Bioventus Inc.: Form 10-Q for the period ended Oct 2, 2021

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 as disclosed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 26, 2021 (2020 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 and Joint Preservation includes the legacy osteoarthritis (OA) joint pain treatment and joint preservation products, plus Peripheral Nerve Stimulation (PNS) products.
• Bone Graft Substitutes (BGS) is comprised of human tissue allograft and synthetic products used primarily in spine surgery; and
• Restorative Therapies includes the legacy minimally invasive fracture treatments, plus rehabilitation products.

The following table sets forth total net sales, net income and Adjusted EBITDA:

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

Recent Developments

Misonix Acquisition

On July 29, 2021, we entered into an Agreement and Plan of Merger (the Misonix Merger Agreement) with Misonix, Inc. (Misonix). On October 29, 2021, we merged with Misonix. in a cash-and-stock transaction (the Misonix Merger). Misonix manufactures minimally invasive surgical ultrasonic medical devices used for precise bone sculpting, removal of soft and hard tumors, and tissue debridement, primarily in the areas of neurosurgery, orthopedic surgery, plastic surgery, wound care and maxillo-facial surgery. Misonix also exclusively distributes skin allografts and wound care products used to support healing of wounds.

Pursuant to the Misonix Merger Agreement, at the closing of the Misonix Merger, we provided merger consideration totaling $513.2 million, including cash of $183.0 million and the issuance of 18,340,790 shares of our Class A common stock and the assumption or settlement of Misonix stock options having a value of $22.6 million. The remaining consideration is the net of Misonix cash and debt which we repaid in full. The acquisition includes the entire portfolio of Misonix products as well as its research and development pipeline. The cash consideration was funded through taking on additional debt, as described below, as well as the use of cash on hand.

Bioness Acquisition

On March 30, 2021, we completed the acquisition of Bioness, a global leader in neuromodulation and advanced rehabilitation medical devices through its innovative PNS therapy and premium advanced rehabilitation solutions.

The Bioness acquisition gives us access into two large and growing markets: PNS and the advanced rehabilitation market, and we estimate their medical devices address total global market opportunities approaching $8 billion per year. We believe both of these markets offer attractive growth opportunities driven by demographic trends and the need for safe, effective, treatment options for the many patients suffering from post-surgical pain, stroke, multiple sclerosis, traumatic brain injury, spinal cord injury and cerebral palsy.

Bioness advanced rehabilitation solutions have a broad portfolio of offerings, including proprietary electrical stimulation exoskeletal devices for both the upper and lower extremities, robotic gait and fall safety systems, and high-tech, interactive software learning and recovery assessment platforms.

These products play an essential role in helping patients regain mobility due to stroke, traumatic brain injury, multiple sclerosis and osteoarthritis, and are used by physical or occupational therapists in a clinical setting or by the patient at home, with the guidance of a clinician through telemedicine.

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

Under the Merger Agreement pursuant to which we acquired Bioness (the Bioness Merger Agreement), we paid $48.9 million at the closing of the transaction and agreed to pay up to an additional $43.0 million of discounted contingent consideration related to the achievement of certain key milestones. The acquisition includes the entire portfolio of Bioness products as well as its research and development pipeline. The up-front consideration was funded exclusively through the use of cash on hand.

CartiHeal

On July 15, 2020, we entered into an Option and Equity Purchase Agreement (Option Agreement) with CartiHeal (2009) Ltd., a privately-held company headquartered in Israel and the developer of the proprietary Agili-C™ implant for the treatment of joint surface lesions in traumatic and osteoarthritic joint, and its shareholders. The agreement provides us with an exclusive option to acquire 100% of CartiHeal’s shares under certain conditions, or the Call Option, and provides CartiHeal with a put option that would require us to purchase 100% of CartiHeal’s shares under certain conditions, or the Put Option. The Put Option is only exercisable by CartiHeal upon pivotal clinical trial success, including achievement of certain secondary endpoints and FDA approval of the Agili-C device with a label consistent in all respects with pivotal clinical trial success. The pivotal clinical trial’s objective is to demonstrate the superiority of the Agili-C implant over the surgical standard of care, including microfracture and debridement, for the treatment of cartilage or osteochondral defects, in both osteoarthritic knees and knees without degenerative changes.

