What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-11 compared with 2021-03-26 · 378 added, 372 removed, 298 unchanged (72% of the section changed)

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Risk Factors and elsewhere in this Annual Report.

A discussion of the year ended December 31, 2019 compared to the year ended December 31, 2018 has been reported previously in our final prospectus filed with the SEC on February 12, 2021, under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations."

A discussion of the year ended December 31, 2020 compared to the year ended December 31, 2019 has been reported previously in our 10-K for the fiscal year ended December 31, 2020, filed with the SEC on March 26, 2021, under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Executive Summary

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We operate our business through two reportable segments, U.S.

and International, and our portfolio of products is grouped into the following three verticals:

• 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;

• minimally invasive fracture treatment, which is a FDA-approved Exogen system prescribed for long bone stimulation for fracture healing.

segment offers our full existing portfolio of products.

This includes our OA joint pain treatment and joint preservation products, which address the entire market for HA viscosupplementation with offerings for single, three and five injection therapies:

(i) Durolane, a single injection therapy, which we launched in the United States in the first half of 2018 and also market outside the United States in more than 30 countries;

(ii) GELSYN-3, a three injection therapy, which we have marketed in the United States since the second half of 2016;

and (iii) SUPARTZ FX, a five injection therapy, which we have marketed in the United States since May 2012.

segment also offers our BGS products, which are targeted at improving bone fusion rates following spinal fusion and other orthopedic surgeries.

These products include 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).

Further, our U.S.

segment offers our Exogen system, which we believe offers significant advantages over electrical based long bone stimulation systems, including documented mechanism of action, shorter treatment times and superior nonunion heal rates.

Our International segment offers Durolane, or single injection therapy, OsteoAMP, our allograft-derived bone graft with growth factors, and our Exogen system.

The following table sets forth total net sales, net income from continuing operations, Adjusted EBITDA and pro forma net income (loss) per unit attributable to common unit holders - basic and diluted:

and International, and our portfolio of products is grouped into three verticals:

• Pain Treatments is comprised of non-surgical joint pain injection therapies as well as peripheral nerve stimulation (PNS) products to help the patient get back to their normal activities.

• Surgical Solutions is comprised of bone graft substitutes (BGS) to fuse and grow bones, improve results following spinal and other orthopedic surgeries as well as minimally invasive ultrasonic medical devices used for precise bone sculpting, removing tumors and tissue debridement, in various surgeries.

• Restorative Therapies is comprised of a bone healing system, skin allografts and products used to support healing of wounds as well as devices designed to help patients regain leg or hand function due to stroke, multiple sclerosis or other central nervous system disorders.

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The following table sets forth notable financial results in 2021 and 2020:

Years Ended December 31,

Net sales $ 430,898 $ 321,161

Net income from continuing operations $ 14,722 $ 8,113

Net income $ 9,586 $ 14,722

Adjusted EBITDA (1)

$ 80,759 $ 72,443

Net income (loss) per unit attributable to common unit holders - basic and diluted (2)

$ 0.89 $ (0.13)

(1) See below under Components of our results of operations-Adjusted EBITDA for a definition of Adjusted EBITDA and Results from continuing operations for a reconciliation of net income from continuing operations to Adjusted EBITDA.

(2) See below for a computation of pro forma net income per unit attributable to common unit holders - basic and diluted after the recapitalization described below which was in conjunction with our IPO.

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On February 16, 2021, our limited liability company agreement was amended and restated to, among other things, (i) provide for a new single class of common membership interests in the Company (LLC Interests) and (ii) exchange all of the existing membership interests for LLC Interests.

For purposes of calculating pro forma earnings per unit, we have adjusted the number of outstanding membership units retroactively to give effect to the amendment and resulting recapitalization.

Pro forma basic net income per unit is computed by dividing net income by the pro forma weighted-average number of units outstanding during the period.

Pro forma diluted net income per unit is computed by dividing net income by the pro forma weighted-average number of units outstanding adjusted to give effect to potentially dilutive securities.

As a result of the recapitalization and the New LLC Owner assuming the obligations of the Company’s Phantom Plan awards there are no dilutive securities.

The following table sets forth a reconciliation of the numerators and denominators used to compute pro forma basic and diluted net income per unit for the years ended December 31 as follows:

Net income from continuing operations attributable to

common unit holders $ 16,411 $ 8,666

Loss from discontinued operations, net of tax — 1,815

Net income attributable to common unit holders $ 16,411 $ 6,851

Pro forma net income per unit attributable to common unit holders

—basic and diluted

Pro forma net income from continuing operations $ 0.29 $ 0.15

Pro forma loss from discontinued operations, net of tax — 0.03

Pro forma net income attributable to common unit holders $ 0.29 $ 0.12

Pro forma weighted average units used in computing basic and diluted

net income per common unit 56,825,325 56,825,325

Loss per share, basic and diluted $ (0.15) NM

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

Strategic transactions

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Below is a summary of some of our recent transactions:

Collaboration and development agreement for MOTYS

On May 29, 2019, we entered into a collaboration and development agreement (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.

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.

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.

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 target.

The sole use of proceeds from these investments is for the development of the implant product that is the subject of our agreement.

We intend to negotiate and enter into a definitive supply agreement with Harbor 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 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.

This investment follows the recently completed enrollment and outcome of interim analysis in CartiHeal’s IDE multinational pivotal study for Agili-C.

This new round of funding is expected to enable CartiHeal to complete all patient follow-up in the Agili-C study and submit an application for PMA to the FDA.

Under the agreement, CartiHeal can secure an additional $5.0

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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.

Contemporaneous with the July 2020 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 CartiHeal’s shares under certain conditions, 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 at any time after the 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.

The pivotal clinical trial’s objective is to demonstrate 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 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 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 to Agili-C.

Such closing would be subject to customary closing conditions.

Certain of the foregoing transactions have had a significant impact on our financial results of operations for the periods in which they occurred, and they have affected the comparability of these statements for the corresponding comparative periods.

We plan to continue to expand our business and to increase our net sales and profitability by executing on the following strategies:

• continue 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;

• opportunistically grow our 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 several factors affecting our business that are beyond our 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 Part I, Item 1A.

Risk Factors and “Special note regarding forward-looking statements” sections of this Annual Report.

COVID-19 Update and Outlook

During 2020, the COVID-19 pandemic spread around the world and in the U.S.

and, more recently, new variants of the virus have emerged, some of which have shown to be more contagious.

Misonix Acquisition

On October 29, 2021, we acquired Misonix, Inc.

(Misonix) in a cash-and-stock transaction.

We provided merger consideration totaling $525.3 million, including Class A common stock valued at $274.6 million, cash of $183.0 million, fully vested Bioventus stock options valued at $27.6 million and additional cash used to pay debt and expenses on Misonix’s behalf totaling $40.1 million.

The cash consideration was primarily funded through taking on additional debt.

The acquisition includes the entire portfolio of Misonix products as well as its research and development pipeline.

Misonix manufactures minimally invasive surgical ultrasonic medical devices used for precise bone sculpting, removal of soft and hard tumors, and tissue debridement, primarily in the areas of neurosurgery, orthopedic surgery, plastic surgery, wound care and maxillo-facial surgery.

Misonix also exclusively distributes skin allografts and wound care products used to support healing of wounds.

The Misonix Acquisition provided additional net sales in 2021 totaling $15.4 million since the date of acquisition.

We incurred transaction costs of $8.0 million.

We expect to benefit from the Misonix Acquisition by capitalizing on the processes below:

• Accelerating Misonix’s BoneScalpel and Nexus adoption through our extensive spine surgical solutions footprint;

• Augmenting our leading lower extremity offerings and commercial footprint to accelerate growth in this call point;

• Significantly expanding the direct wound salesforce that covers the entire customer continuum, including physicians’ offices, ambulatory surgical centers, wound clinics, and hospitals;

• Extending Misonix’s international access through our direct channels and infrastructure in the Netherlands, Canada, Germany, and the UK.

Bioness Acquisition

On March 30, 2021, we acquired Bioness, Inc.

(Bioness), in a cash transaction.

We provided upfront cash of $48.9 million funded exclusively through the use of cash on hand and we could be required to pay up to an additional $50.0 million related to the achievement of certain key milestones.

This discounted contingent consideration is currently valued at $15.5 million based on the probability of reaching the key milestones.

