Bioventus Inc. (BVS) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
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, 2023 compared to the year ended December 31, 2022 has been reported previously in our Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on March 12, 2024, 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 helping patients recover and live life to the fullest by relieving pain and addressing musculoskeletal challenges through a diverse portfolio of high-quality, innovative, and clinically-proven solutions. We operate our business through two reporting segments, U.S. and International, and our portfolio of products is comprised of five patient-focused areas, grouped into three businesses based on clinical use: (i) Pain Treatments, (ii) Surgical Solutions and (iii) Restorative Therapies.
•Pain Treatments, comprised of:
◦Knee Osteoarthritis (“KOA”) area: Our product portfolio includes a range of intra-articular, hyaluronic acid (“HA”) injections that help relieve patient discomfort and improve quality of life.
◦Peripheral Nerve Stimulation (“PNS”) area: We are focused on developing a full portfolio of peripheral nerve stimulation products with solutions for acute, temporary and chronic pain.
•Surgical Solutions, comprised of:
◦Ultrasonics: Our Ultrasonics business offers precision bone resection for patients with degenerative spine conditions and spinal deformities. This portfolio also enables precision ultrasonic neuro and general surgery to address brain tumors and pathologies of the liver and other organs.
◦Bone Graft Substitutes (“BGS”): Our product portfolio includes a range of products that facilitate optimal bone fusion following a surgical procedure.
•Restorative Therapies, comprised of:
◦Fracture Care: We provide low-intensity pulse ultrasound to help patients who suffer from bone fractures that do not heal through traditional methods. We plan to expand our United States clinical indications to address the healing of fresh fractures, especially for high-risk patients.
The following table sets forth total net sales, net loss and Adjusted EBITDA for the periods presented:
| Years Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands, except for loss per share) | 2024 | 2023 | ||||||||
| Net sales | $ | 573,280 | $ | 512,345 | ||||||
| Net loss from continuing operations | $ | (43,833) | $ | (121,196) | ||||||
| Adjusted EBITDA(1) | $ | 108,882 | $ | 88,862 | ||||||
| Loss per Class A common stock, basic and diluted | ||||||||||
| Continuing operations | $ | (0.52) | $ | (1.54) | ||||||
| Discontinued operations | — | (0.95) | ||||||||
| Loss per Class A common stock, basic and diluted | $ | (0.52) | $ | (2.49) |
(1)See below under Results of Operations-Adjusted EBITDA for a reconciliation of net loss to Adjusted EBITDA.
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Significant developments
Advanced Rehabilitation Business
On September 30, 2024, we entered into a Purchase and Sale Agreement (the “Purchase Agreement”) with a third-party purchaser to sell certain products within our advanced rehabilitation business, including the L100, L300 Go, L360, H200, Vector Gait & Safety System and Bioness Integrated Therapy System (BITS) (collectively, the “Advanced Rehabilitation Business”). On December 31, 2024, we closed the sale of the Advanced Rehabilitation Business and received $24.7 million at closing, net of transactional fees, subject to a post-closing adjustment for net working capital. We may also receive an aggregate of $20.0 million in potential earn-out payments, which are based on the achievement of certain revenue and financial metric thresholds in respect to sales of products from the Advanced Rehabilitation Business during the 2025 and 2026 fiscal years. We have incurred $2.5 million in transactional fees resulting from the divestiture of the Advanced Rehabilitation Business. The sale of the Advanced Rehabilitation Business is expected to enhance our strategic focus on our remaining businesses and improve liquidity, as the proceeds, net of transactional fees, were used to pay $20.0 million in long-term debt obligations.
We evaluated the Advanced Rehabilitation Business for impairment due to its divestiture. As a result of this evaluation, we recorded impairments totaling $33.9 million for the year ended December 31, 2024 under the U.S. reporting segment within the consolidated condensed statements of operations and comprehensive loss. The impairment losses reduced the intangible assets of the Advanced Rehabilitation Business to reflect their respective fair values less any costs to sell. The fair value of its intangibles was based on the consideration agreed to with the purchaser for the Advanced Rehabilitation Business.
Reclassification
We reclassified SonicOne revenue and expense of the SonicOne Ultrasonic Cleansing and Debridement Systems (“SonicOne”) from the Restorative Therapies to the Surgical Solutions business in the first quarter of 2024. SonicOne’s capabilities to remove devitalized or necrotic tissue and fiber deposits more closely aligns with Surgical Solutions’ soft tissue management. SonicOne revenue reclassified for the year ended December 31, 2023 totaled $6.8 million for the U.S. reporting segment and $0.3 million for the International reporting segment.
