiana State University and a Masters in Business Administration from the University of Houston.University.
We believe Mr. Sutter is qualified to serve on our board because of his extensive experience in the life sciences industry, his investment experience, and his service as a director of other life sciences companies.
Susan M. Stalnecker has served as a member of our board of directors since September 2020. Ms. Stalnecker has been a Senior Advisor at Boston Consulting Group, a global management consulting firm, since March 2016. Ms. Stalnecker served as Vice President of E.I. duPont de Nemours and Co. (now known as DuPont de Nemours, Inc., or DuPont), a public company engaged primarily in biotechnology and the manufacture of chemicals and pharmaceuticals, from December 1976 until she retired in 2016. During her nearly 40-year career at DuPont, Ms. Stalnecker served in several senior leadership roles including Vice President, Treasurer & M&A; Vice President, Risk Management; Vice President, Government and Consumer Markets; and Vice President, Productivity & Shared Services. Ms. Stalnecker has served as a member of the board of managers of Bioventus LLC since November 2018. Ms. Stalnecker also currently serves on the board of directors of Leidos Holding, Inc. and Optimum Funds McQuairie, and serves on the Board of Trustees of the Duke Health System. She also serves on the audit & finance committee of Leidos Inc., the audit committee of Optimum Funds McQuairie and the compliance, audit & finance committee of the Duke Health System. Ms. Stalnecker holds a Master of Business Administration from The Wharton School of the University of Pennsylvania and received her Bachelor of Arts from Duke University.
We believe Ms. Stalnecker is qualified to serve on our board because of her extensive experience as a financial expert, her investment experience, and her service as a director of other public companies.
Corporate governance
Composition of our board of directors
UponOur business and affairs are managed under the consummationdirection of this offering,our board of directors. We currently have eight directors and one vacant seat. Pursuant to the numberStockholders Agreement, the Essex Members (as defined herein), collectively will have the right to designate up to three individuals to be included in the slate of nominees recommended by our board of directors. Smith & Nephew, Inc. and Smith & Nephew (Europe) B.V., as the other members of the Voting Group, will have the right to designate up to two individuals to be included in the slate of nominees recommended by our board of directors willpursuant to the Stockholders Agreement, one of whom shall be increasedthe individual to nine. Further,be included in the slate of nominees recommended by our board of directors to fill the currently vacant seat. See “Certain Relationships and Related Party Transactions—Stockholders Agreement.” Our amended and restated certificate of incorporation and bylaws will provide for the division of our board of directors into three classes, as nearly equal in number as possible, with the directors in each class serving for athree-year term, and one class being elected each year by our stockholders. Prior to the consummation of this offering, David J. Price will resign as a director and each of Philip G.Mr. Reali, Mr. Hawkins, Mr. Cowdy, William A. Hawkins, Michael R. Minogue, Guido J.Mr. Neels, Guy P.Mr. Nohra, David J.Mr. Parker, Cyrille Y. N. PetitMr. Sutter and Martin P. Sutter, will joinMs. Stalnecker joined our board of directors.
When considering whether directors and nominees have the experience, qualifications, attributes or skills, taken as a whole, to enable our board of directors to satisfy its oversight responsibilities effectively in light of our business and structure, the board of directors focuses primarily on each person’s background and experience as reflected in the information discussed in each of the directors’ individual biographies set forth above. We believe that our directors provide an appropriate mix of experience and skills relevant to the size and nature of our business.
In accordance with our amended and restated certificate of incorporation and the Stockholders Agreement, each of which will be in effect upon the closing of this offering, our board of directors will be divided into three classes with staggered three year terms. At each annual meeting of stockholders after the initial classification, the successors to the directors whose terms will then expire will be elected to serve from the time of election and qualification until the third annual meeting following their election. Our directors will be divided among the three classes as follows:
the Class I directors will be Messrs.Guido J. Neels, Guy P. Nohra and David J. Parker, and their terms will expire at the annual meeting of stockholders to be held in 2017;2022;
the Class II directors will be Messrs.William A. Hawkins, MinogueSusan M. Stalnecker and Petit,a S+N Stockholder Designee (as defined in the Stockholders Agreement) to be included in the slate of nominees pursuant to the Stockholders Agreement, and their terms will expire at the annual meeting of stockholders to be held in 2018;2023; and
the Class III directors will be Messrs. Bihl,Kenneth M. Reali, Philip G. Cowdy and Martin P. Sutter, and their terms will expire at the annual meeting of stockholders to be held in 2019.2024.
Any increase or decrease in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. This classification of our board of directors may have the effect of delaying or preventing changes in control of our Company.
Director independence
Prior to the consummation of this offering, our board of directors undertook a review of the independence of our directors and considered whether any director has a material relationship with us that could compromise that director’s ability to exercise independent judgment in carrying out that director’s responsibilities. Our board of directors has affirmatively determined that except as described below with respect to Anthony P. Bihl III, all of the
members ofMr. Hawkins, Mr. Cowdy, Mr. Neels, Mr. Nohra, Mr. Parker, Mr. Sutter and Ms. Stalnecker are each of the board’s three standing committees are independentan “independent director,” as defined under the rules of The NASDAQ Global Market,Nasdaq. In making these determinations, our board of directors considered the current and prior relationships that each director has with our Company and all other facts and circumstances our board of directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each director, and the transactions involving them described in the case of all members of the audit committee, except Philip G. Cowdy, the independence requirements contemplated byRule 10A-3 under the Exchange Act.section titled “Certain Relationships and Related Party Transactions.”
Board committees
Our board has established threefour standing committees—audit, compliance and ethics, compensation, and nominating and corporate governance—each of which operates under a charter that has been approved by our board of directors. Current copies of each committee’s charter are posted on our website,www.bioventusglobal.comwww.bioventus.com. The information on any of our websites is deemed not to be incorporated in this prospectus or to be part of this prospectus.
Following this offering, the Voting Group, which will hold Class A common stock and Class B common stock collectively representing a majority of the combined voting power of our total common stock outstanding, intends to enter into the Stockholders Agreement to elect the nominees of certain members of the Voting Group to our board of directors. See “Description of capital stock—Stockholders Agreement.” As a result, we will be a “controlled
“controlled company” under The NASDAQ Global MarketNasdaq governance standards. As a controlled company, exemptions under the standards will mean that we are not required to comply with certain corporate governance requirements, including the following requirements:
that a majority of our board of directors consists of “independent directors,” as defined under the NASDAQNasdaq rules;
that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;
that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and
for an annual performance evaluation of the nominating and governance committee and compensation committee.
These exemptions do not modify the independence requirements for our audit committee, and we intend to comply with the applicable requirements of theSarbanes-Oxley Act and rules with respect to our audit committee within the applicable time frame.
Audit committee
The audit committee will be responsible for, among other matters:
appointing, compensating, retaining, evaluating, terminating and overseeing our independent registered public accounting firm;
discussing with our independent registered public accounting firm their independence from management;
reviewing with our independent registered public accounting firm the scope and results of their audit;
approving all audit and permissiblenon-audit services to be performed by our independent registered public accounting firm;
overseeing the financial reporting process and discussing with management and our independent registered public accounting firm the interim and annual financial statements that we file with the SEC;
reviewing and monitoring our accounting principles, accounting policies, financial and accounting controls and compliance with legal and regulatory requirements;
overseeing the Company’s cybersecurity policies, processes and controls; and
establishing procedures for the confidential anonymous submission of concerns regarding questionable accounting, internal controls or auditing matters.
Upon the closing of this offering, our audit committee will consist of Philip G. Cowdy, David J. Parker and Michael R. Minogue,Susan M. Stalnecker, with David J. ParkerSusan M. Stalnecker serving as chair. We intend to rely on the phase-in rules of Rule 10A-3 of under the Exchange Act and NASDAQthe Nasdaq rules require us to have one independentrequiring that the audit committee member uponbe composed entirely of members who qualify as independent under the Nasdaq rules and the additional independence standards applicable to audit committee members established pursuant to Rule 10A-3 under the Exchange Act. Following the listing date of our common stock, a majorityand, in accordance with the phase-in provisions described above, one year from such date we intend all members of our audit committee to meet the definition of “independent director” for purposes of serving on the audit committee under Rule 10A-3 under the Exchange Act and the Nasdaq rules. We have determined that the fact that our audit committee will not be entirely comprised of independent directors onin the first year following this offering will not materially adversely affect the ability of our audit committee within 90 daysto act independently and to satisfy the other requirements of the date of this prospectusSEC and an audit committee composed entirely of independent directors within one year of the date of this prospectus.Nasdaq. Our board of directors has affirmatively determined that David J. Parker and Michael R. MinogueSusan M. Stalnecker meet the definition of “independent director” for purposes of serving on an audit committee underRule 10A-3 and NASDAQthe Nasdaq rules, and we intend to comply with the other independence requirements within the time periods specified. In addition, our board of directors has determined that David J. ParkerSusan M. Stalnecker will qualify as an “audit committee financial expert,” as such term is defined in Item 407(d)(5) ofRegulation S-K.
Compensation committee
The compensation committee’s responsibilities include:
reviewing and approving the compensation of our directors, Chief Executive Officer and other executive officers; and
appointing and overseeing any compensation consultants.
Upon the closing of this offering, our compensation committee will consist of Guy P. Nohra and Guido J. Neels, and Cyrille Y. N. Petit, with Guy P. Nohra serving as chair. As a controlled company, we will rely upon the exemption from the requirement that we have a compensation committee composed entirely of independent directors.
Compliance, ethics and culture committee
The compliance committee’s responsibilities include:
overseeing and monitoring the implementation of a Global Compliance Program, including our Code of Compliance and Ethics, and related compliance policies and procedures; and
overseeing the activities of the Company’s Chief Compliance Officer.
Upon the closing of this offering, our compliance committee will consist of William A. Hawkins and Susan M. Stalnecker, with William A. Hawkins serving as chair.
Nominating and corporate governance committee
The nominating and corporate governance committee’s responsibilities include:
identifying individuals qualified to become members of our board of directors, consistent with criteria approved by our board of directors; and
developing and recommending to our board of directors a set of corporate governance guidelines and principles.
The members of our nominating and corporate governance committee are Martin P. Sutter,Philip G. Cowdy, Guy P. Nohra and Cyrille Y. N. Petit,Martin P. Sutter, with Martin P. Sutter serving as chair. As a controlled company, we will rely upon the exemption from the requirement that we have a nominating and corporate governance committee composed entirely of independent directors.
Risk oversight
Our board of directors is responsible for overseeing our risk management process. Our board of directors focuses on our general risk management strategy, the most significant risks facing us, and oversees the implementation of risk mitigation strategies by management. Our board of directors is also apprised of particular risk management matters in connection with its general oversight and approval of corporate matters and significant transactions.
Risk considerations in our compensation program
We conducted an assessment of our compensation policies and practices for our employees and concluded that these policies and practices are not reasonably likely to have a material adverse effect on us.
Director compensation
None of our directors received compensation as a director during fiscal 2015. We intend to approve and implement a compensation policy that, effective upon the closing of this offering, will be applicable to all of ournon-employee directors.
Compensation committee interlocks and insider participation
During fiscal 2015,2019, the members of Bioventus LLC’s compensation committee were Guy P. Nohra,Bradley J. Cannon, Guido J. Neels and Cyrille Y. N. Petit.Guy P. Nohra. No member of our compensation committee is or has been a current or former
officer or employee of Bioventus or had any related person transaction involving Bioventus. None of our executive officers served as a director or a member of a compensation committee (or other committee serving an equivalent function) of any other entity, one of whose executive officers served as a director or member of Bioventus LLC’s compensation committee during fiscal 2015.2019.
Code of ethicscompliance and codeethics
Prior to the completion of conduct
We have adoptedthis offering, in addition to the existing Bioventus LLC policies in place, Bioventus Inc. will adopt a written code of business conductcompliance and ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. We have postedwill post a current copy of the code on our website,www.bioventusglobal.comwww.bioventus.com. In addition, we intend to post on our website all disclosures that are required by law or NASDAQNasdaq listing standards concerning any amendments to, or waivers from, any provision of the code. The information on any of our websites is deemed not to be incorporated in this prospectus or to be part of this prospectus.
Executive compensationEXECUTIVE COMPENSATION
This section discusses the material components of the executive compensation program for our executive officers who are named in the “2015“2020 Summary compensation table” below. In 2015,2020, our “named executive officers” and their positions were as follows:
Kenneth Reali, Chief Executive Officer
Gregory O. Anglum, Senior Vice President & Chief Financial Officer;
John E. Nosenzo, Senior Vice President & Chief Commercial Officer;
Anthony D’Adamio, Senior Vice President & General Counsel;
Alessandra Pavesio, Senior Vice President & Chief Science Officer; and
Anthony P. Bihl III, former Chief Executive Officer;
David J. Price, Chief Financial Officer; and
Henry C. Tung, M.D., Vice President, Bioventus and General Manager, Bioventus Surgical.Officer.
This discussion may contain forward-looking statements that are basedMr. Kenneth Reali became Chief Executive Officer and a member of the Bioventus LLC board of managers, effective as of April 13, 2020, in connection with Mr. Bihl’s retirement on our current plans, considerations, expectations and determinations regarding future compensation programs. Actual compensation programs that we adopt following the completion of this offering may differ materially from the currently planned programs summarized in this discussion.April 19, 2020.
20152020 Summary compensation tableCompensation Table
The following table sets forth information concerning the compensation of our named executive officers for the yearyears ended December 31, 2015.2019 and December 31, 2020.
Name and principal position | Year | Salary ($)(1) | Equity awards ($)(2) | Non-equity incentive ($)(3) | All Other ($)(4) | Total ($) | ||||||||||||||||||
Anthony P. Bihl III | 2015 | 602,308 | — | 670,200 | 19,875 | 1,292,383 | ||||||||||||||||||
Chief Executive Officer | ||||||||||||||||||||||||
David J. Price | 2015 | 356,760 | 65,400 | 198,460 | 22,055 | 642,675 | ||||||||||||||||||
Chief Financial Officer | ||||||||||||||||||||||||
Henry C. Tung, M.D. | 2015 | 361,278 | 65,400 | 287,345 | 21,459 | 735,482 | ||||||||||||||||||
General Manager, Bioventus Surgical | ||||||||||||||||||||||||
| ||||||||||||||||||||||||
Name and Principal | Year | Salary ($)(1) | Bonus ($) | Stock Awards ($) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | All Other Compensation ($) | Total ($) | ||||||||||||||||||||||||
Kenneth Reali | 2020 | 428,135 | 4,111,191 | (7) | 38,631 | (8) | (3) | 277,719 | (5) | 4,855,676 | ||||||||||||||||||||||
| Chief Executive Officer | 2019 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Gregory O. Anglum | 2020 | 381,044 | (3) | 22,392 | (5) | 403,436 | ||||||||||||||||||||||||||
| Senior Vice President & Chief Financial Officer | 2019 | 374,019 | 143,479 | (4) | 22,386 | (6) | 539,884 | |||||||||||||||||||||||||
| John E. Nosenzo | 2020 | 504,893 | (3) | 22,959 | (5) | 527,852 | ||||||||||||||||||||||||||
| Senior Vice President & Chief Commercial Officer | 2019 | 490,219 | 295,322 | (4) | 22,584 | (6) | 808,125 | |||||||||||||||||||||||||
| Anthony D’Adamio | 2020 | 396,597 | (3) | 22,959 | (5) | 419,556 | ||||||||||||||||||||||||||
| Senior Vice President & General Counsel | 2019 | 391,106 | 150,016 | (4) | 22,584 | (6) | 563,706 | |||||||||||||||||||||||||
| Alessandra Pavesio | 2020 | 408,657 | 100 | (2) | (3) | 21,375 | (5) | 430,132 | ||||||||||||||||||||||||
| Senior Vice President & Chief Science Officer | 2019 | 398,165 | 160,693 | (4) | 21,000 | (6) | 579,858 | |||||||||||||||||||||||||
| Anthony P. Bihl III | 2020 | 236,750 | (3) | 3,639,984 | (5) | 3,876,734 | ||||||||||||||||||||||||||
| Former Chief Executive Officer | 2019 | 684,979 | 552,910 | (4) | 23,561 | (6) | 1,261,450 | |||||||||||||||||||||||||
| (1) | Amounts reflect annual base salary |
| (2) | Amount reflects bonus paid to |
| (3) | Bonus amounts under the |
Amounts reflect the annual performance-based cash incentives earned by our named executive officers in |
Amounts reflect |
| (6) | Amounts reflect (i) $2,561 benefit stipend to Mr. Bihl (ii) $8,400, $8,400, $8,400, $8,400 and $8,400 in matching 401(k) contributions made by us to the 401(k) accounts of Messrs. Anglum, Nosenzo, D’Adamio, Ms. Pavesio and Mr. Bihl, respectively, (iii) additional fixed non-elective contributions of $12,600, $12,600, $12,600, $12,600 and $12,600 made by us to the 401(k) accounts of Messrs. Anglum, Nosenzo, D’Adamio, Ms. Pavesio and Mr. Bihl, respectively, and (iv) reimbursement of cellular telephone expenses to Messrs. Anglum, Nosenzo, and D’Adamio equal to $1,386, $1,584 and $1,584, respectively. |
| (7) | Amount reflects the aggregate grant date fair value of phantom profits interests granted to Mr. Reali during the year ended December 31, 2020 computed in accordance with FASB ASC Topic 718, Compensation—Stock Compensation. See Note 6 of the audited consolidated financial statements included elsewhere in this prospectus for a discussion of the relevant assumptions used in calculating this amount. |
| (8) | Amount reflects the aggregate grant date fair value of options granted to Mr. Reali during the year ended December 31, 2020 computed using a Black-Scholes calculation in accordance with FASB ASC Topic 718, Compensation—Stock Compensation. |
Narrative to summary compensation tableSummary Compensation Table
Employment agreementsLetters
Bioventus LLC offeredThe terms of employment to eachfor Messrs. Reali, Anglum, Nosenzo, D’Adamio and Ms. Pavesio in effect as of Messrs. Bihl and Price and Dr. Tung pursuant toDecember 31, 2020 are documented in their employment letters dated March 12, 2020, August 2, 2017, November 18, 2016, July 11, 2017 and June 13, 2013, respectively, with Mr. Reali’s employment letter subsequently amended as of April 24, 2020. The terms of Mr. Bihl’s prior employment are documented in his offer letter dated November 4, 2013 September 27, 2012 and April 20, 2012, respectively.as amended on October 17, 2019 to reflect his status as a partner. Pursuant to their respective employment letters, Mr. Bihl was hired to serve as the Chief Executive Officer, Mr. PriceReali was hired to serve as the Chief Executive Officer following Mr. Bihl’s retirement, Mr. Anglum was promoted on August 7, 2017 to serve as the Chief Financial Officer and Dr. Tung(after serving as the interim Chief Financial Officer effective May 1, 2017), Mr. Nosenzo was hired to serve as theChief Commercial Officer, Mr. D’Adamio was hired to serve as Senior Vice President – Strategic Planning & Business Development and General Counsel and Ms. Pavesio was later promotedhired to Vice President & General Manager, Surgical in October 2014.
serve as Chief Science Officer. Mr. Bihl also served as a member of the Bioventus LLC board of managers until his retirement on April 19, 2020 and Mr. Reali now serves as a member of the Bioventus LLC board of managers. In connection with this offering, we intend to enterhave entered into new employment agreements with each of our named executive officers, asMessrs. Reali, Anglum, Nosenzo, D’Adamio, and Ms. Pavesio (as further described below under “New incentive arrangements—New employment agreements.”“—Severance”).
20152020 Salaries
The named executive officers were entitled to receive a base salary in 2020 to compensate them for services rendered to Bioventus LLC.us. The base salary payable to each named executive officer is intended to provide a fixed component of compensation reflecting the named executive officer’s skill set, experience, role and responsibilities. The annual base salaries payable to Messrs. Reali, Anglum, Nosenzo, D’Adamio and Ms. Pavesio as of December 31, 2020, were $615,000, $389,881, $518,451, $405,794 and $419,630 respectively, which reflect merit increases which were effective March 29, 2020 for the named executive officers other than Mr. Reali. In connection with the COVID-19 pandemic, we implemented a 20% reduction in base salary for each of our employees with a base salary of $100,000 or greater, including each of our named executive officers, effective May 31, 2020 and ending June 27, 2020, which reductions are reflected in the actual salary paid in the summary compensation table.
PursuantEffective as of the consummation of this offering, we intend to increase the salaries of Messrs. Reali, Anglum, D’Adamio and Ms. Pavesio to $700,000, $430,000, $420,000 and $430,000, respectively.
2020 Incentive Bonuses
With respect to their services in 2020, Messrs. Reali, Anglum, D’Adamio, Ms. Pavesio and Mr. Bihl are eligible to earn an annual performance-based cash bonus pursuant to the terms2020 Executive Annual Incentive Plan – Non Commercial, or the Non Commercial AIP (with Mr. Bihl’s bonus pro-rated for the portion of the year for which he provided service prior to his retirement date), and Mr. Nosenzo is eligible to earn an annual performance-based cash bonus pursuant to the 2020 Executive Annual Incentive Plan – Chief Commercial Officer, or the Commercial AIP. Bonuses earned by our named executive officers under both the Non Commercial AIP and Commercial AIP are based upon weighted minimum, target and maximum achievement of both business and personal performance measures. The Non Commercial AIP and the Commercial AIP objective business measures in 2020 were (1) Global Revenue, (2) Adjusted Global EBITDA and (3) multiple osteoarthritis treatment achievements, including submission of an IND application to FDA for “Biologic” placental tissue product in the third quarter of 2020, the launch of a GTP placental tissue product in the fourth quarter of 2020 and the achievement of $100,000 in 2020 revenue with respect to such placental tissue product. The personal performance standards are based on the named executive officers’ performance ratings.
Mr. Reali’s and Mr. Bihl’s target incentive for 2020 was 100% of their respective existing employment letters,annual base salaries; Mr. Nosenzo’s was 75% of his annual base salary; and Messrs. Anglum, D’Adamio and Ms. Pavesio’s was 50% of their respective annual base salaries.
Objective business measures and personal performance will be weighted as 80% and 20%, respectively, of the annual base salary payablebonuses under the Non Commercial AIP and the Commercial AIP. Payouts for the objective business measures under the Non Commercial AIP and the Commercial AIP will range from 50% for minimum achievement, 100% for target achievement, to each200% for maximum achievement, which amounts shall correspond to 95%, 100%, and 105% achievement of Messrs. Bihl and Price and Dr. Tung was set at $600,000, $325,000 and $309,001,the applicable objective business measure target, respectively. Since their dateThe personal performance component of hire, each of Mr. Price and Dr. Tung has received annual merit increasesthe award amount will range from 50% for minimum achievement, 100% for target achievement, to base salary based on performance. On March 30, 2015, each of Mr. Price and Dr. Tung received an additional merit increase to place their salary at $358,670 and $362,401, respectively. As of December 31, 2015, Mr. Bihl’s annual base salary remained unchanged, however we expect that base salaries200% for maximum achievement. The targets for future incentives for each of our named executive officers will increase pursuant to their expected new employment agreements, as described below under “New incentive arrangements—New employment agreements.”
2015 Bonus incentives
In 2015, each of our named executive officers was eligible to earn an annual performance-based cash bonus from the Company pursuant to either the 2015 Executive Annual Incentive Plan—Non-Commercial (the Non-Commercial AIP) or the 2015 Executive/Director Annual Incentive Plan – Bioventus Surgical (the Surgical AIP). Bonuses earned by our named executive officers under each of these incentive plans in 2015 were based upon threshold, target and maximum achievement of the following objective business measures: sales, Adjusted EBITDA, excluding BMP program costs, certain non-financial objectives (portfolio development including business development and progress of the development of the BMP product candidates) and Exogen growth for the Non-Commercial AIP and business development and market access for the Surgical AIP, as well as the threshold, target and maximum achievement of personal performance standards based on whether the named executive officer inconsistently met, consistently met or consistently exceeded obligations and the method of achieving such obligations. Upon achievement of the target Non-Commercial AIP and personal performance objectives, each of Messrs. Bihl and Price was eligible, pursuant to his respective offer letter, to receive a target incentive under the Non-Commercial AIP in the amount of 100% and 50% of his respective annual base salary and Dr. Tung was eligible to receive a target incentive under the Surgical AIP in the amount of 50% of his annual base salary. Payouts for the objective business measures under the Non-Commercial AIP and the Surgical AIP may be reduced to 50%, or increased to 200%, of the applicable objective business measure target for achievement of minimum or maximum performance results, respectively. We expect the target incentives for each of our named executives officers togenerally remain the same pursuant to their expected new employment agreements, as described below under “New incentive arrangements—New employment agreements.”
Of the targeted objective business measures for the Non-Commercial AIP, we achieved 104%The actual level of sales, 82% of Adjusted EBITDA, 200% of business development, 100%achievement of the targeted development ofperformance measures and the BMP product candidatesactual bonus amounts payable to the named executive officers under the Non Commercial AIP and 0% of Exogen growth. In addition to our business performance, each of Messrs. Bihl and Price achieved 200% of their targeted individual performance, resulting in overall payments of 111.7% of his respective target incentive. Of the targeted objective business measuresCommercial AIP for the Surgical AIP, we achieved 181% of sales, 82% of Adjusted EBITDA, excluding BMP program costs, 200% of business development and 100% of increased market access. In addition to our business performance, Dr. Tung achieved 200% of his targeted
individual performance, resulting in an overall payment to Dr. Tung of 159.7% of his target incentive.fiscal year 2020 have not yet been determined. The actual amount of the performance-based cash incentives earned by each named executive officer paid in 2016, with respect to 2015fiscal year 2020 performance is set forth abovewill be determined by the board of managers in the Summary Compensation TableFebruary 2021 and paid in the column entitled “Non-equity incentive plan compensation.”March 2021.
Equity-based compensationEquity-Based Compensation
Each of our named executive officers hold equity-based compensation inWe currently maintain the Bioventus LLC as set forth below. The grant date fair value of the equity-based awards granted to the named executives officers in 2015 is set forth above in the Summary Compensation Table in the column entitled “Equity Awards” and the critical accounting policies and estimates with respect to these equity-based awards are described above in the section entitled “Management’s discussion and analysis of financial condition and results of operations — Critical accounting policies and estimates — Equity compensation.”
Profits interest units
Bioventus LLC currently maintains a profits interest plan, which we call the Bioventus LLC Management Incentive Plan or the “MIP”. ProfitsMIP, pursuant to which we granted 333,330 profits interest units awardedof Bioventus LLC, or Profits Interest Units, to Mr. Bihl on December 2, 2013. In connection with Mr. Bihl’s retirement, we redeemed or plan to redeem all of his Profits Interest Units as described below under “—Severance.” On and following the date of this offering, the MIP will be terminated and no further awards will be made under the MIPMIP.
We also currently maintain the Bioventus Phantom Profits Interest Plan, which was renamed the Bioventus Stock Plan on June 1, 2020, and which we call the Phantom Plan, pursuant to which we granted time-vesting phantom plan units, or Time Phantom Units, and performance-vesting phantom plan units, or Performance Phantom Units. The Time Phantom Units generally vest twenty-five percent (25%)ratably over five years (20% on the first anniversary of the date of grant and then continue5% quarterly thereafter) and entitle the holder to vest 6.25% on each quarter thereafter.
On December 2, 2013, Mr. Bihl was granted 333,330 profits interest units pursuant to the terms of the MIP and an individual profits interest award agreement thereunder. Neither Mr. Price nor Dr. Tung hold any profits interest units. In connection with the offering, each profits interest unit awarded under the MIP will be exchanged for LLC Interests which may then be exchanged for shares of Class A common stock (upon redemption or cancellation of the same number of their shares of our Class B common stock) or a cash payment, (if mutually agreed). To the extent exchanged profits interest units are subject to vesting, the corresponding LLC Interests will also be subject to vesting and shall continue to vest in accordance with the vesting terms of the exchanged profits interest units; provided, however, any portion of the LLC Interests that remains unvested as of the 12-month anniversary following the termination of the Phantom Profits Interest Plan (as described further below), will accelerate and vest on such 12-month anniversary date.
Phantom profits interest units
Bioventus LLC currently maintains a phantom equity plan, which we call the “Phantom Profits Interest Plan” or “Phantom Plan.” Participants in the Phantom Plan are eligible to receive cash payments upon separation from service or a change of control in an amount determined withby reference to the value of our profits interests.
In connectionProfits Interest Units, with their hire, Mr. Price and Dr. Tung were granted 111,110 and 55,555 phantomrespect to any vested Time Phantom Units upon the earlier of a termination from service or certain distribution events with respect to the Company’s profits interest units, respectively, underunits. In the event of a qualifying distribution event prior to a termination, all Time Phantom Plan. The applicable award agreements for each of Mr. Price and Dr. Tung provide for vesting of twenty percent (20%) of the phantom profits interest unitsUnits fully vest. All Performance Phantom Units generally vest on June 1, 2021, subject to the award on the first anniversaryachievement of the date of grant, with the remainder vesting five percent (5%) on each quarter thereafter.
In addition,2020 corporate revenue goals (other than “Value Creation” Performance Phantom Units granted to Ms. Pavesio on June 1, 2015, each of Mr. Price and Dr. Tung were granted 20,000 phantom profits interest units under the Phantom Plan, with each award scheduled to cliff vest 50% after three years ifwhich fully vested on June 1, 2018 based on the 2017 409A enterprise valuation, exceeds $690 millionas described below in “—Outstanding Equity Awards as Fiscal Year End”), but can also become vested in whole or in part in the board of managers’ discretion in the event such revenue goals are not satisfied. All Performance Phantom Units that do not so vest expire and cliff vest 100% after three years if the 2017 enterprise valuation exceeds $740 million.
are forfeited. In connection with this offering, we intend to terminate the Phantom Plan, effective as of the date of this offering, and settle all awards thereunder 12 months following such termination. We expect that, inIn connection with the Phantom Plan termination, Bioventus Inc.
will assume obligations of Bioventus LLC and that Phantom Plan awards will be paid in the form of shares of Class A common stock. Thestock (or, in the case of former employees whose employment terminated prior to the offering and who hold vested Phantom Plan awards as of 12 months following the termination of the Phantom Plan, in the form of cash). It is anticipated that the number of shares of Class A common stock received by each participant, including our named executive officers, will be determined by dividing (A) the value of the participant’s account balancevested Phantom Units (after giving effect to any accelerations in vesting in connection with this offering, as described below) as of the date of plan termination by (B) the initial public offering price of Class A common stock. Tostock (with any former employees whose employment terminated prior to the offering and who hold vested Phantom Plan awards receiving the cash value of such shares determined as of the date of this offering). It is anticipated that, to the extent that a Time Phantom Plan awardUnit is not otherwise vested as of the date the Phantom Plan is terminated, payment with respect to such Time Phantom Unit will be subject to the participant’sholder’s continued employment with us through the applicable vesting date or the twelve month anniversary of plan termination, if earlier. Certain awards made under the Phantom Plan have been amended to adjust the benchmark amountIt is further anticipated that, in connection with the offering.offering, the board of managers will exercise its discretion to vest 75% of the Performance Phantom Units as of the date of this offering and payment with respect to vested Performance Phantom Units will be subject to the holder’s continued employment with us through June 1, 2021. On and following the date of this offering, no further awards will be made under the Phantom Plan.
Each of our named executive officers holds Phantom Plan awards in Bioventus LLC as set forth below in “—Outstanding Equity Awards at Fiscal-Year End.”
On June 25, 2020, in connection with the commencement of his employment with us, Mr. Reali was granted 417,804 Time Phantom Units. In addition, on July 30, 2020, Mr. Reali was granted an option to purchase up to 5,935 equity interests of Bioventus LLC at a per unit price of $42.12 at any time prior to July 30, 2021 (or the termination of his service, if earlier), which we refer to as the Reali Option. Mr. Reali has forefeited the Reali Option prior to this offering. No other named executive officers received a grant of equity or phantom equity awards in 2020.
New equity-based compensationEquity-Based Compensation
In connection with the offering, we intend to adoptterminate the MIP and the Phantom Plan and have adopted a 2016 Incentive Award Plannew equity incentive plan in order to facilitate the grant of cash and equity incentives to our non-employee directors, employees (including our named executive officers) and consultants and employees and consultants of our subsidiaries and to enable our Company and our subsidiaries to obtain and retain the services of these individuals, which is essential to our long-term success. We expect that the 2016 Incentive Award Planplan will be effective prior to this offering, subject to approval of such plan by our stockholders. In connection with this offering, we intend to grant awards with respect to shares of Class A common stock under the 2016 Incentive Award Plansuch plan to certain of our employees, including our named executive officers. For additional information about the 2016 Incentive Award Plannew equity incentive plan and the intended grants to be made under thissuch plan in connection with this offering, please see the section titled “New incentive arrangements—20162021 Equity Incentive award plan”Plan” below.
Severance
The existing employment letters in effect as of December 31, 2020 for each of Mr. Bihl and Dr. Tungour named executive officers provide for severance payments upon termination of employment by us at any time without cause (other than as a result of death or disability) or a termination by the named executive officer for good reason (as defined below)during the two year period following the date of a change in control (as defined in the respective employment agreement)letter). The employment letter for Mr. Price provides for severance payments upon termination of employment without cause (other than as a result of death or disability) or a termination for good reason (as defined below) at any time prior to a change in control (as defined in the employment agreement) or during the two year period following the date of a change in control. In the event of a termination by us without cause, or for good reason, as described above, each of Mr. Price and Dr. Tungour named executive officers would be entitled to receive (i)(1) twelve monthsmonths’ base salary, payable overin a twelve-month period, (ii)lump sum within 60 days following termination of employment, (2) 100% of their respective target annual cash incentive, paid on or aboutpayable in a lump sum within 60 days following termination of employment, and (iii)(3) payment of COBRA premiums for the first twelve months of coverage following termination of employment. In the event of a termination without cause orby Messrs. Anglum, Nosenzo, D’Adamio and Ms. Pavesio for good reason as described above, Mr. Bihlduring the two-year period following a change in control, Messrs. Anglum, Nosenzo, D’Adamio and Ms. Pavesio would be entitled to receive the same severance payments and benefits as those outlined above forin the case of termination by us without cause. In the event of a termination by Mr. Price and Dr. Tung, with the exception that (i) Mr. Bihl is entitled to a lump sum payment of twelve months base salary on or about 60 days following termination and (ii) if he terminates employmentReali for good reason during the two-year period following a change in control, (as defined in theunder his employment agreement),letter Mr. BihlReali is entitled to receive enhanced severance equal to twenty-four18 months of each of his base salary and his target annual cash incentive, each payable in a lump sum on or about 60 days following termination of employment, as well as payment of COBRA premiums for the first 18 months of coverage following termination of employment. The severance payments for Messrs. Bihl and Price and Dr. Tung are conditioned upon execution and delivery of a release and compliance with confidentiality and restrictive covenant obligations as set forth in a separate proprietary information agreement.
In connection with his retirement on April 19, 2020, Mr. Bihl was not entitled to receive any severance or other benefits under his employment letter. Subsequent to his retirement, we entered into an agreement with Mr. Bihl on June 12, 2020, pursuant to which he received a payment on June 16, 2020 of $9.25 million, which represented a $918,953 payment in full for amounts due to Mr. Bihl under the Phantom Plan, a $6,328,629 payment for the redemption of 150,252 of his Profits Interest Units under the MIP, and an additional cash payment of $2,006,796 to reflect the COVID-19-related decrease in value of his Phantom Plan award and the redeemed portion of his MIP award. Pursuant to this offering,agreement, Mr. Bihl is further entitled to receive a payment with respect to the remainder of his MIP award on or before June 16, 2021 in an amount equal to the greater of (a) $7,711,231 and (b) the fair market value of such remaining MIP award as of the date of payment, as well as an additional cash payment of $1,543,147 to reflect the COVID-19-related decrease in value of the remaining portion of his MIP award. We retained the right to accelerate the redemption of such remaining MIP award and the associated June 16, 2021 payments by paying Mr. Bihl the amounts due on an earlier date, and we expect to enter into new employment agreementsanticipate accelerating such payments in connection with each of our named executive officers that will modify their existing severance arrangements, as described below under “New incentive arrangements—New employment agreements.”this offering.
For purposes of the existing employment letters, “cause” is defined generally as the occurrence of any one of the following events by a named executive officer, and with respect to Messrs. Bihl and Price, without full cure of such event by such named executive officer within 30 days of written notice provided by the board of managers of Bioventus LLC: (a)officer: (i) conviction (including a guilty plea or plea of nolo contendere) of any felony or any other crime involving fraud, violence or violence (or with respect to Mr. Bihl or Dr. Tung, dishonesty), (b)dishonesty, (ii) commission of or participation in a fraud or act of dishonesty or misrepresentation against Bioventus LLC, (c)(iii) violation of any
written and fully executed contract or agreement between the named executive officer and Bioventus LLC, including without limitation, breach of the restrictive covenants agreement, (d)(iv) gross negligence or willful misconduct, (e)(v) continued and substantial failure to perform applicable duties or (f)(vi) violation of any material policies, practices or procedures of Bioventus LLC; and “good reason” is defined generally as the occurrence of any one of the following events without either express prior written consent or full cure within 30 days of written notice provided to Bioventus LLC:LLC and, within the two-year period following the date of a change in control: (i) a material diminution of duties or responsibilities, (ii) a material reduction in salary, other than for across-the-board reductions similarly affecting all senior executive officers, (iii) the relocation of the named executive officer’s principal office, or principal place of employment, to a location more than 50 miles from the location of the principal office or place of business as of the effective date of the employment letter, or (iv) a failure to pay earned compensation.compensation to the named executive officer.
In connection with this offering, we have entered into new employment agreements with each of Messrs. Reali, Anglum, Nosenzo, D’Adamio, and Ms. Pavesio that will become effective as of the date of this offering and will supersede their existing severance arrangements. Under these new employment agreements, it is anticipated that, upon a termination without cause or resignation by the named executive officer with good reason, each of our named executive officers will be entitled to (i) twelve months’ base salary (eighteen months in the case of Mr. Reali), payable in equal installments over the twelve month period (eighteen month period in the case of Mr. Reali) following such termination, (ii) 100% of target annual cash incentive (150% in the case of Mr. Reali), payable in equal installments over the twelve month period (eighteen month period in the case of Mr. Reali) following such termination, and (iii) payment of COBRA premiums for the first twelve months of coverage following termination of employment (eighteen months in the case of Mr. Reali). Additionally, upon a termination without cause or resignation by the named executive officer with good reason within the 24 month period following a change in control, each of our named executive officers will be entitled to (i) eighteen months’ base salary (twenty-four months in the case of Mr. Reali), payable in a lump sum within 60 days following such termination, (ii) 150% of target annual cash incentive (200% in the case of Mr. Reali), payable in a lump sum within 60 days following such termination, (iii) a lump sum payment equal to eighteen months (twenty-four months in the case of Mr. Reali) of COBRA premiums within 60 days following such termination, and (iv) full vesting acceleration of all equity awards. These severance payments will be conditioned upon execution and delivery of a release and compliance with the restrictive covenants described below in “—Restrictive Covenants.”
Restrictive covenantsCovenants
Our named executive officers are subject to certain post-employment restrictive covenants, including twelve-month non-competition and non-solicitation obligations, as set forth in proprietary information agreements entered into with each named executive officer. Further, the employment letters for each of our named executive officers provide for mutual non-disparagement obligations.
In connection with this offering, we have entered into new post-employment restrictive covenants with our named executive officers, effective as of the date of this offering, including twelve-month (and eighteen months in the case of Mr. Reali) non-competition and non-solicitation obligations (increased to eighteen-months (and twenty-four months in the case of Mr. Reali) in the event a named executive officer receives change in control severance, as described above) and perpetual confidentiality and non-disparagement obligations.
Retirement plansPlans
Bioventus LLC currently maintains a 401(k) retirement savings plan, or the 401(k) plan, in which all Bioventus LLC employees, including our named executive officers, who satisfy certain eligibility requirements may participate. The Internal Revenue Code allows eligible employees to defer a portion of their compensation, within prescribed limits, on a pre-tax basis through contributions to the 401(k) plan. Under the terms of the 401(k) plan, we currently make (a) non-discretionary matching contributions equal to 50% of the employee’s contributions, up to a maximum of 6% of the employee’s eligible compensation and (b) a non-elective
contribution equal to 4.5% of the employee’s compensation for the plan year, subjectyear. Due to continued employment through the end ofCOVID-19 crisis, we suspended the plan year.4.5% non-elective contribution effective May 3, 2020, but have reinstated such benefit effective December 26, 2020. Further, our board of managers has discretion under the 401(k) plan to provide for (i) annual discretionary matching contributions based on eligible compensation contributed by each employee and (ii) discretionary nonelectivenon-elective contributions in an amount determined by the board at year end, subject to continued employment through year end. We believe that providing a vehicle for tax-deferred retirement savings though the 401(k) plan adds to the overall desirability of our executive compensation package and further incentivizes our employees, including our named executive officers, in accordance with our compensation policies. Following the consummation of this offering, we anticipate that our employees will continue to be eligible to participate in a 401(k) plan maintained by us.
Employee benefitsBenefits
Health and Welfare Plans. All of our full-time employees and working partners, including our named executive officers, are eligible to participate in health and welfare plans maintained by Bioventus LLC, including:
medical, dental and vision benefits;
medical and dependent care flexible spending accounts;accounts and health savings account;
short-term and long-term disability insurance.insurance;
basic life and accidental death & dismemberment insurance; and
group accident, critical illness and hospital indemnity plans.
Our named executive officers participate in these plans on the same basis as other eligible employees. We do not maintain any supplemental health and welfare plans for our named executive officers. We reimburse our named executive officers for the full cost of their personal cellular phones. We believe the benefits described above are necessary and appropriate to provide a competitive compensation package to our named executive officers.
No tax gross-upsSection 280G
We do not make gross-up payments to coverThe employment letters for Messrs. Reali, Anglum and D’Adamio provide and the new employment agreements we have entered into with our named executive officers’ personal income taxesofficers in connection with this offering to provide that, may pertainin the case of their receipt of any payments in connection with a change in control (as defined in the employment letter), or that would otherwise be considered an “excess parachute payment” within the meaning of Section 280G of the Code, such payments will be reduced to the maximum amount that does not trigger the excise tax imposed by Section 4999 of the Code if Messrs. Reali, Anglum and D’Adamio would be better off on a net after-tax basis with such reduction.
Retention Plan
On April 13, 2020, we initiated a retention plan with Mr. Nosenzo for an aggregate amount of $520,000 less applicable taxes. Payments of $260,000 will be paid on each of May 4, 2021 and May 4, 2022, subject to Mr. Nosenzo’s continued service through each such date; provided that if Mr. Nosenzo’s employment is terminated for a reason that would qualify Mr. Nosenzo for severance benefits under his offer letter (x) before the May 4, 2021 payment date he will receive $260,000 in a single lump sum within 60 days following termination of employment and (y) after the May 4, 2021 payment date but before the May 4, 2022 payment date he will receive $260,000 in a lump sum within 60 days following the termination date. Any such payments are in addition to any of the compensation or perquisites paid or provided by our Company.severance benefits under Mr. Nosenzo’s offer letter.
Outstanding The following table summarizes the number of option awards and profits interest units Anthony P. Bihl III David J. Price Henry C. Tung, M.D. Name Kenneth Reali Gregory O. Anglum John E. Nosenzo Anthony D’Adamio Alessandra Pavesio The Phantom Units do not have an expiration date; provided that any Phantom Units granted on September 17, 2018 that do not vest as a result of achieving 2020 revenue targets on June 1, 2021 will expire. This column shows the number of Phantom Units held by our other named executive officers that have not vested. Phantom Units generally represent the right to receive cash amounts from us based on the distributions that would be made to an equivalent number of profits interests with an equivalent benchmark amount. The benchmark amounts represent the cumulative distributions that must be made by us pursuant to the Bioventus LLC Agreement before a grantee is entitled to receive any distributions or payments in respect of such grantee’s units. The benchmark amount for Mr. Market value is determined based on an independent valuation report on the fair market value of the Company. Mr. Reali was granted Mr. Reali was granted 5,935 options to purchase equity interests of Bioventus LLC on July 30, 2020, all of which were fully vested and exercisable at the time of grant. Mr. Mr. Nosenzo was granted 125,000 Phantom Units on February 6, 2017; 20% of these Phantom Units vested on February 6, 2018 and 5% vests each quarter thereafter. Mr. Nosenzo was also granted 25,000 Phantomequity awardsEquity Awards at fiscal year-endFiscal Year-Endand phantom(including the number of profits interest units underlying outstanding equity incentive plan awardsPhantom Units) for our named executive officers as of December 31, 2015.2020. For additional information about the outstanding equity awards granted to our named executive officers, please see the section titled “—Equity-based compensation” above. Profits interest units Phantom profits interests Name Number of profits
interest units that
have not vested (#) Market value of profits
interest units that have
not vested ($)(4) Number of profits
interest units
underlying phantom
profits interests (#)
vested Number of profits interest
units underlying phantom
profits interests (#) unvested Number of profits
interest units
underlying
unearned phantom
profits interests
unvested (#) 166,666 (1) 2,216,651 — — — — — 66,666 (2) 44,444 (2) — — — 0 — 20,000 (2) — — 38,889 (3) 16,667 (3) — — — 0 — 20,000 (3) Option awards Stock awards Grant Date Number of
securities
underlying
unexercised
options (#)
exercisable Number of
securities
underlying
unexercised
options (#)
unexercisable Option
Exercise
Price ($) Option
Expiration
Date Number of
profits
interest units
(including
profits
interest units
underlying
phantom
units(1))
that have not
vested (2)(#) Market
Value(3) of
profits
interest units
(including
profits
interest units
underlying
phantom
units) that
have not
vested ($) 4/13/2020 417,804 (4) $ 7,716,840 7/30/2020 5,935 (5) — (5) $ 42.12 (5) 7/30/2021 (5) 4/04/2016 2,000 (6) $ 94,300 5/01/2017 28,500 (6) $ 1,257,420 9/17/2018 20,000 (6) $ 580,600 2/06/2017 31,250 (7) $ 1,378,750 9/17/2018 25,000 (7) $ 725,750 8/14/2017 14,000 (8) $ 617,680 9/17/2018 15,000 (8) $ 435,450 9/17/2018 20,000 (9) $ 580,600 (1) (2) BihlAnglum’s 2016 grant of Phantom Units is $472,003,000, for Messrs. Nosenzo, Anglum, and D’Adamio’s 2017 grant is $510,000,000, for Messrs. Anglum, Nosenzo and D’Adamio’s and Ms. Pavesio’s 2018 grant of Phantom Units is $703,691,178, and for Mr. Reali’s 2020 grant of Phantom Units on June 25, 2020 is $840,849,878.(3) (4) 333,330 profits interest units417,804 Phantom Units on December 2, 2013. AsJune 25, 2020; 20% of December 31, 2015, 166,665such grant will vest on April 13, 2021 and 5% will vest each quarter thereafter.(5) (6) Bihl’s profits interest units were vested. Twenty-five percent (25%)Anglum was granted 20,000 Phantom Units on April 4, 2016 and 95,000 Phantom Units on May 1, 2017; 20% of the profits interest units granted to Mr. Bihleach grant vested or will vest, on the first anniversary of the grant date and 6.25% of the profits interest5% vests each quarter thereafter. Mr. Anglum was also granted 20,000 Phantom Units on September 17, 2018; these units granted to Mr. Bihl vested, or will vest on a quarterly basis thereafter.June 1, 2021 at 100% if 2020 revenue is greater than or equal to $391.8 million and at 75% if 2020 revenue is greater than or equal to $336.0 million.(2)(7)
| (8) | Mr. D’Adamio was granted 40,000 Phantom Units on August 14, 2017; 20% of |
| (9) | Ms. Pavesio was granted 20,000 Phantom Units on September 17, 2018; these units will vest on June 1, 2021 at 100% if 2020 revenue is greater than or equal to $391.8 million and at 75% if 2020 revenue is greater than or equal to $336.0 million. Ms. Pavesio was also granted 83,333 Phantom Units on July 22, 2013, 15,000 Phantom Units on June 1, 2015, |
Director compensationCompensation
MembersThe following table sets forth information concerning the compensation of the current members of the Bioventus LLC board of managers have not historically received compensation for their services as board members. In connection with this offering, we have adopted a compensation policy that, effective upon the closing of this offering, will be applicable to all of our non-employee directors. Pursuant to this policy, each eligible non-employee director will receive an annual cash retainer of $40,000. The chairperson of the board will receive an additional annual retainer of $50,000 for such service. Each member of the audit, compensation and nominating and corporate governance committees, other than the committee chairperson, will receive an additional annual cash retainer of $20,000, $15,000 and $10,000, respectively, and the committee chairperson for each committee will receive an additional annual cash retainer of $10,000, $7,500 and $5,000, respectively. Each annual retainer will be paid quarterly in arrears.
Name | Year | Fees Earned or Paid in Cash ($)(1) | Total ($)(2) | |||||||||
William A. Hawkins(3) | 2020 | 90,000 | 90,000 | |||||||||
Susan M. Stalnecker(3) | 2020 | 60,000 | 60,000 | |||||||||
Guy P. Nohra | 2020 | — | — | |||||||||
Martin P. Sutter | 2020 | — | — | |||||||||
Bradley J. Cannon | 2020 | — | — | |||||||||
David J. Parker | 2020 | — | — | |||||||||
Philip G. Cowdy | 2020 | — | — | |||||||||
Guido J. Neels | 2020 | — | — | |||||||||
Also, pursuant to this director compensation policy, each non-employee director who, as of the date of this offering, is serving on our board of directors and is expected to continue his or her service following this offering will be granted an award of stock options with an aggregate grant date fair value equal to $187,500, provided that certain investor directors may elect to receive such award in the form of cash-settled restricted stock units in lieu of stock options. In addition, we will grant each eligible non-employee director who is initially elected or appointed to the board following the pricing of the offering an initial stock option award upon such initial election or appointment with an aggregate grant date fair value equal to $187,500. Finally, commencing with fiscal year 2017, each non-employee director will be entitled to receive, on the date of our annual meeting, an annual award of stock options with an aggregate grant date fair value equal to $125,000. The terms of each such award will be set forth in a written award agreement between each non-employee director and us.
In addition to the non-employee director compensation policy, we have adopted a director stock ownership policy encouraging non-employee directors to hold shares of our Class A Common Stock and/or LLC Interests with a value equal to at least three times the value of the director’s annual base retainer fee.
| (1) | Mr. Hawkins received an annual retainer of $40,000 for his service as a member of the board and an additional annual retainer fee of $50,000 for his service as chairman of the board. Ms. Stalnecker received an annual retainer fee of $50,000 for her service as a member of the board and an additional annual retainer fee of $10,000 for her service on the audit committee of the board. No other members of our board received any cash compensation in 2020. |
| (2) | No members of our board received equity compensation awards in 2020. |
| (3) | As of December 31, 2020, Mr. Hawkins held 50,000 Phantom Units, 95% of which were vested and 5% of which were unvested, and Ms. Stalnecker held 50,000 Phantom Units, 40% of which were vested and 60% of which were unvested, respectively. The benchmark amount for Mr. Hawkins’s grant of Phantom Units is $472,003,000 and the benchmark amount for Ms. Stalnecker’s grant of Phantom Units is $703,691,178. |
In connection with our December 11, 2015 offer to Mr. William A. Hawkins to join the Bioventus LLC board of managers as its chairman, we agreed, pursuant to an offer letter, effective January 1, 2016, to (1) pay Mr. Hawkins an annual retainer fee of $40,000 for his service as a member of the board and $50,000 for his service as chairman of the board, each payable in quarterly installmentsinstalments in arrears and pro-rated for any partial period of service and (2) award Mr. Hawkins a one-time grant of 50,000 phantom profits interest unitsPhantom Units under the Phantom Plan. Mr. Hawkins will be eligible
Effective November 28, 2018, pursuant to receivean offer letter with Ms. Stalnecker providing for her appointment as a member of our board and chair of the audit committee, we agreed to (1) pay Ms. Stalnecker an annual awardsretainer fee of $50,000 for her service as a member of the board and $10,000 for her participation in accordance with the non-employee director compensation policy.
audit committee, each payable in quarterly installments in arrears and New incentive arrangementspro-rated
2016 Incentive for any partial period of service and (2) award planMs. Stalnecker 50,000 Phantom Units under the Phantom Plan.
In connection with thethis offering, we have approved and intend to adoptimplement a compensation policy that, effective upon the 2016closing of this offering, will be applicable to all of our non-employee directors. Under this compensation policy, each such non-employee director will receive an annual cash retainer of $55,000. In
addition, (i) the Chairperson of the Board shall receive an additional annual retainer of $50,000, (ii) the Lead Director of the Board shall receive an additional annual retainer of $30,000, (iii) the Chairpersons of the Audit Committee, Compensation Committee, Nominating and Corporate Governance Committee, and Compliance and Culture Committee shall receive additional annual retainers of $20,000, $15,000, $10,000, and $10,000, respectively, and (iv) non-Chairperson members of the Audit Committee, Compensation Committee, Nominating and Corporate Governance Committee, and Compliance and Culture Committee shall receive additional annual retainers of $10,000, $7,500, $5,000, and $5,000, respectively. In addition, each such non-employee director will receive an annual restricted stock unit award with a grant date value of $152,000, with all such annual restricted stock unit awards (other than those received in respect of a non-employee director’s initial year of service, as described below) vesting on the first anniversary of the grant date of the award (or immediately prior to the date of the annual shareholder meeting immediately following the date of grant, if sooner), subject to such non-employee director continuing in service through such date. Restricted stock unit awards for each non-employee director’s initial year of service shall vest in three equal installments, with the first installment vesting on the first anniversary of the grant date of such initial award (or immediately prior to the date of the annual shareholder meeting immediately following the date of grant, if sooner) and the second and third installments vesting on the first and second anniversaries of such first vesting date, subject to such non-employee director continuing in service through each such date (and any such non-employee director who commences service on a date other than the date of the annual shareholder meeting will receive a pro-rata restricted stock unit award for such initial year of service). In addition, in connection with any initial public offering (including this offering), each non-employee director initially elected or appointed prior to the date of this offering will receive a restricted stock unit award with a grant date value of $152,000, with all such restricted stock unit awards vesting on the first anniversary of the grant date of the award. The vesting of all restricted stock unit awards under the policy will accelerate and vest in full upon a change in control (as defined in the 2021 Plan, described below). In addition, each non-employee director will be reimbursed for out-of-pocket expenses in connection with his or her services.
New Incentive Arrangements
2021 Incentive Award Plan
Our board of directors has adopted the 2021 Incentive Award Plan, or the 2021 Plan, subject to approval by our stockholders under which we may grant cash and equity incentive awards to eligible employees and other service providers in order to attract, motivate and retain the talent for which we compete. The material terms of the 2021 Plan, as it is currently contemplated, are summarized below. The 2021 Plan has been filed as an exhibit to the registration statement of which this prospectus is a part.
Eligibility and administration.Administration. Our employees, consultants and non-employee directors, and the employees and consultants of our subsidiariesparents and affiliates, will be eligible to receive awards under the 2021 Plan. Following theour initial public offering, the 2021 Plan will be administered by our board of directors with respect to awards to non-employee directors and by our compensation committee with respect to other participants, each of which may delegate its duties and responsibilities to committees of our directors and/or officers (referred to collectively as the plan administrator“plan administrator” below), subject to certain limitations that may be imposed under Section 162(m) of the Code,2021 Plan, Section 16 of the Exchange Act, and/or stock exchange rules, as applicable. The plan administrator will have the authority to make all determinations and interpretations under, prescribe all forms for use with, and adopt rules for the administration of, the 2021 Plan, subject to its express terms and conditions. The plan administrator will also set the terms and conditions of all awards under the 2021 Plan, including any vesting and vesting acceleration conditions.
Limitation on awardsAwards and shares available.Shares Available. An aggregate of 2,981,4367,592,476 shares of our Class A common stock will initially be available for issuance under awards granted pursuant to the Plan, which shares may be authorized but unissued shares, treasury common stock, or shares purchased in the open market. In addition, the2021 Plan. The number of shares initially available for issuance under the 2016 Incentive Award Plan will be annually increased by an annual increase on January 1 of each calendar year beginning in 20172022 and ending in 2026, by an amountand including 2031, equal to the leastlesser of (a) 1,494,464 shares, (b) 4%(A) 4.5% of the Company’s shares of our Class A common stock outstanding on the final day of the immediately preceding calendar year and (c) such
lesser(B) a smaller number of shares as is determined by our board of directors. No more than 7,592,476 shares of Class A common stock may be issued under the 2021 Plan upon the exercise of incentive stock options. Shares available under the 2021 Plan may be authorized but unissued shares, shares purchased on the open market or treasury shares.
If any shares subject to an award under the 2021 Plan isare forfeited, expires,expire, are converted to shares of another entity in connection with certain corporate events, are surrendered pursuant to an “exchange program” (as described below) or if such award is settled for cash, any shares subject to such award may, to the extent of such forfeiture, expiration conversion or cash settlement, be used again for new grants under the 2021 Plan. However, the following shares may not be used again for grantsgrant under the 2021 Plan: (1)(i) shares tendered or withheld to satisfy grant orthe exercise price or tax withholding obligations associated with an option oraward; (ii) shares subject to a stock appreciation right, or “SAR”; (2) shares subject to a SAR, or other stock-settled award that are not issued in connection with the stock settlement of the SAR or other stock-settled award on its exercise; and (3)(iii) shares purchased on the open market with the cash proceeds from the exercise of options.
Awards granted under the 2021 Plan upon the assumption of, or in substitution for, outstanding equity awards authorized or outstanding under a qualifying equity plan maintainedpreviously granted by an entity in connection with which we enter intoa corporate transaction, such as a merger, combination, consolidation or similar corporate transactionacquisition of property or stock, will not reduce the shares available for grant under the 2021 Plan.
The maximum number2021 Plan will provide that the sum of shares of our Class A common stock that may be subject to one or more awards granted to any person pursuant to the Plan during any calendar year will be 1,494,464cash compensation and the maximum amount that may be paid in cash under an award pursuant to the Plan to any one participant during any calendar year period will be $2,000,000. Further, the maximum aggregate grant date fair value (determined as of the date of the grant under ASC 718 or any successor thereto) of all awards granted to anya non-employee director pursuant to the 2021 Plan as compensation for services as a non-employee director during any calendar year will be $500,000.shall not exceed the amount equal to $700,000 (with such amount increased to $1,000,000 for the calendar year of a non-employee director’s initial service). The plan administrator may make exceptions to this limit for individual non-employee directors in extraordinary circumstances, as the plan administrator may determine in its discretion, provided that the non-employee director receiving such additional compensation may not participate in the decision to award such compensation or in other contemporaneous compensation decisions involving non-employee directors.
Awards.Awards. The 2021 Plan provides for the grant of stock options, including incentive stock options, or “ISOs,”ISOs, and nonqualified stock options, or “NSOs,”NSOs, restricted stock, appreciation rights, or “SARs,” restricted stock,dividend equivalents, restricted stock units, or “RSUs,”RSUs, other stock-based awards, SARs, and other stock or cash-basedcash awards. No determination has been made as to the types or amounts of awards that will be granted to specific individuals pursuant to the 2021 Plan. Certain awards under the 2021 Plan may constitute or provide for a deferral of compensation, subject to Section 409A of the Code, which may impose additional requirements on the terms and conditions of such awards. All awards under the 2021 Plan will be set forth in award agreements, which will detail all terms and conditions of the awards, including any applicable vesting and payment terms and post-termination exercise limitations. Awards other than cash awards generally will be settled in shares of our Class A common stock, but the plan administrator may provide for cash settlement of any award. A brief description of each award type follows.
| • | Stock |
| • |
|
term of a SAR may not be longer than ten |
| • | Restricted |
plan administrator permits such a deferral. Conditions applicable to restricted stock and RSUs may be based on continuing service, the attainment of performance goals and/or such other conditions as the plan administrator may determine. Holders of restricted stock generally have all of the rights of a stockholder upon the issuance of restricted stock, but dividends paid with respect to a share of restricted stock prior to such share vesting shall be paid to the holder only to the extent such share subsequently vests. RSU holders have no rights of a stockholder with respect to shares subject to RSUs unless and until such shares are delivered in settlement of the RSUs. In the sole discretion of the plan administrator, RSUs may also be settled for an amount of cash equal to the fair market value of the shares underlying the RSU on the RSU’s maturity date, or a combination of cash and shares. |
| • | Other Stock or Cash-Based |
| • | Dividend |
| • | Performance Awards. Performance awards include any of the foregoing awards that are granted subject to vesting and/or payment based on the attainment of specified performance goals or other criteria the plan administrator may determine, which may or may not be |
value; (xxiii) individual employee performance; or (xxiv) any combination of the |
Section 162(m). Section 162(m) of the Code imposes a $1,000,000 cap on the compensation deduction that a public company may take in respect of compensation paid to our “covered employees” (which includes our Chief Executive OfficerCertain Transactions and our next three most highly compensated employees other than our Chief Financial Officer), but excludes from the calculation of amounts subject to this limitation any amounts that constitute “qualified performance-based compensation,” or “QPBC,” within the meaning of Section 162(m) of the Code. Under current tax law, we do not expect Section 162(m) of the Code to apply to certain awards under the Plan until the earliest to occur of (1) our annual stockholders’ meeting at which members of our board of directors are to be elected that occurs after the close of the third calendar year following the calendar year in which occurred the first registration of our equity securities under Section 12 of the Exchange Act; (2) a material modification of the Plan; (3) an exhaustion of the share supply under the Plan; or (4) the expiration of the Plan. However, QPBC performance criteria may be used with respect to awards that are not intended to constitute QPBC. In addition, the company may issue awards that are not intended to constitute QPBC even if such awards might be non-deductible as a result of Section 162(m) of the Code.