We currently estimate the payments to be made in 2024 and 2025.

The acquisition includes the entire portfolio of Bioness products as well as its research and development pipeline.

Bioness manufactures neuromodulation and advanced rehabilitation medical devices through its PNS system and premium advanced rehabilitation solutions.

PNS Systems help patients suffering from pain after surgery on an extremity, which affects over 16 million patients each year globally, and addresses the growing need to reduce opioid usage.

Rehabilitation solutions includes electrical stimulation exoskeletal devices for both the upper and lower extremities, robotic gait and fall safety systems, and high-tech, interactive software learning and recovery assessment platforms.

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The Bioness acquisition provided additional net sales in 2021 totaling $34.0 million since the date of acquisition.

We incurred transaction costs of $8.0 million and restructuring charges of $2.5 million related to the Bioness Acquisition during 2021.

We expect total restructuring expenses related to the Bioness Acquisition to be $2.9 million.

We expect to benefit significantly from the Bioness Acquisition by capitalizing on the processes below:

• Accelerating Bioness’ revenue growth by leveraging our existing global network of sales representatives calling on orthopedic, pain and podiatric physicians;

• Expanding market access and reimbursement processing capabilities as we estimate Bioness medical devices address total global market opportunities approaching $8 billion per year.

On July 15, 2020, we entered into an Option and Equity Purchase Agreement (Option Agreement) with CartiHeal (2009) Ltd.

(CartiHeal), a privately-held company headquartered in Israel and the developer of the proprietary Agili-C™ implant for the treatment of joint surface lesions in traumatic and osteoarthritic joint, and its shareholders.

The agreement provides us with an exclusive option to acquire 100% of CartiHeal’s shares under certain conditions (Call Option), and provides CartiHeal with a put option that would require us to purchase 100% of CartiHeal’s shares under certain conditions (Put Option).

On August 2, 2021, CartiHeal provided us the required evidence of the Agili-C device clinical trial’s success demonstrating 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.

As a result, with Board of Director approval, we deposited $50.0 million into escrow towards the potential purchase price of CartiHeal.

In order to support the completion, if needed, we will purchase an additional 338,089 of CartiHeal Series G Preferred Shares for $5.0 million.

We intend to exercise our Call Option upon FDA approval of the Agili-C device with a label consistent in all respects with the clinical trial.

CartiHeal submitted the non-clinical module of the PMA in January 2021 and submitted the final, clinical module of a Modular PMA in the August 2021 seeking FDA approval.

The review process is progressing according to plan and regulatory feedback received to date from the FDA has been addressed in a timely manner.

We currently believe the required FDA approval will occur in the first half of 2022 and expect to acquire all of the shares of CartiHeal, excluding those we already own, for $314.9 million, payable at closing in the second quarter of 2022.

Upon the achievement of certain sales milestones, an additional $135.0 million could become payable after closing.

In April 2021, we received a letter from the FDA identifying certain deficiencies in the PMA supplement that must be addressed before the FDA can complete its review of the PMA supplement.

The deficiencies include concerns about the data and endpoints from the B.O.N.E.S.

study, and requests for re-analyses of certain data and provision of other information to support the findings.

We are in the process of performing ancillary analysis on the data as requested by the FDA and remain engaged in discussions with the FDA to address the agency’s concerns.

In addition, in December 2021, we completed the follow up of all patients in the scaphoid B.O.N.E.S.

We plan on submitting a PMA supplement for this indication in the fourth quarter of 2022.

We can give no assurance that we will be able to resolve the deficiencies identified by the FDA in a timely manner, or at all.

Consequently, the FDA’s decision on the PMA supplements may be delayed beyond the time originally anticipated.

Moreover, if our responses do not satisfy the FDA’s concerns, the FDA may not approve our PMA supplements seeking to expand the indications for use of EXOGEN in metatarsal and scaphoid fractures as proposed.

We continue to make equity investments in companies that commercialize or could in the future commercialize technologies for sports medicine, wound healing and orthopedic surgical procedures to align with our strategy of expanding our offerings.

Our investments totaling $11 million in 2021 permit, in certain cases, exclusive sales and distribution rights, co-development arrangements, and/or insight into the research and development progress.

COVID-19 pandemic impact

In 2020, the COVID-19 pandemic spread around the world and in the United States.

New variants of the virus have emerged, some of which have shown to be more contagious.

The COVID-19 pandemic has had widespread, rapidly evolving and unpredictable impacts on global society, economies, financial markets and business practices.

Federal and state governments responded by implementing a number of measures designed to prevent or minimize its spread and the ongoing effects of the pandemic, including stay-at-home or shelter-in-place orders, quarantines and closure of all non-essential businesses, social distancing, travel restrictions, border closures, and other measures, which have caused global business disruptions and significant volatility in U.S.

Federal and state governments have implemented measures in an effort to prevent or minimize the spread of the virus, and ongoing effects of the pandemic, including social distancing, travel restrictions, border closures, limitations on public gatherings, mandatory closure or reduced capacity of businesses, work from home, supply chain logistical changes and other measures, which caused global business disruptions and significant volatility in U.S.

and international debt and equity markets.

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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.

It is possible our operations will continue to be impacted in 2021, 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;

• uncertainty regarding the potential for additional waves of the COVID-19 crisis to occur.

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.

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 year ended December 31, 2020, due to a lack of significant delays in payments from customers, decreases in expenses correlating to a related decrease in sales, reduction in travel expenses and the institution of various cost cutting measures provided us with positive cash flow during the year ended December 31, 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 consolidated statement of operations and comprehensive income (loss) for the year ended December 31, 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.

Our business, results of operations and financial condition have been and may continue to be, materially impacted by fluctuations in patient visits and elective procedures and any future temporary cessations of elective procedures 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.

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, the spread of new variants of the virus, new and ongoing measures taken in response to the pandemic, the availability, adoption and effectiveness of vaccines and treatments, the impact on economic activity from the pandemic and actions taken in response and the resulting impact it has on our partners, patients and communities in which we operate, all of which continue to be uncertain.

As of the date of this Annual Report on Form 10-K, the extent to which COVID-19 could materially impact our financial conditions, liquidity or results of operations is uncertain.

To the extent COVID-19 disruptions continue to adversely impact our business, results of operations and financial condition, it may also have the effect of heightening risks relating to our ability to successfully commercialize newly developed or acquired products or therapies, consolidation in the healthcare industry, intensified pricing pressure as a result of changes in the purchasing behavior of hospitals and maintenance of our numerous contractual relationships.

For additional information on the risks we may face as a result of COVID-19, refer to Part I, Item 1A.

Risk Factors – Our business may continue to experience adverse impacts as a result of the COVID-19 pandemic in our 2021 10-K.

Components of our results of operations

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We report sales net of contractual allowances, rebates and returns.

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We sell our OA joint pain treatment and joint preservation products and minimally invasive fracture treatment through our direct sales team, who manage and maintain the sales relationship with healthcare providers, distribution centers or specialty pharmacies.

We sell our products primarily through our direct sales team, who manage and maintain the sales relationship with healthcare providers, distribution centers or specialty pharmacies.

Certain surgical products are sold through independent distributors to hospitals so our neurosurgeon and orthopedic spine surgeon customers can use them in procedures.

In certain international markets, we also sell to independent distributors on prearranged business terms, who manage or maintain the sales relationship with their physician customers.

Refer to Note 2.

Summary of significant accounting policies to our Notes to consolidated financial statements for further information 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 customer and, in the case 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 our BGS products to hospitals so our neurosurgeon and orthopedic spine surgeon customers can use them in procedures.

We recognize revenue based upon consumption in a surgical procedure.

Summary of significant accounting policies to our Notes to consolidated financial statements for further information.

We generally recognize revenue at the point in time when control is transferred to the customer, for example, when the product are shipped to the customer, when the patient has accepted the product or upon consumption in a surgical procedure.

Cost of sales

Our cost of sales primarily consist of costs of products purchased from our third-party suppliers, 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.

Our cost of sales primarily consist of costs of products purchased from our third-party suppliers, direct labor and allocated overhead associated with manufacturing and assembly, 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 manufactured by or obtained from third-party suppliers primarily located in Japan, Switzerland, Sweden and the United States.

Certain products are 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.

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We expect net sales and product mix to vary quarter by quarter and therefore our gross profit will likely fluctuate from quarter to quarter.

