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BIOVENTUS INC.

(BVS)
  Report
Delayed Nasdaq  -  04:00 2022-09-27 pm EDT
6.560 USD   -5.75%
05:36pBioventus : CONSOLIDATED FINANCIAL STATEMENTS - Form 8-K/A
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04:06pBIOVENTUS INC. Financial Statements and Exhibits (form 8-K/A)
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09/14Transcript : Bioventus Inc. Presents at Morgan Stanley 20th Annual Global Healthcare Conference, Sep-14-2022 11:10 AM
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BIOVENTUS INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

08/12/2022 | 08:44am EDT
The following discussion and analysis of Bioventus Inc.'s (sometimes referred to
as "we," "us," "our" or "Bioventus") financial condition and results of
operations should be read in conjunction with the "Special Note Regarding
Forward-Looking Statements" and our unaudited consolidated condensed financial
statements and related notes thereto appearing elsewhere in this Form 10-Q, as
well as our audited consolidated financial statements and related notes included
in our Annual Report on Form 10-K for the year ended December 31, 2021 filed
with the Securities and Exchange Commission (SEC) on March 11, 2022 (2021 10-K).

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.

The following table sets forth total net sales, net (loss) income and Adjusted EBITDA for the periods presented:

                                                   Three Months Ended                             Six Months Ended
                                           July 2, 2022           July 3, 2021           July 2, 2022           July 3, 2021
Net sales                                $     140,331          $    

109,816 $ 257,621 $ 191,594 Net (loss) income

                        $      (8,014)         $     

(10,780) $ (22,820) $ 13,748 Adjusted EBITDA(1)

                       $      22,931          $      

19,887 $ 30,042 $ 30,957 Loss per share, basic and diluted $ (0.11) $ (0.10) $ (0.30) $ (0.12)

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

Strategic transactions

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

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We exercised the Call Option in April 2022 for the acquisition of all the
remaining shares of CartiHeal, excluding shares we already owned, for
approximately $315.0 million, with an additional $135.0 million payable upon the
achievement of certain milestones. The Company's decision to exercise the Call
Option follows the U.S. Food and Drug Administration's (FDA) March 29, 2022
premarket approval of CartiHeal's Agili-C implant. In August, 2021, CartiHeal
provided us with the required evidence of the Agili-CTM 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, we deposited $50.0 million into
escrow toward the potential purchase price of CartiHeal, which was subsequently
transferred to a payment agent on June 16, 2022.

On June 17, 2022, we entered into an amendment to the Option Agreement with
CartiHeal (CartiHeal Amendment) and Elron Ventures Limited, in its capacity as
the CartiHeal shareholder representative. Pursuant to the CartiHeal Amendment,
we secured the right to defer $215.0 million of upfront consideration (Deferred
Amount) otherwise payable to CartiHeal stockholders at the closing of the
acquisition (CartiHeal Acquisition). The Deferred Amount will be paid to
CartiHeal stockholders upon the earlier of the achievement of certain milestones
and the occurrence of certain installment payment dates. The Deferred Amount
will be paid in five tranches commencing in 2023 and ending no later than 2027.

Pursuant to the CartiHeal Amendment, we will pay interest on each tranche of the
Deferred Amount at a rate of 8.0% annually, until such tranche becomes due and
payable and is paid (subject to an interest penalty of 10% per annum in the
event of default). The additional $135.0 million payable would be payable upon
achievement of $75.0 million in trailing twelve month sales pursuant to the
CartiHeal Amendment. The acquisition of CartiHeal closed on July 12, 2022. We
paid at closing to CartiHeal stockholders an aggregate up-front payment of
$100.0 million (inclusive of the previously discussed escrow deposit). We also
paid approximately $8.0 million of CartiHeal's transaction related fees and
expenses.

On July 11, 2022 we amended our credit agreement (as amended, the Amended 2019
Credit Agreement) in conjunction with the CartiHeal Acquisition. Pursuant to the
Amended 2019 Credit Agreement, an $80.0 million term loan facility (Term Loan
Facility) was extended to us for: (i) the financing of the CartiHeal
Acquisition; (ii) the payment of related fees and expenses; and (iii) working
capital needs and general corporate purposes of the Company, including without
limitation for permitted acquisitions. The Term Loan Facility will mature on
October 29, 2026. Refer to the Liquidity and Capital Resources-Credit Facilities
for further information.

