biote Corp. (BTMD) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Unless the context otherwise requires, all references in this section to the “Company,” “Biote,” “we,” “us”, or “our” refer to the business of the “BioTE Companies” prior to the business combination and to biote Corp. and its subsidiaries from and following the Business Combination in the present tense. Throughout this section, unless otherwise noted, “Holdings” refers to BioTE Holdings, LLC and its consolidated subsidiaries.
The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. You should read this discussion and analysis in conjunction with the accompanying consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. Certain amounts may not foot due to rounding. This discussion and analysis contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described under the sections entitled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” included elsewhere in this Annual Report on Form 10-K. We assume no obligation to update any of these forward-looking statements except as required by law. Actual results may differ materially from those contained in any forward-looking statements.
Overview
We operate a high growth practice-building business within the hormone optimization space. Similar to a franchise model, we provide the necessary components to enable Biote-certified practitioners to establish, build, and successfully implement a program designed to optimize hormone levels using personalized solutions for their aging patient populations. The Biote Method is a comprehensive, end-to-end practice building platform that provides Biote-certified practitioners with the components specifically developed for practitioners in the hormone optimization space: Biote Method education, training and certification, practice management software, inventory management software, and information regarding available HRT products, as well as digital and point-of-care marketing support. We also sell a complementary Biote-branded line of dietary supplements. By virtue of our historical performance over the past 12 years, we believe that our business model has been successful, remains differentiated, and is well positioned for future growth.
Our go-to-market strategy focuses on:
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Increase the number of Biote-certified practitioners. Our primary objective in marketing to healthcare providers is to inform them of the value in joining the Biote network. We accomplish this through provider referrals, a dedicated sales force, and through digital and traditional marketing channels. We target specific physicians based on their specialty, prescribing data, demographic information and location match with our existing geographic footprint.
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Grow the practice of our Biote-certified practitioners and Biote-partnered clinics. When the practices of our Biote-certified practitioners and Biote-partnered clinics grow, we grow. We help our Biote-certified practitioners and Biote-partnered clinics grow by, among other things:
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providing mentorship, practice management and marketing capability necessary to operate an efficient hormone optimization practice;
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providing high-quality Biote-branded dietary supplement products;
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providing Biote-certified practitioners and Biote-partnered clinics a full array of wellness education and marketing materials;
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directing consumers that are actively seeking care to Biote-certified practitioners via the “Find A Provider” feature on our company website; and
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utilizing our growing digital outreach capabilities to connect with consumers seeking general information.
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Increasing sales of Biote-branded dietary supplements. Our Biote-branded dietary supplement line currently includes 19 dietary supplements that we offer to our Biote-certified practitioners through our eCommerce site, efficiently leveraging our core Biote provider platform. Practitioners then re-sell Biote-branded dietary supplements to their patients, enabling patients to receive physician-guided therapies to manage the related effects of aging. In August 2021, we launched a direct-to-patient eCommerce platform whereby practitioners can invite their patients to buy Biote-branded dietary supplements online via our online store.
The hormone pellet products used by Biote-certified practitioners are manufactured by third-party compounding pharmacies and shipped directly to Biote-certified practitioners. Custody of the pellets is with Biote-certified practitioners. However, the pellets are recorded as inventory on our financial statements from the date of shipment until such time as they are administered in a patient treatment as monitored and recorded in our BioTracker system as an additional service for administrative convenience of Biote-certified practitioners and Biote-partnered clinics.
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These products have a finite life ranging from six to twelve months. We assume the risk of loss due to expiration, damage or otherwise. Additionally, the products offered in our Biote-branded dietary supplement portfolio are produced by third-party manufacturers located in the United States. Biote contracts with a third-party to provide warehousing, co-packing and logistics services for our Biote-branded dietary supplements. As such our consolidated balance sheets as of December 31, 2023 and December 31, 2022 reflect inventories relating to these items.
Our revenue was $185.4 million and $165.0 million, our net loss was $2.8 million and our net income was $1.3 million, and our Adjusted EBITDA was $55.3 million and $50.1 million, for the years ended December 31, 2023 and 2022, respectively.