On August 2, 2021, CartiHeal provided us a statistical report containing the results of the pivotal clinical trial. We have determined that the report is consistent with the terms of the agreement and all required endpoints have been achieved. As a result, in August 2021, upon approval of the Board of Directors, we deposited $50.0 million into escrow as a deposit towards the potential purchase price of CartiHeal. Consideration for the acquisition of all of the remaining shares of CartiHeal, excluding those we own, pursuant to the Call Option or Put Option would be $314.9 million, inclusive of the existing deposit, all of which would be payable at closing, with an additional $150.0 million payable upon achievement of certain sales milestones related to Agili-C. Such closing would be subject to customary closing conditions.

CartiHeal submitted the final clinical module of a Modular Premarket Approval Application (PMA) seeking FDA approval during the fourth quarter of 2021. In order to support the completion of the PMA, if needed, we will purchase an additional 338,089 of CartiHeal Series G Preferred Shares for $5.0 million.

BONES Trial

We submitted a supplemental PMA 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 continue to evaluate the FDA’s comments and are initiating discussions with them to address their concerns. 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 supplement may be delayed beyond the time originally anticipated. Moreover, if our responses do not satisfy the FDA’s concerns, the FDA may not approve our PMA supplement seeking to expand the indications for use of EXOGEN as proposed.

Other

On August 23, 2021, we invested $10.0 million in Trice Medical, Inc. (Trice). Trice is a privately held company that develops and commercializes minimally invasive technologies for sports medicine and orthopedic surgical procedures. Trice combines their handheld arthroscope and portable ultrasound visualization technologies with its surgical devices to treat a range of sports medicine and orthopedic conditions, including tendinopathy, planter fasciitis and carpel tunnel, in order to improve patient recovery time, reduce pain, minimize scarring and move surgical procedures out of higher cost points of care. Trice’s established and growing presence in sports medicine and orthopedics is directly aligned with our strategy of expanding our offerings.

Our investment resulted in exclusive sales and distribution rights to Trice’s products outside of the U.S. and a seat on the Trice board of directors. It will also fund the ongoing growth of Trice and is expected to allow us both to further assess the merits of a potential combination. We also entered into a co-development arrangement to explore the integration of Trice technologies with our current and future PNS products in order to accelerate the adoption of both of our products.

COVID-19 pandemic impact

In 2020, the COVID-19 pandemic spread around the world, including the United States. New variants of the virus have emerged, some of which have shown to be more contagious. The COVID-19 pandemic has had widespread, rapidly evolving and unpredictable impacts on global society, economies, financial markets and business practices. Federal and state governments have implemented measures in an effort to prevent or minimize the spread of the virus, and ongoing effects of the pandemic, including social distancing, travel restrictions, border closures, limitations on public gatherings, mandatory closure or reduced capacity of businesses, work from home, supply chain logistical changes and other measures, which caused global business disruptions and significant volatility in U.S. and international debt and equity markets. Our business, results of operations and financial condition have been and may continue to be, materially impacted by fluctuations in patient visits and elective procedures and any future temporary cessations of elective procedures and could be further impacted by delays in payments from customers, supply chain interruptions, extended “shelter-in-place” orders or advisories, facility closures or other reasons related to the pandemic. Furthermore, the long-term impact of COVID-19 on our business will depend on many factors, including, but not limited to, the duration and severity of the pandemic, the spread of new variants of the virus, new and ongoing measures taken in response to the pandemic, the availability, adoption and effectiveness of vaccines and treatments, the impact on economic activity from the pandemic and actions taken in response and the resulting impact it has on our partners, patients and communities in which we operate, all of which continue to be uncertain. As of the date of this Quarterly Report on Form 10-Q, the extent to which COVID-19 could materially impact the Company’s financial conditions, liquidity or results of operations is uncertain.

To the extent COVID-19 disruptions continue to adversely impact our business, results of operations and financial condition, it may also have the effect of heightening risks relating to our ability to successfully commercialize newly developed or acquired products or therapies, consolidation in the healthcare industry, intensified pricing pressure as a result of changes in the purchasing behavior of hospitals and maintenance of our numerous contractual relationships. For additional information on the risks we may face as a result of COVID-19, refer to Part I, Item 1A. Risk Factors – Our business may continue to experience adverse impacts as a result of the COVID-19 pandemic in our 2020 10-K.

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 2020 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:

27

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

(in thousands)

(a) Includes for the three months ended October 2, 2021 and September 26, 2020 and the nine months ended October 2, 2021 and September 26, 2020, respectively, depreciation and amortization of $6,637, $5,477, $17,491 and $16,076 in cost of sales and $1,878, $1,667, $5,655 and $5,305 presented in the consolidated statements of operations and comprehensive (loss) income with the balance in research and development.