On July 12, 2022, we closed the CartiHeal Acquisition thereby acquiring all of
its remaining shares for an aggregate purchase price of $315.0 million and an
additional $135.0 million becoming payable after closing upon achievement of the
sales milestones previously discussed. We paid $100.0 million of the aggregate
purchase price at the closing consisting of the $50.0 million escrow deposit and
the $50.0 million from the Term Loan Facility. We also paid approximately $8.0
million for the previously discussed transaction related fees and expenses of
CartiHeal.

B.O.N.E.S. Trial

We submitted a premarket approval (PMA) supplement to the FDA in December 2020
seeking approval of an expanded indication for EXOGEN, specifically, for the
adjunctive treatment of acute and delayed metatarsal fractures to reduce the
risk of non-union. This PMA supplement was based on and supported by clinical
data in metatarsal fractures from the ongoing B.O.N.E.S. study. 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 might not approve our PMA supplements
seeking to expand the indications for use of EXOGEN in metatarsal and scaphoid
fractures as proposed.

MOTYS Update

During the second quarter of 2022, prior to obtaining the results from our Phase
2 trial, we elected to discontinue the development of MOTYS, to focus our
resources on other priorities, including the integration of our recent
acquisitions and our expanded R&D and product development portfolio we inherited
with these acquisitions. We expect to incur approximately $4.0 to $6.0 million
in required costs over the next year exclusively to fulfill our remaining
regulatory obligations related to our Phase 2 trial (MOTYS Costs) with the
majority in the second half of 2022. We may assess further strategic options at
a future date.

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Consolidated Appropriations Act - 2021


In July 2022, in connection with the Consolidated Appropriations Act, 2021
(CAA), the Centers for Medicare and Medicaid Services (CMS) began utilizing new
pricing information the Company reported to it pursuant to the newly adopted
reporting obligations to adjust the Medicare payment to healthcare providers
using our Durolane and Gelsyn-3 products.

COVID-19 pandemic impact


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
as a result of the COVID-19 pandemic and could be further impacted by delays in
payments from customers, supply chain interruptions, "shelter-in-place" orders
or advisories, facility closures or other reasons related to the pandemic. As of
the date of this Quarterly Report on Form 10-Q, 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 might 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.

Results of Operations

For a description of the components of our results of operations, refer to Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2021 10-K.


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

                                                           Three Months Ended                                     Six Months Ended
                                                July 2, 2022               July 3, 2021               July 2, 2022               July 3, 2021
Net sales                                             100.0   %                    100.0   %                100.0   %                     100.0  %
Cost of sales (including depreciation and
amortization)                                          31.1   %                     30.5   %                 33.1   %                      29.1  %
Gross profit                                           68.9   %                     69.5   %                 66.9   %                      70.9  %
Selling, general and administrative expense            64.0   %                     62.9   %                 68.2   %                      54.1  %
Research and development expense                        4.5   %                      4.4   %                  5.2   %                       3.0  %
Restructuring costs                                     0.7   %                        -   %                  0.6   %                         -  %
Change in fair value of contingent
consideration                                           0.2   %                      0.6   %                  0.2   %                       0.3  %
Depreciation and amortization                           1.9   %                      1.7   %                  2.3   %                       2.0  %
Impairment of variable interest entity
assets                                                    -   %                      5.2   %                    -   %                       3.0  %
Operating (loss) income                                (2.4  %)                     (5.3  %)                 (9.6  %)                       8.5  %

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


                                                       Three Months Ended                             Six Months Ended
(in thousands)                                 July 2, 2022           July 3, 2021           July 2, 2022           July 3, 2021
Net (loss) income                            $      (8,014)         $     

(10,780) $ (22,820) $ 13,748 Income tax expense (benefit)

                         1,244                  1,714                 (3,888)                 1,641
Interest expense (income), net                       2,578                  1,681                  1,028                 (1,195)
Depreciation and amortization(a)                    12,384                  7,479                 24,863                 14,663
Acquisition and related costs(b)                     3,901                  4,580                 11,304                  7,776
Restructuring and succession charges(c)              1,695                    187                  2,272                    344
Equity compensation(d)                               4,616                  5,853                  9,505                (16,559)
Equity loss in unconsolidated investments(e)           280                    432                    681                    901
Foreign currency impact(f)                             602                    (12)                   541                    (64)
Impairments related to variable interest
entity(g)                                                -                  7,043                      -                  7,043
Other items(h)                                       3,645                  1,710                  6,556                  2,659
Adjusted EBITDA                              $      22,931          $      19,887          $      30,042          $      30,957