Recent Developments
Impact of Global Economic Trends
Global economic conditions have been challenging, with disruptions to, and volatility in, the credit and financial markets in the U.S. and worldwide resulting from the effects of public health crises and otherwise. If these conditions persist and deepen, we could experience an inability to access additional capital or our liquidity could otherwise be impacted. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs and/or other efforts. A recession or additional market corrections resulting from the impact of the effects of global health crises, such as the COVID-19 pandemic, could materially affect our business and the value of our securities. The impact of global health crises and the related disruptions caused to the global economy did not have a material impact on our business during the years ended December 31, 2023 and 2022.
Additionally, the recent trends of rising inflation may also materially adversely affect our business and corresponding financial position and cash flows. Inflationary factors, such as increases in the cost of our clinical trial materials and supplies, interest rates and overhead costs may adversely affect our operating results. Rising interest and inflation rates also present a recent challenge impacting the U.S. economy and could make it more difficult for us to obtain traditional financing on acceptable terms, if at all, in the future. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, we may experience increases in the near future (especially if inflation rates continue to rise) on our operating costs, including our labor costs and research and development costs, due to supply chain constraints, consequences associated with global health crises and ongoing international conflicts such as the conflict between Russia and Ukraine and the Israel-Hamas war, and employee availability and wage increases, which may result in additional stress on our working capital resources.
Chief Financial Officer Transition
On January 8, 2024, the Company appointed Robert C. Peterson as Chief Financial Officer (principal accounting and principal financial officer) of the Company. In connection with his appointment, the Company entered into an employment agreement with Mr. Peterson, dated as of January 8, 2024, which provides for Mr. Peterson’s at-will employment as the Chief Financial Officer for a term commencing on January 8, 2024 and continuing until terminated by either the Company or Mr. Peterson.
Samar Kamdar, the Company’s prior Chief Financial Officer, transitioned out of his role, effective immediately. On January 11, 2024, Mr. Kamdar entered into an executive transition agreement with the Company, which provided that Mr. Kamdar would remain employed by the Company through February 29, 2024, to assist with the transition and work on special projects.
Business Combination
On May 26, 2022 (the “Closing Date”), BioTE Holdings, LLC (“Holdings,” inclusive of its direct and indirect subsidiaries, the “BioTE Companies,” and as to its members, the “Members”) completed a series of transactions (the “Business Combination”) with Haymaker Acquisition Corp. III (“Haymaker”), Haymaker Sponsor III LLC (the “Sponsor”), BioTE Management, LLC, Dr. Gary S. Donovitz, in his individual capacity, and Teresa S. Weber, in her capacity as the Members’ representative (in such capacity, the “Members’ Representative”) pursuant to the business combination agreement (the “Business Combination Agreement”) dated December 13, 2021. The Business Combination was accounted for as a common control transaction, in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). Under this method of accounting, Haymaker’s acquisition of the BioTE Companies was accounted for at their historical carrying values, and the BioTE Companies were deemed the predecessor entity. This method of accounting is similar to a reverse recapitalization whereby the Business Combination was treated as the equivalent of the BioTE Companies issuing stock for the net assets of Haymaker, accompanied by a recapitalization. The net assets of Haymaker are stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Business Combination are those of the BioTE Companies.
Following the Closing of the Business Combination, the Company was organized in an umbrella partnership-C corporation (“Up-C”) structure in which the business of the Company is operated by Holdings and its subsidiaries, and Biote’s only material direct asset consists of membership interests in Holdings.
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In connection with the Business Combination, on the Closing Date, BioTE Medical entered into a credit agreement with Truist Bank and Truist Securities, Inc. providing for (i) the Revolving Loans, a $50.0 million senior secured revolving credit facility in favor of BioTE Medical and (ii) the Term Loan, a $125.0 million senior secured term loan facility in favor of BioTE Medical, which was borrowed in full at the Closing Date.
Components of Results of Operations
Revenue
We generate revenue by charging the Biote-partnered clinics fees associated with the Biote Method and from the sale of Biote-branded dietary supplements. Revenue generated from individual Biote-partnered clinics varies significantly due to many factors. including but not limited to, the tenure of practitioners as Biote-certified practitioners; the number of certified practitioners in an individual clinic; the number of patients served by a clinic; the clinic’s patient demographics; and the clinic’s geographic location and population density. The master services agreements (“MSAs”) we enter into with Biote-partnered clinics contain tiered pricing provisions for the management fees. These provisions provide for decreasing management fees owed to us based on the number of new patients treated. This can result in declines in revenue we realize from management fees from existing Biote-partnered clinics unless these are offset by revenue generated from newly acquired Biote-partnered clinics which begin at higher fee levels under the MSA.