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Selling, general and administrative expense

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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 to address the standards and requirements applicable to public companies.

We expect to incur additional annual selling, 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 participants of shares of Class A common stock upon settlement of their awards, which settlement is expected to take place twelve months after the date of such termination.

However, over time, as we grow our net sales, we expect selling, general and administrative expenses to decline as a percentage of net sales.

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Research and development expense

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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 study, which began enrollment in 2018 and is aimed at broadening the label of our Exogen system to include a broader range of bones that may be treated as fresh fractures in predisposed patients at risk of nonunion.

In addition, we are planning preclinical and animal model studies for MOTYS and PROcuff.

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Restructuring costs primarily consist of employee severance, legal, consulting and temporary labor expenses.

During the periods presented, restructuring costs were associated with headcount reductions in our international business to improve operating efficiency.

During the periods presented, restructuring costs were associated in 2021 with headcount reductions related to 2021 acquisitions and in 2020 with restructuring efforts 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 software as well as leasehold improvements, furniture, fixtures, machinery and equipment.

Depreciation expense primarily consists of depreciation of computer equipment and software as well as demonstration and consignment inventory, leasehold improvements, furniture, fixtures, machinery and equipment.

Amortization expense primarily consists of amortization expense related to customer relationships and other intangible assets.

Interest expense

Interest expense primarily consists of interest on our indebtedness, which currently consists of our term loan and revolving credit facility, which was incurred pursuant to the 2019 Credit Agreement.

Interest expense primarily consists of interest on our indebtedness, which currently consists of our term loan and revolving credit facility, which was incurred pursuant to the Credit Agreement, as amended.

We have entered into interest rate swaps to limit our exposure to changes in the variable interest rate on our term loan.

Interest expense includes any fair value gain or losses on these swaps.

Interest expense also includes the revaluation for the liability related to our Equity Participation Right, or EPR, Unit.

Interest expense also includes the revaluation for the liability related to our Equity Participation Right (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 and was settled in cash as part of our IPO.

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.

Other expense (income)

Other expense (income) 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 related to foreign currency denominated cash, liabilities and intercompany receivables and payables.

Other (income) expense may also include certain nonrecurring items.

Other expense (income) may also include certain nonrecurring items.

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Income tax expense

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or foreign tax purposes and file tax returns in their local jurisdictions.

Bioventus Inc.

is subject to U.S.

federal, state and local income taxes at the prevailing corporate tax rates with respect to our taxable income.

In addition to tax expenses, we are obligated to make payments under the TRA, which could be significant.

The TRA, obligates us to pay to the Continuing LLC Owner 85% of the amount of any realized tax benefits, (or in some circumstances are deemed to realize) resulting from (i) increases in the tax basis of assets of BV LLC as a result of (a) any future redemptions or exchanges of LLC Interests and (b) certain distributions (or deemed distributions) by BV LLC and (ii) certain other tax benefits arising from our making payments under the TRA.

For more information, see Part II.

Financial Statements—Note 11.

Income Taxes to our consolidated financial statements for additional information.

Income tax expense includes U.S.

federal and state and international income taxes, including certain taxes applicable to BV LLC and U.S.

federal income taxes for one of our subsidiaries that is treated as a corporation for U.S.

federal tax purposes.

federal, state and international income taxes, including certain taxes applicable to BV LLC.

Certain income and expense items in income tax returns are not reported in the same year as financial statements.

2 unchanged sentences

We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense.

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Bioventus Inc.

is subject to U.S.

federal, state and local income taxes at the prevailing corporate tax rates with respect to our taxable income.

In addition to tax expenses, we are obligated to make payments under the TRA, which could be significant.

Certain Relationships and Related Transactions, and Director Independence —Bioventus LLC Agreement—LLC Interest Redemption Right, and (b) certain distributions (or deemed distributions) by BV LLC and (ii) certain other tax benefits arising from our making payments under the TRA.

For more information, see Part III, Item 13.

Certain Relationships and Related Transactions, and Director Independence —Tax Receivable Agreement.

Non-GAAP Financial Measures - Adjusted EBITDA

We present 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 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 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 as net income (loss) from continuing operations before depreciation and amortization, provision of income taxes and interest expense, adjusted for the impact of certain cash, non-cash and other items that we do not consider in our evaluation of ongoing operating performance.

We define Adjusted EBITDA as net income from continuing operations before depreciation and amortization, provision of income taxes and interest expense, adjusted for the impact of certain cash, non-cash and other items that we do not consider in our evaluation of ongoing operating performance.

These items include 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, acquisition and integration costs, inventory step-up costs, equity loss in non-consolidated investments, change in fair value of contingent consideration, impairments related to variable interest entity, foreign currency impact and other 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 is primarily based on a ratio of net sales by segment to total consolidated net sales.

See table within Results from continuing operations for a reconciliation of net income from continuing operations to Adjusted EBITDA.

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.

See table within results of operations for a reconciliation of net income to Adjusted EBITDA.

Results of Operations

The following table sets forth components of our condensed consolidated statements of operations from continuing operations as a percentage of net sales for the periods presented:

The following table sets forth components of our consolidated statements of operations as a percentage of net sales for the periods presented:

Years Ended December 31,

1 unchanged sentence

Cost of sales (including depreciation and amortization)

29.7 % 27.3 %

Gross profit 70.3 % 72.7 %

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Research and development expense 4.4 % 3.5 %

Change in fair value of contingent consideration 0.2 % — %

Restructuring costs 0.6 % 0.2 %

Depreciation and amortization 2.0 % 2.3 %

Impairment of variable interest entity assets 1.3 % — %

Operating income 2.8 % 6.6 %

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The following table presents a reconciliation of net income from continuing operations to Adjusted EBITDA for the periods presented:

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

Years Ended December 31,

(in thousands) 2021 2020

Net income from continuing operations $ 14,722 $ 8,113

Net income $ 9,586 $ 14,722

Income tax (benefit) expense (1,966) 1,192

Interest expense 1,112 9,751

Depreciation and amortization (a)

34,875 28,643

Income tax expense 1,192 1,576

Interest expense 9,751 21,579

Equity compensation (b)

Acquisition and related costs (b)

Restructuring and succession charges (c)

Impairments related to variable interest entity (d)

Equity compensation (e)

(4,512) 10,103

COVID-19 benefits, net (c)

Succession and transition charges (d)

Restructuring costs (e)

Foreign currency impact (f)

COVID-19 benefits, net (f)

Equity loss in unconsolidated investments (g)

Other non-recurring costs (h)

Foreign currency impact (h)

Other items (i)

Adjusted EBITDA $ 80,759 $ 72,443

(a) Includes for the years ended December 31, 2020 and 2019 depreciation and amortization of $21.2 million and $22.4 million in cost of sales and also includes $7.4 million and $7.9 million, respectively, presented 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 CARES Act offset by additional cleaning and disinfecting expenses and contract termination fees for canceled events.

(d) Primarily represents costs related to the CEO transition.

(e) Represents costs related to a shift from direct to an indirect distribution model in our International business to improve performance.

(a) Includes depreciation and amortization of $26,471 and $21,169 in cost of sales and $8,363 and $7,439 in operating expenses, with the balance in research and development, presented in the consolidated statements of operations and comprehensive income.

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

(c) Costs incurred during 2021 were the result of adopting acquisition related restructuring plans to reduce headcount, reorganize management structure, consolidate certain facilities, and costs related to executive transitions.

Costs incurred during 2020 related to a shift from direct to an indirect distribution model in our International business to improve performance.

Various international subsidiaries were dissolved and/or merged into other BV LLC entities.

(f) Foreign currency impact represents realized and unrealized gains and losses from fluctuations in foreign currency and is included within other (income) loss in the consolidated statements of operations and comprehensive income (loss).

(g) Represents our share in the losses of CartiHeal for the year ended December 31, 2020.

(h) Other non-recurring items in 2020 includes settlement and legal costs of $1.9 million with the OIG.

The remaining activities in 2020 and the balance in 2019 are primarily comprised of charges associated with potential strategic transactions, such as potential acquisitions and preparing to become a public company, primarily accounting and legal fees.

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

(e) The year ended December 31, 2021 includes compensation expense resulting from awards granted under the Company’s equity based compensation plans in effect after its IPO.

These expenses were entirely offset and resulted in income due to the change in fair market value of the BV LLC Phantom Profits Interest Plan (Phantom Plan) accrued liability due to expected pricing with our IPO.