In order to constitute QPBC under Section 162(m) of the Code, in addition to certain other requirements, the relevant amounts must be payable only upon the attainment of pre-established, objective performance goals set by our compensation committee and linked to stockholder-approved performance criteria. For purposes of the Plan, one or more of the following performance criteria will be used in setting performance goals applicable to QPBC, and may be used in setting performance goals applicable to other awards: (i) net earnings or losses (either before or after one or more of the following: (A) interest, (B) taxes, (C) depreciation, (D) amortization, (E) non-cash equity-based compensation expense and (F) other non-cash, one-time or non-recurring items); (ii) gross or net sales or revenue or sales or revenue growth; (iii) net income (either before or after taxes); (iv) adjusted net income; (v) operating earnings or profit (either before or after taxes); (vi) cash flow (including, but not limited to, operating cash flow and free cash flow); (vii) return on assets or net assets; (viii) return on capital (or invested capital) and cost of capital; (ix) return on stockholders’ equity; (x) total stockholder return; (xi) return on sales; (xii) gross or net profit or operating margin; (xiii) costs, reductions in costs and cost control measures; (xiv) funds from operations or funds available for distributions; (xv) expenses; (xvi) working capital; (xvii) earnings or loss per share; (xviii) adjusted earnings or loss per share; (xix) price per share or dividends with respect to common stock or appreciation in and/or maintenance of such price or dividends; (xx) economic value added models or similar metrics; (xxi) regulatory achievements or compliance (including, without limitation, regulatory body approval for commercialization of a product); (xxii) implementation, completion or attainment of critical projects, processes or objectives relating to research, development, regulatory, commercial or strategic milestones or developments; (xxiii) sales, unit volume or market share; (xxiv) licensing
revenue; (xxv) brand recognition/acceptance; (xxvi) inventory turns or cycle time (xxvii) strategic initiatives (including, without limitation, with respect to market penetration and spending efficiency, geographic business expansion, manufacturing, commercialization, production and productivity, customer satisfaction and growth, employee satisfaction, recruitment and maintenance of personnel, human resources management, supervision of litigation and other legal matters, information technology, strategic partnerships and transactions (including acquisitions, dispositions, joint ventures, in-licensing and out-licensing of intellectual property), establishment of or growth in relationships with dealers or other commercial entities with respect to the marketing, distribution and sale of Company products, factoring transactions, R&D and related activity, financial or other capital raising transactions, operating efficiency and asset quality); (xxviii) financial ratios (including, without limitation, those measuring liquidity, activity, profitability or leverage); (xxix) compound annual growth rate; (xxx) debt levels or reduction; (xxxi) sales-related goals; (xxxii) comparisons with other stock market indices; (xxxiii) quality control or quality performance; (xxxiv) rate of new product introduction; (xxxv) product launches; and (xxxvi) business development transactions, any of which may be measured either in absolute terms or as compared to any incremental increase or decrease or as compared to results of a peer group or to market performance indicators or indices. The Plan also permits the plan administrator to provide for objectively determinable adjustments to the applicable performance criteria in setting performance goals for QPBC awards.
Certain transactions.Adjustments. The plan administrator haswill have broad discretion to take action under the 2021 Plan, as well as make adjustments to the terms and conditions of existing and future awards, to prevent the dilution or enlargement of intended benefits and facilitate necessary or desirable changes in the event of certain transactions and events affecting our Class A common stock, such as stock dividends, stock splits, mergers, acquisitions, consolidations and other corporate transactions. In addition, in the event of certain non-reciprocal transactions with our stockholders known as “equity restructurings,” the plan administrator will make equitable adjustments to the 2021 Plan and outstanding awards. In the event of a change“change in controlcontrol” of our company (as defined in the 2021 Plan), to the extent that the surviving entity declines to continue, convert, assume or substitutereplace outstanding awards, then the plan administrator may terminate any or all such awards in exchange for cash, rights or other property or may cause any or all of such awards to become fully exercisable immediately prior to the transaction and all applicable forfeiture restrictions to lapse. In the case of any award so exercisable in lieu of assumption or substitution, the plan administrator shall provide notice that such awards will remain fully exercisable for fifteen (15) days after the date the plan administrator provides such notice (contingent upon the occurrence of the change in control) and that such awards shall terminate at the end of such period. In the event an outstanding award is assumed or substituted for an equivalent award in connection with a change in control and the holder of such award terminates employment without “cause” (as such term is defined in the sole discretion of the plan administrator or as set forth in the award agreement relating to such award) within the 12 months following the change in control, then such award will become fully vested and exercisable in connection with the transaction.upon such termination of employment. Individual award agreements may provide for additional accelerated vesting and payment provisions. In addition, the plan administrator has discretion to institute and determine the terms and conditions of an exchange program, which is a program under which outstanding awards may be surrendered or cancelled in exchange for awards of the same type (which may have higher or lower exercise prices and different terms), awards of a different type, and/or cash, under which participants have the opportunity to transfer outstanding awards to a financial institution or other person or entity selected by the plan administrator, or under which the exercise price of an outstanding award may be reduced or increased.
Foreign participants, claw-back provisions, transferability,Participants, Claw-Back Provisions, Transferability, and participant payments.Participant Payments. The plan administrator may modify award terms, establish subplans and/or adjust other terms and conditions of awards, subject to the share limits described above, in order to facilitate grants of awards subject to the laws and/or stock exchange rules of countries outside of the United States. All awards will be subject to the provisions of any claw-back policy implemented by our company to the extent set forth in such claw-back policy and/or in the applicable award agreement. With limited exceptions for estate planning, domestic relations orders, certain beneficiary designations and the laws of descent and distribution, awards under the 2021 Plan are generally non-transferable, prior to vesting, and are exercisable only by the participant. With regard to tax withholding, exercise price and purchase price obligations arising in connection with awards under the 2021 Plan, the plan administrator may, in its discretion, accept cash or check, provide for net withholding of shares, allow shares of our Class A common stock that meet specified conditions to be repurchased, allow a “market sell order” or such other consideration as it deems suitable.
Plan amendmentAmendment and termination. Termination. Our board of directors may amend or terminate the 2021 Plan at any time; however, except in connection with certain changes in our capital structure, stockholder approval will be required for any amendment that increases the number of shares available under the Plan, reduces the price per share of any outstanding stock option or SAR, or cancels any stock option or SAR in exchange for cash or another award when the option or SAR price per share exceeds the fair market value of the underlying shares.2021 Plan. No award may be granted pursuant to the 2021 Plan after the tenth anniversary of the date on which our board of directors adopts the 2021 Plan.
New Equity Awards
In connection with this offering, we intend to grant stock optionsequity awards with respect to 2,514,265 shares of Class A common stock under the 2021 Plan to certain of our employees, including our named executive officers, (the “offering grants”). The offering grantsor the Offering Grants. These equity awards are expected to consist of stock option awards and restricted stock unit awards, which awards are expected to vest in annual installments over time, subjecta period ranging from one to continued employment.four years. A form stock option agreement and form restricted stock unit agreement have been filed as exhibits to the registration statement of which this prospectus is a part.
2016 Senior executive bonus planESPP
In connection with this offering, our board of directors has adopted the offering, we intend to adopt the 2016 Senior Executive Incentive Bonus2021 Employee Stock Purchase Plan, or ESPP, which became effective on the Executive Bonus Plan,day the ESPP was adopted by our board of directors subject to approval by our stockholders. The material terms of the ESPP, are summarized below. The ESPP has been filed as an exhibit to the registration statement of which this prospectus is a part.
The ESPP is comprised of two distinct components in order to provide increased flexibility to grant options to purchase shares under the ESPP. Specifically, the ESPP will authorize (1) the grant of options to employees that are intended to qualify for favorable U.S. federal tax treatment under Section 423 of the Code (the “Section 423 Component”), and (2) the grant of options that are not intended to be effective astax-qualified under Section 423 of the day immediately priorCode to this offering. The Executive Bonus Plan is intendedfacilitate participation for employees who are not eligible to benefit from favorable U.S. federal tax treatment and, to the extent applicable, to provide an incentive for superior workflexibility to comply with non-U.S. laws and to motivate covered key executives toward even greater achievement and business results, to tie their goals and interests to those of us and our stockholders and to enable us to attract and retain highly qualified executives.other considerations (the “Non-Section 423 Component”). The principal features of the Executive Bonus Plan are summarized below.
The Executive Bonus Plan is an incentive bonus plan under which certain key executives, including our named executive officers, will be eligible to receive bonus payments. BonusesNon-Section 423 Component will generally be payable under the Executive Bonus Plan upon the attainment of pre-established performance goals. Notwithstanding the foregoing, we may pay bonuses (including, without limitation, discretionary bonuses) to participants under the Executive Bonus Plan based upon such otheroperated and administered on terms and conditions as our compensation committee may in its sole discretion determine. The payment of a bonus under the Executive Bonus Plan to a participant with respect to a performance period will generally be conditioned on such participant’s continued employment on the last day of such performance period, provided that our compensation committee may make exceptions to this requirement in its sole discretion.
The performance goals under the Executive Bonus Plan will relate to one or more financial, operational or other metrics with respect to individual or company performance with respect to us or any of our affiliates, including but not limitedsimilar to the following possible performance goals: (i) net earnings or losses (either before or after one or more of the following: (A) interest, (B) taxes, (C) depreciation, (D) amortization, (E) non-cash equity-based compensation expense and (F) other non-cash, one-time or non-recurring items); (ii) gross or net sales or revenue or sales or revenue growth; (iii) net income (either before or after taxes); (iv) adjusted net income; (v) operating earnings or profit (either before or after taxes); (vi) cash flow (including, but not limited to, operating cash flow and free cash flow); (vii) return on assets or net assets; (viii) return on capital (or invested capital) and cost of capital; (ix) return on stockholders’ equity; (x) total stockholder return; (xi) return on sales; (xii) gross or net profit or operating margin; (xiii) costs, reductions in costs and cost control measures; (xiv) funds from operations or funds available for distributions; (xv) expenses; (xvi) working capital; (xvii) earnings or loss per share; (xviii) adjusted earnings or loss per share; (xix) price per share or dividends with respect to common stock of the Company or appreciation in and/or maintenance of such price or dividends; (xx) economic value added models or similar metrics; (xxi) regulatory achievements or compliance (including, without limitation, regulatory body approval for commercialization of a product); (xxii) implementation, completion or attainment of critical projects, processes or objectives relating to research, development, regulatory, commercial or strategic milestones or developments; (xxiii) sales, unit volume or market share; (xxiv) licensing revenue; (xxv) brand recognition/acceptance; (xxvi) inventory turns or cycle time; (xxvii) strategic initiatives (including, without limitation, with respect to market penetration and spending efficiency, geographic business expansion, manufacturing, commercialization, production and productivity, customer satisfaction and growth, employee satisfaction, recruitment and maintenance of personnel, human resources management, supervision of litigation and other legal matters, information technology, strategic partnerships and transactions (including acquisitions, dispositions, joint ventures, in-licensing and out-licensing of intellectual property), and establishment of or growth in relationships with dealers or other commercial entities with respect to the marketing, distribution and sale of
Company products, factoring transactions, R&D and related activity, and financial or other capital raising transactions, operating efficiency and asset quality); (xxviii) financial ratios (including, without limitation, those measuring liquidity, activity, profitability or leverage); (xxix) compound annual growth rate; (xxx) debt levels or reduction; (xxxi) sales-related goals; (xxxii) comparisons with other stock market indices; (xxxiii) quality control or quality performance; and (xxxiv) rate of new product introduction, (xxv) product launches; and (xxxvi) business development transactions, any of which may be measured either in absolute terms orSection 423 Component, except as compared to any incremental increase or decrease or as compared to results of a peer group or to market performance indicators or indices. The Plan also permits the plan administrator to provide for objectively determinable adjustments to the applicable performance criteria in setting performance goals for Executive Bonus Plan awards.
The Executive Bonus Plan is administered by our compensation committee. Our compensation committee will select the participants in the Executive Bonus Plan and any performance goals to be utilized with respect to the participants, establish the bonus formulas for each participant’s annual bonus, and certify whether any applicable performance goals have been met with respect to a given performance period. The Executive Bonus Plan provides that we may amend or terminate the Executive Bonus Plan at any time in our sole discretion. Any amendments to the Executive Bonus Plan will require stockholder approval only to the extentotherwise required by applicable law, rule or regulation. The Executive Bonus Plan will expire on the earliest of:
The first material modification of the Executive Bonus Plan;
The first stockholders meeting at which members of our board of directors are elected during 2020; or
Such other date required by Section 162(m) of the Code.
2016 Employee Stock Purchase Plan
In connection with this offering, we intend to adopt the 2016 Employee Stock Purchase Plan, or the ESPP. The material terms of the ESPP, as it is currently contemplated, are summarized below.
Shares Available; Administration. A total of 373,616542,320 shares of our Class A common stock willare initially be reserved for issuance under our ESPP. In addition, the number of shares available for issuance under the ESPP will be annually increased on January 1 of each calendar year beginning in 20172022 and ending in 2026,2031, by an amount equal to the leastlesser of: (a) 186,808 shares, (b) 0.5%(i) 1% of the Company’saggregate number of shares of Class A common stock outstanding on the final day of the immediately preceding calendar year and (c)(ii) such lessersmaller number of shares as is determined by our board of directors. Subject to adjustment upon certain changes in our capitalization, no more than 5,965,520 shares of our Class A common stock be available for issuance under the Section 423 Component.
OurThe compensation committee of our board of directors orwill be the compensation committeeplan administrator of the ESPP and will have authority to interpret the terms of the ESPP and determine eligibility of participants. We expect that the compensation committee
Eligibility. The plan administrator may designate certain of our boardsubsidiaries as participating “designated subsidiaries” in the ESPP and may change these designations from time to time. Employees of directors willour company and our designated subsidiaries are eligible to participate in the ESPP if they meet the eligibility requirements under the ESPP established from time to time by the plan administrator. However, an employee may not be granted rights to purchase stock under the initial administrator of the ESPP.
Eligibility. We expect that our employees, other than employees that,ESPP if such employee, immediately after the grant, of a right to purchase Class A common stock under the ESPP, would own (directly or through attribution) stock possessing 5% or more of the total combined voting power or value of all classes of our common or other class of stock,stock.
If the grant of a purchase right under the ESPP to any eligible employee who is a citizen or resident of a foreign jurisdiction would be prohibited under the laws of such foreign jurisdiction or the grant of a purchase right to such employee in compliance with the laws of such foreign jurisdiction would cause the ESPP to violate the requirements of Section 423 of the Code, as determined by the plan administrator in its sole discretion, such employee will not be permitted to participate in the Section 423 Component.
Eligible employees become participants in the ESPP by enrolling and authorizing payroll deductions by the deadline established by the plan administrator prior to the relevant offering date. Directors who are not employees, as well as consultants, are not eligible to participate in the ESPP. However, consistent with Section 423 of the Code the plan administrator may provide that other groups of employees, including without limitation those customarily employed by us for fewer than 20 hours per weekEmployees who choose not to participate, or less than five months in any calendar year, willare not be eligible to participate at the start of an offering period but who become eligible thereafter, may enroll in the ESPP.any subsequent offering period.
Grant of RightsParticipation in an Offering. The ESPP will be intended to qualify under Section 423 of the Code and shares of our Class A common stockStock will be offered under the ESPP during offering periods. The length of the offering periods under the ESPP will be determined by the plan administrator and may be up to 27 months long. Employee payroll deductions will be used to purchase shares on each purchase date during an offering period. The purchase dates forthe last day of each offering period will be(or such other date as set forth in the final trading day in each purchase period.offering document). Offering periods under the
ESPP will commence when determined by the plan administrator. The plan administrator may, in its discretion, modify the terms of future offering periods. We do not expectTo the extent applicable, in non-U.S. jurisdictions where participation in the ESPP through payroll deductions is prohibited, the plan administrator may provide that any offering periods will commencean eligible employee may elect to participate through contributions to the participant’s account under the ESPP atin a form acceptable to the timeplan administrator in lieu of this offering.or in addition to payroll deductions.
The ESPP will permitpermits participants to purchase our Class A common stock through payroll deductions of up to a fixed dollar amount or percentage15% of their eligible compensation, which includeswill include a participant’s gross base compensation for services to us. The plan administrator will establish a maximum number of shares that may be purchased by a participant during any offering period which, in the absence of a contrary designation, will be 25,000or purchase period is 2,000 shares. In addition, no employee will be permitted to accrue the right to purchase stock under the ESPPSection 423 Component at a rate in excess of $25,000 worth of shares during any calendar year during which such a purchase right is outstanding (based on the fair market value per share of our Class A common stock as of the first day of the offering period).
On the first trading day of each offering period, each participant automatically will automatically be granted an option to purchase shares of our Class A common stock. The option will expire at the end of the applicable offering period, and will be exercised on eachthe applicable purchase datedate(s) during suchthe offering period, to the extent of the payroll deductions accumulated during the offeringapplicable purchase period. Unless the plan administrator otherwise determines,We expect that the purchase price of the shares, in the absence of a contrary determination by the plan administrator, will be 85% of the lower of the fair market value of our Class A common stock on the first trading day of the offering period or on the applicable purchase date, which will be the final trading day of the applicable purchase period.
Participants may voluntarily end their participation in the ESPP at any time at least fourteen (14) days prior to the end of the applicable offering period (or such longer or shorter period specified by the plan administrator), and will be paid their accrued payroll deductions that have not yet been used to purchase shares of Class A common stock. Participation will endends automatically upon a participant’s termination of employment.
Transferability. A participant willmay not be permitted to transfer rights granted under the ESPP other than by will, the laws of descent and distribution or as otherwise provided underin the ESPP.
Certain Transactions. In the event of certain transactions or events affecting our Class A common stock, such as any stock dividend or other distribution, change in control, reorganization, merger, consolidation or other corporate transaction, the plan administrator will make equitable adjustments to the ESPP and outstanding rights. In addition, in the event of the foregoing transactions or events or certain significant transactions, including a change in control, the plan administrator may provide for (1)(i) either the replacement of outstanding rights with other rights or property or termination of outstanding rights in exchange for cash, (2)(ii) the assumption or substitution of outstanding rights by the successor or survivor corporation or parent or subsidiary thereof, if any, (3)(iii) the adjustment in the number and type of shares of stock subject to outstanding rights, (4)(iv) the use of participants’ accumulated payroll deductions to purchase stock on a new purchase date prior to the next scheduled purchase date and termination of any rights under ongoing offering periods or (5)(v) the termination of all outstanding rights.
Plan AmendmentAmendment; Termination. The plan administrator may amend, suspend or terminate the ESPP at any time. However, stockholder approval of any amendment to the ESPP willmust be obtained for any amendment which increases the aggregate number or changes the type of shares that may be sold pursuant to rights under the ESPP or changes the corporations or classes of corporations whose employees are eligible to participate in the ESPP or changes the ESPP in any manner that would cause the ESPP to no longer be an employee stock purchase plan within the meaning of Section 423(b) of the Code.
New employment agreements
In connection with this offering, we expect to enter into new employment agreements with each of our named executive officers to be effective upon the consummation of this offering. We expect base salaries for each of Messrs. Bihl and Price and Dr. Tung will increase pursuant to their new employment agreements to $624,000,ESPP.
$382,340 and $380,520, respectively. We expect the target incentives for each of our named executive officers to remain the same as that provided in their existing employment agreements, as described above in “2015 Bonus incentives.”
We expect that the new employment agreements for our named executive officers will each continue to provide for severance payments upon a termination of employment at such times as provided in their existing employment agreements (as described above). In the event of any such termination, we expect the new employment agreements will provide (A) Mr. Price and Dr. Tung (i) eighteen months base salary, payable over an eighteen-month period, (ii) 150% of their respective target annual cash incentive, paid on or about 60 days following termination of employment and (iii) payment of COBRA premiums for the first eighteen months of coverage following termination of employment; and (B) Mr. Bihl the same severance payments as those outlined above for Mr. Price and Dr. Tung, with the exception that we expect Mr. Bihl will be entitled to (i) a lump sum payment of twenty-four months base salary, (ii) 200% of his target annual cash incentive, paid on or about 60 days following termination of employment and (iii) payment of COBRA premiums for twenty-four months.
Certain relationships and related party transactionsCERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The following is a description of transactions since our inceptionJanuary 1, 2018 to which we have been a party in which the amount involved exceeds $120,000 and in which any of our directors, executive officers or beneficial holders of more than 5% of our Class A common stock, or an affiliate or immediate family member thereof, had or will have a direct or indirect material interest.
Each agreement described below is filed as an exhibit to the registration statement of which this prospectus forms a part, and the following descriptions are qualified by reference to such agreements.
Compensation arrangements for our directors and named executive officers are described in this prospectus under the section entitled “Executive compensation.”
We also describe below certain other transactions and relationships with our directors, executive officers and stockholders.
Limitation of liabilityLiability and indemnificationIndemnification
Our amended and restated certificate of incorporation and our amended and restated bylaws, each of which will be effective upon the closing of this offering, will provide that we will indemnify our directors and officers to the fullest extent permitted under Delaware law, which prohibits our amended and restated certificate of incorporation from limiting the liability of our directors for the following:
any breach of the director’s duty of loyalty to us or our stockholders;
acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law;
unlawful payment of dividends or unlawful stock repurchases or redemptions; or
any transaction from which the director derived an improper personal benefit.
Our amended and restated certificate of incorporation and our amended and restated bylaws will also provide that if Delaware law is amended to authorize corporate action further eliminating or limiting the personal liability of a director, then the liability of our directors will be eliminated or limited to the fullest extent permitted by Delaware law, as so amended. This limitation of liability does not apply to liabilities arising under the federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission.
Our amended and restated certificate of incorporation and our amended and restated bylaws will also provide that we shall have the power to indemnify our employees and agents to the fullest extent permitted by law. Our amended and restated bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in this capacity, regardless of whether we would have the power to indemnify such person against such expense, liability or loss under the General Corporation Law of the State of Delaware. We have obtained directors’ and officers’ liability insurance.
In connection with this offering, we intend to enter into separate indemnification agreements with our directors and executive officers, in addition to indemnification provided for in our amended and restated certificate of incorporation and amended and restated bylaws. These agreements, among other things, provide for indemnification of our directors and executive officers for expenses, judgments, fines and settlement amounts incurred by this person in any action or proceeding arising out of this person’s services as a director or executive officer or at our request. We believe that these provisions in our amended and restated certificate of incorporation and amended and restated bylaws and indemnification agreements are necessary to attract and retain qualified persons as directors and executive officers.
The above description of the indemnification provisions of our amended and restated certificate of incorporation, our amended and restated bylaws and our indemnification agreements is not complete and is qualified in its entirety by reference to these documents, each of which is filed as an exhibit to this registration statement to which this prospectus forms a part.
The limitation of liability and indemnification provisions in our amended and restated certificate of incorporation and amended and restated bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duties. They may also reduce the likelihood of derivative litigation against directors and officers, even though an action, if successful, might benefit us and our stockholders. A stockholder’s investment may be harmed to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions. Insofar as indemnification for liabilities under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. There is no pending litigation or proceeding naming any of our directors or officers as to which indemnification is being sought, nor are we aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer.
Tax Receivable Agreement
We expect to obtain an increase in our share of the tax basis of the assets of Bioventus LLC when (as described below under “—Bioventus LLC Agreement—LLC Interest Redemption Right”) athe Continuing LLC Owner receives shares of our Class A common stock or, if we and suchthe Continuing LLC OwnersOwner agree, cash in connection with an exercise of suchthe Continuing LLC Owner’s right to have its LLC Interests held by such Continuing LLC Owner redeemed by Bioventus LLC or, at the election of Bioventus Inc., directly exchanged (such basis increase,increases, together with the ‘‘basis increases resulting from certain distributions (or deemed distributions) from Bioventus LLC, “the Basis Adjustments’’).Adjustments.” We intend to treat such acquisitionredemptions or exchanges of LLC Interests as ourthe direct purchase of LLC Interests by Bioventus Inc. from athe Continuing LLC Owner for U.S. federal income and other applicable tax purposes, regardless of whether such LLC Interests are surrendered by athe Continuing LLC Owner to Bioventus LLC for redemption or sold to usBioventus Inc. upon the exercise of our election to acquire such LLC Interests directly. A Basis Adjustment may have the effect of reducing the amounts that we would otherwise pay in the future to various tax authorities. The Basis Adjustments may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
In connection with the transactions described above, we will enter into the Tax Receivable Agreement (the ‘‘TRA’’) with the Continuing LLC Owners.Owner. The TRATax Receivable Agreement will provide for our payment to such personsthe Continuing LLC Owner of 85% of the amount of tax benefits, if any, that we actually realize, or in some circumstances are deemed to realize, as a result of any Basis Adjustments and certain other tax benefits related to our makingarising from payments under the TRA.Tax Receivable Agreement. Bioventus LLC will have in effect an election under Section 754 of the Code effective for each taxable year in which a redemption or exchange (including deemed exchange) of LLC Interests for shares of our Class A common stock or cash occurs. These TRATax Receivable Agreement payments are not conditioned upon any continued ownership interest in either Bioventus LLC or us by anythe Continuing LLC Owner. The rights of eachthe Continuing LLC Owner under the TRATax Receivable Agreement are assignable to transferees of its LLC Interests (other than Bioventus Inc. as transferee pursuant to subsequent redemptions (or exchanges) of the transferred LLC Interests). We expect to benefit from the remaining 15% of tax benefits, if any, that we may actually realize.
The actual Basis Adjustments, as well as any amounts paid to the Continuing LLC OwnersOwner under the TRA,Tax Receivable Agreement, will vary depending on a number of factors, including:
| • | the timing of any subsequent redemptions or exchanges—for instance, the increase in any tax deductions will vary depending on the fair value, which may fluctuate over time, of the depreciable or amortizable assets of Bioventus LLC at the time of each redemption or exchange; |
| • | the price of shares of our Class A common stock at the time of redemptions or exchanges—the Basis Adjustments, as well as any related increase in any tax deductions, is directly related to the price of shares of our Class A common stock at the time of each redemption or exchange; |
| • | the extent to which such redemptions or exchanges are taxable—if a redemption or exchange is not taxable for any reason, increased tax deductions will not be available; and |
| • | the amount and timing of our income—the |
For purposes of the TRA,Tax Receivable Agreement, cash savings in income tax will be computed by comparing ourBioventus Inc.’s actual income tax liability to the amount of such taxes that weit would have been required to pay had there been no Basis Adjustments and had the TRATax Receivable Agreement not been entered into. The TRATax Receivable Agreement will generally apply to each of our taxable years, beginning with the first taxable year ending after the consummation of the offering. There is no maximum term for the TRA;Tax Receivable Agreement; however, the TRATax Receivable Agreement may be terminated by us pursuant to an early termination procedure that requires us to pay the Continuing LLC OwnersOwner an agreed upon amount equal to the estimated present value of the remaining payments to be made under the agreement (calculated based on certain assumptions, including regarding tax rates and utilization of the Basis Adjustments).
The payment obligations under the TRATax Receivable Agreement are obligations of Bioventus Inc. and not of Bioventus LLC. Although the actual timing and amount of any payments that may be made under the TRATax Receivable Agreement will vary, we expect that the payments that we may be required to make to the Continuing LLC OwnersOwner could be significant. Assuming no material changes in the relevant tax law and that we earn sufficient taxable income to realize all potential tax benefits that are subject to the Tax Receivable Agreement, we expect that the tax savings associated with the purchase of LLC Interests in connection with this offering, together with future redemptions or exchanges of all remaining LLC Interests owned by the Continuing LLC Owner pursuant to the Bioventus LLC Agreement as described above, would aggregate to approximately $101.0 million over 20 years from the date of this offering based on the assumed initial public offering price of $17.00 per share of our Class A common stock, which is the midpoint of the range set forth on the cover page of this prospectus, and assuming all future redemptions or exchanges would occur one year after this offering. Under such scenario, assuming future payments are made on the date each relevant tax return is due, without extensions, we would be required to pay approximately 85% of such amount, or approximately $85.8 million, over the 20-year period from the date of this offering. The actual amounts we will be required to pay under the Tax Receivable Agreement will depend on, among other things, the timing of subsequent redemptions or exchanges of LLC Interests by the Continuing LLC Owner, the price of our shares of Class A common stock at the time of each such redemption or exchange, and the amounts and timing of our future taxable income, and may be significantly different from the amounts described in the preceding sentence. Any payments made by us to the Continuing LLC OwnersOwner under the TRATax Receivable Agreement will generally reduce the amount of overall cash flow that might have otherwise been available to us or to Bioventus LLC and, to the extent that we are unable to make payments under the TRATax Receivable Agreement for any reason, the unpaid amounts generally will be deferred and will accrue interest until paid by us. Decisions made by us in the course of running our business, such as with respect to mergers, asset sales, other forms of business combinations or other changes in control, may influence the timing and amount of payments that are received by athe Continuing LLC Owner under the TRA.Tax Receivable Agreement. For example, the earlier disposition of assets following a transaction that results in a Basis Adjustment will generally accelerate payments under the TRATax Receivable Agreement and increase the present value of such payments. We anticipate funding ordinary course payments under the TRATax Receivable Agreement from distributions from Bioventus LLC out of distributable cash, to the extent permitted by our agreements governing our indebtedness. See “—“Certain relationships and related party transactions—Bioventus LLC Agreement.”
The TRATax Receivable Agreement provides that if (i) we materially breach any of our material obligations under the TRA,Tax Receivable Agreement, (ii) certain mergers, asset sales, other forms of business combination, or other changes of control were to occur, on or before December 31, 20172021 or (iii) we elect an early termination of the TRA,Tax Receivable Agreement, then our obligations, or our successor’s obligations, under the TRATax Receivable Agreement would be based on certain assumptions, including an assumption that we would have sufficient taxable income to fully utilize all potential future tax benefits that are subject to the TRA.Tax Receivable Agreement. The TRATax Receivable Agreement also provides that in the case of certain mergers, asset sales, other forms of business combination or other changes of control occurring on or after January 1, 2018,December 31, 2021, payments under the TRATax Receivable Agreement would be based on certain assumptions, including an assumption that in each taxable year ending on or after the change of control, we would have taxable income equal to the greater of (A) actual taxable income for such taxable year and (B) the product of (x) four and (y) the highest taxable income in any of the four fiscal quarters ended prior to the change in control (increased by 10% for each taxable year beginning with the second taxable year following the change in control), in each case, as adjusted to take into account our actual percentage ownership in Bioventus LLC for the taxable year for which the tax benefit payment is being determined.
As a result of the foregoing, (i) we could be required to make cash payments to the Continuing LLC OwnersOwner that are greater than the specified percentage of the actual benefits we ultimately realize in respect of the tax benefits that are subject to the TRA,Tax Receivable Agreement, and (ii) if we materially breach any of our material obligations under the TRATax Receivable Agreement or if we elect to terminate the TRATax Receivable Agreement early, we would be required to make an immediate cash payment equal to the present value of the anticipated future tax benefits that are the subject of the TRA,Tax Receivable Agreement, which payment may be made significantly in advance of the actual realization, if any, of such future tax benefits. In these situations, our obligations under the TRATax Receivable Agreement could have a material adverse effect on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combination, or other changes of control. For example, should we elect to terminate the Tax Receivable Agreement immediately following this offering, assuming no material changes in the relevant tax laws or tax rates and that we earn sufficient taxable income to realize all potential tax benefits that are subject to the Tax Receivable Agreement, we estimate that the aggregate of termination payments would be approximately $74.3 million, based on the assumed initial public offering price of $17.00 per share of our Class A common stock, which is the midpoint of the range set forth on the cover page of this prospectus and assuming LIBOR were to be 0.36%. There can be no assurance that we will be able to finance our obligations under the TRA.Tax Receivable Agreement. We may elect to completely terminate the TRATax Receivable Agreement early only with the written approval of a majority of our directors other than any directors that have been appointed or designated by athe Continuing LLC MemberOwner or any of such person’s affiliates. See “Risk Factors—Risks related to our organizational structure and the Tax Receivable Agreement—In certain cases, payments under the Tax Receivable Agreement to the Continuing LLC Owner may be accelerated or significantly exceed the actual benefits we realize in respect of the tax attributes subject to the Tax Receivable Agreement.”
Payments under the TRATax Receivable Agreement will be based on the tax reporting positions that we determine. Pursuant to the TRA,Tax Receivable Agreement, the Continuing LLC Members areMember is required to reimburse us for cash payments previously made to any Continuing LLC Ownerit pursuant to the TRATax Receivable Agreement if any tax benefits initially claimedactually realized by us are subsequently challenged by a taxing authority and ultimately disallowed. In addition, but without duplication of any amounts previously reimbursed by athe Continuing LLC Member,Owner, any excess cash payments made by us to athe Continuing LLC Owner will be netted against any future cash payments that we might otherwise be required to make under the terms of the TRA.Tax Receivable Agreement. However, a challenge to any tax benefits initially claimedactually realized by us may not arise for a number of years following the initial time of such payment and we might not determine that we have effectively made an excess cash payment to the Continuing LLC OwnersOwner for a number of years following the initial time of such payment. Moreover, there can be no assurance that any excess cash payments for which athe Continuing LLC MemberOwner has a reimbursement obligation under the TRATax Receivable Agreement will be repaid to us. As a result, it is possible that we could make cash payments under the TRATax Receivable Agreement that are substantially greater than our actual cash tax savings. The applicable U.S. federal income tax rules are complex and factual in nature, and we cannot assure you that the
IRS or a court will not disagree with our tax reporting positions. We will have full responsibility for, and sole discretion over, all Bioventus’ and Bioventus LLC’s tax matters, including the filing and amendment of all tax returns and claims for refund and defense of all tax contests, subject to certain participation and approval rights held by the Continuing LLC Owners.Owner.
Payments are generally due under the TRATax Receivable Agreement within a specified period of time following the filing of our tax return for the taxable year with respect to which the payment obligation arises, although interest on such payments will begin to accrue at a rate of LIBOR plus 100 basis points from the due date (without extensions) of such tax return and ending on the date that such payments are required to be made under the terms of the TRA.Tax Receivable Agreement. Any late payments that may be made under the TRATax Receivable Agreement will continue to accrue interest at LIBOR plus 500 basis points from the due date of such payments under the TRATax Receivable Agreement until such payments are made, including any late payments that we may subsequently make because we did not have enough available cash to satisfy our payment obligations at the time at which they originally arose, including as a result of restrictions on payments to our equity owners in the agreements governing our indebtedness.
Bioventus LLC Agreement
We will operate our business through Bioventus LLC and its subsidiaries. In connection with the completion of this offering, we and the Continuing LLC OwnersOwner will enter into Bioventus LLC’s second amended and restated limited liability company agreement, which we refer to as the “Bioventus LLC Agreement.” The operations of Bioventus LLC, and the rights and obligations of the holders of LLC Interests, will be set forth in the Bioventus LLC Agreement.
Appointment as Manager.
Under the Bioventus LLC Agreement, we will become a member and the sole manager of BiovtenusBioventus LLC. As the sole manager, we will be able to control all of the day-to-day business affairs and decision-making of Bioventus LLC. As such, we, through our officers and directors, will be responsible for all operational and administrative decisions of Bioventus LLC and theday-to-day management of Bioventus LLC’s business. Pursuant to the terms of the Bioventus LLC Agreement, we cannot, under any circumstances, be removed as the sole manager of Bioventus LLC except by our election.
Compensation.
We will not be entitled to compensation for our services as manager. We will be entitled to reimbursement or capital contribution credit by Bioventus LLC for fees and expenses incurred on behalf of Bioventus LLC, including all expenses associated with this offering and maintaining our corporate existence.
Distributions.
The Bioventus LLC Agreement will require “tax distributions” to be made by Bioventus LLC to its members, as that term is defined in the agreement. Tax distributions will be made as and whento members are required to file tax returns, which we expect will be approximately on a quarterlypro rata basis, to each member of Bioventus LLC, including us, based on such member’s allocable sharein an amount sufficient to allow the members, including us, to pay taxes owed in respect of the taxable income ofallocated by Bioventus LLC and an assumed tax rate that will be determined by us. For this purpose,to allow us to meet our obligations under the taxable income of Bioventus LLC, and Bioventus Inc.’s allocable share of such taxable income, shall be determined without regard to any Basis AdjustmentTax Receivable Agreement (as described above under “—Tax Receivable Agreement”). The assumed tax rate that we expect to use for purposes of determining tax distributions from Bioventus LLC to its members will approximate our reasonable estimate of the highest combined federal, state, and local tax rate that may potentially apply to any one of Bioventus LLC’s members, regardless of the actual final tax liability of any such member. Tax distributions will also be made only to the extent all distributions from Bioventus LLC for the relevant period were otherwise insufficient to enable each member to cover its tax liabilities as calculated in the manner described above. The Bioventus LLC Agreement will also allow for distributions to be made by Bioventus LLC to its members on a pro rata basis out of “distributable cash,” as that term is defined in the agreement. We expect Bioventus LLC may make distributions out of distributable cash periodically to the extent permitted by our agreements governing our indebtedness and necessary to enable us to cover our operating expenses and other obligations, including our tax liability and obligations under the Tax Receivable Agreement, as well as to make dividend payments, if any, to the holders of our Class A common stock. Amounts distributable to Mr. Bihl with respect to any unvested Common Units shall be held in escrow and shall not be paid to Mr. Bihl until such unvested Common Units become vested in accordance with the terms of Mr. Bihls’ profits interest award agreement.
LLC Interest Redemption Right The Bioventus LLC Agreement . provideswill provide a redemption right to the Continuing LLC OwnersOwner which entitles themwill entitle it to have theirits LLC Interests redeemed, at theits election, of each such person, for newly-issued shares of our Class A common stock on a one-for-one basis or a cash payment equal to a volume weighted average market price of one share of Class A common stock for each LLC Interest redeemed (subject to customary adjustments, including for stock splits, stock dividends and reclassifications). If the Continuing LLC Owner elects to receive a cash payment, we may elect to settle such redemption with Class A common stock in lieu of a cash payment, provided that if we elect to do so, the Continuing LLC Owner has the option to rescind its redemption request within a specified time period. Upon the exercise of the redemption right, the redeeming member will surrender its LLC Interests to Bioventus LLC for cancellation. The Bioventus LLC Agreement requireswill require that we contribute cash or shares of our Class A common stock to Bioventus LLC in exchange for an amount of newly-issued LLC Interests in Bioventus LLC that will be issued to us equal to the number of LLC Interests redeemed from the Continuing LLC Owner. Bioventus LLC will then distribute the cash or shares of our Class A common stock to suchthe Continuing LLC Owner to complete the redemption. In the event of such a redemption election by athe Continuing LLC Owner, weBioventus Inc. may effect a direct exchange of cash or our Class A common stock for such LLC Interests in lieu of such a redemption. Whether by redemption or exchange, we arewill be obligated to ensure that at all times the number of LLC Interests that we own equals the number of shares of
Class A common stock issued by us (subject to certain exceptions for treasury shares and shares underlying certain convertible or exchangeable securities).
Indemnification.
The Bioventus LLC Agreement provideswill provide for indemnification of the manager, members and officers of Bioventus LLC and their respective subsidiaries or affiliates.
Stockholders Agreement
Substantially concurrent with the closing of this offering, the Voting Group, which will hold Class A common stock or Class B common stock representing approximately 72.9%86.5% of the combined voting power of our Class A and Class B common stock, intendintends to enter into the Stockholders Agreement.
Voting Agreement.Agreement
Pursuant to the terms of the Stockholders Agreement, Essex Woodlands Health Ventures,EW Healthcare Partners, Spindletop Healthcare Capital, Pantheon Global, Ampersand Capital, and Alta Partners and their respective affiliates, as members of the Voting Group, (whomwhom we refer to as the “Essex Members”),Essex Members, collectively will have the right to designate up to three individuals to be included in the slate of nominees recommended by our board of directors. Pursuant to the terms of the Stockholders Agreement, Smith & Nephew, Inc. and Smith & Nephew (Europe) B.V., as the other membermembers of the Voting Group, will have the right to designate up to two individuals to be included in the slate of nominees recommended by our board of directors. ThePursuant to the terms of the Stockholders Agreement, the number of individuals that the Essex Members, Smith & Nephew, Inc. and Smith & Nephew (Europe) B.V. may designate will decrease if they dispose of certain percentages of the shares of our Class A common stock or Class B common stock, as applicable, that they own on the date this offering is consummated. At such time as the Essex Members or Smith & Nephew, Inc. and Smith & Nephew (Europe) B.V. own less than 10% of the shares of Class A common stock orand Class B common stock that they owned on the date this offering is consummated, the Essex Members or Smith & Nephew, Inc. and Smith & Nephew (Europe) B.V., as the case may be, will no longer have designation rights under the Stockholders Agreement. Until such time, or if the Stockholders Agreement is otherwise terminated in accordance with its terms, the parties to the Stockholders Agreement will agree to vote their shares of Class A common stock and Class B common stock in favor of the election of the nominees of the Essex Members, Smith & Nephew, Inc. and Smith & Nephew (Europe) B.V. to our board of directors upon their nomination by the nominating and corporate governance committee of our board of directors.
Voting Group Approvals.Approvals
Under the Stockholders Agreement, any increase or decrease in the size of our board of directors or any committee, and any amendment to our organizational documents, will in each case require the approval of the
Essex Members, for so long as the Essex Members collectively ownsown at least 10% of the total shares of our Class A common stock owned by them as of the date this offering is consummated, and will also require the approval of Smith & Nephew, Inc. and Smith & Nephew (Europe) B.V. and their affiliates, for so long as Smith & Nephew, ownsInc. and Smith & Nephew (Europe) B.V. and their affiliates own at least 10% of the total shares of our Class A common stock and Class B common stock owned by them as of the date this offering is consummated.
Registration Rights Agreement
We intend to enter into athe Registration Rights Agreement with the Original LLC Owners in connection with this offering. The Registration Rights Agreement will provide the Original LLC Owners certain registration rights whereby, at any time following our initial public offering and the expiration of any relatedlock-up period, the Continuing LLC OwnersOwner can require us to register under the Securities Act shares of Class A common stock issuable to themit upon, at our election, redemption or exchange of theirits LLC Interests, and the Former LLC Owners can require us to register under the Securities Act the shares of Class A common stock issued to them in connection with the Transactions. The Registration Rights Agreement will also provide for piggyback registration rights for the Original LLC Owners.
Kenneth M. Reali Option Agreement
ContinuationIn July 2020, we entered into an agreement with our CEO, Ken Reali, providing him an option to acquire 5,935 units in Bioventus LLC at a price of Product Partnership Right$42.12 per unit. Upon joining and accepting the role of First Negotiation
We intendCEO, Mr. Reali expressed his desire to enter intomake a letter agreement that provides for the continuation of a product partnership right of first negotiation with Smith & Nephew upon consummation of this offering. Under thepersonal investment in our company. The terms of Mr. Reali’s agreement provide for an option period of 12 months and is priced at the letterBioventus LLC’s 409A valuation from April 2020. This agreement Smith & Nephew will be granted a rightwas reviewed and approved by the Compensation Committee and ratified by our entire board of first negotiation with respect to any agreement or arrangement between us and a third party regarding the development, manufacture, marketing or distribution of a new product until the earlier to occur of (i) May 4, 2019, (ii) the first anniversary of a change of control of the Company and (iii) the six month anniversary of a competitor change of control of Smith & Nephew.managers.
Policies and proceduresProcedures for related party transactionsRelated Party Transactions
Our board of directors has adoptedwill adopt a written related person transaction policy, to be effective upon the closing of this offering, setting forth the policies and procedures for the review and approval or ratification of related person transactions. This policy will cover, with certain exceptions set forth in Item 404 of Regulation S-K under the Securities Act, any transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships, in which we were or are to be a participant, where the amount involved exceeds $120,000 in any fiscal year and a related person had, has or will have a direct or indirect material interest, including without limitation, purchases of goods or services by or from the related person or entities in which the related person has a material interest, indebtedness, guarantees of indebtedness and employment by us of a related person.
In reviewing and approving any such transactions, our audit committee is tasked to consider all relevant facts and circumstances, including, but not limited to, whether the transaction is on terms comparable to those that could be obtained in an arm’s length transaction and the extent of the related person’s interest in the transaction. All of the transactions described in this section occurred prior to the adoption of this policy. In connection with the review and approval or ratification of a related person transaction, management must disclose to the audit committee or disinterested directors, as applicable, the name of the related person and the basis on which the person is a related person, the material terms of the related person transaction, including the approximate dollar value of the amount involved in the transaction, and all the material facts as to the related person’s direct or indirect interest in, or relationship to, the related person transaction. Management must advise the audit committee or disinterested directors, as applicable, as to whether the related person transaction complies with the terms of our agreements governing our material outstanding indebtedness that limit or restrict our ability to enter into a related person transaction, and whether the related person transaction will be required to be disclosed in our applicable filings under the Securities Act or the Exchange Act, and related rules, and, to the extent required to be disclosed, management must ensure that the related
person transaction is disclosed in accordance with such Acts and related rules. Management must advise the committee or disinterested directors, as applicable, as to whether the related person transaction constitutes a “personal loan” for purposes of Section 402 of the Sarbanes-Oxley Act.
Principal stockholdersPRINCIPAL STOCKHOLDERS
The following table presents information as to the beneficial ownership of our Class A common stock and Class B common stock, after the consummation of the Transactions, including this offering, for:
each person, or group of affiliated persons, known by us to beneficially own more than 5% of our Class A common stock or our Class B common stock;
each named executive officer;
each of our directors; and
all executive officers and directors as a group.
As described in “Transactions” and “Certain relationships and related party transactions,” eachthe Continuing LLC Owner will be entitled to have theirits LLC Interests redeemed for Class A common stock on aone-for-one basis, or, if Bioventus Inc. and such personthe Continuing LLC Owner agree, cash equal to the market value of the applicable number of our shares of Class A common stock. In addition, at Bioventus’ election, Bioventus may effect a direct exchange of such Class A common stock or such cash (if mutually agreed) for such LLC Interests in lieu of such a redemption. In connection with this offering, we will issue to eachthe Continuing LLC Owner one share of Class B common stock for each LLC Interest it owns. As a result, the number of shares of Class B common stock listed in the table below correlates to the number of LLC Interests each suchthe Continuing LLC Owner will own immediately prior to and after this offering (but after giving effect to the Transactions other than this offering). See “Transactions.”
The number of shares beneficially owned by each stockholder as described in this prospectus is determined under rules issued by the SEC and includes voting or investment power with respect to securities. Under these rules, beneficial ownership includes any shares as to which the individual or entity has sole or shared voting power or investment power. In computing the number of shares beneficially owned by an individual or entity and the percentage ownership of that person, shares of common stock subject to options, or other rights, including the redemption right described above, held by such person that are currently exercisable or will become exercisable within 60 days of the date of this prospectus,February 4, 2021, are considered outstanding, although these shares are not considered outstanding for purposes of computing the percentage ownership of any other person. Unless otherwise indicated, the address of each of the individuals and entities named below is c/o Bioventus Inc., 4721 Emperor Boulevard, Suite 100, Durham, NC 27703. Each of the stockholders listed has sole voting and investment power with respect to the shares beneficially owned by the stockholder unless noted otherwise, subject to community property laws where applicable.
| Shares of class A common stock beneficially owned | Shares of class B common stock beneficially owned | Total common stock beneficially owned | ||||||||||||||||||
| Name of beneficial owner | Number | Percentage | Number | Percentage | Percentage | |||||||||||||||
5% Stockholders | ||||||||||||||||||||
Essex Woodlands Health Ventures(1) | 6,048,306 | 25.5% | — | — | 18.2% | |||||||||||||||
Smith & Nephew(2) | 2,134,022 | 9.0% | 9,374,130 | 97.9% | 34.6% | |||||||||||||||
Spindletop Healthcare Capital L.P.(3) | 1,947,976 | 8.2% | — | — | 5.9% | |||||||||||||||
Pantheon Global Co-Investment Opportunities Fund L.P.(4) | 1,406,870 | 5.9% | — | — | 4.2% | |||||||||||||||
Ampersand Capital(5) | 1,623,315 | 6.8% | — | — | 4.9% | |||||||||||||||
Alta Partners VIII, L.P.(6) | 1,298,650 | 5.5% | — | — | 3.9% | |||||||||||||||
| Shares of class A common stock beneficially owned | Shares of class B common stock beneficially owned | Total common stock beneficially owned | Shares of Class A Common Stock Beneficially Owned | Shares of Class B Common Stock Beneficially Owned | Total Common Stock Beneficially Owned | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Name of beneficial owner | Number | Percentage | Number | Percentage | Percentage | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| After Giving Effect to the Transactions and Before the Offering | After Giving Effect to the Transactions and After the Offering | After Giving Effect to the Transactions and Before the Offering | After Giving Effect to the Transactions and After the Offering | After Giving Effect to the Transactions and Before the Offering | After Giving Effect to the Transactions and After the Offering | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Name of Beneficial | Number | % | Number | % | Number | % | Number | % | % | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
5% Stockholders | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
EW Healthcare Partners(1) | 12,670,415 | 41.8 | % | 12,670,415 | 33.6 | % | — | * | — | * | 27.0 | % | 23.4 | % | ||||||||||||||||||||||||||||||||||||||||||||||
Smith & Nephew(2) | 5,428,680 | 17.9 | % | 5,428,680 | 14.4 | % | 16,534,814 | 100 | % | 16,534,814 | 100 | % | 46.8 | % | 40.5 | % | ||||||||||||||||||||||||||||||||||||||||||||
Spindletop Healthcare Capital L.P.(3) | 3,801,123 | 12.5 | % | 3,801,123 | 10.1 | % | — | * | — | * | 8.1 | % | 7.0 | % | ||||||||||||||||||||||||||||||||||||||||||||||
Pantheon Global Co-Investment Opportunities Fund L.P.(4) | 2,745,253 | 9.0 | % | 2,745,253 | 7.3 | % | — | * | — | * | 5.9 | % | 5.1 | % | ||||||||||||||||||||||||||||||||||||||||||||||
Ampersand Capital(5) | 3,167,605 | 10.4 | % | 3,167,605 | 8.4 | % | — | * | — | * | 6.8 | % | 5.8 | % | ||||||||||||||||||||||||||||||||||||||||||||||
Alta Partners VIII, L.P.(6) | 2,534,082 | 8.4 | % | 2,534,082 | 6.7 | % | — | * | — | * | 5.4 | % | 4.7 | % | ||||||||||||||||||||||||||||||||||||||||||||||
Named Executive Officers and Directors | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Anthony P. Bihl III(7) | — | — | 197,634 | 2.1% | 2.1% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
David J. Price | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Henry C. Tung, M.D. | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Kenneth M. Reali | — | * | — | * | — | * | — | * | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Gregory O. Anglum | — | * | — | * | — | * | — | * | | — | | — | ||||||||||||||||||||||||||||||||||||||||||||||||
John E. Nosenzo | — | * | — | * | — | * | — | * | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
William A. Hawkins | — | * | — | * | — | * | — | * | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Philip G. Cowdy | — | — | — | — | — | — | * | — | * | — | * | — | * | — | — | |||||||||||||||||||||||||||||||||||||||||||||
William A. Hawkins | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Michael R. Minogue | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Guido J. Neels | — | — | — | — | — | — | * | — | * | — | * | — | * | — | — | |||||||||||||||||||||||||||||||||||||||||||||
Guy P. Nohra | — | — | — | — | — | — | * | — | * | — | * | — | * | — | — | |||||||||||||||||||||||||||||||||||||||||||||
David J. Parker | — | — | — | — | — | — | * | — | * | — | * | — | * | — | — | |||||||||||||||||||||||||||||||||||||||||||||
Cyrille Y. N. Petit | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Martin P. Sutter | — | — | — | — | — | — | * | — | * | — | * | — | * | — | — | |||||||||||||||||||||||||||||||||||||||||||||
All directors and named executive officers as a group (11 persons) | — | — | 197,634 | 2.1% | 2.1% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Susan M. Stalnecker | — | * | — | * | — | * | — | * | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
All directors and executive officers as a group (13 persons) | — | * | — | * | — | * | — | * | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| * | Represents beneficial ownership of less than 1%. |
| (1) | Represents 11,766,582 shares held by |
| (2) | Represents the shares of Class A common stock held by Smith & Nephew |
| indirect U.S. subsidiary of Smith & Nephew plc. The address of |
| (3) | Represents shares held by Spindletop Healthcare Capital L.P. Evan Melrose, MD is the Manager of the General Partner of the General Partner of Spindletop Healthcare Capital L.P. and may be deemed to have shared voting and dispositive power with respect to the shares held by Spindletop Healthcare Capital |
| (4) | Represents shares held by Pantheon Global Co-Investment Opportunities Fund L.P. David Braman, Susan Long McAndrews and Lily Wong are directors of Pantheon Global Co-Investment Opportunities GP Limited, the general partner of Pantheon Global Co-Investment Opportunities Fund, L.P. and make the investment and voting decisions with respect to shares held by of Pantheon Global Co-Investment Opportunities Fund, L.P. The address of Pantheon Global Co-Investment Opportunities Fund L.P. is 600 Montgomery Street, 23rd Floor, San Francisco, CA 94111. |
| (5) | Represents shares held by |
| (6) | Represents shares held by Alta Partners VIII, L.P. Alta Partners Management VIII, LLC is the general partner of Alta Partners VIII, L.P. Guy Nohra, Daniel Janney and Farah Champsi are managing directors of Alta Partners Management VIII, LLC and exercise shared voting and investment powers with respect to the shares owned by Alta Partners VIII, L.P. Each of the reporting persons disclaims beneficial ownership of such shares, except to the extent of their proportionate pecuniary interest therein, if any. The principal business address of Alta Partners VIII, L.P. is One Embarcadero Center, 37th Floor San Francisco, CA 94111. |
Description of capital stockDESCRIPTION OF CAPITAL STOCK
The following descriptions of our capital stock and provisions of our amended and restated certificate of incorporation, and our bylaws, each of which will be in effect prior to the completion of this offering, are summaries and are qualified by reference to the amended and restated certificate of incorporation and the bylaws, which are filed as exhibits to the registration statement of which this prospectus forms a part.
Our current authorized capital stock consists of 100 shares of Common Stock, par value $0.001 per share. As of the consummation of this offering, our authorized capital stock will consist of 150,000,000250,000,000 shares of Class A common stock, par value $0.001, 15,000,00050,000,000 shares of Class B common stock, par value $0.001 per share, and 10,000,000 shares of preferred stock.
Common stockStock
As of the consummation of this offering, there will be 23,727,61937,697,158 shares of our Class A common stock issued and outstanding, and 9,571,76416,534,814 shares of our Class B common stock issued and outstanding.
Class A common stockCommon Stock
Voting rightsRights
Holders of our Class A common stock will be entitled to cast one vote per share. Holders of our Class A common stock will not be entitled to cumulate their votes in the election of directors. Generally, all matters to be voted on by stockholders must be approved by a majority (or, in the case of election of directors, by a plurality) of the votes entitled to be cast by all holders of Class A common stock and Class B common stock present in person or represented by proxy, voting together as a single class. Except as otherwise provided by law, amendments to the amended and restated certificate of incorporation must be approved by a majority or, in some cases, asuper-majority of the combined voting power of all shares of Class A common stock and Class B common stock, voting together as a single class.
Dividend rightsRights
Holders of Class A common stock will share ratably (based on the number of shares of Class A common stock held) if and when any dividend is declared by the board of directors out of funds legally available therefor, subject to any statutory or contractual restrictions on the payment of dividends and to any restrictions on the payment of dividends imposed by the terms of any outstanding preferred stock.
Liquidation rightsRights
On our liquidation, dissolution or winding up, each holder of Class A common stock will be entitled to a pro rata distribution of any assets available for distribution to common stockholders.
Other mattersMatters
No shares of Class A common stock will be subject to redemption or have preemptive rights to purchase additional shares of Class A common stock. Holders of shares of our Class A common stock do not have subscription, redemption or conversion rights. There will be no redemption or sinking fund provisions applicable to the Class A common stock. Upon consummation of this offering, all the outstanding shares of Class A common stock will be validly issued, fully paid andnon-assessable.
Class B common stock
Issuance of classClass B common stockCommon Stock with LLC interestsInterests
Shares of Class B common stock will only be issued in the future to the extent necessary to maintain aone-to-one ratio between the number of LLC Interests held by the Continuing LLC OwnersOwner and the number of shares
of Class B common stock issued to the Continuing LLC Owners.Owner. Shares of Class B common stock are transferable only together with an equal number of LLC Interests. Shares of Class B common stock will be cancelled on aone-for-one basis if we, at the election of athe Continuing LLC Owner, redeem or exchange its LLC Interests of such Continuing LLC Owners pursuant to the terms of the Bioventus LLC Agreement.
Voting rightsRights
Holders of Class B common stock will be entitled to cast one vote per share, with the number of shares of Class B common stock held by eachthe Continuing LLC Owner being equivalent to the number of LLC Interests held by such Continuing LLC Owner. Holders of our Class B common stock will not be entitled to cumulate their votes in the election of directors.
Generally, all matters to be voted on by stockholders must be approved by a majority (or, in the case of election of directors, by a plurality) of the votes entitled to be cast by all Class A and Class B stockholders present in person or represented by proxy, voting together as a single class. Except as otherwise provided by law, amendments to the amended and restated certificate of incorporation must be approved by a majority or, in some cases, asuper-majority of the combined voting power of all shares of Class A common stock and Class B common stock, voting together as a single class.
Dividend rightsRights
Holders of our Class B common stock will not participate in any dividend declared by the board of directors.
Liquidation rightsRights
On our liquidation, dissolution or winding up, holders of Class B common stock will not be entitled to receive any distribution of our assets.
Transfers
Pursuant to the Bioventus LLC Agreement, each holder of Class B common stock agrees that:
the holder will not transfer any shares of Class B common stock to any person unless the holder transfers an equal number of LLC Interests to the same person; and
in the event the holder transfers any LLC Interests to any person, the holder will transfer an equal number of shares of Class B common stock to the same person.
Other mattersMatters
No shares of Class B common stock will have preemptive rights to purchase additional shares of Class B common stock. Holders of shares of our Class B common stock do not have subscription, redemption or conversion rights. There will be no redemption or sinking fund provisions applicable to the Class B common stock. Upon consummation of this offering, all outstanding shares of Class B common stock will be validly issued, fully paid and nonassessable.
Preferred stock
Our amended and restated certificate of incorporation provideswill provide that our board of directors has the authority, without action by the stockholders, to designate and issue up to 10,000,000 shares of preferred stock in one or more classes or series and to fix the powers, rights, preferences, privileges and privilegesrestrictions of each class or series of preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption privileges, liquidation preferences and the number of shares constituting any class or series, which may be greater than the rights of the holders of the common stock. There will be no shares of preferred stock outstanding immediately after this offering.
The purpose of authorizing our board of directors to issue preferred stock and determine its rights and preferences is to eliminate delays associated with a stockholder vote on specific issuances. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions, future financings and other corporate purposes, could have the effect of making it more difficult for a third-party to acquire, or could discourage a third-party from seeking to acquire, a majority of our outstanding voting stock. Additionally, the issuance of preferred stock may adversely affect the holders of our Class A common stock by restricting dividends on the Class A common stock, diluting the voting power of the Class A common stock or subordinating the liquidation rights of the Class A common stock. As a result of these or other factors, the issuance of preferred stock could have an adverse impact on the market price of our Class A common stock.