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(a)Includes for the three months ended July 2, 2022 and July 3, 2021 and the six
months ended July 2, 2022 and July 3, 2021, respectively, depreciation and
amortization of $9,684, $5,618, $18,902 and $10,854 in cost of sales and $2,700,
$1,861, $5,961 and $3,809 in operating expenses presented in the consolidated
statements of operations and comprehensive (loss) 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 the three and six months ended July 2, 2022 were the
result of adopting acquisition related restructuring plans to reduce headcount,
reorganize management structure and to consolidate certain facilities. Costs
incurred during the corresponding periods in 2021 were primarily related to
executive transitions.

(d)The three and six months ended July 2, 2022 and the three months ended
July 3, 2021 include compensation expense resulting from awards granted under
the Company's equity-based compensation plans in effect after its initial public
offering (IPO). The six months ended July 3, 2021 also includes the expense and
the change in fair value of the liability-classified awards granted under the
compensation plans in effect prior to the Company's IPO.

(e)Represents CartiHeal equity investment losses.

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

(g)Represents the loss on impairment of Harbor Medtech Inc.'s (Harbor) long-lived assets and the Company's investment in Harbor.


(h)Other items primarily includes charges associated with strategic
transactions, such as potential acquisitions; public company preparation costs,
which primarily includes accounting and legal fees; and MOTYS Costs (as defined
below). During the second quarter of 2022, prior to obtaining the results from
our Phase 2 trial, we elected to discontinue the development of MOTYS, to focus
our resources on other priorities, including the integration of our recent
acquisitions and our expanded R&D and product development portfolio we inherited
with these acquisitions. In the second quarter of 2022, we incurred $0.8
million, and we expect to incur approximately $4.0 to $6.0 million in required
costs over the next twelve months with the majority in the second half of 2022,
exclusively to fulfill our remaining regulatory obligations related to our Phase
2 trial (MOTYS Costs).

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 (loss) income before depreciation and amortization, provision of
income taxes and interest expense (income), 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 related
costs, restructuring and succession charges, equity compensation, 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.

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 report, including in the table above, to
its most directly comparable U.S. GAAP measure.

Net sales


                                                      Three Months Ended                               Change
(in thousands, except for percentage)         July 2, 2022           July 3, 2021              $                   %
U.S.                                        $     126,310          $      98,682          $  27,628                 28.0  %
International                                      14,021                 11,134              2,887                 25.9  %
Net Sales                                   $     140,331          $     109,816          $  30,515                 27.8  %


U.S.

Net sales increased $27.6 million, or 28.0%, of which acquisitions contributed
$18.1 million. Revenue also increased due to volume growth. Total increases by
vertical were: (i) Pain Treatments-$6.9 million; (ii) Restorative Therapies-$8.2
million; and (iii) Surgical Solutions-$12.5 million.

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International

Net sales increased $2.9 million, or 25.9%, of which acquisitions contributed $3.5 million, partially offset by a decline in sales volume within our Restorative Therapies vertical.


                                                       Six Months Ended                                Change
(in thousands, except for percentage)         July 2, 2022           July 3, 2021              $                   %
U.S.                                        $     230,391          $     173,220          $  57,171                 33.0  %
International                                      27,230                 18,374              8,856                 48.2  %
Net Sales                                   $     257,621          $     191,594          $  66,027                 34.5  %


U.S.

Net sales increased $57.2 million, or 33.0%, of which acquisitions contributed
$41.2 million. Revenue also increased due to volume growth. Total increases by
vertical were: (i) Pain Treatments-$17.0 million; (ii) Restorative
Therapies-$18.5 million; and (iii) Surgical Solutions-$21.6 million.

International


Net sales increased $8.9 million, or 48.2%, due to acquisitions. Revenue also
slightly increased due to sales volume growth as revenue during the first
quarter of 2021 was negatively affected by the economic impact of the COVID-19
pandemic. This growth was partially offset by a decline in sales volume within
our Restorative Therapies vertical during the second quarter of 2022.