(b) The three and nine months ended October 2, 2021 primarily includes equity-based compensation expense (income) resulting from awards granted under the Company’s current equity based compensation plan (2021 Plan) and compensation costs. The nine months ended October 2, 2021 also includes the change in fair market value of accrued equity-based compensation related to the BV LLC Phantom Profits Interest Plan (Phantom Plan) due to expected pricing with our IPO. Equity compensation expenses for the three and nine months ended September 26, 2020 represents compensation from the Company’s management incentive plan and Phantom Plan as well as the change in fair market value of accrued equity-based compensation related to the plans due to the impact of the COVID-19 pandemic on our business.

(c) Costs incurred as a result of adopting a restructuring plan for Bioness to reduce headcount, reorganize management structure and consolidate certain facilities.

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

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

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

(g) Represents costs incurred to acquire and integrate Bioness.

(h) Amortization of the inventory step-up associated with the Bioness acquisition.

(i) Represents CartiHeal equity investment losses.

(j) Represents change in fair value of contingent consideration resulting from the Bioness Acquisition.

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

(l) Other non-recurring costs primarily includes charges associated with strategic transactions, such as potential acquisitions and public company preparation costs, primarily accounting and legal fees.

We present Adjusted EBITDA, a non-GAAP financial measure, because we believe it is a useful indicator of our operating performance. Our management uses Adjusted EBITDA principally as a measure of our operating performance and believes that Adjusted EBITDA is useful to our investors because it is frequently used by securities analysts, investors and other interested parties frequently use it in their evaluation of the operating performance of companies in industries similar to ours. Our management also uses Adjusted EBITDA for planning purposes, including the preparation of our annual operating budget and financial projections. We define Adjusted EBITDA as net (loss) income before depreciation and amortization, provision of income taxes and interest expense, adjusted for the impact of certain cash, non-cash and other items that we do not consider in our evaluation of ongoing operating performance. These items include equity compensation, change in fair value of contingent consideration, Bioness acquisition costs, succession and transition charges, loss on impairment of intangible assets, losses associated with debt refinancing, foreign currency impact and other non-recurring costs. Adjusted EBITDA by segment is comprised of net sales and costs directly attributable to a segment, as well as an allocation of corporate overhead costs. The allocation of corporate overhead costs is determined based on various methods but is primarily based on a ratio of net sales by segment to total consolidated net sales.

Net sales

(in thousands, except for percentage)

(in thousands, except for percentage)

Three months ended October 2, 2021 compared to September 26, 2020

U.S.

Net sales increased $20.3 million, or 25.7%. The changes in net sales by vertical are as follows:

Revenue increased primarily due to volume growth as revenue in 2020 was negatively affected by the economic impact of the COVID-19 pandemic. The Bioness acquisition contributed $8.8 million in additional sales primarily within the Restorative Therapies vertical.

International

Net sales increased $2.7 million, or 38.5%, due to the Bioness acquisition contributing $2.0 million in additional sales and the negative impacts to revenue during 2020 as a result of the COVID-19 pandemic.

Nine months ended October 2, 2021 compared to September 26, 2020

U.S.

Net sales increased $68.4 million, or 33.5%. The changes in net sales by vertical are as follows:

Revenue increased primarily due to volume growth as revenue in 2020 was negatively affected by the economic impact of the COVID-19 pandemic. The Bioness acquisition contributed a total of $18.2 million in additional sales comprising of $15.6 million within the Restorative Therapies vertical and the remainder in Pain Treatments and Joint Preservation. These increases were partially offset with more treatments being sold under contracts with major insurers at lower prices.

International

Net sales increased $9.6 million, or 51.5%, primarily due to sales volume growth as revenue in 2020 was negatively affected by the economic impact of the COVID-19 pandemic. The Bioness acquisition contributed $4.5 million in additional sales, a majority of which was reported within our Restorative Therapies vertical.

Gross profit and gross margin

(in thousands, except for percentage)

(in thousands, except for percentage)

Three months ended October 2, 2021 compared to September 26, 2020

U.S.

Gross profit increased $14.9 million, or 25.9%, primarily due to the increase in net sales. Gross margin remained consistent with the prior year comparable period.