The year ended December 31, 2020 includes compensation expense resulting from the BV LLC’s management incentive plan and Phantom Plan as well as the change in fair market value of the associated liability due to the impact of the COVID-19 pandemic on our business.

(f) Includes income resulting from the CARES Act offset by additional cleaning and disinfecting expenses and contract termination fees for canceled events.

(g) Includes CartiHeal equity investment losses.

(h) Includes realized and unrealized gains and losses from fluctuations in foreign currency.

(i) Other items primarily includes charges associated with strategic transactions, such as potential acquisitions, debt retirement and modification costs and public company preparation costs, which primarily includes accounting and legal fees.

We present Adjusted EBITDA, a non-GAAP financial measure, because we believe it is a useful indicator that management uses as a measure of operating performance as well as for planning purposes, including the preparation of our annual operating budget and financial projections.

We believe that Adjusted EBITDA is useful to our investors because it is frequently used by securities analysts, investors and other interested parties in their evaluation of the operating performance of companies in industries similar to ours.

We define Adjusted EBITDA as net income before depreciation and amortization, provision of income taxes and interest expense, adjusted for the impact of certain cash, non-cash and other items that we do not consider in our evaluation of ongoing operating performance.

These items include acquisition and related costs, restructuring and succession charges, impairments related to variable interest entity, equity compensation, COVID-19 expense (benefit), equity loss in unconsolidated investments, foreign currency impact, and other items.

Adjusted EBITDA by segment is comprised of net sales and costs directly attributable to a segment, as well as an allocation of corporate overhead costs primarily based on a ratio of net sales by segment to total consolidated net sales.

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Years Ended December 31, Change

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Net Sales $ 430,898 $ 321,161 $ 109,737 34.2 %

Net sales decreased $11.4 million, or 3.7%, for year ended December 31, 2020, compared to the year ended December 31, 2019.

The changes in net sales by vertical are as follows:

• Minimally invasive fracture treatment

($11.5) million

• OA joint pain treatment and joint restoration

($6.3) million

• Bone graft substitutes

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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 the COVID-19 pandemic as well as 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 sales increased $93.9 million, or 32.0%, of which acquisitions contributed $39.4 million.

Revenue also increased due to volume growth as revenue in 2020 was negatively affected by the economic impact of the COVID-19 pandemic.

These increases were partially offset by more treatments being sold under contracts with major insurers at lower prices.

Revenue increases by vertical were:

i) Pain Treatments—$44.5 million;

ii) Restorative Therapies—$26.4 million;

and iii) Surgical Solutions—$23.0 million.

International

Net sales decreased $7.6 million, or 21.7%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to a decline in order volumes due to the disruption caused by the COVID-19 pandemic.

Net sales increased $15.9 million, or 57.8%, of which acquisitions contributed $10.0 million.

Revenue also increased due to sales volume growth, as revenue in 2020 was negatively affected by the economic impact of the COVID-19 pandemic.

Gross profit and gross margin

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Total $ 302,706 $ 233,519 $ 69,187 29.6 %

Years Ended December 31, Change

Gross margin Years Ended December 31,

2021 2020 Change

70.6 % 73.1 % (2.5 %)

International 66.9 % 69.0 % (2.1 %)

Consolidated 72.7 % 73.3 % (0.6 %)

Gross profit decreased $10.4 million, or 4.6%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the decline in net sales above described.

Manufacturing variances created by maintaining consistent production levels in a period of low demand coupled with idle time attributed to the COVID-19 pandemic caused a slight decrease of 0.6% in gross margin during 2020.

Total 70.3 % 72.7 % (2.4 %)

Gross profit increased $59.1 million, or 27.6%, primarily due to the increase in net sales.

Gross margin decreased due to product mix including products introduced as a result of acquisitions.

Gross margin was also negatively impacted by 1.3% from additional amortization of acquisition related assets in 2021 compared with the prior year.

In addition, we have experienced higher expense related to supply chain delays.

International

Gross profit decreased $5.3 million, or 21.9%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the decrease in sales from the disruption caused by COVID-19 pandemic.

Gross profit increased $10.1 million, or 53.1%, primarily due to the increase in net sales.

Gross margin decreased due to product mix including products introduced as a result of acquisitions.

Selling, general and administrative expense

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Selling, general and administrative expense $ 254,253 $ 193,078 $ 61,175 31.7 %

Selling, general and administrative expense declined $5.4 million, or 2.7%, for the year ended December 31, 2020, compared to the year ended December 31, 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

• Lower legal and accounting expenses, which were higher in 2019 due to the OIG matter discussed in Note 12.

Commitment and contingencies within Part II, Item 8.

Financial Statements and Supplementary data

These items were partially offset by the following increases:

• Succession and transition charges associated with the transition to our new Chief Executive Officer

• Costs and services related to strategic transactions, product recall expenses and other non-recurring charges

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Research and development expense

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Selling, general and administrative expenses increased $61.2 million, or 31.7%, primarily due to:

i) the impact of the COVID-19 pandemic on our business in 2020 compared to normalized spending in 2021;

ii) costs incurred as a result of being a public company in 2021 and iii) acquisitions.

The rise in expenses were primarily within increased compensation related expenses of $38.0 million, increased equity compensation excluding the change in fair value of $16.0 million, increased legal and accounting expenses of $13.5 million, increased consulting and travel related expenses of $11.0 million and increased corporate insurance and employee health insurance of $7.5 million.

These increases were partially offset by a higher change in fair value of our accrued equity-based compensation resulting in an increased net recovery of $29.9 million in expense compared to the prior year.

The change in fair value for 2021 was due to adjustments to reflect the difference between the expected pricing from the then-pending IPO and the actual offering price.

The change in fair value for 2020 was due to the impact of the COVID-19 pandemic on our business.

Research and development expenses

Years Ended December 31, Change

1 unchanged sentence

Research and development expense $ 19,039 $ 11,202 $ 7,837 70.0 %

Research and development expense increased $0.1 million, or 1.3%, for the year ended December 31, 2020, compared to the year ended December 31, 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 COVID-19 pandemic.

Research and development expense increased by $7.8 million, or 70.0%, partially due to our 2021 acquisitions contributing an additional $3.8 million as well as more normalized spending versus our cost reduction efforts implemented during 2020 as a result of the COVID-19 pandemic.

In addition, compensation related expenses increased $3.1 million and equity compensation excluding the change in fair value increased by $1.2 million in 2021 compared to prior year.

These increases were partially offset by a higher change in fair value of our accrued equity-based compensation resulting in an increased net recovery of $2.0 million in expense.

The change in fair value during 2021 was due to adjustments to reflect the difference between the expected pricing from the then-pending IPO and the actual offering price.

The change in fair value during 2020 was due to the impact of the COVID-19 pandemic on our business.

Change in fair value of contingent consideration

The $0.8 million change in fair value of Bioness Acquisition contingent consideration for the year ended December 31, 2021 resulted from the change in present value of discounted cash flows due to the passage of time.

Depreciation and amortization

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Depreciation and amortization $ 8,363 $ 7,439 $ 924 12.4 %

Depreciation and amortization during the year ended December 31, 2020 remained consistent with the year ended December 31, 2019, as it slightly decreased $0.5 million, or 5.9%.

Depreciation and amortization increased primarily due to acquisitions.

Impairment of variable interest entity assets

We terminated the Harbor Collaboration Agreement on June 8, 2021 which resulted in a $5.7 million impairment on Harbor’s long-lived asset balances, of which $5.2 million was recorded in loss attributable to noncontrolling interest.

Other expense (income)

2 unchanged sentences

Interest expense $ 1,112 $ 9,751 $ (8,639) (88.6 %)

Other (income) loss $ (4,428) $ (75) $ (4,353) NM

Interest expense decreased $11.8 million, or 54.8%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to decreased debt interest resulting from refinancing our debt in December 2019 as well as the decline in interest rates.

This decrease was partially offset with an increase of $1.6 million primarily resulting from the decline in value of our interest rate swap.

Other income during year ended December 31, 2020 was primarily the result of receiving Provider Relief Fund payments of approximately $4.1 million in the aggregate pursuant to the CARES Act.