Gross profit and gross margin


                                                      Three Months Ended                               Change
(in thousands, except for percentage)         July 2, 2022           July 3, 2021              $                   %
U.S.                                        $      87,331          $      68,814          $  18,517                 26.9  %
International                                       9,323                  7,499              1,824                 24.3  %
Total                                       $      96,654          $      76,313          $  20,341                 26.7  %


                                Three Months Ended
                   July 2, 2022        July 3, 2021      Change
U.S.                       69.1  %           69.7  %     (0.6  %)
International              66.5  %           67.4  %     (0.9  %)
Total                      68.9  %           69.5  %     (0.6  %)


U.S.

Gross profit increased $18.5 million, or 26.9%, primarily due to the increase in
net sales. Gross margin decreased due to product mix including products
introduced as a result of acquisitions, partially offset by less inventory
step-up amortization of acquisition related assets in 2022 compared with the
prior year.

International

Gross profit increased $1.8 million, or 24.3%, primarily due to the increase in net sales. Gross margin decreased due to product mix including products introduced as a result of acquisitions.


                                                       Six Months Ended                                Change
(in thousands, except for percentage)         July 2, 2022           July 3, 2021              $                   %
U.S.                                        $     154,947          $     123,429          $  31,518                 25.5  %
International                                      17,409                 12,440              4,969                 39.9  %
Total                                       $     172,356          $     135,869          $  36,487                 26.9  %


                                Six Months Ended
                  July 2, 2022       July 3, 2021      Change
U.S.                     67.3  %           71.3  %     (4.0  %)
International            63.9  %           67.7  %     (3.8  %)
Total                    66.9  %           70.9  %     (4.0  %)


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U.S.

Gross profit increased $31.5 million, or 25.5%, 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 1.5% from inventory step-up amortization of acquisition related assets in 2022 compared with the prior year.

International

Gross profit increased $5.0 million, or 39.9%, 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


                                                      Three Months Ended                               Change
(in thousands, except for percentage)         July 2, 2022           July 3, 2021              $                   %

Selling, general and administrative expense $ 89,620 $ 69,050 $ 20,570

                 29.8  %


Selling, general and administrative expenses increased $20.6 million, or 29.8%,
primarily due to: (i) an increase in compensation related expenses of $12.3
million, primarily resulting from acquisitions; (ii) an increase in consulting
and travel related expenses of $4.4 million; and (iii) an increase in bad debt
expenses of $1.9 million.

                                                       Six Months Ended                                Change
(in thousands, except for percentage)         July 2, 2022           July 3, 2021              $                   %

Selling, general and administrative expense $ 175,744 $ 103,736 $ 72,008

                 69.4  %


Selling, general and administrative expenses increased $72.0 million, or 69.4%,
primarily due to: (i) an increase in compensation related expenses of $29.1
million, primarily resulting from acquisitions; (ii) an increase in equity-based
compensation of $24.0 million, which includes a $23.4 million decrease in fair
market value during 2021 of accrued equity-based compensation resulting from the
difference between the pricing from the pending IPO and the actual offering
price; (iii) an increase in consulting and travel related expenses of $8.8
million; (iv) an increase of $2.9 million in bad debt expenses; and (v) an
increase of $1.9 million in corporate and employee health insurance primarily
resulting from acquisitions.

Research and development expenses


                                                     Three Months Ended                               Change
(in thousands, except for percentage)        July 2, 2022           July 3, 2021              $                   %
Research and development expense           $    6,366             $       4,836          $   1,530                 31.6  %


Research and development expense increased by $1.5 million, or 31.6%, due to:
(i) an increase of $0.9 million in consulting costs; and (ii) an increase of
$0.8 million in compensation related expenses partially driven by acquisitions.

                                                   Six Months Ended                     Change

(in thousands, except for percentage) July 2, 2022 July 3, 2021

         $            %

Research and development expense $ 13,294 $ 5,783

$ 7,511 129.9 %



Research and development expense increased by $7.5 million, or 129.9%, primarily
due to: (i) an increase of $2.7 million in consulting costs; (ii) an increase of
$2.3 million in compensation related expenses partially driven by acquisitions;
and (iii) an increase in equity-based compensation of $2.0 million, which
includes a $1.8 million decrease in fair market value during 2021 of accrued
equity-based compensation resulting from the difference between the pricing from
the pending IPO and the actual offering price.