Allograft Delivery Device
The Allograft Delivery Device, a customized delivery system for our OSTEOAMP Flowable product, received FDA clearance in June 2024. OSTEOAMP is an allograft-derived bone graft with growth factors used for reconstructive bone grafting procedures. The Allograft Delivery Device is intended to be used for the delivery of hydrated allograft to an orthopedic site, therefore assisting with the use of OSTEOAMP Flowable, the fastest growing product in our bone graft substitutes portfolio, in minimally invasive surgical procedures as well as open procedures.
EU MDR
The European Union Medical Devices Regulation (“EU MDR”), which became effective in May 2021, was adopted with the aim of ensuring better protection of public health and patient safety. Among other things, the EU MDR imposed changes to clinical evidence for medical devices, post-market clinical follow-up evidence, annual reporting of safety information for Class III products, and bi-annual reporting for Class II products, Unique Device Identification (“UDI”) for all products, submission of core data elements to a European UDI database prior to placement of a device on the market, reclassification of medical devices, and multiple labeling changes. We were able to continue marketing our currently certified products in the European Union (“EU”) after the effective date of EU MDR until the associated certifications expire. In April 2024, we received EU certification for our EXOGEN Bone Stimulation System, which will allow us to market it throughout the EU. The certificate is valid for 5 years.
Wound Business
On May 22, 2023, we closed the sale of certain assets within its Wound Business, including the TheraSkin and TheraGenesis products (collectively, the “Wound Business” or the “Disposal Group”), for potential consideration of $84.7 million, including $34.7 million at closing, $5.0 million deferred for 18 months and up to $45.0 million in potential earn-out payments, which are based on the achievement of certain revenue thresholds by the purchaser of the Wound Business for sales of the TheraSkin and TheraGenesis products during the 2024, 2025 and 2026 fiscal years. We received the deferred payment in November 2024, which was used to pay $5.0 million of long-term debt obligations.
We incurred $3.9 million in transactional fees resulting from the sale of the Wound Business. The loss resulting from the deconsolidation of the Disposal Group totaled $1.5 million for the year ended December 31, 2023 and was recorded in loss on disposals within the consolidated statements of operations and comprehensive loss. We used the proceeds from the sale of the Wound Business to prepay $30.0 million of long-term debt obligations.
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We evaluated the Wound Business for impairment prior to its sale and recorded a $78.6 million impairment within the consolidated statements of operations and comprehensive loss during the year ended December 31, 2023 as a result of this evaluation to reduce the intangible assets of the Disposal Group to reflect their respective fair values less any costs to sell. The fair value of the Disposal Group’s intangibles was determined based on the consideration received for the Wound Business.
Credit and Guaranty Agreement
On January 18, 2024, we further amended the 2019 Credit Agreement to modify certain financial covenants under the 2019 Credit Agreement. Refer to Liquidity and Capital Resources—Credit Facilities for further information regarding the January 2024 amendment.
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, which manages and maintains the sales relationship with healthcare providers, distribution centers or specialty pharmacies. Certain Surgical Solutions 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 Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 2. Significant accounting policies for further information.
We generally recognize revenue at the point in time when control is transferred to the customer, for example, when the product is 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 consists 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 marketed products. Certain products are manufactured by or obtained from third-party suppliers primarily located in Japan, Switzerland, Sweden and the United States.
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.
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 marketization 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.
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Research and development expense
Research and development expense primarily consists of employee compensation, equity-based 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 portfolio across all products and undertake clinical research to support their marketization. As a result, we expect our research and development expenses to vary from low 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. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations.
Restructuring costs
We have restructured portions of our operations and future restructuring activities are possible. Identifying and calculating the cost to exit operations requires certain assumptions to be made, the most significant of which are anticipated future liabilities. Although our estimates have been reasonably accurate in the past, significant judgment is required, and these estimates and assumptions may change as additional information becomes available and facts or circumstances change. Restructuring costs are recorded at estimated fair value. Key assumptions in determining the restructuring costs include negotiated terms and payments to terminate contractual obligations.
Restructuring costs primarily consist of employee severance, legal, consulting and temporary labor expenses. Restructuring costs recorded in 2023 and 2022 are the result of aligning our organizational and management cost structure to improve profitability and cash flow.