Other expense (income) $ 3,329 $ (4,428) $ 7,757 (175.2 %)

Interest expense decreased $8.6 million due to the following:

i) the change in fair value of our interest rate swap resulting in interest income during 2021 compared to interest expense in 2020;

ii) the settlement of our equity participation right (EPR) liability during 2021 resulting in interest income compared to EPR interest expense in 2020;

and iii) decrease in interest from a lower outstanding credit facility balance during 2021.

Other expense (income) increased $7.8 million primarily due to i) receiving $4.1 million in Provider Relief Funds in 2020 under the CARES Act;

ii) an impairment of $1.4 million from our Harbor investment in 2021 and iii) an increase of $1.4 million in net losses resulting from our equity investment in CartiHeal.

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Income tax expense

1 unchanged sentence

(in thousands, except for percentage) 2021 2020 $ %

Income tax expense $ 1,192 $ 1,576 $ (384) (24.4 %)

Income tax (benefit) expense $ (1,966) $ 1,192 $ (3,158) (264.9) %

Effective tax rate 25.8 % 7.5 % 18.3 %

Income tax expense decreased $0.4 million, or 24.4%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the change in income from continuing operations before income taxes.

Our change in effective tax rate is the result of BV 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.

We incurred an income tax benefit in 2021 primarily due to the change in structure resulting from our IPO and associated Up C partnership structure.

Noncontrolling interest

Years Ended December 31, Change

(in thousands, except for percentage) 2021 2020 $ %

Continuing LLC Owner $ 4,124 $ — $ 4,124 NM

Harbor 5,665 1,689 3,976 NM

Total $ 9,789 $ 1,689 $ 8,100

NM = Not meaningful

Subsequent to the IPO and Transactions, we are the sole managing member of BV LLC.

We have a majority economic interest, the sole voting interest in, and control the management of BV LLC.

As a result, we consolidate the financial results of BV LLC and report a non-controlling interest representing the portion owned by Smith & Nephew, Inc.

(Continuing LLC Owner).

Since the IPO until the Misonix Acquisition, the Continuing LLC Owner non-controlling interest was 27.8%.

After the Misonix Acquisition it decreased to 21.0%.

We stopped consolidating Harbor upon the termination of the Collaboration Agreement, as we ceased being the primary beneficiary because we no longer had the power to direct Harbor’s significant activities.

Prior to the deconsolidation, our partial ownership and exclusive Collaboration Agreement with Harbor resulted in loss attributable to noncontrolling interest through June 8, 2021.

The $4.0 million increase in loss was primarily due to the $5.7 million impairment on Harbor’s long-lived asset balances of which $5.2 million is attributable to the non-controlling interest.

This increase was partially offset by lower Harbor losses resulting from only one quarter in 2021 versus four quarters in 2020.

Segment Adjusted EBITDA

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$ 70,640 $ 69,252 $ 1,388 2.0 %

International $ 3,191 $ 7,515 $ (4,324) (57.5 %)

Adjusted EBITDA decreased $2.4 million, or 3.4%, during the comparable time periods.

The decline was the result of decreased gross profit, excluding depreciation and amortization in cost of sales, due to the 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.

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International $ 10,119 $ 3,191 $ 6,928 NM

Adjusted EBITDA increased $1.4 million or 2.0% primarily due to a $59.1 million increase in gross profit resulting from the increase in sales.

This increase was partially offset by the increase in compensation related charges previously discussed, operating costs of acquired companies, as well as travel related expenses and public company costs.

International

Adjusted EBITDA decreased $4.3 million, or 57.5%, during the comparable 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 the economic impact of COVID-19, which was partially offset by lower expenses resulting from doing business virtually, reduced compensation related expenses and various other cost-reduction initiatives.

Adjusted EBITDA increased $6.9 million primarily due to a $10.1 million increase in gross profit resulting from the increase in sales.

This increase was partially offset by the increase in compensation related charges previously discussed as well as an increase in consulting expenses.

Liquidity and Capital Resources

Sources of liquidity

Our principal liquidity needs have historically been for acquisitions, working capital, research and development, clinical trials, and capital expenditures.

We expect these needs to continue as we develop and commercialize new products and further our expansion into international markets.

We believe that our existing cash and cash equivalents, borrowing capacity under our revolving credit facility, cash flow from operations, and net proceeds from our IPO will be enough to meet our anticipated cash requirements for at least the next twelve months.

We may require additional liquidity as we continue to execute our business strategy.

Negative impacts to our liquidity would 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 utilize our products, increased pricing pressures resulting from intensifying competition and cost increases, as well as general economic and industry factors.

We believe that our existing cash and cash equivalents, borrowing capacity under our revolving credit facility and cash flow from operations will be enough to meet our anticipated cash requirements for at least the next twelve months.

We anticipate that to the extent that we require additional liquidity, we will obtain funding through the incurrence of other indebtedness, additional equity financings or a combination of these potential sources of liquidity.

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On February 16, 2021, in connection with our IPO, we issued and sold 9,200,000 shares of our Class A common stock at a price to the public of $13.00 per share, resulting in gross proceeds to us of approximately $119.6 million, before deducting the underwriting discount, commissions and estimated offering expenses payable by us.

We are a holding company and have no material assets other than its ownership of LLC Interests and no independent means of generating revenue.

The limited liability company agreement of BV LLC provides for the payment of certain distributions to the Continuing LLC Owner and us in amounts sufficient to cover the income taxes imposed on such members with respect to the allocation of taxable income from BV LLC as well as to cover our obligations under the Tax Receivable Agreement (TRA).

Additionally, in the event we declare any cash dividend, we intend to cause BV LLC to make distributions to us, in an amount sufficient to cover such cash dividends declared by us.

Bioventus Inc.

is a holding company and has no material assets other than the ownership of LLC Interests and has no independent means of generating revenue.

Deterioration in the financial condition, earnings, or cash flow of BV LLC and its subsidiaries for any reason could limit or impair their ability to pay such distributions.

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Subsidiaries of BV LLC are generally subject to similar legal limitations on their ability to make distributions to BV LLC.

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 TRA for any reason, such payments generally will be deferred and will accrue interest until paid;

provided, however, that nonpayment for a specified period may constitute a material breach of a material obligation under the TRA and therefore accelerate payments due under the TRA.

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In addition, under the TRA, we are required to make cash payments to the Continuing LLC Owner equal to 85% of the tax benefits, if any, that we actually realize (or in certain circumstances are deemed to realize), as a result of (1) increases in the tax basis of assets of BV LLC resulting from (a) any future redemptions or exchanges of LLC Interests described under Part III, Item 13.

Certain Relationships and Related Transactions, and Director Independence— Bioventus LLC Agreement-LLC Interest Redemption Right, and (b) certain distributions (or deemed distributions) by BV LLC and (2) certain other tax benefits arising from payments under the TRA.

Bioventus Inc., as the managing member, causes BV LLC to make cash distributions to the owners of LLC Interests in an amount sufficient to (i) fund tax obligations in respect of allocations of taxable income from BV LLC and (ii) cover Bioventus Inc.

operating expenses, including payments under the Tax Receivable Agreement (TRA).

Future cash requirements

The following table summarizes certain estimated future cash requirements under our various contractual obligations committed to as of December 31, 2021 in total and disaggregated into current and long-term obligations.

(in thousands)

Long-term debt (a)

$ 18,038 $ 342,712 $ 360,750

Interest payments on long-term debt (a)

7,989 24,568 32,557

Operating lease liabilities (b)

3,504 15,038 18,542

Purchase commitments (c)

22,486 46,686 69,172

$ 52,017 $ 429,004 $ 481,021

(a) Refer to Note 5.

Financial Instruments in Part II, Item 8.

Financial Statements and Supplementary Data in this Annual Report for further information regarding long-term debt obligations.

(b) Refer to Note 12.

Commitment and contingencies in Part II, Item 8.

Financial Statements and Supplementary Data in this Annual Report for further information regarding operating lease liabilities.

(c) Amounts that are contractually committed to as of December 31, 2021 related to multi-year exclusive supply agreements.

Generally, our purchase obligations under these supply agreements are based on forecasted requirements, subject in some cases to an annual contractual minimum.

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Other cash requirements

We enter into contracts in the normal course of business with various third parties for development, collaboration and other services for operating purposes.

These contracts provide for termination upon notice.

Payments due upon cancellation generally consist only of payments for services provided or expenses incurred, including non-cancellable obligations of our service providers, up to the date of cancellation.