Exclusive venueVenue
Our amended and restated certificate of incorporation, as it will be in effect upon the closing of this offering, will require,provide that unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware, to the fullest extent permitted by applicable law, thatbe the sole and exclusive forum for: (1) any derivative action or proceeding brought on our behalf,behalf; (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees or stockholders to us or our stockholders,stockholders; (3) any action asserting a claim against us arising pursuant to any provision of the DGCL, or our amended and restated certificate of incorporation or our amended and restated bylaws, or as to which the bylawsDGCL confers exclusive jurisdiction on the Court of Chancery; or (4) any action asserting a claim against us, any director or our officers or employees that is governed by the internal affairs doctrinedoctrine; officers; provided that the exclusive forum provisions will not apply to suits brought to enforce any liability or duty created by the Exchange Act, or to any claim for which the federal courts have exclusive jurisdiction. Unless we consent in writing to the selections of an alternative forum, the federal district courts of the United States of America shall be brought only in the Courtexclusive forum for the resolution of Chanceryany complaint asserting a cause of action arising under the Securities Act, subject to and contingent upon a final adjudication in the State of Delaware. Although we believe this provision benefits us by providing increased consistency inDelaware of the applicationenforceability of Delaware law in the typessuch exclusive forum provision.
Anti-Takeover Effects of lawsuits to which it applies, the provision may have the effect of discouraging lawsuits against our directors and officers.
Anti-takeover effects of provisionsProvisions of our Amended and Restated Certificate of Incorporation, our Bylaws and Delaware Law
Our amended and restated certificate of incorporation our bylaws and delaware law
Our certificate of incorporationamended and restated bylaws, as they will be in effect upon completion of this offering, also contain provisions that may delay, defer or discourage another party from acquiring control of us. We expect that these provisions, which are summarized below, will discourage coercive takeover practices or inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our board of directors, which we believe may result in an improvement of the terms of any such acquisition in favor of our stockholders. However, they also give our board of directors the power to discourage acquisitions that some stockholders may favor.
Classified boardBoard of directorsDirectors
Our amended and restated certificate of incorporation will provide that our board of directors will be divided into three classes, with the classes as nearly equal in number as possible and each class servingthree-year
staggered terms. In addition, our amended and restated certificate of incorporation will provide that directors may only be removed from our board of directors with cause. These provisions may have the effect of deferring, delaying or discouraging hostile takeovers, or changes in control of us or our management.
Authorized but unissued sharesUnissued Shares
The authorized but unissued shares of common stock and preferred stock are available for future issuance without stockholder approval, subject to any limitations imposed by the listing standards of The NASDAQ Global Market.Nasdaq. These additional shares may be used for a variety of corporate finance transactions, acquisitions and employee benefit plans. The existence of authorized but unissued and unreserved common stock and preferred stock could make more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise.
Requirements for advance notificationAdvance Notification of stockholder meetings, nominationsStockholder Meetings, Nominations and proposalsProposals
Our amended and restated certificate of incorporation will provide that stockholders at an annual meeting may only consider proposals or nominations specified in the notice of meeting or brought before the meeting by or at the direction of our board of directors or by a qualified stockholder of record on the record date for the meeting, who is entitled to vote at the meeting and who has delivered timely written notice in proper form to our secretary of the stockholder’s intention to bring such business before the meeting. Our amended and restated certificate of incorporation will provide that, subject to applicable law, special meetings of the stockholders may be called only by a resolution adopted by the affirmative vote of the majority of the directors then in office. Our bylaws will prohibit the conduct of any business at a special meeting other than as specified in the notice for such meeting. In addition, any stockholder who wishes to bring business before an annual meeting or nominate directors must comply with the advance notice and duration of ownership requirements set forth in our bylaws and provide us with certain information. These provisions may have the effect of deferring, delaying or discouraging hostile takeovers or changes in control of us or our management.
Stockholder actionAction by written consentWritten Consent
Pursuant to Section 228 of the DGCL, any action required to be taken at any annual or special meeting of the stockholders may be taken without a meeting, without prior notice and without a vote if a consent or consents in writing, setting forth the action so taken, is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares of our stock entitled to vote thereon were present and voted, unless our amended and restated certificate of incorporation provides otherwise. Our amended and restated certificate of incorporation will provide that stockholder action by written consent will be permitted only if the action to be effected by such written consent and the taking of such action by such written consent have been previously approved by the board of directors.
Amendment of amendedAmended and restated certificateRestated Certificate of incorporationIncorporation or bylawsBylaws
The Delaware General Corporation LawDGCL provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation’s certificate of incorporation or bylaws, unless a corporation’s certificate of incorporation or bylaws, as the case may be, requires a greater percentage. Upon completion of this offering, our bylaws may be amended or repealed by a majority vote of our board of directors or by the affirmative vote of the holders of at least 66- 2/3% of the votes which all our stockholders would be entitled to cast in any annual election of directors. In addition, the affirmative vote of the holders of at least 66- 2/3% of the votes which all our stockholders would be entitled to cast in any election of directors will be required to amend or repeal or to adopt any provisions inconsistent with any of the provisions of our certificate described above.
The foregoing provisions of our amended and restated certificate of incorporation and bylaws could discourage potential acquisition proposals and could delay or prevent a change in control. These provisions are
intended to enhance the likelihood of continuity and stability in the composition of our board of directors and in the policies formulated by our board of directors and to discourage certain types of transactions that may involve an actual or threatened change of control. These provisions are designed to reduce our vulnerability to an unsolicited acquisition proposal. The provisions also are intended to discourage certain tactics that may be used in proxy fights. However, such provisions could have the effect of discouraging others from making tender offers for our shares and, as a consequence, they also may inhibit fluctuations in the market price of our shares of Class A common stock that could result from actual or rumored takeover attempts. Such provisions also may have the effect of preventing changes in our management or delaying or preventing a transaction that might benefit you or other minority stockholders.
In addition, we are subject to Section 203 of the Delaware General Corporation Law.DGCL. Subject to certain exceptions, Section 203 prevents a publicly held Delaware corporation from engaging in a “business combination” with any “interested stockholder” for three years following the date that the person became an interested stockholder, unless the interested stockholder attained such status with the approval of our board of directors or unless the business combination is approved in a prescribed manner. A “business combination” includes, among other things, a merger or consolidation involving us and the “interested stockholder” and the sale of more than 10% of our assets. In general, an “interested stockholder” is any entity or person beneficially owning 15% or more of our outstanding voting stock and any entity or person affiliated with or controlling or controlled by such entity or person.
Because we have “opted out” of Section 203 of the DGCL in our amended and restated certificate of incorporation, the statute will not apply to business combinations involving us.
Limitations on liabilityLiability and indemnificationIndemnification of officersOfficers and directorsDirectors
Our amended and restated certificate of incorporation and bylaws provide indemnification for our directors and officers to the fullest extent permitted by the DGCL. Prior to the completion of this offering, we intend to enter into indemnification agreements with each of our directors that may, in some cases, be broader than the specific indemnification provisions contained under Delaware law. In addition, as permitted by Delaware law, our amended and restated certificate of incorporation includes provisions that eliminate the personal liability of our directors for monetary damages resulting from breaches of certain fiduciary duties as a director. The effect of this provision is to restrict our rights and the rights of our stockholders in derivative suits to recover monetary damages against a director for breach of fiduciary duties as a director, except that a director will be personally liable for:
any breach of his duty of loyalty to us or our stockholders;
acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;
any transaction from which the director derived an improper personal benefit; or
improper distributions to stockholders.
These provisions may be held not to be enforceable for violations of the federal securities laws of the United States.
Corporate opportunitiesOpportunities
In recognition that partners, principals, directors, officers, members, managers and/or employees of the Original LLC Owners and their affiliates and investment funds, which we refer to as the Corporate Opportunity Entities, may serve as our directors and/or officers, and that the Corporate Opportunity Entities may engage in activities or lines of business similar to those in which we engage, our amended and restated certificate of incorporation provides for the allocation of certain corporate opportunities between us and the Corporate
Opportunity Entities. Specifically, none of the Corporate Opportunity Entities has any duty to refrain from engaging, directly or indirectly, in the same or similar business activities or lines of business that we do. In the event that any Corporate Opportunity Entity, through its partner, principal, director, officer, member, manager or employee or otherwise, acquires knowledge of a potential transaction or matter which may be a corporate opportunity for itself and us, we will not have any expectancy in such corporate opportunity, and the Corporate Opportunity Entity will not have any duty to communicate or offer such corporate opportunity to us and may pursue or acquire such corporate opportunity for itself or direct such opportunity to another person. In addition, if a director of our Company who is also a partner, principal, director, officer, member, manager or employee of any Corporate Opportunity Entity acquires knowledge of a potential transaction or matter which may be a corporate opportunity for us and a Corporate Opportunity Entity, we will not have any expectancy in such corporate opportunity. Messrs. Philip G. Cowdy, Guido J. Neels, Guy P. Nohra, David J. Parker Cyrille Y. N. Petit and Martin P. Sutter, who will serve as directors on our Board of Directors, are or are affiliated with Original LLC Owners. In the event that any other director of ours acquires knowledge of a
potential transaction or matter which may be a corporate opportunity for us we will not have any expectancy in such corporate opportunity unless such potential transaction or matter was presented to such director expressly in his or her capacity as such.
By becoming a stockholder in our Company, you will be deemed to have notice of and consented to these provisions of our amended and restated certificate of incorporation. Any amendment to the foregoing provisions of our amended and restated certificate of incorporation requires the affirmative vote of at leasttwo-thirds of the voting power of all shares of our common stock then outstanding.
Dissenters’ rightsRights of appraisalAppraisal and paymentPayment
Under the Delaware General Corporation Law,DGCL, with certain exceptions, our stockholders will have appraisal rights in connection with a merger or consolidation. Pursuant to Section 262 of the Delaware General Corporation Law,DGCL, stockholders who properly requestdemand and perfect appraisal rights in connection with such merger or consolidation will have the right to receive payment of the fair value of their shares as determined by the Delaware Court of Chancery.
Stockholders’ derivative actionsDerivative Actions
Under the Delaware General Corporation Law,DGCL, any of our stockholders may bring an action in our name to procure a judgment in our favor, also known as a derivative action, provided that the stockholder bringing the action is a holder of our shares at the time of the transaction to which the action relates or such stockholder’s stock thereafter devolved by operation of law and such suit is brought in the Court of Chancery in the State of Delaware.
Listing
Our Class A common stock will be listed on The NASDAQ Global MarketNasdaq under the trading symbol “BIOV”“BVS”.
Transfer agentAgent and registrarRegistrar
Upon the closing of this offering, the transfer agent and registrar for our Class A common stock will be American Stock Transfer & Trust Company, LLC.
Stockholders Agreement
In connection with this offering, we will enter into the Stockholders Agreement with the Voting Group pursuant to which the Voting Group will have specified board representation rights, governance rights and other rights. See “Certain relationships and related party transactions—Stockholders Agreement.”
Description of indebtednessSHARES ELIGIBLE FOR FUTURE SALE
On October 10, 2014, we entered into two credit agreements, which we refer to collectively as the 2014 Credit Agreement, with JPMorgan Chase Bank, N.A., as administrative agent, as well as a syndicate of other banks, financial institutions and other entities, or Lenders. The 2014 Credit Agreement is comprised of a $115.0 million first lien term loan, a $60.0 million second lien term loan and a $40.0 million first lien revolving facility, or 2014 revolver.
All obligations under the 2014 Credit Agreement are guaranteed by certain of our direct and indirect wholly-owned domestic subsidiaries. The obligations under the 2014 Credit Agreement are collateralized by substantially all of our and the guarantors’ assets. The first lien term loan and 2014 revolver mature on October 10, 2019 and the second lien term loan matures on April 10, 2020.
As of April 2, 2016, $102.3 million was outstanding under the first lien term loan, net of the unamortized original issue discount of $0.5 million and deferred financing costs of $0.7 million. We may voluntarily prepay the first lien term loan without premium or penalty upon prior notice. Scheduled quarterly principal payments under the first lien term loan as a percentage of the aggregate initial principal borrowed are as follows, with the remaining outstanding principal due at maturity:
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As of April 2, 2016, $57.6 million was outstanding under the second lien term loan, net of the unamortized original issue discount of $0.9 million and deferred financing costs of $1.5 million. There are no scheduled principal payments under the second lien term loan until maturity. After October 10, 2017, we may voluntarily prepay the second lien term loan without premium or penalty upon prior notice. Prepayments made prior to October 10, 2017 will be subject to the prepayment premiums below:
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The first and second lien term loans permit at our election either Eurodollar or Alternate Base Rate, or ABR, term loans, which are due at maturity. ABR loans are due at maturity unless converted to a Eurodollar loan at our option. ABR term loans have interest due on the last day of each calendar quarter-end. Eurodollar loans are one, two, three or six-month loans and interest is due on the last day of each three-month period. In advance of the last day of a Eurodollar loan, we may choose to change such loan for a new loan type so long as it does not extend beyond maturity. The outstanding first and second lien term loans have been Eurodollar loans since inception. In addition, both first and second lien term loans have an interest due date concurrent with any repayment or prepayment.
The 2014 revolver is a five-year revolving credit facility of $40.0 million which includes revolving and swingline loans as well as letters of credit.
2014 revolver loans may be Eurodollar or ABR loans at our election, which are not due until maturity, and interest is payable at the same term as described in the previous paragraph for the first and second lien term loans. Swingline loans are available as ABR loans only and are due within five business days or maturity whichever is earlier. As of April 2, 2016, we had $19.5 million of borrowings outstanding under the 2014 revolver, leaving $20.5 million available. There were no letters of credit outstanding under the 2014 revolver as of April 2, 2016.
The base interest rate for all ABR loans is equal to the highest of (a) the JP Morgan Prime Rate, (b) the Federal Funds Effective Rate plus 1/2% and (c) the Eurodollar Rate for a USD deposit with a maturity of one month plus 1.0% (rounded upward to the next 1/16 of 1%).
The base interest rate for all Eurodollar loans is equal to the rate determined for such day in accordance with the following formula with the second lien term loans having a floor of 1.00%:
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In addition to the base interest rate, all Eurodollar and ABR loans have an applicable margin for borrowings. The first lien term loan margins are tied to a leverage ratio which is defined as the ratio of (a) consolidated GAAP secured debt to (b) Consolidated EBITDA (as defined in the 2014 Credit Agreement) for four consecutive quarters at the end of each period. Pricing grids are used to determine the margin based on the type of loan and the leverage ratio. The second lien term loan margins are fixed at 10.00% for Eurodollar loans and 9.00% for ABR loans.
The first lien term loan margin is adjusted after the quarterly financial statements are delivered to the lenders. The table below set forth the leverage-based pricing grid for the first lien term loan:
| Leverage ratio | Eurodollar | ABR | ||||||
³ 4.00 to 1.00 | 3.00% | 2.00% | ||||||
³ 3.00 to 1.00 but < 4.00 to 1.00 | 2.75% | 1.75% | ||||||
³ 2.00 to 1.00 but < 3.00 to 1.00 | 2.50% | 1.50% | ||||||
< 2.00 to 1.00 | 2.25% | 1.25% | ||||||
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Interest is calculated based on a 360-day year except for ABR loans where the base interest is the JP Morgan Prime Rate, in which case it is calculated based on a calendar-day year. As of April 2, 2016, the first and second lien term loan interest rates including the margin were 3.18% and 11.0%, respectively.
We may be required to make additional principal payments on the first and second lien term loans dependent upon the generation of certain cash flow events as defined in the 2014 Credit Agreement. These additional prepayments will be applied to the scheduled installments of principal in direct order of maturity of the ABR loans first and then the Eurodollar loans. There were no additional principal payments required for the year ended December 31, 2015.
The 2014 revolver includes a commitment fee at 0.50% of the average daily amount of the available revolving commitment, excluding the amount of swingline loans outstanding. There were no swingline loans outstanding as of April 2, 2016. The fee is payable quarterly in arrears on the last day of the calendar quarters and maturity. On and after the first adjustment date, the rate will be determined based on the pricing grid below.
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Letters of credit are available in an amount not to exceed $5.0 million. Fees are charged on all outstanding letters of credit at an annual rate equal to the margin in effect on Eurodollar revolving loans. A fronting fee of 0.125% per year on the undrawn and unexpired amount of each letter of credit is payable as well. The fees are payable quarterly in arrears on the last day of each calendar quarter after October 10, 2014.
The 2014 Credit Agreement requires that, on or before January 8, 2015, we enter into, and thereafter maintain for not less than three years, agreements so that at least 25% of the first lien term loans are subject to a fixed interest rate. During November 2014, we entered into three interest rate swap agreements totaling $70.0 million with a term of three years.
As of April 2, 2016, the effective interest rate, including the applicable lending margin, on 67.63%, or $70.0 million, of the outstanding principal amount of our first lien term loan was fixed at 3.94% through the use of the interest rate swaps. As of April 2, 2016, our effective weighted average interest rate on all outstanding debt, including the commitment fee and interest rate swaps, was 5.48%.
The 2014 Credit Agreement contains a number of covenants, including a covenant not to exceed a consolidated leverage ratio of 4.50 to 1.00 as of December 31, 2016, 4.00 to 1.00 as of December 31, 2017, and 3.65 to 1.00 as of December 31, 2018 and a covenant to maintain a fixed charge coverage ratio of at least 1.25 to 1.00. The leverage ratio and the fixed charge coverage ratio in the 2014 Credit Agreement are based on Consolidated EBITDA as defined in such agreement, which includes several differences from Consolidated EBITDA as calculated in this prospectus. Consolidated EBITDA defined in the 2014 Credit Agreements permits, among other things, the exclusion of (1) non-recurring cash expenses up to a limit of 15% of EBITDA, (2) foreign currency gains/losses recognized in the statement of operations and (3) franchise and excise taxes recognized in the statement of operations. Also, the definition of the fixed charge coverage ratio in the 2014 Credit Agreements permits the exclusion of a defined amount of BMP expenses up to a limit of $10.0 million for 2016.
In addition, the 2014 Credit Agreement contains covenants that restrict the ability of the borrower and its restricted subsidiaries to (subject to certain exceptions):
incur additional indebtedness;
create liens on assets;
engage in mergers, consolidations or other fundamental changes (as defined in the 2014 Credit Agreement);
dispose or sell assets;
pay dividends and make other payments in respect of capital stock;
make any capital expenditures;
make investments, loans or advances;
pay and modify the terms of certain indebtedness and organizational documents;
engage in certain transactions with affiliates;
enter into sale and leaseback transactions and swap agreements;
change fiscal periods;
enter into negative pledge clauses and clauses restricting subsidiary distributions; and
enter new lines of business.
As of April 2, 2016, we were in compliance with the covenants under the 2014 Credit Agreement.
The 2014 Credit Agreement contains customary events of default including, but not limited to, failure to pay principal or interest, breaches of representations and warranties, violations of affirmative or negative covenants, cross-defaults to other indebtedness, a bankruptcy or similar proceeding being instituted by or against us, rendering of certain monetary judgments against us, impairments of loan documentation or security, changes of control, and defaults with respect to certain ERISA obligations.
Each Lender may provide an additional first lien, second lien and or revolving loan by executing and delivering notice specifying the terms, subject to certain conditions. The aggregate amount of all additional borrowings may not exceed $25.0 million without the consent of the Lenders holding more than 50% of the total outstanding debt under the 2014 Credit Agreement.
On November 20, 2015 we amended our senior secured credit facilities to enable certain sales and costs related to acquisitions to be included and certain BMP development expenses to be excluded from future covenant calculations, as well as amending certain covenant calculations. We have entered into an amendment to the agreement governing the first lien term loan facility and the first lien revolving credit facility, which will become operative upon the completion of this offering and will permit the consummation of the Transactions. This amendment also provides for a covenant not to exceed a consolidated leverage ratio of 3.50 to 1.00 with the ability for us to request an increase to 4.00 to 1.00 for a period of four consecutive fiscal quarters in connection with certain permitted acquisitions (but no more than two times over the term of the facilities). We intend to use a portion of the net proceeds from this offering to repay our second lien term loan facility in full, together with a prepayment premium and accrued and unpaid interest thereon and to repay all of the outstanding borrowings under the 2014 Revolver. See “Use of Proceeds.”
Shares eligible for future sale
Immediately prior to this offering, there was no public market for our Class A common stock. Future sales of substantial amounts of Class A common stock in the public market (including shares of Class A common stock issuable upon redemption or exchange of LLC Interests), or the perception that such sales may occur, could adversely affect the market price of our Class A common stock. Although we have applied to have our Class A common stock listed on The NASDAQ Global Market,Nasdaq, we cannot assure you that there will be an active public market for our Class A common stock.
Upon the closing of this offering, we will have outstanding an aggregate of 23,727,61937,697,158 shares of Class A common stock, assuming the issuance of 8,823,5297,350,000 shares of Class A common stock offered by us in this offering and the issuance of 14,904,09030,347,158 shares of Class A common stock to the Former LLC Owners. In addition, 16,534,814 LLC Interests, following this offering, will be redeemable, at the Continuing LLC Owner’s election, for newly-issued shares of Class A common stock on a one-for-one basis or, if Bioventus Inc. and the Continuing LLC Owner agree, a cash payment equal to a volume weighted average market price of one share of Class A common stock for each LLC Interest redeemed (subject to customary adjustments, including for stock splits, stock dividends and reclassifications) in accordance with the terms of the Bioventus LLC Agreement; provided that, at Bioventus Inc.’s election, Bioventus Inc. may effect a direct exchange of such Class A common stock or such cash (if mutually agreed) for such LLC Interests. In addition, upon the closing of this offering, the Phantom Plan will be terminated and Phantom Plan Participants who are employed as of the date of this offering will hold rights to receive 513,1171,351,834 shares of Class A common stock upon settlement of their awards on thebetween twelve month anniversary ofand 24 months following the termination of the Phantom Plan (as more fully described above under “Executive compensation—Narrative to summary compensation table—Equity-based compensation—Phantom profits interest units”compensation”). In connection with the offering, each profits interest unit awarded under the MIP will be exchanged for LLC Interests which may then be exchanged for shares of Class A common stock (upon redemption or cancellation of the same number of their shares of our Class B common stock) or a cash payment (if mutually agreed)(subject to certain conditions). Of these shares, all shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased by our “affiliates,” as that term is defined in Rule 144 under the Securities Act, whose sales would be subject to the Rule 144 resale restrictions described below, other than the holding period requirement. The remaining outstanding shares of our common stock will be “restricted securities” as that term is defined under Rule 144 of the Securities Act.
Subject to thelock-up agreements described below and the provisions of Rules 144 and 701 under the Securities Act, these restricted securities (including shares of Class A common stock issuable upon redemption or exchange of LLC Interests) will be available for sale in the public market as follows:
no shares will be available for sale until 180 days after the date of this prospectus, subject to certain limited exceptions provided for in the lock-up agreements; and
14,904,09030,347,158 shares of Class A common stock (without giving effect to any redemptions or exchanges of LLC Interests for shares of Class A common stock), plus any shares purchased by our affiliates in this offering, will be eligible for sale beginning more than 180 days after the date of this prospectus, subject, in the case of shares held by our affiliates, to the volume limitations under Rule 144.
Lock-up agreementsAgreements
In connection with this offering, our officers and directors, and certain of our stockholders, have each entered into a lock-up agreement with the underwriters of this offering that restricts the sale of shares of our common stock by those parties for a period of 180 days after the date of this prospectus without the prior written consent of J.P. Morgan Securities LLC.the representatives. However, J.P. Morgan Securities LLC,the representatives, on behalf of the underwriters, may, in its soletheir discretion, choose to release any or all of the shares of our common stock subject to these lock-up agreements at any time prior to the expiration of the lock-up period without notice. For more information, see “Underwriting.” Upon the expiration of the lock-up period, substantially all of the shares subject to such lock-up restrictions will become eligible for sale, subject to the limitations discussed above.
Rule 144
Affiliate resalesResales of restricted securitiesRestricted Securities
In general, beginning 90 days after the effective date of the registration statement of which this prospectus is a part, a person who is an affiliate of ours, or who was an affiliate at any time during the 90 days before a sale, who has beneficially owned shares of our Class A common stock for at least 180 days would be entitled to sell in “broker’s transactions” or certain “riskless principal transactions” or to market makers, a number of shares within anythree-month period that does not exceed the greater of:
1% of the number of shares of our Class A common stock then outstanding, which will equal approximately 237,276 shares immediately after this offering; oroutstanding; and
the average weekly trading volume in our Class A common stock on The NASDAQ Global MarketNasdaq during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale.
Affiliate resales under Rule 144 are also subject to the availability of current public information about us. In addition, if the number of shares being sold under Rule 144 by an affiliate during anythree-month period exceeds 5,000 shares or has an aggregate sale price in excess of $50,000, the seller must file a notice on Form 144 with the SEC and The NASDAQ Global MarketNasdaq concurrently with either the placing of a sale order with the broker or the execution directly with a market maker.
Non-affiliateNon-Affiliate resalesResales of restricted securitiesRestricted Securities
In general, beginning 90 days after the effective date of the registration statement of which this prospectus is a part, a person who is not an affiliate of ours at the time of sale, and has not been an affiliate at any time during the 90 days preceding a sale, and who has beneficially owned shares of our Class A common stock for at least six months but less than a year, is entitled to sell such shares subject only to the availability of current public information about us. If such person has held our shares for at least one year, such person can resell under Rule 144(b)(1) without regard to any Rule 144 restrictions, including the90-day public company requirement and the current public information requirement.
Non-affiliate resales are not subject to the manner of sale, volume limitation or notice filing provisions of Rule 144.
Rule 701
In general, under Rule 701, any of an issuer’s employees, directors, officers, consultants or advisors who purchases shares from the issuer in connection with a compensatory stock or option plan or other written agreement before the effective date of a registration statement under the Securities Act is entitled to sell such shares 90 days after such effective date in reliance on Rule 144. An affiliate of the issuer can resell shares in reliance on Rule 144 without having to comply with the holding period requirement, andnon-affiliates of the issuer can resell shares in reliance on Rule 144 without having to comply with the current public information and holding period requirements.
The SEC has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Exchange Act, along with the shares acquired upon exercise of such options, including exercises after an issuer becomes subject to the reporting requirements of the Exchange Act.
Equity Plans
Equity plans
We intend to file one or more registration statements onForm S-8 under the Securities Act to register the offer and sale of all shares of Class A common stock (i) issuable under our stock plans and (ii) issuable to the PhantomStock Plan Participants under the Phantom Plan. We expect to file the registration statement covering shares
offered pursuant to our stock plans shortly after the date of this prospectus, permitting the resale of such shares by non-affiliates in the public market without restriction under the Securities Act and the sale by affiliates in the public market subject to compliance with the resale provisions of Rule 144. We expect that the initial registration statement on Form S-8 will cover 3,868,169 shares.
Registration rightsRights
Upon the closing of this offering, the holders of 24,475,85446,881,972 shares of Class A common stock (including the holders of LLC Interests redeemable or exchangeable for shares of Class A common stock) or their transferees will be entitled to various rights with respect to the registration of these shares under the Securities Act. Registration of these shares under the Securities Act would result in these shares becoming fully tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. See “Certain relationships and related party transactions—Registration Rights Agreement” for additional information. Shares covered by a registration statement will be eligible for sale in the public market upon the expiration or release from the terms of thelock-up agreement.agreement described in “—Lock-up agreements.”
MaterialMATERIAL U.S. federal income tax consequences to Non-U.S. HoldersFEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following discussion is a summary of the material U.S. federal income tax consequences to Non-U.S. Holders (as defined below) of the purchase, ownership and disposition of our Class A common stock issued pursuant to this offering, but does not purport to be a complete analysis of all potential tax effects. The effects of other U.S. federal tax laws, such as estate and gift tax laws, and any applicable state, local or non-U.S. tax laws are not discussed. This discussion is based on the U.S. Internal Revenue Code of 1986, as amended, or the Code, Treasury Regulations promulgated thereunder, judicial decisions, and published rulings and administrative pronouncements of the IRS, in each case in effect as of the date hereof. These authorities may change or be subject to differing interpretations. Any such change or differing interpretation may be applied retroactively in a manner that could adversely affect a Non-U.S. Holder of our Class A common stock. We have not sought and will not seek any rulings from the IRS regarding the matters discussed below. There can be no assurance the IRS or a court will not take a contrary position to that discussed below regarding the tax consequences of the purchase, ownership and disposition of our Class A common stock.
This discussion is limited to Non-U.S. Holders that hold our Class A common stock as a “capital asset” within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address all U.S. federal income tax consequences relevant to a Non-U.S. Holder’s particular circumstances, including the impact of the Medicare contribution tax on net investment income. In addition, it does not address consequences relevant to Non-U.S. Holders subject to special rules, including, without limitation:
U.S. expatriates and former citizens or long-term residents of the United States;
persons subject to the alternative minimum tax;
persons holding our Class A common stock as part of a hedge, straddle or other risk reduction strategy or as part of a conversion transaction or other integrated investment;
banks, insurance companies, and other financial institutions;
brokers, dealers or traders in securities;
“controlled foreign corporations,” “passive foreign investment companies,” and corporations that accumulate earnings to avoid U.S. federal income tax;
partnerships or other entities or arrangements treated as partnerships for U.S. federal income tax purposes (and investors therein);
tax-exempt organizations or governmental organizations;
persons deemed to sell our Class A common stock under the constructive sale provisions of the Code;
persons who hold or receive our Class A common stock pursuant to the exercise of any employee stock option or otherwise as compensation;
tax-qualified retirement plans;
“qualified foreign pension funds” as defined in Section 897(I)(2) of the Code and entities all of the interests of which are held by qualified foreign pension funds; and
tax-qualified retirement plans.persons subject to special tax accounting rules as a result of any item of gross income with respect to the stock being taken into account in an applicable financial statement.
If an entity treated as a partnership for U.S. federal income tax purposes holds our Class A common stock, the tax treatment of a partneran owner in the partnershipsuch an entity will depend on the status of the partner, the activities of the partnershipsuch entity and certain determinations made at the partnerowner level. Accordingly, entities treated as partnerships holding our Class A common stock and the partnersowners in such partnershipsentities should consult their tax advisors regarding the U.S. federal income tax consequences to them.
THIS DISCUSSION IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT TAX ADVICE. INVESTORS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE U.S. FEDERAL INCOME TAX
LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR CLASS A COMMON STOCK ARISING UNDER THE U.S. FEDERAL ESTATE OR GIFT TAX LAWS OR UNDER THE LAWS OF ANY STATE, LOCAL OR NON-U.S. TAXING JURISDICTION OR UNDER ANY APPLICABLE INCOME TAX TREATY.
Definition of a Non-U.S. Holder
For purposes of this discussion, a “Non-U.S.“Non-U.S. Holder” is any beneficial owner of our Class A common stock that is neither a “U.S. person” nor an entity treated as a partnership for U.S. federal income tax purposes. A U.S. person is any person that, for U.S. federal income tax purposes, is or is treated as any of the following:
an individual who is a citizen or resident of the United States;
a corporation created or organized under the laws of the United States, any state thereof, or the District of Columbia;
an estate, the income of which is subject to U.S. federal income tax regardless of its source; or
a trust that (1) is subject to the primary supervision of a U.S. court and the control of one or more “United States persons” (within the meaning of Section 7701(a)(30) of the Code), or (2) has a valid election in effect to be treated as a United States person for U.S. federal income tax purposes.
Distributions
As described in the section entitled “Dividend policy,” we do not anticipate declaring or paying dividends to holders of our Class A common stock in the foreseeable future. However, if we do make distributions of cash or property on our Class A common stock, such distributions will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Amounts not treated as dividends for U.S. federal income tax purposes will constitute a return of capital and first be applied against and reduce a Non-U.S. Holder’s adjusted tax basis in its Class A common stock, but not below zero. Any excess will be treated as capital gain and will be treated as described below under “—Sale or other taxable disposition.”
Subject to the discussion below on effectively connected income, dividends paid to a Non-U.S. Holder of our Class A common stock will be subject to U.S. federal withholding tax at a rate of 30% of the gross amount of the dividends (or such lower rate specified by an applicable income tax treaty, provided the Non-U.S. Holder furnishes a valid IRS Form W-8BEN or W-8BEN-E (or other applicable documentation) certifying qualification for the lower treaty rate). A Non-U.S. Holder that does not timely furnish the required documentation, but that qualifies for a reduced treaty rate, may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS. Non-U.S. Holders should consult their tax advisors regarding their entitlement to benefits under any applicable income tax treaty.
If dividends paid to a Non-U.S. Holder are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, the Non-U.S. Holder maintains a permanent establishment in the United States to which such dividends are attributable), the Non-U.S. Holder will be exempt from the U.S. federal withholding tax described above. To claim the exemption, the Non-U.S. Holder must furnish to the applicable withholding agent a valid IRS Form W-8ECI, certifying that the dividends are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States.
Any such effectively connected dividends will be subject to U.S. federal income tax on a net income basis at the regular graduated rates. A Non-U.S. Holder that is a corporation also may be subject to a branch profits tax at a
rate of 30% (or such lower rate specified by an applicable income tax treaty) on such effectively connected dividends, as adjusted for certain items. Non-U.S. Holders should consult their tax advisors regarding any applicable tax treaties that may provide for different rules.
Sale or other taxable dispositionOther Taxable Disposition
Subject to the discussion below under ‘‘Information reporting and backup withholding’’ and ‘‘Additional withholding tax on payments made to foreign accounts,’’ a Non-U.S. Holder will not be subject to U.S. federal income tax on any gain realized upon the sale or other taxable disposition of our Class A common stock unless:
the gain is effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, the Non-U.S. Holder maintains a permanent establishment in the United States to which such gain is attributable);
the Non-U.S. Holder is a nonresidentnon-resident alien individual present in the United States for 183 days or more during the taxable year of the disposition and certain other requirements are met; or
our Class A common stock constitutes a U.S. real property interest, or USRPI, by reason of our status as a U.S. real property holding corporation, or USRPHC, for U.S. federal income tax purposes.
Gain described in the first bullet point above generally will be subject to U.S. federal income tax on a net income basis at the regular graduated rates. A Non-U.S. Holder that is a corporation also may be subject to a branch profits tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty) on such effectively connected gain, as adjusted for certain items.
Gain described in the second bullet point above will be subject to U.S. federal income tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty), which may be offset by U.S. source capital losses of the Non-U.S. Holder (even though the individual is not considered a resident of the United States), provided the Non-U.S. Holder has timely filed U.S. federal income tax returns with respect to such losses.
With respect to the third bullet point above, we believe we currently are not, and do not anticipate becoming, a USRPHC. Because the determination of whether we are a USRPHC depends, however, on the fair market value of our USRPIs relative to the fair market value of our non-U.S. real property interests and our other business assets, there can be no assurance we currently are not a USRPHC or will not become one in the future. Even if we are or were to become a USRPHC, gain arising from the sale or other taxable disposition by a Non-U.S. Holder of our Class A common stock will not be subject to U.S. federal income tax if our Class A common stock is “regularly traded,” as defined by applicable Treasury Regulations, on an established securities market, and such Non-U.S. Holder owned, actually or constructively, 5% or less of our Class A common stock throughout the shorter of the five-year period ending on the date of the sale or other taxable disposition or the Non-U.S. Holder’s holding period.
Non-U.S. Holders should consult their tax advisors regarding potentially applicable income tax treaties that may provide for different rules.
Information reportingReporting and backup withholdingBackup Withholding
Payments of dividends on our Class A common stock will not be subject to backup withholding, provided the applicable withholding agent does not have actual knowledge or reason to know the holder is a United States person and the holder either certifies its non-U.S. status, such as by furnishing a valid IRS Form W-8BEN,W-8BEN-E or W-8ECI, or otherwise establishes an exemption. However, information returns are required to be filed with the IRS in connection with any dividendsdistributions on our Class A common stock paid to the Non-U.S. Holder,
regardless of whether such distributions constitute dividends or whether any tax was actually withheld. In
addition, proceeds of the sale or other taxable disposition of our Class A common stock within the United States or conducted through certain U.S.-related brokers generally will not be subject to backup withholding or information reporting, if the applicable withholding agent receives the certification described above and does not have actual knowledge or reason to know that such holder is a United States person, or the holder otherwise establishes an exemption. Proceeds of a disposition of our Class A common stock conducted through a non-U.S. office of a non-U.S. broker generally will not be subject to backup withholding or information reporting.
Copies of information returns that are filed with the IRS may also be made available under the provisions of an applicable treaty or agreement to the tax authorities of the country in which the Non-U.S. Holder resides or is established.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a Non-U.S. Holder’s U.S. federal income tax liability, provided the required information is timely furnished to the IRS.
Additional withholding taxWithholding Tax on payments madePayments Made to foreign accountsForeign Accounts
Withholding taxes may be imposed under Sections 1471 to 1474 of the Code (such Sections commonly referred to as the Foreign Account Tax Compliance Act, or FATCA) on certain types of payments made to non-U.S. financial institutions and certain other non-U.S. entities. Specifically, a 30% withholding tax may be imposed on dividends on, or (subject to the proposed Treasury Regulations discussed below) gross proceeds from the sale or other disposition of, our Class A common stock, in each case, paid to a “foreign financial institution” or a “non-financial“non-financial foreign entity” (each as defined in the Code), unless (1) the foreign financial institution undertakes certain diligence and reporting obligations (including providing sufficient documentation evidencing its compliance (or deemed compliance) with FATCA), (2) the non-financial foreign entity either certifies it does not have any “substantial United States owners” (as defined in the Code) or furnishes identifying information regarding each substantial United States owner, or (3) the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from these rules. If the payee is a foreign financial institution and is subject to the diligence and reporting requirements in (1) above, it must enter into an agreement with the U.S. Department of the Treasury requiring, among other things, that it undertake to identify accounts held by certain “specified United States persons” or “United States-owned foreign entities” (each as defined in the Code), annually report certain information about such accounts, and withhold 30% on certain payments to non-compliant foreign financial institutions and certain other account holders. Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States governing FATCA may be subject to different rules.
Under the applicable Treasury Regulations and administrative guidance, withholding under FATCA generally applies to payments of dividends on our Class A common stock, and will applystock. While withholding under FATCA would have applied to payments of gross proceeds from the sale or other disposition of such stock on or after January 1, 2019. If a dividend payment is both subject to2019, proposed Treasury Regulations eliminate FATCA withholding under FATCA and subject to the withholding tax discussed above under ‘‘Distributions,’’ the withholding under FATCAon payments of gross proceeds entirely. Taxpayers generally may be credited against and therefore reduce such other withholding tax.rely on these proposed Treasury Regulations until final Treasury Regulations are issued.
Prospective investors should consult their tax advisors regarding the potential application of withholding under FATCA to their investment in our Class A common stock.
We are offeringUnder the sharesterms and subject to the conditions in an underwriting agreement dated the date of Class A common stock described in this prospectus, through a number of underwriters.the underwriters named below, for whom Morgan Stanley & Co. LLC, J.P. Morgan Securities LLC and Piper JaffrayGoldman Sachs & Co. LLC are acting as jointbook-running managers of the offeringrepresentatives, have severally agreed to purchase, and J.P. Morgan Securities LLC is acting as representative of the underwriters. We have entered into an underwriting agreement with the underwriters. Subject to the terms and conditions of the underwriting agreement, we have agreed to sell to the underwriters, and each underwriter hasthem, severally, agreed to purchase, at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus, the number of shares of Class A common stock listed next to its name in the following table:indicated below:
Name | Number of | |||
Morgan Stanley & Co. LLC | ||||
J.P. Morgan Securities LLC | ||||
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The underwriters and the representatives are committedcollectively referred to purchase allas the “underwriters” and the “representatives,” respectively. The underwriters are offering the shares of Class A common stock subject to their acceptance of the shares from us and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of Class A common stock offered by usthis prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of Class A common stock offered by this prospectus if they purchase any shares. The underwriting agreement also provides that if an underwriter defaults,such shares are taken. However, the purchase commitments of non-defaulting underwriters may also be increasedare not required to take or pay for the offering may be terminated.shares covered by the underwriters’ over-allotment option described below.
The underwriters initially propose to offer part of the shares of Class A common stock directly to the public at the initial public offering price set forthlisted on the cover page of this prospectus and part to certain dealers at a price that price lessrepresents a concession not in excess of $ per share. Any such dealers may resell shares to certain other brokers or dealers at a discount of up to $ per share fromunder the initial public offering price. After the initial public offering of the shares of Class A common stock, the offering price and other selling terms may from time to time be changedvaried by the underwriters. Sales of shares made outside of the United States may be made by affiliates of the underwriters.representatives.
The underwritersWe have an over-allotment optiongranted to buy up to 1,323,529 additional shares of Class A common stock from us to cover sales of shares by the underwriters which exceed the number of shares specified in the table above. The underwriters havean option, exercisable for 30 days from the date of this prospectus, to exercise thisover-allotment option. If any shares are purchased with this over-allotment option, the underwriters will purchase shares in approximately the same proportion as shown in the table above. If anyup to 1,102,500 additional shares of Class A common stock are purchased,at the public offering price listed on the cover page of this prospectus, less underwriting discounts and commissions. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of Class A common stock offered by this prospectus. To the extent the option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase about the same percentage of the additional shares of Class A common stock as the number listed next to the underwriter’s name in the preceding table bears to the total number of shares of Class A common stock listed next to the names of all underwriters in the preceding table.
At our request, the underwriters have reserved for sale, at the initial public offering price, up to 5% of the shares offered by this prospectus for sale to some of our officers, employees and consultants. If these persons purchase reserved shares, this will offerreduce the additionalnumber of shares available for sale to the general public. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same terms as those on which the other shares are being offered.offered by this prospectus.
The underwriting fee is equal to the public offering price per share of Class A common stock less the amount paid by the underwriters to us per share of Class A common stock. The underwriting fee is $ per share. The following table shows the per share and total public offering price, underwriting discounts and commissions, and proceeds before expenses to be paid to the underwritersus. These amounts are shown assuming both no exercise and full exercise of the underwriters’ over-allotment option to purchase up to an additional shares.1,102,500 shares of Class A common stock.
| Total | ||||||||||||
| No | Full Exercise | |||||||||||
| $ | $ | $ | |||||||||
| $ | $ | $ | |||||||||
Proceeds, before expenses to us | $ | $ | $ | |||||||||
We estimate that the totalThe estimated offering expenses payable by us, exclusive of this offering, including registration, filing and listing fees, printing fees and legal and accounting expenses, but excluding the underwriting discounts and commissions, will be
are approximately $3,900,000.$3.8 million. We have also agreed to reimburse the underwriters for certain of their expenses in an amountrelating to this offering up to $25,000 as set forth in the underwriting agreement.$35,000.
A prospectus in electronic format may be made available on the web sites maintained by one or more underwriters, or selling group members, if any, participating in the offering. The underwriters may agreehave informed us that they do not intend sales to allocate adiscretionary accounts to exceed 5% of the total number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocatedof Class A common stock offered by the representatives to underwriters and selling group members that may make Internet distributions on the same basis as other allocations.them.
We have applied to list our Class A common stock for quotation on Nasdaq under the trading symbol “BVS.”
We and all directors and officers and the holders of substantially all of our LLC Interests prior to the Transactions (each, a “lock-up party” and collectively, the “lock-up parties”) have agreed that, for awithout the prior written consent of the representatives, on behalf of the underwriters, we and they will not, during the period ofending 180 days after the date of this prospectus we will not (i) (the “restricted period”):
offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, or file with the SEC a registration statement under the Securities Act relating to, any shares of our Class A common stock or securities convertible into or exchangeable or exercisable for any shares of our Class A common stock or any securities convertible into or exercisable or exchangeable for our Class A common stock, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, or (ii) enter into any swap or other arrangement that transfers all or a portion of the economic consequences associated with the ownership of any shares of Class A common stock or any such other securities (regardless of whether any of these transactions are to be settled by the delivery of shares of Class A common stock or such other securities, in cash or otherwise), in each case without the prior written consent of J.P. Morgan Securities LLC.
Our directors and executive officers, and certain of our significant shareholders have entered intolock-up agreements with the underwriters prior to the commencement of this offering pursuant to which each of these persons or entities, with limited exceptions, for a period of 180 days after the date of this prospectus, may not, without the prior written consent of J.P. Morgan Securities LLC, (1) offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of our Class A common stock or any securities convertible into or exercisable or exchangeable for our Class A common stock (including without limitation, Class Aoptions or warrants to purchase common stock and LLC Interests or such other securities which may be deemed to be beneficially owned by such directors, executive officers, managers and membersthe lock-up party in accordance with the rules and regulations of the SEC and securities which may be issued upon exercise of a stock option or warrant) or (2) warrant (any such securities, the “Restricted Securities”));
enter into any hedging, swap or other agreement or transaction that transfers, in whole or in part, any of the economic consequences of ownership of the Class A common stock or such other securities, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Class A common stock or such other securities, in cash or otherwise, or (3) Restricted Securities;
make any demand for or exercise any right with respect to the registration of any sharesRestricted Securities; or
publicly disclose the intention to do any of our Class A common stockthe foregoing,
whether any such transaction described above is to be settled by delivery of Restricted Securities, in cash or otherwise. The lock-up parties have also acknowledged and agreed that the foregoing precludes them from engaging in any securityhedging or other transactions designed or intended, or which could reasonably be expected to lead to or result in, a sale or disposition of any Restricted Securities, or securities convertible into or exercisable or exchangeable for ourRestricted Securities, even if any such sale or disposition transaction or transactions would be made or executed by or on behalf of someone other than the lock-up party.
The representatives, in their sole discretion, may release Restricted Securities subject to the lock-up agreements described above in whole or in part at any time.
In order to facilitate the offering of the Class A common stock.
We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or contribute payments that the underwriters may be required to make in that respect.
We will apply to have our Class A common stock, approved for listing on The NASDAQ Global Market under the symbol “BIOV”.
In connection with this offering, the underwriters may engage in stabilizing transactions which involves making bids for, purchasing and selling shares of Class A common stock inthat stabilize, maintain or otherwise affect the open market for the purpose of preventing or retarding a decline in the market price of the Class A common stock while this offeringstock. Specifically, the underwriters may sell more shares than they are obligated to purchase under the underwriting agreement, creating a short position. A short sale is in progress. These stabilizing transactions may include makingcovered if the short salesposition is no greater than the number of the Class A common stock, which involves the saleshares available for purchase by the underwriters ofunder the over-allotment option. The underwriters can close out a greater number of shares of Class A common stock than they are required to purchase in this offering, and purchasing shares of Class A common stock on the open market to cover positions created bycovered short sales. Short sales may be “covered” shorts, which are short positions in ansale
amount not greater than the underwriters’over-allotment option referred to above, or may be “naked” shorts, which are short positions in excess of that amount. The underwriters may close out any covered short position either by exercising theirthe over-allotment option in whole or in part, or by purchasing shares in the open market. In making this determination,determining the source of shares to close out a covered short sale, the underwriters will consider, among other things, the open market price of shares available for purchase in the open market compared to the price at whichavailable under the over-allotment option. The underwriters may purchasealso sell shares throughin excess of theover-allotment option. option, creating a naked short position. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the Class A common stock in the open market after pricing that could adversely affect investors who purchase in this offering. To the extent thatAs an additional means of facilitating this offering, the underwriters create a naked short position, they willmay bid for, and purchase, shares in the open market to cover the position.
The underwriters have advised us that, pursuant to Regulation M of the Securities Act, they may also engage in other activities that stabilize, maintain or otherwise affect the price of the Class A common stock, including the imposition of penalty bids. This means that if the representatives of the underwriters purchase Class A common stock in the open market in stabilizing transactions or to cover short sales,stabilize the representatives can requireprice of the underwriters that sold those shares as part of this offering to repay the underwriting discounts and commissions received by them.
Class A common stock. These activities may have the effect of raisingraise or maintainingmaintain the market price of the Class A common stock above independent market levels or preventingprevent or retardingretard a decline in the market price of the Class A common stock,stock. The underwriters are not required to engage in these activities and asmay end any of these activities at any time.
We and the underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act.
A prospectus in electronic format may be made available on websites maintained by one or more underwriters participating in this offering. The representatives may agree to allocate a result, the pricenumber of theshares of Class A common stock to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the representatives to underwriters that may be higher thanmake Internet distributions on the price that otherwise might existsame basis as other allocations.
The underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. Certain of the underwriters and their respective affiliates have, from time to time, performed, and may in the open market. Iffuture perform, various financial advisory and investment banking services for us, for which they received or will receive customary fees and expenses.
In addition, in the ordinary course of their various business activities, the underwriters commence these activities, theyand their respective affiliates may discontinue themmake or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers and may at any time.time hold long and short positions in such securities and instruments. Such investment and securities activities may involve our securities and instruments. The underwriters and their respective affiliates may carry out these transactions onalso make investment recommendations or publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long or short positions in such securities and instruments.
Pricing of the NASDAQ, in theover-the-counter market or otherwise.Offering
Prior to this offering, there has been no public market for our Class A common stock. The initial public offering price will bewas determined by negotiations between us and the representatives ofrepresentatives. Among the underwriters. Infactors considered in determining the initial public offering price wewere our future prospects and those of our industry in general, our sales, earnings and certain other financial and operating information in recent periods, and the price-earnings ratios, price-sales ratios, market prices of securities, and certain financial and operating information of companies engaged in activities similar to ours.
Selling Restrictions
European Economic Area
In relation to each Member State of the European Economic Area (each, a “Relevant Member State”), an offer to the public of any shares of Class A common stock may not be made in that Relevant Member State,
except that an offer to the public in that Relevant Member State of any shares may be made at any time under the following exemptions under the Prospectus Regulation:
| (a) | to any legal entity which is a “qualified investor” as defined under the Prospectus Regulation; |
| (b) | to fewer than 150 natural or legal persons (other than “qualified investors” as defined under the Prospectus Regulation), subject to obtaining the prior consent of the representatives for any such offer; or |
| (c) | in any other circumstances falling within Article 1(4) of the Prospectus Regulation, |
provided that no such offer of shares of Class A common stock shall result in a requirement for us or any underwriter to publish a prospectus pursuant to Article 3 of the Prospectus Regulation or a supplemental prospectus pursuant to Article 23 of the Prospectus Regulation and each person who initially acquires any shares of Class A common stock or to whom any offer is made will be deemed to have represented, warranted and agreed to and with each of the underwriters expectand us that it is a qualified investor within the meaning of Article 2(e) of the Prospectus Regulation.
In the case of any shares of Class A common stock being offered to consider a numberfinancial intermediary as that term is used in Article 1(4) of factors including:
the information set forthProspectus Regulation, each financial intermediary will also be deemed to have represented, warranted and agreed that the shares of Class A common stock acquired by it in this prospectus and otherwise availableoffering have not been acquired on a non-discretionary basis on behalf of, nor have they been acquired with a view to their offer or resale to, persons in circumstances which may give rise to an offer of any shares of Class A common stock to the representatives;
our prospects and the history and prospects for the industrypublic, other than their offer or resale in a Relevant Member State to qualified investors as so defined or in circumstances in which we compete;
an assessment of our management;
our prospects for future earnings;
the general conditionprior consent of the securities markets at the time of this offering;representatives has been obtained to each such proposed offer or resale.
the recent market prices of, and demand for, publicly traded common stock of generally comparable companies; and
other factors deemed relevant byWe, the underwriters and us.
Neither we northeir affiliates will rely upon the truth and accuracy of the foregoing representations, warranties and agreements. Notwithstanding the above, a person who is not a “qualified investor” and who has notified the underwriters can assure investors that an active trading market will develop for our common shares, or thatof such fact in writing may, with the shares will trade in the public market at or above the initial public offering price.
Other than in the United States, no action has been taken by us orprior consent of the underwriters, that would permit a public offeringbe permitted to acquire shares of Class A common stock in this offering.
For the securities offered bypurposes of this prospectusprovision, the expression an “offer to the public” in relation to any shares of Class A common stock in any jurisdiction where action for that purpose is required. The securities offeredRelevant Member State means the communication in any form and by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection withmeans of sufficient information on the terms of the offer and saleany shares of Class A common stock to be offered so as to enable an investor to decide to purchase or subscribe for any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulationsshares of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the
offeringClass A common stock, and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.expression “Prospectus Regulation” means Regulation (EU) 2017/1129.
Selling restrictions
United Kingdom
This document is only being distributedAn offer to and is only directed at (i) persons who are outside the United Kingdom or (ii) to investment professionals falling within Article 19(5)public of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”) or (iii) high net worth entities, and other persons to whom it may lawfully be communicated, falling with Article 49(2)(a) to (d)any shares of the Order (all such persons together being referred to as “relevant persons”). The securities are only available to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such securities will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on this document or any of its contents.
European economic area
In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a ‘‘Relevant Member State’’), from and including the date on which the EU Prospectus Directive (the ‘‘EU Prospectus Directive’’) was implemented in that Relevant Member State (the ‘‘Relevant Implementation Date’’) an offer of securities described in this prospectusClass A common stock may not be made in the United Kingdom, except that an offer to the public in that Relevant Member State prior to the publicationUnited Kingdom of a prospectus in relation to theany shares which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the EU Prospectus Directive, except that, with effect from and including the Relevant Implementation Date, an offer of securities described in this prospectusClass A common stock may be made to the public in that Relevant Member State at any time:time under the following exemptions under the UK Prospectus Regulation:
to any legal entity which is a qualified investor as defined under the EU Prospectus Directive;
| (a) | to any legal entity which is a “qualified investor” as defined under the UK Prospectus Regulation; |
to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150 natural or legal persons (other than qualified investors as defined in the EU Prospectus Directive); or
| (b) | to fewer than 150 natural or legal persons (other than “qualified investors” as defined under the UK Prospectus Regulation), subject to obtaining the prior consent of the representatives for any such offer; or |
| (c) | in any other circumstances falling within section 86 of the Financial Services and Markets Act 2000 (as amended, “FSMA”), |
in any other circumstances falling within Article 3(2) of the EU Prospectus Directive, provided that no such offer of securities described in this prospectusshares of Class A common stock shall result in a requirement for the publication by us ofIssuer or any underwriter to publish a prospectus pursuant to Article 3section 85 of the EUFSMA or a supplemental prospectus pursuant to Article 23 of the UK Prospectus Directive.Regulation and each person who initially acquires any shares of
Class A common stock or to whom any offer is made will be deemed to have represented, warranted and agreed to and with each of the underwriters and the Issuer that it is a qualified investor within the meaning of Article 2 of the UK Prospectus Regulation.
In the case of any shares of Class A common stock being offered to a financial intermediary as that term is used in Article 1(4) of the UK Prospectus Regulation, each financial intermediary will also be deemed to have represented, warranted and agreed that the shares of Class A common stock acquired by it in this offering have not been acquired on a non-discretionary basis on behalf of, nor have they been acquired with a view to their offer or resale to, persons in circumstances which may give rise to an offer of any shares of Class A common stock to the public, other than their offer or resale in the United Kingdom to qualified investors as so defined or in circumstances in which the prior consent of the representatives has been obtained to each such proposed offer or resale.
We, the underwriters and their affiliates will rely upon the truth and accuracy of the foregoing representations, warranties and agreements. Notwithstanding the above, a person who is not a “qualified investor” and who has notified the underwriters of such fact in writing may, with the prior consent of the underwriters, be permitted to acquire shares of Class A common stock in this offering.
For the purposes of this provision, the expression an ‘‘offer of securities“offer to the public’’public” in relation to any securitiesshares of Class A common stock in any Relevant Member Statethe United Kingdom means the communication in any form and by any means of sufficient information on the terms of the offer and the securitiesany shares of Class A common stock to be offered so as to enable an investor to decide to purchase or subscribe for the securities, as the same may be varied in that Member State by any measure implementing the EU Prospectus Directive in that Member State. The expression “EU Prospectus Directive” means Directive 2003/71/EC (and any amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State) and includes any relevant implementing measure in each Relevant Member State,shares of Class A common stock, and the expression “2010 PD Amending Directive”“UK Prospectus Regulation” means Directive 2010/73/EU.Regulation (EU) 2017/1129 as it forms part of domestic law by virtue of the European Union (Withdrawal) Act 2018.
In the United Kingdom, this prospectus and any other material in relation to the shares of Class A common stock are being distributed only to, and are directed only at, persons who are “qualified investors” (as defined in the UK Prospectus Regulation) who are (i) persons having professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the “Order”), or (ii) high net worth entities falling within Article 49(2)(a) to (d) of the Order, or (iii) persons to whom it would otherwise be lawful to distribute them, all such persons together being referred to as “Relevant Persons”. In the United Kingdom, the Shares are only available to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such Shares will be engaged in only with, Relevant Persons. This prospectus and its contents are confidential and should not be distributed, published or reproduced (in whole or in part) or disclosed by any recipients to any other person in the United Kingdom. Any person in the United Kingdom that is not a Relevant Person should not act or rely on this prospectus or its contents.
Other relationships
Certain of the underwriters and their affiliates have provided in the past to us and our affiliates and may provide from time to time in the future certain commercial banking, financial advisory, investment banking and other services for us and such affiliates in the ordinary course of their business, for which they have received and may continue to receive customary fees and commissions. In addition, from time to time, certain of the underwriters and their affiliates may effect transactions for their own account or the account of customers, and hold on behalf of themselves or their customers, long or short positions in our debt or equity securities or loans, and may do so in the future.
An affiliate of J.P. Morgan Securities LLC served as an arranger and lender under our senior secured credit facility. Such affiliate of the representative of the underwriters receives customary fees and expenses in connection with its provision of these services.
The validity of the issuance of our Class A common stock offered in this prospectus will be passed upon for us by Latham & Watkins LLP, New York, New York.LLP. The validity of the issuance of our Class A common stock offered in this prospectus will be passed upon for the underwriters in connection with this offering by Simpson Thacher & Bartlett LLP, New York, New York.
The Bioventus LLCaudited financial statements as of December 31, 2015 and 2014 and for each of the three years in the periodyear ended December 31, 20152019 of Bioventus LLC included in this prospectus and elsewhere in the registration statement have been so included in reliance on the report of Grant Thornton LLP, or GT, independent registered public accountants, upon the authority of said firm as experts in accounting and auditing.
The financial statements for the year end December 31, 2018 included in this prospectus have been so included in reliance on the report (which contains an emphasis of matter paragraph relating to the Company’s identification of noncompliance with certain U.S. Federal statutes and regulations to which the Company is subject and the Company’s voluntary self-disclosure to the U.S. Department of Health and Human Services Office of Inspector General. As a result of the noncompliance, the Company may be subject to civil monetary penalties, as well as repayment obligations related to previously reimbursed claims and fines as described in Notes 2 and 13 to the financial statements) of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
The BioStructures, LLC financial statements as of December 31, 2014 and for the period ended December 31, 2014 included in this prospectus have been so included in reliance on the report ofCHANGE IN REGISTERED PUBLIC ACCOUNTANT
We dismissed PricewaterhouseCoopers LLP, anor PwC, as our independent auditor on November 1, 2019. Our Audit, Compliance and Quality Committee participated in and approved our change in independent registered public accounting firm. On November 20, 2019, we engaged GT as our independent registered public accounting firm givenfor the year ended December 31, 2019. Concurrent with GTs appointment, we engaged GT to audit our consolidated financial statements as of and for the year ended December 31, 2019.
The report of PwC on the authorityfinancial statements of said firmBioventus LLC as expertsof and for the year ended December 31, 2018 did not contain any adverse opinions or disclaimer of opinion and was not qualified as to uncertainty, audit scope or accounting principles; however, it does include an emphasis of matter paragraph relating to the Company’s identification of noncompliance with certain U.S. Federal statutes and regulations to which the Company is subject and the Company’s voluntary self-disclosure to the OIG. As a result of the noncompliance, the Company may be subject to civil monetary penalties, as well as repayment obligations related to previously reimbursed claims and fines as described in Notes 2 and 13 to the financial statements.
During the audit of the year ended December 31, 2018 and subsequent interim period through November 1, 2019, there were no disagreements with PwC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure that, if not resolved to PwC’s satisfaction, would have caused PwC to make reference to the subject matter of the disagreement in connection with its report and accounting.(ii) no “reportable events” (as defined in Item 304(a)(1)(v) of Regulation S-K), except for the material weaknesses in our internal control over financial reporting related to (a) an ineffective design of internal controls to review reimbursement claims in order to identify non-compliance with regulations and contract terms and (b) an effective design of internal controls to establish and review a reimbursement claim reserve for errors related to the determination of medical necessity from such non-compliance.
We requested that PwC provide us with a letter addressed to the SEC stating whether or not it agrees with the above disclosure. A copy of PwC’s letter, dated January 19, 2021, is attached as Exhibit 16.1 to the registration statement of which this prospectus is a part.
During the year ended December 31, 2018 and the subsequent interim period through November 20, 2019, neither we, nor any person on our behalf, consulted GT with respect to either (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that may be rendered on our financial statements, and no written report or oral advice was provided to us by GT that GT concluded was an important factor considered by us in reaching a decision as to the accounting, auditing or financial reporting issue or (ii) any matter that was either the subject of a disagreement, as that term is described in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-K, or a reportable event, as that term is described in Item 304(a)(1)(v) of Regulation S-K.