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 Amended 2019 Credit Agreement. We have previously 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.
Other (income) expense
Other (income) expense primarily consists of foreign currency transaction and remeasurement gains and losses on transactions denominated in currencies other than our functional currency. Our foreign currency transaction and remeasurement gains and losses are primarily related to foreign currency denominated cash, liabilities and intercompany receivables and payables. Other (income) expense may also include certain nonrecurring items.
Income tax expense
The Company’s subsidiary, 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 tax receivable agreement (“TRA”), which could be significant. The TRA obligates us to pay to Smith & Nephew, Inc. (“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 Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 11. Income taxes 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.
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Non-GAAP Financial Measures - Adjusted EBITDA
We present Adjusted EBITDA, a non-GAAP financial measure, because we believe it is a useful indicator that management uses to measure operating performance and 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 loss from continuing operations before depreciation and amortization, provision of income taxes and interest expense, net, 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 divestiture related costs, certain shareholder litigation costs, impairments of assets, restructuring and succession charges, equity-based compensation expense, financial restructuring costs 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.
Non-GAAP financial measures have limitations as an analytical tool and should not be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with U.S. GAAP. These measures might exclude certain normal recurring expenses. Therefore, these measures might not provide a complete understanding of the Company's performance and should be reviewed in conjunction with the U.S. GAAP financial measures. Additionally, other companies might define their non-GAAP financial measures differently than we do. Investors are encouraged to review the reconciliation of the non-GAAP measure provided in this Annual Report on Form 10-K, including all tables referencing Adjusted EBITDA to its most directly comparable U.S. GAAP measure.
Results of Continuing Operations
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, | |||||
|---|---|---|---|---|---|
| 2024 | 2023 | ||||
| Net sales | 100.0 | % | 100.0 | % | |
| Cost of sales (including depreciation and amortization) | 32.3 | % | 35.9 | % | |
| Gross profit | 67.7 | % | 64.1 | % | |
| Selling, general and administrative expense | 59.5 | % | 59.4 | % | |
| Research and development expense | 2.4 | % | 2.6 | % | |
| Restructuring costs | — | % | 0.2 | % | |
| Change in fair value of contingent consideration | 0.2 | % | 0.1 | % | |
| Depreciation and amortization | 1.3 | % | 1.7 | % | |
| Impairment of assets | 6.3 | % | 15.4 | % | |
| Loss on disposals | 0.1 | % | 0.7 | % | |
| Operating loss | (2.1 | %) | (16.0 | %) |
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The following table presents a reconciliation of net loss from continuing operations to Adjusted EBITDA for the periods presented:
| Years Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2024 | 2023 | ||||||||
| Net loss from continuing operations | $ | (43,833) | $ | (121,196) | ||||||
| Interest expense, net | 38,792 | 40,676 | ||||||||
| Income tax expense (benefit), net | (5,293) | 85 | ||||||||
| Depreciation and amortization(a) | 49,555 | 57,365 | ||||||||
| Acquisition and related costs(b) | 1,339 | 5,694 | ||||||||
| Shareholder litigation costs(c) | 13,802 | — | ||||||||
| Restructuring and succession charges(d) | (57) | 2,331 | ||||||||
| Equity-based compensation(e) | 10,058 | 2,722 | ||||||||
| Financial restructuring costs(f) | 351 | 7,291 | ||||||||
| Impairment of assets(g) | 36,357 | 78,615 | ||||||||
| Loss on disposal of a business(h) | 292 | 1,539 | ||||||||
| Other items(i) | 7,519 | 13,740 | ||||||||
| Adjusted EBITDA | $ | 108,882 | $ | 88,862 |
(a)Includes for the years ended December 31, 2024 and 2023, respectively, depreciation and amortization of $41.9 million and $48.5 million in cost of sales and $7.7 million and $8.9 million in operating expenses presented in the consolidated statements of operations and comprehensive loss.
(b)Includes acquisition and integration costs related to completed acquisitions and changes in fair value of contingent consideration.
(c)Costs incurred as a result of certain shareholder litigation unrelated to our ongoing operations.
(d)Costs incurred were the result of adopting restructuring plans to reduce headcount, contract termination, reorganize management structure and consolidate certain facilities.
(e)Includes compensation expense resulting from awards granted under our equity-based compensation plans. The year ended December 31, 2024 includes increased award activity as a result of certain annual employee bonuses granted in the form of equity awards. The year ended December 31, 2023 includes the reversal of $3.8 million in equity-based compensation expenses related to the transition of our executive leadership.