International

Gross profit increased $1.7 million, or 34.7%, primarily due to the increase in net sales. Gross margin decreased due to product mix.

Nine months ended October 2, 2021 compared to September 26, 2020

U.S.

Gross profit increased $48.3 million, or 32.7%, primarily due to the increase in net sales. Gross margin slightly decreased due to product mix.

International

Gross profit increased $6.5 million, or 52.8%, primarily due to the increase in net sales. Gross margin increased slightly due to product and geographical mix.

Selling, general and administrative expense

(in thousands, except for percentage)

(in thousands, except for percentage)

30

Three months ended October 2, 2021 compared to September 26, 2020

Selling, general and administrative expenses increased $19.3 million, or 38.5%, primarily due: i) to the impact of the COVID-19 pandemic on our business in 2020 compared to normalized spending in 2021; ii) costs incurred as a result of being a public company in 2021 and iii) the Bioness Acquisition. The increases were primarily in the following areas:

These increases were partially offset by a change in fair value of our accrued equity-based compensation, resulting in less expense compared to the prior year of $5.7 million.

Nine months ended October 2, 2021 compared to September 26, 2020

Selling, general and administrative expenses increased $42.3 million, or 32.2%, primarily due: i) to the impact of the COVID-19 pandemic on our business in 2020 compared to normalized spending in 2021; ii) costs incurred as a result of being public company in 2021 and iii) the Bioness Acquisition. The increases were primarily in the following areas:

These increases were partially offset by a higher change in fair value of our accrued equity-based compensation resulting in an increased net recovery of expense compared to the prior year of $21.3 million. The change in fair value for 2021 was due to adjustments to reflect the difference between the expected pricing from the pending IPO and the actual offering price. The change in fair value for 2020 was due to the impact of the COVID-19 pandemic on our business.

Research and development expenses

(in thousands, except for percentage)

(in thousands, except for percentage)

Three months ended October 2, 2021 compared to September 26, 2020

Research and development expense increased by $2.6 million, or 72.4%, partially due to the Bioness acquisition and as well as our cost reduction efforts implemented during 2020 as a result of the COVID-19 pandemic. In addition, compensation related expenses increased $1.0 million.

Nine months ended October 2, 2021 compared to September 26, 2020

Research and development expense increased by $3.6 million, or 43.6%, partially due to the Bioness acquisition and as well as our cost reduction efforts implemented during 2020 as a result of the COVID-19 pandemic. In addition, compensation related expenses increased $2.0 million and equity compensation, excluding the change in fair value discussed below, increased $1.3 million. These increases were partially offset by a higher change in fair value of our accrued equity-based compensation resulting in an increased net recovery of expense totaling $2.0 million. The change in fair value during 2021 was due to adjustments to reflect the difference between the expected pricing from the pending IPO and the actual offering price. The change in fair value during 2020 was due to the impact of the COVID-19 pandemic on our business.

Restructuring costs

Restructuring costs of $1.8 million for the three and nine months ended October 2, 2021 were incurred as a result of initiating a restructuring plan for a recently acquired business to reduce headcount and to reorganize management structure.

Change in fair value of contingent consideration

The change in fair value of the Bioness contingent consideration of $0.7 million and $1.3 million during the three and nine months ended October 2, 2021, respectively, resulted from the change in present value of discounted cash flows due to the passage of time.

Depreciation and amortization

(in thousands, except for percentage)

(in thousands, except for percentage)

Depreciation and amortization increased during three and nine months ended October 2, 2021 compared with the prior year comparable periods primarily due to the Bioness acquisition.

Impairment of variable interest entity assets

The Company terminated the Harbor Collaboration Agreement on June 8, 2021 which resulted in a $5.7 million impairment on Harbor’s long-lived asset balances, of which $5.2 million was recorded in loss attributable to noncontrolling interest. Refer to Note 3. Business combinations and investments within the Notes to the Unaudited Condensed Consolidated Financial statements of Part 1, Item 1. Financial Statements of this Form 10-Q for further details concerning the impairment and deconsolidation of Harbor.

Other (income) expense

(in thousands, except for percentage)

(in thousands, except for percentage)

NM = Not meaningful

Three months ended October 2, 2021 compared to September 26, 2020

Interest expense decreased $0.5 million primarily due to incurring $0.3 million of interest on our outstanding revolving credit facility balance in 2020 and $0.2 million less interest on our Term Loan due to lower outstanding principal during 2021.