Where you can find more informationWHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of Class A common stock offered hereby. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules filed therewith, certain portions of which are omitted as permitted by the rules and regulations of the SEC. For further information with respect to Bioventus Inc. and the shares of Class A common stock offered hereby, reference is made to the registration statement and the exhibits and schedules filed therewith. Statements contained in this prospectus regarding the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and each such statement is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit to the registration statement. A copy of the registration statement and the exhibits and schedules filed therewith may be inspected without charge at the public reference room maintained by the SEC, located at 100 F Street N.E., Room 1580, Washington, D.C. 20549, and copies of all or any part of the registration statement may be obtained from such offices upon the payment of the fees prescribed by the SEC. Please call the SEC at 1-800- SEC-0330 for further information about the public reference room. The SEC also maintains a website that contains reports, proxy and information statements and other information regarding registrants, like us, that file electronically with the SEC. The address of that website is www.sec.gov.
As a result of this offering, we will become subjectbe required to the information and reporting requirements of the Exchange Act and, in accordance with this law, will file periodic reports, proxy statements and other information with the SEC. These periodic reports, proxy statements and other information will be available for inspection and copying at the SEC’s public reference room and the website of the SEC referred to above. We also maintain a website at www.bioventusglobal.com. The referencewww.bioventus.com, through which you may access these materials free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, our website address does not constitute incorporation by reference of the informationSEC. Information contained on our website is not a part of this prospectus and you should not consider the contentsinclusion of our website address in makingthis prospectus is an investment decision with respect to our common stock.
You may also request a copy of these filings, at no cost to you, by writing or telephoning us at the following address:
Bioventus Inc.
4721 Emperor Boulevard, Suite 100
Durham, NC 27703
Attention: Chief Financial Officer
(919) 474-6700inactive textual reference only.
Index to financial statementsINDEX TO CONSOLIDATED FINANCIAL STATEMENTS
BioventusBIOVENTUS LLC
Years ended December 31, 2013, 2014 and 2015
Three months ended March 28, 2015 and April 2, 2016 (unaudited)
Notes to consolidated financial statements
| F-8 | ||||
Nine months ended September 26, 2020 and September 28, 2019 (unaudited) | ||||
Consolidated condensed statements of operations and comprehensive | ||||
| F-43 | ||||
Consolidated | F-44 | |||
| F-45 | |||
BioStructures LLC
Year ended December 31, 2014
| ||||
| ||||
Nine month periods ended September 30, 2014 and 2015 (unaudited)
ReportREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of independent registered public accounting firmManagers
Bioventus LLC
In our opinion,Opinion on the financial statements
We have audited the accompanying consolidated balance sheetssheet of Bioventus LLC (a Delaware Limited Liability Company) and subsidiaries (the “Company”) as of December 31, 2019, the related consolidated statements of operations and comprehensive loss, ofincome (loss), changes in members’ equity, and of cash flows for the year ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Bioventus LLC and its subsidiaries atthe Company as of December 31, 2015 and 2014,2019, and the results of theirits operations and theirits cash flows for each of the three years in the periodyear ended December 31, 2015,2019, in conformity with accounting principles generally accepted in the United States of America.
Change in accounting principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases in 2019 due to the adoption of FASB Accounting Standards Codification (Topic 842), Leases.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesethe Company’s financial statements based on our audits. audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these statementsaudit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Anmisstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit includesof its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audit also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provideaudit provides a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2019.
Raleigh, North Carolina
October 6, 2020
Report of Independent Registered Public Accounting Firm
To the Board of Managers and Members of Bioventus LLC
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Bioventus LLC and its subsidiaries (the “Company”) as of December 31, 2018, and the related consolidated statements of operations and comprehensive income (loss), of changes in members’ equity and of cash flows for the year then ended, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of these consolidated financial statements in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
Emphasis of Matter
As discussed in Notes 2 and 13 to the consolidated financial statements, the Company has identified noncompliance with certain U.S. Federal statutes and regulations to which the Company is subject and made a voluntary self-disclosure to the U.S. Department of Health and Human Services Office of Inspector General. As a result of the noncompliance, the Company may be subject to civil monetary penalties, as well as repayment obligations related to previously reimbursed claims and fines. Management’s evaluation of the impact of these material contingencies is also discussed in Note 13.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
April 19, 2016,August 16, 2019, except for the effects of the revisiondisclosing net loss per unit information discussed under the caption ‘May 2016 Revision’ in Note 1914 and the effects of discontinued operations discussed in Note 17 to the consolidated financial statements, as to which the date is May 26, 2016, and except forOctober 6, 2020
We served as the effects of the revision discussed under the caption ‘July 2016 Revision’ in Note 19Company’s auditor from 2012 to the consolidated financial statements, as to which the date is July 19, 2016.2019.
BIOVENTUS LLC
Consolidated statements of operations and comprehensive lossincome (loss)
Years ended December 31, 2013, 20142019 and 20152018
(Dollars in thousands, except per unit and per share data)
| 2013 | 2014 | 2015 | ||||||||||
Net sales | $ | 232,375 | $ | 242,893 | $ | 253,650 | ||||||
Cost of sales (including depreciation and amortization of $16,693, $19,622 and $22,474, respectively) | 71,372 | 75,792 | 74,544 | |||||||||
|
| |||||||||||
Gross profit | 161,003 | 167,101 | 179,106 | |||||||||
Selling, general and administrative expense | 150,370 | 147,058 | 148,441 | |||||||||
Research and development expenses | 10,936 | 9,465 | 14,747 | |||||||||
Change in fair value of contingent consideration | — | 1,590 | 19,493 | |||||||||
Restructuring costs | — | — | 2,443 | |||||||||
Depreciation and amortization | 7,765 | 8,968 | 10,570 | |||||||||
|
| |||||||||||
Operating income (loss) | (8,068 | ) | 20 | (16,588 | ) | |||||||
Interest expense | 11,459 | 11,969 | 14,229 | |||||||||
Other (income) expense | 713 | (596 | ) | 1,154 | ||||||||
|
| |||||||||||
Other expense, net | 12,172 | 11,373 | 15,383 | |||||||||
|
| |||||||||||
Loss before income taxes | (20,240 | ) | (11,353 | ) | (31,971 | ) | ||||||
Income tax expense | 2,127 | 1,547 | 2,140 | |||||||||
|
| |||||||||||
Net loss | (22,367 | ) | (12,900 | ) | (34,111 | ) | ||||||
Other comprehensive (loss) income, net of tax | ||||||||||||
Change in prior service cost and unrecognized loss for defined benefit plan adjustment | — | (75 | ) | 48 | ||||||||
Change in foreign currency translation adjustments | (51 | ) | 163 | (712 | ) | |||||||
|
| |||||||||||
Other comprehensive (loss) income | (51 | ) | 88 | (664 | ) | |||||||
|
| |||||||||||
Comprehensive loss | $ | (22,418 | ) | $ | (12,812 | ) | $ | (34,775 | ) | |||
|
| |||||||||||
Net loss | (22,367 | ) | (12,900 | ) | (34,111 | ) | ||||||
Accumulated and unpaid preferred distributions (as revised) | (3,610 | ) | (3,718 | ) | (3,997 | ) | ||||||
|
|
|
|
|
| |||||||
Net loss attributable to common unit holders (as revised) | (25,977 | ) | (16,618 | ) | (38,108 | ) | ||||||
Net loss per unit, basic and diluted (Note 14) | $ | (5.30 | ) | $ | (3.39 | ) | $ | (7.78 | ) | |||
Weighted average common units outstanding, basic and diluted | 4,900 | 4,900 | 4,900 | |||||||||
Unaudited pro forma net loss per share (Note 18): | ||||||||||||
Net loss per share, basic and diluted | — | — | (1.45 | ) | ||||||||
Weighted average common shares, basic and diluted | — | — | 14,904,090 | |||||||||
| ||||||||||||
| 2019 | 2018 | |||||||
Net sales | $ | 340,141 | $ | 319,177 | ||||
Cost of sales (including depreciation and amortization of $22,399 and $20,614, respectively) | 90,935 | 84,168 | ||||||
|
|
|
| |||||
Gross profit | 249,206 | 235,009 | ||||||
Selling, general and administrative expense | 198,475 | 191,672 | ||||||
Research and development expense | 11,055 | 8,095 | ||||||
Change in fair value of contingent consideration | — | (739 | ) | |||||
Restructuring costs | 575 | 1,373 | ||||||
Depreciation and amortization | 7,908 | 8,615 | ||||||
Loss on impairment of intangible assets | — | 489 | ||||||
|
|
|
| |||||
Operating income | 31,193 | 25,504 | ||||||
Interest expense | 21,579 | 19,171 | ||||||
Other (income) expense | (75 | ) | 226 | |||||
|
|
|
| |||||
Other expense | 21,504 | 19,397 | ||||||
|
|
|
| |||||
Income from continuing operations before income taxes | 9,689 | 6,107 | ||||||
Income tax expense | 1,576 | 1,664 | ||||||
|
|
|
| |||||
Net income from continuing operations | 8,113 | 4,443 | ||||||
Loss from discontinued operations, net of tax | 1,815 | 16,650 | ||||||
|
|
|
| |||||
Net income (loss) | 6,298 | (12,207 | ) | |||||
Loss attributable to noncontrolling interest | 553 | — | ||||||
|
|
|
| |||||
Net income (loss) attributable to unit holders | 6,851 | (12,207 | ) | |||||
Other comprehensive income (loss), net of tax | ||||||||
Change in prior service cost and unrecognized (loss) gain for defined benefit plan adjustment | (78 | ) | 131 | |||||
Change in foreign currency translation adjustments | (322 | ) | (334 | ) | ||||
|
|
|
| |||||
Other comprehensive loss | (400 | ) | (203 | ) | ||||
|
|
|
| |||||
Comprehensive income (loss) | $ | 6,451 | $ | (12,410 | ) | |||
|
|
|
| |||||
Net income from continuing operations attributable to unit holders | $ | 8,666 | $ | 4,443 | ||||
Accumulated and unpaid preferred distributions | (5,955 | ) | (5,781 | ) | ||||
Net income allocated to participating shareholders | (1,555 | ) | — | |||||
|
|
|
| |||||
Net income (loss) from continuing operations attributable to common unit holders | 1,156 | (1,338 | ) | |||||
Loss from discontinued operations, net of tax | 1,815 | 16,650 | ||||||
|
|
|
| |||||
Net loss attributable to common unit holders | $ | (659 | ) | $ | (17,988 | ) | ||
|
|
|
| |||||
Net loss per unit attributable to common unit holders—basic and diluted (Note 14) | ||||||||
Net income (loss) from continuing operations | $ | 0.24 | $ | (0.27 | ) | |||
Loss from discontinued operations, net of tax | 0.37 | 3.40 | ||||||
|
|
|
| |||||
Net loss attributable to common unit holders | $ | (0.13 | ) | $ | (3.67 | ) | ||
|
|
|
| |||||
Weighted average common units outstanding, basic and diluted | 4,900 | 4,900 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
BIOVENTUS LLC
Consolidated balance sheets
December 31, 20142019 and 20152018
(Dollars in thousands)
| 2014 | 2015 | 2019 | 2018 | |||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash | $ | 15,774 | $ | 4,950 | ||||||||||||
Restricted cash | — | 343 | ||||||||||||||
Cash and cash equivalents | $ | 64,520 | $ | 42,774 | ||||||||||||
Accounts receivable, net | 47,075 | 54,511 | 85,128 | 72,569 | ||||||||||||
Inventory, net | 26,674 | 35,178 | ||||||||||||||
Inventory | 27,326 | 27,396 | ||||||||||||||
Prepaid and other current assets | 5,708 | 4,445 | 6,059 | 5,615 | ||||||||||||
|
|
|
| |||||||||||||
Total current assets | 95,231 | 99,427 | 183,033 | 148,354 | ||||||||||||
Property and equipment, net | 10,428 | 9,602 | 4,489 | 4,759 | ||||||||||||
Goodwill | 49,953 | 58,694 | 49,800 | 49,800 | ||||||||||||
Intangible assets, net | 274,332 | 319,152 | 216,510 | 237,029 | ||||||||||||
Other assets | 298 | 393 | ||||||||||||||
Deferred tax asset | 179 | 84 | ||||||||||||||
Operating lease assets | 15,267 | — | ||||||||||||||
Investments and other assets | 3,308 | 2,781 | ||||||||||||||
|
|
|
| |||||||||||||
Total assets | $ | 430,421 | $ | 487,352 | $ | 472,407 | $ | 442,723 | ||||||||
|
|
|
| |||||||||||||
Liabilities and Members’ Equity | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 5,383 | $ | 8,368 | $ | 6,440 | $ | 8,207 | ||||||||
Accrued liabilities | 25,969 | 34,368 | 52,827 | 50,984 | ||||||||||||
Note payable | — | 23,546 | ||||||||||||||
Contingent consideration | 7,266 | 7,270 | ||||||||||||||
License agreement obligation | 5,662 | — | ||||||||||||||
Accrued equity-based compensation | 15,547 | — | ||||||||||||||
Long-term debt | 7,188 | 12,938 | 10,000 | 5,250 | ||||||||||||
Capital lease obligations | 688 | 1,200 | ||||||||||||||
Other current liabilities | 4,201 | 987 | ||||||||||||||
|
|
|
| |||||||||||||
Total current liabilities | 52,156 | 87,690 | 89,015 | 65,428 | ||||||||||||
Long-term debt, less current portion | 162,297 | 149,607 | 187,965 | 189,578 | ||||||||||||
Long-term revolver | — | 8,000 | ||||||||||||||
Contingent consideration, less current portion | 24,949 | 32,635 | ||||||||||||||
Capital lease obligations, less current portion | 803 | 1,222 | ||||||||||||||
Accrued equity-based compensation, less current portion | 25,255 | 33,063 | ||||||||||||||
Deferred tax liability | 3,874 | 3,955 | ||||||||||||||
Other long-term liabilities | 3,399 | 7,080 | 20,681 | 5,432 | ||||||||||||
Deferred tax liability | 9,328 | 8,780 | ||||||||||||||
|
|
|
| |||||||||||||
Total liabilities | 252,932 | 295,014 | 326,790 | 297,456 | ||||||||||||
|
| |||||||||||||||
Commitments and contingencies (Note 13) | ||||||||||||||||
Members’ equity (preferred unit liquidation preference of $127,649 and $181,645 at December 31, 2014 and 2015, respectively) | 233,970 | 284,828 | ||||||||||||||
Accumulated other comprehensive income (loss) | 14 | (650 | ) | |||||||||||||
Members’ equity (preferred unit liquidation preference of $204,443 and $198,488 at December 31, 2019 and 2018, respectively) | 285,147 | 285,153 | ||||||||||||||
Accumulated other comprehensive loss | (465 | ) | (65 | ) | ||||||||||||
Accumulated deficit | (56,495 | ) | (91,840 | ) | (141,700 | ) | (139,821 | ) | ||||||||
|
| |||||||||||||||
Equity attributable to unit holders | 142,982 | 145,267 | ||||||||||||||
Noncontrolling interest | 2,635 | — | ||||||||||||||
|
|
|
| |||||||||||||
Total members’ equity | 177,489 | 192,338 | 145,617 | 145,267 | ||||||||||||
|
|
|
| |||||||||||||
Total liabilities and members’ equity | $ | 430,421 | $ | 487,352 | $ | 472,407 | $ | 442,723 | ||||||||
|
|
|
| |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
BIOVENTUS LLC
Consolidated statements of changes in members’ equity
Years ended December 31, 2013, 20142019 and 20152018
(Dollars in thousands)
| Members’ equity | Accumulated Other comprehensive loss | Accumulated deficit | Total members’ equity | Members’ Equity | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Noncontrolling Interest | Total Members’ Equity | ||||||||||||||||||||||||||||
Balance at December 31, 2012 | $ | 232,523 | $ | (23 | ) | $ | (16,328 | ) | $ | 216,172 | ||||||||||||||||||||||||||
Balance at December 31, 2017 | $ | 285,114 | $ | 138 | $ | (119,795 | ) | $ | — | $ | 165,457 | |||||||||||||||||||||||||
Profits interest compensation | 576 | — | — | 576 | 39 | — | — | — | 39 | |||||||||||||||||||||||||||
Distribution to members | — | — | (2,501 | ) | (2,501 | ) | — | — | (7,819 | ) | — | (7,819 | ) | |||||||||||||||||||||||
Net loss | — | — | (22,367 | ) | (22,367 | ) | ||||||||||||||||||||||||||||||
Translation adjustment | — | (51 | ) | — | (51 | ) | ||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||
Balance at December 31, 2013 | 233,099 | (74 | ) | (41,196 | ) | 191,829 | ||||||||||||||||||||||||||||||
Profits interest compensation | 871 | — | — | 871 | ||||||||||||||||||||||||||||||||
Distribution to members | — | — | (2,399 | ) | (2,399 | ) | ||||||||||||||||||||||||||||||
Net loss | — | — | (12,900 | ) | (12,900 | ) | ||||||||||||||||||||||||||||||
Net loss attributable to unit holders | — | — | (12,207 | ) | — | (12,207 | ) | |||||||||||||||||||||||||||||
Defined benefit plan adjustment | — | (75 | ) | — | (75 | ) | — | 131 | — | — | 131 | |||||||||||||||||||||||||
Translation adjustment | — | 163 | — | 163 | — | (334 | ) | — | — | (334 | ) | |||||||||||||||||||||||||
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||
Balance at December 31, 2014 | 233,970 | 14 | (56,495 | ) | 177,489 | |||||||||||||||||||||||||||||||
Capital contribution | 50,000 | — | — | 50,000 | ||||||||||||||||||||||||||||||||
Profits interest compensation | 858 | — | — | 858 | ||||||||||||||||||||||||||||||||
Balance at December 31, 2018 | 285,153 | (65 | ) | (139,821 | ) | — | 145,267 | |||||||||||||||||||||||||||||
Profits interest forfeitures | (6 | ) | — | — | — | (6 | ) | |||||||||||||||||||||||||||||
Distribution to members | — | — | (1,234 | ) | (1,234 | ) | — | — | (8,730 | ) | — | (8,730 | ) | |||||||||||||||||||||||
Net loss | — | — | (34,111 | ) | (34,111 | ) | ||||||||||||||||||||||||||||||
Acquisition of noncontrolling interest | — | — | — | 3,188 | 3,188 | |||||||||||||||||||||||||||||||
Net income (loss) attributable to unit holders | — | — | 6,851 | (553 | ) | 6,298 | ||||||||||||||||||||||||||||||
Defined benefit plan adjustment | — | 48 | — | 48 | — | (78 | ) | — | — | (78 | ) | |||||||||||||||||||||||||
Translation adjustment | — | (712 | ) | — | (712 | ) | — | (322 | ) | — | — | (322 | ) | |||||||||||||||||||||||
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||
Balance at December 31, 2015 | $ | 284,828 | $ | (650 | ) | $ | (91,840 | ) | $ | 192,338 | ||||||||||||||||||||||||||
Balance at December 31, 2019 | $ | 285,147 | $ | (465 | ) | $ | (141,700 | ) | $ | 2,635 | $ | 145,617 | ||||||||||||||||||||||||
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
BIOVENTUS LLC
Consolidated statements of cash flows
Years ended December 31, 2013, 20142019 and 20152018
(Dollars in thousands)
| 2013 | 2014 | 2015 | ||||||||||
Operating activities: | ||||||||||||
Net loss | $ | (22,367 | ) | $ | (12,900 | ) | $ | (34,111 | ) | |||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 24,458 | 28,820 | 33,078 | |||||||||
Change in fair value of contingent consideration | — | 1,590 | 19,493 | |||||||||
Provision for doubtful accounts | 5,485 | 5,880 | 4,707 | |||||||||
In-kind interest expense | 11,281 | 3,885 | — | |||||||||
Profits interest compensation | 576 | 871 | 858 | |||||||||
Management incentive plan and liability-classified awards compensation | — | 1,484 | 2,467 | |||||||||
Change in fair value of Equity Participation Rights unit | 470 | 567 | 1,352 | |||||||||
Deferred income taxes | (475 | ) | (701 | ) | (432 | ) | ||||||
Unrealized foreign currency transaction (gains) losses | 288 | (575 | ) | 1,284 | ||||||||
Amortization of debt (premium) discount and capitalized loan fees, net | (562 | ) | (1,806 | ) | 871 | |||||||
Changes in operating assets and liabilities, net of acquisitions: | ||||||||||||
Accounts receivable | (11,094 | ) | (217 | ) | (11,266 | ) | ||||||
Inventories | (3,718 | ) | 10,649 | (5,729 | ) | |||||||
Accounts payable and accrued expenses | (2,928 | ) | 3,043 | 5,182 | ||||||||
Other current assets and liabilities | 1,335 | (3,152 | ) | 1,166 | ||||||||
Payment of in-kind interest | — | (22,329 | ) | — | ||||||||
|
| |||||||||||
Net cash provided by operating activities | 2,749 | 15,109 | 18,920 | |||||||||
Investing activities: | ||||||||||||
Acquisition of business, net of cash acquired | — | (10,546 | ) | (51,459 | ) | |||||||
Acquisition of intellectual property | — | (19,668 | ) | (5,324 | ) | |||||||
Acquisition of distributor assets | (4,643 | ) | — | — | ||||||||
Purchase of property and equipment | (6,356 | ) | (1,162 | ) | (2,118 | ) | ||||||
Settlement of foreign currency forward contract | — | — | (941 | ) | ||||||||
Restricted cash | — | — | (343 | ) | ||||||||
|
| |||||||||||
Net cash used in investing activities | (10,999 | ) | (31,376 | ) | (60,185 | ) | ||||||
Financing activities: | ||||||||||||
Payment on note payable to related party | — | (160,000 | ) | — | ||||||||
Proceeds from the issuance of long-term debt, net of issuance costs | — | 170,505 | — | |||||||||
Payments on long-term debt | — | (1,438 | ) | (7,188 | ) | |||||||
Long-term debt modification costs | — | — | (718 | ) | ||||||||
Payment of contingent consideration | — | (1,731 | ) | (16,345 | ) | |||||||
Borrowing on the revolving line of credit | 12,839 | 4,068 | 23,000 | |||||||||
Payments on the revolving line of credit | (2,071 | ) | (14,373 | ) | (15,000 | ) | ||||||
Principal payments toward capital lease obligations | (1,466 | ) | (1,277 | ) | (1,487 | ) | ||||||
Capital contribution | — | — | 50,000 | |||||||||
Distribution to members | (2,501 | ) | (2,399 | ) | (1,016 | ) | ||||||
|
| |||||||||||
Net cash provided by (used in) financing activities | 6,801 | (6,645 | ) | 31,246 | ||||||||
Effect of exchange rate changes on cash and cash equivalents | (514 | ) | (1,428 | ) | (805 | ) | ||||||
|
| |||||||||||
Net change in cash and cash equivalents | (1,963 | ) | (24,340 | ) | (10,824 | ) | ||||||
Cash and cash equivalents at the beginning of the period | 42,077 | 40,114 | 15,774 | |||||||||
|
| |||||||||||
Cash and cash equivalents at the end of the period | $ | 40,114 | $ | 15,774 | $ | 4,950 | ||||||
|
| |||||||||||
Supplemental disclosure of cash flow information | ||||||||||||
Cash paid for income taxes | $ | 2,151 | $ | 785 | $ | 2,614 | ||||||
|
| |||||||||||
Cash paid for interest | $ | 197 | $ | 31,901 | $ | 15,630 | ||||||
|
| |||||||||||
Supplemental disclosure of noncash investing and financing activities | ||||||||||||
Notes payable, contingent consideration and other accrued liabilities for business acquisitions | — | $ | 32,343 | $ | 33,028 | |||||||
Liabilities assumed for intellectual property acquisition | $ | 25,738 | — | — | ||||||||
Capital lease obligations for purchase of property and equipment | $ | 3,612 | $ | 622 | $ | 2,418 | ||||||
Accrued member distributions | $ | 0 | $ | 0 | $ | 218 | ||||||
| ||||||||||||
| 2019 | 2018 | |||||||
Operating activities: | ||||||||
Net income (loss): | $ | 6,298 | $ | (12,207 | ) | |||
Less: Net loss from discontinued operations | 1,815 | 16,650 | ||||||
|
|
|
| |||||
Net income from continuing operations | 8,113 | 4,443 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities from continuing operations: | ||||||||
Depreciation and amortization | 30,316 | 29,238 | ||||||
Loss on impairment of intangible assets | — | 489 | ||||||
Change in fair value of contingent consideration | — | (739 | ) | |||||
Payment of contingent consideration in excess of amount established in purchase accounting | (945 | ) | (3,558 | ) | ||||
Provision for doubtful accounts | 2,242 | 2,538 | ||||||
Profit interest, management incentive plan and liability-classified awards compensation | 10,844 | 14,325 | ||||||
Change in fair value of Equity Participation Rights unit | 565 | 1,009 | ||||||
Deferred income taxes | (348 | ) | (79 | ) | ||||
Unrealized foreign currency transaction losses and other | 395 | 106 | ||||||
Amortization of debt discount and capitalized loan fees, net | 1,583 | 1,686 | ||||||
Loss on debt retirement and modification | 3,352 | — | ||||||
Changes in operating assets and liabilities, net of acquisitions: | ||||||||
Accounts receivable | (14,909 | ) | (12,130 | ) | ||||
Inventories | (1,427 | ) | 3,256 | |||||
Accounts payable and accrued expenses | 6,646 | 12,148 | ||||||
Other current assets and liabilities | (3,882 | ) | (422 | ) | ||||
|
|
|
| |||||
Net cash provided by operating activities from continuing operations | 42,545 | 52,310 | ||||||
Net cash used in operating activities of discontinued operations | (1,832 | ) | (7,123 | ) | ||||
|
|
|
| |||||
Net cash provided by operating activities | 40,713 | 45,187 | ||||||
Investing activities: | ||||||||
Investment and acquisition of distribution rights | (6,000 | ) | (3,500 | ) | ||||
Acquisition of VIE | 430 | — | ||||||
Purchase of property and equipment and other | (2,342 | ) | (2,561 | ) | ||||
|
|
|
| |||||
Net cash used in investing activities from continuing operations | (7,912 | ) | (6,061 | ) | ||||
Net cash used in investing activities of discontinued operations | — | (40 | ) | |||||
|
|
|
| |||||
Net cash used in investing activities | (7,912 | ) | (6,101 | ) | ||||
Financing activities: | ||||||||
Proceeds from the issuance of long-term debt, net of issuance costs | 198,134 | — | ||||||
Payments on long-term debt | (199,500 | ) | (5,250 | ) | ||||
Long-term refinancing costs | (367 | ) | — | |||||
Principal payments toward finance lease obligations and notes payable | (81 | ) | (160 | ) | ||||
Distribution to members | (9,137 | ) | (7,846 | ) | ||||
|
|
|
| |||||
Net cash used in financing activities | (10,951 | ) | (13,256 | ) | ||||
Effect of exchange rate changes on cash | (104 | ) | (160 | ) | ||||
|
|
|
| |||||
Net change in cash and cash equivalents | 21,746 | 25,670 | ||||||
Cash and cash equivalents at the beginning of the period | 42,774 | 17,104 | ||||||
|
|
|
| |||||
Cash and cash equivalents at the end of the period | $ | 64,520 | $ | 42,774 | ||||
|
|
|
| |||||
Supplemental disclosure of cash flow information | ||||||||
Cash paid for income taxes | $ | 1,577 | $ | 1,944 | ||||
|
|
|
| |||||
Cash paid for interest | $ | 15,450 | $ | 17,273 | ||||
|
|
|
| |||||
Supplemental disclosure of noncash investing and financing activities | ||||||||
Accrued acquisition of distribution rights | $ | — | $ | 6,000 | ||||
|
|
|
| |||||
Accounts payable for purchase of property and equipment | $ | 34 | $ | 184 | ||||
|
|
|
| |||||
Accrued member distribution | $ | 499 | $ | 906 | ||||
|
|
|
| |||||
The accompanying notes are an integral part of these consolidated financial statements.
BIOVENTUS LLC
Notes to consolidated financial statements
(Dollars in thousands, except per unit and per share data)
1. Organization and basis of presentation of financial information (dollars in thousands)
The Company
Bioventus LLC, or Bioventus or the Company, is a limited liability company formed under the laws of the state of Delaware on November 23, 2011 and operates as a partnership. Bioventus is a global medical technologydevice company, conducting business in various countries, primarily in North America and Europe, with nearly 650approximately 690 employees. The Company is focused on developing and commercializing innovative and proprietary orthobiologic products for the treatment of patients suffering from a broad array of musculoskeletal conditions. The Company seeks to address the growing need for clinically effective,differentiated, cost efficient and minimally invasive solutionstreatments that engage and enhance the body’s natural healing processes.
On November 23, 2011, Smith & Nephew plc or S&N, filed a certificate of formation for the Company. On January 3, 2012, a series of agreements were executed with investment vehicles sponsored and managed by Essex Woodlands, (Essex),or Essex, a healthcare growth equity firm, in order to effect a spin-off of S&N’saffiliates of Smith & Nephew plc biologic and clinical therapies segment (the Business) into Bioventus.
On May 4, 2012 S&Nthe Spin-off occurred and affiliates of Smith & Nephew plc sold certain assets related to the Business’ worldwide operations to Essex and the assets were subsequently contributed by Essex to Bioventus in addition to $20,000 cash in exchange for 5,100 preferred units, representing a 51% ownership interest. S&NAs part of the Spin-off, affiliates of Smith & Nephew plc then contributed certain other assets, primarily related to the Business’ remaining worldwide operations, to Bioventus for 4,900 common units, representing a 49% ownership interest.
On May 4, 2012, As a result, the Company commenced operations in Durham, North Carolina, USA, which is its headquarters.
Principles of consolidation
The consolidated financial statements have been prepared in accordanceconformity with U.S. generally accepted accounting principles, generally acceptedor U.S. GAAP. The consolidated financial statements include the Company, its subsidiaries and investments in which the Company has control. Amounts pertaining to the non-controlling ownership interests held by third parties in the United States of America (US GAAP)operating results and regulationsfinancial position of the United States Securities Exchange Commission (SEC).Company’s controlled subsidiaries are reported as non-controlling interests. All significant intercompany accountsbalances and transactions have been eliminated in consolidation.
Unaudited pro forma net loss per common unitReclassifications
Unaudited pro forma basic and diluted net loss per unit reflects the conversion of all outstanding units of members’ capital as if the conversion had occurred at the beginning of theCertain prior period or the date of issuance, if later. The unaudited pro forma basic and diluted net loss per unit amounts do not give effecthave been reclassified to conform to the issuance of sharescurrent period presentation. These changes had no effect on previously reported total revenues, net income (loss), comprehensive income (loss), members’ equity or cash flows. Unless otherwise noted, all financial information in the consolidated financial statement footnotes reflect the Company’s results from the planned initial public offering, nor do they give effect to potential dilutive securities where the impact would be anti-dilutive.continuing operations. Discontinued operation is discussed further in Note 17.
Segment reporting
The Company identifies a business as an operating segment if: i)(i) it engages in business activities from which it may earn revenues and incur expenses; ii)(ii) its operating results are regularly reviewed by the Chief Operating Decision Maker, or CODM, to make decisions about resources to be allocated to the segment and assess its performance; and iii)(iii) it has available discrete financial information. The Company’s CODM is its Chief Executive Officer. The CODM reviews financial information at the operating segment level to allocate resources and to assess the operating results and financial performance for each operating segment.
The Company’s fourtwo reportable segments include: Active Healing Therapies (AHT)are U.S. business (U.S. AHT), AHTand International business (International AHT), Surgical business and bone morphogenetic protein research and development (BMP) business (discussed further in Note 15 and 16). AHTU.S. and International products are primarily sold to orthopedists, musculoskeletal andphysicians spanning the orthopedic continuum, including sports medicine, physicians,total joint reconstruction, hand and podiatrists,upper extremities, foot and ankle, podiatric surgery, trauma, spine and neurosurgery, as well as directly to their patients. Surgical products are primarily sold to neurosurgeons and orthopedic spine surgeons. BMP is a research and development operation for future surgical bone growth products.
Use of estimates
The preparation of the consolidated financial statements in conformityaccordance with USU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses during the period, as well as disclosuresdisclosure of contingent assets and liabilities, at the date of the financial statements.statements, as well as the reported amounts of revenues and expenses during the period. On an ongoing basis, management evaluates these estimates, including those related to contractual allowances and sales incentives, allowances for doubtful accounts, inventory reserves, goodwill and intangible assets impairment, useful lives of long lived assets, noncontrolling interest, fair value measurements, litigation and contingent liabilities, income taxes, and equity-based compensation. Management bases its estimates on historical experience, future expectations and other relevant assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.those estimates.
2. Summary of significant accounting policies
Recent accounting pronouncements
Leases
In February 2016, the Financial Accounting Standards Board, or FASB, issued guidance that requires lessees to recognize the rights and obligations resulting from leases as assets and liabilities. It also modifies the classification criteria and the accounting for sales-type and direct financing leases for the lessor.
The Company adopted this guidance January 1, 2019, using the cumulative-effect adjustment transition method, which applies the new guidance at the effective date with no restatement of prior periods. In addition, the Company elected the transition package of practical expedients permitted within the new lease guidance, which among other things allowed the Company to carry forward the historical lease classification of existing leases at the time of adoption. The Company also elected not to separate lease components from non-lease components and to exclude short-term leases from its consolidated balance sheet. The adoption of the new guidance resulted in recognizing net lease assets of $12,003 and lease liabilities of $12,827 to the consolidated balance sheet as of January 1, 2019 and reclassifying deferred rent and lease incentive liabilities required under the previous lease guidance to lease assets. There was no impact to the consolidated statement of operations or statements of cash flows. There was also no impact to liquidity or debt covenant compliance under the Company’s agreements.
The Company determines if an arrangement is a lease at inception. Operating leases are separately stated on the consolidated balance sheets as operating lease assets, and current and noncurrent operating lease obligations. Finance leases are included in property and equipment, and separately stated as current and noncurrent finance lease obligations on the consolidated balance sheets. Operating lease costs are recognized on a straight-line basis over the lease term and are included in selling, general and administrative expense. Finance lease amortization and interest are included in depreciation and amortization expense and interest expense, respectively.
Operating lease assets represent the Company’s right to use an underlying asset for the lease term and lease liability obligations represent the Company’s obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at commencement date based on the present value of fixed lease payments over the lease term. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The Company estimates its
incremental borrowing rate based on the information available at commencement date in determining the present value of its lease payments, as the implicit rate in its leases is not readily determinable. In addition, the Company uses a portfolio approach to determine its incremental borrowing rate. The operating lease asset also includes any advance lease payments made and excludes any lease incentives and lease direct costs (discussed further in Note 13).
Other
In June 2016, the FASB issued new accounting guidance that significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance is effective for annual and interim periods beginning after December 15, 2019. The Company has adopted the guidance on January 1, 2020. Based on the Company’s preliminary evaluation, this guidance is expected to primarily impact its trade accounts receivables; however, it does not expect a material impact to its consolidated financial statements.
In August 2017, the FASB issued new guidance amending the hedge accounting model to enable entities to better portray risk management activities in the financial statements. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same statement of operations line as the hedged item. The Company adopted this guidance January 1, 2019 and there was no material impact on its consolidated financial statements.
In August 2018, the FASB issued new guidance addressing a customer’s accounting for implementation costs incurred in a cloud computing arrangement, or CCA, that is considered a service contract. Under the new guidance, implementation costs for a CCA should be evaluated for capitalization using the same approach as implementation costs associated with internal-use software. The capitalized implementation costs should be expensed over the term of the hosting arrangement, which includes any reasonably certain renewal periods. Capitalized implementation costs should be assessed for impairment like long-lived assets. The Company will adopt this guidance on January 1, 2020. The Company does not believe the new guidance will have a material impact on its consolidated financial statements.
In August 2018, the FASB issued new guidance modifying the disclosure requirements on fair value measurements. The guidance eliminates the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. The guidance modifies certain disclosures related to investments measured at net asset value and clarifies that companies are to disclose uncertainties in measurements as of the reporting date. The guidance requires additional disclosure related to changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements as well as the range and weighted average, or other quantitative information would be a more reasonable and rational method, of significant unobservable inputs used to develop Level 3 fair value measurements. The guidance is effective for annual reporting periods beginning after December 31, 2019. Early adoption is permitted upon issuance. The additional disclosures and description of any measurement uncertainty amendments should be applied prospectively for the most recent interim or annual period in the initial year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company will adopt this guidance on January 1, 2020. The Company does not believe the new guidance will have a material impact on its consolidated financial statements.
In December 2019, the FASB issued new guidance amending the accounting for income taxes. The guidance eliminates certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences as well as simplifying aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The guidance also clarifies that single-member limited liability companies and similar
disregarded entities that are not subject to income tax are not required to recognize an allocation of consolidated income tax expense in their separate financial statements, but they could elect to do so. The guidance is effective for annual and interim periods beginning after December 15, 2020. Early adoption is permitted in interim or annual periods for which financial statements have not been made available for issuance. Entities that elect to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Certain amendments are to be applied prospectively while others are retrospective. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
Variable Interest Entity
The Company reviews each investment and collaboration agreement to determine if it has a variable interest in the entity. In assessing whether the Company has a variable interest in the entity as a whole, the Company considers and makes judgments regarding the purpose and design of entity, the value of the licensed assets to the entity, the value of the entity’s total assets and the significant activities of the entity. If the Company has a variable interest in the entity as a whole, the Company assesses whether or not the Company is a primary beneficiary of that variable interest entity, or VIE, based on a number of factors, including: (i) which party has the power to direct the activities that most significantly affect the VIE’s economic performance, (ii) the parties’ contractual rights and responsibilities pursuant to the collaboration agreement, and (iii) which party has the obligation to absorb losses of or the right to receive benefits from the VIE that could be significant to the VIE. If the Company determines that it is the primary beneficiary of a VIE at the onset of the collaboration, the collaboration is treated as a business combination and the Company consolidates the financial statement of the VIE into the Company’s consolidated financial statements. On a quarterly basis, the Company evaluates whether it continues to be the primary beneficiary of the consolidated VIE. If the Company determines that it is no longer the primary beneficiary of a consolidated VIE, it deconsolidates the VIE in the period the determination is made.
Assets and liabilities recorded as a result of consolidating VIEs’ financial results into the Company’s consolidated balance sheet do not represent additional assets that could be used to satisfy claims against the Company’s general assets or liabilities for which creditors have recourse to the Company’s general assets.
Noncontrolling Interest
The Company records noncontrolling interest related to the consolidated VIEs on its consolidated balance sheet. The Company records loss attributable to noncontrolling interest on its consolidated statements of operations, which reflects the VIE’s net loss for the reporting period, adjusted for changes in the noncontrolling interest holders claim to net assets, including contingent milestone and royalty payments, which are evaluated each reporting period.
Deconsolidation and discontinued operations
Upon the occurrence of certain events and on a regular basis, the Company evaluates whether it no longer has a controlling interest in its subsidiaries, including consolidated VIEs. If the Company determines it no longer has a controlling interest, the subsidiary is deconsolidated. The Company records a gain or loss on deconsolidation based on the difference on the deconsolidation date between (i) the aggregate of (a) the fair value of any consideration received, (b) the fair value of any retained noncontrolling investment in the former subsidiary and (c) the carrying amount of any noncontrolling interest in the subsidiary being deconsolidated, less (ii) the carrying amount of the former subsidiary’s assets and liabilities.
The Company assesses whether a deconsolidation is required to be presented as discontinued operations in its consolidated financial statements on the deconsolidation date. This assessment is based on if the deconsolidation represents a strategic shift that has or will have a major effect on the Company’s operations or financial results. If the Company determines that a deconsolidation requires presentation as a discontinued
operation on the deconsolidation date, or at any point during the one-year period following such date, it will present the former subsidiary as a discontinued operation in current and comparative period financial statements.
Effect of foreign currency
The assets and liabilities of foreign subsidiaries whose functional currency is the local currency are translated into U.S. dollars at rates of exchange in effect at the close of their month end. Equity accounts are translated at their historical rates. Revenues and expenses are translated at the exchange rate on the transaction date. Translation gains and losses are accumulated within accumulated other comprehensive loss as a separate component of members’ equity.
Foreign currency transaction gains and losses are included in other expense (income) on the consolidated statements of operations and comprehensive loss andincome (loss). There were $713, $(777) and $213nominal losses for the yearsyear ended December 31, 2013, 20142019 and 2015, respectively.losses of $234 for the year ended December 31, 2018.
Other comprehensive lossincome (loss)
Comprehensive lossincome (loss) consists of two components: net lossincome (loss) and other comprehensive loss.income (loss). Other comprehensive lossincome (loss) refers to gains and losses that under U.S. GAAP are recorded as an element of members’ equity and are excluded from net loss.income (loss). The Company’s other comprehensive lossincome (loss) consists of a defined benefit plan adjustment and foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency.
Cash, cash equivalents and restricted cash
Cash and cash equivalents
Cash equivalents consist of highly liquid investments with an original maturity of three months or less at date of purchase. At December 31, 2014 and 2015 the Company did not have any cash equivalents. The Company’s cash and cash equivalents consist principally of cash which is primarily held in financial institutions in the USUnited States and the Netherlands. The Company maintains cash balances in the United States in excess of the federally insured limits. The Company’sCompany did not have restricted cash primarily consistedas of amounts collateralizing standby letters of credit issued in favor of leaseDecember 31, 2019 and other commitments.2018.
Derivatives
The Company uses derivative instruments to manage exposures to interest rates and foreign currencies.rates. Derivatives are recorded on the balance sheet at fair value at each balance sheet date. Thedate and the Company has elected the fair value method of accounting and does not designate whether the derivative instrument is an
effective hedge of an asset, liability or firm commitment.hedge. Changes in the fair values of derivative instruments are recognized in the consolidated statements of operations and comprehensive loss.income (loss). The Company has entered, and may in the future enter, into derivative contracts related to its debt and forecasted foreign currency transactions.debt.
Fair value
The Company records certain assets and liabilities at fair value (discussed further in Note 8). Fair value is defined as the price that would be received to sellfrom selling an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy that prioritizes the inputs used to measure fair value is described below. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. Assets and liabilities are categorized based on the lowest level that is significant to the valuation.
The three levels of inputs used to measure fair value are as follows:
Level 1—Quoted prices in active markets for identical assets or liabilities;
Level 2—Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data; and
Level 3—Unobservable inputs that are supported by little or no market data. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
Revenue recognition
Sale of productsProducts
Product sales directly to the customer areThe Company derives revenue primarily generated throughfrom the sale of external bone growth stimulators, osteoarthritisits osteoarthritic, or OA, joint pain treatment and joint preservation products, which are hyaluronic acid, or HA, viscosupplementation therapies, BGS products and surgical bone growth products. The Company presents revenue on a net basis, excluding taxes collected from customers and remitted to governmental authorities, as well as discounts, rebates, certain distribution fees and contractual allowances when recording revenue.Minimally Invasive Fracture Treatment product. The Company sells product directly to healthcare institutions, patients, distributors and dealers. Direct sales accountThe Company also enters arrangements with pharmacy and health benefit managers that provide for negotiated rebates, chargebacks and discounts with respect to the majority of net sales. Revenue is recognized when title and risk of losspurchase of the product passes to the purchaser, once all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the collection of the fees is reasonably assured and (3) the arrangement consideration is fixed or determinable.Company’s products.
The Company recordedrecognizes revenue at a point in time upon transfer of control of the promised product to customers in an amount that reflects the consideration it expects to receive in exchange for those products. The Company excludes from contractual payorsrevenues taxes collected from customers and remitted to governmental authorities.
Revenues are recorded at the contractual rate,transaction price, which is determined as the contracted price net of estimates of variable consideration resulting from discounts, rebates, returns, chargebacks, contractual allowances, estimated third-party payer settlements, and certain distribution and administration fees offered in our customer contracts and other indirect customer contracts relating to the sale of our products. The Company establishes reserves for the estimated variable consideration based on the amounts earned or eligible to be claimed on the related sales. Where appropriate, these estimates take into consideration a range of possible outcomes, which are probability-weighted for relevant factors such as the Company’s historical experience, current contractual requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. The amount of variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. The Company regularly reviews all reserves and update them at the timeend of sale. For non-contracted payors,each reporting period as needed. There were no adjustments arising from the Company records revenuechange in estimates of variable consideration that were significant for the years ended December 31, 2019 and 2018.
OA Joint Pain Treatment and Joint Preservation
Revenue from customers, such as healthcare providers, distribution centers or specialty pharmacies is recognized at the estimated recoverable amount based on historical results and other available information.point in time when control is transferred to the customer, typically upon shipment.
For certain products, we offerDistributor chargebacks to distributors who supply their customers with our products. We have
The Company has preexisting contracts with established rates with many of the wholesalers’distributors’ customers who require the wholesalersdistributors to sell our product at their established rate. Accordingly we record an adjustmentThe Company offers chargebacks to distributors who supply these customers with our products. The Company reduces revenue at the time of sale to estimatefor the estimated future chargebacks, basedchargebacks. The Company records chargeback reserves as a reduction of accounts receivable and base the reserves on the expected value by using probability-weighted estimates of volume of purchases, inventory holdings and historical data of rebateschargebacks requested for each wholesaler. All liabilities associated with chargebacks are reviewed regularly taking into consideration known market eventsdistributor.
Discounts and trends,gross-to-net deductions
The Company offers retrospective discounts and gross-to-net deductions linked to the volume of purchases which may increase at negotiated thresholds within a contract-buying period. The Company reduces revenue and records the reserve as well as internal and external historical dataa reduction to accounts receivable for the industryestimated discount and customer.
Revenue recognition for external bone growth stimulatorsMinimally Invasive Fracture Treatment
RevenueThe Company recognizes revenue from third-party payors,payers, such as governmental agencies, insurance companies or managed care providers, is recognizedwhen the Company transfers control to the patient, typically when the patient has accepted the product. Suchproduct or upon delivery. The Company records this revenue is recorded at the contracted rate, net of contractual allowances and estimated third-party payer settlements at the time of sale, or an estimated price based on historical resultsdata and other available information for non-contracted payors. Revenue payers. The Company estimates the contractual allowances using the portfolio approach and based on probability weighting historical data and collections history within those portfolios. The portfolios determined using the portfolio approach consist of the following customer groups: government payers, commercial payers, and patients. The Company recognizes revenue from patients (self-pay and insured patients with coinsurance and deductible responsibilities) based on billed amounts giving effect to any discounts and implicit price concessions. Implicit price concessions represent differences between amounts billed and the amounts the Company expects to collect from patients, which considers historical collection experience and current market conditions.
Settlements with third-party payers for retroactive revenue adjustments due to audits, reviews or investigations are considered variable consideration and are included in the determination of the estimated transaction price using the most likely outcome method. These settlements are estimated based on the terms of the payment agreement with the payer, correspondence from the payer and historical settlement activity, including an assessment to ensure that it is probable that a patient is negotiated with each individual andsignificant reversal in the amount of cumulative revenue recognized will not occur when the patient has accepteduncertainty associated with the product.
Revenue recognition for osteoarthritis pain treatment products
Revenue from customersretroactive adjustment is subsequently resolved. Estimated settlements are adjusted in future periods as adjustments become known (that is, new information becomes available), or as years are settled or are no longer subject to such as a healthcare provider, distribution center or specialty pharmacy is recognized when an order is receivedaudits, reviews and the product is delivered to the customer location. Revenue is recognized at the contracted price.investigations. The Company offers retrospective discountsis not aware of any claims, disputes or unsettled matters with any payer that are linked towould materially affect revenues for which the volumeCompany has not adequately provided for or disclosed in the accompanying consolidated financial statements (discussed further in Note 13).
Product returns
The Company estimates the amount of purchasesreturns and may increase at negotiated thresholds within a contract buying period.reduces revenue in the period the related product revenue is recognized. The Company records a liability for expected returns based on probability-weighted historical data.
Bone Graft Substitute
Most of the Company’s BGS product sales are through consignment inventory with hospitals, where ownership remains with the Company until the hospital or ambulatory surgical center, or ASC, performs a surgery and consumes the consigned inventory. The Company recognizes revenue when the surgery has been performed. The customer does not have control of the product until the customer consumes it, as the Company is able to require the return or transfer of the product to a third-party. An unconditional obligation to pay for the product does not exist until the customer consumes it.
Accounts receivable, net
Accounts receivable, net are amounts billed and currently due from customers. The Company records the amounts due net of allowance for doubtful accounts. The Company maintains an estimated discount and returns allowance basedfor
doubtful accounts to provide for receivables the Company does not expect to collect. The Company bases the allowance on historical, forecasted or negotiated results, the typean assessment of customer creditworthiness, historical payment experience, the age of outstanding receivables and other information as applicable. Collection of the specifics of each arrangement.
Revenue recognition for surgical bone growth products
Revenue from customers such as a healthcare provider is recognized when a surgery is performed and the consigned inventory has been consumed. Revenue is recognized at the contracted price.
S&N distribution arrangement
During 2013 and 2014,consideration that the Company participatedexpects 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.
Contract assets
Contract assets consist of unbilled amounts resulting from estimated future royalties from an international distributor that exceeds the amount billed. Contract assets totaling $261 and $472 as of December 31, 2019 and 2018, are included in a distribution arrangement with S&N, whereby S&N marketedprepaid and sold products outside the USother current assets on the Company’s behalf. Theconsolidated balance sheets, respectively.
Contract liabilities
Contract liabilities consist of customer advance payments and deferred revenue. Occasionally for certain international customers, the Company recognizedrequires payments in advance of shipping product and recognizing revenue under this distribution arrangement upon sale to third-party customers. Sales totaled $3,176 and $556 for the years endedresulting in contract liabilities. Contract liabilities were nominal as of December 31, 20132019 and 2014, respectively. During2018 and are included in accrued liabilities on the period from May 4, 2012 through September 2013, the Company entered into many of these markets directly and sales under this agreement ended December 31, 2014.consolidated balance sheets.
Shipping and handling
The Company classifies amounts billed for shipping and handling as a component of net sales. The related shipping and handling fees and costs as well as other distribution costs are included in cost of sales.
Accounts receivable and allowances
Accounts receivables are amounts due from customers and payors that are recorded at net realizable value for product sold in the ordinary course of business. The Company maintains a contractual allowancehas elected to recognize shipping and an allowance for doubtful accounts.handling activities that occur after control of the related product transfers to the customer as fulfillment costs and are included in cost of sales.
Contract costs
The contractual allowance is offset against revenue for each sale to a contracted and non-contracted payor so that revenue andCompany applies the resulting accounts receivable are recorded atpractical expedient of recognizing the expected reimbursement amount atincremental costs of obtaining contracts as an expense when incurred as the timeamortization period of the sale. When evaluating the adequacy of the contractual allowance,assets that the Company analyzes contractual pricingotherwise would have recognized is one year or less. These incremental costs include the Company’s sales incentive programs for the internal sales force and third-party sales agents as the compensation is commensurate with third party payors as well as historical results with contractual and non-contractual payors. The difference between actual contract adjustments and the estimates recorded have not been material.
The allowance for doubtful accounts is based on the assessment of the collectability of specific customer accounts and the aging of the accounts receivable. When evaluating the adequacy of this allowance, the Company analyzes accounts receivable, historical bad debts, customer concentrations, customer solvency, current economic and geographic trends, and changes in customer payment terms and practices. Credit is
granted to costumers in the normal course of business, generally without collateral. Charges to the allowance for doubtful accountsannual sales activities. These costs are recordedincluded in selling, general and administrative expense (SG&A) inon the consolidated statements of operations and comprehensive loss. The Company’s reserve levels have generally been sufficient to cover credit losses.income (loss).
Inventory
The Company values its inventory at the lower of cost or marketnet realizable value and adjusts for the value of inventory that is estimated to be excess, obsolete or otherwise unmarketable. Cost is determined using the first-in, first-out (FIFO) method. Elements of cost in inventory include raw materials, direct labor, manufacturing overhead and inbound freight. The Company records allowances for excess and obsolete inventory based on historical and estimated future demand and market conditions.
Business combinations
Accounting for acquisitions requires the Company to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While best estimates and assumptions are used to accurately value assets acquired and
liabilities assumed at the acquisition date, as well as contingent consideration where applicable, estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with a corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations and comprehensive loss.income (loss). Subsequent changes in the estimated fair value of contingent consideration are recognized in earnings in the period of change.
Long-lived assets
Property and equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expense are depreciatedrecognized using the straight-line method over the estimated useful life of each asset, or the shorter of the asset’s estimatedlease term or useful life or the lease term if related to leased property,leasehold improvements. The useful lives are as follows (in years):
Computer software and hardware | 3-5 | |||
Leasehold improvements | ||||
Machinery and equipment | ||||
Furniture and fixtures | ||||
| 7 | ||||
Finite-lived identifiableGoodwill and intangible assets
Finite-lived intangible assets were initially recorded at fair value upon acquisition and are amortized using the straight-line method over their estimated remaining useful lives as follows (in years):
Weighted
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Intellectual property | ||||
Distribution rights | ||||
Customer relationships | ||||
Developed technology | ||||
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| 5.0 | ||||
The Company evaluates goodwillGoodwill is not amortized but is evaluated for impairment annually or more frequently if events or changes in circumstances indicate that goodwill might be impaired. The Company reviews goodwill for impairment by applying a quantitative impairment analysis using the two step method. Under the first step,where the fair value of the reporting unit is compared with itsthe carrying value (including goodwill). IfThe Company determines the fair value of each reporting unit based on an income approach. 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 exceedsin an orderly transaction between market participants at the measurement date. The Company performs its carrying value,annual goodwill is not considered impaired and no additional analysis is performed.impairment test on October 31st. If the fair value of the reporting unit is less than its carrying value, the Company will recognize the difference as an impairment loss, which is limited to the amount of the impairment loss for any excess carrying amount ofgoodwill allocated to the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, and the residual fair value after this allocation is the implied fair value of the reporting unit goodwill.
In the fourth quarter of 2014, as a result of the OsteoAmp acquisition, the Company changed from a geographic operating segment and reporting unit basis to a product basis resulting in three operating segments, U.S. AHT, International AHT & Surgical. Goodwill impairment was reassessed resulting in no impairment. The Company also performed its annual impairment test on October 31st. On December 31, 2015 the Company began presenting information in four operating segments to the CODM and an updated impairment test was performed. A portion of U.S. AHT goodwill was reassigned to the fourth reporting unit, BMP, based on relative fair value.units. There were no impairment charges for the years ended December 31, 2013, 20142019 and 2015.2018.
Software development costs
The Company capitalizes internal and external costs incurred from third-party vendorsto develop internal-use software during the application development stage for software design, configuration, coding and testing upon placing the asset in service and then amortizes these costs on a straight-line basis over the estimated useful life of the product, not to exceed three years. The Company does not capitalize costs that are precluded from capitalization in authoritative
guidance, such as preliminary project phase costs, planning, oversight, process re-engineering costs, training costs or data conversion costs. Capitalized software costs totaled $9,715$14,119 and $10,981 at$13,027 as of December 31, 20142019 and 2015, respectively. The2018 and the related accumulated amortization totaled $3,868$12,184 and $7,068$11,301 as of December 31, 20142019 and 2015,2018, respectively. Depreciation expense was $1,138 and $1,204 for the years ended December 31, 2019 and 2018, respectively.
The carrying values of property, equipment, intangible assets as well as other long-lived and indefinite lived assets are reviewed for recoverability if the facts and circumstances suggest that a potential impairment may have occurred. If this review indicates that carrying values may not be recoverable as determined based on undiscounted cash flow projections, the Company will perform an assessment to determine if an impairment charge is required to reduce carrying values to estimated fair value. ThereIf quoted market prices are not available, the Company estimates fair value using an undiscounted value of estimated future cash flows. During 2018, the Company determined that it would no longer sell a specific BGS product and as a result, an intangible asset related to this product was fully written off and the Company recognized impairment charges of $489 for the year ended December 31, 2018, which is included on the consolidated statements of operations and comprehensive income (loss). Upon retirement or sale of property and equipment, the cost of assets disposed of and the related accumulated depreciation and amortization are removed from the accounts, and any resulting gain or loss is included in income from operations.
Other than in-process research and development, or IPR&D, described below, there were no events, facts or circumstances for the years ended December 31, 2013, 2014 and 20152019 that resulted in any other impairment charges to the Company’s property, equipment, intangible or other long-lived assets.
Acquired in-process research and development
The fair value of acquired in-process research and development, or IPR&D projectsassets acquired in a business combination are capitalized and accounted for as indefinite-lived intangible assets. Once theassets and are not amortized until development is completed and the product is available for sale. Once the product is available for sale, the asset is transferred to developed technology and amortized over its remaining estimated useful life.
The initial costs of rights to Impairment tests for IPR&D projects obtainedassets occur at least annually in anDecember, or more frequently if events or changes in circumstances indicate that the asset acquisition are expensed unless the project has an alternative future use. During June 2013, the Company entered into a license agreement for $7,000 granting the Company a research license for certain compounds as well as related rights and options.might be impaired. If the Company reaches certain development milestonesfair value of the intangible assets is less than the carrying amount, an impairment loss is recognized for the difference. There were no events, facts or exercises certaincircumstances for the years ended December 31, 2019 and 2018 that resulted in any impairment charges to the Company’s IPR&D.
Deferred Offering Costs
Deferred offering costs, consisting of legal, accounting, filing and other options,fees related to the Companyinitial public offering, are capitalized. The deferred offering costs will be subject to cash paymentsoffset against proceeds from the initial public offering upon the achievementeffectiveness of certain development milestonesthe initial public offering. In the event the initial public offering is terminated, all capitalized deferred offering costs would be expensed. As of December 31, 2019 and royalties ranging from mid-single digit to low double digit percentages of net sales. The transaction was accounted for as an asset acquisition and the 2013 payment is included in research and development expense (R&D) on the consolidated statement of operations and comprehensive loss.
Concentration of risk
The Company provides credit, in the normal course of business, to its customers. The Company does not require collateral or other securities to support customer receivables. Credit losses are provided for through allowances and have historically been materially within management’s estimates.
Certain suppliers provide the Company with product that results in a significant percentage of total sales for the years ended December 31 as follows:
| 2013 | 2014 | 2015 | 2019 | 2018 | ||||||||||||||||
Supplier A | 37% | 33% | 32% | 20 | % | 12 | % | |||||||||||||
Supplier B | 9% | 9% | 7% | 19 | % | 17 | % | |||||||||||||
Supplier C | 0% | 2% | 9% | 15 | % | 20 | % | |||||||||||||
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Two
Accounts payable to these significant suppliers at December 31 were as follows:
| 2019 | 2018 | |||||||
Supplier A | $ | 3,586 | $ | 426 | ||||
Supplier B | $ | 697 | $ | 457 | ||||
Supplier C | $ | 360 | $ | 1,605 | ||||
Certain products provide the Company with a significant percentage of the Company’s products make up 89%, 87% and 83% oftotal sales for the years ended December 31 2013, 2014 and 2015.as follows:
| 2019 | 2018 | |||||||
Product A | 30 | % | 38 | % | ||||
Product B | 20 | % | 12 | % | ||||
Product C | 19 | % | 17 | % | ||||
Product D | 15 | % | 20 | % | ||||
Restructuring costs
The Company has restructured portions of its operations and future restructuring activities are possible. Identifying and calculating the cost to exit these operations requires certain assumptions to be made, the most significant of which are anticipated future liabilities. Although estimates have been reasonably accurate in the past, significant judgment is required, and these estimates and assumptions may change as additional information becomes available and facts or circumstances change. Restructuring costs are recorded at estimated fair value. Key assumptions in determining the restructuring costs include the net realizable value of inventory as well as negotiated terms and payments to terminate certain contractual obligations.
Profits interest compensation
The Company measures profits interest compensation cost at the grant date based on the fair value of the award and recognizes this cost as compensation expense over the required or estimated service period for awards expected to vest. Certain awards are liability-classified, which require they be remeasured at each reporting date. Compensation expense is included in SG&ASelling, general and R&Dadministrative expense and Research and development expense on the consolidated statement of operations and comprehensive lossincome (loss) based upon the classification of the employees who were granted the awards.
The Company uses the Monte Carlo option model to allocatedetermine the fair value to the granted profits interest awards and other equity instruments. Expected stock price volatility is based on an average of several peer public companies due to the Company’s limited operating history. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the award. The dividend yield percentage is zero because the Company neither currently pays dividends nor intends to do so during the expected term.
The expected term of awards represents the average time the awards are expected to be outstanding. The expected term is based on the mid-point betweenestimated time until a liquidity or Distribution Event as defined in the vesting dateamended and the contractual term.restated limited liability company agreement of Bioventus LLC, or LLC Agreement, discussed further in Note 10.
Advertising costs
Advertising costs include costs incurred to promote the Company’s business and are expensed as incurred. Advertising costs were $1,852, $1,791$2,351 and $1,543$2,916 for the years ended December 31, 2013, 20142019 and 2015,2018, respectively.
Research and development expense
R&D consistsResearch and development expense consist primarily of employee compensation and related expenses andas well as contract research organization services. Internal R&Dresearch and development costs are expensed as incurred. R&DResearch and development costs incurred by third parties are expensed as the contracted work is performed.