(f)Financial restructuring costs include advisory fees and debt amendment related costs.
(g)Activity in 2024 includes: (i) a non-cash impairment charge of $33.9 million for intangible assets solely attributable to our Advanced Rehabilitation Business due to the decision to divest the business and (ii) a non-cash impairment charge of $2.5 million for rented right-of-use assets involving exited office and warehouse spaces. Activity in 2023 relates to the non-cash impairment charge attributable to our divested Wound Business.
(h)Represents the loss on the disposal of the Advanced Rehabilitation and Wound Businesses for the years ended December 31, 2024 and 2023, respectively.
(i)Other items primarily include charges associated with strategic transactions, such as potential acquisitions or divestitures and a transformative project to redesign systems and information processing. During the year ended December 31, 2024, other items primarily consisted of the following: (i) divestiture costs related to the Company’s Advanced Rehabilitation Business, including transactional fees, totaled $4.7 million; (ii) transformative project costs of $1.7 million; and (iii) strategic transaction costs of $0.4 million.
During the year ended December 31, 2023, other items mainly consisted of the following: (i) strategic transaction costs totaling $4.8 million, including divestiture costs of $1.1 million related to Advanced Rehabilitation; (ii) transformative project costs of $4.5 million; (iii) transition and severance costs of $2.8 million; and (iv) $1.0 million in costs related to the discontinuance of MOTYS.
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Net sales
| Years Ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands, except for percentage) | 2024 | 2023 | $ | % | ||||||||||
| U.S. | ||||||||||||||
| Pain Treatments | $ | 234,936 | $ | 197,954 | $ | 36,982 | 18.7 | % | ||||||
| Surgical Solutions | 167,706 | 141,888 | 25,818 | 18.2 | % | |||||||||
| Restorative Therapies | 104,167 | 110,018 | (5,851) | (5.3 | %) | |||||||||
| Total U.S. net sales | 506,809 | 449,860 | 56,949 | 12.7 | % | |||||||||
| International | ||||||||||||||
| Pain Treatments | 26,353 | 22,847 | 3,506 | 15.3 | % | |||||||||
| Surgical Solutions | 21,549 | 19,715 | 1,834 | 9.3 | % | |||||||||
| Restorative Therapies | 18,569 | 19,923 | (1,354) | (6.8 | %) | |||||||||
| Total International net sales | 66,471 | 62,485 | 3,986 | 6.4 | % | |||||||||
| Total net sales | $ | 573,280 | $ | 512,345 | $ | 60,935 | 11.9 | % |
U.S.
Net sales increased $56.9 million, or 12.7%, compared to the prior year. Changes by major product groups were: (i) Pain Treatments—$37.0 million increase due to volume growth primarily driven by Durolane; (ii) Surgical Solutions—$25.8 million net sales increase due to volume growth; and (iii) Restorative Therapies—$5.9 million net sales decrease due primarily to the divestiture of our Wound Business ($11.1 million of revenue in 2023) and lower volume from the Advanced Rehabilitation Business, partly offset by increased volumes and higher average selling price related to our EXOGEN Bone Stimulation System in 2024.
International
Net sales increased $4.0 million, or 6.4%, due to volume growth in Pain Treatments and Surgical Solutions, partially offset with a volume decline in Restorative Therapies.
Gross profit and gross margin
| Years Ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands, except for percentage) | 2024 | 2023 | $ | % | ||||||||||
| U.S. | $ | 348,953 | $ | 294,366 | $ | 54,587 | 18.5 | % | ||||||
| International | 39,273 | 33,827 | 5,446 | 16.1 | % | |||||||||
| Total | $ | 388,226 | $ | 328,193 | $ | 60,033 | 18.3 | % |
| Years Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Change | ||||||
| U.S. | 68.9 | % | 65.4 | % | 3.5 | % | ||
| International | 59.1 | % | 54.1 | % | 5.0 | % | ||
| Total | 67.7 | % | 64.1 | % | 3.6 | % |
U.S.
Gross profit increased $54.6 million, or 18.5%, primarily due to volume growth in Pain Treatments, Surgical Solutions and our EXOGEN Bone Stimulation System, partially offset by the Wound Business divestiture. Gross margin increased due to product mix.