Other expense (income) increased $4.0 million primarily due to receiving a $2.9 million Provider Relief Fund payment in 2020 under the Coronavirus Aid, Relief and Economic Security Act (CARES Act) and incurring $0.4 million in net losses related to our equity investment in CartiHeal during 2021.

Nine months ended October 2, 2021 compared to September 26, 2020

Interest expense decreased $6.9 million due to the following: i) the change in the fair value of our interest rate swap resulted in interest income of $1.4 million during 2021 compared to interest expense of $2.0 million in 2020; ii) the settlement of our equity participation right (EPR) liability during 2021 resulted in interest income of $2.8 million compared to EPR interest income of $0.8 million in 2020; iii) lower interest of $1.1 million on our Term Loan in 2021 as we have lower outstanding principal; and iv) we incurred $0.7 million in interest relating to our outstanding revolving credit facility balance in 2020.

Other expense (income) increased $7.4 million primarily due to i) a $4.1 million Provider Relief Fund payment under the CARES Act received in 2020; ii) an impairment of our Harbor investment of $1.4 million during 2021 and iii) $1.3 million in net losses related to our equity investment in CartiHeal during 2021.

Income tax expense

(in thousands, except for percentage)

(in thousands, except for percentage)

Income tax expense increased for the three and nine months ended October 2, 2021 and September 26, 2020 primarily due to the increase in our effective tax rate related to the change in structure resulting from our IPO and associated Up C partnership structure as well as the impact of non-deductible stock option expense during 2021.

Noncontrolling interest

(in thousands, except for percentage)

(in thousands, except for percentage)

Subsequent to the IPO and Transactions, we are the sole managing member of BV LLC in which we own 72.3%. 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 27.7% which is owned by the Continuing LLC Owner.

We stopped consolidating Harbor upon the termination of the Collaboration Agreement, as we ceased being the primary beneficiary because we no longer had the power to direct Harbor’s significant activities. Prior to the deconsolidation, our partial ownership and exclusive Collaboration Agreement with Harbor resulted in loss attributable to noncontrolling interest through June 8, 2021. The $4.5 million increase for the nine months ended October 2, 2021 and September 26, 2020 is primarily due to the $5.7 million impairment on Harbor’s long-lived asset balances.

Segment Adjusted EBITDA

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

(in thousands, except for percentage)

(in thousands, except for percentage)

Three months ended October 2, 2021 compared to September 26, 2020

U.S.

Adjusted EBITDA decreased $1.9 million or 8.6%, primarily due to an increase in expenses such as compensation related charges of $8.0 million as previously discussed, additional costs of being a public company and an increase in travel related expenses. The decrease was partially offset with a $14.9 million increase in gross profit resulting from higher sales.

International

Adjusted EBITDA increased $0.1 million primarily due to a $1.7 million increase in gross profit resulting from higher sales. This increase was partially offset by the increase in compensation related charges of $1.0 million previously discussed.

Nine months ended October 2, 2021 compared to September 26, 2020

U.S.

Adjusted EBITDA increased $4.1 million or 9.6% primarily due a $48.3 million increase in gross profit resulting from the increase in sales. This increase was partially offset by the increase in compensation related charges of $29.3 million previously discussed as well as higher public company costs.

International

Adjusted EBITDA increased $3.9 million primarily due to a $6.5 million increase in gross profit resulting from the increase in sales. This increase was partially offset by the increase in compensation related charges of $2.0 million previously discussed.

Liquidity and Capital Resources

Our principal liquidity needs have historically been for acquisitions, working capital, research and development, clinical trials, and capital expenditures. We expect these needs to continue as we develop and commercialize new products and further our expansion into international markets. We believe that our existing cash and cash equivalents, borrowing capacity under our revolving credit facility, cash flow from operations, and net proceeds from our IPO will be enough to meet our anticipated cash requirements for at least the next twelve months. We may require additional liquidity as we continue to execute our business strategy. Negative impacts to our liquidity would include a decline in sales of our products, including declines due to changes in our customers’ ability to obtain third-party coverage and reimbursement for procedures that utilize our products, increased pricing pressures resulting from intensifying competition and cost increases, as well as general economic and industry factors. We anticipate that to the extent that we require additional liquidity, we will obtain funding through the incurrence of other indebtedness, additional equity financings or a combination of these potential sources of liquidity. In addition, we may raise additional funds to finance future cash needs through receivables or royalty financings or corporate collaboration and licensing arrangements. If we raise additional funds by issuing equity securities or convertible debt, our stockholders will experience dilution. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, or making capital expenditures. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish valuable rights to our products, future revenue streams or product candidates, or to grant licenses on terms that may not be favorable to us. The covenants under our credit agreement limit our ability to obtain additional debt financing. We cannot be certain that additional funding will be available on acceptable terms, or at all. Any failure to raise capital in the future could have a negative impact on our financial condition and our ability to pursue our business strategies.