Net lossincome (loss) per unit
Basic lossincome (loss) per common unit is determined by dividing the net lossincome (loss) allocable to common unit holders by the weighted average number of common units outstanding during the periods presented. Diluted loss per common unit is computed by dividing the net lossincome (loss) allocable to common unit holders on an “if converted” basis by the weighted average number of actual common units outstanding and, when dilutive, the unit equivalents that would arise from the assumed conversion of convertible instruments.
Contingencies
The Company records a liability in the consolidated financial statements on an undiscounted basis for loss contingencies when a loss is known or considered probable and the amount may be reasonably estimated. If the reasonable estimate of known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is reasonably possible but not known or probable, and may be reasonably estimated, the estimated loss or range of loss is disclosed. Legal fees expected to be incurred in connection with a loss contingency are not included in the estimated loss contingency. The Company accrues for any legal costs as they are incurred.
Income taxes
Bioventus is treated as a partnership for U.S. tax purposes. Accordingly, the profits and losses are passed through to the members and included in their income tax returns. The Company ishas been required to make tax distributions to its members in an amount equal to 40% of the members’ taxable income attributable to their ownership. The tax rate applied for purposes of this distribution may be changed only by approval of the Company’s Board of Managers.
Certain wholly-ownedwholly owned subsidiaries of Bioventus are taxable entities for U.S. or foreign tax purposes and file tax returns in their local jurisdictions. Income tax expense includes U.S. federal, state and international income taxes. Certain items of income and expense are not reported in income tax returns and financial statements in the same year. The income tax effects of these differences are reported as deferred income taxes. Valuation allowances are provided to reduce the related deferred tax assets to an amount which will, more likely than not, be realized. Interest and penalties related to unrecognized tax benefits are recognized as a component of income tax expense.
The Company recognizes a tax benefit from any uncertain tax positions only if they are more likely than not to be sustained upon examination based on the technical merits of the position. The amount of the accrual for which an exposure exists is measured as the largest amount of benefit determined on a cumulative probability basis that the Company believes is more likely than not to be realized upon ultimate settlement of the position. Components of the reserve, if relevant, are classified as a current or noncurrent liability in the consolidated balance sheet based on when the Company expects each of the items to be settled. Interest and penalties related to unrecognized tax benefits are recognized as a component of income tax expense.
Subsequent eventsEvents
The Company has considered the effects of subsequent events through April 19, 2016,October 6, 2020, the date the Company’s consolidated financial statements were issued.
Recent accounting pronouncements
In May 2014, the U.S. Financial Accounting Standards Board (FASB) issued guidance that provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. This guidance is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted for annual reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact of this new standard on its consolidated financial statements, the date of adoption, and the transition approach to implement the new guidance.
In February 2015, the FASB issued guidance which changes the analysis in determining whether an entity is considered a variable interest entity (VIE) and the identification of the primary beneficiary of the VIE to determine whether the VIE should be included in an entity’s consolidated financial statements. The Company will adopt the new accounting guidance on January 1, 2016, as required. The Company does not expect this guidance to have a material effect on the Company’s consolidated financial statements.
In April 2015, the FASB issued guidance that requires debt issuance costs related to a recognized debt liability to be presented in the consolidated balance sheet as a direct deduction from the debt liability rather than as an asset. In August 2015, the FASB issued updated guidance related to debt issuance costs to include SEC guidance regarding line-of-credit arrangements. The SEC staff would not object to deferring and presenting debt issuance costs as an asset for line of credit arrangement regardless of whether there is an outstanding balance. This guidance is effective for annual and interim periods beginning after December 15, 2015. The Company adopted the new accounting guidance early on December 31, 2015 resulting in a reclassification of $2,196 and $1,760 in other assets to a reduction of the long-term debt balance at December 31, 2014 and 2015, respectively.
In September 2015, the FASB issued guidance that eliminated the requirement that an acquirer in a business combination account for the measurement-period adjustments retrospectively. The acquirer will recognize the measurement-period adjustment during the period in which the adjustment is determined. The Company adopted the new accounting guidance early on January 1, 2015 with no material effect on the Company’s consolidated financial statements.
In November 2015, the FASB issued guidance that requires companies to classify all deferred tax assets and liabilities as noncurrent on the consolidated balance sheet. The Company adopted the new accounting guidance early on December 31, 2015 resulting in a reclassification of $276 and $251 in current deferred tax liabilities to long term at December 31, 2014 and 2015, respectively.
In February 2016, the FASB issued guidance that requires lessees to recognize the rights and obligations resulting from leases as assets and liabilities. It also modifies the classification criteria and the accounting for sales-type and direct financing leases for the lessor. This guidance is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted and must be adopted using a modified retrospective transition. The Company is currently evaluating the impact of this new standard on its consolidated financial statements and the date of adoption to implement the new guidance.
3. Balance sheet information
Accounts receivable, net
Accounts receivable, net of allowances, consisted of the following as of December 31:
| 2014 | 2015 | |||||||
Accounts receivable | $ | 74,366 | $ | 87,227 | ||||
Less: | ||||||||
Contractual allowances | (19,118 | ) | (24,114 | ) | ||||
Allowances for doubtful accounts | (8,671 | ) | (8,602 | ) | ||||
|
| |||||||
| 46,577 | 54,511 | |||||||
Receivables from related parties | 498 | — | ||||||
|
| |||||||
| $ | 47,075 | $ | 54,511 | |||||
| ||||||||
Accounts receivable Less: Allowances for doubtful accounts 2019 2018 $ 89,274 $ 77,066 (4,146 ) (4,497 ) $ 85,128 $ 72,569
Changes in the allowances for doubtful accounts were as follows for the years ended December 31:
| 2013 | 2014 | 2015 | 2019 | 2018 | ||||||||||||||||
Balance, beginning of period | $ | (6,430 | ) | $ | (8,634 | ) | $ | (8,671 | ) | $ | (4,497 | ) | $ | (3,795 | ) | |||||
Provision for losses | (5,485 | ) | (5,880 | ) | (4,707 | ) | (2,242 | ) | (2,538 | ) | ||||||||||
Write-offs, net of recoveries | 3,281 | 5,843 | 4,776 | 2,593 | 1,836 | |||||||||||||||
|
|
|
| |||||||||||||||||
| $ | (4,146 | ) | $ | (4,497 | ) | |||||||||||||||
| $ | (8,634 | ) | $ | (8,671 | ) | $ | (8,602 | ) |
|
| ||||||||||
| ||||||||||||||||||||
Inventory net
Inventory consisted of the following as of December 31:
| 2014 | 2015 | 2019 | 2018 | |||||||||||||
Raw materials and supplies | $ | 5,266 | $ | 8,433 | $ | 3,349 | $ | 3,998 | ||||||||
Finished goods | 24,006 | 27,861 | 24,509 | 23,968 | ||||||||||||
|
|
|
| |||||||||||||
Gross | 29,272 | 36,294 | 27,858 | 27,966 | ||||||||||||
Excess and obsolete reserves | (2,598 | ) | (1,116 | ) | (532 | ) | (570 | ) | ||||||||
|
|
|
| |||||||||||||
| $ | 27,326 | $ | 27,396 | |||||||||||||
| $ | 26,674 | $ | 35,178 |
|
| |||||||||||
| ||||||||||||||||
Changes in excess and obsolete reserves for inventory were as follows for the years ended December 31:
| 2013 | 2014 | 2015 | 2019 | 2018 | ||||||||||||||||
Balance, beginning of period | $ | (1,243 | ) | $ | (1,088 | ) | $ | (2,598 | ) | $ | (570 | ) | $ | (485 | ) | |||||
Provision for losses | (303 | ) | (2,364 | ) | (1,210 | ) | (870 | ) | (1,059 | ) | ||||||||||
Write-offs | 458 | 854 | 2,692 | 908 | 974 | |||||||||||||||
|
|
|
| |||||||||||||||||
| $ | (532 | ) | $ | (570 | ) | |||||||||||||||
| $ | (1,088 | ) | $ | (2,598 | ) | $ | (1,116 | ) |
|
| ||||||||||
| ||||||||||||||||||||
Property and equipment, net
Property and equipment consisted of the following as of December 31:
| 2014 | 2015 | 2019 | 2018 | |||||||||||||
Computer equipment and software | $ | 14,640 | $ | 16,375 | $ | 16,854 | $ | 18,371 | ||||||||
Leasehold improvements | 2,349 | 2,583 | 2,918 | 2,461 | ||||||||||||
Furniture and fixtures | 925 | 1,173 | 1,451 | 1,431 | ||||||||||||
Machinery and equipment | 914 | 914 | 1,138 | 1,052 | ||||||||||||
Assets not yet placed in service | 499 | 2,730 | 370 | 200 | ||||||||||||
|
|
|
| |||||||||||||
| 22,731 | 23,515 | |||||||||||||||
| 19,327 | 23,775 | |||||||||||||||
Less accumulated depreciation | (8,899 | ) | (14,173 | ) | (18,242 | ) | (18,756 | ) | ||||||||
|
|
|
| |||||||||||||
Property and equipment, net | $ | 10,428 | $ | 9,602 | ||||||||||||
|
| $ | 4,489 | $ | 4,759 | |||||||||||
|
| |||||||||||||||
Depreciation expense was $3,541, $5,064$2,579 and $5,321$3,439 for the years ended December 31, 2013, 20142019 and 2015,2018, respectively.
Goodwill and intangible assets, net
The following is a summary of goodwill by segment:
| US AHT | International AHT | Surgical | BMP | Consolidated | ||||||||||||||||
Balance at December 31, 2013 | $ | 48,339 | $ | — | $ | — | $ | — | $ | 48,339 | ||||||||||
OsteoAMP acquisition | — | — | 1,614 | — | 1,614 | |||||||||||||||
Allocation to new segment | (8,760 | ) | 8,760 | — | — | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance at December 31, 2014 | 39,579 | 8,760 | 1,614 | — | 49,953 | |||||||||||||||
OsteoAMP acquisition measurement period adjustment | — | — | (376 | ) | — | (376 | ) | |||||||||||||
BioStructures acquisition | — | — | 9,117 | — | 9,117 | |||||||||||||||
Allocation to new segment | (8,894 | ) | — | — | 8,894 | — | ||||||||||||||
|
| |||||||||||||||||||
Balance at December 31, 2015 | $ | 30,685 | $ | 8,760 | $ | 10,355 | $ | 8,894 | $ | 58,694 | ||||||||||
| ||||||||||||||||||||
There were no changes to goodwill during the yearyears ended December 31, 2013. During 2015,2019 and 2018. Following is a summary of goodwill was adjusted primarily for the reduction in working capital related to inventory and prepaid assets.by reportable segment:
| U.S. | International | Consolidated | ||||||||||
Balance at December 31, 2018 and 2019 | $ | 41,040 | $ | 8,760 | $ | 49,800 | ||||||
|
|
|
|
|
| |||||||
Intangible assets consisted of the following as of December 31:
| 2014 | 2015 | 2019 | 2018 | |||||||||||||
Intellectual property | $ | 213,438 | $ | 259,238 | $ | 263,422 | $ | 258,588 | ||||||||
Distribution rights | 60,600 | 42,700 | 59,700 | 59,700 | ||||||||||||
Customer relationships | 53,200 | 57,700 | 57,700 | 57,700 | ||||||||||||
IPR&D | 4,000 | 27,000 | 11,095 | 9,650 | ||||||||||||
Developed technology | 2,800 | 2,800 | ||||||||||||||
Other intangibles | 424 | 474 | ||||||||||||||
Developed technology and other | 4,649 | 4,648 | ||||||||||||||
|
|
|
| |||||||||||||
Total carrying amount | 334,462 | 389,912 | 396,566 | 390,286 | ||||||||||||
|
| |||||||||||||||
|
| |||||||||||||||
Less accumulated amortization: | ||||||||||||||||
Intellectual property | (23,460 | ) | (36,377 | ) | (100,982 | ) | (84,900 | ) | ||||||||
Distribution rights | (22,072 | ) | (11,598 | ) | (28,716 | ) | (23,670 | ) | ||||||||
Customer relationships | (13,306 | ) | (19,887 | ) | (46,407 | ) | (41,567 | ) | ||||||||
Developed technology | (1,273 | ) | (2,800 | ) | ||||||||||||
Other intangibles | (19 | ) | (98 | ) | ||||||||||||
Developed technology and other | (3,404 | ) | (3,120 | ) | ||||||||||||
|
|
|
| |||||||||||||
Total accumulated amortization | (60,130 | ) | (70,760 | ) | (179,509 | ) | (153,257 | ) | ||||||||
|
|
|
| |||||||||||||
Intangible assets, net | $ | 274,332 | $ | 319,152 | ||||||||||||
Intangible assets, net before currency translation | 217,057 | 237,029 | ||||||||||||||
Currency translation | (547 | ) | — | |||||||||||||
|
|
|
| |||||||||||||
| $ | 216,510 | $ | 237,029 | |||||||||||||
|
| |||||||||||||||
In August 2019, the Company invested in Harbor Medtech Inc., or Harbor, and consolidated its financial statements with the Company’s (discussed further in Note 4). As a result of this consolidation, $4,834 of intellectual property and $1,445 of IPR&D was added to intangible assets. The remaining $9,650 of IPR&D consists of research and development progress toward the next-generation of a BGS product for which the Company filed a 510(k) in 2019 and intends to begin commercialization in 2020.
Amortization expense related to intangible assets was $21,087, $25,152$26,252 and $28,529$26,622 for the years ended December 31, 2013, 20142019 and 20152018 of which $6,505, $7,983$6,416 and $8,565$7,766 are included in ending inventory at December 31, 2013, 20142019 and 2015,2018, respectively. Estimated amortization expense for the years ended December 31, 20162020 through 20202024 is expected to be $27,597, $27,150, $25,310, $24,022$27,106, $27,106, $22,754, $21,141 and $23,873,$20,103, respectively.
Investments
VIE
On August 23, 2019, the Company purchased 285,714 shares of Harbor’s Series C Preferred Stock or 3.1% of fully diluted shares for $1,000 in cash. In addition, the Company and Harbor entered into an exclusive license and development collaboration agreement, or Collaboration Agreement, for purposes of developing a product for orthopedic uses to be commercialized by the Company and supplied by Harbor (discussed further in Note 13). As a result of these transactions, the Company determined that it had a variable interest in Harbor. The Company
also concluded that it was the primary beneficiary since it controls the significant activities of Harbor through the Collaboration Agreement. Accordingly, the Company accounted for the $1,000 investment in Harbor as a business combination and consolidated Harbor in its consolidated financial statements with a noncontrolling interest for the remaining 96.9% (discussed further in Note 4).
Harbor assets that can only be used to settle Harbor obligations and Harbor liabilities for which creditors do not have recourse to the general credit of the Company are as follows as of December 31, 2019:
Cash and cash equivalents | $ | 1,127 | ||
Property and equipment, net | 60 | |||
Intangible assets, net | 6,122 | |||
Operating lease assets | 231 | |||
Other assets | 59 | |||
|
| |||
| $ | 7,599 | |||
|
| |||
Accounts payable and accrued liabilities | $ | 458 | ||
Other current liabilities | 2,395 | |||
Deferred income tax | 215 | |||
Other long-term liabilities | 872 | |||
|
| |||
| $ | 3,940 | |||
|
|
Other
On January 30, 2018, the Company purchased 337,397 shares of CartiHeal (2009) Ltd., or CartiHeal, a privately held entity, Series F Convertible Preferred Stock or 2.8% of fully diluted shares for $2,500 in cash. The investment does not have a readily determinable fair value. Under the measurement alternative, the investment is recorded at cost, less any impairment, plus or minus any changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. There have not been any impairments or adjustments to the investment. This investment is included in investment and other assets on the consolidated balance sheet.
Accrued liabilities
Accrued liabilities consisted of the following at December 31:
| 2014 | 2015 | |||||||
Bonus and commission | $ | 11,558 | $ | 10,161 | ||||
Compensation and benefits | 4,452 | 4,709 | ||||||
BioStructure second close payment | — | 4,965 | ||||||
Product costs | 966 | 3,063 | ||||||
Income and other taxes | 1,313 | 2,656 | ||||||
Accounting and legal fees | 2,032 | 2,602 | ||||||
Amounts due to managed care organizations | 1,698 | 1,438 | ||||||
Research, development and regulatory | 834 | 1,309 | ||||||
Other liabilities | 3,116 | 3,465 | ||||||
|
| |||||||
| $ | 25,969 | $ | 34,368 | |||||
| ||||||||
| 2019 | 2018 | |||||||
Gross-to-net deductions | $ | 14,622 | $ | 4,238 | ||||
Bonus and commission | 14,200 | 12,255 | ||||||
Reserve for estimated overpayments from third-party payers | 6,801 | 12,468 | ||||||
Compensation and benefits | 3,231 | 3,139 | ||||||
Income and other taxes | 2,555 | 2,032 | ||||||
Distribution rights | — | 6,000 | ||||||
Other liabilities | 11,418 | 10,852 | ||||||
|
|
|
| |||||
| $ | 52,827 | $ | 50,984 | |||||
|
|
|
| |||||
4. Business combination
OsteoAMP acquisition
On OctoberAs discussed in Note 3, 2014, in order to enter the surgical orthobiologics market,on August 23, 2019, the Company purchasedinvested $1,000 in Harbor. Harbor is a corporation formed under the OsteoAMP assetslaws of the biologic growth factor technology business from a California biologics company (the OsteoAMP Seller). The total purchase price was $42,890. The purchase price consistedstate of contingent consideration of $32,344 and cash of $10,546.
Delaware on October 12, 2010. The Company accounted for the OsteoAMP purchaseHarbor investment as a business combination using the acquisition method of accounting whereby the total
purchase price was preliminarily allocated to tangible and intangible assets acquired and liabilities assumed based on respective fair values. The following table summarizes the preliminary and final fair values of the assets acquired and liabilities assumed at the acquisition date:
| Preliminary | Measurement period adjustments | Final | ||||||||||
Fair value of consideration | $ | 42,890 | $ | — | $ | 42,890 | ||||||
|
| |||||||||||
Assets acquired: | ||||||||||||
Inventory | 2,509 | 234 | 2,743 | |||||||||
Prepaid and other assets | — | 142 | 142 | |||||||||
Intangible assets | 39,400 | — | 39,400 | |||||||||
|
| |||||||||||
Total assets acquired | 41,909 | 376 | 42,285 | |||||||||
|
| |||||||||||
Liabilities assumed: | ||||||||||||
Accounts payable | 633 | — | 633 | |||||||||
|
| |||||||||||
Net identifiable assets acquired | 41,276 | 376 | 41,652 | |||||||||
|
| |||||||||||
Resulting goodwill | $ | 1,614 | $ | (376 | ) | $ | 1,238 | |||||
| ||||||||||||
As of December 31, 2014, thetotal cash purchase price allocation for the OsteoAMP acquisition was preliminary and subject to completion. Adjustments to the current fair value estimates in the above table occurred as the process conducted for various valuations and assessments was finalized in September 2015, including tax
assets, liabilities and other attributes. Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and nearly 100% represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized.$1,000.
The factors contributing to the recognition of goodwill are based on several strategic and synergistic benefits that are expected to be realized from the OsteoAMP acquisition including the expansion into the surgical market. The goodwill is tax deductible and was allocated to the Surgical reporting unit for purposes of the evaluation for any future goodwill impairment.
The contingent consideration consists of up to $12,000 for various cash earn-out payments upon the achievement of certain net sales targets through December 31, 2019, a royalty on certain future net sales of OsteoAMP beginning January 1, 2019 through December 31, 2023 and a supply agreement with the OsteoAMP Seller ending in October 2018. Under the terms of the supply agreement, the Company will purchase the OsteoAMP product from the OsteoAMP Seller at prices above the market rate. Contingent consideration payments may be up to $70,117. There was $1,731 and $16,345 in contingent consideration payments for the year ended December 31, 2014 and 2015, respectively.
The intangible assets purchased consisted of the following:
| Fair value | Useful life (in years) | |||||||
Intellectual property | $ | 30,300 | 10 | |||||
Customer relationships | 4,800 | 3 | ||||||
IPR&D | 4,000 | N/A | ||||||
Non-compete agreement | 300 | 4 | ||||||
|
| |||||||
Total intangible assets acquired | $ | 39,400 | ||||||
| ||||||||
The preliminary fair value of the OsteoAMPHarbor intellectual property and IPR&D was determined using the income approach through an excess earnings analysis, with projected earnings discounted at a rate of 25.0% and 27.0%, respectively.16.5%. The $1,445 of IPR&D consists of certain R&Dresearch and development progress toward the next-generation of OsteoAMP.developing a product for orthopedic uses. The preliminary fair value of the customer relationship assetnoncontrolling interest was determined using the income approach through an incremental cash flow analysis utilizing the with-and-without or lost profits method, with projected cash flow discounted at a ratecalculated as estimated fair value of 24.0%. The determination of the useful lives was based upon consideration of market participant assumptions and transaction specific factors.
The results of OsteoAMP operations of the business have been included in the accompanying consolidated financial statements since the October 3, 2014 acquisition date. OsteoAMP revenue and earnings included in operations are as follows for the years ended December 31:
| 2014 | 2015 | |||||||
Net sales | $ | 4,150 | $ | 24,034 | ||||
Loss before income taxes | $ | (2,092 | ) | $ | (17,709 | ) | ||
| ||||||||
Revenue and earnings including the OsteoAMP operations as if it was acquired at January 1, 2013 are as follows for the years ended December 31:
| 2013 | 2014 | |||||||
| (unaudited) | (unaudited) | |||||||
Net sales | $ | 241,780 | $ | 254,579 | ||||
Loss before income taxes | $ | (19,351 | ) | $ | (9,225 | ) | ||
| ||||||||
OsteoAMP acquisition-related costs for the year ended December 31, 2014 were $178 and are recorded in SG&A in the consolidated statement of operations and comprehensive loss.
BioStructures acquisition
On November 24, 2015, in order to increase its presence in the surgical orthobiologics market, the Company purchased BioStructures, LLC for cash of $48,397, a $23,528 note payable to the former BioStructures owners, contingent consideration of $4,542 and a second closing payment of $4,960. Contingent consideration is made up of future earn-out payments contingent upon the achievement of certain research and development milestones through November 24, 2017. BioStructures, LLC is a limited liability company formed under the laws of the state of California on August 22, 2007 and operates as a partnership. The Company accounted for the BioStructures purchase using the acquisition method of accounting whereby the total purchase price was preliminarily allocated to tangible and intangiblenet assets acquired and liabilities assumed based on respective fair values. less the Bioventus’ purchase price.
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the acquisition date:
Fair value of consideration | $ | 81,427 | ||
|
| |||
Assets acquired: | ||||
Cash | 778 | |||
Accounts receivable | 1,677 | |||
Inventory | 1,924 | |||
Property and equipment | 44 | |||
Intangible assets | 73,350 | |||
|
| |||
Total assets acquired | 77,773 | |||
|
| |||
Liabilities assumed: | ||||
Accounts payable | 1,077 | |||
Accrued liabilities | 4,386 | |||
|
| |||
Net identifiable assets acquired | 72,310 | |||
|
| |||
Resulting goodwill | $ | 9,117 | ||
| ||||
As of December 31, 2015, the purchase price allocation for the BioStructures acquisition was preliminary and subject to completion. Adjustments to the current fair value estimates in the above table may occur as the process conducted for various valuations and assessments is finalized, including tax liabilities and other working capital accounts. Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and nearly 100% represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized.
The factors contributing to the recognition of goodwill are based on several strategic and synergistic benefits that are expected to be realized from the BioStructures acquisition including the expansion into the surgical market. The goodwill is tax deductible and was allocated to the Surgical reporting unit for purposes of the evaluation for any future goodwill impairment.
Contingent consideration is made up of future earn-out payments contingent upon the achievement of certain R&D milestones to be achieved by the former BioStructures owners. The contingent consideration could be lowered and is not to exceed $5,000.
The intangible assets purchased consisted of the following:
| Fair value | Weighted Useful life | |||||||
Intellectual property | $ | 45,800 | 13.4 | |||||
IPR&D | 23,000 | N/A | ||||||
Distributor relationships | 4,500 | 2.7 | ||||||
Trade name | 50 | 1 | ||||||
|
| |||||||
Total intangible assets acquired | $ | 73,350 | ||||||
| ||||||||
The preliminary fair value of the BioStructures intellectual property and IPR&D was determined using the income approach through an excess earnings analysis, with projected earnings discounted at a rate of 17.0% and 18.0%, respectively. The IPR&D consists of certain R&D progress toward the next-generation of Silhouette and SignaFuse. The preliminary fair value of the distributor relationship asset was determined using the income approach through an incremental cash flow analysis utilizing the with-and-without or lost profits method for consignment distributors and the cost method for stocking distributors, with projected cash flow discounted at a rate of 17.0%. The determination of the useful lives was based upon consideration of market participant assumptions and transaction specific factors.
Cash and cash equivalents | $ | 1,430 | ||
Intellectual property (10-year useful life) | 4,834 | |||
IPR&D | 1,445 | |||
Other assets | 70 | |||
Accounts payable and accrued liabilities | (932 | ) | ||
Other current liabilities | (1,696 | ) | ||
Other long-term liabilities | (697 | ) | ||
Deferred income tax | (266 | ) | ||
|
| |||
Estimated fair value of net assets acquired | 4,188 | |||
Bioventus purchase price | 1,000 | |||
Fair value of Harbor’s noncontrolling interest | 3,188 | |||
|
| |||
| $ | — | |||
|
|
The results of Harbor operations of the business have been included in the accompanying consolidated financial statements since the November 24, 2015subsequent to acquisition date. BioStructures revenue and earnings included in operations areThe Company has not disclosed post-acquisition or pro-forma losses attributable to Harbor as follows forthey did not have a material effect on the year ended December 31:
| 2015 | ||||
Net sales | $ | 1,755 | ||
Income before income taxes | $ | 410 | ||
| ||||
Revenue and earnings including the BioStructures operations as if it was acquired at January 1, 2014 are as follows for the years ended December 31:
| 2014 | 2015 | |||||||
| (unaudited) | (unaudited) | |||||||
Net sales | $ | 255,071 | $ | 265,824 | ||||
Loss before income taxes | $ | (7,905 | ) | $ | (28,922 | ) | ||
| ||||||||
BioStructures acquisition-related costs for the year ended December 31, 2015 were $332 and are recorded in SG&A in theCompany’s consolidated statementstatements of operations and comprehensive loss.income (loss).
Nearly all the liabilities assumed are payable to Harbor shareholders. The notes payable primarily consists of $1,196 in promissory notes to various Harbor shareholders that mature August 31, 2020 and have an interest rate of 8%. Payments are due monthly. The remaining $500 of notes payable are two convertible promissory notes, or Convertible Notes, to Harbor shareholders that was entered on August 22, 2019 and were scheduled to mature on November 18, 2019. On March 27, 2020, the Convertible Notes were converted to 142,858 of Harbor Series C Preferred Stock and warrants for 428,572 shares of the Harbor common stock exercisable at a price of $1.167 per share with a 5-year exercise period expiring March 27, 2025.
5. Debt
Related party note2016 credit agreement
On May 4, 2012, in conjunction with the business formation, the Company entered into the note payable to S&N (Related Party Note) at a premium of $3,188, due May 4, 2017. Premiums of $637 and $2,126 for the years ended December 31, 2013 and December 31, 2014 were amortized and reduced interest expense in the consolidated statement of operations and comprehensive loss. Interest was calculated based on a calendar day year and accrued annually in arrears on May 4 of each year (Interest Payment Date). The interest rate was equal to LIBOR plus 5% per year provided however, that LIBOR was not lower than 1.75% or higher than 2.5%. As of December 31, 2013, the interest rate on the Related Party Note was 6.75%. Until and including the Interest Payment Date occurring on May 4, 2014, the interest was paid-in-kind and, on the applicable Interest Payment
Date, was added to the outstanding principal amount, from which succeeding interest was calculated. The principal of $160,000, in-kind interest of $22,329 and accrued interest of $5,361 were repaid in full in October 2014.
2013 revolving credit agreement
During June 2013,November 15, 2016, the Company entered into a two-year$250,000 credit agreement, or 2016 Credit Agreement, with JPMorgan Chase Bank, N.A., as well as a syndicate of other entities. The 2016 Credit Agreement was comprised of a $210,000 term loan, or 2016 Term Loan, with an original issue discount, or OID, of $4,200, and a $40,000 revolving facility, or 2016 Revolver. All obligations under the 2016 Credit Agreement were guaranteed by the Company and certain of the Company’s wholly owned subsidiaries. The obligations under the 2016 Credit Agreement were collateralized by substantially all the assets of the Company. The 2016 Term Loan and 2016 Revolver were to mature on November 15, 2021. As of December 31, 2018, $194,828 was outstanding on the 2016 Term Loan, net of the OID of $2,705 and deferred financing costs of $1,967. As of December 31, 2018, there was no outstanding balance on the 2016 Revolver and one nominal letter of credit, facilityor LOC, outstanding,
leaving approximately $39,917 available. On December 6, 2019, all outstanding balances under the 2016 Credit Agreement were paid in full. As a result, $1,728 of $25,000 (2013 Revolver)OID and $1,257 of deferred financing costs were written off and recorded in interest expense.
As of December 31, 2018, the 2016 Term Loan interest rate including a margin of 6.25% was 8.77%. The 20132016 Revolver included a commitment fee of 0.375%at 0.40% of the average daily amount of the available revolving commitment.commitment, assuming any swingline loans outstanding were $0. There were no swingline loans outstanding as of December 31, 2018. The fee was payable monthlyquarterly in arrears on the firstlast day of the month.calendar quarters.
During November 2016, the Company entered into an interest rate swap agreement totaling $52,500 with a term of three years as required by the 2016 Credit Agreement (discussed further in Note 6). As of December 31, 2013,2018, the effective interest rate, including the applicable lending margin, on 26.3% or $52,500, of the outstanding principal of the Company’s 2016 Term Loan was fixed at 7.90% using the interest rate swap. The Company’s effective weighted average interest rate on all outstanding debt, including the borrowings under the 2013 Revolvercommitment fee and interest rate swap, was 2.05%. In October 2014, the Company repaid and terminated the 2013 Revolver.8.74% as of December 31, 2018.
2014 credit agreement2019 Credit Agreement
On October 10, 2014 (Closing),December 6, 2019, the Company entered into a $215,000$250,000 credit and guaranty agreement, (2014or 2019 Credit Agreement)Agreement, with JPMorgan ChaseWells Fargo Bank N.A. (JP Morgan),National Association, or Wells, as well as a syndicate of other banks, financial institutions and other entities (Lenders).or Lenders. The 20142019 Credit Agreement is comprised of a $115,000 first lien$200,000 term loan, (First Lienor Term Loan), a $60,000 second lien term loan (Second Lien Term Loan)Loan, with an OID of $666, and a $40,000$50,000 revolving facility, (2014 Revolver).
or Revolver. All obligations under the 20142019 Credit Agreement are guaranteed by the Company and certain of the Company’s direct and indirect wholly-owned domesticwholly owned subsidiaries. The obligations under the 2014 Credit Agreement are collateralized by substantiallySubstantially all of the assets of the Company.Company collateralize the obligations under the 2019 Credit Agreement. The First Lien Term Loan obligations rank higher in right of payment to the Second Lien Term Loan. The First Lien Term Loan and 2014 Revolver mature on October 10, 2019 and the Second Lien December 6, 2024, or Maturity.
Term Loan matures on April 10, 2020 (Maturity).
As of December 31, 2014 and 2015, $112,248 and $105,0852019, $197,965 was outstanding on the First Lien Term Loan, net of the unamortized original issue discount of $736 and $581$657 and deferred financing costs of $578 and $708, respectively. $1,378. As of December 31, 2019, the Term Loan interest rate including a margin of 2.25% was 3.96%. Scheduled quarterly principal payments are as follows with the final payment of $125,000 at Maturity:
| Quarterly payment | ||||
2020 | $ | 2,500 | ||
2021 and 2022 | $ | 3,750 | ||
2023 and 2024 | $ | 5,000 | ||
The Company may voluntarily prepay the First Lien Term Loan without premium or penalty upon prior notice. Scheduled quarterlyThe Company may be required to make additional principal payments on the Term Loan dependent upon the generation of certain cash flow events as a percentagedefined in the 2019 Credit Agreement. These additional prepayments will be applied to the scheduled installments of principal in direct order of maturity of the aggregate initial principal borrowedBase Rate, or BR portions of the Term Loan first and then the Eurodollar portions of the Term Loan.
Revolver
The Revolver is a five-year revolving credit facility of $50,000 which includes revolving and swingline loans as well as LOCs and, inclusive of all, cannot exceed $50,000 at any one time. LOCs are as follows, with the remaining outstanding principalavailable in an amount not to exceed $7,500. Revolving loans are due at Maturity:
| Percentage | Quarterly payment | |||||||
December 31, 2014 to September 30, 2015 | 1.25% | $ | 1,438 | |||||
December 31, 2015 to September 30, 2016 | 2.50% | $ | 2,875 | |||||
December 31, 2016 to September 30, 2017 | 3.75% | $ | 4,312 | |||||
December 31, 2017 to September 30, 2018 | 3.75% | $ | 4,313 | |||||
December 31, 2018 to Maturity | 5.00% | $ | 5,750 | |||||
| ||||||||
The Second Lien Term Loan principalthe earlier of termination or Maturity. Swingline loans are available as BR interest rate option loans only and must be outstanding for at least five days. Swingline loans are due the fifteenth or last day of a calendar month or Maturity whichever is due at Maturity and asearlier. As of December 31, 20142019, there was no outstanding balance on the Revolver and 2015, $57,225 and $57,459 wasone nominal LOC outstanding, net of the unamortized original issue discount of $1,147 and $927 and deferred financing costs of $1,630 and $1,613, respectively. After October 10, 2017, the Company may voluntarily prepay the Second Lienleaving approximately $49,917 available.
Interest
The Term Loan without premium or penalty upon prior notice. Prepayments made prior to October 10, 2017 will be subject to the prepayment premiums below:
| ||||
| ||||
| ||||
The First and Second Lien Term Loans permitRevolver permits at the Company’s election either Eurodollar or Alternate Base Rate (ABR) termBR interest rate options for the entire amount or certain portions of the loans which are dueand have interest rates equal to a formula driven base interest rate plus a margin, tied to a leverage ratio. The leverage ratio is the ratio of debt to consolidated EBITDA as defined in the 2019 Credit Agreement, or Bank EBITDA, for four consecutive quarters at Maturity. ABR term loansthe end of each period.
BR portions of the Term Loan have interest due the last day of each calendar quarter-end. Eurodollar loans areportions of the Term Loan have one, two, three or six-month loans interest reset periods and interest is due on the last day of each three-month period or the last day of the loan term if less than three months. In advance of the last day of the current Eurodollar Loan, the Company may select a new loan type so long as it does not extend beyond Maturity. The outstanding FirstTerm Loan has been a Eurodollar Loan since inception and Second Lien Term Loans have been Eurodollar Loans since inception.is an auto-renewing one-month loan for setting an interest rate. In addition, both First and Second Lienthe Term Loans haveLoan has an interest due date concurrent with any scheduled principal repayment or prepayment.
The 2014 RevolverInterest is calculated based on a five-year revolving credit facility of $40,000 which includes revolving and swingline360-day year except for BR loans as well as letters of credit (LOC) and, inclusive of all, cannot exceed $40,000 at any one time. Revolving loans may be Eurodollar or ABR loans atwhere the Company’s election which are not due until the termination date or Revolver Maturity, andbase interest is payablethe Wells Prime Rate, in which case it is calculated based on the same terms as described in the previous paragraph for the First and Second Lien Term Loans. Swingline loans are available as ABR loans only and are due within five business days or Revolver Maturity whichever is earlier. The Company had not borrowed on the 2014 Revolver at December 31, 2014, leaving $40,000 available. As of December 31, 2015, the 2014 Revolver balance is $8,000, leaving $32,000 available. There were no LOCs outstanding under the 2014 Revolver, as of December 31, 2014 and 2015.
a calendar-day year. The base interest rate for all ABRBR loans is equal to the highest of (a) the JP MorganWells Prime Rate, (b) the greater of the Federal Funds Effective Rate or Overnight Bank Funding Rate plus 1/2% 1/2% and (c) the Eurodollar Rate for a USD deposit with a maturity of one month plus 1.0% (rounded upward to the next 1/16 of 1%). The base interest rate for all Eurodollar Loans is equal to the rate determined for such day in accordance with the following formula with the Second Lien Term LoansLoan having a floor of 1.00%0%:
| LIBOR |
|
1—Eurocurrency Reserve Requirements |
In addition to the base interest rate, all Eurodollar and ABR loans have a margin. The First Lien Term Loan margins are tied to a leverage ratio which is the ratio of debt to Consolidated EBITDA (as defined in the 2014 Credit Agreement) for four consecutive quarters at the end of each period. Pricing grids are used to determine the marginloan margins based on the type of loan and the leverage ratio. The Second Lien Term Loan margins are fixed at 10.00% forinitial Eurodollar Loans and 9.00% for ABR Loans.
The First Lien TermBR loans have a margin of 2.25% and 1.25%, respectively. Loan margin is adjusted after the quarterly financial statements are delivered to the lenders. Below islenders in accordance with the pricing grid:grid below:
| Leverage ratio | Eurodollar | ABR | ||||||
³ 4.00 to 1.00 | 3.00% | 2.00% | ||||||
³ 3.00 to 1.00 but< 4.00 to 1.00 | 2.75% | 1.75% | ||||||
³ 2.00 to 1.00 but< 3.00 to 1.00 | 2.50% | 1.50% | ||||||
< 2.00 to 1.00 | 2.25% | 1.25% | ||||||
| ||||||||
Interest is calculated based on a 360-day year except for ABR loans where the base interest is the JP Morgan Prime Rate, in which case it is calculated based on a calendar-day year. As of December 31, 2015, the First and Second Lien Term Loan interest rates including the margin were 3.2% and 11.0%, respectively.
Leverage ratio | Eurodollar | BR | ||||||
> 2.50 to 1.00 | 2.50 | % | 1.50 | % | ||||
>1.50 to 1.00 and < 2.50 to 1.00 | 2.25 | % | 1.25 | % | ||||
> 1.25 to 1.00 and <1.50 to 1.00 | 1.75 | % | 0.75 | % | ||||
> 0.75 to 1.00 and <1.25 to 1.00 | 1.50 | % | 0.50 | % | ||||
< 0.75 to 1.00 | 1.25 | % | 0.25 | % | ||||
The Company may be required to make additional principal payments on the First and Second Lien Term Loans dependent upon the generation of certain cash flow events or excess cash as defined in the 2014 Credit
Agreement. These additional prepayments will be applied to the scheduled installments of principal in direct order of maturity of the ABR Loans first and then the Eurodollar Loans.
The 2014 Revolver includes a commitment fee at 0.50%0.25% of the average daily amount of the available revolving commitment, assuming any swingline loans outstanding are $0. There were no swingline loans outstanding atas of December 31, 2014 or 2015.2019. The fee is payable quarterly in arrears on the last day of the calendar quarters and the Revolverat Maturity. On andThe commitment fee rate is adjusted after the first adjustment date the rate will be determinedquarterly financial statements are delivered to lenders based on the pricing grid below.below:
Leverage ratio | Commitment fee rate | |||
| % | |||
| % | |||
| % | |||
| % | |||
< 0.75 to 1.00 | 0.10 | % | ||
LOCs are available in an amount not to exceed $5,000. Fees are charged on all outstanding LOCs at an annual rate equal to the margin in effect on Eurodollar revolving loans. A fronting fee of 0.125% per year on the undrawn and unexpired amount of each LOC is payable as well. The fees are payable quarterly in arrears on the last day of the calendar quarters after Closing.quarters.
The 2014 Credit Agreement required that, on or before January 8, 2015, the Company to enter into, and thereafter maintain for not less than three years, agreements so that at least 25% of the First Lien Term Loans are subject to a fixed interest rate. During November 2014, the Company entered into three interest rate swap agreements totaling $70 million with a term of three years (discussed further in Note 6).
As of December 31, 2014 and 2015, the effective interest rate, including the applicable lending margin, on 61.6% and 65.8%, respectively, or $70.0 million, of the outstanding principal of the Company’s First Lien Term Loan was fixed at 4.19% through the use of the interest rate swaps. As of December 31, 2014 and 2015,2019, the Company’s effective weighted average interest rate on all outstanding debt, including the commitment fee and interest rate swaps,swap, was 6.21% and 6.38%, respectively.3.27%.
Other
The 20142019 Credit Agreement contains certaincustomary affirmative and negative covenants, including but not limitedthose related to (1) a minimum fixed charge ratiofinancial reporting and a maximum debt leverage ratio requirement as defined in the 2014 Credit Agreement, (2)notification, restrictions on the declaration or payment of certain distributions on or in respect of the Company’s equity interests, (3) restrictions on acquisitions, investments and certain other payments, (4) limitations on the incurrence of new indebtedness, (5) limitations on transfers, sales and other dispositions and (6)of Company assets, as well as limitations on making any material change in any ofchanges to the Company’s business objectives that could reasonably be expectedand organizational documents. Financial covenant requirements include a maximum debt leverage ratio as well as an interest coverage ratio not less than 3.00 to have a material adverse effect on1.00 as defined in the repayment2019 Credit Agreement. As of December 31, 2019, the note.Company complied with the financial covenants in the 2019 Credit Agreement.
Each Lender may provide an additional First Lien, Second Lien andTerm or Revolving Loan by executing and delivering notice specifying the terms, provided thatif doing so would not cause certain undesired events to occur as defined in the 20142019 Credit Agreement or extend repayment beyond Maturity. The aggregate amount of all additional borrowings may not exceed $25,000the greater of $100,000 and the trailing four quarters Bank EBITDA without the consent of the Lenders holding more than 50% of the total outstanding debt under the 20142019 Credit Agreement.
Financing costs
As a result of entering into the 2013 Revolver, the Company incurred a total of $275 in financing costs. These costs were recorded in prepaid and other current assets and were being amortized to interest expense on a straight-line basis over the life of the 2013 Revolver, which approximated the effective interest method. During
October 2014, the bank that provided the 2013 Revolver became one of the syndicate banks for the 2014 Credit Agreement. The net financing costs related to the 2013 Revolver of $97 were combined with the 2014 Credit Agreement financing costs of $2,520 and totaled $2,617. During November 2015,December 2019, the Company paid financing costs totaling $910$2,117 in order to amend future debt covenant requirements and to obtain approval forrefinance the BioStructures acquisition.
$192 of the 2015 finance costs were2016 Credit Agreement. The Company recorded $269 directly to interest expense. Theselling, general and administrative expense and the remaining $718 along with the $2,617$1,848 was capitalized to the consolidated balance sheet. The portionOne lender participating in the 2016 Credit Agreement became a lender in the 2019 Credit Agreement and, as a result, $2,985 related to the First2016 Term Loan was written off and Second Lien Term Loans totaling $2,893 was recorded as a reduction to long-term debt while the portion related to the 2014 Revolver totaling $456 wasinterest expense. The $269 recorded in other assets. Theselling, general and administrative expense and the $2,985 recorded in interest expense total the $3,252 of loss on debt retirement and modification.
Total capitalized deferred financing costsfees for the Term Loan of $1,398 and Revolver of $653 are being amortized to interest expense on a straight-line basis over each of the respective lives, of the First Lien Term Loan, Second Lien Term Loans and 2014 Revolver, as applicable, which approximates the effective interest method. The Company recorded $75, $226$711 and $510$745 in interest expense associated with these deferred costs for the years ended December 31, 2013, 20142019 and 2015,2018, respectively.
Contractual maturities of long-term debt atas of December 31, 2015,2019, were as follows:
2016 | $ | 12,938 | ||||||
2017 | 17,250 | |||||||
2018 | 18,688 | |||||||
2019 | 57,500 | |||||||
2020 and thereafter | 60,000 | |||||||
2020 | $ | 10,000 | ||||||
2021 | 15,000 | |||||||
2022 | 15,000 | |||||||
2023 | 20,000 | |||||||
2024 | 140,000 | |||||||
Deferred finance costs | (2,322 | ) | (1,378 | ) | ||||
Original issue discount | (1,509 | ) | (657 | ) | ||||
|
| |||||||
Total long-term debt | 162,545 | 197,965 | ||||||
Less current portion | (12,938 | ) | (10,000 | ) | ||||
|
| |||||||
Total | $ | 149,607 | $ | 187,965 | ||||
|
|
| ||||||
6. Derivatives
The Company does not use derivative financial instruments for speculative or trading purposes. The Company was not a party to derivative instruments in 2013. As of December 31, 2014 the Company had one foreign exchange forward contract (5,000 Euro notional) to protect against the effect of foreign currency fluctuations on a 5,000 Euro payment made in November 2015. The derivative instrument was not designated as a hedge. In November 2015 the Company paid $6,234 for the 5,000 Euro resulting in a realized loss of $941 recorded in other (income) expense on the consolidated statement of operations and comprehensive loss. This realized loss was 100% offset by the realized gain recognized on the final license agreement payment discussed further in Note 13.
In November 2014,2016, the Company entered into threean interest rate swapsswap effective November 28, 2014 and expiring November 30, 2017 in an effort2016 to limit its exposure to
changes in the variable interest rate on its First Lien2016 Term Loan (as discussed in Note 5). The derivative instruments haveinterest rate swap was not been designated as hedges.
a hedge. Effective November 30, 2019 the interest rate swap expired leaving no balance as of December 31, 2019. The fair valuesvalue of the Company’s derivativesderivative was recorded in accrued liabilities in the Company’s consolidated balance sheets are as follows atother current asset totaling $430 as of December 31:
| 2014 | 2015 | |||||||
Interest rate swaps | $ | (134 | ) | $ | (286 | ) | ||
Foreign exchange forward contract | (187 | ) | — | |||||
|
| |||||||
Total | $ | (321 | ) | $ | (286 | ) | ||
| ||||||||
31, 2018. The effect of the Company’s derivatives on interest expense (income) in the consolidated statements of operations and comprehensive loss is as followsincome (loss) totaled $96 and ($334) for the yearyears ended December 31, (except for 2013 where there was no derivative outstanding):2019 and 2018, respectively.
Statement of operations and loss | 2014 | 2015 | ||||||||
Interest rate swaps | Interest expense | $ | 134 | $ | 152 | |||||
Foreign exchange forward contract | Other (income) expense | 187 | 754 | |||||||
|
| |||||||||
Total | $ | 321 | $ | 906 | ||||||
| ||||||||||
7. Members’ equity
Members’ equity consisted of the following at December 31:
| 2014 | 2015 | 2019 | 2018 | |||||||||||||
Preferred | $ | 118,000 | $ | 168,000 | $ | 168,000 | $ | 168,000 | ||||||||
Common | 113,400 | 113,373 | 113,373 | 113,373 | ||||||||||||
Profits interest (discussed further in Note 10) | 2,570 | 3,455 | 3,774 | 3,780 | ||||||||||||
|
|
|
| |||||||||||||
| $ | 285,147 | $ | 285,153 | |||||||||||||
| $ | 233,970 | $ | 284,828 |
|
| |||||||||||
| ||||||||||||||||
The authorized number of common and preferred units is unlimited. On May 4, 2012, 4,900 common units and 5,100 preferred units, (2012or 2012 Preferred Units)Units, were issued and remained outstanding as of December 31, 2014.issued. During November 2015, the Company obtained a $50,000 capital contribution from its existing members and 1,490 in preferred units were issued, (2015or 2015 Preferred Units).Units. The Commoncommon and Preferred Memberspreferred members have stated rights and privileges, which include, but are not limited to: (1) voting and Company governance, (2) the transfer of membership interests and (3) dissolutions and liquidation of the Company.
Each preferred unit carries a priority payout (the Liquidation Preference as defined in the LLC agreement) upon certain events, including but not limited to a qualified initial public offering, sale of the Company or a liquidation or dissolution of the Company (Distribution Event).Company. The initial Liquidation Preference for the 2012 and 2015 Preferred unitsUnits are $23.14 and $33.57, respectively. Until such time as preferred units are converted to common units, the preferred units will also accrue a distribution right, (theor Preferred Distribution)Distribution, at a rate of 3% per annum and as long asif it is unpaid, such Preferred Distribution shall be added annually to the Liquidation Preference.
In addition to the commonother units, the Common Memberone member owns the only Equity Participation Right (EPR)Unit, or EPR Unit. The EPR Unit is junior to the common units and its only entitlement is 0.55% of available distributions arising from a Distribution Event.Event (discussed further in note 8). Upon the conclusion of a Distribution Event, the EPR Unit will cease to exist and all entitlements will end.
8. Fair value measurements
Recurring fair value measurements
ThereAs of December 31, 2019, there were no material assets subject to recurringor liabilities measured at fair value measurement carried on the accompanying consolidated balance sheet at December 31, 2014 and 2015.
using Level 1 or Level 2 inputs. The following table provides information, by level, for liabilities that were measured at fair value on a recurring basis atusing Level 3 inputs:
Liability | Balance Sheet Caption | Level 3 | ||||
Management incentive plan awards | Accrued equity-based compensation | $ | 15,547 | |||
Liability-classified awards | Accrued equity-based compensation, less current portion | 25,255 | ||||
EPR | Other long-term liabilities | 5,457 | ||||
|
| |||||
| $ | 46,259 | |||||
|
| |||||
As of December 31, 2014:
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Liabilities: | ||||||||||||||||
Contingent consideration | $ | 32,215 | $ | — | $ | — | $ | 32,215 | ||||||||
Interest rate swaps | 134 | — | 134 | — | ||||||||||||
Foreign exchange forward contracts | 187 | — | 187 | — | ||||||||||||
Management incentive plan and liability-classified awards | 1,484 | — | — | 1,484 | ||||||||||||
EPR liability | 1,037 | — | — | 1,037 | ||||||||||||
|
| |||||||||||||||
Total liabilities | $ | 35,057 | $ | — | $ | 321 | $ | 34,736 | ||||||||
| ||||||||||||||||
2018, there were no assets or liabilities measured at fair value using Level 1 inputs. The following table provides information by level, for assets and liabilities that are measured at fair value on a recurring basis at December 31, 2015:using Level 2 and Level 3 inputs:
| Total | Level 1 | Level 2 | Level 3 | Total | Level 2 | Level 3 | ||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||
Interest rate swaps | $ | 430 | $ | 430 | $ | — | ||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||
Contingent consideration | $ | 39,905 | $ | — | $ | — | $ | 39,905 | $ | 945 | $ | — | $ | 945 | ||||||||||||||
Interest rate swaps | 286 | — | 286 | — | ||||||||||||||||||||||||
Management incentive plan and liability-classified awards | 3,924 | — | — | 3,924 | 33,063 | — | 33,063 | |||||||||||||||||||||
EPR liability | 2,389 | — | — | 2,389 | 4,892 | — | 4,892 | |||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||
Total liabilities | $ | 46,504 | $ | — | $ | 286 | $ | 46,218 | $ | 38,900 | $ | — | $ | 38,900 | ||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||
Below is a summary of the valuation techniques used in determining fair value:
Contingent consideration—The Company valuesinitially valued contingent consideration related to business combinations using a weighted probabilityprobability-weighted calculation of potential payment scenarios discounted at rates reflective of the risks associated with the expected future cash flows. Key assumptions used to estimate the fair value of contingent consideration include revenue, net new business and operating forecasts and the probability of achieving the specific targets. After the initial valuation, the Company’s best estimate is assigned 100% probability.
Interest rate swaps—The Company values interest rate swaps by discounting cash flows of the swap. Forward curves and volatility levels are used to estimate future cash flows that are not certain. These are determined using observable market inputs when available and based on the basis of estimates when not available.
Foreign exchange forward contracts—The Company values foreign exchange forward contracts using quoted market prices for similar assets in less active markets or using other observable inputs.
Management incentive plan (MIP)MIP and liability-classified awards—The Company values these awards using the Monte Carlo option model to allocate fair value. Key assumptions used to estimate the fair value include expected stock price volatility, risk-free interest rate, dividend yield and the average time the award is expected to be outstanding.
EPR liability—The Company values the EPR Unit using a weighted probabilityprobability-weighted calculation of potential payment scenarios discounted at rates reflective of the risks associated with the expected future cash flows. Key assumptions used to estimate the fair value of the EPR Unit include the timing and amount available from a Distribution Event. In addition, in 2013 a key assumption used was the date at which the percentage applied to the distributions would become fixed, which coincided with the Related Party Note repayment date.
The percentages that would be applied to distributions resulting from a Distribution Event started in 2013 and accrued daily on a straight-line basis:
| ||||
| ||||
| ||||
| ||||
Management’s probability assessment of the Related Party Note repayment date included the following three scenarios in 2013:
| ||||
| ||||
| ||||
In October 2014, the percentage that will be applied to distributions resulting from a Distribution Event became fixed at 0.55%.
The following tables summarize the changes in the Level 3 contingent consideration liabilities measured on a recurring basis for the years ended December 31:
| Contingent consideration | MIP and liability- classified awards | EPR liability | ||||||||||||||||||||||
| 2014 | 2015 | 2014 | 2015 | 2014 | 2015 | |||||||||||||||||||
Beginning balance | $ | — | $ | 32,215 | $ | — | $ | 1,484 | $ | — | $ | 1,037 | ||||||||||||
Initial estimate | 32,344 | 4,542 | 1,484 | 1,244 | 470 | — | ||||||||||||||||||
Change in fair value | 1,602 | 19,493 | — | 1,196 | 567 | 1,352 | ||||||||||||||||||
Payment | (1,731 | ) | (16,345 | ) | — | — | — | — | ||||||||||||||||
|
| |||||||||||||||||||||||
Ending balance | $ | 32,215 | $ | 39,905 | $ | 1,484 | $ | 3,924 | $ | 1,037 | $ | 2,389 | ||||||||||||
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The contingent consideration change in fair value of $1,602 and $19,493 for the years ended December 31, 2014 and 2015, respectively, was primarily driven by sales exceeding estimates at the OsteoAMP acquisition date as well as higher than estimated inventory on hand.
The revaluation for the EPR liability is recognized in interest expense on the consolidated statements of operations and comprehensive loss.income (loss).
Non-recurringThe following table summarize the changes in the Level 3 liabilities measured on a recurring basis for the years ended December 31:
| Contingent consideration | MIP and liability- classified awards | EPR liability | ||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||
Beginning balance | $ | 945 | $ | 5,242 | $ | 33,063 | $ | 18,382 | $ | 4,892 | $ | 3,883 | ||||||||||||
Initial estimate | — | — | 5,464 | 4,253 | — | — | ||||||||||||||||||
Forfeitures | — | — | (1,013 | ) | (391 | ) | — | — | ||||||||||||||||
Change in fair value | — | (739 | ) | 6,290 | 10,914 | 565 | 1,009 | |||||||||||||||||
Payment | (945 | ) | (3,558 | ) | (3,002 | ) | (95 | ) | — | — | ||||||||||||||
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Ending balance | $ | — | $ | 945 | $ | 40,802 | $ | 33,063 | $ | 5,457 | $ | 4,892 | ||||||||||||
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The contingent consideration change in fair value of ($739) for the year ended December 31, 2018 was primarily driven by lower forecasted sales in subsequent years as well as 2018 sales being lower than those estimated at December 31, 2017 partially offset by interest on discounted cash flows.
Non-recurring fair value measurements and fair value disclosures
The carrying value of the 20142016 and 2019 Credit Agreement and other indebtedness was not materially different from fair value at December 31, 20142019 and 2015.2018, respectively. The fair value of these obligations was determined based on discounted cash flows using estimated incremental borrowing rates for obligations with similar characteristics.
As of December 31, 2014 and 2015, assets carried on the consolidated balance sheet and not remeasured to fair value on a recurring basis are comprised of long-lived assets, finite and indefinite-lived intangible assets and goodwill.
9. Restructuring costs
In November 2014, the Company adopted a plan to restructure and no longer sell a diagnostic ultrasound product in order to improve margins, principally through headcount reduction which was communicatedRestructuring costs are not allocated to the
affected employees in January 2015. Costs included in Company’s reportable segments as they are not part of the restructuring plan are employee severance and other administrative expenses. For the year ended December 31, 2015, the Company recorded total pre-tax charges of $490 related to severance and $221 in other administrative expenses. The plan was completed in 2015 with total costs incurred of $711. Additionally, related to this restructuring, the Company recorded inventory provisions in cost of sales totaling $1,183 for the year ended December 31, 2014 and $202 for the year ended December 31, 2015.
In January 2015, the Company adopted a plan to restructure and relocate certain finance functions from Memphis, TN to headquarters in Durham, NC. The plan was completed in 2015 with charges totaling $960. For the year ended December 31, 2015, the Company recorded total pre-tax charges of $508 related to severance and temporary labor, $258 related to consulting and compensation for departing employees that remained through the transition and $194 in other administrative expenses.
In November 2015, the Company adopted a restructuring plan to improve margins in the international business principally through headcount reduction. The plan is expected to be completed in 2016. For the year ended December 31, 2015, the Company recorded total pre-tax charges of $772 related to severance. The Company estimates that the one-time costs will total $952 upon completion. Final restructuring costs of $180 are expected to be expensed in 2016 upon notifying employees of termination.
segment performance measures regularly reviewed by management. These charges are included in restructuring expenses in the consolidated statement of operations and comprehensive lossincome (loss).
In the fourth quarter of 2018, the Company adopted a restructuring plan to improve the performance of International operations, principally through headcount reduction and all relateclosing offices in certain countries as the Company shifts to an indirect distribution model in these countries. The plan was completed in 2019 and for the Active Healing Therapies segment. There were no restructuring charges in 2013 or 2014. During the yearyears ended December 31, 20152019 and 2018, the Company recorded total pre-tax charges of $575 and $1,373, respectively, primarily related to severance. The Company’s costs totaled $1,948, consulting and compensation for departing employees that remained through the transition totaled $1,569 and other associated costs totaled $379.
During the years ended December 31, 2019 and 2018 the Company made payments and provision adjustments for all plansthe plan as presented below:
| Employee severance and temporary labor costs | Other charges | Total | Employee severance and temporary labor costs | Other charges | Total | |||||||||||||||||||
Balance at December 31, 2014 | $ | — | $ | — | $ | — | ||||||||||||||||||
Balance at December 31, 2017 | $ | 723 | $ | — | $ | 723 | ||||||||||||||||||
Expenses incurred | 1,770 | 673 | 2,443 | 1,078 | 295 | 1,373 | ||||||||||||||||||
Payments made | (998 | ) | (673 | ) | (1,671 | ) | (804 | ) | (89 | ) | (893 | ) | ||||||||||||
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Balance at December 31, 2015 | $ | 772 | $ | — | $ | 772 | ||||||||||||||||||
Balance at December 31, 2018 | 997 | 206 | 1,203 | |||||||||||||||||||||
Expenses incurred | 491 | 84 | 575 | |||||||||||||||||||||
Payments made | (1,488 | ) | (290 | ) | (1,778 | ) | ||||||||||||||||||
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Balance at December 31, 2019 | $ | — | $ | — | $ | — | ||||||||||||||||||
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10. Benefit plans
Equity-based compensation plans
The Company operates two equity-based compensation plans, or the Plans, the MIP and the Phantom Profits Interest Plan (PIP).Plan. The awards granted under both plans represent a non-managing, non-voting interest in the Company designed for grantees to share in the future appreciation of the value of the Company. The total amount of awards available for grant through MayAwards granted under the MIP Plan and the 2015 was limited to 1,111,111. In June 2015Phantom Units are liability-classified and the PIP was amended and restated increasing the awards available for distribution by 821,722 bringing the total awards available to 1,932,833.2012 Phantom Units are equity-classified. At December 31, 2015, 484,3702019, 2,437,192 units are authorized to be awarded and 307,092 units were available for award. Profits interest compensation of $576, $2,355$10,844 and $3,325$14,325 was recognized for the years ended December 31, 2013, 20142019 and 2015,2018, respectively. The expense is included in SG&Aselling, general and R&Dadministrative expense and research and development expense on the consolidated statement of operations and comprehensive lossincome (loss) based upon
the classification of the employee. Profits interest (forfeiture) compensation of ($111) and $490 were recognized in loss from discontinued operations for the years ended December 31, 2019 and 2018, respectively. As of December 31, 2015,2019, there was approximately $3,747 (as revised)$7,162 of unrecognized compensation expense to be recognized over a weighted-average period of 0.5 years for the MIP and 1.5 years for the PIP.1.1 years.