Our revenue fluctuates in response to a combination of factors, including the following:
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sales volumes;
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the mix of male and female patients treated by Biote-certified practitioners, as treatment for males generates more revenue per patient than treatment for females;
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our overall product mix of dietary supplements sold;
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the effects of competition on market share;
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new Biote-partnered clinics acquired as customers, less any existing clinics lost as customers (“net new clinics”);
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number of procedures performed by practitioners;
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medical industry acceptance of hormone optimization generally as a solution to unmet medical needs;
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the number of business days in a particular reporting period, including as a result of holidays;
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weather disruptions impacting medical offices’ ability to maintain regular operating schedules;
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the effects of competition and competitive pricing strategies;
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governmental regulations influencing our markets; and
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global and regional economic cycles.
Generally, our MSAs require us to provide (1) initial training to practitioners on the Biote Method, (2) inventory management services and (3) other contract-term marketing and practice development services (including recurring training and licenses of Biote IP). Historically, we have provided the optional free lease of reusable trocars by Biote-certified practitioners.
Substantially all of our revenue originates from sales to clinic locations in the United States.
Product Revenue
Product revenue includes both pellets, in connection with the service described above, and the related inventory management services provided to clinics. Product revenue is recognized at the point in time when the clinic obtains ownership of the pellet, which we determined to be when the Biote-certified practitioner performs the procedure to implant the pellet into their patient. The consideration allocated to this performance obligation is a procedure-based service fee which we refer to as procedure revenue. Our product revenue also includes revenue earned from sales of pellet insertion kits and Biote-branded dietary supplements. Revenue from the sale of pellet insertion kits and Biote-branded dietary supplements is recognized when the clinic or clinic’s patient (supplements only) obtains control of the product and is generally at the time of shipment from our distribution facility. Any shipping or handling fees paid by clinics are also recorded within product revenue.
Service Revenue
Service revenue is revenue earned from fees paid by Biote-partnered clinics for training services and other contract term services pursuant to our MSAs. While the option to receive and right to use the reusable trocars through the term of the contract represents an embedded lease, we have adopted the practical expedient within ASC 842 to combine the lease and non-lease components and account for the combined component under ASC 606.
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For Biote Method arrangements, we recognize revenue for training and for management services over time. For initial training, progress is measured by the number of training sessions completed, and for contract-term services, progress is measured on a time-elapsed basis.
The training completion and time-elapsed bases represent the most reliable measure of transfer of control to the clinic for trainings and contract-term services, respectively. Revenue is deferred for amounts billed or received prior to delivery of the services.
Cost of Revenue
Cost of service revenue consists primarily of costs incurred to deliver training to Biote-partnered clinics. Cost of product revenues include the pass-through cost of pellets purchased from outsourcing facilities, the cost of pellet insertion kits and Biote-branded dietary supplements purchased from manufacturing facilities, and the shipping and handling costs incurred to deliver these products to Biote-partnered clinics.
Selling, General and Administrative Expense
Selling, general and administrative expense consists primarily of software licensing and maintenance and the cost of employees who engage in corporate functions, such as finance and accounting, information technology, human resources, legal, and executive management. Also included are rent occupancy costs, office expenses, recruiting expenses, marketing and advertising expenses, entertainment allocations, depreciation and amortization, share-based compensation, transaction related expenses, other general overhead costs, insurance premiums, professional service fees, research and development and costs related to regulatory and legal matters.
Interest Expense, Net
Interest expense, net consists primarily of cash and non-cash interest under our Term Loan, commitment fees for our unused Revolving Loans and interest income earned on our money market account and now matured short-term investment.
Gain (Loss) from Change in Fair Value of Warrant Liability
Gain (loss) from change in fair value of warrant liability consists of the change in fair value of the warrant liability during the period.
Gain (Loss) from Change in Fair Value of Earnout Liability
Gain (loss) from change in fair value of earnout liability consists of the change in fair value of the Member and Sponsor earnouts during the period.
Loss from extinguishment of debt
Loss from extinguishment of debt consists of the remaining unamortized portion of the debt issuance costs related to the Bank of America Credit Agreement (as defined below) written off upon repayment in connection with the Business Combination.