Misonix Acquisition

For information regarding our recently announced acquisition of Misonix, see above under Recent Developments.

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.

We are a holding company and have no material assets other than our ownership of LLC Interests and no independent means of generating revenue. The limited liability company agreement of BV LLC provides for the payment of certain distributions to the Continuing LLC Owner and us in amounts sufficient to cover the income taxes imposed on such members with respect to the allocation of taxable income from BV LLC as well as to cover our obligations under the Tax Receivable Agreement (the TRA). Additionally, in the event we declare any cash dividend, we intend to cause BV LLC to make distributions to us, in an amount sufficient to cover such cash dividends declared by us. Deterioration in the financial condition, earnings, or cash flow of BV LLC and its subsidiaries for any reason could limit or impair their ability to pay such distributions. In addition, the terms of our financing arrangements, including the 2019 Credit Agreement, contain covenants that may restrict BV LLC and its subsidiaries from paying such distributions, subject to certain exceptions. Further, BV LLC is generally prohibited under Delaware law from making a distribution to a member to the extent that, at the time of the distribution, after giving effect to the distribution, liabilities of BV LLC (with certain exceptions), as applicable, exceed the fair value of its assets. Subsidiaries of BV LLC are generally subject to similar legal limitations on their ability to make distributions to BV LLC. If we do not have sufficient funds to pay taxes or other liabilities or to fund our operations, we may have to borrow funds, which could materially adversely affect our liquidity and financial condition and subject us to various restrictions imposed by any such lenders. To the extent that we are unable to make payments under the TRA for any reason, such payments generally will be deferred and will accrue interest until paid; provided, however, that nonpayment for a specified period may constitute a material breach of a material obligation under the TRA and therefore accelerate payments due under the TRA.

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

Cash, cash equivalents and restricted cash as of October 2, 2021 totaled $130.9 million, compared to $86.8 million as of December 31, 2020. The increase in cash was primarily due to the following:

(in thousands, except for percentage)

NM = Not Meaningful

Operating Activities

Net cash from operating activities from continuing operations decreased $36.9 million, primarily due to the following:

• Compensation and annual incentive plan payments increased $19.9 million during 2021;
• Completed and potential acquisition expenses increased in 2021 as well as other nonrecurring costs of $13.6 million;
• Tax payments increased $7.2 million during 2021;
• Higher inventory purchases during 2021 of $4.9 million;
• Larger directors and officers annual insurance premiums in 2021 for $4.6 million;
• Larger net settlements in 2021 with the sole MIP awardee of $4.3 million;
• Receipt of $4.1 million from the CARES Act during 2020;
• Settlement of our EPR liability for $3.3 million occurred in 2021;
• Increase in travel expenditures of $0.7 million; and
• Fluctuations in working capital.

The above uses of cash were partially offset by:

• An increase of $35.2 million in net collections during 2021, primarily due to the economic impact of COVID-19 during 2020.

Investing Activities

Cash flows used in investing activities from continuing operations increased $43.5 million, primarily due to the $46.8 million acquisition of Bioness as well as $2.2 million in capital expenditures. These increases were partially offset by a $5.5 million decrease in investments.

Financing Activities

Cash flows provided by financing activities increased $116.8 million, primarily due to the $107.8 million in net proceeds from the issuance of Class A common stock sold during our IPO and a $14.5 million decrease in net partner distributions. These increases were partially offset by a $6.3 million increase in debt payments due to the timing of our quarter ends and the scheduled escalation in quarterly principal payments.

Credit Facilities

As of October 2, 2021, there were no material changes to our outstanding indebtedness or the terms of and available borrowing capacity under our credit facilities as disclosed in our 2020 10-K and we were in compliance with all required financial covenants. Material changes after October 2, 2021 are described below.

