Bioventus Inc. (BVS) FY 2021 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Part I, Item 1A, Risk Factors and our consolidated financial statements and the related notes to those statements included elsewhere in this Annual Report on Form 10-K (Annual Report). In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Some of the numbers included herein have been rounded for the convenience of presentation. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under Part 1, Item 1A. Risk Factors and elsewhere in this Annual Report. 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

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

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

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

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

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

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

Strategic transactions

We have pursued and continue to pursue business development opportunities that leverage our significant customer presence across orthopedics, broaden our portfolio and increase our global footprint. Below is a summary of some of our recent transactions:

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; and

•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; and

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

CartiHeal

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.

B.O.N.E.S. Trial

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. study. 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.

Other

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.

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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 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. 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

Net sales

We generate net sales from a portfolio of active healing products that serve physicians spanning the orthopedic continuum, including sports medicine, total joint reconstruction, hand and upper extremities, foot and ankle, podiatric surgery, trauma, spine and neurosurgery. We report sales net of contractual allowances, rebates and returns.

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 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 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. 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. In the future, we expect our cost of sales to increase due to increased sales volume.

Gross profit and gross margin

Gross profit consists of net sales less cost of sales. We calculate gross margin as gross profit divided by net sales. Our gross margin has been and will continue to be affected by a variety of factors, including costs of products purchased from our third-party suppliers, manufacturing costs, product mix and implementation over time of cost-reduction strategies. We expect net sales and product mix to vary quarter by quarter and therefore our gross profit will likely fluctuate from quarter to quarter.

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Selling, general and administrative expense

Selling, general and administrative expense primarily consists of salaries, benefits and other related costs, including equity-based compensation, for personnel employed in sales, marketing, finance, legal, compliance, administrative, information technology, medical education and training, quality and human resource departments. Selling, general and administrative expense also includes third-party marketing, supply chain and distribution, product recall costs, information technology, legal, human resources, insurance and facilities expenses, selling, general and administrative expenses also include commissions, generally based on a percentage of sales, to our direct sales team and independent distributors. We expect our selling, general and administrative expenses will increase with the continued expansion of our sales organization and commercialization of our current and pipeline products. We plan to hire more personnel to support the growth of our business. However, over time, as we grow our net sales, we expect selling, general and administrative expenses to decline as a percentage of net sales.

Research and development expense

Research and development expense primarily consists of employee compensation, equity compensation and related expenses, as well as contract research organization service expenses related to clinical trials. We expense internal research and development costs as incurred and research and development costs incurred by third parties as they perform contracted work. Our research and development expenses may vary substantially from period to period based on the timing of research and development activities. We are focused on internal research and development to broaden our product portfolio across all verticals, expand our Exogen system product label and undertake clinical research to support commercialization of all of our products. As a result, we expect our research and development expenses to increase to the mid-single digits as a percentage of net sales as we introduce new products, extend existing product lines and expand indications. We see significant opportunity to develop innovative and clinically differentiated products in-house with our experienced research and development team. In addition, we are planning preclinical and animal model studies for MOTYS and PROcuff. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations.

Restructuring costs

Restructuring costs primarily consist of employee severance, legal, consulting and temporary labor expenses. 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 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 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 (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 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 expense (income) may also include certain nonrecurring items.

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Income tax expense

Bioventus LLC (BV LLC) is a partnership for U.S. federal tax purposes. Accordingly, the members include the profits and losses of BV LLC in their income tax returns. Certain wholly-owned subsidiaries of BV LLC are taxable entities for U.S. 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. Item 8. Financial Statements—Note 11. Income Taxes to our consolidated financial statements for additional information.

Income tax expense includes U.S. 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. We report the income tax effects of these differences as deferred income taxes. Valuation allowances recognized reduce the related deferred tax assets to an amount which will, more likely than not, be realized. We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense.

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 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 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 of operations for a reconciliation of net income to Adjusted EBITDA.

Results of Operations

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

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

(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.

(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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Net sales

U.S.

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 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

U.S.

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 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 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

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

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)

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

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

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

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

U.S.