Other Income / Expense
Other income and other expense consist of the foreign currency exchange gains and losses for sales denominated in foreign currencies and other income or payments not appropriately classified as operating expenses.
Income Taxes
We are subject to federal and state income taxes in the United States and taxes in foreign jurisdictions in which we operate. We recognize deferred tax assets and liabilities based on temporary differences between the financial reporting and income tax bases of assets and liabilities using statutory rates. We regularly assess the need to record a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
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Results of Operations
Comparison of the years ended December 31, 2023 and 2022
The table and discussion below present our results for the years ended December 31, 2023 and 2022:
| Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2023 | 2022 | ||||||
| Revenue: | ||||||||
| Product revenue | $ | 182,573 | $ | 163,133 | ||||
| Service revenue | 2,787 | 1,824 | ||||||
| Total revenue | 185,360 | 164,957 | ||||||
| Cost of revenue | ||||||||
| Cost of products | 54,246 | 51,990 | ||||||
| Cost of services | 3,631 | 2,585 | ||||||
| Cost of revenue | 57,877 | 54,575 | ||||||
| Selling, general and administrative | 98,826 | 171,104 | ||||||
| Income (loss) from operations | 28,657 | (60,722 | ) | |||||
| Other income (expense), net: | ||||||||
| Interest expense, net | (6,363 | ) | (4,047 | ) | ||||
| Gain (loss) from change in fair value of warrant liability | (13,411 | ) | 5,127 | |||||
| Gain (loss) from change in fair value of earnout liability | (8,990 | ) | 61,770 | |||||
| Loss from extinguishment of debt | — | (445 | ) | |||||
| Other income (expense) | (16 | ) | 29 | |||||
| Total other income (expense), net | (28,780 | ) | 62,434 | |||||
| Income (loss) before provision for income taxes | (123 | ) | 1,712 | |||||
| Income tax expense | 2,682 | 388 | ||||||
| Net income (loss) | $ | (2,805 | ) | $ | 1,324 |
Revenue
Revenue for the year ended December 31, 2023 increased $20.4 million to $185.4 million, or 12.4% compared to the year ended December 31, 2022. The increase was primarily driven by a $17.7 million increase of procedure and Biote-branded dietary supplement revenue. Procedures performed increased 9.3% versus the prior year resulting in a $12.0 million increase in procedure revenue. During the year ended December 31, 2023, the number of active clinics billed increased 14.1% over the year ended December 31, 2022. Biote-branded dietary supplement sales increased 17.5% or $5.7 million over the same period in the prior year. Service revenue increased 52.8% over the same period in the prior year resulting from an increase in the number of training sessions during the year ended December 31, 2023 compared to the year ended December 31, 2022.
Cost of revenue
Cost of revenue for the year ended December 31, 2023 increased $3.3 million, to $57.9 million, or 6.1% compared to the year ended December 31, 2022. The increase was primarily due to the net impact of higher volumes at sustained unit costs. Cost of procedures increased $1.3 million for the period, consisting of $1.4 million attributable to volume increases in pellets dispensed which was offset by a reduction of $0.1 million related to broken, damaged, or expired pellets. Biote branded dietary supplement costs increased $0.4 million or 3%, due to higher sales volume. Additionally, there was an increase in both trocar and shipping and freight costs of $0.7 million and $0.2 million, respectively.
Selling, General and Administrative
Selling, general and administrative expense for the year ended December 31, 2023 decreased $72.3 million to $98.8 million, or (42.2%), compared to the year ended December 31, 2022. This decrease was primarily driven by a $73.1 million decline in stock compensation expense compared to the year ended December 31, 2022, as the Closing of the Business Combination triggered the accelerated vesting of incentive units and phantom equity rights and resulted in the recognition of $78.0 million of stock compensation expense. Additionally, during the year ended December 31, 2022, the Company incurred transaction-related expenses of $21.6 million related to the Business Combination and other associated capital structure transactions that did not recur during the year ended December 31, 2023. The transaction-related expenses consisted of the excess closing costs of the Business Combination over the Business Combination proceeds received, costs associated with sponsor share transfers and certain compensation paid resulting from the transaction. These decreases were partially offset by a $5.3 million increase in employee-related expenses due to an overall increase in headcount, an increase in sales incentives consistent with sales growth for the year and an increase in severance expense. Additionally, outsourced professional services fees increased $6.0 million, primarily due to an increase in legal expenses related to litigation costs incurred to defend the Company against claims asserted by the Company’s former owner (see “Donovitz Litigation” under Item 3 Legal Proceedings in this Annual Report on Form 10-K and Note 18 to our consolidated financial statements for
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additional information). Furthermore, during the year ended December 31, 2023, the Company entered into a $1.2 million legal settlement with a former employee. Marketing expenses increased $1.9 million due to an increase in web-based marketing and the production of informational materials in an ongoing effort to increase awareness of the products and services offered by Biote-certified practitioners.