International
Gross profit increased $5.4 million, or 16.1% compared with the prior period, which is primarily due to an increase in volume for Pain Treatments, specifically Durolane, and Surgical Solutions. Gross margin increased due to product mix.
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Selling, general and administrative expense
| Years Ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands, except for percentage) | 2024 | 2023 | $ | % | ||||||||||
| Selling, general and administrative expense | $ | 340,894 | $ | 303,879 | $ | 37,015 | 12.2 | % |
Selling, general and administrative expense increased $37.0 million, or 12.2%, primarily due to increases in: (i) compensation and related costs of $24.4 million; (ii) accounting and legal costs of $10.8 million, mostly related to the settlement of shareholder litigation; and (iii) equity-based compensation of $8.2 million. These increases were partially offset with a $12.2 million decrease in consulting expenses resulting from fewer strategic transactions, project initiatives and debt refinancing costs in 2024 compared to 2023.
Research and development expense
| Years Ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands, except for percentage) | 2024 | 2023 | $ | % | ||||||||||
| Research and development expense | $ | 13,639 | $ | 13,446 | $ | 193 | 1.4 | % |
Research and development expense remained consistent with the prior year comparable period.
Restructuring costs
| Years Ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands, except for percentage) | 2024 | 2023 | $ | % | ||||||||||
| Restructuring costs | $ | (52) | $ | 840 | $ | (892) | (106.2 | %) |
There were expense reversals during the year ended December 31, 2024 primarily due to employee transitions associated with prior restructuring initiatives. Costs incurred for the year ended December 31, 2023 were primarily the result of an initiative to align the Company’s organizational and management cost structure to improve profitability and cash flow through reducing headcount and third-party related costs.
Change in fair value of contingent consideration
| Years Ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands, except for percentage) | 2024 | 2023 | $ | % | ||||||||||
| Change in fair value of contingent consideration | $ | 1,423 | $ | 719 | $ | 704 | 97.9 | % |
Changes in fair value for both periods relates to contingent consideration associated with the acquisition of Bioness in March 2021.
Depreciation and amortization
| Years Ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands, except for percentage) | 2024 | 2023 | $ | % | ||||||||||
| Depreciation and amortization | $ | 7,652 | $ | 8,842 | $ | (1,190) | (13.5 | %) |
Depreciation and amortization decreased during the year ended December 31, 2024 compared with the prior year primarily due to the write-off of consigned fixed assets and fewer assets to depreciate due to divestitures.
Impairment of assets
We evaluated the Advanced Rehabilitation Business for impairment during the second quarter of 2024 due our decision to divest the business. As a result of this evaluation, we recorded a $33.9 million impairment to reduce the intangible assets of the Advanced Rehabilitation Business to reflect their respective fair values less any costs to sell. We based the fair value of its intangibles on the consideration agreed to with the purchaser for the Advanced Rehabilitation Business. We also recorded impairment losses of $2.5 million during the year ended December 31, 2024 for 2 right-of-use assets, specifically office and warehouse spaces, which the Company exited during 2024.
Our decision to divest the Wound Business required us to evaluate whether certain of its assets were impaired. We recorded a $78.6 million non-cash impairment charge in 2023 as a result of this evaluation to reduce the intangible assets to their fair values less costs to sell. We determined the fair value of intangibles of the Wound Business based on the consideration offered for the Wound Business.
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Loss on disposals
The loss on disposals during the year ended December 31, 2024 resulted from the sale of the Advanced Rehabilitation Business. The loss on disposals during the year ended December 31, 2023 resulted from $1.5 million in working capital adjustments associated with the sale of our Wound Business and a $2.0 million loss on fixed assets disposed of during the integration of acquisitions.
Other (income) expense
| Years Ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands, except for percentage) | 2024 | 2023 | $ | % | ||||||||||
| Interest expense, net | $ | 38,792 | $ | 40,676 | $ | (1,884) | (4.6 | %) | ||||||
| Other (income) expense | $ | (1,645) | $ | (1,290) | $ | (355) | 27.5 | % |
Interest expense, net decreased during the year ended December 31, 2024 compared to the prior year primarily due to less debt outstanding and a decrease in interest rates. Other (income) expense during 2024 primarily consisted of an increase of $1.0 million in foreign currency gains, resulting from recognizing previously unrealized gains and losses on the assets and liabilities of the Advanced Rehabilitation Business, which was sold in the fourth quarter of 2024. Activity during 2023 primarily included a $1.5 million receipt from the settlement of a legal claim.
