Biote Corp. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Financial statements are unaudited. Dollar amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where appropriate.
Business context
Biote operates a practice-building platform for hormone optimization, training and supporting certified practitioners and clinics, and selling related procedure products and Biote-branded dietary supplements. Most revenue is generated in the United States. The May 26, 2022 business combination with Haymaker created a public-company “Up-C” structure; the BioTE businesses are the accounting predecessor. Comparisons therefore span the transaction and associated changes in ownership, financing, and public-company costs.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $42.0m | $35.6m | $120.5m | $101.9m |
| Operating income (loss) | $7.8m | $9.0m | ($68.0m) | $28.6m |
| Net income (loss), consolidated | ($6.3m) | $8.5m | $43.3m | $27.1m |
| Adjusted EBITDA, non-GAAP | $12.2m | $10.3m | $37.0m | $30.8m |
| Operating cash flow | Not separately reported | Not separately reported | ($15.2m) | $23.6m |
- Q3 revenue increased 18.0% year over year; procedures performed rose 17.4%, active clinics billed increased 14%, and supplement sales grew 18.6%.
- Nine-month revenue increased 18.3%; procedures performed rose 18.9%, active clinics billed increased 14%, and supplement sales grew 14.2%. Product revenue was the principal revenue source.
- Gross margin, calculated as revenue less cost of revenue, was approximately 68.2% in Q3 2022 versus 65.5% in Q3 2021, and 67.5% for the first nine months of 2022 versus 65.3% in 2021.
- Q3 consolidated net loss includes a $13.7m noncash loss from revaluing the earnout liability. Nine-month consolidated net income includes a $109.7m noncash gain from that revaluation. The filing reports $102.2m of nine-month net income attributable to Biote Corp. stockholders; allocations to noncontrolling interests and the post-combination share structure affect per-share comparisons.
- Nine-month SG&A was $145.2m, including $80.0m of share-based compensation and $20.6m of transaction-related expenses in the company’s Adjusted EBITDA reconciliation. Q3 SG&A was $19.6m, up 59.3%, reflecting public-company costs, compensation and hiring, among other items.
- Cash was $77.5m at September 30, 2022, versus $26.8m at December 31, 2021. Current assets were $100.8m and current liabilities $22.4m, implying working capital of approximately $78.4m.
- Operating cash flow was negative despite reported nine-month net income. The company attributed the decline to transaction closing costs paid after being accrued, working-capital movements, and other items. Investing cash outflow was $1.5m; financing cash inflow was $67.4m.
- Term-loan principal was $123.4m at quarter-end, compared with $37.5m at year-end 2021. The new Truist facility included a $125m term loan and a $50m revolving commitment, which was undrawn. The term loan carried an approximately 5.6% rate; a 100-basis-point increase was estimated to add $1.2m to annualized interest expense.
Material changes and notable items
- Revenue growth was driven by procedure volume and supplements; cost of revenue grew more slowly than revenue. Commissions declined as Biote shifted toward an internal sales force.
- The business combination brought substantial new debt, public-company expenses, share-based compensation and fair-value accounting for warrants and earnout securities. These items materially affect operating results and period-to-period comparability.
- The company reported a $109.7m nine-month gain on the earnout liability as its estimated fair value fell from $187.8m at closing to $78.1m at September 30. The liability is sensitive to stock-price and other valuation assumptions.
- Stockholders’ deficit was $109.9m at quarter-end, including a $78.1m earnout liability and $72.7m noncontrolling interest presented within equity. The company’s ownership of Holdings was approximately 14.7% at September 30.
Outlook, risks and contingencies
- Management said available cash and expected sources of funds should be adequate for operations, working capital, capital expenditures, debt service and potential dividends for at least the next 12 months. No quantified revenue or earnings guidance was provided.
- Risks include practitioner and patient adoption of the Biote Method, competition, reliance on a small number of third-party hormone-pellet outsourcing facilities and supplement manufacturers, and regulatory scrutiny of compounded hormones, dietary supplements and related products. The filing discusses prior FDA warning letters and inspection findings involving certain outsourcing-facility partners, as well as potential effects of FDA action on NASEM recommendations.
- The company reported an ongoing dispute with founder and stockholder Dr. Gary S. Donovitz, including claims and counterclaims in Texas and Delaware. The company said the outcome and potential liability were uncertain and did not expect a material adverse effect on financial position or results; a Texas trial was scheduled for January 2023.
- Management identified an unremediated material weakness in internal control over financial reporting relating to accounting competence for complex and non-routine matters, including revenue recognition, financial instruments and equity. The CEO and CFO concluded disclosure controls were not effective for the period. Remediation efforts include hiring, training and external consultants.
- The company was in compliance with its loan covenants at September 30, 2022. Covenants include leverage and fixed-charge coverage tests; default could permit acceleration of debt. Other stated risks include variable interest rates, inflation, geographic concentration and possible future dilution, including under the standby equity purchase agreement.
Most important facts for investors to verify
- Underlying operating performance apart from noncash earnout and warrant revaluations, unusually large share-based compensation, and transaction-related costs.
- Whether growth in procedures, active clinics and supplement sales continues, and how clinic pricing tiers affect revenue per clinic over time.
- Operating cash conversion, transaction-related cash demands, debt service and compliance with leverage and fixed-charge covenants.
- Progress in remediating the material weakness and whether future filings report effective controls.
- Developments in Donovitz litigation and regulatory actions affecting compounded hormone pellets or key suppliers.
- Potential dilution from Holdings exchange rights, equity awards, warrants and the Yorkville facility, along with the possible cash and tax effects of the tax receivable agreement.