Restructuring costs

Restructuring costs of $1.0 million and $1.6 million for the three and six months ended July 2, 2022, respectively, were incurred as a result of restructuring plans for recently acquired businesses to reduce headcount, to reorganize management structure and to consolidate certain facilities.

Change in fair value of contingent consideration


                                                     Three Months Ended                              Change

(in thousands, except for percentage) July 2, 2022 July 3, 2021

              $                    %
Change in fair value of contingent
consideration                               $      273          $         641          $    (368)               (57.4  %)


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                                                        Six Months Ended                                  Change
(in thousands, except for percentage)          July 2, 2022            July 3, 2021              $                    %
Change in fair value of contingent
consideration                               $      542               $         641          $     (99)               (15.4  %)


The changes in fair value of contingent consideration during the three and six
months ended July 2, 2022 compared with the prior year comparable periods
resulted from not meeting the $15,000 FDA approval milestone related to the
Bioness Acquisition, thereby decreasing the amount of contingent consideration
owed. Fair value changes involving contingent consideration represent changes in
the present value of discounted cash flows due to the passage of time.

Depreciation and amortization


                                                  Three Months Ended                    Change

(in thousands, except for percentage) July 2, 2022 July 3, 2021

        $           %
Depreciation and amortization             $    2,696          $       1,852      $ 844        45.6  %


                                                   Six Months Ended                     Change

(in thousands, except for percentage) July 2, 2022 July 3, 2021

         $            %
Depreciation and amortization             $       5,950      $       3,777  

$ 2,173 57.5 %



Depreciation and amortization increased during three and six months ended
July 2, 2022 compared with the prior year comparable periods primarily due to
acquisitions, partially offset by lower amortization expense in the current year
as certain assets became fully amortized.

Impairment of variable interest entity assets


We terminated its Collaboration Agreement with Harbor on June 8, 2021 resulting
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. Refer
to Note 3. Business combination and investments in the Notes to the unaudited
condensed consolidated financial statements Part I, Item 1. Financial Statements
of this Form 10-Q for further details concerning the impairment and
deconsolidation of Harbor.

Other expense

                                                     Three Months Ended                                Change
(in thousands, except for percentage)        July 2, 2022           July 3, 2021              $                    %
Interest expense, net                      $    2,578             $       1,681          $     897                 53.4  %
Other expense                              $      884             $       1,645          $    (761)               (46.3  %)


Interest expense, net increased $0.9 million due to an increase of $1.3 million
in interest expense as a result of our October 2021 debt refinancing, partially
offset by $0.5 million of interest income from the change in the fair value of
our interest rate swap.

Other expense decreased $0.8 million primarily due to the impairment of our Harbor investment of $1.4 million in the prior year, partially offset by a $0.6 million foreign currency impact.


                                                      Six Months Ended                                Change
(in thousands, except for percentage)       July 2, 2022           July 3, 2021              $                    %
Interest expense (income), net             $      1,028          $      (1,195)         $   2,223                (186.0  %)
Other expense                              $        922          $       2,064          $  (1,142)                (55.3  %)


Interest expense (income), net changed $2.2 million due to: (i) the settlement
of our equity participation right (EPR) liability in 2021 resulting in interest
income of $2.8 million; and (ii) an increase of $2.1 million in interest expense
as a result of our October 2021 debt refinancing. These changes were partially
offset by a $2.9 million increase in interest income resulting from the change
in the fair value of our interest rate swap.

Other expense decreased $1.1 million primarily due to the impairment of our Harbor investment of $1.4 million in the prior year, partially offset by a $0.6 million foreign currency impact.

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Income tax (benefit) expense

                                                 Three Months Ended                   Change

(in thousands, except for percentage) July 2, 2022 July 3, 2021

      $            %
Income tax expense                        $      1,244       $     1,714       $ (470)      (27.4) %
Effective tax rate                                18.4  %           18.9  %                  (0.5) %

Income tax expense for the three months ended July 2, 2022 and July 3, 2021 was primarily due to a change in our forecasted effective tax rate.