MIP liability-classified
The awards granted under MIP vestvested 25% upon the first anniversary of the grant date, and 6.25% per quarter thereafter.thereafter and were fully vested at December 2, 2017. Receipt of value will be realized upon sale of the Company or a liquidation or dissolution of the
Company as defined in the LLC Agreement, (MIPor MIP Distribution Event)Event, and will be based on the grantees to vested ownership of their award in proportion to the Company’s equity, including vested interests under both the MIP and PIP plans,Phantom Plan, after all debt and equity holders have been repaid. CumulativeThere are cumulative distributions that must be made to the members before distributions are made, (Benchmark Amount) total $231,372or Benchmark Amount. The Benchmark Amount is $281,372 for MIP awards. The MIP award allows the grantee to force a cash settlement after the 5th anniversary of the effective date of the awardDecember 2, 2018 if the grantee retires. The grantee announced his intention to retire in 2020. The proceeds received by the MIP grantee upon a forced cash settlement will be calculated on the same basis as if a MIP Distribution Event occurred. The value to be allocated to the MIP grantee will be calculated as the greater of fair value in an arms-length transaction or 8.25the earnings before interest, tax, depreciation and amortization, or EBITDA, multiple of the Spin-out times the annualized most recent 6 month6-month EBITDA. The MIP awards are re-measured to fair value at each reporting date and are included in other long-term liabilities on the consolidated balance sheet (as discussed in Note 8). As of December 31, 2019, $15,547 was recorded as current accrued equity-based compensation on the consolidated balance sheet.
2012 PIPPhantom Units equity-classified
Awards granted under the Phantom Plan in 2012 PIP generally vestvested over a five-year period. The majority of the awards vest 20% on each of the first five anniversaries from the grant date. Certain awards vest 20% upon the first anniversary of the grant date and 5% per quarter thereafter. Receipt of value will be realized upon the closing of a sale of units representing a percentage interest of more than 66.66%, or the sale of all or substantially all of the assets of the Company, provided such event constitutes a change of control, (PIPor Phantom Plan Distribution Event)Event, and will be based on the grantees vested ownership of their award in proportion to the Company’s equity, including vested interests under both the MIP and PIP plans,Phantom Plan, after all debt and equity holders have been repaid. Payment amount for vested awards shall be equal to an amount that would be payable with respect to the equivalent number of PIP unitsPhantom Units with an equivalent Benchmark Amount that was pursuant to the LLC Agreement, which is $231,372.was $281,372, subject to change as defined in the Phantom Plan.
2015 PIP value creation“value creation” Phantom Units liability-classified
2015 PIP “Value CreationCreation” Phantom Plan awards were granted in 2015 with a three yearthree-year cliff vesting related to the 2017 enterprise value, as follows:
| 2017 enterprise value | <$690,000 | ³$690,000 but <$740,000 | ³$740,000 | |||||||||
Percent vested | 0% | 50% | 100% | |||||||||
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which, exceeded the required value of $740,000. As a result, 100.0% vesting was achieved in 2018 on the third anniversary of the award. Receipt of value will be realized upon a PIPPhantom Plan Distribution Event or termination that was not for cause, whichever comes first. The payment amount for vested awards shall be an amount that would be allocated to an equivalent number of PIP unitsPhantom Units with an equivalent Benchmark Amount, or $367,264,$394,899, upon a PIPPhantom Plan Distribution Event or upon termination as if the Company were liquidated on the termination date at fair market value. Payment will be based on the grantees vested ownership of their award in proportion to the Company’s equity, including vested interests under both the MIP and PIP plans,Phantom Plan, after all debt and equity holders have been repaid. The 2015 PIP Value CreationPhantom Plan awards are re-measured to fair value at each reporting date and are included in other long-term liabilitiesaccrued equity-based compensation, less current portion on the consolidated balance sheet (as discussed in Note 8).
2015 PIPPhantom Units liability-classified
Phantom Plan Awards granted under thein 2015 PIP generally vest over a five-year period. The majorityMost of the awards vest 20% on each of the first five anniversaries from the grant date. Certain awards vest 20% upon the first anniversary of
the grant date and 5% per quarter thereafter. Receipt of value will be realized upon a PIPPhantom Plan Distribution Event or termination, that was not for cause, whichever comes first. The payment amount for vested awards shall be an amount that would be allocated to an equivalent number of PIP unitsPhantom Units with an equivalent Benchmark Amount, or $367,264, upon a PIPPhantom Plan Distribution Event or upon termination as if the Company were liquidated on the termination date at fair market value. Payment will be based on the grantees vested ownership of their award in proportion to the Company’s equity, including vested interests under both the MIP and PIP plans,Phantom Plan, after all
debt and equity holders have been repaid. The 2015 PIPPhantom Plan awards are re-measured to fair value at each reporting date and are included in other long-term liabilitiesaccrued equity-based compensation, less current portion on the consolidated balance sheet (as discussed in Note 8).
2018 “value creation” Phantom Units liability-classified
“Value Creation” Phantom Plan awards were granted in 2018 with a three-year cliff vesting related to the annual 2020 net sales.
2020 net sales | <$350,600 | >$350,600 but <$370,800 | >$370,800 but <$391,800 | >$391,800 | ||||||||||||
Percent vested | 0.0 | % | 50.0 | % | 75.0 | % | 100.0 | % | ||||||||
Receipt of value will be realized upon a Phantom Plan Distribution Event or termination that was not for cause, whichever comes first. The payment amount for vested awards shall be an amount that would be allocated to an equivalent number of Phantom Units with an equivalent Benchmark Amount, or $703,691, upon a Phantom Plan Distribution Event or upon termination as if the Company were liquidated on the termination date at fair market value. Payment will be based on the grantees vested ownership of their award in proportion to the Company’s equity, including vested interests under both the MIP and Phantom Plan, after all debt and equity holders have been repaid. The 2018 “Value Creation” Phantom Plan awards are re-measured to fair value at each reporting date and are included in accrued equity-based compensation, less current portion on the consolidated balance sheet (as discussed in Note 8).
The assumptions utilized to determine the fair value of the awards for the years ended December 31 are indicated in the following table:
| 2013 | 2014 | 2015 | 2019 | 2018 | ||||||||||||||||
Expected dividend yield | 0.0% | 0.0% | 0.0% | 0.0 | % | 0.0 | % | |||||||||||||
Expected volatility | 42.1% | 40.7% | 50.0% | 35.0 | % | 30.0 | % | |||||||||||||
Risk-free interest rate | 1.3% | 1.3% | 0.4% | �� | 1.5 | % | 2.7 | % | ||||||||||||
Time to exit event (in years) | 5.0 | 4.0 | 0.6 | 1.5 | 1.0 | |||||||||||||||
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A summary of the award activity of the Plans is as follows (number of awards in thousands):
| MIP and 2012 plan | 2015 plan | MIP and 2012 Phantom Units | Other Phantom Units | |||||||||||||||||||||||||||||
| Number of awards | Weighted- average grant-date fair value | Number of awards | Weighted- average grant-date fair value | Number of awards | Weighted average grant-date fair value | Number of awards | Weighted average grant-date fair value | |||||||||||||||||||||||||
Outstanding at December 31, 2012 | 817 | $ | 5.12 | — | $ | — | ||||||||||||||||||||||||||
Outstanding at December 31, 2018 | 993 | $ | 5.46 | 1,150 | $ | 9.12 | ||||||||||||||||||||||||||
Granted | 506 | $ | 4.89 | — | $ | — | — | $ | — | 160 | $ | 15.31 | ||||||||||||||||||||
Converted to cash | — | $ | — | (93 | ) | $ | 4.84 | |||||||||||||||||||||||||
Forfeited | (358 | ) | $ | 5.12 | — | $ | — | (2 | ) | $ | 9.70 | (78 | ) | $ | 10.61 | |||||||||||||||||
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Outstanding at December 31, 2013 | 965 | $ | 5.00 | — | $ | — | ||||||||||||||||||||||||||
Granted | 140 | $ | 9.31 | — | $ | — | ||||||||||||||||||||||||||
Forfeited | (56 | ) | $ | 6.03 | — | $ | — | |||||||||||||||||||||||||
Outstanding at December 31, 2019 | 991 | $ | 5.44 | 1,139 | $ | 10.24 | ||||||||||||||||||||||||||
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Outstanding at December 31, 2014 | 1,049 | $ | 5.52 | — | $ | — | ||||||||||||||||||||||||||
Granted | 40 | $ | 10.01 | 379 | $ | 3.92 | ||||||||||||||||||||||||||
Forfeited | (20 | ) | $ | 6.06 | — | $ | — | |||||||||||||||||||||||||
Awards vested at December 31, 2019 | 989 | $ | 5.43 | 471 | $ | 6.76 | ||||||||||||||||||||||||||
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Outstanding at December 31, 2015 | 1,069 | $ | 5.68 | 379 | $ | 3.92 | ||||||||||||||||||||||||||
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There were no 2012 Phantom Unit awards granted in 2018. The weighted average grant date fair value per 2012 Plan awards granted in the years ended December 31, 2013, 2014 and 2015 was $4.89, $9.31 and $10.01, respectively. The weighted average fair value per 2015 PlanOther Phantom Unit awards granted in the year ended December 31, 20152018 was $3.92.$14.93.
| MIP and 2012 plan | ||||||||
| Number of awards | Weighted-average grant-date fair value | |||||||
Nonvested at December 31, 2012 | 817 | $ | 5.12 | |||||
Vested during 2013 | 128 | $ | 5.12 | |||||
Nonvested at December 31, 2013 | 837 | $ | 4.98 | |||||
Vested during 2014 | 197 | $ | 6.66 | |||||
Nonvested at December 31, 2014 | 726 | $ | 7.31 | |||||
Vested during 2015 | 226 | $ | 7.25 | |||||
Nonvested at December 31, 2015 | 891 | $ | 7.58 | |||||
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| MIP and 2012 Phantom Units | Other Phantom Units | |||||||||||||||
| Number of awards | Weighted average grant-date fair value | Number of awards | Weighted average grant-date fair value | |||||||||||||
Nonvested at December 31, 2018 | 12 | $ | 9.65 | 719 | $ | 11.09 | ||||||||||
Vested during 2019 | 8 | $ | 9.56 | 134 | $ | 8.33 | ||||||||||
Nonvested at December 31, 2019 | 2 | $ | 10.01 | 667 | $ | 12.71 | ||||||||||
The total fair value of MIP and 2012 Plan sharesPhantom Units vested in the years ended December 31, 2013, 20142019 and 2018 was $80 and $184, respectively. The total fair value of 2015 Phantom Units vested in the years ended December 31, 2019 and 2018 was $655, $1,312$3,696 and $3,001,$6,130, respectively. No 2015 Plan shares have vested.
Defined contribution plans
The Company has various defined contribution plans or plans that share profit which are offered in Australia, Canada, Finland, France, Germany, Italy, the Netherlands and the United Kingdom. In some cases, these plans are required by local laws or regulations. Contributions are primarily discretionary, except in some countries where contributions are contractually required. These plans cover substantially all eligible employees in the countries where the plans are offered either voluntarily or statutorily.
In the US,U.S., the Company provides a 401(k) defined contribution plan (U.S. Plan) that covers substantially all USU.S. employees that meet minimum age requirements, or US Plan.requirements. The Company matches 50% of the employees’ contribution up to 6% of the employees’ wages. In addition, the Company contributes 4.5% of the employees’ wages to the USU.S. Plan.
For the years ended December 31, 2013, 20142019 and 20152018 Company contributions totaled $4,514, $4,831$5,401 and $4,562,$5,462, respectively, for all global plans. The expense is included in cost of sales, SG&Aselling, general and R&Dadministrative expense and research and development expense on the consolidated statement of operations and comprehensive lossincome (loss) based upon the classification of the employee.
11. Income taxes
On December 22, 2017, the Tax Cuts and Jobs Act, or Tax Act, was enacted. The Tax Act significantly revised U.S. corporate income tax law by reducing the U.S. statutory federal corporate income tax rate to 21% effective January 1, 2018. The Company completed its accounting for the tax effects of the Tax Act as of December 31, 2018 recognizing a nominal adjustment to the provisional amounts recorded at December 31, 2017.
The Tax Act also subjects companies to tax on Global intangible low-taxed income (GILTI) earned by certain foreign subsidiaries. FASB guidance states that the Company can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. Due to Bioventus LLC’s pass-through structure for U.S. income tax purposes, related deferred taxes are not recognized on the consolidated balance sheet. The Company has included an estimate for GILTI related to operations in the effective income tax rate. The impact of GILTI was nominal for the years ended December 31, 2019 and 2018.
The components of income (loss) from continuing operations before income taxes for the years ended December 31 are as follows:
| 2013 | 2014 | 2015 | ||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||
Taxable subsidiaries: | ||||||||||||||||||||
Domestic | $ | 4,501 | $ | 2,025 | $ | 3,804 | $ | 2,679 | $ | 2,925 | ||||||||||
Foreign | (1,985 | ) | 3,211 | 2,931 | 2,967 | (1,393 | ) | |||||||||||||
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| 5,646 | 1,532 | |||||||||||||||||||
| 2,516 | 5,236 | 6,735 | ||||||||||||||||||
Other domestic subsidiaries | (22,756 | ) | (16,589 | ) | (38,706 | ) | 4,043 | 4,575 | ||||||||||||
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Pretax loss | $ | (20,240 | ) | $ | (11,353 | ) | $ | (31,971 | ) | |||||||||||
Income from continuing operations before income taxes | $ | 9,689 | $ | 6,107 | ||||||||||||||||
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| 2013 | 2014 | 2015 | ||||||||||
Federal income taxes: | ||||||||||||
Current | $ | 1,728 | $ | 1,335 | $ | 1,770 | ||||||
Deferred | (476 | ) | (476 | ) | (476 | ) | ||||||
Foreign income taxes: | ||||||||||||
Current | 442 | 1,291 | 633 | |||||||||
Deferred | 45 | 52 | 69 | |||||||||
State income taxes: | ||||||||||||
Current | 432 | (378 | ) | 190 | ||||||||
Deferred | (44 | ) | (277 | ) | (46 | ) | ||||||
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Provision for income tax expense | $ | 2,127 | $ | 1,547 | $ | 2,140 | ||||||
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Federal income taxes: Current Deferred Foreign income taxes: Current Deferred State income taxes: Current Deferred Change in tax rates—deferred Income tax expense 2019 2018 $ 932 $ 891 (345 ) (294 ) 815 472 — 180 177 380 (3 ) (1 ) — 36 $ 1,576 $ 1,664
The differences between the effective income tax rate and the federal statutory income tax rates for the years ended December 31 by taxable and other subsidiaries are as follows:
| 2013 | 2014 | 2015 | 2019 | 2018 | ||||||||||||||||
U.S. statutory income tax rate | 34.0 | % | 34.0 | % | 34.0 | % | ||||||||||||||
U.S. statutory federal corporate income tax rate | 21.0 | % | 21.0 | % | ||||||||||||||||
LLC flow-through structure | (38.2 | ) | (49.7 | ) | (41.2 | ) | (8.8 | ) | (15.7 | ) | ||||||||||
State and local income taxes, net of federal benefit | (1.4 | ) | (2.0 | ) | (0.6 | ) | 2.4 | 7.3 | ||||||||||||
Foreign rate differential | (5.7 | ) | 1.2 | 0.6 | 1.7 | 11.5 | ||||||||||||||
Provision to return adjustment | 0.7 | (6.3 | ) | 0.5 | — | 3.1 | ||||||||||||||
State refund for jurisdiction change | 0.0 | 9.2 | 0.0 | |||||||||||||||||
Other | 0.1 | 0.0 | 0.0 | |||||||||||||||||
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Effective income tax rate | (10.5 | )% | (13.6 | )% | (6.7 | )% | 16.3 | % | 27.2 | % | ||||||||||
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The Company’s effective tax rate differs from statutory rates primarily due to Bioventus LLC’s pass-through structure for U.S. income tax purposes while being treated as taxable in certain states and various foreign jurisdictions as well as for certain subsidiaries. The 2014 taxable provision to return adjustment was driven in part by changes in items estimated in the original provision.In addition, certain states assess income taxes on pass-through structures.
Tax effects of temporary differences give rise to deferred
Deferred tax assets and liabilities.liabilities are determined based on the difference between financial statement and tax bases using enacted tax rates in effect for the year in which the differences are expected to reverse. The components of the deferred taxes as of December 31 arewere as follows:
| 2014 | 2015 | |||||||||||||||
| 2019 | 2018 | |||||||||||||||
Deferred tax assets: | ||||||||||||||||
Net operating losses | $ | 179 | $ | 84 | $ | 3,530 | $ | — | ||||||||
Tax credit carryforwards and other | 390 | — | ||||||||||||||
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Gross deferred tax assets | 3,920 | — | ||||||||||||||
Valuation allowance | (2,423 | ) | — | |||||||||||||
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Total deferred tax assets | 1,497 | — | ||||||||||||||
Deferred tax liability: | ||||||||||||||||
Amortization | (9,052 | ) | (8,529 | ) | ||||||||||||
Negotiated tax deferral | (276 | ) | (251 | ) | ||||||||||||
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| (9,328 | ) | (8,780 | ) | |||||||||||||
Acquired intangible | (5,371 | ) | (3,955 | ) | ||||||||||||
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Net deferred tax liability | $ | (9,149 | ) | $ | (8,696 | ) | $ | (3,874 | ) | $ | (3,955 | ) | ||||
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The Company has foreign NOL carryforwards of $527 and $227 atAt December 31, 2014 and 2015, respectively, for which no valuation allowance has been established as there are no jurisdictions where2019, the Company believes future benefit is uncertain. These NOLhad federal and state net operating loss carryforwards do not expire.related to Harbor of $24,349 expiring at various dates from 2020 through 2037 and approximately $900 with no expiration date.
Under current tax law, the utilization of tax attributes will be restricted if an ownership change, as defined, were to occur. Section 382 of the U.S. Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, provides, in general, that if an “ownership change” occurs with respect to a corporation with net operating and other loss carryforwards, such carryforwards will be available to offset taxable income in each taxable year after the ownership change only up to the “Section 382 Limitation” for each year. The Company’s ability to use its loss carryforwards will be limited in the event of an ownership change.
During the year ended December 31, 2018, Dutch income taxes arewere imposed on a negotiated percentage of sales. The Company has an agreement with the Dutch taxing authorities where the Company’s Netherland subsidiary will incur but not have to pay income taxes in years when the subsidiary is operating at a loss. As a result, based on the net sales for the year ended December 31, 2013, the Company recorded a deferred tax liability of $276 which is still outstanding at December 31, 2015.
Minimal interest and penalties were incurred for the years ended December 31, 2013, 20142019 and 2015.2018. The Company is subject to audit by various taxing jurisdictions for the years ended December 31, 2013, 2014 and 2015.2015 through 2019.
12. Related-party transactions
Sales of $3,176 and $556 were made to S&N for the years ended December 31, 2013 and 2014, respectively, and as of December 31, 2014 the related trade receivables totaled $498. There were no such sales for the year ended December 31, 2015 and no receivable outstanding at December 31, 2015.
The Company made cash tax distributions of $2,501, $2,399$9,137 and $1,016$7,846 to its members in an amount equal to approximately 40% of the members’ estimated taxable income for the years ended December 31, 2013, 20142019 and 2015,2018, respectively.
In conjunction with At December 31, 2019 and 2018, there were tax distributions payable to tax authorities on the business formation, the Company entered into a $160,000 senior secured note with S&N which was repaid in October 2014 (discussed further in Note 5). During 2013, the Company acquired from S&N additional net distributor assets in foreign markets for $4,874.
On May 4, 2012, the Company entered into a Transition Services Agreement (TSA) with S&N indicating that certain services would be providedmembers behalf totaling $473 and $572 as well as tax distributions payable to the Company relating to operations, logisticsmembers totaling $26 and distribution, global information services, finance and human resources. In consideration for these services, the Company incurred estimated arms-length expenses of $4,298 and $216 for the years ended December 31, 2013 and 2014,$334, respectively. There were no such expenses for the year ended December 31, 2015 and there were no related payables at December 31, 2014 and 2015.
13. Commitments and contingencies
Leases
The Company leases its office facilities as well as other property, vehicles and equipment under operating leases. The Company also leases certain office equipment under finance leases. The remaining lease agreements that expire in various years through 2020terms range from 1 month to 9 years.
The components of lease cost were as follows:
| 2019 | ||||
Operating lease cost | $ | 2,529 | ||
Short-term lease cost* | 358 | |||
Financing lease cost: | ||||
Amortization of finance lease assets | 48 | |||
Interest on lease liabilities | 3 | |||
|
| |||
Total lease cost | $ | 2,938 | ||
|
| |||
| * | Includes variable lease cost and sublease income, which are immaterial. |
Supplemental cash flow information and records rent expensenon-cash activity related to the leases on a straight-line basis over the term of the lease. Rent expense was $3,131, $3,182were as follow:
| 2019 | ||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||
Operating cash flows from operating leases | $ | 2,343 | ||
Operating cash flows from finance leases | $ | 3 | ||
Finance cash flows from finance leases | $ | 43 | ||
Right-of-use assets obtained in exchange for lease obligations: | ||||
Operating leases | $ | 5,016 | ||
Finance leases | $ | — | ||
Current and $3,186 for the years ended December 31, 2013, 2014noncurrent operating and 2015, respectively. Certain facility leases provide for reduced rent periods. As of December 31, 2014 and 2015, respectively, these rent concessions totaling $982 and $902 have been reflectedfinance lease liabilities are included in accruedother current liabilities and other long-term liabilities, inrespectively, on the consolidated balance sheets.sheet. Other balance sheet information related to leases are as follows:
Lease payments are subject to increases
| 2019 | ||||
Operating leases | ||||
Operating lease assets | $ | 15,267 | ||
|
| |||
Operating lease liabilities—current | $ | 1,814 | ||
Operating lease liabilities—noncurrent | 14,513 | |||
|
| |||
Total operating lease liabilities | $ | 16,327 | ||
|
| |||
Finance leases | ||||
Finance lease assets | $ | 20 | ||
|
| |||
Finance lease liabilities—current | $ | 41 | ||
Finance lease liabilities—noncurrent | 13 | |||
|
| |||
Total finance lease liabilities | $ | 54 | ||
|
| |||
| 2019 | ||||
Weighted average remaining lease term (years): | ||||
Operating leases | 8.0 | |||
Finance leases | 1.8 | |||
Weighted average discount rate: | ||||
Operating leases | 5.0 | % | ||
Finance leases | 4.1 | % | ||
Maturities of lease liabilities as specified inof December 31, 2019 were as follows:
| Operating leases | Finance leases | |||||||
2020 | $ | 2,572 | $ | 42 | ||||
2021 | 2,452 | 7 | ||||||
2022 | 2,397 | 7 | ||||||
2023 | 2,230 | — | ||||||
2024 | 2,246 | — | ||||||
Thereafter | 7,991 | — | ||||||
|
|
|
| |||||
Total future lease payments | 19,888 | 56 | ||||||
Less amounts representing interest | (3,561 | ) | (2 | ) | ||||
|
|
|
| |||||
Present value of future lease payments | $ | 16,327 | $ | 54 | ||||
|
|
|
| |||||
As disclosed under the previous lease agreements. Futureaccounting standard, future minimum lease payments by year and in the aggregate, under capitalfor finance leases and non-cancelable operating leases as of December 31, 2015,2018 were as follows:
| Operating leases | Capital leases | Operating leases | Capital leases | |||||||||||||
2016 | $ | 3,023 | $ | 1,354 | ||||||||||||
2017 | 2,599 | 1,155 | ||||||||||||||
2018 | 2,229 | 38 | ||||||||||||||
2019 | 1,456 | — | $ | 2,672 | $ | 45 | ||||||||||
2020 | 447 | — | 2,093 | 40 | ||||||||||||
2021 and thereafter | — | — | ||||||||||||||
2021 | 1,569 | 7 | ||||||||||||||
2022 | 1,516 | 7 | ||||||||||||||
2023 | 1,388 | — | ||||||||||||||
2024 and thereafter | 7,015 | — | ||||||||||||||
|
|
|
| |||||||||||||
Total minimum payments | $ | 9,754 | 2,547 | $ | 16,253 | 99 | ||||||||||
|
| |||||||||||||||
Less amounts representing interest | (125 | ) | (2 | ) | ||||||||||||
|
| |||||||||||||||
Present value of capital lease obligations | 2,422 | 97 | ||||||||||||||
Less current maturities | (1,200 | ) | (42 | ) | ||||||||||||
|
| |||||||||||||||
Capital lease obligations, less current maturities | $ | 1,222 | $ | 55 | ||||||||||||
|
|
| ||||||||||||||
No particular lease obligation ranks senior in right of payment to any other. The gross value of assets under capital leases atas of December 31, 2014 and 20152018 was approximately $4,143 and $4,679, respectively.$2,806 with accumulated depreciation of $2,738. These assets mainly consist of softwarecomputer and computeroffice equipment, andwhich are included in property and equipment. The accumulated depreciation associated with these assets at December 31, 2013, 2014 and 2015, was approximately $913, $2,055 and $3,412, respectively. Depreciation of capital lease assets is included in
depreciation and amortization expense as well as cost of sales in the consolidated statements of operations and comprehensive loss.income (loss). Rent expense was $2,858 for the year ended December 31, 2018. Certain facility leases provide for reduced rent periods. As of December 31, 2018, these rent concessions totaling $696 have been reflected in accrued liabilities and other long-term liabilities in the consolidated balance sheets.
OIG’s Provider Self-Disclosure
The Company identified non-compliance with certain U.S. federal statutes and requirements governing the Medicare program in 2018 related to improper completion of Certificate for Medical Necessity, or CMN, forms and in November 2018 made a voluntary self-disclosure to the Office of Inspector General of the U.S. Department of Health and Human Services, or the OIG, pursuant to the OIG’s Provider Self-Disclosure Protocol related to this matter. This non-compliance is subject to statutory Civil Monetary Penalties, or CMP, on a per claim basis that ranges from nothing to $1 per instance of non-compliance. The Company has estimated the number of impacted claims with improperly completed CMN forms based on the extrapolation of an occurrence rate found in a statistical sample of CMN forms and calculated the potential fine for all impacted claims based on the range above as nothing to $10,800 in aggregate. Although the statutory CMP are reasonably possible, the Company does not believe it is probable that they will be incurred. Additionally, the OIG could require
repayment of the total dollar amount of the impacted claims or $30,060 as well as assessing an additional fine equivalent to half the dollar amount of impacted claims or $15,030 for an aggregate potential impact of $55,890. The Company does not believe the requirement to repay the claims and associated fines is probable. Accordingly, no accrual has been recorded for these potential repayment obligations related to improper completion of CMN forms and potential fines at this time. While these matters are not considered probable, the ultimate outcome of these matters is uncertain. In the event of an unfavorable outcome to the Company, these contingencies could have a material adverse effect on the Company’s financial position, results of operations, liquidity and cash flows.
Reserve for estimated overpayments from all third-party payers
The Company maintains a reserve for reimbursement claims related to its Bone Growth Stimulator Products that may have been processed for payment by the Company without adequate medical records support. The Company held a reserve of $6,801 and $12,468 at December 31, 2019 and 2018, respectively for these amounts. The Company refunded Medicare $7,458 related to known and estimated overpayments for medical necessity included in this reserve for periods through December 31, 2018. Certain of these overpayments were identified as potential overpayments in the Company’s OIG self-disclosure in November 2018. The OIG is currently reviewing the Company’s self-disclosure. The Company’s reserve was estimated using extrapolation of an error rate from a statistical sample, which represents the Company’s best estimate as of the date of the financial statements, but because of the uncertainty inherent in such estimates, the ultimate resolution may be materially different.
Other matters
As discussed in Note 3, on August 23, 2019, the Company and Harbor entered into an exclusive Collaboration Agreement for purposes of developing a product for orthopedic uses to be commercialized by the Company and supplied by Harbor. Upon execution of the Collaboration Agreement, the Company paid a nominal license fee for certain technology and intellectual property licenses owned by Harbor and for the assignment of a third-party license used in the product development. The third-party license assigned to the Company is subject to 3% royalty on commercial sales of product developed with the licensed patent(s), or a minimum of $25 per quarter beginning 2023, regardless of commercial sales and will remain in effect until earlier of expiration of the licensed patent, or terminated by the Company and ceased selling of the licensed product. The Company will also make two one-time payments totaling $6,000 contingent upon the successful completion of the following milestones: $1,000 upon receiving regulatory approval, or Regulatory Milestone, and $5,000 upon achieving a pre-established net sales target, or Net Sales Milestone. Unless earlier terminated, the Collaboration Agreement will remain in effect until the earlier of 8 years or payment of the Net Sales Milestone. In addition, contingent on Harbor obtaining certain debt or equity financing and the achievement of certain milestones, the Company has agreed to purchase additional shares of Harbor’s Series C Preferred Stock for $1,000.
On May 29, 2019, the Company and Musculoskeletal Transplant Foundation, Inc. d/b/a MTF Biologics, or MTF, entered into a collaboration and development agreement, or Development Agreement, whereby both parties will undertake a collaborative program to develop one or more products for orthopedic application to be commercialized by the Company and supplied by MTF. The development will be performed over several phases. The Company is obligated to pay $4,250 for the third phase as well as $444 upon the receipt of samples, and another $444 upon initiation of the first clinical trial conducted under an Investigational New Drug Application. The Company paid cash of $1,250 in June 2019, of which $1,146 is included in research and development expense on the consolidated statement of operations and comprehensive income (loss) and the remaining $104 is included in prepaid and other current assets on the consolidated balance sheet. Additional fees for the subsequent phases will be determined as the development work progresses. The Development Agreement continues until the date when the parties execute a supply agreement for the commercial products.
On December 31, 20139, 2016, the Company entered into an amended and restated license agreement for the exclusive U.S. distribution and commercialization rights of a single injection, OA product with the supplier of the Company’s single injection OA product for the non-U.S. market. In November 2018, the Company was notified and a supplier (the License Agreement) thatunique reimbursement code became effective for the product on January 1, 2019 resulting in the Company making an additional $4,000 cash payment in January 2019 which was recognized as a liability as of December 31, 2018 and included an option to purchase certain trademarksin accrued liabilities on the consolidated balance sheet as well as an intangible asset. The Company began selling the product registrationsin the U.S. in 2018 and clinical data (the IP)as of January 1, 2019 became subject to minimum purchase requirements. The agreement requires the Company to pay royalties on net sales. Royalties related to this agreement totaled $7,622 and $3,082 for the years ended December 31, 2019 and 2018, respectively, and are included in cost of sales on the consolidated statement of operations and comprehensive income (loss).
On June 30, 2016, the Company entered into an amended and restated distribution agreement with the sole supplier of the Company’s five injection OA product. This agreement provided non-exclusive U.S. market distribution rights until May 4, 2019. No additional payments were required to amend and restate the distribution agreement. In February 2018, the Company entered into an amended and restated distribution agreement effective May 2018, which provides exclusive U.S. market distribution rights until May 2028. The Company paid $2,000 and $1,000 in cash to the supplier in May 2019 and 2018, respectively, which was capitalized as an intangible asset. The additional $2,000 paid in May 2019, was recorded as liability as of December 31, 2018 and included in accrued liabilities on the consolidated balance sheet.
As part of a supply agreement entered on February 9, 2016 for the Company’s three injection OA product, the Company currently sells. The License Agreement grantsis subject to annual minimum purchase requirements for ten years. After the initial ten years, the agreement will automatically renew for an additional five years unless terminated by the Company an exclusive license to commercializeor the product outside of the U.S. without competition for five years. In addition, the Company was no longer required to make royalty payments to the supplier. Inseller in accordance with the License Agreement, the Company made payments of $19,668 in 2014 and $3,726 in 2015, including implicit interest. agreement.
The Company also paid $1,597 and exercised the option to purchase the IP.
In November 2015 upon acquiring BioStructures, the Company assumedhas an exclusive license and supply agreement for the use of bioactive glass in certain of its BGS products. The Company assumedhas a world-wide, royalty bearing license, as well as the right to sublicense, for the use of certain developed technologies related to spine repair. The Company iswas required to pay a royalty of 3% on all commercial sales revenue from the licensed products. Royalty expense is included in cost of sales. The agreement will expireexpired in 2019 upon the expiration of the last to expire patents held by the licensor.
In November 2015 upon acquiring BioStructures, theApril 2019. The Company assumedhas an exclusive license agreement for bioactive bone graft putty. The Company wasis required to pay a royalty of 3% on all commercial sales revenue from the license products with a minimum annual royalty payment of $201 forthrough 2023, the period from 2015 through 2023. In March 2016 this royalty agreement was amended. Subsequent todate the amendment, the royalty rate has changed to 1.5% in 2016 and 2017 and 2.0% for 2018 through 2023. Royalty expense is included in cost of sales. The agreement will expire, in 2023 upon the expiration of the patent held by the licensor. These royalties are included in cost of sales on the consolidated statement of operations and comprehensive income (loss).
On October 3, 2014, the Company purchased certain BGS assets and the resulting BGS business from a biologics company. The purchase price included contingent consideration which consists of up to $12,000 for various cash earn-out payments upon the achievement of certain net sales targets through December 31, 2019, a royalty on future net sales of certain BGS products beginning January 1, 2019 through December 31, 2023 and a supply agreement with the previous owner ending in October 2018. Under the terms of the supply agreement, the Company purchased the BGS products at prices above the market rate. In May 2017, the Company entered into an agreement with the previous owners to end exclusivity for certain BGS products and to extend the supply agreement for the other BGS products for an additional six months to April 2019. In addition, the duration for achieving sales targets to trigger certain earn-out payments was extended through June 30, 2020. There are no estimated contingent consideration payments remaining as of December 31, 2019.
From time to time, the Company causes LOCs to be issued to provide credit support for guarantees, contractual commitments and insurance policies. The fair values of the letters of creditLOCs reflect the amount of the underlying obligation and are subject to fees payable to the issuers, of the letters of credit, competitively determined in the marketplace. As of December 31, 20142019 and 2015,2018, the Company had a letter of creditLOCs for $122$83 and $110,$84, respectively, outstanding with one of the Company’s banking institutions. As of December 31, 2015, the Company had a letter of credit for $110 outstanding and $28 outstanding with the Company’s primary banking institution.
The Company currently maintains insurance for risks associated with the operation of its business, provision of professional services and ownership of property. These policies provide coverage for a variety of potential losses, including loss or damage to property, bodily injury, general commercial liability, professional errors and omissions and medical malpractice. The Company’s retentions and deductibles associated with these insurance policies range in amounts up to $1,250. The Company is self-insured for health insurance for the majoritycovering most of its employees located withinin the US, butUnited States. The Company maintains stop-loss insurance on a “claims made” basis for expenses in excess of $100$150 per member per year.
As part of the formation of the Company, Bioventus is liable to S&N for one-half of all costs incurred in the defense and litigation of a certain pre-acquisition legal dispute for an amount not to exceed $5,000. Legal expenses for the years ended December 31, 2014 and 2015 totaled $274 and $131, respectively, and are included in SG&A on the consolidated statements of operations and comprehensive loss. The legal expense liability at December 31, 2014 was $160. There was no legal expense liability outstanding at December 31, 2015. As of December 31, 2014, a settlement liability totaling $688 was established for this contingency as an adverse outcome of these legal proceedings was deemed to be probable or reasonably estimable and the liability remains outstanding at December 31, 2015.
In the normal course of business, the Company periodically becomes involved in various claims and lawsuits, and governmental proceedings and investigations that are incidental to the business. ManagementWith respect to governmental proceedings and investigations, like other companies in our industry, the Company is subject to extensive regulation by national, state and local governmental agencies in the U.S. and in other jurisdictions in which the Company and its affiliates operate. As a result, interaction with governmental agencies is ongoing. The Company’s standard practice is to cooperate with regulators and investigators in responding to inquiries. The outcomes of legal actions are not within the Company’s complete control and may not be known for extended periods of time. Other than the matters discussed above, management of the Company, after consultation with legal counsel, does not believe there are any unrecorded matters that will have a material adverse effect upon the Company’s financial statements.
14. Net loss per unit
The following table presents the computation of basic and diluted net loss per unit for the years ended December 31 2013, 2014 and 2015 as follows:
| 2013 | 2014 | 2015 | ||||||||||
Net loss | $ | (22,367 | ) | $ | (12,900 | ) | $ | (34,111 | ) | |||
Accumulated and unpaid preferred distributions | (3,610 | ) | (3,718 | ) | (3,997 | ) | ||||||
|
| |||||||||||
Net loss attributable to common unit holders | (25,977 | ) | (16,618 | ) | (38,108 | ) | ||||||
Weighted average units used in computing net loss per unit, basic and diluted | 4,900 | 4,900 | 4,900 | |||||||||
|
| |||||||||||
Net loss per unit, basic and diluted | $ | (5.30 | ) | $ | (3.39 | ) | $ | (7.78 | ) | |||
| ||||||||||||
| 2019 | 2018 | |||||||
Net income from continuing operations attributable to unit holders | $ | 8,666 | $ | 4,443 | ||||
Accumulated and unpaid preferred distributions | (5,955 | ) | (5,781 | ) | ||||
Net income allocated to participating shareholders | (1,555 | ) | — | |||||
|
|
|
| |||||
Net income (loss) from continuing operations attributable to common unit holders | 1,156 | (1,338 | ) | |||||
Loss from discontinued operations, net of tax | 1,815 | 16,650 | ||||||
|
|
|
| |||||
Net loss attributable to common unit holders | $ | (659 | ) | $ | (17,988 | ) | ||
|
|
|
| |||||
Net loss per unit attributable to common unit holders—basic and diluted | ||||||||
Net income (loss) from continuing operations | $ | 0.24 | $ | (0.27 | ) | |||
Loss from discontinued operations, net of tax | 0.37 | 3.40 | ||||||
|
|
|
| |||||
Net loss attributable to common unit holders | $ | (0.13 | ) | $ | (3.67 | ) | ||
|
|
|
| |||||
Weighted average units used in computing basic and diluted net loss per common unit | 4,900 | 4,900 | ||||||
The computation of diluted earnings per unit for the yearsyear ended December 31, 2013, 20142019 and 20152018 excludes the effect of potential common units that would be issued upon the conversion of preferred units, profits interest units and the EPR unit.units. The effect of these 6,590 units would be antidilutive due to the Company being in a net loss position and these units only convert upon completion of a Distribution Event.
15. Operations by geographic location
NetThe Company attributes net sales to external customers are attributed to the United StatesU.S. and to all foreign countries based on the location from which the sale originated. Net sales to external customers and long-lived asset information by geographic area are summarized as follows:
| United States | The Netherlands | Other | Total | |||||||||||||
Year ended December 31, 2013 | ||||||||||||||||
Net sales | $ | 197,118 | $ | 31,753 | $ | 3,504 | $ | 232,375 | ||||||||
Property and equipment, net | $ | 13,201 | $ | 455 | $ | — | $ | 13,656 | ||||||||
Year ended December 31, 2014 | ||||||||||||||||
Net sales | $ | 198,718 | $ | 38,261 | $ | 5,914 | $ | 242,893 | ||||||||
Property and equipment, net | $ | 10,006 | $ | 422 | $ | — | $ | 10,428 | ||||||||
Year ended December 31, 2015 | ||||||||||||||||
Net sales | $ | 217,803 | $ | 30,025 | $ | 5,822 | $ | 253,650 | ||||||||
Property and equipment, net | $ | 9,370 | $ | 232 | $ | — | $ | 9,602 | ||||||||
| ||||||||||||||||
16. Segments
The AHT business is comprised of two types of non-surgical products including external bone growth stimulation product for long bone fracture healing and osteoarthritis pain relief products. Following are the net sales for each product type for the years ended December 31:
| 2013 | 2014 | 2015 | ||||||||||
External bone growth stimulators | $ | 121,333 | $ | 131,528 | $ | 130,367 | ||||||
Diagnostic ultrasound products | 5,065 | 3,935 | — | |||||||||
Osteoarthritis pain treatment products | 105,977 | 103,280 | 97,494 | |||||||||
|
| |||||||||||
| $ | 232,375 | $ | 238,743 | $ | 227,861 | |||||||
| ||||||||||||
The Surgical business offers a portfolio of advanced bone graft substitutes that are designed to improve bone fusion rates following spinal fusion and other orthopedic surgeries.
The following table presents our net sales by reportable segment disaggregated by geographic markets and major products for the years ended December 31 as follows:
| 2013 | 2014 | 2015 | ||||||||||
U.S. AHT | $ | 197,118 | $ | 194,568 | $ | 192,014 | ||||||
International AHT | 35,257 | 44,175 | �� | 35,847 | ||||||||
Surgical | — | 4,150 | 25,789 | |||||||||
|
| |||||||||||
| $ | 232,375 | $ | 242,893 | $ | 253,650 | |||||||
| ||||||||||||
| 2019 | 2018 | |||||||
Primary geographic markets: | ||||||||
U.S. | $ | 305,072 | $ | 282,895 | ||||
International | 35,069 | 36,282 | ||||||
|
|
|
| |||||
Total net sales | $ | 340,141 | $ | 319,177 | ||||
|
|
|
| |||||
Major product lines: | ||||||||
OA joint pain treatment and joint preservation | $ | 182,082 | $ | 155,576 | ||||
Minimally invasive fracture treatment | 103,504 | 121,032 | ||||||
Bone graft substitutes | 54,555 | 42,569 | ||||||
|
|
|
| |||||
Total net sales | $ | 340,141 | $ | 319,177 | ||||
|
|
|
| |||||
The following16. Segments
Segment information by asset is not disclosed as it is not reviewed by the CODM or used to allocate resources or to assess the operating results and financial performance. We believe EBITDA, adjusted for additional non-operational factors disclosed in the table presents total assetsbelow, or Adjusted EBITDA, is a key measure for internal reporting. Adjusted EBITDA should not be considered in isolation or as a substitute for consolidated net income (loss) attributable to the Company, the most closely analogous U.S. GAAP measure. Adjusted EBITDA is not defined in the same manner by reportable segment asall companies and may not be comparable to other similarly titled measures of December 31 as follows:
| 2013 | 2014 | 2015 | ||||||||||
U.S. AHT (as revised) | $ | 366,820 | $ | 310,246 | $ | 289,638 | ||||||
International AHT (as revised) | 76,687 | 63,187 | 56,039 | |||||||||
Surgical | — | 47,336 | 132,355 | |||||||||
BMP | 9,231 | 9,652 | 9,320 | |||||||||
|
| |||||||||||
| $ | 452,738 | $ | 430,421 | $ | 487,352 | |||||||
| ||||||||||||
other companies unless the definition is the same. The following table presents segment adjusted EBITDA and reconciliationreconciled to lossincome from continuing operations before income taxes for the years ended December 31 as follows:
| 2013 | 2014 | 2015 | ||||||||||
Segment adjusted EBITDA | ||||||||||||
U.S. AHT | $ | 32,557 | $ | 33,466 | $ | 40,161 | ||||||
International AHT | 578 | 7,778 | 6,743 | |||||||||
Surgical | — | 1,631 | 6,591 | |||||||||
BMP | (7,650 | ) | (6,682 | ) | (11,309 | ) | ||||||
Depreciation and amortization | (24,458 | ) | (28,820 | ) | (33,078 | ) | ||||||
Interest expense | (11,459 | ) | (11,969 | ) | (14,229 | ) | ||||||
Equity compensation | (576 | ) | (2,355 | ) | (3,325 | ) | ||||||
Change in fair value of contingent consideration | — | (1,590 | ) | (19,493 | ) | |||||||
Inventory step-up | — | (1,629 | ) | (280 | ) | |||||||
Restructuring costs | — | (1,183 | ) | (2,645 | ) | |||||||
Transition and other non-recurring | (9,232 | ) | — | (1,107 | ) | |||||||
|
| |||||||||||
Loss before income taxes | $ | (20,240 | ) | $ | (11,353 | ) | $ | (31,971 | ) | |||
| ||||||||||||
| 2019 | 2018 | |||||||
Segment adjusted EBITDA | ||||||||
U.S. | $ | 71,673 | $ | 67,480 | ||||
International | 7,515 | 4,691 | ||||||
Depreciation and amortization | (30,316 | ) | (29,238 | ) | ||||
Interest expense | (21,579 | ) | (19,171 | ) | ||||
Loss on impairment of intangible assets | — | (489 | ) | |||||
Equity compensation | (10,844 | ) | (14,325 | ) | ||||
Loss on debt retirement and modification | (367 | ) | — | |||||
Change in fair value of contingent consideration | — | 739 | ||||||
Restructuring costs | (575 | ) | (1,373 | ) | ||||
Realized and unrealized foreign currency loss | (8 | ) | (234 | ) | ||||
Other non-recurring costs | (5,810 | ) | (1,973 | ) | ||||
|
|
|
| |||||
Income from continuing operations before income taxes | $ | 9,689 | $ | 6,107 | ||||
|
|
|
| |||||
17. Discontinued operations
17. Subsequent events
On February 9, 2016, in order to enter the three-injection Osteoarthritis pain treatment US market,In December 2018, the Company, purchased for ten years with automatic renewal periodsunder the exclusive distribution rights of a three-injection, hyaluronic acid product for pain relief associated with osteoarthritisdirection and authority of the kneeCompany’s Board of Managers, committed to shut down the bone morphogenetic protein, or BMP, research and development program which had been reported as its own segment in previous years. Substantially all operations, including project close documentation, contract termination, vacating the facility and ultimately the termination of the employees,
ceased by March 2019 and as a result the BMP research and development program met the criteria for cashdiscontinued operations. Included in prepaid and other current assets on the consolidated balance sheet is net property and equipment classified as current assets held for sale totaling $172 and $224 as of $6,000. As part of this agreement, the seller will supply the Company products subject to annual minimum purchase requirements for ten years.
18. Unaudited pro forma net loss per share
Pro forma basic net loss per share is calculated by dividing net loss attributable to Class A common stockholders by the number of weighted average shares of Class A common stock after giving effect to the corporate conversion.
| 2015 | ||||
Net loss per share, basic and diluted: | ||||
Numerator | ||||
Net loss | (35,426 | ) | ||
Less: Net loss attributable to non-controlling interests | (13,854 | ) | ||
Net loss attributable to Class A common stockholders | (21,572 | ) | ||
Denominator | ||||
Shares of Class A common stock held by the Former LLC Owners | 14,904,090 | |||
|
| |||
Weighted-average shares of Class A common stock | 14,904,090 | |||
|
| |||
Net loss per share, basic and diluted | $ | (1.45 | ) | |
Due to the pro forma net loss of Bioventus LLC for the year ended December 31, 2015,2019 and 2018, respectively. The following table summarizes the exchangestatement of 9,571,764 shares of Class B common stock was excludedoperations information from the calculation of diluted net loss per share and no adjustment to the net loss attributable to non-controlling interests was necessary since all shares were antidilutive.
19. Revision of Consolidated Financial Statements
May 2016 Revision
In connection with the preparation of the consolidated financial statements of April 2,2016 and for the three months then ended, the Company determined that it had errors in certain presentation matters and footnote disclosures related to the consolidated financial statementsdiscontinued operations for the years ended December 31, 2013, 301431:
| 2019 | 2018 | |||||||
Research and development expense | $ | 1,773 | $ | 7,127 | ||||
Loss on disposal | 52 | 9,638 | ||||||
Income tax benefit | (10 | ) | (115 | ) | ||||
|
|
|
| |||||
Loss from discontinued operations, net of tax | $ | 1,815 | $ | 16,650 | ||||
|
|
|
| |||||
18. Subsequent events
COVID-19 pandemic impact
In December 2019, an outbreak of the Coronavirus Disease 2019, or COVID-19, originated in China and 2015.has since spread to other countries, including the U.S. On March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. In addition, multiple jurisdictions in the U.S. have declared a state of emergency. It is anticipated that these impacts will continue for some time. There have been moderate disruptions and restrictions on our employees’ ability to work. Future potential impacts may include significant disruptions or restrictions on our employees’ ability to work, loss of revenue and diminished future cash flows among others. An estimate of the financial statement effect cannot be made at this time other than those described below. Continued volatility could impact the carrying value of goodwill, intangible assets, long-lived assets, right of use assets, and investment securities as well as the valuation of equity-based compensation plans.
On March 24, 2020, the Company increased its cash position by borrowing $49,000 on its Revolver as a precautionary measure to preserve financial flexibility in view of the uncertainty resulting from the COVID-19 pandemic. The $49,000 was repaid on September 24, 2020.
On March 27, 2020, the U.S. enacted the Coronavirus Aid, Relief and Economic Security Act, or CARES Act. The CARES Act is an emergency economic stimulus package that includes spending and tax breaks to strengthen the U.S. economy and fund a nationwide effort to curtail the effect of COVID-19. While the CARES Act provides sweeping tax changes in response to the COVID-19 pandemic, some of the more significant provisions which are expected to impact the Company’s financial statements include removal of certain limitations on utilization of net operating losses and increasing the ability to deduct interest expense, as well as amending certain provisions of the previously enacted Tax Act. The Company concludedcontinues to quantify the impact, if any, that the correctionCARES Act will have on its financial position, results of these errorsoperations or cash flows.
As a result of the CARES Act, on May 15, 2020, the Company began deferring employer social security payroll tax payments through the remainder of the 2020 calendar year of which, 50% is deferred until December 31, 2021, with the remaining 50% deferred until December 31, 2022, all of which will be initially recorded in other long-term liabilities on the condensed consolidated balance sheet.
As a result of the CARES Act and at the direction of the U.S. Department of Health and Human Services (“HHS”), the Company received a $1,247 Provider Relief Fund Payment in April 2020. The Company determined it complied with the conditions to be able to keep and use the funds to reimburse for health care related expenses and lost revenue attributable to the public health emergency resulting from COVID-19. The payment will be recorded as other income on the consolidated statement of operations and comprehensive income (loss). A second Provider Relief Fund Payment totaling $2,854 was received in July 2020.
As of March 28 2020, due to the COVID-19 triggering event, the Company performed a fair value assessment of its liability-classified MIP and 2015 Phantom Plan awards and determined that the fair value decreased by $7,849 primarily attributable to a change in management’s forecast of future net sales because of uncertainty in the market and the economy from the impact of COVID-19.
Other
On January 22, 2020, the Company invested in CartiHeal through a Simple Agreement for Future Equity, or SAFE, by paying cash of $152. On July 15, 2020, the Company entered into an Option and Equity Purchase Agreement with CartiHeal. Under the terms of the agreement, the Company purchased 1,014,267 shares of CartiHeal Series G Preferred Shares for $15,000 and the SAFE converted to 12,825 in Series G-1 Preferred Shares. As a result, the Company’s equity ownership in CartiHeal increased to 10.03% of fully diluted shares. The Company will, if needed, purchase an additional 338,089 of CartiHeal Series G Preferred Shares for $5,000, for the completion of a certain study. The Company has an exclusive option to acquire the remaining equity in CartiHeal which may be exercised at any time up to and within 45 days following notice of FDA approval for a CartiHeal product currently in development. In addition, upon the same FDA approval, CartiHeal may exercise an option within 45 days that requires the Company to complete the acquisition of the remaining equity in CartiHeal.
On March 26, 2020, the Company entered into an interest rate swap agreement to limit its exposure to changes in the variable interest rate on its Term Loan (as discussed in Note 5). The interest rate swap was not material individually,designated as a hedge and expires December 6, 2024. The interest rate swap totaled $100,000, or 50% of the Term Loan outstanding principal at December 31, 2019, and as of March 26, 2020, the Term Loan effective interest rate, including the applicable lending margin of 2.25%, is fixed at 2.88%.
The Company refunded Medicare $1,500 of the reserve for estimated overpayments from third-party payors during June 2020 related to known and estimated overpayments for medical necessity for periods through December 31, 2019.
In June 2020, the sole MIP awardee exercised the right to force a cash settlement for 150,252 of the 333,330 vested units resulting in a payment of $6,329. The Company agreed to cash settle for the aggregate, to the previously issued financial statements. Accordingly,remaining 183,078 units in June 2021.
On October 5, 2020, the Company has revised thepurchased 285,714 additional shares of Harbor’s Series C Preferred Stock for $1,000 (as discussed in Note 13).
BIOVENTUS LLC
Condensed consolidated statements of operations and comprehensive loss and related footnotes for the years ended December 31, 2013, 2014 and 2015. The adjustments in these periods are all corrections to presentation and footnotes to the consolidated financial statements. The adjustments made in connection with the revisions include:income
Adding the lines for accumulated and unpaid preferred distributions and the total for net loss attributable to common unit holders used in the calculation of EPS on the face of the consolidated statements of operations and comprehensive loss for the years ended December 31, 2013, 2014 and 2015. This financial information had previously only been disclosed in Note 14.
An $8,760 reclassification of goodwill from U.S. AHT total assets to International AHT total assets as of December 31, 2013 and 2014 in Note 16.
A $3,012 decrease in unrecognized compensation expense to be recognized in future periods as of December 31, 2015 in Note 10.
The following schedules reconcile the amounts, as previously reported in the Notes to the consolidated financial statements, to the corresponding revised amounts:
| Year End December 31, 2013 | ||||||||||||
| As previously reported | Revision adjustment | As revised | ||||||||||
U.S. AHT total assets (Note 16) | $ | 375,580 | $ | (8,760 | ) | $ | 366,820 | |||||
International AHT total assets (Note 16) | $ | 67,927 | $ | 8,760 | $ | 76,687 | ||||||
| ||||||||||||
| Year End December 31, 2014 | ||||||||||||
| As previously reported | Revision adjustment | As revised | ||||||||||
U.S. AHT total assets (Note 16) | $ | 319,006 | $ | (8,760 | ) | $ | 310,246 | |||||
International AHT total assets (Note 16) | $ | 54,427 | $ | 8,760 | $ | 63,187 | ||||||
| ||||||||||||
| Year End December 31, 2015 | ||||||||||||
| As previously reported | Revision adjustment | As revised | ||||||||||
Unrecognized compensation expense (Note 10) | $ | 6,759 | $ | (3,012 | ) | $ | 3,747 | |||||
| ||||||||||||
July 2016 Revision
The Company determined that it had incorrectly included an inventory write-down of the diagnostic ultrasound product line as a restructuring cost rather than as cost of sales in the consolidated statements of operations and comprehensive loss for the years ended December 31, 2014 and 2015. The Company concluded that the correction of these errors was not material to the previously issued financial statements. Accordingly, the Company has revised the consolidated statements of operations and comprehensive loss and related footnote (Note 9) for the years ended December 31, 2014 and 2015. The adjustments include a $1,183 and $202 reclassification from restructuring costs to cost of sales in the consolidated statements of operations and comprehensive loss for the years ended December 31, 2014 and 2015, respectively. In addition, the related activity in the restructuring reserve rollforward table in Note 9 has been corrected.