Certain agreements include contingent events that upon occurrence would require payment.

For information regarding Commitments and Contingencies, refer to Note 12.

Commitment and contingencies in Part II, Item 8.

Financial Statements and Supplementary Data in this Annual Report for further information regarding other matters.

The BV LLC Agreement provides for the payment of certain distributions to the Continuing LLC Owner in amounts sufficient to cover the income taxes imposed with respect to the allocation of taxable income from BV LLC as well as obligations under the TRA.

Under the TRA, we are required to make cash payments to the Continuing LLC Owner equal to 85% of the tax benefits, if any, that we actually realize (or in certain circumstances are deemed to realize), as a result of (1) increases in the tax basis of assets of BV LLC resulting from (a) any future redemptions or exchanges of LLC Interests, and (b) certain distributions (or deemed distributions) by BV LLC and (2) certain other tax benefits arising from payments under the TRA.

We expect the amount of the cash payments required to be made under the TRA will be significant.

1 unchanged sentence

Any payments made by us to the Continuing LLC Owner under the TRA will generally reduce the amount of overall cash flow that might have otherwise been available to us.

Cash and cash equivalents, as of December 31, 2020, totaled $86.8 million compared to $64.5 million at December 31, 2019.

Changes in cash are as follows:

To the extent that we are unable to make payments under the TRA for any reason, such payments generally will be deferred and will accrue interest until paid;

provided, however, that nonpayment for a specified period may constitute a material breach of a material obligation under the TRA and therefore accelerate payments due under the TRA.

We entered into a lease agreement during November 2021 to expand our current manufacturing operations in Memphis, Tennessee.

The above table does not reflect the future cash requirements related to this lease.

The lease term is 10 years and occupancy is expected to begin in July 2022, contingent upon certain improvements.

In connection with this lease, we expect to make cash payments of $769 during the year ended December 31, 2022, and aggregate cash payments of $16,076 thereafter.

Contingent events requiring significant payments that we anticipate will occur in 2022 include the exercise of our Call Option upon FDA approval of the Agili-C device discussed above in the CartiHeal strategic transaction.

We intend to finance the acquisition through additional debt.

As described in Part I, Item 1.

Business , we currently believe the required FDA approval will occur in the first half of 2022 and expect to acquire all of the shares of CartiHeal, excluding those we already own, for $314.9 million, payable at closing which is anticipated to occur in the second quarter of 2022.

Upon the achievement of certain sales milestones, an additional $135.0 million could become payable after closing.

Information regarding cash flows

Cash, cash equivalents and restricted cash as of December 31, 2021 totaled $99.2 million compared to $86.8 million as of December 31, 2020.

The increase in cash was primarily due to the following:

Years Ended December 31, Change

(in thousands, except for percentage) 2021 2020 $ %

Consolidated statement of cash flow data:

Net cash provided by (used in):

Operating activities from continuing operations $ 72,199 $ 42,545 $ 29,654 69.7 %

Investing activities from continuing operations (20,672) (7,912) (12,760) 161.3 %

Financing activities (29,569) (10,951) (18,618) 170.0 %

Discontinued operations (228) (1,832) 1,604 (87.6) %

Effect of exchange rate changes on cash and

cash equivalents 589 (104) 693 NM

Net change in cash and cash equivalents $ 22,319 $ 21,746 $ 573

Net cash from operating activities - continuing operations $ 22,991 72,199 $ (49,208) (68.2 %)

Net cash from investing activities - continuing operations (283,760) (20,672) (263,088) NM

Net cash from financing activities 273,371 (29,569) 302,940 NM

Net cash from discontinued operations — (228) 228 (100.0 %)

Effect of exchange rate changes on cash (228) 589 (817) (138.7 %)

Net change in cash, cash equivalents and restricted cash $ 12,374 $ 22,319 $ (9,945) (44.6 %)

NM = Not Meaningful

Operating activities

Cash flows from operating activities from continuing operations increased $29.7 million during the year ended December 31, 2020 compared to year ended December 31, 2019 due to collections on accounts receivables staying strong while selling, general and administrative expenses declined, partially offset by the timing of rebate payments.

We experienced lower travel expense payments resulting from the near halting of all travel due to the COVID-19 pandemic, 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 year ended December 31, 2020 due to the December 2019 refinancing.

Net cash from operating activities decreased $49.2 million during 2021, primarily due to completed acquisitions and resulting integration costs, higher employee compensation, and increased general and administrative expense as a result of becoming a public company.

These decreases were partially offset by increased collections from higher sales and the economic impact of COVID-19 during 2020.

Investing activities

Cash flows used in investing activities increased $12.8 million during the year ended December 31, 2020 compared to year ended December 31, 2019 primarily due to $16.6 million in payments for the 2020 CartiHeal investments and an increase of $1.8 million in capital expenditures due to software and technology upgrades.

These investing cash outflows were partially offset by the absence of payments for distribution rights in 2020 compared to $6.0 million for the purchases of distribution rights during 2019.

Cash flows used in investing activities increased $263.1 million, primarily due to the acquisitions of Misonix and Bioness as well as $3.3 million in capital expenditures.

These increases were partially offset by a $3.1 million decrease in investments.

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Financing activities

Cash flows used in financing activities increased $18.6 million during the year ended December 31, 2020 compared to the year ended December 31, 2019 primarily due to a $10.7 million increase in distribution to members as well as the $6.1 million increase in debt payments.

For information regarding Commitments and Contingencies, refer to Note 12.

Commitment and contingencies in Part II, Item 8.

Financial Statements and Supplementary Data in this Annual Report for further information regarding other matters.

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On December 6, 2019, we entered into the 2019 Credit Agreement.

The 2019 Credit Agreement is comprised of our $200.0 million term loan and our $50.0 million revolving credit facility.

All obligations under the 2019 Credit Agreement are guaranteed by certain of our wholly owned domestic subsidiaries and secured by substantially all our and the guarantors’ assets.

The term loan and revolving credit facility mature on December 6, 2024.

The 2019 Credit Agreement contains various restrictive covenants, including a quarterly covenant not to exceed a consolidated leverage ratio of 3.50 to 1.00 and an interest coverage ratio of 3.00:1.00 for the prior four consecutive quarters.

The leverage and interest coverage ratios are based on Consolidated EBITDA as defined in the 2019 Credit Agreement, which includes several differences from Adjusted EBITDA as calculated in this Annual Report.

Consolidated EBITDA as defined in the 2019 Credit Agreement permits, among other things, the exclusion of (1) certain extraordinary, unusual and/or non-recurring expenses, some of which are subject to an aggregate cap, including but not limited to severance, acquisitions, dispositions, debt refinancing/amendment and IPO-related, (2) foreign currency gains/losses recognized in the statement of operations and (3) franchise, excise and property taxes recognized in the statement of operations.

Cash flows provided by financing activities increased $302.9 million, primarily due to the $257.5 million in proceeds from the issuance of long-term debt, $107.8 million in net proceeds from the issuance of Class A common stock sold during our IPO and a $19.5 million decrease in net partner distributions.

These increases were partially offset by a $81.3 million increase in debt payments primarily due to the $80.0 million debt prepayment in conjunction with the Misonix Acquisition and the scheduled escalation in quarterly principal payments.

On December 6, 2019, we entered into the 2019 Credit Agreement and during 2021 we executed two amendments in connection with the Misonix Acquisition (as amended, the Amended 2019 Credit Agreement).

The Amended 2019 Credit Agreement is comprised of our $360.8 million term loan and our $50.0 million revolving credit facility.

All obligations under the Amended 2019 Credit Agreement are guaranteed by certain of our wholly owned domestic subsidiaries, are secured by substantially all our and the guarantors’ assets and mature on October 29, 2026.

On October 29, 2021, in conjunction with the Misonix Acquisition, we prepaid $80.0 million on the pre-amendment term loan.

On the same date, we used the $262.0 million in proceeds from an amendment to the 2019 Credit Agreement to finance the $223.1 million in Misonix Acquisition cash consideration, transaction costs of $8.0 million and fees and expenses associated with the amendment totaling $4.5 million.

The remaining $26.3 million will be used for ongoing operations.

The Amended 2019 Credit Agreement contains various restrictive covenants, including a quarterly covenant not to exceed a consolidated leverage ratio of 3.50 to 1.00 (with the option to increase the leverage ratio up to 4.00 to 1.00 after a permitted acquisition) and an interest coverage ratio of 3.00 to 1.00 for the prior four consecutive quarters.