                                                  Six Months Ended          

Change

(in thousands, except for percentage) July 2, 2022 July 3, 2021

       $            %
Income tax (benefit) expense              $     (3,888)      $     1,641       $ (5,529)          NM
Effective tax rate                                14.6  %           10.7  %                   3.9  %


(NM = Not Meaningful)

Income tax benefit for the six months ended July 2, 2022 and July 3, 2021 was
primarily due to net losses experienced during the first six months of 2022. The
income tax expense for the six months ended July 3, 2021 was primarily due to
capitalized expenses resulting from our IPO.

Noncontrolling interest


                                                       Three Months Ended                                 Change
(in thousands, except for percentage)          July 2, 2022            July 3, 2021              $                    %
Continuing LLC Owner                        $      545               $       1,478          $    (933)               (63.1)  %
Other noncontrolling interest                      217                       5,176             (4,959)               (95.8  %)
Total                                       $      762               $       6,654          $  (5,892)


                                                       Six Months Ended                                 Change
(in thousands, except for percentage)         July 2, 2022           July 3, 2021              $                    %
Continuing LLC Owner                        $       3,956          $       1,397          $   2,559                183.2  %
Other noncontrolling interest                         335                  5,665             (5,330)               (94.1  %)
Total                                       $       4,291          $       7,062          $  (2,771)


Subsequent to the IPO and related transactions, we are the sole managing member
of BV LLC in which we own 79.6%. 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 20.4% that is owned by the Continuing LLC Owner.

The decline in losses associated with other noncontrolling interest resulted
from our deconsolidation of Harbor upon the termination of the Collaboration
Agreement during the second quarter of 2021 in which we incurred a $5.7 million
impairment charge. We ceased being the primary beneficiary upon termination as
we no longer had the power to direct Harbor's significant activities.

Segment Adjusted EBITDA

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


                                                  Three Months Ended                    Change

(in thousands, except for percentage) July 2, 2022 July 3, 2021

        $            %
U.S.                                      $      19,196      $      17,149      $ 2,047        11.9  %
International                             $       3,735      $       2,738      $   997        36.4  %


U.S.

Adjusted EBITDA increased $2.0 million, or 11.9%, primarily due to higher gross profit, partially offset with an increase in compensation related charges, consulting and travel related expenses as well as higher public company costs.

International


Adjusted EBITDA increased $1.0 million, or 36.4%, primarily due to an increase
in gross profit resulting from the increase in sales. This increase was
partially offset by consulting, travel related expenses and the negative impact
of foreign currency.

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                                                       Six Months Ended                                 Change
(in thousands, except for percentage)         July 2, 2022           July 3, 2021              $                    %
U.S.                                        $      23,924          $      27,147          $  (3,223)               (11.9  %)
International                               $       6,118          $       3,810          $   2,308                 60.6   %


U.S.

Adjusted EBITDA decreased $3.2 million, or 11.9%, primarily due to an increase
in compensation related charges of previously discussed as well as higher public
company costs, partially offset by an increase in gross profit.

International

Adjusted EBITDA increased $2.3 million, or 60.6%, primarily due to an increase in gross profit resulting from the increase in sales. This increase was partially offset by the increase in consulting, travel related expenses, compensation and the negative impact of foreign currency.

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. As discussed below under
CartiHeal, additional capital was provided to consummate the CartiHeal
Acquisition through the Term Loan Facility, extended to us through the Amended
2019 Credit Agreement, and additional capital will be required to fund the
Deferred Amount under the CartiHeal Amendment. 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. However, additional capital
may be required to fund the Deferred Amount under the CartiHeal Amendment.

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 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 might not be favorable to us. The covenants under
the Amended 2019 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 Amended 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).

Cash requirements


Except as provided below and the previously discussed capital requirements for
the acquisition of CartiHeal, there have been no material changes to our future
cash requirements as disclosed in Part II, Item 7 of our 2021 10-K.

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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 11. Commitment and contingencies in
Part 1, Item 8. Financial Statements and Supplementary Data in this Quarterly
Report on Form 10-Q for further information regarding other matters.

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 under the Tax Receivable Agreement (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.