The following schedule reconciles the amounts, as previously reported in the consolidated financial statements, to the corresponding revised amounts:
| Year End December 31, 2014 | ||||||||||||
Consolidated Statement of Operations and Comprehensive Loss | As previously reported | Revision adjustment | As revised | |||||||||
Cost of Sale | $ | 74,609 | $ | 1,183 | $ | 75,792 | ||||||
Gross Profit | $ | 168,284 | $ | (1,183 | ) | $ | 167,101 | |||||
Restructuring Costs | $ | 1,183 | $ | (1,183 | ) | $ | — | |||||
| ||||||||||||
Cost of Sale Gross Profit Restructuring Costs Year End December 31, 2015 Consolidated Statement of Operations and Comprehensive Loss As
previously
reported Revision
adjustment As revised $ 74,342 $ 202 $ 74,544 $ 179,308 $ (202 ) $ 179,106 $ 2,645 $ (202 ) $ 2,443
| Year End December 31, 2014 | ||||||||||||
| Notes to Consolidated Financial Statements | As previously reported | Revision adjustment | As revised | |||||||||
Expenses incurred (Note 9) | $ | 1,183 | $ | (1,183 | ) | $ | — | |||||
Inventory reserved for (Note 9) | $ | (1,183 | ) | $ | 1,183 | $ | — | |||||
| ||||||||||||
| Year End December 31, 2015 | ||||||||||||
| Notes to Consolidated Financial Statements | As previously reported | Revision adjustment | As revised | |||||||||
Expenses incurred (Note 9) | $ | 875 | $ | (202 | ) | $ | 673 | |||||
Payments made (Note 9) | $ | (875 | ) | $ | 202 | $ | (673 | ) | ||||
| ||||||||||||
Consolidated statements of operations and comprehensive loss
ThreeNine months ended MarchSeptember 26, 2020 and September 28, 2015 and April 2, 20162019
(Dollars in thousands, except per unit and per share data)
(unaudited)(Unaudited)
| March 28, 2015 | April 2, 2016 | |||||||
Net sales | $ | 53,362 | $ | 65,402 | ||||
Cost of sales (including depreciation and amortization of $5,741 and $6,300, respectively) | 16,807 | 19,235 | ||||||
|
| |||||||
Gross profit | 36,555 | 46,167 | ||||||
Selling, general and administrative expense | 37,270 | 40,184 | ||||||
Research and development expenses | 2,966 | 3,718 | ||||||
Change in fair value of contingent consideration | 8,971 | 1,301 | ||||||
Restructuring costs | 1,076 | 172 | ||||||
Depreciation and amortization | 2,571 | 2,830 | ||||||
|
| |||||||
Operating loss | (16,299 | ) | (2,038 | ) | ||||
Interest expense | 3,854 | 3,555 | ||||||
Other (income) expense | 496 | (147 | ) | |||||
|
| |||||||
Other expense, net | 4,350 | 3,408 | ||||||
|
| |||||||
Loss before income taxes | (20,649 | ) | (5,446 | ) | ||||
Income tax expense | 369 | 603 | ||||||
|
| |||||||
Net loss | (21,018 | ) | (6,049 | ) | ||||
Other comprehensive (loss) income, net of tax | ||||||||
Change in prior service cost and unrecognized loss for defined benefit plan adjustment | 12 | — | ||||||
Change in foreign currency translation adjustments | (397 | ) | 90 | |||||
|
| |||||||
Other comprehensive (loss) income | (385 | ) | 90 | |||||
|
| |||||||
Comprehensive loss | $ | (21,403 | ) | $ | (5,959 | ) | ||
|
| |||||||
Net loss | | (21,018 | ) | | (6,049 | ) | ||
Accumulated and unpaid preferred distributions | (953 | ) | (1,042 | ) | ||||
|
|
|
| |||||
Net loss attributable to common unit holders | (21,971 | ) | (7,091 | ) | ||||
Net loss per unit, basic and diluted (Note 11) | $ | (4.48 | ) | $ | (1.45 | ) | ||
Weighted average common units outstanding, basic and diluted | 4,900 | 4,900 | ||||||
Unaudited pro forma net loss per share (Note 13): | ||||||||
Net loss per share, basic and diluted | — | (0.25 | ) | |||||
Weighted average common shares, basic and diluted | — | 14,904,090 | ||||||
| ||||||||
| Nine Months Ended | ||||||||
| September 26, 2020 | September 28, 2019 | |||||||
Net sales | $ | 222,570 | $ | 242,587 | ||||
Cost of sales (including depreciation and amortization of $16,076 and $17,149, respectively) | 62,521 | 66,810 | ||||||
|
|
|
| |||||
Gross profit | 160,049 | 175,777 | ||||||
Selling, general and administrative expense | 131,104 | 144,021 | ||||||
Research and development expense | 8,311 | 7,911 | ||||||
Restructuring costs | — | 540 | ||||||
Depreciation and amortization | 5,305 | 5,815 | ||||||
|
|
|
| |||||
Operating income | 15,329 | 17,490 | ||||||
Interest expense | 7,095 | 13,935 | ||||||
Other (income) expense | (4,539 | ) | 71 | |||||
|
|
|
| |||||
Other expense | 2,556 | 14,006 | ||||||
|
|
|
| |||||
Income from continuing operations before income taxes | 12,773 | 3,484 | ||||||
Income tax expense | 302 | 684 | ||||||
|
|
|
| |||||
Net income from continuing operations | 12,471 | 2,800 | ||||||
Loss from discontinued operations, net of tax | — | 1,616 | ||||||
|
|
|
| |||||
Net income | 12,471 | 1,184 | ||||||
Loss attributable to noncontrolling interest | 1,164 | 30 | ||||||
|
|
|
| |||||
Net income attributable to unit holders | 13,635 | 1,214 | ||||||
Other comprehensive income (loss), net of tax | ||||||||
Change in foreign currency translation adjustments | 687 | (577 | ) | |||||
|
|
|
| |||||
Comprehensive income | $ | 14,322 | 637 | |||||
|
|
|
| |||||
Net income from continuing operations attributable to unit holders | $ | 13,635 | $ | 2,830 | ||||
Accumulated and unpaid preferred distributions | (4,525 | ) | (4,421 | ) | ||||
Net income allocated to participating shareholders | (5,225 | ) | — | |||||
|
|
|
| |||||
Net income (loss) from continuing operations attributable to common unit holders | 3,885 | (1,591 | ) | |||||
Loss from discontinued operations, net of tax | — | 1,616 | ||||||
|
|
|
| |||||
Net income (loss) attributable to common unit holders | $ | 3,885 | $ | (3,207 | ) | |||
|
|
|
| |||||
Net income (loss) per unit attributable to common unit holders—basic and diluted (Note 12) | ||||||||
Net income (loss) from continuing operations | $ | 0.79 | $ | (0.32 | ) | |||
Loss from discontinued operations, net of tax | — | 0.33 | ||||||
|
|
|
| |||||
Net income (loss) attributable to common unit holders | $ | 0.79 | $ | (0.65 | ) | |||
|
|
|
| |||||
Weighted average common units outstanding, basic and diluted | 4,900 | 4,900 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
BIOVENTUS LLC
ConsolidatedCondensed consolidated balance sheets as of September 26, 2020 (Unaudited) and December 31, 2019
(Dollars in thousands)
(unaudited)
December 31, (Note 1) | April 2, 2016 | September 26, 2020 | December 31, 2019 | |||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash | $ | 4,950 | $ | 6,166 | ||||||||||||
Restricted cash | 343 | 343 | ||||||||||||||
Cash and cash equivalents | $ | 72,478 | $ | 64,520 | ||||||||||||
Accounts receivable, net | 54,511 | 51,109 | 80,813 | 85,128 | ||||||||||||
Inventory, net | 35,178 | 37,119 | ||||||||||||||
Inventory | 34,705 | 27,326 | ||||||||||||||
Prepaid and other current assets | 4,445 | 5,248 | 5,145 | 6,059 | ||||||||||||
|
|
|
| |||||||||||||
Total current assets | 99,427 | 99,985 | 193,141 | 183,033 | ||||||||||||
Property and equipment, net | 9,602 | 8,984 | 5,886 | 4,489 | ||||||||||||
Goodwill | 58,694 | 58,694 | 49,800 | 49,800 | ||||||||||||
Intangible assets, net | 319,152 | 318,141 | 196,688 | 216,510 | ||||||||||||
Other assets | 393 | 371 | ||||||||||||||
Deferred tax asset | 84 | 89 | ||||||||||||||
Operating lease assets | 13,906 | 15,267 | ||||||||||||||
Investment and other assets | 19,856 | 3,308 | ||||||||||||||
|
|
|
| |||||||||||||
Total assets | $ | 487,352 | $ | 486,264 | $ | 479,277 | $ | 472,407 | ||||||||
|
| |||||||||||||||
|
| |||||||||||||||
Liabilities and Members’ Equity | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 8,368 | $ | 9,819 | $ | 8,790 | $ | 6,440 | ||||||||
Accrued liabilities | 34,368 | 30,534 | 73,019 | 52,827 | ||||||||||||
Note payable | 23,546 | 23,597 | ||||||||||||||
Contingent consideration | 7,270 | 7,156 | ||||||||||||||
Accrued equity-based compensation | 9,580 | 15,547 | ||||||||||||||
Long-term debt | 12,938 | 14,375 | 16,250 | 10,000 | ||||||||||||
Capital lease obligations | 1,200 | 1,318 | ||||||||||||||
Other current liabilities | 4,095 | 4,201 | ||||||||||||||
|
|
|
| |||||||||||||
Total current liabilities | 87,690 | 86,799 | 111,734 | 89,015 | ||||||||||||
Long-term debt, less current portion | 149,607 | 145,535 | 177,025 | 187,965 | ||||||||||||
Long-term revolver | 8,000 | 19,500 | ||||||||||||||
Contingent consideration, less current portion | 32,635 | 31,136 | ||||||||||||||
Capital lease obligations, less current portion | 1,222 | 1,030 | ||||||||||||||
Accrued equity-based compensation, less current portion | 22,086 | 25,255 | ||||||||||||||
Deferred income taxes | 3,436 | 3,874 | ||||||||||||||
Other long-term liabilities | 7,080 | 7,313 | 19,657 | 20,681 | ||||||||||||
Deferred tax liability | 8,780 | 8,649 | ||||||||||||||
|
|
|
| |||||||||||||
Total liabilities | 295,014 | 299,962 | 333,938 | 326,790 | ||||||||||||
Commitments and contingencies (Note 8) | ||||||||||||||||
Members’ equity (preferred unit liquidation preference of $208,968 and $204,443 at September 26, 2020 and December 31, 2019, respectively) | 285,173 | 285,147 | ||||||||||||||
Accumulated other comprehensive income (loss) | 222 | (465 | ) | |||||||||||||
Accumulated deficit | (142,176 | ) | (141,700 | ) | ||||||||||||
|
| |||||||||||||||
Commitments and contingencies (Note 10) | ||||||||||||||||
Members’ equity (preferred unit liquidation preference of $181,645 and $182,687 at December 31, 2015 and April 2, 2016, respectively) | 284,828 | 284,837 | ||||||||||||||
Accumulated other comprehensive loss | (650 | ) | (560 | ) | ||||||||||||
Accumulated deficit | (91,840 | ) | (97,975 | ) | ||||||||||||
Equity attributable to Bioventus LLC members | 143,219 | 142,982 | ||||||||||||||
Noncontrolling interest | 2,120 | 2,635 | ||||||||||||||
|
|
|
| |||||||||||||
Total members’ equity | 192,338 | 186,302 | 145,339 | 145,617 | ||||||||||||
|
|
|
| |||||||||||||
Total liabilities and members’ equity | $ | 487,352 | $ | 486,264 | $ | 479,277 | $ | 472,407 | ||||||||
|
|
|
| |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
BIOVENTUS LLC
ConsolidatedCondensed consolidated statements of changes in members’ equity
ThreeNine months ended April 2, 2016September 26, 2020 and September 28, 2019
(Dollars in thousands)
(unaudited)(Unaudited)
| Members’ equity | Accumulated other loss | Accumulated deficit | Total members’ equity | Members’ equity | Accumulated other comprehensive (loss) income | Accumulated deficit | Noncontrolling interest | Total members’ equity | ||||||||||||||||||||||||||||
Balance at December 31, 2015 | $ | 284,828 | $ | (650 | ) | $ | (91,840 | ) | $ | 192,338 | ||||||||||||||||||||||||||
Balance at December 31, 2019 | $ | 285,147 | $ | (465 | ) | $ | (141,700 | ) | $ | 2,635 | $ | 145,617 | ||||||||||||||||||||||||
Profits interest compensation | 9 | — | — | 9 | 26 | — | — | — | 26 | |||||||||||||||||||||||||||
Distribution to members | — | — | (86 | ) | (86 | ) | — | — | (14,111 | ) | — | (14,111 | ) | |||||||||||||||||||||||
Net loss | — | — | (6,049 | ) | (6,049 | ) | ||||||||||||||||||||||||||||||
Debt conversion | — | — | — | 649 | 649 | |||||||||||||||||||||||||||||||
Net income (loss) | — | — | 13,635 | (1,164 | ) | 12,471 | ||||||||||||||||||||||||||||||
Translation adjustment | — | 90 | — | 90 | — | 687 | — | — | 687 | |||||||||||||||||||||||||||
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||
Balance at April 2, 2016 | $ | 284,837 | $ | (560 | ) | $ | (97,975 | ) | $ | 186,302 | ||||||||||||||||||||||||||
Balance at September 26, 2020 | $ | 285,173 | $ | 222 | $ | (142,176 | ) | $ | 2,120 | $ | 145,339 | |||||||||||||||||||||||||
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||
| Members’ equity | Accumulated other comprehensive loss | Accumulated deficit | Noncontrolling interest | Total members’ equity | ||||||||||||||||||||||||||||||||
Balance at December 31, 2018 | $ | 285,153 | $ | (65 | ) | $ | (139,821 | ) | $ | — | $ | 145,267 | ||||||||||||||||||||||||
Profits interest forfeitures | (8 | ) | — | — | — | (8 | ) | |||||||||||||||||||||||||||||
Distribution to members | — | — | (9,648 | ) | — | (9,648 | ) | |||||||||||||||||||||||||||||
Acquisition of noncontrolling interest | — | — | — | 3,188 | 3,188 | |||||||||||||||||||||||||||||||
Net income (loss) | — | — | 1,214 | (30 | ) | 1,184 | ||||||||||||||||||||||||||||||
Translation adjustment | — | (577 | ) | — | — | (577 | ) | |||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||
Balance at September 28, 2019 | $ | 285,145 | $ | (642 | ) | $ | (148,255 | ) | $ | 3,158 | $ | 139,406 | ||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
BIOVENTUS LLC
ConsolidatedCondensed consolidated statements of cash flows
ThreeNine months ended MarchSeptember 26, 2020 and September 28, 2015 and April 2, 20162019
(Dollars in thousands)
(unaudited)(Unaudited)
| Nine Months Ended | ||||||||||||||||
| March 28, 2015 | April 2, 2016 | September 26, 2020 | September 28, 2019 | |||||||||||||
Operating activities: | ||||||||||||||||
Net loss | $ | (21,018 | ) | $ | (6,049 | ) | ||||||||||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||||||||||
Net income | $ | 12,471 | $ | 1,184 | ||||||||||||
Net loss from discontinued operations | — | 1,616 | ||||||||||||||
|
| |||||||||||||||
Net income from continuing operations | 12,471 | 2,800 | ||||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities from continuing operations: | ||||||||||||||||
Depreciation and amortization | 8,394 | 9,137 | 21,789 | 22,972 | ||||||||||||
Change in fair value of contingent consideration | 8,971 | 1,301 | ||||||||||||||
Provision for doubtful accounts | 1,128 | 1,133 | ||||||||||||||
Profits interest compensation | 187 | 9 | ||||||||||||||
Management incentive plan and liability-classified awards compensation | 342 | 279 | ||||||||||||||
Payment of contingent consideration in excess of amount established in purchase accounting | — | (959 | ) | |||||||||||||
Provision for expected credit losses | 1,089 | 2,211 | ||||||||||||||
Profits interest plan and liability-classified awards compensation | 619 | 3,252 | ||||||||||||||
Change in fair value of Equity Participation Rights unit | 326 | — | (788 | ) | 14 | |||||||||||
Change in fair value of interest rate swap | 1,980 | 71 | ||||||||||||||
Deferred income taxes | (131 | ) | (131 | ) | (438 | ) | (222 | ) | ||||||||
Unrealized foreign currency transaction (gains) losses | 476 | (252 | ) | |||||||||||||
Amortization of debt discount and capitalized loan fees, net | 205 | 262 | 407 | 1,264 | ||||||||||||
Changes in operating assets and liabilities, net of acquisitions: | ||||||||||||||||
Other, net | (235 | ) | 574 | |||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | 2,217 | 2,539 | 3,361 | (3,671 | ) | |||||||||||
Inventories | (3,748 | ) | (2,582 | ) | (7,004 | ) | (3,827 | ) | ||||||||
Accounts payable and accrued expenses | (3,139 | ) | (2,643 | ) | 11,568 | (198 | ) | |||||||||
Other current assets and liabilities | 1,969 | (841 | ) | 1,933 | (2,952 | ) | ||||||||||
|
|
|
| |||||||||||||
Net cash (used in) provided by operating activities | (3,821 | ) | 2,162 | |||||||||||||
Net cash provided by operating activities from continuing operations | 46,752 | 21,329 | ||||||||||||||
Net cash used in operating activities of discontinued operations | (400 | ) | (1,663 | ) | ||||||||||||
|
| |||||||||||||||
Net cash provided by operating activities | 46,352 | 19,666 | ||||||||||||||
Investing activities: | ||||||||||||||||
Equity method investments | (16,630 | ) | — | |||||||||||||
Purchase of property and equipment | (2,331 | ) | (1,778 | ) | ||||||||||||
Acquisition of distribution rights | — | (6,000 | ) | — | (6,000 | ) | ||||||||||
Purchase of property and equipment | (306 | ) | (638 | ) | ||||||||||||
Acquisition of VIE | — | 430 | ||||||||||||||
|
| |||||||||||||||
Net cash used in investing activities from continuing operations | (18,961 | ) | (7,348 | ) | ||||||||||||
Net cash provided by investing activities from discontinued operations | 172 | — | ||||||||||||||
|
|
|
| |||||||||||||
Net cash used in investing activities | (306 | ) | (6,638 | ) | (18,789 | ) | (7,348 | ) | ||||||||
Financing activities: | ||||||||||||||||
Borrowing on revolver | 49,000 | — | ||||||||||||||
Payment on revolver | (49,000 | ) | — | |||||||||||||
Payments on long-term debt | (5,000 | ) | (2,625 | ) | ||||||||||||
Distribution to members | (14,691 | ) | (9,015 | ) | ||||||||||||
|
| |||||||||||||||
Financing activities: | ||||||||||||||||
Payments on long-term debt | — | (2,875 | ) | |||||||||||||
Payment of contingent consideration | (8,790 | ) | (2,914 | ) | ||||||||||||
Borrowing on the revolving line of credit | 13,000 | 20,500 | ||||||||||||||
Payments on the revolving line of credit | — | (9,000 | ) | |||||||||||||
Principal payments toward capital lease obligations | (358 | ) | (216 | ) | ||||||||||||
|
| |||||||||||||||
Net cash provided by financing activities | 3,852 | 5,495 | ||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | (470 | ) | 197 | |||||||||||||
Net cash used in financing activities | (19,691 | ) | (11,640 | ) | ||||||||||||
Effect of exchange rate changes on cash | 86 | 171 | ||||||||||||||
|
|
|
| |||||||||||||
Net change in cash and cash equivalents | (745 | ) | 1,216 | 7,958 | 849 | |||||||||||
Cash and cash equivalents at the beginning of the period | 15,774 | 4,950 | 64,520 | 42,774 | ||||||||||||
|
|
|
| |||||||||||||
Cash and cash equivalents at the end of the period | $ | 15,029 | $ | 6,166 | $ | 72,478 | $ | 43,623 | ||||||||
|
|
|
| |||||||||||||
Supplemental disclosure of noncash investing and financing activities | ||||||||||||||||
Capital lease obligations for purchase of property and equipment | $ | 251 | $ | 142 | ||||||||||||
|
| |||||||||||||||
Accrued member distributions | $ | 194 | $ | 86 | $ | 607 | 1,540 | |||||||||
|
|
|
| |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
BIOVENTUS LLC
Notes to condensed consolidated financial statements
(Dollars in thousands)thousands, except for per unit and per share data)
(unaudited)(Unaudited)
1. Summary of significant accounting policies
Unaudited interim financial information
The accompanying unaudited consolidated financial statements of Bioventus LLC and its subsidiaries (the Company)the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP)U.S. GAAP for interim financial information.
Accordingly,information under Rule 10-01 of Regulation S-X. Pursuant to these rules and regulations they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) 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 audited consolidated financial statements for the year ended December 31, 2015.2019. The balance sheet at December 31, 20152019 has been derived from the audited consolidated financial statements of the Company but does not include all the disclosures required by U.S. GAAP.
Fair valueOperating results attributable to the BMP research and development business are presented as discontinued operations on the consolidated statements of operations and comprehensive income (Refer to Note 11. Discontinued Operations).
We reclassified certain prior period amounts to conform to the current period presentation.
Interim periods
The Company records certainreports 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 ended on March 28, June 27 and September 26 for the year ended December 31, 2020. As a result, the fourth and first quarters may vary in length depending on the calendar year.
COVID-19 pandemic impact
In December 2019, an outbreak of COVID-19 originated in China and spread to other countries, including the U.S. On March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic and was subsequently declared a national emergency. The Company remains focused on protecting the health and wellbeing of its employees, partners, patients, and the communities in which it operates while assuring the continuity of its business operations.
The impact of COVID-19 on the Company’s business is highly uncertain and difficult to predict, as information surrounding the pandemic is rapidly evolving. Although the U.S. and other countries implemented plans to ease social distancing and quarantine measures, there are still many unknowns and risks, such as the possibility of U.S. states or other countries returning to a state of quarantine or the return to more stringent social distancing, when elective procedures will return to a pre COVID-19 pace, the impact to capital markets and the possibility of local and global economic recession. Any resulting economic disruption could have a material impact on our business. In addition, the long-term impact of COVID-19 on the Company’s business will depend on many factors, including, but not limited to, the duration and severity of the pandemic and the impact it has on our partners, patients and communities in which we operate, all of which are uncertain. The Company’s future results of operations and liquidity will be materially impacted due to the decrease in elective procedures and could be further impacted by delays in payments from customers, supply chain interruptions, extended “shelter in
place” orders or advisories, facility closures or other reasons related to the pandemic. As of the date of issuance of these condensed consolidated financial statements, the extent to which COVID-19 could materially impact the Company’s financial conditions, liquidity or results of operations is uncertain.
On March 27, 2020, the CARES Act was signed into law, which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, and modifications to the net interest deduction limitations. The Company has not quantified the full impact of the CARES Act.
The Company deferred employer social security payroll tax payments from May 2020 until the remainder of the 2020 calendar year of which, 50% is deferred until December 31, 2021, with the remaining 50% deferred until December 31, 2022. The Company has deferred $1,229 as of September 26, 2020, all of which has been recorded in other long-term liabilities on the condensed consolidated balance sheet. The Company is in the process of analyzing other provision to determine the financial impact on our condensed consolidated financial statements. Refer to Note 7. Income Taxes for further information.
As a result of the CARES Act and at the direction of the U.S. Department of Health and Human Services, or HHS, the Company received a $1,247 Provider Relief Fund Payment in April 2020. The Company determined it complied with the conditions to be able to keep and use the funds to reimburse for health care related expenses and lost revenue attributable to the public health emergency resulting from COVID-19. A second Provider Relief Fund Payment totaling $2,854 was received in July 2020. The payments were recorded as other income on the condensed consolidated statement of operations and comprehensive income for the nine months ended September 26, 2020.
Recent accounting pronouncements
The Company has elected to comply with non-accelerated public company filer effective dates of adoption. Therefore, the required effective dates for adopting new or revised accounting standards as described below are specific to non-accelerated public company filers, which are generally earlier than when emerging growth companies are required to adopt.
Accounting Pronouncements Recently Adopted
The FASB issued Accounting Standards Update 2016-13,Financial Instruments-Credit Losses, or ASU 2016-13, in June 2016 that significantly changes accounting for credit losses for most financial assets and liabilitiescertain other instruments that are not measured at fair value (discussed furtherthrough net income. ASU 2016-13 requires that an entity measure and recognize expected credit losses for financial assets held at amortized cost and replaces the incurred loss impairment methodology in Note 6). prior GAAP with a methodology that considers a broad range of information for the estimation of credit losses. The Company adopted ASU 2016-13 on January 1, 2020 prospectively and the adoption did not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued Accounting Standards Update 2018-15,Intangibles-Goodwill and Other-Internal-Use Software, or ASU 2018-15 addressing a customer’s accounting for implementation costs incurred in a CCA that is considered a service contract. Under ASU 2018-15, implementation costs for a CCA should be evaluated for capitalization using the same approach as implementation costs associated with internal-use software. The capitalized implementation costs should be expensed over the term of the hosting arrangement, which includes any reasonably certain renewal periods. Capitalized implementation costs should be assessed for impairment like long-lived assets. The Company adopted ASU 2018-15 on January 1, 2020 prospectively and it had no material impact on the consolidated financial statements.
In August 2018, the FASB issued Accounting Standards Update 2018-13,Fair Value Measurement, or ASU 2018-13, modifying the disclosure requirements on fair value is definedmeasurements and eliminates the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. ASU 2018-13 modifies certain disclosures related to investments measured at net asset value and clarifies that companies are to disclose uncertainties in measurements as of the reporting date. ASU 2018-13 requires additional disclosure related to changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements as well as the pricerange and weighted average, or other quantitative information that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy that prioritizes themore reasonable and rational method, of significant unobservable inputs used to measuredevelop Level 3 fair value is described below. This hierarchy requires entitiesmeasurements. The additional disclosures and description of any measurement uncertainty amendments should be applied prospectively for the most recent interim or annual period in the initial year of adoption. All other amendments should be applied retrospectively to maximize the use of observable inputs and minimize the use of unobservable inputs.
The three levels of inputs used to measure fair value are as follows:
Level 1—Quoted prices in active markets for identical assets or liabilities;
Level 2—Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data; and
Level 3—Unobservable inputs that are supported by little or no market data. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
Concentration of risk
all periods presented upon their effective date. The Company provides credit,adopted ASU 2018-13 on January 1, 2020 and it did not have a material impact on its consolidated financial statements.
New Accounting Pronouncements Not Yet Adopted
In December 2019, the FASB issued Accounting Standards Update 2019-12,Income Taxes, or ASU 2019-12, which amended the accounting for income taxes. ASU 2019-12 eliminates certain exceptions to the guidance for income taxes related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences as well as simplifying aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the normal coursetax basis of business, to its customers. The Company does not require collateral or other securities to support customer receivables. Credit losses are provided for through allowances and have historically been materially within management’s estimates.
Certain suppliers provide the Company with product that results in a significant percentage of total sales for the three months ended as follows:
March 28, | April 2, | |||||||
Supplier A | 33% | 28% | ||||||
Supplier B | 9% | 10% | ||||||
| ||||||||
Two of the Company’s products make up 85% and 77% of sales for the three months ended March 28, 2015 and April 2, 2016, respectively.
goodwill. ASU Recent accounting pronouncements2019-12
In May 2014, the U.S. Financial Accounting Standards Board (FASB) issued guidance that provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. This guidance is effective for annual and interim periods beginning after December 15, 2017.2020. Early adoption is permitted in interim or annual periods for which financial statements have not been made available for issuance. Entities that elect to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual reporting periods beginning after December 15, 2016.period that includes that interim period. Certain amendments are to be applied prospectively while others are retrospective. The Company is currently evaluating the impact of this new standard on its consolidated financial statements, the date of adoption and the transition approach to implement the new guidance.
In February 2016, the FASB issued guidance that requires lessees to recognize the rights and obligations resulting from leases as assets and liabilities. It also modifies the classification criteria and the accounting for sales-type and direct financing leases for the lessor. This guidance is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted and must be adopted using a modified retrospective transition. The Company is currently evaluating the impact of this new standard on its consolidated financial statements and the date of adoption to implement the new guidance.
In March 2016, the FASB issued new accounting guidance which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements and the classification of excess tax benefits on the statement of cash flows. The new accounting guidance will be effective for annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the impact of this new accounting guidance on its consolidated financial statements and the date of adoption to implement the new guidance.statements.
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:
| December 31, 2015 | April 2, 2016 | |||||||
Accounts receivable | $ | 87,227 | $ | 83,957 | ||||
Less: | ||||||||
Contractual allowances | (24,114 | ) | (24,204 | ) | ||||
Allowances for doubtful accounts | (8,602 | ) | (8,644 | ) | ||||
|
| |||||||
| $ | 54,511 | $ | 51,109 | |||||
| ||||||||
| September 26, 2020 | December 31, 2019 | |||||||
Accounts receivable | $ | 85,697 | $ | 89,274 | ||||
Less: Allowance for credit losses | (4,884 | ) | (4,146 | ) | ||||
|
|
|
| |||||
| $ | 80,813 | $ | 85,128 | |||||
|
|
|
| |||||
ChangesThe Company maintains an allowance for credit losses for estimated losses resulting from the inability of its customers to make required payments. The allowance for credit losses is calculated by region and by customer type, where appropriate considering several factors including age of accounts, collection history, historical account write-offs, current economic conditions, and supportable forecasted economic expectations. Due to the short-term nature of its 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. An increase in the allowancesprovision for doubtfulcredit losses may be required when the financial condition of
the Company’s customers or its collection experience deteriorates. The Company has a diverse customer base with no single customer representing ten percent of sales or accounts werereceivable. Historically, the Company’s reserves have been adequate to cover credit losses. The Company’s exposure to credit losses may increase if its customers are adversely affected by changes in health care laws, coverage and reimbursement, economic pressures or uncertainty associated with local or global economic recessions, disruption associated with the COVID-19 pandemic, or other customer-specific factors. The Company considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and determined that the estimate of credit losses was not significantly impacted. Estimates are used to determine the allowance, which are based on an assessment of anticipated payment and all other historical, current and future information that is reasonably available.
A roll-forward of the allowance for credit losses is as follows for the three months ended:follows:
| March 28, 2015 | April 2, 2016 | |||||||
Balance, beginning of period | $ | (8,671 | ) | $ | (8,602 | ) | ||
Provision for losses | (1,128 | ) | (1,133 | ) | ||||
Write-offs, net of recoveries | 1,239 | 1,091 | ||||||
|
| |||||||
| $ | (8,560 | ) | $ | (8,644 | ) | |||
| Nine Months Ended | ||||||||
| September 26, 2020 | September 28, 2019 | |||||||
Beginning balance | $ | (4,146 | ) | $ | (4,497 | ) | ||
Provision for losses | (1,089 | ) | (2,211 | ) | ||||
Write-offs | 628 | 1,960 | ||||||
Recoveries | (277 | ) | (299 | ) | ||||
|
|
|
| |||||
Ending balance | $ | (4,884 | ) | $ | (5,047 | ) | ||
|
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| |||||
Inventory, netInventory
Inventory consisted of the following as of:
| December 31, 2015 | April 2, 2016 | September 26, 2020 | December 31, 2019 | |||||||||||||
Raw materials and supplies | $ | 8,433 | $ | 9,402 | $ | 4,153 | $ | 3,349 | ||||||||
Finished goods | 27,861 | 29,203 | 31,209 | 24,509 | ||||||||||||
|
|
|
| |||||||||||||
Gross | 36,294 | 38,605 | 35,362 | 27,858 | ||||||||||||
Excess and obsolete reserves | (1,116 | ) | (1,486 | ) | (657 | ) | (532 | ) | ||||||||
|
|
|
| |||||||||||||
| $ | 34,705 | $ | 27,326 | |||||||||||||
| $ | 35,178 | $ | 37,119 |
|
| |||||||||||
| ||||||||||||||||
Changes in excess and obsolete reserves for inventory were as follows for the three months ended:
| March 28, 2015 | April 2, 2016 | |||||||
Balance, beginning of period | $ | (2,598 | ) | $ | (1,116 | ) | ||
Provision for losses | (143 | ) | (850 | ) | ||||
Write-offs | 232 | 480 | ||||||
|
| |||||||
| $ | (2,509 | ) | $ | (1,486 | ) | |||
| ||||||||
Property and equipment, net
Property and equipment consisted of the following as of:
| December 31, 2015 | April 2, 2016 | |||||||
Computer equipment and software | $ | 16,375 | $ | 16,268 | ||||
Leasehold improvements | 2,583 | 2,593 | ||||||
Furniture and fixtures | 1,173 | 1,183 | ||||||
Machinery and equipment | 914 | 1,040 | ||||||
Assets not yet placed in service | 2,730 | 1,400 | ||||||
|
| |||||||
| 23,775 | 22,484 | |||||||
Less accumulated depreciation | (14,173 | ) | (13,500 | ) | ||||
|
| |||||||
Property and equipment, net | $ | 9,602 | $ | 8,984 | ||||
| ||||||||
Depreciation expense was $1,311 and $1,485 for the three months ended March 28, 2015 and April 2, 2016, respectively.
Goodwill and intangible assets, net
There were no changes to goodwill during the threenine months ended April 2, 2016.
September 26, 2020. Intangible assets consisted of the following as of:
| December 31, 2015 | April 2, 2016 | September 26, 2020 | December 31, 2019 | |||||||||||||
Intellectual property | $ | 259,238 | $ | 259,238 | $ | 263,422 | $ | 263,422 | ||||||||
Distribution rights | 42,700 | 48,700 | 59,700 | 59,700 | ||||||||||||
Customer relationships | 57,700 | 57,700 | 57,700 | 57,700 | ||||||||||||
IPR&D | 27,000 | 27,000 | 1,445 | 11,095 | ||||||||||||
Developed technology | 2,800 | 2,800 | ||||||||||||||
Other intangibles | 474 | 474 | ||||||||||||||
Developed technology and other | 13,998 | 4,649 | ||||||||||||||
|
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|
| |||||||||||||
Total carrying amount | 389,912 | 395,912 | 396,265 | 396,566 | ||||||||||||
|
| |||||||||||||||
|
| |||||||||||||||
Less accumulated amortization: | ||||||||||||||||
Intellectual property | (36,377 | ) | (40,434 | ) | (113,188 | ) | (100,982 | ) | ||||||||
Distribution rights | (11,598 | ) | (12,488 | ) | (33,012 | ) | (28,716 | ) | ||||||||
Customer relationships | (19,887 | ) | (21,920 | ) | (50,037 | ) | (46,407 | ) | ||||||||
Developed technology | (2,800 | ) | (2,800 | ) | ||||||||||||
Other intangibles | (98 | ) | (129 | ) | ||||||||||||
Developed technology and other | (3,475 | ) | (3,404 | ) | ||||||||||||
|
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|
| |||||||||||||
Total accumulated amortization | (70,760 | ) | (77,771 | ) | (199,712 | ) | (179,509 | ) | ||||||||
|
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| |||||||||||||
Intangible assets, net before currency translation | 196,553 | 217,057 | ||||||||||||||
Currency translation | 135 | (547 | ) | |||||||||||||
|
| |||||||||||||||
Intangible assets, net | $ | 319,152 | $ | 318,141 | ||||||||||||
|
| $ | 196,688 | $ | 216,510 | |||||||||||
|
| |||||||||||||||
On February 9, 2016, in order to enter the three-injection osteoarthritis pain treatment in the U.S. market, the Company purchased a license for the exclusive U.S. distribution rights of a three-injection, hyaluronic acid product for pain relief associated with osteoarthritis of the knee for cash of $6,000. This purchase was accounted for as an asset acquisition as the product is fully developed and available for commercialization.
The Company expects to begin selling thisfiled a 510(k) in 2019 and began commercializing a next-generation surgical product in third quarter of 2020. As a result, $9,650 of IPR&D was reclassified to developed technology and will be amortized over 10 years increasing the second half of 2016.
estimated amortization expense by $965 each year. Amortization expense related to intangible assets was $7,234$20,503 and $7,012$19,613 for the threenine months ended MarchSeptember 26, 2020 and September 28, 2015 and April 2, 2016, respectively,2019 of which $5,605$6,712 and $5,283$6,469, respectively, is included in ending inventoryinventory.
Investments
VIEs
On August 23, 2019, the Company purchased 285,714 shares of Harbor’s Series C Preferred Stock or 3.1% of fully diluted shares for $1,000 in cash. The Company and Harbor entered into an exclusive Collaboration Agreement for purposes of developing a product for orthopedic uses to be commercialized by the Company and supplied by Harbor. As a result of these transactions, the Company determined that it had a variable interest in Harbor. On March 27, 2020, two convertible promissory notes to Harbor shareholders totaling $500 were converted to 142,858 of Harbor Series C Preferred Stock and warrants for 428,572 shares of the Harbor common stock exercisable at a price of $1.167 per share with a 5-year exercise period expiring March 28, 201527, 2025. The Company continues to conclude that it is the primary beneficiary since it controls the significant activities of Harbor through the Collaboration Agreement. The Company has consolidated Harbor in its consolidated financial statements with a noncontrolling interest for the remaining 95.3% and April 2, 2016,96.9% as of September 26, 2020 and December 31, 2019, respectively. On October 5, 2020, the Company purchased an additional 285,714 shares of Harbor’s Series C Preferred Stock for $1,000 in cash decreasing the noncontrolling interest to 91.4%.
Harbor assets that can only be used to settle Harbor obligations and Harbor liabilities for which creditors do not have recourse to the general credit of the Company are as follows:
| September 26, 2020 | December 31, 2019 | |||||||
Cash and cash equivalents | $ | 271 | $ | 1,127 | ||||
Property and equipment, net | 165 | 60 | ||||||
Intangible assets, net | 5,755 | 6,122 | ||||||
Operating lease assets | 192 | 231 | ||||||
Other assets | 74 | 59 | ||||||
|
|
|
| |||||
| $ | 6,457 | $ | 7,599 | |||||
|
|
|
| |||||
Accounts payable and accrued liabilities | $ | 374 | $ | 458 | ||||
Other current liabilities | 2,323 | 2,395 | ||||||
Deferred income taxes | — | 215 | ||||||
Other long-term liabilities | 675 | 872 | ||||||
|
|
|
| |||||
| $ | 3,372 | $ | 3,940 | |||||
|
|
|
| |||||
Equity Method
Investments in which the Company can exercise significance influence, but do not control, are recorded under the equity method of accounting and are included in investments and other assets on the consolidated balance sheets. The Company’s share of net earnings or losses is included in other (income) expense within the consolidated statements of operations and comprehensive income. The Company evaluates investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may be impaired. Impairment losses are recorded within earnings within the current period.
On January 30, 2018, the Company purchased 337,397 shares of CartiHeal, a privately held entity, Series F Convertible Preferred Stock or 2.8% of fully diluted shares for $2,500 in cash. The investment does not have a readily determinable fair value. On January 22, 2020, the Company made an additional investment in CartiHeal, through a SAFE by paying cash of $152. On July 15, 2020, CartiHeal completed an equity financing that the Company participated in and as a result, the Company received 12,825 in Series G-1 Preferred Shares and the SAFE terminated.
In addition, on July 15, 2020, the Company entered into an Option and Equity Purchase Agreement with CartiHeal. Under the terms of the agreement, the Company purchased 1,014,267 shares of CartiHeal Series G Preferred Shares for $15,000. As a result, the Company’s equity ownership in CartiHeal increased to 10.03% of its fully diluted shares. The CartiHeal investment, included capitalized transaction costs of $1,478 and the $152 investment in January 2020, totaling $16,630 was recorded as an equity method investment beginning in July 2020, as the Company can exercise significant influence over CartiHeal but does not have control. It is included within investments and other assets on the consolidated balance sheet.
The Company will, if needed, purchase an additional 338,089 of CartiHeal Series G Preferred Shares for $5,000, for the completion of a certain study. The Company has an exclusive option to acquire the remaining equity in CartiHeal, which may be exercised at any time up to and within 45 days following notice of the U.S. Food and Drug Administration (“FDA”) approval for a CartiHeal product currently in development. In addition, upon the same FDA approval, CartiHeal may exercise an option within 45 days that requires the Company to complete the acquisition of the remaining equity in CartiHeal.
Accrued liabilities
Accrued liabilities consisted of the following as of:
| December 31, 2015 | April 2, 2016 | |||||||
Bonus and commission | $ | 10,161 | $ | 5,557 | ||||
Compensation and benefits | 4,709 | 5,712 | ||||||
BioStructure second close payment | 4,965 | 4,976 | ||||||
Product costs | 3,063 | 2,713 | ||||||
Income and other taxes | 2,656 | 3,319 | ||||||
Accounting and legal fees | 2,602 | 2,801 | ||||||
Amounts due to managed care organizations | 1,438 | 1,302 | ||||||
Research, development and regulatory | 1,309 | 939 | ||||||
Other liabilities | 3,465 | 3,215 | ||||||
|
| |||||||
| $ | 34,368 | $ | 30,534 | |||||
| ||||||||
| September 26, 2020 | December 31, 2019 | |||||||
Gross-to-net deductions | $ | 36,079 | $ | 14,622 | ||||
Bonus and commission | 9,793 | 14,200 | ||||||
Reserve for estimated overpayments from third-party payers | 5,139 | 6,801 | ||||||
Compensation and benefits | 4,620 | 3,231 | ||||||
Income and other taxes | 2,508 | 2,555 | ||||||
Other liabilities | 14,880 | 11,418 | ||||||
|
|
|
| |||||
| $ | 73,019 | $ | 52,827 | |||||
|
|
|
| |||||
3. Business combination
BioStructures acquisition
On November 24, 2015, in order to increase its presence in the surgical orthobiologics market, the Company purchased BioStructures, LLC for cash of $48,397, a $23,528 note payable to the former BioStructures owners, contingent consideration of $4,542 and a second closing payment of $4,960. The Company accounted for the BioStructures purchase using the acquisition method of accounting, whereby the total purchase price was preliminarily allocated to tangible and intangible assets acquired and liabilities assumed based on respective fair values. The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the acquisition date:
| ||||
Fair value of consideration | $ | 81,427 | ||
|
| |||
Assets acquired: | ||||
Cash | 778 | |||
Accounts receivable | 1,677 | |||
Inventory | 1,924 | |||
Property and equipment | 44 | |||
Intangible assets | 73,350 | |||
|
| |||
Total assets acquired | 77,773 | |||
|
| |||
Liabilities assumed: | ||||
Accounts payable | 1,077 | |||
Accrued liabilities | 4,386 | |||
|
| |||
Net identifiable assets acquired | 72,310 | |||
|
| |||
Resulting goodwill | $ | 9,117 | ||
| ||||
As of April 2, 2016, the purchase price allocation for the BioStructures acquisition remains preliminary and subject to completion. There have been no adjustments to the current fair value estimates in the above table. Adjustments may occur as the process conducted for various valuations and assessments is finalized, including tax liabilities and other working capital accounts.
The results of operations of the business have been included in the accompanying consolidated financial statements since the November 24, 2015 acquisition date. BioStructures revenue and earnings included in operations are as follows for the three months ended April 2:
| 2016 | ||||
Net sales | $ | 4,255 | ||
Income before income taxes | $ | 1,031 | ||
| ||||
Revenue and earnings, including the BioStructures operations as if it was acquired at January 1, 2015, are as follows for the three months ended:
| (unaudited) | March 28, 2015 | |||
Net sales | $ | 56,514 | ||
Loss before income taxes | $ | (19,798 | ) | |
| ||||
4. DebtFinancial instruments
Long-term debt consists of the following:
| December 31, 2015 | April 2, 2016 | |||||||
2014 Revolver due October 2019 (5.33% at April 2, 2016) | $ | 8,000 | $ | 19,500 | ||||
|
|
|
| |||||
First Lien Term Loan due October 2019 (3.18% at April 2, 2016) | $ | 106,375 | $ | 103,500 | ||||
Second Lien Term Loan due April 2020 (11.00% at April 2, 2016) | 60,000 | 60,000 | ||||||
Less: | ||||||||
Current portion | 12,938 | 14,375 | ||||||
Unamortized debt issuance cost | 2,322 | 2,175 | ||||||
Unamortized discount | 1,508 | 1,415 | ||||||
|
| |||||||
| $ | 149,607 | $ | 145,535 | |||||
| ||||||||
| September 26, 2020 | December 31, 2019 | |||||||
Term loan due December 2024 (2.66% at September 26, 2020) | $ | 195,000 | $ | 200,000 | ||||
Less: | ||||||||
Current portion of long-term debt | (16,250 | ) | (10,000 | ) | ||||
Unamortized debt issuance cost | (1,168 | ) | (1,378 | ) | ||||
Unamortized discount | (557 | ) | (657 | ) | ||||
|
|
|
| |||||
| $ | 177,025 | $ | 187,965 | |||||
|
|
|
| |||||
The 2014Company increased its cash position by borrowing $49,000 on its Revolver as a precautionary measure to preserve financial flexibility in view of the current uncertainty resulting from the COVID-19 pandemic during the first quarter of 2020. The $49,000 balance was repaid September 24, 2020. The 2019 Credit Agreement contains certainrequires the Company to comply with financial and other covenants. The Company complied with all covenants including, but not limited to (1) a minimum fixed charge ratio and a maximum debt leverage ratio requirement as defined in the 20142019 Credit Agreement (2) restrictions on the declaration or paymentas of certain distributions on or in respectSeptember 26, 2020.
The estimated fair value of the Company’s equity interests, (3) restrictionsTerm Loan as of September 26, 2020 was $187,106. The fair value of these obligations was determined by using a discounted cash flow model based on acquisitions, investmentscurrent market interest rates available to the Company. These inputs are corroborated by observable market data for similar obligations and certain other payments, (4) limitations onare classified as Level 2 instruments within the incurrence of new indebtedness, (5) limitations on transfers, sales and other dispositions and (6) limitations on making any material change in any of the Company’s business objectives that could reasonably be expected to have a material adverse effect on the repayment of the note.fair value hierarchy.
Contractual maturities of long-term debt at April 2, 2016, were as follows:
| ||||
2016 | $ | 14,375 | ||
2017 | 17,250 | |||
2018 | 14,375 | |||
2019 | 57,500 | |||
2020 and thereafter | 60,000 | |||
Deferred finance costs | (2,175 | ) | ||
Original issue discount | (1,415 | ) | ||
|
| |||
Total long-term debt | 159,910 | |||
Less current portion | (14,375 | ) | ||
|
| |||
Total | $ | 145,535 | ||
| ||||
5. Derivatives
In November 2014, theThe Company enteredenters into three interest rate swaps, effective November 28, 2014 and expiring November 30, 2017, in an effortswap agreements to limit its exposure to changes in the variable interest rate on its First Lien Term Loan.long-term debt. On March 26, 2020, the Company entered an interest rate swap agreement with one of its Lenders, which expires in December 2024. The derivative instruments haveinterest rate swap was not been designated as hedges.
a hedge. The Company has no other active derivatives and the swap is carried at fair values ofvalue on the Company’s interest rate swaps recorded in accrued liabilities in the Company’s consolidated balance sheets are $286 and $634, respectively,sheet (Refer to Note 4). There were no outstanding derivatives as of December 31, 2015 and April 2, 2016.
The effect2019. Interest expense of the Company’s derivatives on$1,980 was recorded within the consolidated statements of operations and comprehensive loss is as followsincome related to the change in fair value of the swap for the threenine months ended:ended September 26, 2020.
The notional amount of the swap totaled $100,000, or 51.3%, of the Term Loan outstanding principal at September 26, 2020. The swap locked in the variable portion of the interest rate on the $100,000 notional at 0.64%. The total long-term debt effective interest rate, with the applicable lending margin of 2.50% and the impact of the swap is fixed at 2.98% as of September 26, 2020.
| Statement of operations and comprehensive loss | March 28, 2015 | April 2, 2016 | ||||||||
Interest rate swaps | Interest expense | $ | 456 | $ | 348 | |||||
Foreign exchange forward contract | Other (income) expense | 610 | — | |||||||
|
| |||||||||
Total | $ | 1,066 | $ | 348 | ||||||
| ||||||||||
6.4. Fair value measurements
RecurringOur process for determining fair value measurementshave not changed from those described in the December 31, 2019 audited consolidated financial statements of the Company.
There were no material assets subject to recurring fair value measurement carried on the accompanying consolidated balance sheet at December 31, 2015 and April 2, 2016. The following table provides information, by level, for liabilities that are measured at fair value on a recurring basis and there were no liabilities valued at December 31, 2015:
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Liabilities: | ||||||||||||||||
Contingent consideration | $ | 39,905 | $ | — | $ | — | $ | 39,905 | ||||||||
Interest rate swaps | 286 | — | 286 | — | ||||||||||||
Management incentive plan and liability-classified awards | 3,924 | — | — | 3,924 | ||||||||||||
EPR liability | 2,389 | — | — | 2,389 | ||||||||||||
|
| |||||||||||||||
Total liabilities | $ | 46,504 | $ | — | $ | 286 | $ | 46,218 | ||||||||
| ||||||||||||||||
fair value using Level 1 inputs. The following table provides information by level, for liabilities that were measured at fair value on a recurring basis at Aprilusing Level 2 2016:and Level 3 inputs:
| �� | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Liabilities: | ||||||||||||||||
Contingent consideration | $ | 38,292 | $ | — | $ | — | $ | 38,292 | ||||||||
Interest rate swaps | 634 | — | 634 | — | ||||||||||||
Management incentive plan and liability-classified awards | 4,202 | — | — | 4,202 | ||||||||||||
EPR liability | 2,389 | — | — | 2,389 | ||||||||||||
|
| |||||||||||||||
Total liabilities | $ | 45,517 | $ | — | $ | 634 | $ | 44,883 | ||||||||
| ||||||||||||||||
| September 26, 2020 | December 31, 2019 | |||||||||||||||
| Total | Level 2 | Level 3 | Total | |||||||||||||
Interest rate swap | $ | 1,982 | $ | 1,982 | $ | — | $ | — | ||||||||
Management incentive plan and liability-classified awards | 31,666 | — | 31,666 | 40,802 | ||||||||||||
Equity Participation Right | 4,669 | — | 4,669 | 5,457 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities | $ | 38,317 | $ | 1,982 | $ | 36,335 | $ | 46,259 | ||||||||
|
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|
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|
|
| |||||||||
Below is a summary of the valuation techniques used in determining fair value:
Contingent consideration—The Company values contingent consideration related to business combinations using a weighted probability calculation of potential payment scenarios discounted at rates reflective of the risks associated with the expected future cash flows. Key assumptions used to estimate the fair value of contingent consideration include revenue, net new business and operating forecasts and the probability of achieving the specific targets.
Interest rate swapsswap—
The Company values interest rate swaps by discountingusing discounted cash flows of the swap.flows. Forward curves and volatility levels are used to estimate future cash flows that are not certain. These are determined using observable market inputs when available and based on the basis of estimates when not available. The fair value of the swap was recorded in the Company’s consolidated balance sheets within accrued liabilities. Changes in fair value are recognized as interest expense within the consolidated statements of operations and comprehensive income.
Management incentive plan (MIP)MIP and liability-classified awards—
The Company valuesoperates two equity-based compensation plans, the MIP and the Phantom Plan. The estimated fair value reflects assumptions made by management as of September 26, 2020, including the impact of COVID-19 on significant unobservable assumptions, such as the expected timing and volume of elective procedures and the impact of these awards usingprocedures on future revenues which impact the Monte Carlo option modelequity value. However, as the impact of COVID-19 on the Company’s business is highly uncertain and difficult to allocatepredict, and as information surrounding the pandemic is rapidly evolving, the actual amount ultimately paid could be higher or lower than the fair value. Key assumptions used to estimateThe Company has classified $9,580 of the balance as accrued equity-based compensation and $22,086 as accrued equity-based compensation, less current portion as of September 26, 2020. Any changes in fair value includeare recorded as an operating expense and included within selling, general and administrative expense and research and development expense on the consolidated statement of operations and comprehensive income based upon the classification of the employee.
expected stock price volatility, risk-free interest rate, dividend yieldThe following table provides a reconciliation of the beginning and ending balances for the MIP and liability-classified awards at fair value using significant unobservable inputs or Level 3:
Balance at December 31, 2019 | $ | 40,802 | ||
Initial estimate | 3,518 | |||
Forfeitures | (1,076 | ) | ||
Change in fair value | (1,849 | ) | ||
Payments | (9,729 | ) | ||
|
| |||
Balance at September 26, 2020 | $ | 31,666 | ||
|
|
The $1,849 decrease in fair value for the nine months ended September 26, 2020 is primarily attributable to a change in management’s forecast of future net sales because of uncertainty in the market and the average timeeconomy from the award is expectedimpact of COVID-19. In June 2020, the sole MIP awardee exercised the right to be outstanding.
EPR liability—force a cash settlement for 150,252 of the 333,330 vested units resulting in a payment of $6,329. The Company valuesagreed to cash settle for the remaining 183,078 units in June 2021 or early at the option of the Company subject to a floor.
EPR Unit
One member owns the only EPR Unit and its only entitlement is 0.55% of available distributions arising from the closing of a sale of units representing a percentage interest of more than 66.66%, or the sale of all or substantially all of the assets of the Company, provided such event constitutes a change of control, or Distribution Event. Upon the conclusion of a Distribution Event, the EPR Unit using a weighted probability calculationwill cease to exist and all entitlements will end. The estimated fair value reflects assumptions made by management as of September 26, 2020, including potential payment scenarios discounted at rates reflective of the risks associated with the expected future cash flows. Key assumptions used to estimate theThe fair value of the EPR Unit include the timing and amount available from a Distribution Event.
The following tables summarize the changeswas recorded in the Level 3 contingent consideration liabilities measured on a recurring basis for the three months ended:
| Contingent consideration | MIP and liability- classified awards | EPR liability | ||||||||||||||||||||||
| March 28, 2015 | April 2, 2016 | March 28, 2015 | April 2, 2016 | March 28, 2015 | April 2, 2016 | |||||||||||||||||||
Beginning balance | $ | 32,215 | $ | 39,905 | $ | 1,484 | $ | 3,924 | $ | 1,037 | $ | 2,389 | ||||||||||||
Initial estimate | — | — | 235 | 278 | — | — | ||||||||||||||||||
Change in fair value | 8,971 | 1,301 | 18 | — | 326 | — | ||||||||||||||||||
Payment | (8,790 | ) | (2,914 | ) | — | — | — | — | ||||||||||||||||
|
| |||||||||||||||||||||||
Ending balance | $ | 32,396 | $ | 38,292 | $ | 1,737 | $ | 4,202 | $ | 1,363 | $ | 2,389 | ||||||||||||
| ||||||||||||||||||||||||
The contingent consideration change in fair value of $8,971 for the three months ended March 28, 2015 was primarily driven by sales exceeding estimates at the OsteoAMP acquisition date, higher than estimated inventory on hand and the interest on discounted cash flows. The contingent consideration change in fair value of $1,301 for the three months ended April 2, 2016 was primarily driven by interest on discounted cash flows.
Company’s condensed consolidated balance sheets as other long-term liabilities. The revaluation for the EPR liability is recognized in interest expense on the consolidated statements of operations and comprehensive loss.income.
Non-recurringThe following table provides a reconciliation of the beginning and ending balances for the EPR Unit at fair value measurementsusing significant unobservable inputs Level 3:
Balance at December 31, 2019 | $ | 5,457 | ||
Change in fair value | (788 | ) | ||
|
| |||
Balance at September 26, 2020 | $ | 4,669 | ||
|
|
The carryingCompany estimated the fair value of the 2014 Credit AgreementPlans and other indebtedness was not materially different fromEPR Unit using a Monte Carlo simulation. This fair value at December 31, 2015 and April 2, 2016. The fair value of these obligations was determinedmeasurement is based on discounted cash flows usingsignificant inputs that are unobservable in the market, and thus represents a Level 3 measurement. The key assumptions used in applying the valuation model include the Company’s equity value, the expected timing until a liquidity event, applicable discount rates applied, and equity volatility. In addition, for the EPR Unit, the estimated incremental borrowing rates for obligations with similar characteristics.
As of December 31, 2015 and April 2, 2016, assets carried onaccrued preferred distribution at the consolidated balance sheet and not remeasured to fair value on a recurring basis are comprised of long-lived assets, finite and indefinite-lived intangible assets and goodwill.
7. Restructuring costs
In November 2014, the Company adopted a plan to restructure and no longer sell a diagnostic ultrasound productliquidity event date totaling $44,628 as it is senior in order to improve margins, principally through headcount reduction, which was communicatedof payment. Significant changes in these assumptions could result in a significantly higher or lower fair value.
The following table provides a range of key assumptions used within the valuation of the awards as of September 26, 2020:
Valuation technique | Unobservable inputs | Range | Weighted average | |||
Option pricing approach | Time to liquidity event | 1.0 | 1.0 | |||
| Risk free rate | 0.16% | 0.16% | ||||
| Equity volatility | 40.5% - 100.17% | 55.0% | ||||
| Equity value | $840,000 - $970,000 | $900,000 | ||||
| Lack of marketability discount | 12.0% | 12.0% |
5. Restructuring costs
Restructuring costs are not allocated to the affected employees in January 2015. Costs included inCompany’s reportable segments as they are not part of the restructuring plan are employee severance and other administrative expenses. For the three months ended March 28, 2015, the Company recorded total pre-tax charges of $504 related to severance and $43 in other administrative expenses. The plan was completed in 2015 with total costs incurred of $711.
In January 2015, the Company adopted a plan to restructure and relocate certain finance functions from Memphis, TN to headquarters in Durham, NC. For the three months ended March 28, 2015, the Company recorded total pre-tax charges of $413 related to severance and temporary labor, $81 related to consulting and
compensation for departing employees that remained through the transition and $35 in other administrative expenses. The plan was completed in 2015 with charges totaling $960.
In November 2015, the Company adopted a restructuring plan to improve operatingsegment performance in the international business, principally through headcount reduction. For the three months ended April 2, 2016, the Company recorded total pre-tax charges of $172 related to severance. The plan is expected to be completed in 2016 with charges totaling $944.
measures regularly reviewed by management. These charges are included in restructuring costsexpenses in the consolidated statementstatements of operations and comprehensive loss and all relate to the Active Healing Therapies segment.income.
The Company madeadopted a restructuring plan during the fourth quarter of 2018 to improve the performance of International operations, principally through headcount reduction and closing offices in certain countries as the Company shifted to an indirect distribution model in these countries. The plan was completed in 2019. The Company recorded total pre-tax charges of $540 during the nine months ended September 28, 2019 primarily related to severance.
The Company’s restructuring charges and payments and provision adjustments for all plans forare comprised of the three months ended as presented below:following:
| Employee severance and temporary labor costs | Other charges | Total | Employee severance and temporary labor costs | Other charges | Total | |||||||||||||||||||
Balance at December 31, 2014 | $ | — | $ | — | $ | — | ||||||||||||||||||
Balance at December 31, 2018 | $ | 997 | $ | 206 | $ | 1,203 | ||||||||||||||||||
Expenses incurred | 917 | 159 | 1,076 | 460 | 80 | 540 | ||||||||||||||||||
Payments made | (477 | ) | (73 | ) | (550 | ) | (1,457 | ) | (286 | ) | (1,743 | ) | ||||||||||||
|
|
|
|
| ||||||||||||||||||||
Balance at March 28, 2015 | $ | 440 | $ | 86 | $ | 526 | ||||||||||||||||||
Balance at September 28, 2019 | $ | — | $ | — | $ | — | ||||||||||||||||||
|
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|
|
|
| |||||||||||||||||||
Balance at December 31, 2015 | $ | 772 | $ | — | $ | 772 | ||||||||||||||||||
Expenses incurred | 172 | — | 172 | |||||||||||||||||||||
Payments made | (267 | ) | — | (267 | ) | |||||||||||||||||||
|
| |||||||||||||||||||||||
Balance at April 2, 2016 | $ | 677 | $ | — | $ | 677 | ||||||||||||||||||
| ||||||||||||||||||||||||
8. Benefit plans
6. Equity-based compensation plans
The Company operates two equity-based compensation plans,Excluding the MIP and the Phantom Profits Interest Plan (PIP). The awards granted under both plans represent a non-managing, non-voting interest$1,849 decrease in the Company designed for grantees to sharefair market value discussed in the future appreciation of the value of the Company. The total amount of awards available for grant through May 2015 was limited to 1,111,111. In June 2015 the PIP was amended and restated, increasing the awards available for distribution by 821,722, bringing the total awards available to 1,932,833. At April 2, 2016, 508,070 units were available for award. ProfitsNote 4, profits interest compensation of $529$2,468 and $288$3,252 was recognized for the threenine months ended MarchSeptember 26, 2020 and September 28, 2015,2019, respectively, with $2,139 and April 2, 2016, respectively. The expense is$2,924 included in SG&Aselling, general and R&D onadministrative expense and the consolidated statementbalance in research and development expense. Profits interest forfeiture of $111 was recognized in loss from discontinued operations and comprehensive loss based uponfor the classification of the employee.nine months ended September 28, 2019. As of April 2, 2016,September 26, 2020, there was approximately $3,255$8,084 of unrecognized compensation expense to be recognized over a weighted-average period of 0.251.3 years forbased on time to vest.
As discussed in Note 4, 150,252 MIP units were converted to cash during the MIP and 1.25 years for the PIP.
The assumptions utilized to determine thenine months ended September 26, 2020 with a grant date fair value of the awards are indicated in the following table for the three months ended:
| March 28, 2015 | April 2, 2016 | |||||||
Expected dividend yield | 0.0 | % | 0.0 | % | ||||
Expected volatility | 50.0 | % | 50.0 | % | ||||
Risk-free interest rate | 0.4 | % | 0.4 | % | ||||
Time to exit event (in years) | 1.6 | 0.6 | ||||||
| ||||||||
$4.89. A summary of the award activity of the Phantom Plan for the nine months ended September 26, 2020 is as follows (number of awards in thousands):
| MIP and 2012 plan | ||||||||
| Number of awards | Weighted- average grant- date fair value | |||||||
Outstanding at December 31, 2014 | 1,049 | $ | 5.52 | |||||
Granted | 40 | $ | 10.01 | |||||
|
| |||||||
Outstanding at March 28, 2015 | 1,089 | $ | 5.68 | |||||
| ||||||||
| Number of awards | Weighted- average grant- date fair value | |||||||
Outstanding at December 31, 2019 | 1,139 | $ | 10.24 | |||||
Granted | 553 | $ | 10.29 | |||||
Converted to cash | (114 | ) | $ | 5.98 | ||||
Forfeited | (115 | ) | $ | 13.31 | ||||
|
| |||||||
Outstanding at September 26, 2020 | 1,463 | $ | 10.35 | |||||
|
| |||||||
A summary of7. Income taxes
Income tax provisions for interim periods are based on an estimated annual income tax rate, adjusted for discrete tax items. As a result, the award activity ofCompany’s interim effective tax rates may vary significantly from the Plans is as follows (number of awards in thousands):
| MIP and 2012 plan | 2015 plan | |||||||||||||||
| Number of awards | Weighted- average grant- date fair value | Number of awards | Weighted- average grant- date fair value | |||||||||||||
Outstanding at December 31, 2015 | 1,069 | $ | 5.68 | 379 | $ | 3.92 | ||||||||||
Granted | — | $ | — | 85 | $ | 6.69 | ||||||||||
Forfeited | (26 | ) | $ | 8.97 | (83 | ) | $ | 4.11 | ||||||||
|
|
|
| |||||||||||||
Outstanding at April 2, 2016 | 1,043 | $ | 5.60 | 381 | $ | 4.50 | ||||||||||
| ||||||||||||||||
Defined contribution plans
For the three months ended March 28, 2015 and April 2, 2016 Company contributions totaled $1,136 and $1,328, respectively, for all global plans. The expense is included in cost of sales, SG&A and R&D on the consolidated statement of operations and comprehensive loss based upon the classification of the employee.
9. Income taxes
The components of income (loss) from operations before income taxes are as follows for the three months: ended:
| March 28, 2015 | April 2, 2016 | |||||||
Taxable subsidiaries: | ||||||||
Domestic | $ | 850 | $ | 986 | ||||
Foreign | (66 | ) | 96 | |||||
|
| |||||||
| 784 | 1,082 | |||||||
Other domestic subsidiaries | (21,433 | ) | (6,528 | ) | ||||
|
| |||||||
Pretax loss | $ | (20,649 | ) | $ | (5,446 | ) | ||
| ||||||||
April 2, 2016 Federal income taxes: Current Deferred Foreign income taxes: Current Deferred State income taxes: Current Deferred Provision for income tax expense March 28,
2015 $ 364 $ 425 (119 ) (119 ) (3 ) 38 2 (5 ) 137 276 (12 ) (12 ) $ 369 $ 603
The differences between the effective incomestatutory tax rate and the federal statutory incomeannual effective tax rates are as follows:
| March 28, 2015 | April 2, 2016 | |||||||
U.S. statutory income tax rate | 34.0 | % | 34.0 | % | ||||
LLC flow-through structure | (35.3 | ) | (40.8 | ) | ||||
State and local income taxes, net of federal benefit | (0.5 | ) | (4.9 | ) | ||||
Foreign rate differential | (0.1 | ) | 0.5 | |||||
Other | 0.1 | 0.1 | ||||||
|
| |||||||
Effective income tax rate | (1.8 | )% | (11.1 | )% | ||||
| ||||||||
rate. The effective tax rate was 2.4% and 19.6% for the nine months ended September 26, 2020 and September 28, 2019, respectively. The primary factor affecting the Company’s effective tax rate differs from statutory rates primarily due tofor the for the nine months ended September 26, 2020, was Bioventus LLC’s pass-through structure for U.S. income tax purposes, while being treated as taxable in certain states and various foreign jurisdictions as well as for certain subsidiaries. The Company does not expect the CARES Act to have a significant impact on the tax provision for income.
10.8. Commitments and contingencies
Leases
The Company leases its office facilities as well as other property, vehicles and equipment under operating leases. The Company also leases certain office equipment under nominal finance leases. The remaining lease agreements that expire in various years through 2020 and records rent expense relatedterms range from 6 months to the leases on a straight-line basis over the term8 years.
The components of the lease. Rent expense was $787 and $891 for the three months ended March 28, 2015 and April 2, 2016, respectively. Certain facility leases provide for reduced rent periods. As of December 31, 2015 and April 2, 2016, respectively, these rent concessions totaling $902 and $868 have been reflected in accrued liabilities and other long-term liabilities in the consolidated balance sheets.