Income tax (benefit) expense, net
| Years Ended December 31, | Change | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands, except for percentage) | 2024 | 2023 | $ | % | |||||||||
| Income tax (benefit) expense, net | $ | (5,293) | $ | 85 | $ | (5,378) | NM | ||||||
| Effective tax rateNM - Not Meaningful | 10.8 | % | (0.1) | % | 10.9 | % |
The $5.4 million change in income taxes was due to the recognition of deferred tax benefits resulting from the impairments recorded.
Noncontrolling interest
Subsequent to the IPO and related transactions, we are the sole managing member of BV LLC of which we owned 80.6% and 80.0% at December 31, 2024 and 2023, respectively. 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 noncontrolling interest representing the 19.4% that is owned by the Continuing LLC Owner. Noncontrolling interest activity during year ended December 31, 2024 was the result of losses recorded.
Segment Adjusted EBITDA
Adjusted EBITDA for each of our reportable segments is as follows:
| Years Ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands, except for percentage) | 2024 | 2023 | $ | % | ||||||||||
| U.S. | $ | 95,421 | $ | 78,668 | $ | 16,753 | 21.3 | % | ||||||
| International | $ | 13,461 | $ | 10,194 | $ | 3,267 | 32.0 | % |
U.S.
Adjusted EBITDA increased $16.8 million, or 21.3%, due to revenue growth and increased gross profit.
International
Adjusted EBITDA increased $3.3 million or 32.0%, due to increased gross profit.
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 market new products and further our expansion into international markets.
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We believe that we have enough liquidity to continue operations for the next twelve months. We anticipate that to the extent that we require capital, we will obtain funding through additional equity financings or the incurrence of other indebtedness or a combination of these potential sources of capital. As of December 31, 2024, we have the ability to borrow up to $40.0 million using our Revolving Credit Facility and available letters of credit. We may explore divestiture opportunities for non-core assets to improve our liquidity position. 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. The covenants under the Amended 2019 Credit Agreement limit our ability to obtain additional debt financing. Debt financing, if allowed under the Amended 2019 Credit Agreement and if available, would result in increased payment obligations and might 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 might be necessary to relinquish valuable rights to our products, future revenue streams or product candidates, or to grant licenses on terms that might not be favorable to us. We cannot be certain that additional funding will be available on acceptable terms, or at all. Any failure to raise capital in the future might have a negative impact on our financial condition and our ability to pursue our business strategies.
Future cash requirements
The following table summarizes certain estimated future cash requirements under our various contractual obligations committed to as of December 31, 2024 in total and disaggregated into current and long-term obligations.
| (in thousands) | Current | Long-Term | Total | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Long-term debt(a) | $ | 27,339 | $ | 310,525 | $ | 337,864 | ||||
| Interest payments on long-term debt obligations(a) | 28,974 | 21,442 | 50,416 | |||||||
| Lease liabilities(b) | 5,104 | 20,104 | 25,208 | |||||||
| Purchase commitments(c) | 29,196 | 1,223 | 30,419 | |||||||
| $ | 90,613 | $ | 353,294 | $ | 443,907 |
(a)Refer to Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 5. Financial instruments in this Annual Report for further information regarding long-term debt obligations.
(b)Refer to Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 12. Commitments and contingencies in this Annual Report for further information regarding operating and finance lease liabilities.
(c)Amounts that are contractually committed to as of December 31, 2024 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.
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 Item 8. Financial Statements and Supplementary Data in this Annual Report.
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Tax Receivable Agreement
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 within 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.
Indebtedness
Our 2019 Credit Agreement (as amended on August 29, 2021 and October 29, 2021), and in effect from October 29, 2021 to July 11, 2022, consisted of a $360.8 million term loan (“Term Loan”) and a $50.0 million revolving credit facility (the “Revolver”). The Company amended the 2019 Credit Agreement on August 29, 2021, and then again on October 29, 2021 in connection with the acquisition of Misonix, Inc. On July 11, 2022, the Company further amended the 2019 Credit Agreement in conjunction with the acquisition of CartiHeal.
The Company was not in compliance with certain financial covenants under the 2019 Credit Agreement in effect as of December 31, 2022. As a result, on March 31, 2023, we entered into another amendment to the 2019 Credit Agreement to, among other things, modify certain financial covenants, waive the noncompliance at December 31, 2022 and modify interest rates applicable to borrowings under the agreement. The Revolver’s capacity was reduced $5.0 million on December 31, 2023 and again on June 30, 2024 in accordance with the amendments to the 2019 Credit Agreement resulting in a maximum capacity of $40.0 million as of December 31, 2024. We were in compliance with the financial covenants as of December 31, 2024 and 2023 as stated within the 2019 Credit Agreement then in effect.
