Bioventus Inc. — Q2 2023 Form 10-Q
Reporting period: 13 weeks ended July 1, 2023; comparisons are to the corresponding 2022 periods. Unless noted otherwise, financial amounts below are in millions of dollars. Bioventus develops and sells minimally invasive medical treatments through U.S. and International segments, across Pain Treatments, Restorative Therapies and Surgical Solutions.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $137.1 | $140.3 | $256.1 | $257.6 |
| Gross profit / margin | $89.1 / 65.0% | $96.7 / 68.9% | $163.0 / 63.7% | $172.4 / 66.9% |
| Operating income (loss) | $6.8 | $(3.3) | $(85.3) | $(24.8) |
| Net loss from continuing operations | $(4.7) | $(7.7) | $(104.7) | $(22.1) |
| Net loss attributable to Bioventus | $(3.7) | $(7.3) | $(142.8) | $(18.5) |
| Adjusted EBITDA (non-GAAP) | $28.2 | $22.3 | $45.1 | $29.5 |
| Net interest expense | $10.6 | $2.6 | $20.3 | $1.0 |
| Class A loss per share | $(0.06) | $(0.11) | $(2.29) | $(0.30) |
- Sales mix: Q2 U.S. sales declined 4.3% to $120.8 million, while International sales rose 15.7% to $16.2 million. For the half-year, U.S. sales fell 2.4%; International sales grew 15.0%.
- Cash flow: Six-month operating cash flow from continuing operations was $15.5 million, versus an outflow of $18.1 million in 2022. Total operating cash flow, including discontinued operations, was $13.3 million. Investing activities provided $18.4 million, including $34.9 million of Wound Business sale proceeds; financing activities used $34.9 million. Cash and cash equivalents were $29.4 million at July 1, 2023, compared with $30.2 million at year-end.
- Debt and liquidity: The balance sheet showed $11.3 million of current debt and $374.6 million of long-term debt, net of discounts and issuance costs. The term loan had $382.4 million outstanding and the revolver $7.0 million; stated rates were 9.56% and 9.58%, respectively. The credit agreement requires at least $10 million of defined liquidity at each month-end during the specified covenant period.
- Balance sheet: Current assets were $260.6 million and current liabilities $179.1 million. Total assets were $837.0 million and total stockholders’ equity $233.3 million at July 1, 2023.
Material changes and unusual items
- Q2 sales decreased 2.3% year over year. U.S. Pain Treatments revenue was pressured by lower selling prices and reimbursement levels, partly offset by higher volume; U.S. Restorative Therapies sales reflected the Wound Business divestiture. International growth was led by Surgical Solutions.
- Gross margin contracted 3.9 percentage points in Q2, primarily from lower Pain Treatments selling prices, product mix and increased amortization. SG&A fell 16.5% in Q2, including lower equity compensation and cost-saving effects. Management reported Q2 Adjusted EBITDA growth despite lower sales and gross profit.
- Six-month results included a $78.6 million non-cash impairment of Wound Business intangible assets and a $1.0 million loss on disposal. The impairment contributed substantially to the operating loss.
- Bioventus transferred CartiHeal to a trustee for former securityholders in February 2023 and deconsolidated it. The transaction relieved deferred purchase consideration and milestone obligations but generated a $60.6 million disposal loss; discontinued operations recorded a $74.4 million six-month net loss.
- The May 2023 Wound Business sale provided $34.9 million at closing, $5.0 million deferred for 18 months and up to $45.0 million in contingent earn-outs. The company used $30.0 million of proceeds to prepay debt. Earn-outs depend on future revenue thresholds.
- The company identified prior-period equity and deferred-tax presentation errors as immaterial and is revising prior presentation prospectively. It reported no impact on revenue, total assets or cash flows.
Outlook, risks and contingencies
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern. It is at risk of violating financial covenants and, absent successful mitigation, at substantial risk of covenant failure in 2024, which could accelerate repayment. Cost reductions and potential additional divestitures are being pursued, but management said the plans do not alleviate substantial doubt. No specific full-year revenue or earnings guidance is provided in the filing text.
- Cost actions: Restructuring and other initiatives are expected to generate $9–$10 million of annualized savings upon completion. The December 2022 plan was expected to incur $5–$6 million of pretax costs.
- Controls: Disclosure controls were ineffective at July 1, 2023 because material weaknesses in internal control over financial reporting remained unremediated. The company cited control-environment, risk-assessment and monitoring deficiencies, as well as a separate rebate-accrual weakness. Remediation work is ongoing; controls had not operated long enough to conclude the weaknesses were fully remediated.
- Legal and operating risks: A shareholder class action alleges failures to disclose information concerning rebates, business prospects and internal controls; the company disputes the claims and says the outcome is not presently determinable. A separate product-liability case alleges an MRSA infection associated with Exogen coupling gel subject to a 2020 recall. Other risks include pricing and reimbursement pressure, product and regulatory exposure, and access to financing.
- The company reported that it was not in compliance with certain debt covenants at December 31, 2022; a March 2023 amendment waived that breach, revised covenants and increased borrowing rates. Debt covenants restrict additional financing and certain business actions.
Most important facts for investors to verify
- Monthly liquidity and covenant headroom, and whether management’s plans can prevent a 2024 covenant breach or a debt acceleration.
- Cash generation excluding asset-sale proceeds, debt service at current interest rates, and availability and terms of any additional financing.
- Whether revenue and gross-margin pressure in U.S. Pain Treatments persists, and whether reported Adjusted EBITDA gains translate into sustainable cash flow.
- Potential Wound Business earn-out proceeds and the realized cash impact of the CartiHeal deconsolidation and sale transactions.
- Progress in remediating material weaknesses, the risk of further financial reporting errors, and developments in the shareholder and Exogen product-liability litigation.