Interest Expense, Net
Interest expense, net for the year ended December 31, 2023 increased $2.3 million to $6.4 million, or 57.2%, compared to the year ended December 31, 2022. The increase was primarily a result of higher interest rates incurred during the period, partially offset by interest income earned on our money market account and no matured short-term investment.
Gain (Loss) from Change in Fair Value of Warrant Liability
The change in the gain (loss) from change in fair value of warrant liability was primarily due to the Company’s offer to exchange its outstanding warrants for common stock. On May 9, 2023, the Company announced the commencement of its offer to each holder of its outstanding warrants, the opportunity to receive shares of common stock in exchange for each warrant tendered by the holder. During the year ended December 31, 2023, the Company issued common stock valued at $17.5 million in exchange for all outstanding warrants. The warrants were remeasured to fair value prior to each exchange, and in doing so, we recognized a net loss from the change in fair value of our warrant liability of $13.4 million for the year ended December 31, 2023.
Gain (Loss) from Change in Fair Value of Earnout Liability
The change in the gain (loss) from change in fair value of the earnout liability was primarily due to the change in the closing price of our Class A common stock during the years ended December 31, 2023 and 2022. For the year ended December 31, 2023, the closing price of the Company’s class A common stock increased 32.4%, compared with a decrease of 58.6% in the corresponding period of 2022. The increase in the closing price of our Class A common stock increased the fair value of the earnout liability; therefore, the Company recognized a corresponding loss of $9.0 million for the year ended December 31, 2023. In comparison, the decrease in the closing price of our Class A common stock decreased the fair value of the earnout liability, resulting in a gain of $61.8 million for the year ended December 31, 2022.
In connection with the Business Combination, the Company entered into a new loan agreement with Truist Bank and used a portion of the proceeds to refinance and replace its existing credit facility with Bank of America, N.A. As a result of this refinancing, the Company recorded a $0.5 million charge to loss from extinguishment of debt during the year ended December 31, 2022.
Other Income (Expense)
The change in other income (expense) for the year ended December 31, 2023 compared to the year ended December 31, 2022. primarily resulted from currency fluctuations during the period.
Income Tax Expense (Benefit)
Income tax expense for the year ended December 31, 2023 increased $2.3 million compared to the year ended December 31, 2022. This increase reflects the taxability of the income attributable to Biote that prior to the Business Combination was taxable to the Company’s Members offset by a tax benefit from certain one-time expenses related to the Business Combination that will be attributed to Biote.
Non-GAAP Measures
Adjusted EBITDA is a non-GAAP performance measure that provides supplemental information that we believe is useful to analysts and investors to evaluate the Company’s ongoing results of operations when considered alongside net income (the most directly comparable U.S. GAAP measure).
We use Adjusted EBITDA as alternative measures to evaluate our operational performance. We calculate Adjusted EBITDA by excluding from net income: interest expense; depreciation and amortization expenses; and income taxes. Additionally, we exclude certain expenses we believe are not indicative of our ongoing operations or operational performance. We present Adjusted EBITDA because it is a key measure used by our management to evaluate our operating performance, generate future operating plans and determining payments under compensation programs. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with U.S. GAAP. Some of these limitations are as follows:
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although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
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Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; and
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•
Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us.
In addition, Adjusted EBITDA is subject to inherent limitations as it reflects the exercise of judgment by Biote’s management about which expenses are excluded or included. Other companies, including companies in our industry, may calculate Adjusted EBITDA or similarly titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our Adjusted EBITDA as a tool for comparison. Investors are encouraged to review the reconciliation, and not to rely on any single financial measure to evaluate our business.