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 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.

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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 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. In addition, we may raise additional funds to finance future cash needs through receivables or royalty financings or corporate collaboration and licensing arrangements. If we raise additional funds by issuing equity securities or convertible debt, our stockholders will experience dilution. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, or making capital expenditures. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish valuable rights to our products, future revenue streams or product candidates, or to grant licenses on terms that may not be favorable to us. The covenants under our credit agreement limit our ability to obtain additional debt financing. We cannot be certain that additional funding will be available on acceptable terms, or at all. Any failure to raise capital in the future could have a negative impact on our financial condition and our ability to pursue our business strategies.

Initial public offering

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. 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. In addition, the terms of our financing arrangements, including the 2019 Credit Agreement, contain covenants that may restrict BV LLC and its subsidiaries from paying such distributions, subject to certain exceptions. Further, BV LLC is generally prohibited under Delaware law from making a distribution to a member to the extent that, at the time of the distribution, after giving effect to the distribution, liabilities of BV LLC (with certain exceptions), as applicable, exceed the fair value of its assets. Subsidiaries of BV LLC are generally subject to similar legal limitations on their ability to make distributions to BV LLC. 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.

(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. The actual amount and timing of any payments under the TRA will vary depending upon a number of factors, including the timing of redemptions or exchanges by the Continuing LLC Owner, the amount of gain recognized by the Continuing LLC Owner, the amount and timing of the taxable income we generate in the future, and the federal tax rates then applicable. Any payments made by us to the Continuing LLC Owner under the TRA will generally reduce the amount of overall cash flow that might have otherwise been available to us. To the extent that we are unable to make payments under the TRA for any reason, such payments generally will be deferred and will accrue interest until paid; provided, however, that nonpayment for a specified period may constitute a material breach of a material obligation under the TRA and therefore accelerate payments due under the TRA.

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:

NM = Not Meaningful

Operating activities

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 $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 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.

Indebtedness

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

Recent accounting pronouncements

Refer to Note 2. Summary of significant accounting policies in Part II, Item 8. Financial Statements and Supplementary Data for further information regarding recently adopted and proposed accounting pronouncements.

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Critical accounting policies and estimates

The preparation of the consolidated financial statements requires us to make assumptions, estimates and judgments that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities as of the date of the consolidated financial statements, and the reported amounts of sales and expenses during the reporting periods. Certain of our more critical accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. On an ongoing basis, we evaluate our judgments, including those related to inventories, recoverability of long-lived assets and the fair value of our common stock. We use historical experience and other assumptions as the basis for our judgments in making these estimates. Because future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Any changes in these estimates will be reflected in our consolidated financial statements as they occur. Refer to Note 1. Organization and basis of presentation of financial information in Part II, Item 8. Financial Statements and Supplementary Data for a further description of our significant accounting policies, however, we believe that the following accounting policies and estimates that are considered critical to our business in order to obtain a full understanding and to evaluate our reported financial results. The critical accounting policies addressed below reflect our most significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue recognition

Sale of products

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 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 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 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.

Distributor chargebacks

We have preexisting contracts with established rates with many of the distributors’ customers that require the distributors to sell our product at their established rate. We offer chargebacks to distributors who supply these customers with our products. We reduce revenue at the time of sale for the estimated future chargebacks. 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.

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.

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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. The customer does not have control of the product until the customer consumes it, as we are able to require the return or transfer of the product to a third-party. An unconditional obligation to pay for the product does not exist until the customer consumes it.

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.

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 expected 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. Estimated settlements are adjusted in future periods as adjustments become known (that is, new information becomes available), or as years are settled or are no longer subject to such audits, reviews and investigations. We are not aware of any claims, disputes or unsettled matters with any payer that would materially affect revenues for which we have not been adequately provided.

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. 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

We estimate the amount of returns and reduce revenue in the period the related product revenue is recognized. We record a liability for expected returns based on probability weighted historical data.