On January 18, 2024 (the “Closing Date”), we further amended the 2019 Credit Agreement (collectively, with the August 2021, October 2021, July 2022 and March 2023 amendments, the “Amended 2019 Credit Agreement”), to modify certain financial covenants under the 2019 Credit Agreement. With respect to Term Loan Facilities and the Revolver outstanding as of the Closing Date, we may elect either SOFR or Base Rate interest rate options for the entire amount or certain portions of the loans and have interest rates equal to a formula driven base interest rate plus a margin, tied to a leverage ratio. The leverage ratio is the ratio of debt to Consolidated Adjusted EBITDA as defined in the Amended 2019 Credit Agreement for four consecutive quarters as of the end of each period. Pursuant to the Amended 2019 Credit Agreement, the margin at each applicable leverage ratio will be increased by 1.00% per annum. SOFR loans and base rate loans had a margin of 3.25% and 2.25%, respectively, subsequent to July 11, 2022 and prior to the Closing Date. Subsequent to the March 31, 2023 amendment, SOFR loans and base rate loans had a margin of 4.25% and 3.25%, respectively. All obligations under the Amended 2019 Credit Agreement are guaranteed by the Company and certain wholly owned subsidiaries where substantially all the assets of the Company collateralize the obligations.
The Amended 2019 Credit Agreement contains customary affirmative and negative covenants, including those related to financial reporting and notification, restrictions on the declaration or payment of certain distributions on or in respect of Bioventus LLC’s equity interests, restrictions on acquisitions, investments and certain other payments, limitations on the incurrence of new indebtedness, limitations on transfers, sales and other dispositions of assets of Bioventus LLC and its subsidiaries, as well as limitations on making changes to the business and organizational documents of Bioventus LLC and its subsidiaries. Financial covenant requirements include (i) a maximum debt leverage ratio of not greater than 4.50 to 1.00 for the testing period ending December 31, 2024, 4.25 to 1.00 for the testing period ending March 31, 2025, 4.00 to 1.00 for the testing period ending June 30, 2025 and at the end of each testing period occurring thereafter, and beginning on March 31, 2025, to be subject to a temporary increase to 4.50 to 1.00 upon certain events; and (ii) an interest coverage ratio not less than 2.00 to 1.00 for the testing period ending December 31, 2024, 2.00 to 1.00 for the testing period ending March 31, 2025, 2.25 to 1.00 for the testing period ending June 30, 2025, 2.50 to 1.00 for the testing period ending September 30, 2025 and 3.00 to 1.00 for the testing period ending December 31, 2025 and each testing period thereafter. In addition, during the period commencing on the Closing Date and ending upon the satisfaction of certain conditions occurring not prior to October 29, 2025, the Company will be subject to certain additional requirements and covenants, including a requirement to maintain Liquidity (as defined in the Amended 2019 Credit Agreement) of not less than $10.0 million as of the end of each calendar month during such period.
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The Term Loan Facilities matures on October 29, 2026 and the Revolver matures on October 29, 2025.
Refer to Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 5. Financial instruments in this Annual Report for further details on the Company’s indebtedness.
Information regarding cash flows
Cash and cash equivalents as of December 31, 2024 totaled $41.6 million, compared to $37.0 million as of December 31, 2023. As of December 31, 2024, $22.1 million and $19.5 million of our cash and cash equivalents was held within the U.S. and International segments, respectively. The change in cash was primarily due to the following:
| Years Ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands, except for percentage) | 2024 | 2023 | $ | % | ||||||||||
| Cash flows from continuing operations: | ||||||||||||||
| Net cash from operating activities | $ | 38,795 | $ | 17,513 | $ | 21,282 | 121.5 | % | ||||||
| Net cash from investing activities | 22,963 | 27,313 | (4,350) | (15.9 | %) | |||||||||
| Net cash from financing activities | (54,580) | (26,653) | (27,927) | 104.8 | % | |||||||||
| Net cash from discontinued operations | — | (13,675) | 13,675 | (100.0 | %) | |||||||||
| Effect of exchange rate changes on cash | (2,560) | 629 | (3,189) | NM | ||||||||||
| Net change in cash and cash equivalents | $ | 4,618 | $ | 5,127 | $ | (509) | (9.9 | %) |
Operating Activities
Net cash in operating activities from continuing operations increased $21.3 million, due to cash collections from sales growth and the timing of working capital payments. These operating inflows were partially offset with: (i) increases in employee compensation due to higher bonus payments in 2024 compared to prior year; (ii) an increase in inventory purchases; and (iii) an increase in interest payments.