The following table presents a reconciliation of net income (loss) to Adjusted EBITDA:
| Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2023 | 2022 | ||||||
| Net income (loss) | $ | (2,805 | ) | $ | 1,324 | |||
| Interest expense, net | 6,363 | 4,047 | ||||||
| Income tax expense | 2,682 | 388 | ||||||
| Depreciation and amortization | 2,994 | 2,199 | ||||||
| Loss from extinguishment of debt(1) | — | 445 | ||||||
| Share-based compensation expense(2) | ` | 9,057 | 82,180 | |||||
| Litigation expenses-former owner(3) | 6,770 | 3,603 | ||||||
| Litigation-other(4) | 633 | 477 | ||||||
| Legal settlement (gain) loss(5) | 1,048 | 88 | ||||||
| Transaction-related expenses(6) | 2,118 | 21,627 | ||||||
| Other expenses(7) | 1,174 | 646 | ||||||
| Merger and acquisition expenses(8) | 2,821 | — | ||||||
| (Gain) loss from change in fair value of warrant liability | 13,411 | (5,127 | ) | |||||
| (Gain) loss from change in fair value of earnout liability | 8,990 | (61,770 | ) | |||||
| Adjusted EBITDA | $ | 55,256 | $ | 50,127 |
(1)
Represents unamortized debt issuance costs of $0.4 million charged to extinguishment of debt upon full repayment of the Company’s credit agreement with Bank of America.
(2)
Represents employee compensation expense associated with equity-based stock awards. This includes expense associated with equity incentive instruments including phantom stock awards, stock options and restricted stock units.
(3)
Represents legal expenses to defend the Company against claims asserted by the Company’s former owner. See “Donovitz Litigation” under Item 3 Legal Proceedings in this Annual Report on Form 10-K and Note 18 to our consolidated financial statements for additional information.
(4)
Represents litigation expenses other than those incurred in connection with claims asserted by the Company’s former owner that are not related to the Company’s ongoing business.
(5)
Represents settlements of legal matters.
(6)
Represents transaction costs including legal fees of $0.9 million, filing fees of $0.2 million and professional services fees of $1.0 million, each of which were incurred in connection with the filing of, and transactions contemplated by, the Company’s securities offerings. For the year ended December 31, 2022, this amount represents transaction costs including professional services fees of $4.0 million, legal fees of $4.8 million, consulting fees of $0.2 million, filing fees of $0.4 million, share redemption costs of $7.2 million and transaction bonuses of $4.2 million, each of which were incurred in connection with the Business Combination that occurred during the year ended December 31, 2022.
(7)
Represents executive severance costs of $0.8 million, costs related to recruiting executive level management, including the Chief Commercial Officer of $0.2 million, legal fees of $0.1 million and professional services fees of $0.1 million associated with the restatement of the Company’s financial statements for the quarters ended June 30, 2022 and September 30, 2022 and a realized foreign currency loss of less than $0.02 million. For the year ended December 31, 2022, this amount represents executive severance costs of $0.4 million, private air transportation expense incurred by the Company’s previous controlling stockholder of $0.2 million, expenses related to the transition of the CEO and CFO of $0.07 million and a realized foreign currency gain of $0.03 million.
(8)
Represents professional fees of $0.6 million, consulting fees of $0.4 million and legal fees of $1.8 million all of which were associated with strategic opportunities to expand the business.
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Liquidity and Capital Resources
Our liquidity is derived primarily from available cash and cash equivalents, cash generated from operations, capacity under our revolving loans and, when necessary, debt and equity financing activities. We believe that for at least the next 12 months, our current cash position, coupled with anticipated cash generated from operations and the capacity under our revolving loans, is sufficient to fund our operations and our debt service obligations. As of December 31, 2023 and 2022, we had cash and cash equivalents of $89.0 million and $79.2 million, respectively. Additionally, as of both December 31, 2023 and 2022, we had $50.0 million of revolving loans available under our Truist credit agreement.
Since our inception, we have financed our operations and capital expenditures primarily through capital investment from our founder and other members, debt financing in the form of short-term lines of credit and long-term notes payable, and net cash inflows from operations.