On August 29, 2021, we amended the 2019 Credit Agreement (the First Amendment). The First Amendment provided additional flexibility allowing for the future establishment and incurrence of a senior secured term loan facility (Term Loan Facility) in the aggregate principal amount of up to $262.0 million plus, at the Company’s election, an amount sufficient to fund any original issue discount or upfront fees.

On October 29, 2021, we amended the 2019 Credit Agreement (the Second Amendment) and prepaid $80.0 million on the existing term loan under the 2019 Credit Agreement. Upon executing the Second Amendment and making the prepayment, the amended 2019 Credit Agreement (2021 Credit Agreement) is comprised of a $360.8 million term loan (2021 Term Loan) and the $50.0 million revolving facility. All obligations under the 2021 Credit Agreement remain guaranteed by us and some of our wholly owned subsidiaries. Substantially all of our assets collateralize the obligations under the 2021 Credit Agreement. As required, we used the proceeds to finance the cash consideration related to the Misonix Merger and to repay debt and related fees, premiums and expenses. On October 25, 2021, as a precautionary measure and in order to increase our cash position and preserve financial flexibility we borrowed $20.0 million on our revolving credit facility to use for working capital needs and general corporate purposes as needed.

As of October 29, 2021 there was $360.8 million of outstanding borrowings under the 2021 Term Loan. The amended term loan and revolving credit facility mature on October 29, 2026 and there were no material changes to the various restrictive covenants. For additional information regarding the terms of the 2021 Credit Agreement, including amended interest rates, refer to Note 4. Financial instruments and Note 13. Subsequent events to the Notes to the Unaudited condensed consolidated financial statements of Part 1, Item 1. Financial Statements of this Form 10-Q.

Other

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

Off-balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Contractual Obligations

Contractual lease commitments increased $0.2 million, $0.8 million, $0.8 million, $0.8 million and $0.6 million for the years ended December 31, 2021, 2022, 2023, 2024 and 2025, respectively, compared to our lease commitments disclosed in our 2020 10-K due to a newly contracted lease and the acquisition of Bioness. As of October 2, 2021, the Misonix acquisition was still pending as described above under “Recent Developments - Misonix Acquisition” and “Credit Facilities.” Other than the foregoing, as of October 2, 2021, there have been no material changes to our contractual obligations as disclosed in our 2020 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 2020 10-K, except for the following:

Contingent Consideration

The Company initially values contingent consideration related to business combinations using a probability-weighted calculation of potential payment scenarios discounted at rates reflective of the risks associated with the expected future cash flows. Key assumptions used to estimate the fair value of contingent consideration include revenue and the probability of achieving the specific targets. After the initial valuation, the Company will use its best estimate to measure contingent consideration at each subsequent reporting period. Gains and losses are recorded with selling, general and administrative expenses within the consolidated statements of operations and comprehensive (loss) income.

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.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of October 2, 2021.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarterly period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors and other cautionary statements described under the heading Risk Factors included in our 2020 10-K, which could materially affect our businesses, financial condition, or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or future results. The below update to our Risk Factors as those presented in our 2020 10-K results from the potential acquisition of Misonix.

Risks Related to the Acquisition of Misonix

We are subject to various risks related to the acquisition of Misonix.

On October 29, 2021, we completed our acquisition of Misonix. The risks, contingencies and other uncertainties that could have a material adverse effect on our business, financial condition or results of operations as a result of the acquisition, and the anticipated benefits of the acquisition include:

• the effect of the announcement of the acquisition on our ability to retain and hire key personnel, maintain business relationships, and on operating results and the businesses generally;
• the diversion of our management’s attention from our core business as we work to take all steps necessary to integrate Misonix’s business into ours; and
• the inability to achieve the anticipated synergies and our incurrence of significant transaction related costs in connection with the acquisition.

Our future results will suffer if we do not effectively manage the expanded operations or successfully integrate the businesses of Misonix.

Our future success will depend, in part, upon our ability to manage the expanded business, including challenges related to the management and monitoring of new operations and associated increased costs and complexity associated with the acquisition of Misonix and other acquisitions. If we are not able to successfully complete integrations in an efficient and effective manner, the anticipated benefits of these acquisitions may not be realized fully, or at all, or may take longer to realize than expected, and the value of our common stock may be affected adversely. An inability to realize the full extent of the anticipated benefits of the proposed acquisitions, as well as any delays encountered in the integration processes, could have an adverse effect upon on our business, financial condition or results of operations. In addition, the actual integrations may result in additional and unforeseen expenses, including increased legal, accounting and compliance costs.