Accounts receivable, net

Accounts receivable, net are amounts billed and currently due from customers. We record the amounts due net of allowance for credit losses. We maintain allowances for credit losses to provide for receivables we do not expect to collect. We base the allowance on an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivables and other information as applicable. Collection of the consideration that we expect to receive typically occurs within 30 to 90 days of billing. We apply the practical expedient for contracts with payment terms of one year or less which does not consider the effects of the time value of money. Occasionally, we enter into payment agreements with patients that allow payment terms beyond one year. In those cases, the financing component is not deemed significant to the contract.

Contract assets

Contract assets consist of unbilled amounts resulting from estimated future royalties from an international distributor that exceeds the amount billed. Contract assets are included in prepaid and other current assets on the consolidated balance sheets.

Contract liabilities

Contract liabilities consist of customer advance payments or deposits and deferred revenue. Occasionally for certain international customers, we require payments in advance of shipping product and recognizing revenue resulting in contract liabilities. Contract liabilities are included in accrued liabilities on the consolidated balance sheets.

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Shipping and handling

We classify amounts billed for shipping and handling as a component of net sales. The related shipping and handling fees and costs as well as other distribution costs are included in cost of sales. We have elected to recognize shipping and handling activities that occur after control of the related product transfers to the customer as fulfillment costs and are included in cost of sales.

Contract costs

We apply the practical expedient of recognizing the incremental costs of obtaining contracts as an expense when incurred as the amortization period of the assets that we otherwise would have recognized is one year or less. These incremental costs include our sales incentive programs for the internal sales force and third-party sales agents as the compensation is commensurate with annual sales activities. These costs are included in selling, general and administrative expense on the consolidated statements of operations and comprehensive income.

Fair value

We record certain assets and liabilities at fair value. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy that prioritizes the inputs used to measure fair value is described below. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. Assets and liabilities are categorized based on the lowest level that is significant to the valuation.

The three levels of inputs used to measure fair value are as follows:

•Level 1—Quoted prices in active markets for identical assets or liabilities;

•Level 2—Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data; and

•Level 3—Unobservable inputs that are supported by little or no market data. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

Business combinations

We record identifiable assets acquired, liabilities assumed and any noncontrolling interest in an acquiree resulting from a business combination at their estimated fair values on the date of the acquisition. We generally have third-party valuations completed for intangible assets in a business combination using a discounted cash flow analysis, incorporating various assumptions. Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired, including the amount assigned to identifiable intangible assets. The most significant estimates and assumptions inherent in a discounted cash flow analysis include the amount and timing of projected future cash flows, discount rate used to measure the risks inherent in the future cash flows, assessment of the asset’s life cycle, and competitive and other trends impacting the asset, including consideration of technical, legal, regulatory, economic and other factors. Each of these factors and assumptions can significantly affect the value of the intangible asset.

Acquired in-process research and development, or IPR&D, is the fair value of projects for which the related products have not received regulatory approval and have no alternative future use and is capitalized as an indefinite-lived intangible asset. Due to inherent uncertainty related to research and development, actual results could differ materially from the assumptions used in the discounted cash flow model. Additionally, there are risks including, but not limited to, delay or failure to receive regulatory requirements to conduct clinical trials, required market clearances, or patent issuance, and that the research and development project does not result in a successful commercial product. Development costs incurred after the acquisition are expensed as incurred. Upon receipt of regulatory approval of the related technology or product, the indefinite-lived intangible asset is accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life. If the research and development project is abandoned, the indefinite-lived asset is charged to expense.

We recognize contingent consideration liabilities resulting from business combinations at estimated fair value on the acquisition date. Contingent consideration liabilities are revalued subsequent to the acquisition date with changes in fair value recognized in earnings. Contingent payments related to acquisitions consist of development, regulatory and commercial milestone payments, and are valued using discounted cash flow techniques. Significant estimates and assumptions required for these valuations include the probability of achieving regulatory approval under specified time frames, product sales projections under various scenarios and discount rates used to calculate the present value of the estimated payments. Changes in the fair value of contingent consideration liabilities result from changes in these estimates and assumptions. Significant judgment is employed in determining the appropriateness of the estimates and assumptions as of the acquisition date and in post-acquisition periods.