We expect our operating and capital expenditures to increase as we increase headcount, expand our operations and grow our clinic base. If additional funds are required to support our working capital requirements, acquisitions or other purposes, we may seek to raise funds through additional debt or equity financings or from other sources. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our equity holders could be significantly diluted, and these newly issued securities may have rights, preferences or privileges senior to those of existing equity holders. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operating flexibility and also require us to incur additional interest expense. We can provide no assurance that additional financing will be available at all or, if available, that we would be able to obtain additional financing on terms favorable to us.
Our ability to raise additional capital through the sale of equity or convertible debt securities could be significantly impacted by the resale of shares of Class A common stock by selling securityholders pursuant to the registration statement on Form S-1 filed with the SEC on June 17, 2022, which could result in a significant decline in the trading price of our Class A common stock and potentially hinder our ability to raise capital at terms that are acceptable to us or at all. In addition, debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, or substantially reduce our operations. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in the section titled “Risk Factors” included in this Annual Report.
Cash Flows
The following table summarizes our consolidated cash flows for the years ended December 31, 2023 and 2022:
| Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2023 | 2022 | ||||||
| Consolidated Statements of Cash Flows Data: | ||||||||
| Net cash provided by (used in) operating activities | $ | 26,883 | $ | (9,157 | ) | |||
| Net cash used in investing activities | (2,713 | ) | (1,838 | ) | ||||
| Net cash provided by (used in) financing activities | (14,380 | ) | 63,460 |
Operating Activities
Cash flows from operating activities result primarily from fees associated with the Biote Method and from the sale of Biote-branded dietary supplements. Cash flows from operating activities are affected by earnings levels and changes in working capital related to our business. Working capital varies from period to period and can be affected by changes in our inventory levels due to varying demand for our products. Net cash provided by operating activities increased $36.0 million to $26.9 million for the year ended December 31, 2023 compared to cash used by operating activities of $9.2 million for the year ended December 31, 2022. Our cash flow from working capital for the year ended December 31, 2023 was positively impacted by the cash settlement of liabilities incurred related to the Business Combination during the year ended December 31, 2022 and negatively impacted by increases in inventory levels and advances and prepayments made to certain vendors during the year ended December 31, 2023.
Investing Activities
Net cash used in investing activities increased $0.9 million to $2.7 million for the year ended December 31, 2023 compared to $1.8 million for the year ended December 31, 2022, principally related to expenditures for capitalized software development costs.
Financing Activities
Net cash used in financing activities during the year ended December 31, 2023 consisted of quarterly interest payments on our term loan with Truist and $8.7 million in distributions to our partners, which decreased $4.2 million from the year ended December 31, 2022.
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In May 2022, the Company received proceeds of $12.3 million in relation to the Business Combination with Haymaker and executed a Term Loan with Truist Bank that included borrowings of $125.0 million as of the Closing Date. Additionally, during the year ended December 31, 2022, we incurred debt issuance costs of $4.0 million, recorded a $36.3 million charge related to the extinguishment of our term loan with Bank of America, incurred capitalized transaction costs of $8.3 million and settled an aggregate of $7.3 million in phantom equity rights, each of which were incurred in relation to the Business Combination.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in accordance with U.S. GAAP requires our management to make judgments, assumptions and estimates that affect the amounts reported in our accompanying consolidated financial statements and the accompanying notes included elsewhere in this Annual Report.
Our management bases its estimates and judgments on historical experience, current economic and industry conditions and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
The methods, estimates, and judgments that we use in applying our accounting policies have a significant impact on the results that we report in our consolidated financial statements. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain.
Our most critical accounting estimates include revenue recognition, the valuation of inventory, the valuation of stock compensation and the valuation of earnout liability.
Our significant accounting policies are described in Note 2 to our consolidated financial statements. We believe that the accounting policies described reflect our most critical accounting policies and estimates, which represent those that involve a significant degree of judgment and complexity. Accordingly, we believe these policies are critical in fully understanding and evaluating our reported financial condition and results of operations.
Revenue Recognition
To determine revenue recognition for arrangements within the scope of Financial Accounting Standards Board (“FASB”) Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers, and subsequent amendments (collectively, “ASC 606”), we perform the following five steps: (1) identify the contract(s) with a clinic; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) we satisfy performance obligations. We recognize revenue when the control of the promised goods or services is transferred to Biote-partnered clinics in an amount that reflects the consideration we expect to receive in exchange for such goods or services.