Lease payments are subject to increases as specified in the lease agreements. Future minimum lease payments, by year and in the aggregate, under capital leases and non-cancelable operating leases as of April 2, 2016,cost were as follows:
| Operating leases | Capital leases | |||||||
2016 | $ | 2,969 | $ | 1,453 | ||||
2017 | 2,583 | 993 | ||||||
2018 | 2,503 | — | ||||||
2019 | 1,372 | — | ||||||
2020 | 529 | — | ||||||
2021 and thereafter | 433 | — | ||||||
|
| |||||||
Total minimum payments | $ | 10,389 | 2,446 | |||||
|
| |||||||
Less amounts representing interest | (98 | ) | ||||||
|
| |||||||
Present value of capital lease obligations | 2,348 | |||||||
Less current maturities | (1,318 | ) | ||||||
|
| |||||||
Capital lease obligations, less current maturities | $ | 1,030 | ||||||
| ||||||||
| Nine Months Ended | ||||||||
| September 26, 2020 | September 28, 2019 | |||||||
Operating lease cost | $ | 1,943 | $ | 1,871 | ||||
Short-term lease cost(a) | 285 | 178 | ||||||
|
|
|
| |||||
Total lease cost | $ | 2,228 | $ | 2,049 | ||||
|
|
|
| |||||
No particular lease obligation ranks senior
| (a) | Includes variable lease cost and sublease income, which are immaterial. |
Supplemental cash flow information and non-cash activity related to operating leases were as follows:
| Nine Months Ended | ||||||||
| September 26, 2020 | September 28, 2019 | |||||||
Operating cash flows from operating leases | $ | 1,920 | $ | 1,757 | ||||
Right-of-use assets obtained in exchange for lease obligations | $ | — | $ | 4,643 | ||||
Supplemental balance sheet and other information related to operating leases were as follows:
| September 26, 2020 | December 31, 2019 | |||||||
Operating lease assets | $ | 13,906 | $ | 15,267 | ||||
|
|
|
| |||||
Operating lease liabilities- current | $ | 1,803 | $ | 1,814 | ||||
Operating lease liabilities- noncurrent | 13,183 | 14,513 | ||||||
|
|
|
| |||||
Total operating lease liabilities | $ | 14,986 | $ | 16,327 | ||||
|
|
|
| |||||
Weighted average remaining lease term (years) | 7.3 | 8.0 | ||||||
Weighted average discount rate | 5.0 | % | 5.0 | % | ||||
OIG’s Provider Self-Disclosure
The Company identified non-compliance with certain U.S. federal statutes and requirements governing the Medicare program in right2018 related to improper completion of CMN forms and in November 2018 made a voluntary self-disclosure to the OIG pursuant to the OIG’s Provider Self-Disclosure Protocol related to this matter. This non-compliance is subject to statutory CMP on a per claim basis that ranges from nothing to $1 per instance of non-compliance. The Company has estimated the number of impacted claims with improperly
completed CMN forms based on the extrapolation of an occurrence rate found in a statistical sample of CMN forms and calculated the potential fine for all impacted claims based on the range above as nothing to $10,800 in aggregate. Although the statutory CMP are reasonably possible, the Company does not believe it is probable that they will be incurred. Additionally, the OIG could require repayment of the total dollar amount of the impacted claims or $30,060 as well as assessing an additional fine equivalent to half the dollar amount of impacted claims or $15,030 for an aggregate potential impact of $55,890. The Company does not believe the requirement to repay the claims and associated fines is probable. Accordingly, no accrual has been recorded for these potential repayment obligations related to improper completion of CMN forms and potential fines at this time. While these matters are not considered probable, the ultimate outcome of these matters is uncertain. In the event of an unfavorable outcome to the Company, these contingencies could have a material adverse effect on the Company’s financial position, results of operations, liquidity and cash flows. In October 2019, the Company’s legal counsel, received a letter from the Office of the United States Attorney in the Middle District of North Carolina, or the USAO, stating that the USAO would be working with the OIG to resolve the Company’s self-disclosure. Subsequently, the Company’s legal counsel received requests for further information which was furnished. At this time, the matter remains pending and there has been no indication from the USAO or OIG on the potential outcome of the matter or if claims will be asserted for any additional amounts.
Reserve for estimated overpayments from all third-party payers
The Company maintains a reserve for reimbursement claims related to its Bone Growth Stimulator system that may have been processed for payment to any other.by the Company without adequate medical records support. The gross valueCompany held a reserve of assets under capital leases$5,139 and $6,801 at September 26, 2020 and December 31, 20152019, respectively, for these amounts. The Company refunded Medicare $7,458 in 2019 and April 2,$1,519 during the nine months ended September 26, 2020 related to known and estimated overpayments for medical necessity included in this reserve for periods through December 31, 2019. Certain of these overpayments were identified as potential overpayments in the Company’s OIG self-disclosure in November 2018. The OIG is currently reviewing the Company’s self-disclosure. The Company’s reserve was estimated using extrapolation of an error rate from a statistical sample, which represents the Company’s best estimate as of the date of the financial statements, but because of the uncertainty inherent in such estimates, the ultimate resolution may be materially different.
Other matters
On December 9, 2016, was approximately $4,679the Company entered into an amended and $4,486,restated license agreement for the exclusive U.S. distribution and commercialization rights of a single injection OA product with the supplier of the Company’s single injection OA product for the non-U.S. market. The agreement requires the Company to meet annual minimum purchase requirements and pay royalties on net sales. Royalties related to this agreement totaled $7,038 and $4,973 for the nine months ended September 26, 2020 and September 28, 2019, respectively. These assets mainly consist of software and computer equipment androyalties are included in property and equipment in the accompanying consolidated balance sheet. The accumulated depreciation associated with these assets at December 31, 2015 and April 2, 2016, was approximately $3,412 and $1,540, respectively. Depreciation of capital lease assets is included in depreciation and amortization expense as well as cost of sales inon the consolidated statementsstatement of operations and comprehensive loss.income.
Other matters
OnAs part of a supply agreement entered on February 9, 2016, in order to enterfor the three-injection osteoarthritis pain treatment in the U.S. market,Company’s three injection OA product, the Company purchased the exclusive distribution rights of a three-injection, hyaluronic acid product for pain relief associated with osteoarthritis of the knee for cash of $6,000. As part of this agreement, the seller will supply the Company productsis subject to annual minimum purchase requirements for ten years. After the initial ten years, the agreement will automatically renew for an additional five years unless terminated by the Company or the seller in accordance with the agreement.
In November 2015 upon acquiring BioStructures, The agreement requires the Company assumedto pay royalties on net sales. Royalties related to this agreement totaled $2,122 and $3,238 for the nine months ended September 26, 2020 and September 28, 2019, respectively. These royalties are included in cost of sales on the consolidated statement of operations and comprehensive income.
The Company has an exclusive license and supply agreement for the use of bioactive glass in certain of its BGS products. The Company assumedhas a world-wide, royalty bearing license, as well as the right to sublicense, for the use of certain developed technologies related to spine repair. The Company iswas required to pay a royalty of 3% on all commercial sales revenue from the licensed products. Royalty expense is included in cost of sales. The agreement will expireexpired in 2019 upon the expiration of the last to expire patents held by the licensor. In November 2015 upon acquiring BioStructures, theApril 2019. The Company assumedhas an exclusive license agreement for bioactive bone graft putty. The Company wasis required to pay a royalty of 3% on all
commercial sales revenue from the license products with a minimum annual royalty payment of $201 forthrough 2023, the period from 2015 through 2023. In March 2016, this royalty agreement was amended. Subsequent todate the amendment, the royalty rate has changed to 1.5% in 2016 and 2017 and 2.0% for 2018 through 2023. Royalty expense is included in cost of sales. The agreement will expire, in 2023 upon the expiration of the patent held by the licensor. Royalties related to these agreements totaled $123 forThese royalties are included in cost of sales on the three months ended April 2, 2016.
From time to time,On October 3, 2014, the Company causes LOCspurchased a BGS business. The purchase price included contingent consideration, which consisted of a supply agreement with the previous owner and up to be issued to provide credit support$12,000 for guarantees, contractual commitments and insurance policies. The fair valuesvarious cash earn-out payments upon the achievement of the letterscertain net sales targets, both of credit reflect the amountwhich have expired. It also included a royalty on future net sales of the underlying obligation and are subject to fees payable to the issuers of the letters of credit, competitively determined in the marketplace. As ofcertain BGS products beginning January 1, 2019 through December 31, 2015 and April 2, 2016, the Company had a letters2023. There are no estimated contingent consideration payments remaining as of credit for $220 and $230 outstanding with two of the Company’s banking institutions.
The Company currently maintains insurance for risks associated with the operation of its business, provision of professional services and ownership of property. These policies provide coverage for a variety of potential losses, including loss or damage to property, bodily injury, general commercial liability, professional errors and omissions and medical malpractice. The Company’s retentions and deductibles associated with these insurance policies range in amounts up to $1,250. The Company is self-insured for health insurance for the majority of its employees located within the US, but maintains stop-loss insurance on a “claims made” basis for expenses in excess of $100 per member per year.
As part of the formation of the Company, Bioventus is liable to S&N for one-half of all costs incurred in the defense and litigation of a certain pre-acquisition legal dispute for an amount not to exceed $5,000. There were no legal expenses for the three months ended March 28, 2015 or April 2, 2016 and there was no legal expense liability outstanding at December 31, 2015 or April 2, 2016. A settlement liability totaling $688 was established for this contingency as an adverse outcome of these legal proceedings was deemed to be probable and reasonably estimable. The liability remains outstanding at December 31, 2015 and April 2, 2016 and was paid subsequent to the end of the three month period.September 26, 2020.
In the normal course of business, the Company periodically becomes involved in various claims and lawsuits, and governmental proceedings and investigations that are incidental to the business. ManagementWith respect to governmental proceedings and investigations, like other companies in our industry, the Company is subject to extensive regulation by national, state and local governmental agencies in the U.S. and in other jurisdictions in which the Company and its affiliates operate. As a result, interaction with governmental agencies is ongoing. The Company’s standard practice is to cooperate with regulators and investigators in responding to inquiries. The outcomes of legal actions are not within the Company’s complete control and may not be known for extended periods of time. Other than the matters discussed above, management of the Company, after consultation with legal counsel, does not believe there are any unrecorded matters that will have a material adverse effect upon the Company’s financial statements.
9. Revenue recognition
Our policies for recognizing sales have not changed from those described in the audited consolidated financial statements of the Company. The Company attributes net sales to external customers to the U.S. and to all foreign countries based on the legal entity from which the sale originated. The following table presents our net sales by segment disaggregated by geographic markets and major product lines as follows:
| Nine Months Ended | ||||||||
| September 26, 2020 | September 28, 2019 | |||||||
Primary geographic markets: | ||||||||
U.S. | $ | 204,022 | $ | 218,228 | ||||
International | 18,548 | 24,359 | ||||||
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Total net sales | $ | 222,570 | $ | 242,587 | ||||
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Major product lines: | ||||||||
OA joint pain treatment and joint preservation | $ | 118,932 | $ | 127,623 | ||||
Minimally invasive fracture treatment | 61,433 | 76,749 | ||||||
Bone graft substitutes | 42,205 | 38,215 | ||||||
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Total net sales | $ | 222,570 | $ | 242,587 | ||||
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Contract assets and liabilities
Contract assets consist of unbilled amounts resulting from estimated future royalties from an international distributor that exceeds the amount billed and the right to payment is not solely subject to the passage of time. Contract assets totaling $126 and $261 as of September 26, 2020 and December 31, 2019, are included in prepaid and other current assets on the consolidated balance sheets.
Contract liabilities consist of customer advance payments or deposits and deferred revenue. Occasionally for certain international customers, the Company requires payments in advance of shipping product and recognizing revenue resulting in contract liabilities. Contract liabilities were nominal as of September 26, 2020 and December 31, 2019 and are included in accrued liabilities on the consolidated balance sheets.
10. Segments
The Company’s two reportable segments are U.S. and International. The Company’s products are primarily sold to orthopedists, musculoskeletal and sports medicine physicians, podiatrists, neurosurgeons and orthopedic spine surgeons, as well as to their patients. The Company does not disclose segment information by asset as the CODM does not review or use it to allocate resources or to assess the operating results and financial performance.
The following table presents segment adjusted EBITDA reconciled to income from continuing operations before income taxes:
| Nine Months Ended | ||||||||
| September 26, 2020 | September 28, 2019 | |||||||
Segment adjusted EBITDA from continuing operations | ||||||||
U.S. | $ | 42,800 | $ | 44,406 | ||||
International | 1,489 | 4,077 | ||||||
Depreciation and amortization | (21,789 | ) | (22,972 | ) | ||||
Interest expense | (7,095 | ) | (13,935 | ) | ||||
Equity compensation | (619 | ) | (3,252 | ) | ||||
COVID-19 benefits, net | 4,158 | — | ||||||
Succession and transition charges | (5,345 | ) | — | |||||
Restructuring costs | — | (540 | ) | |||||
Foreign currency impact | 58 | (146 | ) | |||||
Other non-recurring costs | (884 | ) | (4,154 | ) | ||||
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Income from continuing operations before income taxes | $ | 12,773 | $ | 3,484 | ||||
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11. Discontinued operations
In December 2018, the Company, under the direction and authority of the Company’s Board of Managers, committed to shut down the BMP research and development program, which had been reported as a segment in previous years. Substantially, all operations, including project close documentation, contract termination, vacating the facility and ultimately the termination of the employees, ceased by March 2019 and as a result the BMP research and development program met the criteria for discontinued operations. There was no activity related to BMP during the second quarter of 2019. The Company sold the remaining $172 held for sale asset and paid the remaining $400 accrued liability from the BMP research and development program during the nine months ended September 26, 2020.
The following table summarizes the statement of operations information from discontinued operations:
| Nine Months Ended September 28, 2019 | ||||
Research and development expense | $ | 1,626 | ||
Income tax benefit | (10 | ) | ||
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Loss from discontinued operations, net of tax | $ | 1,616 | ||
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12. Net lossincome (loss) per unit
The following table presents the computation of basic and diluted net lossincome (loss) per unit for the three months ended as follows:
| March 28, 2015 | April 2, 2016 | |||||||
Net loss | $ | (21,018 | ) | $ | (6,049 | ) | ||
Accumulated and unpaid preferred distributions | (953 | ) | (1,042 | ) | ||||
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Net loss attributable to common unit holders | (21,971 | ) | (7,091 | ) | ||||
Weighted average units used in computing net loss per unit, basic and diluted | 4,900 | 4,900 | ||||||
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Net loss per unit, basic and diluted | $ | (4.48 | ) | $ | (1.45 | ) | ||
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| Nine Months Ended | ||||||||
| September 26, 2020 | September 28, 2019 | |||||||
Net income from continuing operations attributable to unit holders | $ | 13,635 | $ | 2,830 | ||||
Accumulated and unpaid preferred distributions | (4,525 | ) | (4,421 | ) | ||||
Net income allocated to participating shareholders | (5,225 | ) | — | |||||
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Net income (loss) from continuing operations attributable to common unit holders | 3,885 | (1,591 | ) | |||||
Loss from discontinued operations, net of tax | — | 1,616 | ||||||
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Net income (loss) attributable to common unit holders | $ | 3,885 | $ | (3,207 | ) | |||
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Net income (loss) per unit attributable to common unit holders—basic and diluted | ||||||||
Net income (loss) from continuing operations | $ | 0.79 | $ | (0.32 | ) | |||
Loss from discontinued operations, net of tax | — | 0.33 | ||||||
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Net income (loss) attributable to common unit holders | $ | 0.79 | $ | (0.65 | ) | |||
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Weighted average units used in computing basic and diluted net income (loss) per common unit | 4,900 | 4,900 | ||||||
The computation of diluted earnings per unit for the nine months ended September 26, 2020 and September 28, 2019 excludes the effect of potential common units that would be issued upon the conversion of preferred units, profits interest units and the EPR unit.units. The effect of these 6,590 units would be antidilutive due to the impact of the accumulated and unpaid preferred distributions as well as the Company being in a net loss position and thesefor the nine months ended September 28, 2019. These units only convert upon completion of a Distribution Event.
12. Segments
The Company’s four reportable segments include: Active Healing Therapies (AHT)–U.S. business (U.S. AHT), AHT–International business (International AHT), Surgical business and bone morphogenetic protein research and development (BMP) business. AHT products are primarily sold to orthopedists, musculoskeletal and sports medicine physicians, and podiatrists, as well as to their patients. Surgical products are primarily sold to
neurosurgeons and orthopedic spine surgeons. BMP is a research and development operation for future surgical bone growth products.
The following table presents net sales by reportable segment for the three months ended as follows:
March 28, 2015 | April 2, 2016 | |||||||
U.S. AHT | $ | 40,572 | $ | 45,496 | ||||
International AHT | 7,864 | 8,794 | ||||||
Surgical | 4,926 | 11,112 | ||||||
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| $ | 53,362 | $ | 65,402 | |||||
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The following table presents total assets by reportable segment as follows:
December 31, 2015 | April 2, 2016 | |||||||
U.S. AHT | $ | 289,638 | $ | 290,440 | ||||
International AHT | 56,039 | 54,245 | ||||||
Surgical | 132,355 | 131,919 | ||||||
BMP | 9,320 | 9,660 | ||||||
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| $ | 487,352 | $ | 486,264 | |||||
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The following table presents segment adjusted EBITDA and reconciliation to loss before income taxes for the three months ended as follows:
| March 28, 2015 | April 2, 2016 | |||||||
Segment adjusted EBITDA | ||||||||
U.S. AHT | $ | 2,173 | $ | 9,006 | ||||
International AHT | 971 | 1,660 | ||||||
Surgical | 1,686 | 2,546 | ||||||
BMP | (2,491 | ) | (2,535 | ) | ||||
Depreciation and amortization | (8,394 | ) | (9,137 | ) | ||||
Interest expense | (3,854 | ) | (3,555 | ) | ||||
Equity compensation | (529 | ) | (288 | ) | ||||
Change in fair value of contingent consideration | (8,971 | ) | (1,301 | ) | ||||
Inventory step-up | (164 | ) | (300 | ) | ||||
Restructuring costs | (1,076 | ) | (172 | ) | ||||
Transition and other non-recurring | — | (1,370 | ) | |||||
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Loss before income taxes | $ | (20,649 | ) | $ | (5,446 | ) | ||
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13. Unaudited pro forma net loss per share
Pro forma basic net loss per share is calculated by dividing net loss attributable to Class A common stockholders by the number of weighted average shares of Class A common stock after giving effect to the corporate conversion.
| 2016 | ||||
Net loss per share, basic and diluted: | ||||
Numerator | ||||
Net loss | (6,049 | ) | ||
Less: Net loss attributable to non-controlling interests | (2,366 | ) | ||
Net loss attributable to Class A common stockholders | (3,683 | ) | ||
Denominator | ||||
Shares of Class A common stock held by the Former LLC Owners | 14,904,090 | |||
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Weighted-average shares of Class A common stock | 14,904,090 | |||
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Net loss per share, basic and diluted | $ | (0.25 | ) | |
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Due to the pro forma net loss of Bioventus LLC for the three months ended April 2, 2016, the exchange of shares of Class B common stock was excluded from the calculation of diluted net loss per share and no adjustment to the net loss attributable to non-controlling interests was necessary since all shares were antidilutive.
To: Management and the Board of Managers of BioStructures, LLC
We have audited the accompanying financial statements of BioStructures, LLC, which comprise the statement of financial position as of December 31, 2014, and the related statements of income and comprehensive income, changes in members’ equity and of cash flows for the year then ended.
Management’s responsibility for the financial statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of BioStructures, LLC as of December 31, 2014, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
February 1, 2016
BioStructures, LLCStatement of financial position December 31, 2014 (Amounts in U.S. dollars)
Assets | ||||
Cash | $ | 309,454 | ||
Trade accounts receivable, net | 1,600,391 | |||
Inventory | 999,884 | |||
|
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Total current assets | 2,909,729 | |||
Property and equipment, net | 130,488 | |||
Intangible assets, net | 355,941 | |||
|
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Total Assets | $ | 3,396,158 | ||
|
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Liabilities and Members’ Equity | ||||
Accounts payable | $ | 740,379 | ||
Accrued expenses | 3,674 | |||
Loan | 400,000 | |||
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Total current liabilities | 1,144,053 | |||
Accrued taxes | 467,186 | |||
|
| |||
Total Liabilities | 1,611,239 | |||
Members’ equity | 853,588 | |||
Retained earnings | 931,331 | |||
|
| |||
Total Members’ Equity | 1,784,919 | |||
|
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Total Liabilities and Members’ Equity | $ | 3,396,158 | ||
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The accompanying notes are an integral part of these financial statements.
BioStructures, LLCStatement of income and comprehensive income Year ended December 31, 2014 (Amounts in U.S. dollars)
Net sales | $ | 12,178,713 | ||
Cost of sales | 2,256,853 | |||
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Gross profit | 9,921,860 | |||
Selling, general and administrative expense | 6,066,628 | |||
Research and development | 379,982 | |||
Depreciation | 28,753 | |||
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Operating income | 3,446,497 | |||
Interest expense | 14,397 | |||
Other income | (16,335 | ) | ||
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Net income and comprehensive income | $ | 3,448,435 | ||
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The accompanying notes are an integral part of these financial statements.
BioStructures, LLCStatement of changes in members’ equity Year ended December 31, 2014 (Amounts in U.S. dollars)
| Members’ equity | Retained earnings | Total members’ equity | ||||||||||
Balance at December 31, 2013 | $ | 853,588 | $ | 839,397 | $ | 1,692,985 | ||||||
Distributions | — | (3,356,501 | ) | (3,356,501 | ) | |||||||
Net income | — | 3,448,435 | 3,448,435 | |||||||||
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Balance at December 31, 2014 | $ | 853,588 | $ | 931,331 | $ | 1,784,919 | ||||||
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The accompanying notes are an integral part of these financial statements.
BioStructures, LLCStatement of cash flows Year ended December 31, 2014 (Amounts in U.S. dollars)
Cash flows from operating activities | ||||
Net income | $ | 3,448,435 | ||
Adjustments to reconcile net income to net cash provided by operating activities | ||||
Depreciation and amortization | 93,154 | |||
Provision for bad debts | 191,144 | |||
Changes in operating assets and liabilities: | ||||
Trade accounts receivable | (470,558 | ) | ||
Inventory | (502,341 | ) | ||
Accounts payable and accrued expenses | 673,025 | |||
|
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Net cash provided by operating activities | 3,432,859 | |||
|
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Cash flows from investing activities | ||||
Purchase of property and equipment | (62,037 | ) | ||
License fee and milestone payments | (150,000 | ) | ||
|
| |||
Net cash used in investing activities | (212,037 | ) | ||
|
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Cash flows from financing activities | ||||
Repayment of loan | (11,391 | ) | ||
Member distributions | (3,356,501 | ) | ||
|
| |||
Net cash used in financing activities | (3,367,892 | ) | ||
|
| |||
Net decrease in cash | (147,070 | ) | ||
Cash and cash equivalents at the beginning of year | 456,524 | |||
|
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Cash and cash equivalents at the end of year | $ | 309,454 | ||
|
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Supplemental disclosure of cash flow information | ||||
Cash paid for interest | $ | 14,397 | ||
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The accompanying notes are an integral part of these financial statements.
BioStructures, LLC
(Amounts in U.S. dollars)
1. Organization and Summary of Significant Accounting Policies
The Company
BioStructures, LLC, or BioStructures or the Company, is a limited liability company formed under the laws of the state of California on August 22, 2007 and operates as a partnership. The Company was owned by two members until the acquisition of the Company by Bioventus, LLC in November 2015 (see Note 8).
BioStructures is a medical device company focused on developing innovation propriety platforms in bio-resorbable bone graft products for a broad range of spinal surgical applications. The Company’s products are developed to benefit the surgeon and their patients during each phase of the bone healing process. BioStructures’ bio-resorbable implants are created for best-in-class performance. The synthetic and allograft implants are designed for proportionate resorption to facilitate balanced bone regeneration with optimized clinical efficacy.
Use of estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses during the period, as well as disclosures of contingent assets and liabilities at the date of the financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Cash
The Company’s cash consists of cash held by a single financial institution in the U.S. in excess of the federally insured limits.
Fair value
The Company records certain assets and liabilities at fair value (discussed further in Note 5). Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy that prioritizes the inputs used to measure fair value is described below. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs.
The three levels of inputs used to measure fair value are as follows:
Level 1—Quoted prices in active markets for identical assets or liabilities;
Level 2—Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data; and
Level 3—Unobservable inputs that are supported by little or no market data. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
Accounts receivable and allowances
Accounts receivables are amounts due from customers and are recorded at net realizable value for product sold in the ordinary course of business. The Company maintains an allowance for doubtful accounts.
The allowance for doubtful accounts is based on the assessment of the collectability of specific customer accounts and the aging of the accounts receivable. When evaluating the adequacy of this allowance, the Company analyzes accounts receivable, historical bad debts, customer concentrations, customer solvency, current economic and geographic trends, and changes in customer payment terms and practices. Changes to the allowance for doubtful accounts are recorded in selling, general and administrative expense in the statement of income and comprehensive income.
Inventory
Inventories are valued at the lower of cost or estimated net realizable value, after provision for excess or obsolete items. All products the Company sells are procured through third-party contract manufacturing arrangements and cost is determined on an average cost basis, which approximates the first-in, first-out, or FIFO, method. The valuation of finished products and consignment inventory includes the cost of materials, labor and packaging costs. Consignment inventory represents finished products located at third parties, such as distributors and hospitals.
Long-lived assets
Property and equipment are stated at cost and are depreciated using the straight-line method over the shorter of the asset’s estimated useful life, or the lease term if related to leased property, as follows (in years):
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Finite-lived identifiable intangible assets are recorded at cost and are amortized using the straight-line method over their estimated remaining useful lives ranging between 8 and 10 years.
The carrying values of property, equipment, intangible and other long-lived assets are reviewed for recoverability if the facts and circumstances suggest that a potential impairment may have occurred. If this review indicates that carrying values may not be recoverable, as determined based on undiscounted cash flow projections, the Company will perform an assessment to determine if an impairment charge is required to reduce carrying values to estimated fair value. There were no events, facts or circumstances for the year ended December 31, 2014 that resulted in any impairment charges to the Company’s property, equipment, intangible or other long-lived assets.
Revenue recognition
Sale of products
The Company primarily sells its products to hospitals and recognizes revenue upon notification from the hospital that the product was used in surgery. Accordingly, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is reasonably assured. Until such time as the product is used in surgery, ownership of the product remains with the Company.
The Company uses a distribution network to deliver its product to hospitals. The majority of the distributors hold the Company’s product on consignment until delivered to the hospitals to be used in surgery. In these circumstances, ownership of the product remains with the Company. The Company does sell products directly to distributors who take ownership of the product at the point of shipment. In these circumstances, the Company recognizes revenue upon delivery to such distributors as there is no right of return. Accordingly, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is reasonably assured.
Shipping and handling
The Company classifies amounts billed for shipping and handling as a component of net sales. The related shipping and handling fees and costs as well as other distribution costs are included in cost of sales.
Advertising costs
Advertising costs include costs incurred to promote the Company’s business and are expensed as incurred. Advertising costs were $124,346 for the year ended December 31, 2014.
Research and development
Research and development, or R&D, expenses consists primarily of contract research organization services. Internal R&D costs are expensed as incurred. R&D costs incurred by third parties are expensed as the contracted work is performed. Initial and milestone payments made to third parties in connection with technology license agreements are also expensed as incurred as research and development costs, up to the point of regulatory approval. Payments made to third parties subsequent to regulatory approval will be capitalized and amortized over the estimated remaining useful life of the related product.
Income taxes
The Company is treated as a partnership for US tax purposes. Accordingly, the profits and losses are passed through to the members and included in their income tax returns. The Company makes periodic distributions to its members.
Recently issued accounting standards
In May 2014, the Financial Accounting Standards Board, or FASB, issued guidance that provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In August 2015, the FASB approved a one-year deferral of the effective date making this guidance effective for annual and interim periods beginning after December 15, 2018 for private companies. Early application is permitted. This guidance permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating the impact this guidance will have on the Company’s financial statements.
In July 2015, the FASB issued guidance for simplifying the calculation for subsequent measurement of inventory measured using the first-in-first-out or average cost methods. The guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2016, and is effective for the Company for the year ending December 31, 2017. The Company is currently evaluating the impact that the implementation of this standard will have on the Company’s financial statements.
2. Balance sheet information
Accounts receivable
Accounts receivable consisted of the following at December 31, 2014:
| ||||
Accounts receivable | $ | 1,791,535 | ||
Less allowance | (191,144 | ) | ||
|
| |||
| $ | 1,600,391 | |||
| ||||
The following table shows the activity in the allowance for doubtful accounts for the year ended December 31, 2014:
| ||||
Beginning balance | $ | — | ||
Charged to operating expenses | 191,144 | |||
|
| |||
Ending balance | $ | 191,144 | ||
| ||||
The allowance as of December 31, 2014 relates to a specific customer that filed for bankruptcy in June 2015.
Inventory
Inventory consisted of the following at December 31, 2014:
| ||||
Raw materials and supplies | $ | 176,255 | ||
Work-in-process | 52,968 | |||
Finished goods | 770,661 | |||
|
| |||
| $ | 999,884 | |||
| ||||
Finished goods includes consignment inventory representing immediately saleable finished products that are in the possession of the Company’s distributors or located at third-party customers, such as hospitals.
Property and equipment, net
Property and equipment consisted of the following at December 31, 2014:
| ||||
Automobile | $ | 39,135 | ||
Furniture and fixtures | 29,753 | |||
Machinery and equipment | 134,645 | |||
|
| |||
| 203,533 | ||||
Less accumulated depreciation | (73,045 | ) | ||
|
| |||
Property and equipment, net | $ | 130,488 | ||
| ||||
Depreciation expense was $28,753 for the year ended December 31, 2014. The Company’s assets are pledged as security under a bank loan agreement.
Intangible assets, net and royalty agreements
In July 2009, the Company entered into an exclusive license and supply agreement for the use of bioactive glass in certain of its products. The Company paid a non-refundable technology access fee of $230,000 in exchange for the world-wide, royalty bearing license for the use of certain developed technologies related to spine repair.
The Company is required to pay a royalty of 3% on all commercial sales revenue from the licensed products. In October 2010, the agreement was amended whereby the Company paid $234,000 as additional consideration primarily to obtain the right to sublicense. During the year ended December 31, 2014, the Company incurred royalty expense of $153,532. Royalty expense is included in cost of goods sold. The agreement shall expire in 2019 upon the expiration of the last to expire patents held by the licensor.
In November 2011, the Company entered into a development and license agreement with a third party whereby both parties collaborated in the development, pre-clinical and clinical evaluation and commercialization of a product for use in certain orthopedic applications. Pursuant to this agreement, upon receipt of a 510(k) approval for a developed product, both parties agreed to enter into a license agreement for such product. Upon receiving a 510(k) approval in January 2014 for bioactive bone graft putty, the Company paid a $50,000 milestone payment and in February 2014 the Company entered into an exclusive license agreement with the third party for the developed product whereby the Company paid $100,000 as a conversion fee. The Company is required to pay a royalty of 3% on all commercial sales revenue from the license products with a minimum royalty payment of $60,000 in 2013, $102,000 in 2014 and $201,000 annually for the period from 2015 through 2023. During the year ended December 31, 2014, the Company incurred the minimum royalty payment of $102,000. Royalty expense is included in cost of goods sold. The agreement shall expire in 2023 upon the expiration of the last to expire patents held by the licensor.
Intangible assets are recorded at cost and consisted of the following at December 31, 2014:
| ||||
Licenses | $ | 614,000 | ||
Less accumulated amortization: | (258,059 | ) | ||
|
| |||
Intangible assets, net | $ | 355,941 | ||
| ||||
Amortization expense related to intangible assets was $64,401 for the year ended December 31, 2014 and is included in cost of goods sold. Estimated amortization expense for the years ended December 31, 2015 through 2019 is expected to be $66,549 for each of the five annual periods and $23,196 thereafter.
3. Loan
The Company was a party to a loan agreement with a commercial bank with a total borrowing limit of $2,000,000, with interest payable monthly at LIBOR plus 2.75%. The maturity date of the loan was initially set at August 1, 2013 and was extended in one year increments until paid in full. Outstanding borrowings as of December 31, 2104 were $400,000. The loan was secured by the assets of the Company and guaranteed by the members. In November 2015, the loan was paid in full and all security interests and guarantees were terminated in connection with sale of the Company (see Note 8).
During 2014, the Company paid in full an outstanding balance of an automobile loan of $11,391.
4. Members’ equity
Members’ equity consisted of the following at December 31, 2014:
| ||||
Members’ equity | $ | 853,588 | ||
Retained earnings | 931,331 | |||
|
| |||
Total | $ | 1,784,919 | ||
| ||||
The Company is owned by two members and all profits and distributions are shared equally. During the year ended December 31, 2014, the Company made aggregate cash distributions of $3,356,501. On November 24, 2015, the Company was acquired (see Note 8).
5. Fair value measurements
Recurring fair value measurements
There were no material assets or liabilities carried on the accompanying balance sheet at December 31, 2014 that were measured at fair value on a recurring basis.
Non-recurring fair value measurements
Certain assets are carried on the balance sheets at cost and are not remeasured to fair value on a recurring basis. These assets include finite-lived tangible and intangible assets which are tested for impairment when a triggering event occurs.
The carrying value of the bank loan was not materially different from fair value at December 31, 2014 using level 2 inputs.
6. Accrued taxes
The Company has evaluated sales tax and medical device excise tax exposures in relevant jurisdictions and determined that an accrual of $317,186 at December 31, 2014 should be recorded for the estimated amount of unbilled and unremitted sales and medical device excise taxes. The Company’s estimates of potential liabilities are based on its engagement of third-party experts to calculate the applicable taxes based on the Company’s sales data. For the year ended December 31, 2014, the Company recorded $194,000 to selling, general and administrative expenses related to the Company’s estimated unbilled and unremitted taxes related to that year.
Further, the Company has recorded an accrual of $150,000 at December 31, 2014 for related interest and penalties associated with the estimated unpaid taxes. For the year ended December 31, 2014, the Company recorded $88,000 to selling, general and administrative expenses related to such exposures.
7. Commitments and contingencies
Leases
In April 2011, the Company entered into an operating lease agreement for its office facilities that initially expired in October 2015. Rent expense under this lease agreement was $72,804 for the year ended December 31, 2014. The Company is also required to pay its pro-rata share of taxes and common area maintenance. On March 10, 2015, the Company amended the lease agreement extending the term to October 21, 2019.
Lease payments are subject to increases as specified in the lease agreements. Future minimum lease payments, by year and in the aggregate, under non-cancelable operating leases as of December 31, 2014, are as follows:
| ||||
2015 | $ | 71,722 | ||
2016 | 78,331 | |||
2017 | 81,457 | |||
2018 | 84,709 | |||
2019 | 72,936 | |||
|
| |||
Total minimum payments | $ | 389,155 | ||
| ||||
8. Subsequent events
The Company has considered the effects of subsequent events through February 1, 2016, the date the Company’s financial statements were available to be issued.
On November 24, 2015, Bioventus LLC, a privately held medical products company, acquired 100% of the membership interest of the Company.
BioStructures, LLC
Statements of financial position
(Amounts in U.S. dollars)
(Unaudited)
| September 30, 2015 | December 31, 2014 | |||||||
Assets | ||||||||
Cash | $ | 796,441 | $ | 309,454 | ||||
Trade accounts receivable, net | 1,597,729 | 1,600,391 | ||||||
Inventory | 1,245,542 | 999,884 | ||||||
|
| |||||||
Total current assets | 3,639,712 | 2,909,729 | ||||||
Property and equipment, net | 134,706 | 130,488 | ||||||
Intangible assets, net | 306,029 | 355,941 | ||||||
|
| |||||||
Total Assets | $ | 4,080,447 | $ | 3,396,158 | ||||
|
|
|
| |||||
Liabilities and Members’ Equity | ||||||||
Accounts payable | $ | 676,784 | $ | 740,379 | ||||
Accrued expenses | 249,923 | 3,674 | ||||||
Loan | 350,000 | 400,000 | ||||||
Accrued taxes | 536,900 | — | ||||||
|
| |||||||
Total current liabilities | 1,813,607 | 1,144,053 | ||||||
Accrued Taxes | — | 467,186 | ||||||
|
| |||||||
Total liabilities | 1,813,607 | 1,611,239 | ||||||
Members’ equity | 853,588 | 853,588 | ||||||
Retained earnings | 1,413,252 | 931,331 | ||||||
|
| |||||||
Total Members’ Equity | 2,266,840 | 1,784,919 | ||||||
|
| |||||||
Total Liabilities and Members’ Equity | $ | 4,080,447 | $ | 3,396,158 | ||||
| ||||||||
The accompanying notes are an integral part of these financial statements.
BioStructures, LLC
Statements of income and comprehensive income
(Amounts in U.S. dollars)
(Unaudited)
| Nine months ended September 30, | ||||||||
| 2015 | 2014 | |||||||
Net sales | $ | 9,890,138 | $ | 8,369,328 | ||||
Cost of sales | 1,815,840 | 1,821,234 | ||||||
|
| |||||||
Gross profit | 8,074,298 | 6,548,094 | ||||||
Selling, general and administrative expense | 4,926,053 | 4,010,237 | ||||||
Research and development | 157,390 | 345,550 | ||||||
Depreciation | 30,180 | 24,224 | ||||||
|
| |||||||
Operating income | 2,960,675 | 2,168,083 | ||||||
Interest expense | 11,899 | 11,115 | ||||||
Other expense (income) | 16,855 | (15,943 | ) | |||||
|
| |||||||
Net income and comprehensive income | $ | 2,931,921 | $ | 2,172,911 | ||||
| ||||||||
The accompanying notes are an integral part of these financial statements.
Biostructures, LLC
Statement of changes in members’ equity
Nine months ended September 30, 2015
(Amounts in U.S. dollars)
(Unaudited)
| Members’ equity | Retained earnings | Total members’ equity | ||||||||||
Balance at December 31, 2014 | $ | 853,588 | $ | 931,331 | $ | 1,784,919 | ||||||
Distributions | — | (2,450,000 | ) | (2,450,000 | ) | |||||||
Net income | 2,931,921 | 2,931,921 | ||||||||||
|
| |||||||||||
Balance at September 30, 2015 | $ | 853,588 | $ | 1,413,252 | $ | 2,266,840 | ||||||
| ||||||||||||
The accompanying notes are an integral part of these financial statements.
BioStructures, LLC
(Amounts in U.S. dollars)
(Unaudited)
| Nine months ended September 30, | ||||||||
| 2015 | 2014 | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 2,931,921 | $ | 2,172,911 | ||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||
Depreciation and amortization | 80,092 | 71,988 | ||||||
Provision for bad debts | 59,435 | 157 | ||||||
Changes in operating assets and liabilities: | ||||||||
Trade accounts receivable | (56,773 | ) | 6,700 | |||||
Inventory | (245,658 | ) | (428,759 | ) | ||||
Accounts payable and accrued expenses | 252,368 | 448,521 | ||||||
|
| |||||||
Net cash provided by operating activities | 3,021,385 | 2,271,518 | ||||||
|
| |||||||
Cash flows from investing activities | ||||||||
Purchase of property and equipment | (34,398 | ) | (56,729 | ) | ||||
License fee and milestone payments | — | (150,000 | ) | |||||
|
| |||||||
Net cash used in investing activities | (34,398 | ) | (206,729 | ) | ||||
|
| |||||||
Cash flows from financing activities | ||||||||
Borrowings (repayment) of debt | (50,000 | ) | 143,900 | |||||
Member distributions | (2,450,000 | ) | (2,000,000 | ) | ||||
|
| |||||||
Net cash used in financing activities | (2,500,000 | ) | (1,856,100 | ) | ||||
|
| |||||||
Net increase in cash | 486,987 | 208,689 | ||||||
Cash and cash equivalents at the beginning of period | 309,454 | 456,524 | ||||||
|
| |||||||
Cash and cash equivalents at the end of period | $ | 796,441 | $ | 665,213 | ||||
|
| |||||||
Supplemental disclosure of cash flow information | ||||||||
Cash paid for interest | $ | 11,899 | $ | 11,115 | ||||
| ||||||||
The accompanying notes are an integral part of these financial statements.
BioStructures, LLC
(Amounts in U.S. dollars)
(Unaudited)
1. Organization and summary of significant accounting policies
Basis of presentation
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results of operations for the periods presented have been included. Operating results for the nine months ended September 30, 2015 and 2014 are not necessarily indicative of the results that may be expected for the fiscal year. The balance sheet at December 31, 2014 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements.
The Company
BioStructures, LLC, or BioStructures or the Company, is a limited liability company formed under the laws of the state of California on August 22, 2007 and operates as a partnership. The Company was owned by two members until the acquisition of the Company by Bioventus, LLC in November 2015 (see Note 8).
BioStructures is a medical device company focused on developing innovation proprietary platforms in bio-resorbable bone graft products for a broad range of spinal surgical applications. The Company’s products are developed to benefit the surgeon and their patients during each phase of the bone healing process. BioStructures’ bio-resorbable implants are created for best-in-class performance. The synthetic and allograft implants are designed for proportionate resorption to facilitate balanced bone regeneration with optimized clinical efficacy.
Use of estimates
The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses during the period, as well as disclosures of contingent assets and liabilities at the date of the financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Cash
The Company’s cash consists of cash held by a single financial institution in the U.S. in excess of the federally insured limits.
Fair value
The Company records certain assets and liabilities at fair value (discussed further in Note 5). Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy that prioritizes the inputs used to measure fair value is
described below. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs.
The three levels of inputs used to measure fair value are as follows:
Level 1—Quoted prices in active markets for identical assets or liabilities;
Level 2—Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data; and
Level 3—Unobservable inputs that are supported by little or no market data. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
Accounts receivable and allowances
Accounts receivables are amounts due from customers and are recorded at net realizable value for product sold in the ordinary course of business. The Company maintains an allowance for doubtful accounts.
The allowance for doubtful accounts is based on the assessment of the collectability of specific customer accounts and the aging of the accounts receivable. When evaluating the adequacy of this allowance, the Company analyzes accounts receivable, historical bad debts, customer concentrations, customer solvency, current economic and geographic trends, and changes in customer payment terms and practices. Changes to the allowance for doubtful accounts are recorded in selling, general and administrative expense in the statement of income and comprehensive income.
Inventory
Inventories are valued at the lower of cost or estimated net realizable value, after provision for excess or obsolete items. All products the Company sells are procured through third-party contract manufacturing arrangements and cost is determined on an average cost basis, which approximates the first-in, first-out, or FIFO, method. The valuation of finished products and consignment inventory includes the cost of materials, labor and packaging costs. Consignment inventory represents finished products located at third parties, such as distributors and hospitals.
Long-lived assets
Property and equipment are stated at cost and are depreciated using the straight-line method over the shorter of the asset’s estimated useful life, or the lease term if related to leased property, as follows (in years):
| ||||
| ||||
| ||||
Finite-lived identifiable intangible assets are recorded at cost and are amortized using the straight-line method over their estimated remaining useful lives ranging between 8 and 10 years.
The carrying values of property, equipment, intangible and other long-lived assets are reviewed for recoverability if the facts and circumstances suggest that a potential impairment may have occurred. If this review indicates that carrying values may not be recoverable, as determined based on undiscounted cash flow projections, the Company will perform an assessment to determine if an impairment charge is required to
reduce carrying values to estimated fair value. There were no events, facts or circumstances for the nine months ended September 30, 2015 and 2014 that resulted in any impairment charges to the Company’s property, equipment, intangible or other long-lived assets.
Revenue recognition
Sale of products
The Company primarily sells its products to hospitals and recognizes revenue upon notification from the hospital that the product was used in surgery. Accordingly, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is reasonably assured. Until such time as the product is used in surgery, ownership of the product remains with the Company.
The Company uses a distribution network to deliver its product to hospitals. The majority of the distributors hold the Company’s product on consignment until delivered to the hospitals to be used in surgery. In these circumstances, ownership of the product remains with the Company. The Company does sell products directly to distributors who take ownership of the product at the point of shipment. In these circumstances, the Company recognizes revenue upon delivery to such distributors. Accordingly, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is reasonably assured.
Shipping and handling
The Company classifies amounts billed for shipping and handling as a component of net sales. The related shipping and handling fees and costs as well as other distribution costs are included in cost of sales.
Advertising costs
Advertising costs include costs incurred to promote the Company’s business and are expensed as incurred. Advertising costs were $102,384 and $107,558 for the nine months ended September 30, 2015 and 2014, respectively.
Research and development
Research and development, or R&D, expenses consists primarily of contract research organization services. Internal R&D costs are expensed as incurred. R&D costs incurred by third parties are expensed as the contracted work is performed. Initial and milestone payments made to third parties in connection with technology license agreements are also expensed as incurred as research and development costs, up to the point of regulatory approval. Payments made to third parties subsequent to regulatory approval will be capitalized and amortized over the estimated remaining useful life of the related product.
Income taxes
The Company is treated as a partnership for U.S. tax purposes. Accordingly, the profits and losses are passed through to the members and included in their income tax returns. The Company makes periodic distributions to its members.
Recently issued accounting standards
In May 2014, the Financial Accounting Standards Board, or FASB, issued guidance that provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the
transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In August 2015, the FASB approved a one-year deferral of the effective date making this guidance effective for annual and interim periods beginning after December 15, 2018 for private companies. Early application is permitted. This guidance permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating the impact this guidance will have on the Company’s financial statements.
In July 2015, the FASB issued guidance for simplifying the calculation for subsequent measurement of inventory measured using the first-in-first-out or average cost methods. The guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2016, and is effective for the Company for the year ending December 31, 2017. The Company is currently evaluating the impact that the implementation of this standard will have on the Company’s financial statements.
2. Balance sheet information
Accounts receivable
Accounts receivable consisted of the following at September 30, 2015:
| ||||
Accounts receivable | $ | 1,848,308 | ||
Less allowance | (250,579 | ) | ||
|
| |||
| $ | 1,597,729 | |||
| ||||
The following table shows the activity in the allowance for doubtful accounts at September 30, 2015:
| ||||
Beginning balance at December 31, 2014 | $ | 191,144 | ||
Charged to operating expenses | 59,435 | |||
|
| |||
Ending balance at September 30, 2015 | $ | 250,579 | ||
| ||||
The allowance as of September 30, 2015 relates to a specific customer that filed for bankruptcy in June 2015.
Inventory
Inventory consisted of the following at September 30, 2015:
| ||||
Raw materials and supplies | $ | 226,318 | ||
Work-in-process | 73,694 | |||
Finished goods | 945,530 | |||
|
| |||
| $ | 1,245,542 | |||
| ||||
Finished goods includes consignment inventory representing immediately saleable finished products that are in the possession of the Company’s distributors or located at third-party customers, such as hospitals.
Property and equipment, net
Property and equipment consisted of the following at September 30, 2015:
| ||||
Automobile | $ | 39,135 | ||
Furniture and fixtures | 46,775 | |||
Machinery and equipment | 152,022 | |||
|
| |||
| 237,932 | ||||
Less accumulated depreciation | (103,226 | ) | ||
|
| |||
Property and equipment, net | $ | 134,706 | ||
| ||||
Depreciation expense was $30,180 and $24,224 for the nine months ended September 30, 2015 and 2014, respectively. The Company assets are pledged as security under a bank loan agreement.
Intangible assets, net and royalty agreements
In July 2009, the Company entered into an exclusive license and supply agreement for the use of bioactive glass in certain of its products. The Company paid a non-refundable technology access fee of $230,000 in exchange for the world-wide, royalty bearing license for the use of certain developed technologies related to spine repair. The Company is required to pay a royalty of 3% on all commercial sales revenue from the licensed products. In October 2010, the agreement was amended whereby the Company paid $234,000 as additional consideration, primarily for the right to sublicense. During the nine months ended September 30, 2015 and 2014, the Company incurred royalty expense of $150,152 and $101,194, respectively. Royalty expense is included in cost of goods sold. The agreement shall expire in 2019 upon the expiration of the last to expire patents held by the licensor.
In November 2011, the Company entered into a development and license agreement with a third-party, whereby both parties collaborated in the development, pre-clinical and clinical evaluation and commercialization of a product for use in certain orthopedic applications. Pursuant to this agreement, upon receipt of a 510(k) approval for a developed product, both parties agreed to enter into a license agreement for such product. Upon receiving a 510(k) approval in January 2014 for bioactive bone graft putty, the Company paid a $50,000 milestone payment and in February 2014, the Company entered into an exclusive license agreement with the third-party for the developed product whereby the Company paid $100,000 as a conversion fee. The Company is required to pay a royalty of 3% on all commercial sales revenue from the license products with a minimum royalty payment of $60,000 in 2013, $102,000 in 2014 and $201,000 annually for the period from 2015 through 2023. During the nine months ended September 30, 2015 and 2014, the Company incurred the minimum royalty expense of $150,750 and $76,500, respectively. Royalty expense is included in cost of goods sold. The agreement shall expire in 2023 upon the expiration of the last to expire patents held by the licensor.
Intangible assets are recorded at cost and consisted of the following at September 30, 2015:
| ||||
License fees | $ | 614,000 | ||
Less accumulated amortization | (307,971 | ) | ||
|
| |||
Intangible assets, net | $ | 306,029 | ||
| ||||
Amortization expense related to intangible assets was $49,912 and $47,764 for the nine months ended September 30, 2015 and 2014, respectively.
3. Loans
The Company was a party to a loan agreement with a commercial bank with a total borrowing limit of $2,000,000, with interest payable monthly at LIBOR plus 2.75%. The maturity date of the loan was initially set at August 1, 2013 and was extended in one year increments until paid in full. Outstanding borrowings as of September 30, 2015 were $350,000. The loan was secured by the assets of the Company and guaranteed by the members. In November 2015, the loan was paid in full and all security interests and guarantees were terminated in connection with sale of the Company (see Note 8).
During 2014, the Company paid in full an outstanding balance of an automobile loan of $11,391.
4. Members’ equity
Members’ equity consisted of the following at September 30, 2015:
| ||||
Members’ equity | $ | 853,588 | ||
Retained earnings | 1,413,252 | |||
|
| |||
Total | $ | 2,266,840 | ||
| ||||
The Company is owned by two members and all profits and distributions are shared equally. During the nine months ended September 30, 2015 and 2014, the Company made aggregate cash distributions of $2,450,000 and $2,000,000, respectively. On November 24, 2015, the Company was acquired (see Note 8).
5. Fair value measurements
Recurring fair value measurements
There were no material assets or liabilities carried on the accompanying balance sheet at September 30, 2015 measured at fair value on a recurring basis.
Non-recurring fair value measurements
Certain assets are carried on the balance sheets at cost and are not remeasured to fair value on a recurring basis. These assets include finite-lived tangible and intangible assets which are tested for impairment when a triggering event occurs.
The carrying value of the bank loan was not materially different from fair value at September 30, 2015 using level 2 inputs.
6. Accrued taxes
The Company has evaluated sales tax and medical device excise tax exposures in relevant jurisdictions and determined that an accrual of $370,384 at September 30, 2015 should be recorded for the estimated amount of unbilled and unremitted sales and medical device excise taxes. The Company’s estimates of potential liabilities are based on its engagement of third-party experts to calculate the applicable taxes based on the Company’s sales data. For the nine months ended September 30, 2015 and 2014, the Company recorded $49,150 and $133,000, respectively, to selling, general and administrative expenses related to the Company’s estimated unbilled and unremitted taxes related to that year.
Further, the Company has recorded an accrual of $166,516 at September 30, 2015 for related interest and penalties associated with the estimated unpaid taxes. For the nine months ended September 30, 2015 and 2014, the Company recorded $16,516 and $62,000, respectively, to selling, general and administrative expenses related to such exposures.
7. Commitments and contingencies
Leases
In April 2011, the Company entered into an operating lease agreement for its office facilities that initially expired in October 2015. Rent expense under this lease agreement was $57,690 and $55,997 for the nine months ended September 30, 2015 and 2014, respectively. The Company is also required to pay its pro-rata share of taxes and common area maintenance. On March 10, 2015, the Company amended the lease agreement extending the term to October 21, 2019.
Lease payments are subject to increases as specified in the lease agreements. Future minimum lease payments, by year and in the aggregate, under non-cancelable operating leases as of September 30, 2015, are as follows:
| ||||
2015 | $ | 18,878 | ||
2016 | 78,331 | |||
2017 | 81,457 | |||
2018 | 84,709 | |||
2019 | 72,936 | |||
|
| |||
Total minimum payments | $ | 336,311 | ||
| ||||
8. Subsequent events
On November 24, 2015, Bioventus LLC, a privately held medical products company, acquired 100% of the membership interest of the Company.
Until , 20162021 (25 days after the date of this prospectus), all dealers that effect transactions in our securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligations to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
8,823,5297,350,000 Shares
Class A Common Stock
P r o s p e c t u s
| Morgan Stanley | J.P. Morgan | |||
| Canaccord Genuity | ||||||
, 2016
2021
PartPART II
Information not requiredRequired in prospectusProspectus
Item 13. Other expenses of issuance and distribution.
| Item 13. | Other Expenses of Issuance and Distribution. |
The following table sets forth the costsfees and expenses, other than the underwriting discounts and commissions, payable by the registrant in connection with the offer and sale of Class A common stock being registered. All amounts shown are estimates except for the SEC, registration fee, the Financial Industry Regulatory Authority, Inc., or FINRA, filing fee and NASDAQexchange listing fee.
| Item | Amount to be paid | Amount to be paid | ||||||
SEC registration fee | $ | 18,393 | $ | 16,600 | ||||
FINRA filing fee | 23,000 | 23,322 | ||||||
Listing fee | 25,000 | |||||||
Printing and engraving expenses | 200,000 | |||||||
Exchange listing fee | 250,000 | |||||||
Printing expenses | 400,000 | |||||||
Legal fees and expenses | 2,500,000 | 2,000,000 | ||||||
Accounting fees and expenses | 1,070,000 | 1,020,000 | ||||||
Blue Sky, qualification fees and expenses | 25,000 | |||||||
Transfer Agent fees and expenses | 25,000 | |||||||
Transfer agent fees and expenses | 25,000 | |||||||
Miscellaneous expenses | 13,607 | 60,000 | ||||||
|
| |||||||
Total | $ | 3,900,000 | $ | 3,794,922 | ||||
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Item 14. Indemnification of directors and officers.
| Item 14. | Indemnification of Directors and Officers. |
Section 102 of the Delaware General Corporation Law of the State of Delaware, or DGCL, permits a corporation to eliminate the personal liability of directors of a corporation to the corporation or its stockholders for monetary damages for a breach of fiduciary duty as a director, except where the director breached his or her duty of loyalty, failed to act in good faith, engaged in intentional misconduct or knowingly violated a law, authorized the payment of a dividend or approved a stock repurchase in violation of Delaware corporate law or obtained an improper personal benefit. Our amended and restated certificate of incorporation provides that none of our directors shall be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duty as a director, notwithstanding any provision of law imposing such liability, except to the extent that the DGCL prohibits the elimination or limitation of liability of directors for breaches of fiduciary duty.
Section 145 of the DGCL provides that a corporation has the power to indemnify a director, officer, employee or agent of the corporation, or a person serving at the request of the corporation for another corporation, partnership, joint venture, trust or other enterprise in related capacities against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with an action, suit or proceeding to which he or she was or is a party or is threatened to be made a party to any threatened, endingpending or completed action, suit or proceeding by reason of such position, if such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, in any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful, except that, in the case of actions brought by or in the right of the corporation, no indemnification shall be made with respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or other adjudicating court determines that, despite the adjudication of liability but in view of all of the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.
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Our amended and restated bylaws provide that we will indemnify each person who was or is a party or threatened to be made a party to any threatened, pending or completed action, suit or proceeding (other than an
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action by or in the right of us) by reason of the fact that he or she is or was, or has agreed to become, a director or officer, or, while a director or officer, is or was serving, or has agreed to serve, at our request as a director, officer, partner, employee or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise (all such persons being referred to as an “Indemnitee”)Indemnitee), or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including attorneys’ fees), liabilities, losses, judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with such action, suit or proceeding and any appeal therefrom, if such Indemnitee acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, our best interests, and, with respect to any criminal action or proceeding, he or she had no reasonable cause to believe his or her conduct was unlawful. Our amended and restated bylaws provide that we will indemnify any Indemnitee who was or is a party to or threatened to be made a party to any threatened, pending or completed action or suit by or in the right of us to procure a judgment in our favor by reason of the fact that the Indemnitee is or was, or has agreed to become, a director or officer, or, while a director or officer, is or was serving, or has agreed to serve, at our request as a director, officer, partner, employee or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including attorneys’ fees) actually and reasonably incurred in connection with such action, suit or proceeding, and any appeal therefrom, if the Indemnitee acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, our best interests, except that no indemnification shall be made with respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to us, unless a court determines that, despite such adjudication but in view of all of the circumstances, he or she is entitled to indemnification of such expenses. Notwithstanding the foregoing, to the extent that any Indemnitee has been successful, on the merits or otherwise, he or she will be indemnified by us against all expenses (including attorneys’ fees) actually and reasonably incurred in connection therewith. Expenses must be advanced to an Indemnitee under certain circumstances.
We have entered into indemnification agreements with each of our directors and officers. These indemnification agreements may require us, among other things, to indemnify our directors and officers for some expenses, including attorneys’ fees, judgments, fines and settlement amounts incurred by a director or officer in any action or proceeding arising out of his or her service as one of our directors or officers, or any of our subsidiaries or any other company or enterprise to which the person provides services at our request.
We maintain a general liability insurance policy that covers certain liabilities of directors and officers of our corporation arising out of claims based on acts or omissions in their capacities as directors or officers.
In any underwriting agreement we enter into in connection with the sale of Class A common stock being registered hereby, the underwriters will agree to indemnify, under certain conditions, us, our directors, our officers and persons who control us within the meaning of the Securities Act of 1933, as amended, or the Securities Act, against certain liabilities.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. Please read “Item 17. Undertakings” for more information on the SEC’s position regarding such indemnification provisions.
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Item 15. Recent sales of unregistered securities.Unregistered Securities.
On July 15, 2016, the registrant agreed to issue ten shares of common stock, par value $0.001 per share, which will be redeemed upon the closing of this offering, to ana former officer of the registrant in exchange for $0.01.$0.01, which were transferred to an officer of the registrant on September 22, 2020 and will be redeemed upon closing of this offering. The issuance was exempt from registration under Section 4(a)(2) of the Securities Act, as a transaction by an issuer not involving any public offering.
Item 16. Exhibits and financial statement schedules
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| Item 16. | Exhibits and Financial Statement Schedules |
| (a) | Exhibits. See the Exhibit Index attached to this registration statement, which is incorporated by reference herein. |
| (b) | Financial Statement Schedules. Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the Financial Statements or notes thereto. |
Item 17. Undertakings.
| Item 17. | Undertakings. |
(a) The undersigned Registrant undertakes that in a primary offering of securities of the undersigned Registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned Registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
| (i) | Any preliminary prospectus or prospectus of the undersigned Registrant relating to the offering required to be filed pursuant to Rule 424 (§ 230.424 of this chapter); |
| (ii) | Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned Registrant or used or referred to by the undersigned Registrant; |
| (iii) | The portion of any other free writing prospectus relating to the offering containing material information about the undersigned Registrant or its securities provided by or on behalf of the undersigned Registrant; and |
| (iv) | Any other communication that is an offer in the offering made by the undersigned Registrant to the purchaser. |
(b) The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
(c) Insofar as indemnification by the Registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registration has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction, the question whether such indemnification by usit is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
(d) The Registrant hereby further undertakes that:
| (1) | For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. |
| (2) | For |
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SignaturesEXHIBIT INDEX
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| * | Previously filed. |
| # | Indicates management contract or compensatory plan. |
| † | Certain portions of this exhibit have been omitted pursuant to Regulation S-K, Item (601)(b)(10). |
| + | Schedules omitted pursuant to Item 601(a)(5) of Regulation S-K. Bioventus Inc. agrees to furnish supplementally a copy of any omitted schedule to the SEC upon request. |
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in Durham, North Carolina, on this nineteenth10th day of July, 2016.February, 2021.
| Bioventus Inc. | ||||
By: | /s/ | |||
| Name: | Kenneth M. Reali | |||
| Title: | Chief Executive Officer and Director | |||
Signatures and Power of Attorney
We, the undersigned officers and directors of Bioventus Inc. hereby severally constitute and appoint Anthony P. Bihl III and David J. Price, and each of them singly (with full power to each of them to act alone), our true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution in each of them for him and in his name, place and stead, and in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement (or any other registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933), and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as full to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons on behalf of the Registrant and in the capacities andindicated on the dates indicated.February 10, 2021:
Name | Title | |||
/s/
| Chief Executive Officer and Director (Principal Executive Officer) | |||
|
| |||
/s/ Gregory O. Anglum Gregory O. Anglum | Senior Vice President and Chief
| |||
| Chairman | |||
* Phillip G. Cowdy | Director | |||
|
| |||
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|
| |||
Guido J. Neels | Director | |||
Guy P. Nohra | Director | |||
David J. Parker | Director | |||
| Director | |||
Martin P. Sutter | Director | |||
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Exhibit index
/s/ Kenneth M. Reali | ||
Attorney-in-fact | ||
II-6II-8
| ||
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