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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.

Impairment

We evaluate goodwill and other indefinite-lived intangible assets for impairment annually during the fourth quarter, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Our reporting units are U.S. and International and we analyze each reporting unit separately in our goodwill impairment evaluation. We used independent third-party valuation specialists in 2021 and 2020 using year-to-date October data in each year to assist management in performing the annual review of goodwill for impairment. We also 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 reporting units based upon inputs and assumptions provided by management, which management uses for its impairment assessment. We analyze all other indefinite-lived intangible assets qualitatively to determine if it is more likely than not for an impairment to exist. If we meet the criteria, we perform a quantitative analysis to determine if an impairment exists.

Goodwill

Our goodwill impairment process includes applying a quantitative impairment analysis where the fair value of the reporting unit and compare it to its carrying value (including goodwill). We determine the fair value of U.S. and International reporting units based primarily on an income approach, which incorporates the use of a discounted free cash flow analysis. The discounted free cash flow analyses is based on significant judgments, including the current operating budgets, estimated long-term growth projections and future forecasts for each reporting unit. We discount future cash flows based on a market comparable weighted average cost of capital rate for each reporting unit. The discount rates used in the discounted free cash flow analyses reflect the risks inherent in the expected future cash flows generated by the respective intangible assets. Market risk, industry risk and a small company premium has an impact on the discount rate. The value of each reporting unit is determined on a stand-alone basis from the perspective of a market participant and represents the price we estimate we would receive in a sale of the reporting unit in an orderly transaction between market participants at the measurement date. Significant judgments inherent in this analysis include estimating the amount and timing of future cash flows and the selection of appropriate discount rates, royalty rate and long-term growth rate assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit and for some of the reporting units and could result in an impairment charge, which could be material to our financial position and results of operations. 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-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 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. 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.

Income taxes

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

Property and equipment are stated at cost and are depreciated using the straight-line method over the shorter of the asset’s estimated useful life, or the lease term if related to leased property, as follows in years:

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

We capitalize costs incurred from third-party vendors for software design, configuration, coding and testing and amortizes these costs on a straight-line basis over the estimated useful life of the product, not to exceed three years. We do not capitalize costs that are precluded from capitalization in authoritative guidance, such as preliminary project phase costs, planning, oversight, process re-engineering costs, training costs or data conversion costs.

The carrying values of property, equipment and finite lived intangible assets are reviewed for recoverability if the facts and circumstances suggest that a potential impairment may have occurred. If this review indicates that carrying values may not be recoverable, we will perform an assessment to determine if an impairment charge is required to reduce carrying values to estimated fair value. There were no events, facts or circumstances for the years ended December 31, 2021 and 2020 that resulted in any impairment charges to our property, equipment or finite lived intangible assets.

JOBS Act

We qualify as an “emerging growth company” pursuant to the provisions of the JOBS Act. For as long as we are an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, reduced disclosure obligations relating to the presentation of financial statements in the “Management’s discussion and analysis of financial condition and results of operations” section and exemptions from the requirements of holding advisory “say-on-pay” votes on executive compensation and shareholder advisory votes on golden parachute compensation. We have availed ourselves of the reduced reporting obligations and executive compensation disclosure in this Annual Report and expect to continue to avail ourselves of the reduced reporting obligations available to emerging growth companies in future filings.

In addition, an emerging growth company can delay its adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we plan to comply with any new or revised accounting standards on the relevant dates on which non-emerging growth companies must adopt such standards. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

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

•The last day of our fiscal year following the fifth anniversary of the date of our IPO;

•The last day of our fiscal year in which have annual gross revenues of $1.07 billion or more;

•The date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt;

•The date on which we are deemed to be a “large accelerated filer”, which will occur at such time as we (1) have an aggregate worldwide market value of common equity securities held by non-affiliates of $700 million or more as of the last business day of our most recently completed second quarter, (2) have been required to file annual and quarterly reports under the Exchange Act for a period of at least 12 months, (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).