CartiHeal

As disclosed under Strategic Transactions-CartiHeal, we exercised the Call
Option in April 2022 for the acquisition of all the remaining shares of
CartiHeal, excluding shares we already own, for approximately $315.0 million. An
additional $135.0 million is payable contingent upon the achievement of $75.0
million in trailing twelve month sales. Pursuant to the CartiHeal Amendment, we
deferred $215.0 million of the aggregate purchase price otherwise due at closing
until the earlier of the achievement of certain milestones and the occurrence of
certain installment payment dates. The first two milestones, each of which are
$50.0 million, will be paid no later than the end of the third quarter of 2023.
The next two milestones, each of which are $25.0 million, will be paid by the
end of 2024 and 2025, respectively. The final milestone of $65.0 million is to
be paid by 2027. We are currently exploring financing options in order to fund
Deferred Amount payable in connection with the CartiHeal Acquisition. For
additional information, see Part II, Item 1A. Risk Factors.

Credit Facilities


On July 11, 2022 we amended the 2019 Credit Agreement (as amended, the Amended
2019 Credit Agreement) in conjunction with the CartiHeal Acquisition. Through
the Amended 2019 Credit Agreement, an $80.0 million Term Loan Facility was
extended to us for (i) the financing of the CartiHeal Acquisition; (ii) the
payment of related fees and expenses; and (iii) working capital needs and
general corporate purposes of the Company. The Term Loan Facility will mature on
October 26, 2026. We may elect either the secured overnight financial rate
(SOFR) or base interest rate options for all borrowings as of July 12, 2022,
which includes any outstanding balances under the Term Loan, Term Loan Facility
and revolving credit facility. Initial SOFR loans and base rate loans had a
margin of 3.25% and 2.25%, respectively, subsequent to July 12, 2022. The
Amended 2019 Credit Agreement includes customary affirmative and negative
covenants including financial maintenance covenants.

We were in compliance with all required financial covenants under the 2019 Credit Agreement as of July 2, 2022.

Other


For information regarding Commitments and Contingencies, refer to Note 11.
Commitments and contingencies and Note 3. Acquisitions and investments to the
Notes to the Unaudited condensed consolidated financial statements of Part 1,
Item 1. Financial Statements of this Form 10-Q.

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Information regarding cash flows

Cash, cash equivalents and restricted cash as of July 2, 2022 totaled $41.0 million, compared to $99.2 million as of December 31, 2021. The decrease in cash was primarily due to the following:


                                                         Six Months Ended                                 Change
(in thousands, except for percentage)           July 2, 2022           July 3, 2021               $                   %
Net cash from operating activities            $     (18,080)         $        (713)         $  (17,367)                     NM
Net cash from investing activities                  (56,699)               (49,296)             (7,403)               15.0  %
Net cash from financing activities                   16,860                101,409             (84,549)              (83.4  %)
Effect of exchange rate changes on cash                (293)                  (171)               (122)               71.3  %
Net change in cash, cash equivalents and
restricted cash                               $     (58,212)         $      51,229          $ (109,441)                     NM


NM = Not Meaningful

Operating Activities

Net cash used in operating activities increased $17.4 million, primarily due to
completed acquisitions and the resulting integration costs, higher employee
compensation and increased operating expenses. These outflows were partially
offset by increased collections from higher sales.

Investing Activities


Cash flows used in investing activities increased $7.4 million, primarily due to
the $50.0 million held in trust for the acquisition of CartiHeal and an increase
of $2.3 million in capital expenditures, partially offset by the $45.8 million
acquisition of Bioness in 2021.

Financing Activities


Cash flows provided by financing activities decreased $84.5 million, primarily
due to the $107.8 million in net proceeds from the issuance of Class A common
stock sold during our 2021 IPO. This was partially offset by a $25.0 million
draw on our revolving credit facility in 2022.

Off-balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Contractual Obligations

Except as discussed above, there have been no material changes to our contractual obligations as disclosed in our 2021 10-K.

Critical Accounting Estimates


Our discussion of operating results is based upon the unaudited condensed
consolidated financial statements and accompanying notes. The preparation of
these statements requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. Our critical accounting
estimates are detailed in Item 7 of our 2021 10-K and we have no material
changes from such disclosures.

Recently Issued Accounting Pronouncements


Refer to Note 1. Organization, in the Notes to the unaudited condensed
consolidated financial statements of Part 1, Item 1. Financial Statements of
this Form 10-Q for detailed information regarding the status of recently issued
accounting pronouncements.

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