The leverage and interest coverage ratios are based on Consolidated EBITDA as defined in the Amended 2019 Credit Agreement, which includes several differences from Adjusted EBITDA as calculated in this Annual Report.

Consolidated EBITDA as defined in the Amended 2019 Credit Agreement permits, among other things, the exclusion of (1) certain extraordinary, unusual and/or other expenses, some of which are subject to an aggregate cap, including but not limited to severance, acquisitions, dispositions, debt refinancing/amendment and IPO-related, (2) foreign currency gains/losses recognized in the statement of operations and (3) franchise, excise and property taxes recognized in the statement of operations.

The restrictive covenants include limitations on (1) the declaration or payment of certain distributions on or in respect of our equity 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 our business and organizational documents.

As of December 31, 2020, we complied with all covenants under the 2019 Credit Agreement and there was $190.0 million of outstanding borrowings under the term loan.

As of December 31, 2021, we were in compliance with all covenants under the Amended 2019 Credit Agreement and there was $357.7 million of outstanding borrowings under the term loan.

Refer to Note 5.

Financial instruments in Part II, Item 8.

Financial Statements and Supplementary Data in this Annual Report for repayment obligations.

We have one nominal outstanding letter of credit.

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.

Our revolving credit facility had $49.9 million in borrowing capacity as of December 31, 2021.

Off-balance sheet arrangements

We do not have any off-balance sheet arrangements.

Contractual Obligations

Our contractual obligations as of December 31, 2020 were as follows:

Payments Due by Period

Contractual Obligations (in thousands)

Long-term debt obligations $ 15,000 $ 35,000 $ 140,000 $ — $ 190,000

Interest on long-term debt obligations 4,606 8,073 3,139 — 15,818

Operating lease obligations 1,960 3,955 4,232 5,921 16,068

Purchase obligations 19,655 25,920 25,920 — 71,495

$ 41,221 $ 72,948 $ 173,291 $ 5,921 $ 293,381

The table above does not include certain obligations as follows:

• commitments under our multi-year exclusive supply agreements for our OA products except for those amounts that are contractually committed as of December 31, 2020.

Our purchase obligations under these supply agreements are generally based upon our forecasted requirements, subject in some cases to a contractual minimum per annum;

• 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;

• 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.

Recent accounting pronouncements

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Financial Statements and Supplementary Data for further information regarding recently adopted and proposed accounting pronouncements.

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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.

Presently, as a newly public company, our management is not 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 either an “emerging growth company” or a “non-accelerated filer,” as such terms are defined by Rule 12b-2 of the Exchange Act.

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Critical accounting policies and estimates

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Sale of products

We derive revenue primarily from the sale of our OA joint pain treatment and joint preservation products, BGSs and minimally invasive fracture treatment.

We sell these products directly to healthcare institutions, patients, distributors and dealers.

We derive revenue primarily from product sales within our (i) Pain Treatments portfolio, which includes osteoarthritic (OA) joint pain treatments, which are hyaluronic acid (HA), viscosupplementation therapies and peripheral nerve stimulation products (ii) Surgical Solutions, which includes bone graft substitutes, tissue resection, ultrasonic bone cutting and sculpting systems and other surgical products, and (iii) Restorative Therapies, which includes minimally invasive fracture treatments, rehabilitation and wound products.

We sell products directly to healthcare institutions, patients, distributors and dealers.

We 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 recognize revenue generally 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 taxes collected from customers and remitted to governmental authorities from revenues.

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 customer contracts and other indirect customer contracts relating to the sale of products.

We establish reserves for the estimated 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 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.

Where appropriate, these estimates take into consideration a range of possible outcomes, which are probability-weighted for relevant factors such as our historical experiences, 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.

There were no adjustments arising from the change in estimates of variable consideration for the years ended December 31, 2020 and 2019.

OA joint pain treatment and joint preservation

There were no significant adjustments arising from the change in estimates of variable consideration for the years ended December 31, 2021 and 2020.

Pain Treatments

Revenue from customers such as healthcare providers, distribution centers or specialty pharmacies is recognized at the point in time when control is transferred to the customer, typically upon shipment.

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We record 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 chargebacks requested for each distributor.

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Discounts and rebates

We offer retrospective discounts and rebates linked to the volume of purchases which may increase at negotiated thresholds within a contract-buying period.

Discounts and gross-to-net deductions

We offer retrospective discounts and gross-to-net deductions 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 a reduction to accounts receivable for the estimated discount and rebate at the most likely amount the customer will earn, based on historical buying trends and forecasted purchases.

Bone 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.

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Surgical Solutions

The majority of our product sales related to bone graft substitutes 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.

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An unconditional obligation to pay for the product does not exist until the customer consumes it.

Minimally invasive fracture treatment

We recognize revenue from third-party payers, such as governmental agencies, insurance companies or managed care providers, when we transfer control of the Exogen system to the patient, typically when the patient has accepted the product or upon delivery.

We record this revenue 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 typically recognize revenue from sales of our ultrasonic products acquired through the Misonix acquisition in accordance with shipping terms.

Control is transferred to the customer when the product is shipped or received, and revenue is recognized accordingly.

Restorative Therapies

We recognize revenue from third-party payers, such as governmental agencies, insurance companies or managed care providers, when we transfer control to the patient, typically when the patient has accepted the product or upon delivery.

We record this revenue 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 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 amounts 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 settlement 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.

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We are not aware of any claims, disputes or unsettled matters with any payer that would materially affect revenues for which we have not been adequately provided.

We recognize revenue from other restorative therapies products generally at the point in time when control is transferred to the customer, either upon shipment or reaching the destination depending on the product.

Product returns

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Accounts receivable, net are amounts billed and currently due from customers.

We record the amounts due net of allowance for doubtful accounts.

We record the amounts due net of allowance for credit losses.

We maintain allowances for credit losses to provide for receivables we do not expect to collect.

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Contract liabilities are included in accrued liabilities on the consolidated balance sheets.

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Shipping and handling

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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 included in selling, general and administrative expense on the consolidated statements of operations and comprehensive income (loss).

Use of estimates

The preparation of financial statements in accordance with U.S.

GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities, at the date of the financial 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 those estimates.

These costs are included in selling, general and administrative expense on the consolidated statements of operations and comprehensive income.

We record certain assets and liabilities at fair value.

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Each of these factors and assumptions can significantly affect the value of the intangible asset.

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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.

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Significant judgment is employed in determining the appropriateness of the estimates and assumptions as of the acquisition date and in post-acquisition periods.

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Contingent consideration

The Company initially values contingent consideration related to business combinations using a probability-weighted calculation of potential payment scenarios discounted at rates reflective of the risks associated with the expected future cash flows.

Key assumptions used to estimate the fair value of contingent consideration include revenue and the probability of achieving the specific targets.

After the initial valuation, the Company will use its best estimate to measure contingent consideration at each subsequent reporting period.

Gains and losses are recorded with selling, general and administrative expenses within the consolidated statements of operations and comprehensive income.

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.

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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.

As of December 31, 2021, the fair value of our reporting units is significantly in excess of the carrying value.

There has been no impairment of our goodwill related to our U.S.

and International reporting units since our formation.

Equity compensation

Prior to the IPO, the Company operated two equity-based compensation plans, the MIP and the Phantom Plans, which allows our employees to share our future profit without granting any additional voting rights.

Awards granted under the MIP and certain Phantom Plan awards granted in 2015 and thereafter, or the 2015 Phantom Plan Units, are liability-classified.

Those Phantom Plan awards granted from inception in 2012 and until the grant of the 2015 Phantom Plan Units, or the 2012 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 based on estimated fair values as of the grant date for the 2012 Phantom Plan Units and 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.

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Equity-based compensation

We operate an equity-based compensation plan (2021 Plan).

The 2021 Plan is designed to grant incentive awards to eligible employees and other service providers in order to attract, motivate and retain the talent for which we compete.

The 2021 Plan allows for the issuance of stock options (incentive and nonqualified), restricted stock, dividend equivalents, restricted stock units (RSUs), other stock-based awards, and cash awards.

(collectively, Awards).

Generally, non-cash Awards granted under the 2021 Plan are equity-classified.