Investing Activities
Net cash flows in investing activities from continuing operations decreased $4.4 million, primarily due to $10.0 million less net cash received from the sale of businesses, partially offset with $6.4 million less in capital expenditures.
Financing Activities
Cash flows from financing activities decreased $27.9 million, primarily due to: (i) net outflows totaling $30.0 million related to our revolving credit facility as $15 million was repaid in 2024 compared to $15 million in net borrowings during 2023; and (ii) an increase of $6.3 million in debt principal payments. These outflows were partially offset with: (i) a deferred consideration receipt of $4.5 million in 2024 resulting from the prior year sale of the Wound Business; (ii) $2.5 million less debt financing costs paid in 2024; and (iii) $1.7 million more in proceeds from the issuance of stock as stock option exercises increased in 2024 compared to 2023.
Discontinued Operations
Net cash flows from discontinued operations in 2023 were primarily the result of $10.2 million in fees used to settle the CartiHeal disposition and $1.4 million in cash held by the CartiHeal entity at the time of disposal.
Recently Issued Accounting Pronouncements
Refer to Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 2. Significant accounting policies for information regarding accounting pronouncements that may impact our financial statements in future periods.
Critical Accounting 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.
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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 Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 2. Significant accounting policies for a further description of our significant accounting policies, however, we believe that the following accounting estimates are considered critical to our business in order to obtain a full understanding and to evaluate our reported financial results. The critical accounting estimates addressed below reflect our most significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue recognition estimates
Variable consideration estimates
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, 2024 and 2023.
Accounts receivable allowances 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.
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.
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Acquired in-process research and development (“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 product.
Contingent consideration
We recognize contingent consideration liabilities resulting from business combinations at estimated fair value on the acquisition date, and at each subsequent reporting period. Significant judgment is employed in determining the appropriateness of the estimates and assumptions as of the acquisition date and in post-acquisition periods. 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. 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. 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 loss.
Impairment of goodwill and indefinite-lived intangible assets
We evaluate goodwill for impairment annually during the fourth quarter, or more frequently if events or changes in circumstances indicate that the asset might be impaired. We analyze all other indefinite-lived intangible assets qualitatively to determine if it is more likely than not that an impairment exists. If we meet the criteria, we perform a quantitative analysis to determine if an impairment exists. Our reporting units are U.S. and International and we analyze each reporting unit separately in our impairment evaluations.
Our impairment process includes applying a quantitative impairment analysis to the fair value of the reporting unit and comparing it to its carrying value. We used independent third-party valuation specialists in 2024 and 2023 using year-to-date October data in each year to assist management in performing our annual impairment evaluation. 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 analysis 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 estimates and assumptions could materially affect the determination of fair value for each reporting unit and could result in an impairment charge, which could be material to our financial position and results of operations.
On November 8, 2022, due to a significant decline in the value of our Class A common stock, circumstances became evident that a possible impairment existed as of the third quarter balance sheet date. We concluded that the carrying value of the U.S. reporting unit exceeded its fair value. We recorded a non-cash goodwill impairment charge within the U.S. reporting unit for the year ended December 31, 2022. The impairment was recorded within impairment of goodwill on the consolidated statements of operations and comprehensive loss. There were no goodwill impairment charges for the years ended December 31, 2024 and 2023. Refer to Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 3. Balance sheet information.
Equity-based compensation
Equity-based compensation expense generated from the granting of 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.
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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 the 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.
Income taxes
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 we have 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.
Emerging Growth Company and Smaller Reporting Company Status
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.
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 $1.235 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 second fiscal 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).
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Additionally, we are considered a “smaller reporting company,” as defined by Rule 12b-2 of the Exchange Act, which was determined as of the last day of our second fiscal quarter of 2024 (a “determination date”). We will continue to be categorized as a smaller reporting company—accelerated filer until our public float reaches $250 million at a future determination date.
If we are a smaller reporting company at the time we cease to be an emerging growth company, we may rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations including regarding executive compensation.