The majority of our revenue is derived from our long-term service agreements for Biote-partnered clinics of the Biote Method. In determining the transaction price, we evaluate whether the price is subject to discounts or adjustments to determine the net consideration to which we expect to be entitled.
Revenue is recognized when control of the product or service is transferred to the clinic (i.e., when our performance obligation is satisfied), which varies between the different performance obligations within the contract. In determining whether control has transferred for a product, we consider if there is a present right to payment and legal title, and whether risks and rewards of ownership have transferred to the clinic. For services, we consider whether we have an enforceable right to payment and when the clinic receives the benefits of our performance. Refer to Note 2 to our consolidated financial statements for additional discussion of our revenue recognition policy.
Inventories
Our inventories consist of physician-prescribed pellets used by Biote-certified practitioners in partnered clinics and Biote-branded dietary supplements which are sold and distributed to the Biote-partnered clinics and their patients. Custody of the pellets remains with Biote-certified practitioners. The pellets are presented as inventory on our financial statements from the date of shipment until such time as they are administered in a treatment by a Biote-certified practitioner on their patient for the convenience of Biote-certified practitioners and Biote-partnered clinics. Biote-partnered clinics directly purchase Biote-branded dietary supplements from us, and our 3PL suppliers fill and ship directly to the ordering practice. The Biote-partnered clinic then sets their own pricing in compliance with our applicable policies and sells Biote-branded dietary supplements directly to patients.
Inventories are valued at the lower of cost or net realizable value. We regularly review our inventories and write down our inventories for estimated losses due to obsolescence or expiration. The allowance for pellets is determined based on the age of the specific manufacturing lots of the product and its remaining life until expiration. Dietary supplements are evaluated at the product level based on sales of our products in the recent past and/or expected future demand. Future demand is affected by market conditions, new products and strategic plans, each of which is subject to change with little or no forewarning. In estimating obsolescence, we utilize information that includes projecting future demand.
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The need for strategic inventory levels to ensure competitive delivery performance to our Biote-partnered clinics are balanced against the risk of inventory obsolescence due to clinic requirements.
Share-Based Compensation
Share-based compensation awards previously granted by Holdings were valued using a Monte-Carlo simulation as of the grant date because the value of the awards was dependent on future distributions to be received from a change in control or qualifying liquidity event. The significant assumptions used in the valuation include the constant risk-free rate, constant volatility factor and the Geometric Brownian Motion.
Earnout Liability
Our earnout liability was valued using a Monte-Carlo simulation in order to simulate the future path of our stock price over the earnout period. The carrying amount of the liability may fluctuate significantly and actual amounts paid may be materially different from the liability’s estimate value. The significant assumptions used in the valuation include the Company’s stock price, volatility and the drift rate.
Off-Balance Sheet Commitments and Arrangements
As of December 31, 2023, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
Contractual Obligations
Our principal contractual obligations and commitments consist of obligations to pay loan principal and interest under our long-term debt agreement and obligations under our operating lease agreement.
Refer to Note 8 and Note 10 to our consolidated financial statements for a discussion of the nature and timing of our obligations under these agreements. The future amount and timing of interest payments under our long-term debt agreement are expected to vary with the amount and then-prevailing contractual interest rates of our debt, which are discussed in Note 8 to our consolidated financial statements.
Recently Issued and Adopted Accounting Pronouncements
See Note 2 to our consolidated financial statements for a discussion of accounting pronouncements recently adopted and recently issued accounting pronouncements not yet adopted and their potential impact to our financial statements.
JOBS Act Accounting Election
We are an emerging growth company, as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Section 107 of the JOBS Act provides that an emerging growth company can take advantage of an extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards applicable to public companies, allowing them to delay the adoption of those standards until those standards would otherwise apply to private companies. We have elected to use this extended transition period under the JOBS Act. As a result, following the Business Combination, our consolidated financial statements may not be comparable to the financial statements of companies that are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies, which may make our common stock less attractive to investors.
We will remain an emerging growth company under the JOBS Act until the earliest of (i) March 4, 2026, (ii) the last date of our fiscal year in which we have total annual gross revenue of at least $1.235 billion, (iii) the date on which we are deemed to be a “large accelerated filer” under the rules of the SEC with at least $700.0 million of outstanding securities held by non-affiliates or (iv) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the previous three years.
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