Equity-based compensation expense is primarily included in selling, general and administrative expense with a nominal amount in research and development expense on the consolidated statement of operations and comprehensive income based upon the classification of the employee.

Equity-based compensation expense generated from the granting restricted stock units represents the fair value of the stock measured at the market price on the date of grant.

Restricted stock equity-based compensation expense is recognized over the vesting period.

The fair value of time-based stock options is determined using the Black-Scholes valuation model, with such value recognized as expense over the service period, net of actual forfeitures.

Assumptions used in determining stock option fair value include risk-free interest rate, expected dividend yield, expected price volatility, expected life of stock options and weighted-average fair value of stock options granted.

The expected term of the options granted is estimated using the simplified method.

Expected volatility is based on the historical volatility of our peers’ common stock.

The risk-free interest rate is determined based upon a constant U.S.

Treasury security rate with a contractual life that approximates the expected term of the option.

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Prior to the IPO, we operated two equity-based compensation plans, the MIP and the Phantom Plans, which had allowed our employees to share our future profit without granting any additional voting rights.

Awards granted under the MIP and certain Phantom Plan awards granted in 2015 and thereafter, or the 2015 Phantom Plan Units, were liability-classified.

Those Phantom Plan awards granted from inception in 2012 and until the grant of the 2015 Phantom Plan Units, or the 2012 Phantom Plan Units, were equity-classified, as they did not contain a put option or other features requiring them to be liability-classified.

Equity compensation included compensation expense for all equity awards made to employees that are part of continuing operations and were based on estimated fair values as of the grant date for the 2012 Phantom Plan Units and period end fair value for the MIP units and 2015 Phantom Plan Units.

We recognized expense for performance-based awards when we expected them to be earned.

We recognized timed-based awards over the requisite service period, which was generally the vesting period of the award.

Forfeitures were recognized as they occurred.

We used independent third-party valuation specialists in 2020 and 2019 using year-to-date October data in each year to assist management in performing the annual valuation of MIP and 2015 Phantom Plan Units.

We also utilized valuation specialists in April 2020 as we believed COVID-19 represented a triggering event that might indicate impairment.

We utilized valuation specialists in April 2020 as we believed COVID-19 represented a triggering event that might indicate impairment.

The specialists assist management in the determination of fair value of awards granted using the Monte Carlo option pricing model.

The subjective assumptions and the application of judgment in determining the fair value of the awards represent management’s best estimates.

If factors change and different assumptions are used, our equity compensation expense could be materially different in the future.

The most significant assumptions and 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 device 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 based the risk-free rate on U.S.

Government Constant Maturity Treasury rates for a term corresponding to the 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.

The assumptions utilized to determine the fair value of the awards are indicated in the following table:

Expected dividend yield 0.0 % 0.0 %

Expected volatility 50.0 % 35.0 %

Risk-free interest rate 0.1 % 1.5 %

Time to exit event (in years) 0.4 1.5

The calculation of the fair value of awards also requires an estimate of our equity value, based on inputs from management and reporting unit valuation reports prepared by the specialists during the annual goodwill impairment process.

We determined the 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”.

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 overall inherent risks associated with our business at the time awards were approved;

• the overall equity market conditions and general economic trends.

As of December 31, 2020, there was approximately $9.7 million of unrecognized compensation expense to be recognized over a weighted-average period of 1.3 years.

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BV LLC is currently a partnership for U.S.

federal income tax purposes.

As a partnership, taxable income or loss is generally included in the income tax returns of its members.

We also have a subsidiary that operates as a C-corporation that is subject to income tax requirements and international operations that are subject to foreign income tax requirements.

Additionally, BV LLC is liable for various other state and local taxes.

As a corporation, Bioventus Inc.

will be subject to U.S.

federal, state and local income taxes.

We recognize the effect of income tax positions only if these positions are more likely than not to be sustained.

We reflect changes in recognition or measurement in the period in which the change in judgment occurs.

Upon the redemption or exchange of BV LLC Units for shares of Class A common stock or cash, we will determine if we are likely to 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 TRA and (iii) a tax benefit based on the net difference between (i) and (ii).

As we realize cash tax savings, we will reduce the deferred tax asset and the payments made under the TRA 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 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.

The most significant assumptions utilized in the MIP and Phantom Plans were expected volatility, time outstanding, risk-free rate and expected dividend yield.

Expected volatility was based on the historical volatility of our peer group.

The risk-free rate was based on U.S.

Government Constant Maturity Treasury rates for a term corresponding to the amount of time the awards were expected to be outstanding.

The Expected dividend yield assumption had the rate of zero as we have not previously issued dividends and did not anticipate paying dividends in the foreseeable future.

As a result of the IPO, Bioventus Inc.

became the sole managing member of BV LLC, which is treated as a partnership for U.S.

federal and most applicable state and local income tax purposes.

As a partnership, BV LLC is not subject to U.S.

federal and certain state and local income taxes.

Any taxable income or loss generated by BV LLC is passed through to and included in the taxable income or loss of its members, including the Company following the Transactions, on a pro rata basis.

Bioventus Inc.

is subject to U.S.

federal income taxes, in addition to state and local income taxes with respect to its allocable share of any taxable income of BV LLC following the Transactions.

We are also subject to taxes in foreign jurisdictions.

The tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that arise during the period.

Each quarter, we update our estimate of our annual effective tax rate, and if the estimated annual effective tax rate changes, we make a cumulative adjustment in such period.

The quarterly tax provision, and estimate of our annual effective tax rate, are subject to variation due to several factors, including variability in pre-tax income (or loss), the mix of jurisdictions to which such income relates, changes in how we conduct business, and tax law developments.

We maintain a valuation allowance on certain deferred tax assets that has determined are not more-likely-than-not to be realizable and assess the need for an adjustment to this valuation allowance on a quarterly basis.

The assessment is based on estimates of future sources of taxable income for the jurisdictions in which we operate and the periods over which deferred tax assets will be realizable.

In the event we determine we will be able to realize all or part of the net deferred tax assets in the future, all or part of the valuation allowance will be reversed in the period it is determined.

The release of all or part of the valuation allowance against deferred tax assets may cause greater volatility in the effective tax rate in the periods in which it is reversed.

We recognize 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 we believe 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 we expect each of the items to be settled.

Interest and penalties related to unrecognized tax benefits are recognized as a component of income tax expense.

Tax Receivable Agreement

We expect to obtain an increase in the share of the tax basis of the assets of BV LLC when LLC Interests are redeemed or exchanged by the Continuing LLC Owner and other qualifying transactions.

This increase in tax basis may have the effect of reducing the amounts that we would otherwise pay in the future to various tax authorities.

The increase in tax basis 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.

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On February 16, 2021, we entered into a tax receivable agreement (TRA) with the Continuing LLC Owner that provides for the payment by us to the Continuing LLC Owner of 85% of the amount of tax benefits, if any, that we actually realize as a result of (i) increases in the tax basis of assets of BV LLC resulting from any redemptions or exchanges of LLC Interests or any prior sales of interests in BV LLC and (ii) certain other tax benefits related to our making payments under the TRA.

We will maintain a full valuation allowance against deferred tax assets related to the tax attributes generated as a result of redemptions of LLC Interests or exchanges described above until it is determined that the benefits are more-likely-than-not to be realized.

As of December 31, 2021, Continuing LLC Owner had not exchanged LLC Interests for shares of Class A common stock and therefore we had not recorded any liabilities under the TRA.

Long-lived assets

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Computer software and hardware 3 - 5

Demonstration and consignment inventory 5

Furniture and fixtures 3 - 7

Leasehold improvements 3 - 7

Machinery and equipment 3 - 7

Furniture and fixtures 7

We amortize finite-lived identifiable intangible assets using the straight-line method over their estimated remaining weighted average useful lives as follows in years:

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We have availed ourselves of the reduced reporting obligations and executive compensation disclosure in this Annual Report and expect to continue to avail ourselves of the reduced reporting obligations available to emerging growth companies in future filings.

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In addition, an emerging growth company can delay its adoption of certain accounting standards until those standards would otherwise apply to private companies.

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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.

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We will continue to qualify as an emerging growth company until the earliest of:

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• 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, (3) have filed at least one annual report pursuant to the Exchange Act, and (4) are not eligible to use the requirements for smaller reporting companies as defined in Rule 12b-2 under the Exchange Act (annual revenue less than $100 million and either no public float or a public float of less than $700 million).

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis