UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2022
or
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-40826
THORNE HEALTHTECH, INC.
(Exact name of registrant as specified in its charter)
Delaware |
|
27-2877253 |
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
152 W. 57th Street, New York, NY |
|
10019 |
(Address of Principal Executive Offices) |
|
(Zip Code) |
Registrant’s telephone number, including area code: (929) 251-6321
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
|
Trading symbol(s) |
|
Name of each exchange on which registered |
Common Stock, $0.01 par value per share |
|
THRN |
|
Nasdaq Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer |
☐ |
|
Accelerated filer |
☐ |
Non-accelerated filer |
☒ |
|
Smaller reporting |
☒ |
|
|
|
Emerging growth company |
☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of the registrant's common stock, par value $0.01 per share, as of May 10, 2022 was 52,733,269.
THORNE HEALTHTECH, INC.
FORM 10-Q TABLE OF CONTENTS
|
|
Page No. |
PART I |
|
|
Item 1. |
4 |
|
Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
36 |
Item 3. |
48 |
|
Item 4. |
49 |
|
PART II |
|
|
Item 1. |
51 |
|
Item 1A. |
51 |
|
Item 2. |
52 |
|
Item 3. |
52 |
|
Item 4. |
52 |
|
Item 5. |
52 |
|
Item 6. |
53 |
|
|
55 |
1
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (Quarterly Report) contains forward-looking statements. All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our future results of operations and financial position, business strategy, commercial activities and costs, research and development costs, timing and likelihood of success, as well as plans and objectives of management for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that are in some cases beyond our control and may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “would,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these terms or other similar expressions. Forward-looking statements contained in this Quarterly Report include, but are not limited to, statements about:
2
We have based these forward-looking statements largely on our current expectations and projections about our business, the industry in which we operate and financial trends that we believe may affect our business, financial condition, results of operations and prospects, and these forward-looking statements are not guarantees of future performance or development. These forward-looking statements are current only as of the date of this Quarterly Report and are subject to a number of risks, uncertainties and assumptions described in the section titled “Risk Factors” and elsewhere in this Quarterly Report. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events or otherwise.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, and you are cautioned not to unduly rely upon these statements.
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THORNE HEALTHTECH, INC.
Condensed Consolidated Balance Sheets
(unaudited)
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Assets |
|
|
|
|
|
|
||
Current Assets |
|
|
|
|
|
|
||
Cash |
|
$ |
31,403,174 |
|
|
$ |
51,100,915 |
|
Accounts receivable, net |
|
|
9,158,909 |
|
|
|
5,285,321 |
|
Related party receivables |
|
|
5,909 |
|
|
|
366,590 |
|
Inventories, net |
|
|
50,424,216 |
|
|
|
41,012,124 |
|
Prepaid expenses and other current assets |
|
|
4,184,583 |
|
|
|
3,494,473 |
|
Total current assets |
|
|
95,176,791 |
|
|
|
101,259,423 |
|
|
|
|
|
|
|
|
||
Restricted cash |
|
|
4,900,000 |
|
|
|
4,900,000 |
|
Property and equipment, net |
|
|
30,862,978 |
|
|
|
27,030,400 |
|
Operating lease right-of-use asset, net |
|
|
17,037,892 |
|
|
|
17,836,756 |
|
Finance lease right-of-use asset |
|
|
783,075 |
|
|
|
883,076 |
|
Intangible assets, net |
|
|
16,742,424 |
|
|
|
6,592,316 |
|
Goodwill |
|
|
16,541,041 |
|
|
|
14,440,683 |
|
Investments |
|
|
1,400,000 |
|
|
|
400,000 |
|
Equity-method investments |
|
|
963,685 |
|
|
|
963,685 |
|
Other assets |
|
|
1,267,885 |
|
|
|
993,538 |
|
Total assets |
|
$ |
185,675,771 |
|
|
$ |
175,299,877 |
|
4
THORNE HEALTHTECH, INC.
Condensed Consolidated Balance Sheets
(unaudited)
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Liabilities, Convertible Preferred Stock and Stockholders’ Equity (Deficit) |
|
|
|
|
|
|
||
Current Liabilities |
|
|
|
|
|
|
||
Accounts payable |
|
$ |
18,042,286 |
|
|
$ |
16,889,756 |
|
Accrued payroll |
|
|
3,629,110 |
|
|
|
2,526,917 |
|
Other accrued expenses |
|
|
1,477,320 |
|
|
|
1,144,573 |
|
Related party payable |
|
|
975,344 |
|
|
|
1,634,775 |
|
Current portion of operating lease liability |
|
|
2,037,520 |
|
|
|
2,633,236 |
|
Current portion of finance lease liability |
|
|
403,824 |
|
|
|
413,487 |
|
Current portion of long-term debt |
|
|
501,453 |
|
|
|
494,173 |
|
Total current liabilities |
|
|
27,066,857 |
|
|
|
25,736,917 |
|
Long-term Liabilities |
|
|
|
|
|
|
||
Revolving line of credit |
|
|
— |
|
|
|
— |
|
Operating lease liability, net of current portion |
|
|
27,317,015 |
|
|
|
27,605,739 |
|
Finance lease liability, net of current portion |
|
|
398,578 |
|
|
|
482,544 |
|
Long-term debt, net of current portion |
|
|
955,505 |
|
|
|
1,083,634 |
|
Warrant liability |
|
|
2,124,485 |
|
|
|
2,058,566 |
|
Total liabilities |
|
|
57,862,440 |
|
|
|
56,967,400 |
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
||
Series E convertible preferred stock; par value $0.01, 0 shares authorized as of March 31, 2022 and December 31, 2021; 0 shares issued and outstanding as of March 31, 2022 and December 31, 2021 |
|
|
— |
|
|
|
— |
|
Stockholders’ Equity (Deficit) |
|
|
|
|
|
|
||
Common stock; par value $0.01, 200,000,000 shares authorized as of March 31, 2022 and December 31, 2021, respectively; 52,728,814 and 52,554,214 issued and outstanding as of March 31, 2022 and December 31, 2021, respectively |
|
|
527,288 |
|
|
|
525,542 |
|
Common stock, Class B; no par value, 0 shares authorized as of March 31, 2022 and December 31, 2021; 0 shares issued and outstanding as of March 31, 2022 and December 31, 2021 |
|
|
— |
|
|
|
— |
|
Additional paid-in capital |
|
|
252,395,590 |
|
|
|
250,163,984 |
|
Accumulated deficit |
|
|
(127,178,957 |
) |
|
|
(132,158,016 |
) |
Accumulated other comprehensive loss |
|
|
(65,545 |
) |
|
|
— |
|
Total stockholders’ equity —Thorne HealthTech, Inc. |
|
|
125,678,376 |
|
|
|
118,531,510 |
|
Non-controlling interest |
|
|
2,134,955 |
|
|
|
(199,033 |
) |
Total stockholders’ equity |
|
|
127,813,331 |
|
|
|
118,332,477 |
|
Total liabilities, convertible preferred stock and stockholders’ equity |
|
$ |
185,675,771 |
|
|
$ |
175,299,877 |
|
See accompanying notes to condensed consolidated financial statements.
5
THORNE HEALTHTECH, INC.
Condensed Consolidated Statements of Operations
(unaudited)
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Net sales |
|
$ |
54,668,198 |
|
|
$ |
44,483,740 |
|
Cost of sales |
|
|
24,550,591 |
|
|
|
21,246,522 |
|
Gross profit |
|
|
30,117,607 |
|
|
|
23,237,218 |
|
Operating expenses: |
|
|
|
|
|
|
||
Research and development |
|
|
1,967,666 |
|
|
|
907,170 |
|
Marketing |
|
|
5,730,253 |
|
|
|
4,239,017 |
|
Selling, general and administrative |
|
|
17,637,681 |
|
|
|
11,237,303 |
|
Income from operations |
|
|
4,782,007 |
|
|
|
6,853,728 |
|
Other income (expense): |
|
|
|
|
|
|
||
Interest expense, net |
|
|
(30,157 |
) |
|
|
(282,645 |
) |
Guarantee fees |
|
|
— |
|
|
|
(138,864 |
) |
Change in fair value of warrant liability |
|
|
(65,919 |
) |
|
|
(1,627,751 |
) |
Other income, net |
|
|
57,855 |
|
|
|
— |
|
Total other income (expense), net |
|
|
(38,221 |
) |
|
|
(2,049,260 |
) |
Income before income taxes and loss from equity interests in unconsolidated affiliates |
|
|
4,743,786 |
|
|
|
4,804,468 |
|
Income tax expense |
|
|
32,545 |
|
|
|
40,530 |
|
Net income before loss from equity interests in unconsolidated affiliates |
|
|
4,711,241 |
|
|
|
4,763,938 |
|
Loss from equity interests in unconsolidated affiliates |
|
|
— |
|
|
|
(57,448 |
) |
Net income |
|
|
4,711,241 |
|
|
|
4,706,490 |
|
Net loss — non-controlling interest |
|
|
(267,818 |
) |
|
|
— |
|
Net income attributable to Thorne HealthTech, Inc. |
|
|
4,979,059 |
|
|
|
4,706,490 |
|
Undistributed earnings attributable to Series E convertible preferred stockholders |
|
|
— |
|
|
|
(4,706,490 |
) |
Net income attributable to common stockholders |
|
$ |
4,979,059 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
||
Earnings per share: |
|
|
|
|
|
|
||
Basic |
|
$ |
0.09 |
|
|
$ |
— |
|
Diluted |
|
$ |
0.09 |
|
|
$ |
— |
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
||
Basic |
|
|
52,564,779 |
|
|
|
17,650,035 |
|
Diluted |
|
|
52,624,951 |
|
|
|
17,650,035 |
|
See accompanying notes to condensed consolidated financial statements.
6
THORNE HEALTHTECH, INC.
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Net income |
|
$ |
4,711,241 |
|
|
$ |
4,706,490 |
|
Other comprehensive loss: |
|
|
|
|
|
|
||
Foreign currency translation adjustment, net of tax |
|
|
(65,545 |
) |
|
|
— |
|
Total other comprehensive loss |
|
|
(65,545 |
) |
|
|
— |
|
|
|
|
|
|
|
|
||
Comprehensive income |
|
|
4,645,696 |
|
|
|
4,706,490 |
|
Comprehensive loss attributable to non-controlling interests |
|
|
(267,818 |
) |
|
|
— |
|
Comprehensive income attributable to common stockholders |
|
$ |
4,913,514 |
|
|
$ |
4,706,490 |
|
See accompanying notes to condensed consolidated financial statements.
7
THORNE HEALTHTECH, INC.
Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(unaudited)
|
|
|
|
|
|
Equity (Deficit) Attributable to Thorne Stockholders |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||
|
|
Convertible |
|
|
|
Common Stock |
|
|
Class B Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
|
Shares |
|
|
Amount |
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Additional |
|
|
Accumulated |
|
|
Accumulated |
|
|
Non-controlling |
|
|
Total |
|
|||||||||||
Three Months Ended March 31, 2022: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at January 1, 2022 |
|
|
— |
|
|
$ |
— |
|
|
|
|
52,554,214 |
|
|
$ |
525,542 |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
250,163,984 |
|
|
$ |
(132,158,016 |
) |
|
$ |
— |
|
|
$ |
(199,033 |
) |
|
$ |
118,332,477 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,979,059 |
|
|
|
— |
|
|
|
(267,818 |
) |
|
|
4,711,241 |
|
Other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Currency translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(65,545 |
) |
|
|
— |
|
|
|
(65,545 |
) |
Other comprehensive loss |
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(65,545 |
) |
|
|
— |
|
|
|
(65,545 |
) |
Exercise of stock options |
|
|
— |
|
|
|
— |
|
|
|
|
174,600 |
|
|
|
1,746 |
|
|
|
— |
|
|
|
— |
|
|
|
222,194 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
223,940 |
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,009,412 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,009,412 |
|
Issuance of ownership interest in consolidated subsidiary |
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,601,806 |
|
|
|
2,601,806 |
|
Balance at March 31, 2022 |
|
|
— |
|
|
$ |
— |
|
|
|
|
52,728,814 |
|
|
$ |
527,288 |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
252,395,590 |
|
|
$ |
(127,178,957 |
) |
|
$ |
(65,545 |
) |
|
$ |
2,134,955 |
|
|
$ |
127,813,331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Three Months Ended March 31, 2021: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at January 1, 2021 |
|
|
27,011,500 |
|
|
$ |
133,484,531 |
|
|
|
|
12,323,830 |
|
|
$ |
123,238 |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
52,451,862 |
|
|
$ |
(132,964,365 |
) |
|
$ |
— |
|
|
$ |
(6,447,074 |
) |
|
$ |
(86,836,339 |
) |
Net loss |
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,706,490 |
|
|
|
— |
|
|
|
— |
|
|
|
4,706,490 |
|
Common stock issued in exchange for remaining interest in consolidated affiliate |
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
6,179,270 |
|
|
|
— |
|
|
|
— |
|
|
|
(6,447,074 |
) |
|
|
— |
|
|
|
6,447,074 |
|
|
|
— |
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
510,522 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
510,522 |
|
Balance at March 31, 2021 |
|
|
27,011,500 |
|
|
$ |
133,484,531 |
|
|
|
|
12,323,830 |
|
|
$ |
123,238 |
|
|
|
6,179,270 |
|
|
$ |
— |
|
|
$ |
52,962,384 |
|
|
$ |
(134,704,949 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(81,619,327 |
) |
See accompanying notes to condensed consolidated financial statements.
8
THORNE HEALTHTECH, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Cash Flows from Operating Activities |
|
|
|
|
|
|
||
Net income |
|
$ |
4,711,241 |
|
|
$ |
4,706,490 |
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
1,341,850 |
|
|
|
985,401 |
|
Change in fair value of warrant liability |
|
|
65,919 |
|
|
|
1,627,751 |
|
Non-cash lease expense |
|
|
1,573,757 |
|
|
|
1,450,595 |
|
Stock-based compensation |
|
|
2,009,412 |
|
|
|
510,522 |
|
Change in inventory and receivable reserves |
|
|
20,479 |
|
|
|
(104,589 |
) |
Loss from equity interests in unconsolidated affiliate |
|
|
— |
|
|
|
57,448 |
|
Change in operating assets and liabilities |
|
|
|
|
|
|
||
Accounts receivable |
|
|
(3,866,766 |
) |
|
|
(1,919,225 |
) |
Related party receivables |
|
|
(167,284 |
) |
|
|
(339,643 |
) |
Related party payables |
|
|
(659,431 |
) |
|
|
1,335,093 |
|
Inventories |
|
|
(9,424,379 |
) |
|
|
(3,549,422 |
) |
Prepaid expenses and other assets |
|
|
(964,457 |
) |
|
|
(1,219,851 |
) |
Accounts payable and accrued liabilities |
|
|
2,405,354 |
|
|
|
7,109,669 |
|
Operating lease liabilities |
|
|
(1,546,936 |
) |
|
|
(1,863,504 |
) |
Net cash (used in) provided by operating activities |
|
$ |
(4,501,241 |
) |
|
$ |
8,786,735 |
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
||
Purchase of property and equipment |
|
|
(1,492,540 |
) |
|
|
(589,212 |
) |
Acquisition, net of cash acquired |
|
|
(14,862,287 |
) |
|
|
— |
|
Purchase of investment in unconsolidated subsidiaries |
|
|
(1,000,000 |
) |
|
|
— |
|
Purchase of license agreements |
|
|
(375,000 |
) |
|
|
— |
|
Net cash used in investing activities |
|
$ |
(17,729,827 |
) |
|
$ |
(589,212 |
) |
Cash Flows from Financing Activities |
|
|
|
|
|
|
||
Payments on long-term debt and finance leases |
|
|
(226,874 |
) |
|
|
(125,845 |
) |
Proceeds from issuance of ownership interest in consolidated subsidiary |
|
|
2,601,806 |
|
|
|
— |
|
Proceeds from exercise of stock options |
|
|
223,940 |
|
|
|
— |
|
Net cash provided by (used in) financing activities |
|
$ |
2,598,872 |
|
|
$ |
(125,845 |
) |
|
|
|
|
|
|
|
||
Effect of exchange rate changes on cash and restricted cash |
|
|
(65,545 |
) |
|
|
— |
|
Net (decrease) increase in cash and restricted cash |
|
|
(19,697,741 |
) |
|
|
8,071,678 |
|
Cash and restricted cash, beginning of period |
|
|
56,000,915 |
|
|
|
15,262,094 |
|
Cash and restricted cash, end of period |
|
$ |
36,303,174 |
|
|
$ |
23,333,772 |
|
|
|
|
|
|
|
|
||
Supplemental Disclosure of Cash Flows Information: |
|
|
|
|
|
|
||
Cash paid during the period: |
|
|
|
|
|
|
||
Interest |
|
$ |
31,661 |
|
|
$ |
301,660 |
|
Income taxes, net of refunds |
|
$ |
— |
|
|
$ |
— |
|
Noncash Investing and Financing Activities: |
|
|
|
|
|
|
||
Equipment acquired through finance lease obligations |
|
$ |
12,399 |
|
|
$ |
284,551 |
|
Equipment acquired through debt obligations |
|
$ |
— |
|
|
$ |
817,202 |
|
Right-of-use assets obtained in exchange for lease liabilities |
|
$ |
— |
|
|
$ |
2,913,002 |
|
Forgiveness of obligation by acquiree as consideration for acquisition |
|
$ |
(527,965 |
) |
|
$ |
— |
|
9
Thorne HealthTech, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Thorne HealthTech, Inc. was originally incorporated under the name of Thorne Holding Corp. (the Company) and was incorporated under the laws of the state of Delaware on June 17, 2010, to acquire 100% of the stock of Thorne Research, Inc. (Thorne Research). On November 13, 2020, the Company changed its name to Thorne HealthTech, Inc.
The Company is a science-driven wellness company, pioneering innovative solutions and personalized approaches to health and wellness. The Company is building a new health category to deliver better health outcomes through a proactive, empowered approach. Its unique, vertically integrated brands, Thorne and Onegevity, provide actionable insights and personalized data, products and services that help individuals take a proactive approach to improve and maintain their health over their lifetime. By combining its proprietary multi-omics database, artificial intelligence (AI) and digital health content with its science-backed nutritional supplements, the Company delivers a total system for health and wellness.
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (U.S. GAAP). The condensed consolidated financial statements include the operations of the Company and all of its wholly-owned subsidiaries, as well as majority-owned subsidiaries over which the Company exercises control and, when applicable, entities for which the Company has a controlling financial interest or variable interest for which the Company is the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
On September 10, 2021, the Company approved and effected a 445-for-1 forward stock split of the Company’s Class A common stock, Class B common stock, and Series E convertible preferred stock. The par value and other terms of the common stock and preferred stock were not affected by the stock split. All related share and per share amounts have been retroactively adjusted in these condensed consolidated financial statements for all periods presented to reflect the 445-for-1 forward stock split. Furthermore, other related information, including shares of common stock underlying the Company’s warrants, stock options and restricted stock units and their respective exercise prices have been retroactively adjusted in these condensed consolidated financial statements for all periods presented to reflect the 445-for-1 forward stock split.
Unaudited Consolidated Financial Statements
The condensed consolidated balance sheet as of March 31, 2022, and the condensed consolidated statements of operations, condensed consolidated statements of comprehensive income, condensed consolidated convertible preferred stock and stockholders’ equity (deficit), and condensed consolidated statements of cash flows for the three months ended March 31, 2022, and 2021, are unaudited. The unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and reflect, in the opinion of management, all adjustments of a normal and recurring nature that are necessary for the fair statement of the Company’s financial position as of March 31, 2022, and the results of operations and cash flows for the three months ended March 31, 2022, and 2021. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The financial data and the other financial information disclosed in these notes to the condensed consolidated financial statements related to the three months ended March 31, 2022, and 2021, are also unaudited. The condensed consolidated results of operations for the three months ended March 31, 2022, are not necessarily indicative of results to be expected for the year ending December 31, 2022, nor for any other future annual or interim period. The condensed consolidated balance sheet as of December 31, 2021, included herein was derived from the audited consolidated financial statements as of that date.
These interim condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and expenses, as well as related disclosure of contingent assets and
10
Thorne HealthTech, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
liabilities. The Company bases its estimates on its historical experience and on assumptions that the Company believes are reasonable; however, actual results could significantly differ from those estimates.
There have been no significant changes from the significant accounting policies disclosed in the Company’s audited financial statements as of and for the year ended December 31, 2021.
Concentrations of Risk
Credit Risk - Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. Although the Company places its cash with high quality institutions, these balances can exceed federally insured limits. Concentrations of credit risk primarily relate to unsecured trade receivables. Major customers who accounted for more than 10% of the Company’s total receivables were as follows:
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
iHerb, Inc. |
|
|
37.3 |
% |
|
|
41.3 |
% |
Emerson Ecologics, LLC |
|
|
37.3 |
% |
|
|
33.3 |
% |
Pattern Inc. |
|
|
13.1 |
% |
|
* |
|
|
* Represents less than 10%
Sales - Major customers who accounted for more than 10% of the Company’s total sales were as follows:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Pattern Inc. |
|
|
32.6 |
% |
|
|
31.4 |
% |
Emerson Ecologics, LLC |
|
|
10.7 |
% |
|
|
12.1 |
% |
iHerb, Inc. |
|
|
10.4 |
% |
|
|
13.2 |
% |
* Represents less than 10%
In-process Research and Development
In-process research and development (IPR&D) was recorded at its fair value using a discounted cash flow model and was assigned to acquired research and development assets that were not fully developed as of the completion of the acquisition of Drawbridge Health, Inc. (the Drawbridge Transaction; see Note 4). IPR&D acquired in an asset purchase is capitalized on the Company’s balance sheet at its acquisition-date fair value if the acquired IPR&D has alternative future use. For the IPR&D acquired from the Drawbridge Transaction it was determined that the IPR&D had no alternative future use and therefore it was expensed immediately following the Drawbridge Transaction. Fair value measurement was classified as Level 3 under the fair value hierarchy.
Fair Value Measurements
ASC 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
11
Thorne HealthTech, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The carrying amounts of certain financial instruments, which include cash, receivables, accounts payable, and accrued expenses approximate their fair values as of March 31, 2022 and December 31, 2021 due to their short-term nature and management’s belief that their carrying amounts approximate the amount for which the assets could be sold or the liabilities could be settled.
Deferred Offering Costs
The Company capitalizes within other assets, certain legal, accounting and other third-party fees directly related to the Company’s in-process equity financings until such financings are consummated. After consummation of the equity financing, these costs are recorded as a reduction of the proceeds received as a result of the offering. Should a planned equity financing be abandoned, terminated or significantly delayed, the deferred offering costs are immediately written off to operating expenses.
On September 22, 2021, the Company’s Registration Statement on Form S-1, as amended, was declared effective and on September 23, 2021, the Company’s common stock began trading on the Nasdaq Global Select Market, under the ticker symbol “THRN”. On September 27, 2021, the Company closed its initial public offering (IPO) of 7,000,000 shares of common stock. Through the completion of the offering, the Company incurred $10.0 million of offering costs, which had been capitalized prior to the completion of the offering. Upon closing of the offering, the Company reclassified these amounts to additional paid-in capital, as a reduction of the offering proceeds.
Revenue Recognition
The Company accounts for revenues under Financial Accounting Standards Board (FASB) Topic 606, Revenue from Contracts with Customers (ASC 606) using the following steps:
The Company recognizes revenue at a point in time when it satisfies a performance obligation by transferring control over a product and other promised goods and services to a customer. Significant judgments made in the application of ASC 606 include determining the transaction price and the timing of transfer of control of the performance obligation (i.e., sale of product). The Company considers several factors in determining the point in time when control transfers to the customer. These factors include that legal title transfers to the customer, the Company has a present right to payment, and the customer has assumed the risks and rewards of ownership.
Professional/B2B Sales: The Company sells to wholesale customers, including healthcare professionals, retail stores, and through various online sites operated by authorized resellers. Certain customers resell Company products in online marketplaces, however, no inventories are held on consignment; revenue is recognized when control of the goods is transferred to these customers which is at the time of shipment. The terms of payment over the recognized receivables from distributors are less than one year and therefore these sales do not have any significant financing components. The Company uses standard price lists in determining the transaction price, adjusted for estimates of variable consideration. Any discounts stated or implied are allocated entirely to the sole performance obligation.
Direct-to-Consumer (DTC) Transaction Sales: The Company also sells direct to consumers online through a Company owned and operated website. Revenue from online sales is recognized at time of shipment of the product. In addition, the Company sells testing services and test kits. Testing services and test kits are recorded as revenue when the test results are provided to the customer. Shipping and handling costs are considered a fulfillment activity and are expensed as incurred.
DTC Subscription Sales: The Company offers its customers the ability to opt into recurring automatic refills on Thorne.com and on Amazon.com. Revenue is recognized under the subscription program when product is shipped to the consumer. No funds are collected at the time a consumer signs up for a subscription and the customer can cancel or modify a subscription at any
12
Thorne HealthTech, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
time at no cost to the customer. On the Thorne.com website, customers are allowed to subscribe at a frequency of monthly, every 45 days, every 2 months, every 3 months, or every 4 months. For all these frequencies, a 10% discount is offered on retail refill orders. For orders placed through Amazon.com, the discount ranges from 5% to 10% depending on the number of products to which a customer is subscribed; the average discount on Amazon for the Company’s subscriptions is approximately 6%. The Company records revenues, net of estimated discounts.
If a customer is not satisfied for any reason with a product purchased, the customer can return it to the place of purchase to receive a refund, credit, or a replacement product. The return or refund request must be submitted within 60 days of the date of purchase. The Company estimates returns and accrues for potential returns based on historical data.
There are no material differences in the Company’s revenue recognition policy between the DTC subscription program and the DTC transaction program.
The Company primarily sells to customers in the United States, but also sells in international markets. Regardless of customer location, customers are invoiced and payments are required to be made in U.S. dollars.
The Company has elected to exclude sales and use taxes for non-exempt customers from the transaction price and, therefore, sales and use taxes are excluded from revenue.
Product Returns, Sales Incentives and Other Forms of Variable Consideration
In measuring revenue and determining the consideration the Company is entitled to as part of a contract with a customer, the Company takes into account the related elements of variable consideration. Such elements of variable consideration include product return rights, discounts, rebates, volume discounts and rebates, promotional offers, and other marketing offers that may impact net sales.
For the sale of goods with a right of return, the Company only recognizes revenue for the consideration it expects to be entitled to (considering the products to be returned) and records a sales return accrual within accrued expenses for the amount it expects to credit back its customers. Given that most product returns cannot be resold to another customer, the Company does not recognize an asset in inventory, or a corresponding adjustment to cost of sales, for the right to recover goods from customers associated with the estimated returns.
The sales return accrual includes estimates that directly impact reported net sales. These estimates are calculated based on a history of actual returns and estimated future returns. In addition, as necessary, sales return accruals may be established for significant future known or anticipated events. The types of future known or anticipated events that are considered, and will continue to be considered, include the Company’s decision to continue to support new and existing products.
Returns are handled on a case-by-case basis, but generally returns are accepted when the customer is unsatisfied with the product. The Company has accrued an estimate for returns related to a future period. Sales returns accrued as of March 31, 2022, and December 31, 2021, were approximately $64 thousand and $50 thousand, respectively, and reduced net sales.
The Company estimates sales incentives and other variable consideration using the expected value method. The variable consideration is included in the transaction price only to the extent that it is probable, in the Company's judgment, that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Under this method, certain forms of variable consideration are based on volumes of sales to the customer, which requires subjective estimates. These estimates are supported by historical results, as well as specific facts and circumstances related to the current period. A select few customers, because of their size, are offered a discount for early payment.
The Company also enters into transactions and makes payments to certain of its customers related to advertising, some of which involve cooperative relationships with customers. These activities can be arranged either with unrelated third parties or in conjunction with the customer. To the extent the Company receives a distinct good or service in exchange for consideration and the fair value of the benefit can be reasonably estimated, the Company’s share of the costs of these transactions (regardless of to whom they were paid) are reflected in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations. The Company also enters into other advertising activities arranged with customers. Since these activities cannot be arranged with unrelated third parties and no distinct good or service is received in exchange for consideration, the fair value of the
13
Thorne HealthTech, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
benefit is not reasonably estimated. The Company’s share of the costs for these transactions paid to customers are reflected as a reduction in the transaction price within net sales in the accompanying condensed consolidated statements of operations.
For certain sales, the Company incurs incremental costs of obtaining the contract through the form of sales commissions. The sales commissions incurred are short-term (less than 12 months in duration) and directly correlated to the sales generated and are therefore, expensed as incurred.
The following table presents revenue disaggregated by geography, as determined by the country products were shipped to:
|
|
Three Months Ended March 31, |
|
|||||||||||||
|
|
2022 |
|
|
2021 |
|
||||||||||
|
|
Amount |
|
|
Percentage |
|
|
Amount |
|
|
Percentage |
|
||||
Domestic |
|
$ |
52,516,349 |
|
|
|
96.1 |
% |
|
$ |
41,879,286 |
|
|
|
94.1 |
% |
Foreign |
|
|
2,151,849 |
|
|
|
3.9 |
% |
|
|
2,604,454 |
|
|
|
5.9 |
% |
Total sales |
|
$ |
54,668,198 |
|
|
|
100.0 |
% |
|
$ |
44,483,740 |
|
|
|
100.0 |
% |
The following table presents disaggregated revenues based on sales channel:
|
|
Three Months Ended March 31, |
|
|||||||||||||
|
|
2022 |
|
|
2021 |
|
||||||||||
|
|
Amount |
|
|
Percentage |
|
|
Amount |
|
|
Percentage |
|
||||
DTC subscription sales |
|
$ |
8,347,896 |
|
|
|
15.3 |
% |
|
$ |
5,480,524 |
|
|
|
12.3 |
% |
DTC transaction sales |
|
|
17,462,301 |
|
|
|
31.9 |
% |
|
|
13,923,476 |
|
|
|
31.3 |
% |
Professional/B2B |
|
|
28,858,001 |
|
|
|
52.8 |
% |
|
|
25,079,740 |
|
|
|
56.4 |
% |
Total |
|
$ |
54,668,198 |
|
|
|
100.0 |
% |
|
$ |
44,483,740 |
|
|
|
100.0 |
% |
Segments
The Company operates in one reportable segment: the selling of innovative solutions and personalized approaches to health and wellness. The Company’s chief operating decision maker (determined to be the Chief Executive Officer) does not manage any part of the Company separately, and the allocation of resources and assessment of performance are based on the Company’s condensed consolidated operating results and where the best future opportunities arise.
Recent Accounting Pronouncements – Adopted
ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. In August 2020, the FASB issued this ASU to simplify the accounting for convertible instruments. This ASU also requires entities to use the if-converted method for all convertible instruments in calculating diluted earnings-per-share. This update was adopted by the Company effective January 1, 2022. The adoption did not have a material impact on its condensed consolidated financial statements.
ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options, a consensus of the Emerging Issues Task Force. In May 2021, the FASB issued this ASU to provide explicit guidance on accounting by issuers for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after the modification or exchange. This update was adopted by the Company effective January 1, 2022. The adoption did not have a material impact on its condensed consolidated financial statements.
Recent Accounting Pronouncements – Not Yet Adopted
ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. In June 2016, the FASB issued this ASU to amend the current accounting guidance which requires the measurement of all expected losses to be based on historical experience, current conditions and reasonable and supportable forecasts. For trade
14
Thorne HealthTech, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
receivables, loans, and other financial instruments, the Company will be required to use a forward-looking expected loss model that reflects probable losses rather than the incurred loss model for recognizing credit losses. This ASU was amended by ASU 2019-10 to be effective for smaller reporting companies beginning after December 15, 2022. The Company does not believe the adoption of this ASU will have a material impact on its consolidated financial statements and related disclosures.
ASU 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In March 2020, the FASB issued guidance providing optional expedients and exceptions to account for the effects of reference rate reform to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The optional guidance, which became effective on March 12, 2020 and can be applied through December 31, 2022, has not impacted the Company’s consolidated financial statements. The Company has no contracts that reference LIBOR and does not believe the adoption of this ASU will have a material impact on its consolidated financial statements and related disclosures.
ASU 2021-08, Business Combinations – Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. In October 2021, the FASB issued guidance intended to improve the accounting for acquired revenue contracts with customer in a business combination by addressing diversity in practice. The guidance requires an acquirer to recognize and measure contract assets and liabilities acquired in a business combination in accordance with Topic 606 as if they had originated the contracts, as opposed to fair value on the date of acquisition. The standard will be effective for business combinations occurring after January 1, 2023. Early adoption is permitted. The Company is currently evaluating the impact that this guidance may have on its consolidated financial statements and related disclosures.
No other new accounting pronouncement issued or effective during the three months ended March 31, 2022, had, or is expected to have, a material impact on our condensed consolidated financial statements.
COVID-19 Pandemic and CARES Act
The full impact of the Covid-19 outbreak continues to evolve. As such, the impact of this pandemic on the Company’s financial condition is uncertain. Management is actively monitoring the impact of this virus on its financial condition, liquidity, operations, suppliers, customers, and workforce. The Company's unaudited condensed consolidated financial statements presented herein reflect the latest estimates and assumptions made by management that affect the reported amounts of assets and liabilities and related disclosures as of the date of the condensed consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented.
On March 27, 2020, the “Coronavirus Aid, Relief, and Economic Security (CARES) Act,” was enacted. The CARES Act includes provisions relating to refundable payroll tax credits, deferment of employer-side Social Security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property. The Company deferred the employer portion of payroll taxes during the year ended December 31, 2020, totaling approximately $1.0 million. During the year ended December 31, 2021, the Company paid $0.5 million of the deferred payroll taxes. As of March 31, 2022 the remaining total amount of deferred was approximately $0.5 million and will be payable by December 31, 2022.
Transaction with Mitsui & Co., Ltd. and Kirin Holdings Company, Limited
Series E Convertible Preferred Stock Financing
On July 5, 2018, the Company issued and sold an aggregate of 27,011,500 shares of Series E convertible preferred stock to Mitsui & Co., Ltd. (Mitsui), and Kirin Holdings Company, Limited (Kirin), at a purchase price of $5.12 per share for aggregate gross proceeds of approximately $138.4 million (the Series E Financing). Immediately prior to the completion of the Company’s IPO on September 22, 2021, all outstanding shares of the Series E convertible preferred stock automatically converted on a one-to-one
15
Thorne HealthTech, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
basis into an aggregate of 27,011,500 shares of common stock. See Note 11 for additional information related to the Series E convertible preferred stock.
Kirin and Mitsui Feasibility Review Agreement
On March 19, 2019, Onegevity Health, LLC (Onegevity) entered into a feasibility review agreement (Feasibility Agreement) with Kirin and Mitsui. Entities affiliated with both Mitsui and Kirin each held more than 5% of our capital stock as of and for the years ended December 31, 2021 and 2020. Pursuant to the Feasibility Agreement, Onegevity is required to conduct a feasibility study for the successful commercialization of Onegevity’s Gutbio product (Gutbio Product) and in return each of Kirin and Mitsui paid the company $500,000 (Feasibility Payment Amount). Under the Feasibility Agreement, Kirin and Mitsui may, acting jointly, any time prior to March 19, 2022, make the decision to commercialize the Gutbio Product. If they choose to commercialize the Gutbio Product, then Onegevity is required to enter into a definitive license agreement to license the Gutbio Product to Kirin and Mitsui for their exclusive use in Japan. If they do not choose to commercialize the Gutbio Product, the Feasibility Agreement requires Onegevity to issue equity securities of Onegevity to each of Kirin and Mitsui in equal amounts in consideration for the Feasibility Payment Amount. This agreement was subsequently amended on June 8, 2021 with the Amendment Agreement extending the date of determination by one year to March 19, 2023; see ‘Kirin and Mitsui Amendment Agreement’ below.
Kirin and Mitsui Letter Agreements
On July 5, 2018, the Company entered into a letter agreement with Kirin and Mitsui (the Thorne Japan Agreement) in connection with the Company’s Series E convertible preferred stock financing which designates Kirin and Mitsui as the Company’s exclusive strategic partners in Japan, including with respect to the commercialization in Japan of any products and services designed, developed, manufactured, marketed, provided, licensed, sold or bought by the Company from time to time. This agreement further appoints Kirin and Mitsui as the exclusive marketers and distributors of the Company’s products in Japan and provides Kirin and Mitsui with the exclusive right to conduct research and development activities related to the Company’s products in Japan, as well as manage any regulatory approvals required to market or distribute the Company’s products in Japan. This agreement also provides Kirin and Mitsui with an exclusive right of first negotiation with respect to marketing of the Company’s products in any country in Asia, including China, ASEAN member countries, Australia, New Zealand and any other countries in which Kirin and Mitsui have an interest. This agreement expires on July 5, 2028. This agreement was subsequently amended on June 8, 2021 with the Amendment Agreement; see ‘Kirin and Mitsui Amendment Agreement’ below.
Also, on July 5, 2018, the Company and Onegevity entered into a letter agreement with Kirin and Mitsui (the Onegevity Agreement) in connection with the Company’s Series E convertible stock financing which provided for certain exclusive commitments between the Company and Onegevity. Kirin and Mitsui also received a right of first negotiation with respect to any business collaboration, including with respect to Onegevity products, intellectual property, services or technology, in or with respect to Japan. The agreement also provides Kirin and Mitsui a right of first refusal over any agreement, arrangement or understanding with any third party regarding a business collaboration in the Asia Pacific region, other than Japan. This agreement does not expire. This agreement was subsequently amended on June 8, 2021 with the Amendment Agreement; see ‘Kirin and Mitsui Amendment Agreement’ below.
Kirin and Mitsui Amendment Agreement
On June 8, 2021, the Company entered into an Amendment Agreement with Kirin and Mitsui in order to amend the Feasibility Agreement, the Thorne Japan Agreement and the Onegevity Agreement. This Amendment Agreement removed the requirement from the Thorne Japan Agreement that the parties enter into separate agreements related to the exclusivity provisions discussed above and removed any provisions regarding the establishment of a joint venture in Japan. The Amendment Agreement further removed certain obsolete intercompany commitments between the Company and Onegevity, in light of the Company’s merger with Onegevity. The Amendment Agreement also amended the Onegevity Agreement to replace Onegevity with the Company as a party to the agreement. Finally, the Amendment Agreement amended the Feasibility Agreement discussed above to obligate the Company (rather than Onegevity) to issue equity securities to each of Kirin and Mitsui in the event Kirin and Mitsui elect to not commercialize the Gutbio Product by March 19, 2023. As of March 31, 2022, no equity securities have been issued related to the Feasibility Agreement or the Feasibility Payment Amount.
Kirin Juntendo Agreement
On October 16, 2020, Onegevity entered into a service agreement (Juntendo Agreement) with Juntendo University and Kirin. Pursuant to the Juntendo Agreement, we shall provide DNA analysis services for up to 600 samples and in return may receive
16
Thorne HealthTech, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
up to $129,000. During the three months ended March 31, 2022 and 2021, we recorded $0 and $8 thousand, respectively, for analysis services provided under the agreement. As of March 31, 2022 and December 31, 2021, we had no receivables outstanding from Juntendo University and Kirin, related to the service agreement.
Kirin and Mitsui Employment Secondments
The Company is party to secondment agreements with Kirin’s employee, Mr. Yasuhiro Oki, dated March 18, 2019 (Kirin Secondment Agreement), and Mitsui’s employee, Mr. Shuntaro Yamamoto, dated February 28, 2019 (Mitsui Secondment Agreement), under which they provide full-time services to Thorne and Thorne reimburses Kirin and Mitsui for such services. Under the Kirin Secondment Agreement and the Mitsui Secondment Agreement, we reimburse each of Kirin and Mitsui up to $120 thousand annually for such services.
During each of the three months ended March 31, 2022 and 2021, the Company recorded employment related expense of $21 thousand, related to the Kirin Secondment Agreement. As of each of March 31, 2022, and December 31, 2021, the Company had an associated and outstanding related party payable to Kirin of $21 thousand, related to the secondment reimbursement.
During each of the three months ended March 31, 2022 and 2021, the Company recorded employment related expense of $30 thousand, related to the Mitsui Secondment Agreement. As of each of March 31, 2022, and December 31, 2021, the Company had an associated and outstanding related party payable to Mitsui of $30 thousand, related to the secondment reimbursement.
Kirin and Mitsui Fee Letters for $4.9 Million Letter of Credit Guarantee
The Company is party to certain fee letters with Mitsui and Kirin, under which Mitsui and Kirin provide certain guarantees of certain of the Company’s obligations. On November 30, 2018, the Company entered into fee letters with Mitsui (2018 Mitsui Fee Letter) and Kirin (2018 Kirin Fee Letter), whereby both Mitsui and Kirin individually agree to guarantee half of the $4.9 million letter of credit under the Reimbursement Agreement with Sumitomo Mitsui Banking Corporation (SMBC), dated October 31, 2018 (LC Reimbursement Agreement). Under the 2018 Mitsui Fee Letter and 2018 Kirin Fee Letter, the Company is required to pay each, Mitsui and Kirin, an annual fee equal to twelve-month LIBOR, plus 300 basis points of their half of the $4.9 million guarantee.
On December 3, 2018, the Company issued an irrevocable standby letter of credit pursuant to the LC Reimbursement Agreement in the amount of $4.9 million to serve as security under the lease for the manufacturing facility in Summerville, South Carolina. The irrevocable standby letter of credit had an original expiration date of December 3, 2019 and automatic renewals until October 31, 2037.
On October 29, 2021, the Company deposited $4.9 million into a restricted interest-bearing account with SMBC to fund the standby letter of credit and release the guarantees provided by Kirin and Mitsui. As of March 31, 2022 and December 31, 2021, we have recorded the $4.9 million deposit as restricted cash in our condensed consolidated balance sheet. See Note 10 for additional information related to the standby letter of credit.
During the three months ended March 31, 2022 and 2021, the Company recorded guarantee fee expense of $0 and $40 thousand, respectively, related to the $4.9 million letter of credit guarantee.
Kirin and Mitsui Fee Letters for $20.0 Million Revolver Guarantee
On February 14, 2020, the Company entered into additional fee letters with Mitsui (2020 Mitsui Fee Letter) and Kirin (2020 Kirin Fee Letter), whereby both Mitsui and Kirin individually agree to guarantee half of the $20.0 million of borrowings under the Uncommitted and Revolving Credit Line Agreement with SMBC, dated February 14, 2020 (2020 Credit Agreement). Under the 2020 Mitsui Fee Letter and 2020 Kirin Fee Letter, the Company is required to pay each, Mitsui and Kirin, an annual fee equal to 2.00% of their half of the $20.0 million guarantee.
On February 12, 2021, in connection with entering into the Uncommitted and Revolving Credit Line Agreement with SMBC, dated February 12, 2021 (2021 Credit Agreement), the Company entered into new fee letters with Mitsui (2021 Mitsui Fee Letter) and Kirin (2021 Kirin Fee Letter), whereby both Mitsui and Kirin individually agreed to guarantee half of the $20.0 million of
17
Thorne HealthTech, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
borrowings. Under the 2021 Mitsui Fee Letter and 2021 Kirin Fee Letter, the Company is required to pay each, Mitsui and Kirin, an annual fee equal to 1.20% of their half of the $20.0 million guarantee.
During the three months ended March 31, 2022 and 2021, the Company recorded guarantee fee expense related to the $20.0 million guarantees of $0 and $99 thousand, respectively.
On October 4, 2021, the Company repaid the $20.0 million of outstanding borrowings under the 2021 Credit Agreement, plus interest accrued and unpaid on the loan through the date of repayment. Upon repayment of the outstanding borrowings under the 2021 Credit Agreement, the related Kirin and Mitsui guarantees were released and terminated. See Note 10 for additional information related to the 2021 Credit Agreement.
Kirin and Mitsui Registration Rights Agreement
The Company is party to a registration rights agreement, as amended, with certain holders of our capital stock. Under the Company’s registration rights agreement, certain holders of our capital stock, including Mitsui and Kirin, have the right to demand that we file a registration statement or request that their shares of our capital stock be covered by a registration statement that we are otherwise filing. As of and for the three months ended March 31, 2022 and 2021, the Company had incurred no costs associated with a registration or offering of shares of our common stock on behalf of Mitsui or Kirin.
Kirin and Kyowa Hakko Bio Co., Ltd. Research Agreements
The Company provides certain research services under several research contracts with Kirin and Kyowa Hakko Bio Co., Ltd., a subsidiary of Kirin. During the three months ended March 31, 2022 and 2021, the Company recognized no revenue related to these research services. As of March 31, 2022 and December 31, 2021, the Company had recorded deferred revenue of $98 thousand related to a research contract with Kirin, which has been included in other accrued expenses within the condensed consolidated balance sheets. As of March 31, 2022 and December 31, 2021, there were no receivables outstanding from Kirin related to the research agreements.
Other Related Party Transactions
Merger with Onegevity
On January 6, 2021, the Company announced a merger with Onegevity. Paul Jacobson, our Chief Executive Officer, was also the Chief Executive Officer of Onegevity and owned 5,712 (4.0%) of Onegevity’s outstanding shares. The merger transaction was approved by a majority of each of our and Onegevity’s board’s independent board members. The transaction exchanged all outstanding Onegevity equity for 14.1% of the outstanding equity of the combined Thorne and Onegevity entity. This transaction increased Paul Jacobson’s ownership in the Company to 4.4% based on our common stock outstanding following the merger transaction. The transaction was completed on March 3, 2021. See Note 4 for additional information related to the Onegevity merger.
Merger with Drawbridge
On April 21, 2021, the Company entered into a Merger Agreement with Drawbridge to acquire the majority of outstanding shares of Drawbridge, a healthcare technology company. Prior to the merger, the Company owned approximately 11.2% of the outstanding shares of Drawbridge and accounted for the investment in Drawbridge as an equity method investment, as the Company determined it had significant influence over Drawbridge. The Company’s net equity investment was approximately $3.4 million as of December 31, 2020. The Company's portion of Drawbridge’s loss during 2021, up to the date of the merger, was $0.2 million. As of March 31, 2021 and immediately preceding the merger, the Company’s net equity investment was approximately $3.2 million. Under the Merger Agreement, the Company increased its ownership interest in Drawbridge by 76.3 percentage points, to a total ownership of 87.5%. The Merger Agreement called for the payment of approximately $1.4 million in cash and the assumption of certain liabilities of Drawbridge. See Note 4 for additional information related to the Drawbridge merger.
Supply Agreement with NR Therapeutics, LLC
The Company is party to an exclusive supply agreement dated June 5, 2020 with NR Therapeutics, LLC (NR Therapeutics) pursuant to which the Company purchases inventory of nicotinamide riboside (NR). Paul Jacobson, the Company’s Chief Executive Officer, is a member of NR Therapeutics board of directors, and the Company holds a 49% interest in NR
18
Thorne HealthTech, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Therapeutics. During the three months ended March 31, 2022 and 2021, the Company purchased inventory from NR Therapeutics totaling $341 thousand and $1.0 million, respectively. As of March 31, 2022 and December 31, 2021, the Company had a related party payable of $0 and $175 thousand, respectively.
Letter Agreement with Tecton Group, LLC
The Company is party to a letter agreement between the Company, Tecton Group, LLC (Tecton), Kirin and Mitsui (Tecton Letter Agreement) providing the Company with, amongst other things, a right of first offer to commercialize any Tecton product or service. The Tecton Letter Agreement also provides Kirin and Mitsui, with a right of first negotiation for any commercialization of Tecton products or services in Japan. The Company’s Chief Executive Officer, Paul Jacobson is a member of Tecton’s board of directors. During the three months ended March 31, 2022 and 2021, we paid certain fees on behalf of Tecton, totaling $0 and $474 thousand, respectively, in exchange for additional equity interest in Tecton. As of March 31, 2022 and December 31, 2021, there were no amounts outstanding to the Company from Tecton.
Supply Agreement with Indena S.p.A.
The Company is party to a supply agreement to purchase certain inventory with Indena S.p.A. (Indena), a company focused on the development and production of active principles derived from plants, for use in the pharmaceutical and health food industries. Indena is a shareholder of the Company and as of March 31, 2022, Indena held less than 1% of the outstanding shares. During the three months ended March 31, 2022 and 2021, the Company purchased inventory from Indena totaling $2.4 million and $1.7 million, respectively. As of March 31, 2022 and December 31, 2021, the Company had a related party payable of $0.9 million and $1.4 million, respectively.
Strategic Supplier Agreement with Nutrativa LLC
The Company is party to a strategic supplier agreement dated August 2, 2018, as amended, with Nutrativa LLC (Nutrativa). As part of the strategic supplier agreement, the Company serves as Nutrativa’s contract manufacturer for Nutrativa’s Effusio product. The Company also provides support services including customer service, order processing, warehousing and fulfillment, safety and surveillance, production planning, finance, legal and regulatory, human resources, and marketing. All manufacturing and development of Nutrativa products currently reside within the Company’s facilities located in Summerville, South Carolina. Paul Jacobson, the Company’s Chief Executive Officer, is the Chief Executive Officer of Nutrativa. During the three months ended March 31, 2021, the Company recognized revenue related to the supply agreement of $15 thousand. As of December 31, 2021, the Company had recorded a related party receivable with Nutrativa of approximately $364 thousand. On February 28, 2022, the Company completed the purchase of all the outstanding membership interest of Nutrativa, LLC, a Delaware limited liability company (“Nutrativa”, or the “Nutrativa Acquisition”). See Note 4 for additional information related to the acquisition of Nutrativa.
Investment in Oova, Inc.
The Company maintains an investment in Oova, Inc. (Oova). During the three months ended March 31, 2022 and 2021, the Company recognized $3 thousand and $4 thousand, respectively, of revenue related to contractual fulfillment services that the Company provides to Oova. As of March 31, 2022, and December 31, 2021, the Company had a related party receivable with Oova of approximately $5 thousand and $2 thousand, respectively.
Other Related Party Transactions
As of March 31, 2022, and December 31, 2021, the Company had a related party payable of $43 thousand to Chief Executive Officer, Paul Jacobson.
Onegevity Health LLC Merger
On January 6, 2021, the Company announced a merger with Onegevity, a health intelligence company.
19
Thorne HealthTech, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
As of December 31, 2020 the Company’s ownership in Onegevity was approximately 50%. Since Onegevity’s inception in 2018, the Company determined that it has been the primary beneficiary of Onegevity and has accordingly consolidated the assets and liabilities of Onegevity in accordance with ASC 810, Consolidations.
To effect the merger, the Company issued 6,179,270 shares of Class B common stock, 472,590 which were subject to time-based restrictions, to the minority shareholders of Onegevity, plus an additional 1,959,335 stock options with various strike prices to key managers of Onegevity who had stock options in Onegevity in a tax-free exchange. No cash was involved in the transaction. The shares of Class B common stock did not have voting rights among other restrictions.
As part of the merger, the legal entity Onegevity Health, LLC was dissolved; its wholly owned subsidiary, Health Elements, LLC, became a wholly owned subsidiary of the Company.
The merger did not lead to a change in control and therefore the transaction was recorded in the equity section of the Company’s balance sheet.
Drawbridge Health, Inc. Merger
On April 26, 2021, the Company entered into a merger agreement (the Merger Agreement) with Drawbridge Health, Inc. (Drawbridge), to acquire the majority of the outstanding shares of Drawbridge, a healthcare technology company (the Drawbridge Transaction). Prior to the merger, the Company owned approximately 11.2% of the outstanding shares of Drawbridge and accounted for its investment in Drawbridge as an equity-method investment, because the Company determined it had significant influence over Drawbridge. The Company’s net equity investment was approximately $3.2 million as of March 31, 2021. Under the Merger Agreement, the Company increased its ownership of Drawbridge by 76.3 percentage points to a total ownership of 87.5%. The Merger Agreement calls for the payment of approximately $1.4 million in cash and the assumption of certain liabilities of Drawbridge.
The Drawbridge Transaction was accounted for as an asset acquisition because the Company concluded the assets acquired and liabilities assumed did not constitute a business under ASC 805, Business Combinations (ASC 805). The Company performed a reassessment of Drawbridge as a variable interest entity under ASC 810, Consolidation (ASC 810), and concluded Drawbridge to be a variable interest entity as of the date of the transaction. Furthermore, the Company determined it was the primary beneficiary of Drawbridge as of the transaction date. Accordingly, the Drawbridge Transaction was accounted for as an asset acquisition under ASC 810, rather than under ASC 805. Under ASC 810, the Company is required to recognize a gain (loss) on the acquisition, equal to the sum of the consideration paid, the carrying value of the existing equity-method investment, and the fair value of the resulting non-controlling interest less the fair value of the net assets acquired. The Company concluded the carrying value of the Company’s existing Drawbridge investment of approximately $3.2 million was impaired in the second quarter of 2021 prior to the transaction and recorded a loss from equity interest in unconsolidated affiliates of approximately $3.0 million on the condensed consolidated statements of operations for the nine months ended September 30, 2021. Additionally, a loss on the Drawbridge Transaction of approximately $0.2 million was recorded during the nine months ended September 30, 2021 within other (income) expense in the condensed consolidated statements of operations. The net tangible and intangible assets acquired, and liabilities assumed, in connection with the Drawbridge Transaction were recorded based on their fair values as of the acquisition date and the value associated with in-process research and development was expensed because it was determined to have no alternative future use. The in-process research and development costs of approximately $1.6 million are recorded as an operating expense on the condensed consolidated statement of operations. Subsequent to the acquisition, the operations of Drawbridge were fully consolidated in the Company’s consolidated financial statements, and a non-controlling interest of approximately $0.2 million was recorded for the 12.5% equity interest held by other investors.
20
Thorne HealthTech, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The assets and liabilities acquired based on their fair value were as follows:
Cash |
|
$ |
11,823 |
|
Accounts receivable |
|
|
8,686 |
|
Prepaid expenses and other current assets |
|
|
711,389 |
|
Inventories |
|
|
10,051 |
|
Property and equipment |
|
|
914,716 |
|
Operating lease right-of-use asset |
|
|
410,732 |
|
Intangible asset consisting of in process research and development |
|
|
1,563,015 |
|
Other assets |
|
|
22,782 |
|
Accounts payable |
|
|
(701,242 |
) |
Other accrued expenses |
|
|
(864,483 |
) |
Current portion of operating lease obligations |
|
|
(263,509 |
) |
Long term operating lease, net of current portion |
|
|
(147,223 |
) |
Net assets acquired |
|
$ |
1,676,737 |
|
Less: non-controlling interest |
|
|
(209,592 |
) |
Net assets acquired by Thorne HealthTech, Inc. |
|
$ |
1,467,145 |
|
Nutrativa LLC Acquisition
On February 28, 2022, the Company completed the purchase of all the outstanding membership interest of Nutrativa (the Nutrativa Acquisition). Nutrativa leverages proprietary two-dimensional high-speed printing technology to develop and manufacture dissolvable supplement discs. Paul Jacobson, the co-founder, CEO and director for the Company, is also the CEO of Nutrativa. A special committee of independent directors (the “Special Committee”) of the Company's Board of Directors negotiated and approved the Nutrativa Acquisition in consultation with an independent advisory firm.
The consideration provided to the unit-holders was approximately $15.390 million, comprised of $14.880 million in cash and the forgiveness of $528 thousand of amounts due to the Company at the time of the transaction (net of $18 thousand cash acquired). The Company funded the purchase with available cash on hand. Upon acquisition, Nutrativa will now be integrated into the Company. The Nutrativa Acquisition will allow the Company to utilize innovative printing technology to help address consumer needs in a green, sustainable fashion, while at the same time enabling the Company to expand its portfolio of products and services into new target markets.
We have accounted for the acquisition of Nutrativa under the acquisition method of accounting in accordance with ASC 805, Business Combinations. The acquisition price has been allocated among assets acquired and liabilities assumed at fair value based on information currently available, with the excess recorded as goodwill (non-deductible for tax purposes). The goodwill recognized is attributable primarily to expected synergies to be realized by Nutrativa in leveraging the Company's existing manufacturing, distribution, research and development, and marketing capabilities to efficiently scale and grow the Nutrativa products and business. Estimates of fair value included in the condensed consolidated financial statements represent our best estimates and valuations. In accordance with the acquisition method of accounting, the allocation of consideration value is subject to adjustment until we finalize our analysis, within a period of time not to exceed one year after the date of acquisition, or February 28, 2023, in order to provide us with the time to complete the valuation of its assets and liabilities. As of March 31, 2022, the valuation for the acquired developed technology intangible asset remains subject to finalization.
Total transaction costs incurred by the Company were $460 thousand for the three months ended March 31, 2022. These transaction costs were expensed as incurred and are included as a component of selling, general and administrative expense within the condensed consolidated statements of operations.
21
Thorne HealthTech, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following table sets forth the preliminary allocation of the purchase price to Nutrativa’s identifiable tangible and intangible assets acquired and liabilities assumed, including measurement period adjustments:
Cash |
|
$ |
17,713 |
|
Accounts receivable, net |
|
|
14,740 |
|
Inventories, net |
|
|
274 |
|
Property and equipment, net |
|
|
3,256,996 |
|
Intangible assets, net |
|
|
10,200,000 |
|
Goodwill |
|
|
2,100,358 |
|
Accounts payable |
|
|
(181,913 |
) |
Other accrued expenses |
|
|
(203 |
) |
Net assets acquired |
|
$ |
15,407,965 |
|
The Company consolidates variable interest entities where the Company is determined to be the primary beneficiary, under ASC 810. The Company consolidates into its consolidated financial statements two legal entities (Onegevity Health, LLC and Thorne HealthTech Asia Pte, Ltd.) in which it holds a controlling interest. The Company presents non-controlling interest as a component of stockholders’ deficit on its condensed consolidated balance sheet and reports net income (loss)--non-controlling interest in the condensed consolidated statements of operations. The Company’s acquisition or disposal of ownership interests in the variable interest entities is a reconsideration event that requires a reassessment of whether the entity continues to be a variable interest entity and whether the primary beneficiary has changed. If after making these reassessments, the primary beneficiary remains the same (i.e., a controlling financial interest is maintained), and the transaction is in the scope of ASC 810, the Company accounts for the acquisition or disposal of a non-controlling interest as an equity transaction, consistent with the principles of ASC 810-10. Any difference between the price paid and the carrying amount of the non-controlling interest is not reflected in net income, but instead reflected directly in equity.
Onegevity Health, LLC. As of January 1, 2021, the Company owned 58,252 shares of Onegevity capital stock, which equated to approximately a 50% ownership interest. After evaluating relevant factors, the Company determined that it is the primary beneficiary of Onegevity and accordingly, consolidated the assets and liabilities of Onegevity in accordance with ASC 810.
During the first quarter of 2021, the Company merged with Onegevity. As part of the merger, the legal entity Onegevity Health, LLC was dissolved; its wholly owned subsidiary, Health Elements, LLC, became a wholly owned subsidiary of the Company. The merger did not lead to a change in control, and therefore, the transaction was recorded in the equity section of the Company’s balance sheet. See Note 4 for additional information related to the Onegevity merger.
Thorne HealthTech Asia Pte, Ltd. On January 10, 2022, the Company entered into an agreement with Mitsui and TM HealthTech Pte. Ltd., a wholly owned subsidiary of Mitsui, to form a joint venture entity, Thorne HealthTech Asia PTE, LTD. (Thorne Asia JV), to exclusively market, distribute and sell Thorne’s products across Singapore, Hong Kong, Taiwan, Thailand, Indonesia, Malaysia, Australia, the Philippines, Vietnam, India, and New Zealand. On January 20, 2022, Thorne and Mitsui contributed approximately $2.7 million and $2.6 million, respectively, in cash and hold 51% and 49%, respectively, of the total issued share capital of Thorne Asia JV. After evaluating relevant factors, the Company determined that it is the primary beneficiary of Thorne Asia JV, as substantially all of the activities either involve, or are conducted on behalf of, the Company. Under ASC 810, the Company has consolidated Thorne HealthTech Asia Pte, Ltd. in its condensed consolidated financial statements for the three months ended March 31, 2022
The board of directors of Thorne Asia JV is composed of five directors, of which three were nominated by Thorne, and two by Mitsui. Each director is appointed for a term of office of one year and will be eligible for re-election.
22
Thorne HealthTech, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Summary information for Thorne Asia JV, excluding intercompany activity with the Company, is included in the condensed consolidated balance sheets and statement of operations as follows, for the period ended March 31, 2022:
Total assets |
|
$ |
4,963,318 |
|
Less: Total liabilities |
|
|
62,259 |
|
Net assets (liabilities) |
|
|
4,901,059 |
|
Revenue |
|
|
5,892 |
|
Net loss |
|
$ |
(371,311 |
) |
Less: Loss attributable to non-controlling interest |
|
|
181,943 |
|
Net loss attributable to Thorne HealthTech, Inc. |
|
$ |
(189,368 |
) |
Property and equipment, net are as follows:
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Machinery and equipment |
|
$ |
14,130,736 |
|
|
$ |
9,937,510 |
|
Furniture and fixtures |
|
|
509,054 |
|
|
|
491,173 |
|
Office equipment |
|
|
1,144,489 |
|
|
|
1,111,141 |
|
Leasehold improvements |
|
|
19,487,519 |
|
|
|
19,431,916 |
|
Vehicles |
|
|
98,282 |
|
|
|
98,282 |
|
Lab equipment |
|
|
2,938,346 |
|
|
|
2,930,059 |
|
Purchased software |
|
|
2,107,327 |
|
|
|
2,107,327 |
|
Internally-developed software |
|
|
312,438 |
|
|
|
|
|
Total property and equipment |
|
|
40,728,191 |
|
|
|
36,107,408 |
|
Less accumulated depreciation and amortization |
|
|
(12,304,273 |
) |
|
|
(11,262,651 |
) |
In-process assets including deposits on new equipment |
|
|
2,439,060 |
|
|
|
2,185,643 |
|
Property and equipment, net |
|
$ |
30,862,978 |
|
|
$ |
27,030,400 |
|
In-process assets are stated at cost, which includes the cost of construction and other directly attributable costs. No provision for depreciation is made on in-process assets until the relevant assets are completed and available for intended use.
Depreciation and amortization expense of property and equipment was $916 thousand and $576 thousand for the three months ended March 31, 2022, and 2021, respectively.
23
Thorne HealthTech, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Goodwill
The following table sets forth the change in the carrying amount of goodwill during the three months ended March 31, 2022:
Balance as of December 31, 2021 |
|
$ |
14,440,683 |
|
Acquisitions |
|
|
2,100,358 |
|
Balance as of March 31, 2022 |
|
$ |
16,541,041 |
|
In June 2010, the Company acquired all the outstanding shares of capital stock of Thorne Research, which is now a wholly owned subsidiary of the Company. The Company accounted for the transaction as a business combination in accordance with ASC 805, Business Combinations, and recorded the consideration transferred and assets acquired, and liabilities assumed at their fair values, resulting in the recording of goodwill of approximately $14.4 million.
In February 2022, the Company acquired all of the outstanding ownership interest of Nutrativa, which is now a wholly owned subsidiary of the Company. The Company accounted for the transaction as a business combination in accordance with ASC 805, Business Combinations, and recorded the consideration transferred and assets acquired, and liabilities assumed at their fair values, resulting in the recording of goodwill of approximately $2.1 million. See Note 4 for additional information related to the acquisition of Nutrativa.
Finite-lived Intangible Assets
Finite-lived intangible assets are as follows:
|
|
March 31, 2022 |
|
|||||||||
|
|
Gross Carrying Value |
|
|
Accumulated Amortization |
|
|
Net |
|
|||
Customer relationships |
|
$ |
6,500,000 |
|
|
$ |
(3,818,750 |
) |
|
$ |
2,681,250 |
|
Trade names |
|
|
8,640,000 |
|
|
|
(6,993,334 |
) |
|
|
1,646,666 |
|
Existing technology/reformulations |
|
|
13,407,923 |
|
|
|
(2,731,257 |
) |
|
|
10,676,666 |
|
Research and development formulas |
|
|
800,000 |
|
|
|
(800,000 |
) |
|
|
|
|
License agreements |
|
|
8,966,823 |
|
|
|
(7,228,981 |
) |
|
|
1,737,842 |
|
|
|
$ |
38,314,746 |
|
|
$ |
(21,572,322 |
) |
|
$ |
16,742,424 |
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
December 31, 2021 |
|
|||||||||
|
|
Gross Carrying Value |
|
|
Accumulated Amortization |
|
|
Net |
|
|||
Customer relationships |
|
$ |
6,500,000 |
|
|
$ |
(3,737,500 |
) |
|
$ |
2,762,500 |
|
Trade names |
|
|
8,640,000 |
|
|
|
(6,866,667 |
) |
|
|
1,773,333 |
|
Existing technology/reformulations |
|
|
3,207,923 |
|
|
|
(2,694,590 |
) |
|
|
513,333 |
|
Research and development formulas |
|
|
800,000 |
|
|
|
(800,000 |
) |
|
|
|
|
License agreements |
|
|
8,591,822 |
|
|
|
(7,048,672 |
) |
|
|
1,543,150 |
|
|
|
$ |
27,739,745 |
|
|
$ |
(21,147,429 |
) |
|
$ |
6,592,316 |
|
The Company’s intangible assets include intangible assets acquired through the Thorne Research acquisition in 2010 and the Nutrativa acquisition in 2022. As of March 31, 2022 and December 31, 2021, the net book value of such intangible assets was approximately $15.0 million and $5.0 million, respectively. Intangible assets also include payments under license agreements related to trademarks and content, which had a net book value as of March 31, 2022 and December 31, 2021, of $1.7 million and $1.5 million, respectively.
Amortization expense totaled $425 thousand and $409 thousand for the three months ended March 31, 2022 and 2021, respectively.
24
Thorne HealthTech, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Heart-Tech Health, Inc.
On January 7, 2022, the Company entered into a Strategic Partnership Agreement with Heart-Tech Health, Inc. (Heart-Tech). Heart-Tech was formed by Dr. Suzanne Steinbaum, a leading holistic cardiologist, and has developed a program for women’s holistic health prevention. Together, the Company and Heart-Tech will open and operate a Thorne Lab location in New York, New York. Simultaneous to executing the Strategic Partnership Agreement with Heart-Tech, the Company made a $1.0 million investment in Heart-Tech through a simple agreement for future equity, or SAFE. During the three months ended March 31, 2022, there was no reportable activity between the Company and Heart-Tech.
Long-term Debt
Long-term debt balances and associated interest rates and maturities are as follows:
|
|
March 31, |
|
|
December 31, |
|
||
Note payable with quarterly principal and interest payments of $30,917 per quarter, with fixed interest of 6.94% and maturity August 12, 2024. |
|
$ |
260,307 |
|
|
$ |
286,255 |
|
Note payable with quarterly principal and interest payments of $30,917 per quarter, with fixed interest of 6.94% and maturity July 15, 2023. |
|
|
174,733 |
|
|
|
202,142 |
|
Note payable with quarterly principal and interest payments of $56,548 per quarter, with fixed interest of 4.89% and maturity March 20, 2025. |
|
|
627,556 |
|
|
|
675,836 |
|
Note payable with quarterly principal and interest payments of $8,250 per quarter, with fixed interest of 5.44% and maturity |
|
|
394,362 |
|
|
|
413,574 |
|
|
|
|
1,456,958 |
|
|
|
1,577,807 |
|
Less current maturities |
|
|
(501,453 |
) |
|
|
(494,173 |
) |
Long-term debt |
|
$ |
955,505 |
|
|
$ |
1,083,634 |
|
The notes payable were issued in connection with various equipment purchases. The notes are collateralized by the original purchased equipment which had an aggregate net book value of $1.8 million as of March 31, 2022.
Credit Facilities
On February 12, 2021, the Company entered into the 2021 Credit Agreement to refinance and replace the 2020 Credit Agreement, entered into on February 14, 2020.
On October 4, 2021, the Company repaid the $20.0 million of outstanding borrowings under the 2021 Credit Agreement, plus interest accrued and unpaid on the loan through the date of repayment. Upon repayment, the 2021 Credit Agreement was terminated. The Company incurred incremental fees related to the payoff totaling $7 thousand.
The 2021 Credit Agreement was guaranteed by two significant Company stockholders, Kirin and Mitsui. Each stockholder guaranteed 50% of the total amount of the loan, or $10 million.
Under the respective 2021 Fee Letters, the Company has agreed to reimburse Mitsui and/or Kirin in cash for any amounts that Mitsui and/or Kirin pays under its respective guarantee of the 2021 Credit Agreement. However, if the Company is unable to reimburse such amounts wholly or partially to Mitsui and/or Kirin, then the Company and Mitsui and/or Kirin may agree to deem such unreimbursed amounts to be made for the Company’s benefit in consideration for its debt or equity securities on terms reasonably satisfactory to Mitsui and/or Kirin and the Company.
25
Thorne HealthTech, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The guarantee fee during the period of February 14, 2020 through February 13, 2021 was calculated as 2.00% of the outstanding borrowings under the Credit Agreements, to be paid by the borrower on an annual basis. Beginning February 12, 2021, the guarantee fee was calculated as 1.20% of the outstanding borrowings under the Credit Agreements. The Company recorded $99 thousand of related expense during the three months ended March 31, 2021, which are included in the guarantee fees in the condensed consolidated statements of operations. Upon repayment of the outstanding borrowings under the 2021 Credit Agreement, the related Kirin and Mitsui guarantees were released and terminated.
Standby Letter of Credit
In 2018, an irrevocable standby letter of credit was issued by a bank on the Company’s behalf as required by the landlord of the South Carolina production facility, and guarantees were issued by related parties. The standby letter of credit was for $4.9 million and had an original expiration date of December 3, 2019, with automatic renewals until October 31, 2037. The standby letter of credit is guaranteed 50% by Kirin and Mitsui, to whom the Company pays an annual guarantee fee. Under the respective 2018 Fee Letters, the guarantee fee is based on the 12-month USD LIBOR rate, plus 3% on the amount of the guarantee. The letter of credit has an annual fee of $20 thousand.
On October 29, 2021, the Company deposited $4.9 million into a restricted interest-bearing account with SMBC to fund the standby letter of credit and release the guarantees provided by Kirin and Mitsui. The Company incurred total guarantee fee expense for the standby letter of credit for the three months ended March 31, 2021 of $40 thousand, which has been included in guarantee fees in the condensed consolidated statements of operations.
The Company leases real estate, vehicle, and equipment for use in its operations. The Company’s leases generally have lease terms of to 30 years, some of which include options to terminate, or to extend leases. The Company includes options that are reasonably certain to be exercised as part of the determination of lease terms. The Company may negotiate termination clauses in anticipation of any changes in market conditions, but generally these termination options are not exercised. Residual value guarantees are generally not included within operating leases. In addition to base rent payments, the leases may require the Company to pay directly for taxes and other non-lease components, such as insurance, maintenance and other operating expenses, which may be dependent on usage or vary month-to-month.
On January 26, 2021, the Company entered into a five-year lease agreement for 115,500 square feet within a 136,500 square foot building for the Company's fulfillment and distribution operations, located in Summerville, South Carolina. Rent was abated for the first three months while the Company installed racking, packing stations, and other required equipment, prior to the Company's shipping operations to this facility. This lease terminates in July 2026. The lease has two renewal options for three years each. The Company has funded a customary security deposit of $52 thousand upon execution of the lease, which has been recorded in other assets with our condensed consolidated balance sheets at March 31, 2022 and December 31, 2021.
On July 28, 2021, the Company entered into a lease agreement for a 360,320 square foot industrial building for the Company's finished goods warehousing and shipping operations, located in Summerville, South Carolina. The building is currently under construction and the lease will commence on the date of which the landlord completes construction of the facility and required tenant improvements, currently estimated to be during the first quarter of 2023, and will terminate upon the thirteenth anniversary of the commencement date. The lease has one renewal option for a five-year term. The lease provides for an allowance for tenant improvements of up to $1.26 million. The annual base rent for the first year will be $1.98 million and is subject to an annual escalation of 2.0% on each anniversary. The Company has funded a customary security deposit of $331 thousand upon execution of the lease which has been recorded in other assets with our condensed consolidated balance sheets at March 31, 2022 and December 31, 2021.
26
Thorne HealthTech, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The balances for the operating and finance leases where the Company is the lessee are presented as follows within the condensed consolidated balance sheets:
|
|
March 31, |
|
|
December 31, |
|
||
Operating lease: |
|
|
|
|
|
|
||
Operating lease right-of-use assets |
|
$ |
17,037,892 |
|
|
$ |
17,836,756 |
|
|
|
|
|
|
|
|
||
Current portion of operating lease obligations |
|
|
2,037,520 |
|
|
|
2,633,236 |
|
Operating lease obligations, net of current portion |
|
|
27,317,015 |
|
|
|
27,605,739 |
|
Total operating lease liabilities |
|
$ |
29,354,535 |
|
|
$ |
30,238,975 |
|
|
|
|
|
|
|
|
||
Finance lease: |
|
|
|
|
|
|
||
Finance right-of-use assets |
|
$ |
783,075 |
|
|
$ |
883,076 |
|
|
|
|
|
|
|
|
||
Current portion of finance lease obligations |
|
|
403,824 |
|
|
|
413,487 |
|
Finance lease obligation, net of current portion |
|
|
398,578 |
|
|
|
482,544 |
|
Total finance lease liabilities |
|
$ |
802,402 |
|
|
$ |
896,031 |
|
The components of lease expense are as follows within our condensed consolidated statement of operations:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Operating lease expense: |
|
|
|
|
|
|
||
Operating lease cost(1) |
|
$ |
1,461,355 |
|
|
$ |
1,232,708 |
|
Finance lease expense: |
|
|
|
|
|
|
||
Amortization of leased assets |
|
|
112,400 |
|
|
|
73,915 |
|
Interest on lease liabilities |
|
|
11,588 |
|
|
|
11,300 |
|
Total lease expense |
|
$ |
1,585,343 |
|
|
$ |
1,317,923 |
|
The weighted-average remaining lease term and weighted-average discount rate at March 31, 2022 and December 31, 2021, were as follows:
|
|
March 31, |
|
|
December 31, |
|
||
Weighted average remaining lease term (years) |
|
|
|
|
|
|
||
Operating leases |
|
13.81 years |
|
|
13.73 years |
|
||
Finance leases |
|
2.16 years |
|
|
2.33 years |
|
||
Weighted average discount rate applied |
|
|
|
|
|
|
||
Operating leases |
|
|
9.0 |
% |
|
|
9.2 |
% |
Finance leases |
|
|
6.1 |
% |
|
|
6.1 |
% |
Supplemental cash flow information related to leases where the Company is the lessee is as follows:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Operating cash outflows from operating leases |
|
$ |
1,546,933 |
|
|
$ |
1,863,504 |
|
Operating cash outflows from finance leases (interest payments) |
|
|
11,588 |
|
|
|
11,300 |
|
Financing cash outflows from finance leases |
|
|
106,025 |
|
|
|
76,039 |
|
Leased assets obtained in exchange for finance lease liabilities |
|
|
12,399 |
|
|
|
284,551 |
|
Leased assets obtained in exchange for operating lease liabilities |
|
|
— |
|
|
|
2,913,002 |
|
27
Thorne HealthTech, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
As of March 31, 2022, the maturities of the operating and finance lease liabilities are as follows:
Period |
|
Operating Leases |
|
|
Finance Leases |
|
||
April 1, 2022 - March 31, 2023 |
|
$ |
4,442,202 |
|
|
$ |
438,055 |
|
April 1, 2023 - March 31, 2024 |
|
|
3,520,374 |
|
|
|
291,284 |
|
April 1, 2024 - March 31, 2025 |
|
|
3,590,764 |
|
|
|
88,566 |
|
April 1, 2025 - March 31, 2026 |
|
|
3,571,398 |
|
|
|
51,512 |
|
April 1, 2026 - March 31, 2027 |
|
|
3,146,563 |
|
|
|
— |
|
Thereafter |
|
|
34,981,041 |
|
|
|
— |
|
Total minimum lease payments |
|
$ |
53,252,342 |
|
|
$ |
869,417 |
|
Less: imputed interest |
|
|
23,897,807 |
|
|
|
67,015 |
|
Total present value of lease liabilities |
|
$ |
29,354,535 |
|
|
$ |
802,402 |
|
Less: current portion |
|
|
2,037,520 |
|
|
|
403,824 |
|
Long-term portion of lease liabilities |
|
$ |
27,317,015 |
|
|
$ |
398,578 |
|
In 2016, the Company entered into a new lease agreement for office, warehouse and production space in Summerville, South Carolina. The Company was required to provide the landlord with a $4.9 million irrevocable letter of credit as a security deposit (see Note 10). The required security deposit may be reduced upon the attainment of certain EBITDA levels.
On July 5, 2018, the Company issued 27,011,500 Series E convertible preferred stock to Kirin and Mitsui for $138.4 million.
A summary of the significant rights and privileges of the Series E convertible preferred stock is as follows:
Conversion - Each share of Series E preferred stock is convertible at the option of the holder into common stock on a one-for-one basis. Each share of Series E preferred stock shall automatically be converted into shares of common stock at the then effective conversion price immediately after the consummation of a qualified public offering. Additionally, each share of preferred stock is automatically converted immediately upon the conversion or vote to convert by the holders of a majority of the then outstanding preferred stock.
Liquidation - Upon any liquidation, dissolution, or winding-up of the business, the assets of the Company available for distribution to its stockholders shall be distributed first to the holders of shares of Series E convertible preferred stock up to their original issue prices.
Voting Rights - The holder of each share of preferred stock shall be entitled to vote on all matters and shall be entitled to that number of votes equal to the total number of shares of common stock into which the preferred stock are convertible.
Dividends - In the event the Board of Directors declares the payment of dividends, they shall be distributed first to the holders of shares of Series E convertible preferred stock up to their original issue prices. Thereafter, the amounts remaining shall be distributed pro rata based on the number of shares of common stock then held by each shareholder (assuming conversion of all outstanding shares of Series E convertible preferred stock into common stock).
The Company’s Series E convertible preferred stock has been classified as temporary equity on the accompanying condensed consolidated balance sheet in accordance with authoritative guidance for the classification and measurement of redeemable securities. Upon certain change in control events outside of the Company’s control, including liquidation, sale, or transfer of control of the Company, holders of the Series E convertible preferred stock can cause its redemption. The Company has determined not to adjust the carrying values of the Series E convertible preferred stock to the liquidation preferences of such shares because the Series E convertible preferred stock is not currently redeemable and not probable of becoming redeemable due to the uncertainty of whether or when the contingent events would occur.
28
Thorne HealthTech, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Immediately prior to the completion of the Company’s IPO on September 22, 2021, all outstanding shares of the Series E convertible preferred stock automatically converted on a one-to-one basis into an aggregate of 27,011,500 shares of common stock. As of March 31, 2022 and December 31, 2021, there were no shares of Series E convertible preferred stock outstanding.
On October 10, 2018, the Company issued to Kirin and Mitsui each 2,225,000 warrants, for a total of 4,450,000 warrants, to purchase the Company’s common stock. The warrants have an exercise price of $5.12 and an expiration date of October 11, 2028. In July 2020, each shareholder exercised 2,168,485 warrants for a total of $22.2 million in gross proceeds. As of March 31, 2022 and December 31, 2021, 113,030, of the original 4,450,000 warrants, remain outstanding. These warrants are classified as equity within the condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021.
On June 23, 2010, the Company issued 2,532,000 warrants to a related-party stockholder, with a strike price of $6.74 and an original expiration date of June 23, 2020. In May 2019, the Board of Directors extended the term of the warrants for an additional 10 years to June 23, 2030. As of March 31, 2022 and December 31, 2021, none of the 2,532,000 warrants have been exercised and all common stock warrants remained outstanding. These warrants are classified as equity within the condensed consolidated balance sheets at March 31, 2022 and December 31, 2021.
On May 10, 2011, the Company issued 453,455 warrants to purchase common stock to a related-party stockholder, with a strike price of $6.74 per warrant. In May 2019, the Board of Directors extended the term of the warrants for an additional 10 years to June 23, 2030. The extension was determined by management to be a modification of the warrant. Due to these warrants containing certain down-round protections, which are not associated with the underlying Company’s equity that may trigger in the event of a modification of certain other outstanding warrant instruments, the Company has classified these warrants as liabilities within the condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021.
The warrant liability is remeasured at fair value at each reporting date and have a fair value of $2.1 million as of each of March 31, 2022 and December 31, 2021.
To calculate the fair value of the warrants, certain assumptions were made, including the fair market value of the underlying common stock, risk-free interest rate, volatility, and remaining contractual life. Changes to the assumptions could cause significant adjustments to the valuation. Due to the fact that the Company had no publicly available stock price information prior to the IPO and limited publicly available stock price information subsequent to the IPO, the expected volatility assumption was determined by examining the historical volatilities of a group of industry peers whose share prices are publicly available. The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of the grant for treasury securities of similar maturity or expected term. The Company has not paid and does not anticipate paying cash dividends on its shares of common stock; therefore, the expected dividend yield is assumed to be zero.
The Black-Scholes model was used to value the liability-classified warrants. The following assumptions were used:
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Fair market value |
|
$ |
6.36 |
|
|
$ |
6.21 |
|
Exercise Price |
|
$ |
6.74 |
|
|
$ |
6.74 |
|
Term |
|
|
8.2 |
|
|
|
8.5 |
|
Volatility |
|
|
75 |
% |
|
|
75 |
% |
Annual dividend |
|
|
|
|
|
|
||
Risk-free interest rate |
|
|
2.36 |
% |
|
|
1.48 |
% |
29
Thorne HealthTech, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The fair value of financial instruments measured on a recurring basis is as follows:
|
|
March 31, 2022 |
|
|||||||||||||
Description |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Warrant liability |
|
$ |
2,124,485 |
|
|
|
|
|
|
|
|
$ |
2,124,485 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
December 31, 2021 |
|
|||||||||||||
Description |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Warrant liability |
|
$ |
2,058,566 |
|
|
|
|
|
|
|
|
$ |
2,058,566 |
|
||
The following table summarizes the change in fair value, as determined by Level 3 inputs, for all assets and liabilities using unobservable Level 3 inputs:
|
|
Warrant |
|
|
Balance at December 31, 2021 |
|
$ |
2,058,566 |
|
Change in fair value during the three months ended March 31, 2022 |
|
|
65,919 |
|
Balance at March 31, 2022 |
|
$ |
2,124,485 |
|
Prior to the Company’s IPO, the Company’s Board of Directors adopted, and the stockholders approved the Company’s 2021 Equity Incentive Plan (2021 Plan). The 2021 Plan provides for the grant of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code, to Company employees and parent and subsidiary corporations’ employees, and for the grant of non-statutory stock options, stock appreciation rights, restricted stock awards (RSAs), restricted stock units (RSUs), and performance awards to employees, directors, and consultants and parent and subsidiary corporations’ employees and consultants.
On January 26, 2022, in accordance with the 2021 Plan's adjustment provisions, the Company increased the share reserve by 2,627,710 shares, as registered on Form S-8 and filed with the SEC on January 26, 2022. As of March 31, 2022, there were 3,577,220 shares available for issuance under the 2021 Plan.
Stock Options
During the three months ended March 31, 2022 and 2021, there were no grants of stock options.
The following table summarizes stock option activity for the three months ended March 31, 2022:
|
|
Options Outstanding |
|
|
Weighted- |
|
|
Weighted Average Remaining Contractual Term (Years) |
|
|
Aggregate |
|
||||
Outstanding as of January 1, 2022 |
|
|
9,699,656 |
|
|
$ |
5.28 |
|
|
|
6.22 |
|
|
$ |
12.3 |
|
Granted |
|
|
— |
|
|
|
- |
|
|
|
|
|
|
|
||
Exercised |
|
|
(174,600 |
) |
|
|
1.28 |
|
|
|
|
|
|
|
||
Cancelled/forfeited |
|
|
— |
|
|
|
- |
|
|
|
|
|
|
|
||
Outstanding as of March 31, 2022 |
|
|
9,525,056 |
|
|
|
5.35 |
|
|
|
5.83 |
|
|
$ |
12.5 |
|
Vested and expected to vest after March 31, 2022 |
|
|
9,525,056 |
|
|
$ |
5.35 |
|
|
|
5.83 |
|
|
$ |
12.5 |
|
Exercisable, March 31, 2022 |
|
|
5,516,941 |
|
|
$ |
4.38 |
|
|
|
5.34 |
|
|
$ |
10.9 |
|
30
Thorne HealthTech, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following information summarizes additional information on stock options outstanding as of March 31, 2022:
|
|
Three Months Ended March 31, |
||||
|
|
2022 |
|
|
2021 |
|
Weighted-average grant date fair value of stock options granted (1) |
|
N/A |
|
|
N/A |
|
Grant date fair value of stock options vested |
|
N/A |
|
|
N/A |
|
Intrinsic value of stock options exercised (2) |
|
$ |
849,327 |
|
|
N/A |
During the three months ended March 31, 2022, and 2021, the Company recorded stock-based compensation expense related to stock options of $238 thousand and $511 thousand, respectively. As of March 31, 2022, the unrecognized stock-based compensation expense related to outstanding stock options was approximately $476 thousand and is expected to be recognized as expense over approximately six months.
Restricted Stock Units
During the three months ended March 31, 2022 and 2021, there were no grants of RSUs.
The following table summarizes all RSU activity for the three months ended March 31, 2022:
|
|
Number |
|
|
Weighted- |
|
||
Outstanding as of January 1, 2022 |
|
|
3,406,760 |
|
|
$ |
9.82 |
|
Granted |
|
|
— |
|
|
|
— |
|
Released |
|
|
— |
|
|
|
— |
|
Cancelled/forfeited |
|
|
(5,000 |
) |
|
|
8.40 |
|
Outstanding as of March 31, 2022 |
|
|
3,401,760 |
|
|
$ |
9.82 |
|
Vested and expected to vest after March 31, 2022 |
|
|
3,401,760 |
|
|
$ |
9.82 |
|
During the three months ended March 31, 2022, the Company recorded stock-based compensation expense related to RSUs of $1.8 million. There was no compensation expense related to RSUs recorded during the three months ended March 31, 2021. As of December 31, 2021, the unrecognized stock-based compensation expense related to outstanding RSUs was approximately $29.9 million and is expected to be recognized as expense over approximately 3.6 years.
31
Thorne HealthTech, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following table summarizes additional information related to RSUs for the periods presented:
|
|
Three Months Ended March 31, |
||
|
|
2022 |
|
2021 |
Weighted-average grant date fair value of RSUs granted (1) |
|
N/A |
|
N/A |
Grant date fair value of RSUs vested (1)(2) |
|
N/A |
|
N/A |
Intrinsic value of RSUs released (1)(3) |
|
N/A |
|
N/A |
Basic net income (loss) per share is calculated by dividing the net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for common stock equivalents. Diluted net income (loss) per share is computed by dividing the net income (loss) available to common stockholders by the weighted-average number of common stock and common stock equivalents outstanding for the period.
Holders of Series E convertible preferred stock met the definition of participating securities, which required the Company to apply the two-class method to compute both basic and diluted net income (loss) per share. The two-class method is an earnings allocation formula that treats participating securities as having rights to earnings that would otherwise have been available to common stockholders. The two-class method requires earnings for the period to be allocated between common stock and participating securities based upon their respective rights to receive dividends as if all earnings for the period had been distributed. In the event the Board of Directors declared dividends or any distributions, the available distributions would be distributed (i) first, to the Series E convertible preferred stock until such holders have received on a cumulative basis an amount per share equal to the Series E original issue price, and (ii) second, to the holders of common stock and Series E convertible preferred stock (on an as converted basis) on a pro rata, pari passu, basis. The attribution of earnings to the Series E convertible preferred stockholders was based on its contractual rights to receive dividends and, for the quarter in which they converted, the attribution was calculated using a weighted-average method. The Series E convertible preferred stock did not contractually participate in the Company’s net losses, and therefore, undistributed losses were not allocated to Series E convertible preferred stock. Immediately prior to the completion of the Company’s IPO on September 22, 2021, all outstanding shares of the Series E convertible preferred stock automatically converted on a one-to-one basis into an aggregate of 27,011,500 shares of common stock. See Note 12 for additional information related to the Series E convertible preferred stock.
The dilutive effect of stock options, warrants, and unvested nonparticipating restricted stock is based on the treasury stock method while the dilutive effect of the convertible preferred stock is based on the if-converted method. These potential common stock equivalents are only included in the calculations when their effect is dilutive. The Company presents the more dilutive of the two-class method or if-converted method as diluted net income (loss) per share during the period. For the three months ended March 31, 2021, the Company presented diluted net income per share under the two-class method.
32
Thorne HealthTech, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following table presents information necessary to calculate net income (loss) per share:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Numerator: |
|
|
|
|
|
|
||
Net income (loss) attributable to Thorne HealthTech, Inc. |
|
$ |
4,979,059 |
|
|
$ |
4,706,490 |
|
Undistributed earnings attributable to Series E convertible preferred stockholders |
|
N/A |
|
|
|
(4,706,490 |
) |
|
Numerator for basic EPS—net income (loss) available to Thorne HealthTech, Inc. common stockholders (A) |
|
|
4,979,059 |
|
|
|
— |
|
|
|
|
|
|
|
|
||
Effect of dilutive securities: |
|
|
|
|
|
|
||
Undistributed earnings attributable to Series E convertible preferred stockholders—basic |
|
N/A |
|
|
|
4,706,490 |
|
|
Undistributed earnings attributable to Series E convertible preferred stockholders—diluted |
|
N/A |
|
|
|
(4,706,490 |
) |
|
|
|
|
— |
|
|
|
— |
|
Numerator for diluted EPS—net income (loss) available to Thorne HealthTech, Inc. common stockholders (C) |
|
|
4,979,059 |
|
|
|
— |
|
|
|
|
|
|
|
|
||
Denominator: |
|
|
|
|
|
|
||
Denominator for basic EPS—weighted average shares (B) |
|
|
52,564,779 |
|
|
|
17,650,035 |
|
|
|
|
|
|
|
|
||
Effect of dilutive securities(1): |
|
|
|
|
|
|
||
Stock options |
|
|
60,172 |
|
|
|
— |
|
RSUs |
|
|
— |
|
|
|
— |
|
Warrants |
|
|
— |
|
|
|
— |
|
Dilutive potential common shares |
|
|
60,172 |
|
|
|
— |
|
Denominator for diluted EPS—adjusted weighted average common stock and common stock equivalents (D) |
|
|
52,624,951 |
|
|
|
17,650,035 |
|
Basic EPS (A/B) |
|
$ |
0.09 |
|
|
$ |
— |
|
Diluted EPS (C/D) |
|
$ |
0.09 |
|
|
$ |
— |
|
Royalties and Other Agreements - The Company has entered into various agreements that require future payments. The agreements call for future payments to a major hospital for use of their trademarks and tradenames in advertising the benefits of supplements and provides the Company access to research information owned by the hospital and provides for the hospital to perform clinical trials and to support the Company’s products. As of March 31, 2022, future annual minimum commitments under these agreements are as follows:
2022 |
|
$ |
535,000 |
|
2023 |
|
|
562,500 |
|
Total |
|
$ |
1,097,500 |
|
The Company also has various royalty agreements, that are dependent on future sales. Total royalties paid during the three months ended March 31, 2022 and 2021, were $142 thousand and $155 thousand, respectively.
Other - In 2017, the Company received incentives totaling $0.8 million from Berkeley County, South Carolina, which includes certain performance obligations that must be met over the next seven years and maintained by the company for five years once attained. The grant agreement includes the potential for repayment of proceeds in whole or in part for failure to satisfy the performance obligations. As of March 31, 2022, Berkeley County has not asked for repayment of these proceeds.
33
Thorne HealthTech, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The Company, like other manufacturers of products that are ingested, faces an inherent risk of exposure to product liability claims if, among other things, the use of its product results in personal injury. The Company maintains product liability insurance to manage these risks. However, there can be no assurance the amount of insurance would be sufficient to cover all product liability claims.
In addition to the matter discussed below, occasionally the Company is involved in lawsuits arising in the ordinary course of its operations. The Company’s management does not expect the ultimate resolution of pending legal actions to have a material effect on the consolidated financial statements of the Company.
The Company is aware of two third-party U.S. patents that have claims relating to compositions of nicotinamide riboside – an ingredient contained in several of the Company’s nutritional supplement products – issued to the Trustees of Dartmouth College and licensed to ChromaDex Corporation (ChromaDex), of Los Angeles, California. On December 1, 2020, and February 1, 2021, the Company filed separate petitions for inter partes review against U.S. Patent No. 8,383,086 and U.S. Patent No. 8,197,807, respectively, at the U.S. Patent Trial and Appeal Board to seek to invalidate these two patents. On June 10, 2021, the U.S. Patent Trial and Appeal Board issued a decision granting institution of inter partes review against U.S. Patent No. 8,383,086, and on August 12, 2021, the U.S. Patent Trial and Appeal Board issued a decision granting institution of inter partes review against U.S. Patent No. 8,197,807. On May 12, 2021, the Trustees of Dartmouth College and ChromaDex filed a complaint against the Company in the U.S. District Court for the Southern District of New York, alleging the Company’s infringement of U.S. Patent Nos. 8,383,086 and 8,197,807. The complaint seeks to enjoin the Company from selling its nutritional supplement products that contain nicotinamide riboside and further seeks monetary damages for alleged infringement of the patents. On August 20, 2021, the trial judge in the patent infringement litigation issued an Order to Stay the litigation during the pendency of the two inter partes review, in which decisions will likely be made in mid-2022. The Company has not recorded a loss in connection with this matter because the Company believes that a loss is currently neither probable nor estimable.
Bank of America Loan Agreement
On April 8, 2022, the Company entered into a Loan Agreement with Bank of America, N.A. (BofA), with an effective date of March 31, 2022. Under the terms of the Loan Agreement, BofA will provide a revolving line of credit to the Company in the amount of $15.0 million (the Line of Credit). Under the Loan Agreement, the Company may repay principal amounts and reborrow them as necessary, up through March 31, 2027 (the Expiration Date). Outstanding borrowings under the Loan Agreement will be subject to interest at a rate equal to the Bloomberg Short-Term Bank Yield Index rate (BSBY), plus 1.50 percentage points, adjusted on the first day of each month (the Adjustment Date). Interest is calculated on the basis of a 360-day year and the actual number of days elapsed. The Company will pay interest on any outstanding borrowings beginning April 30, 2022, and then on the same day of each month thereafter, until all principal outstanding is repaid under the Loan Agreement. Should the first day of a calendar month fall on a day that is not a banking day, then the Adjustment Date shall be the first banking day immediately following thereafter. The Line of Credit is subject to an Unused Commitment Fee equal to 0.2% per year. The Unused Commitment Fee is due on May 1, 2022, and on the same day each following quarter until the expiration of the Loan Agreement.
As a sub-facility under the Line of Credit, the Lender will provide up to $6.0 million in commercial and standby letters of credit (the Letters of Credit). Any outstanding and undrawn Letters of Credit shall be reserved under the Line of Credit and such amount shall not be available for borrowings. Letters of Credit issued under the Loan Agreement are subject to BofA’s customary issuance, presentation, amendment and other processing fees, and other standard costs and charges.
All borrowings under the Loan Agreement are guaranteed by Thorne Research, Inc., a subsidiary of the Company, and secured by substantially all personal property of the company, including depository accounts, receivables, inventory, equipment, general intangibles, and other unencumbered assets.
Upon the occurrence of any default, all outstanding and unpaid amounts, including unpaid interest, fees, or costs will bear interest at a rate equal the then effective interest rate, plus 6.0 percentage points.
The Loan Agreement is subject to customary covenants, including the following financial covenants:
34
Thorne HealthTech, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The Company incurred and paid an origination loan fee at the closing on April 8, 2022, of $15 thousand.
Material Contract
On April 21, 2022, the Company entered into an Authorized Reseller Agreement (Reseller Agreement) with Pattern, Inc., (Pattern) with an effective date of April 18, 2022. The Reseller Agreement replaces and supersedes the previous reseller agreement entered into November 25, 2019. The new agreement sets forth updated terms and conditions, including pricing revisions, purchase commitments, marketing commitments and operating terms for the reselling arrangement. The Reseller Agreement has an initial term through December 31, 2022, which may be extended at the sole discretion of Pattern for two additional one-year periods. Pattern is required to provide their election to extend the Reseller Agreement for the first one-year term no later than 60 days after the effective date. Should Pattern elect to extend for the second one-year term, notice is required to be provided no later than April 1, 2023. During the months ended March 31, 2022 and 2021, Pattern represented 32.6% and 31.4% of the Company's total sales.
There were no other subsequent events requiring recognition or disclosure in the accompanying consolidated financial statements.
35
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K, filed on March 16, 2022. This discussion contains forward-looking statements that involve risks and uncertainties, including those described in the section titled “Special Note Regarding Forward-Looking Statements.” Our actual results and the timing of selected events could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those set forth under the section titled “Risk Factors.”
Overview
We are a science-driven wellness company pioneering innovative solutions and personalized approaches to health and well-being. We are building a new health category to deliver better health outcomes through a proactive, empowered approach. Our unique, vertically integrated brands, Thorne and Onegevity, provide actionable insights and personalized data, products and services that help individuals take a proactive approach to improve and maintain their health over their lifetime. By combining our proprietary multi-omics database, artificial intelligence (AI) and digital health content with our science-backed nutritional supplements, we deliver a total system for wellness. We believe our integrated solution will redefine the expectations for good health, peak performance and healthy aging.
Founded in 1984, Thorne Research was a small company dedicated to being a “thorn” in the side of the traditional supplement industry by making the purest and highest quality nutritional supplements to sell to health professionals. With a vision for an unparalleled health ecosystem fueled by innovation and technology, our current Chief Executive Officer, Paul Jacobson, and his management team, acquired Thorne Research in 2010 and co-founded Onegevity. We completed our acquisition of Onegevity and combined these two complementary companies in early 2021. During the past 11 years, we have evolved to become a transformative consumer brand, trusted by more than 4,000,000 customers, 46,000 healthcare professionals, thousands of professional athletes, more than 100 professional sports teams and 12 U.S. Olympic teams.
Key milestones in our growth history include:
Our revenue is generated primarily from the sale of our supplements and health tests. We have experienced significant sales growth of our supplements and health tests through the acquisition of new customers and strong customer retention.
For the three months ended March 31, 2021 and 2022:
36
The recent key customer metrics of our business included:
Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (GAAP). In this Quarterly Report, we have used certain non-GAAP financial measures, including Adjusted EBITDA, Adjusted EBITDA Margin and free cash flow. These measures are derived on the basis of methodologies other than in accordance with GAAP. Non-GAAP financial measures used by us may be calculated differently from, and therefore may not be comparable to, similarly titled measures used by other companies. We have provided a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure. These non-GAAP financial measures should be considered along with, but not as alternatives to, the operating performance measures as prescribed by GAAP.
Key Financial and Operating Data
Our financial profile is characterized by high growth, recurring revenue, improving gross margins, efficient customer acquisition, and free cash flow.
We measure our business using both financial and operational data and use the following metrics to assess the near-term and long-term performance of our brands and business. These metrics serve as guidance for identifying trends, formulating financial projections, making strategic decisions, assessing operational efficiencies, and monitoring our business.
Net Sales
We define net sales as sales of our goods and services and related shipping fees less discounts and returns following the accounting guidelines in accordance with Financial Accounting Standards Board (FASB), Topic 606, “Revenue from Contracts with Customers,” (ASC 606). Our net sales consist of sales of our nutritional supplements, health tests and sales associated with our services leveraging our AI and multi-omics databases, such as product development services. We recognize revenues when control of the promised goods or services is transferred to our customers in an amount that reflects the consideration we expect to be entitled in exchange for those goods or services. We consider several factors in determining when control transfers to the customer upon shipment, or upon delivery for certain customers. These factors include when legal title transfers to the customer, if we have a present right to payment and whether the customer has assumed the risks and rewards of ownership at the time of shipment. Shipping and handling costs are considered a fulfillment activity and are expensed as incurred. We view net sales as a key indicator of demand for our products and services.
Gross Profit
We define gross profit as net sales less cost of sales. Cost of sales consists of depreciation and amortization, product and packaging costs, including manufacturing costs, inventory freight, testing costs of all raw materials and finished goods, inventory shrinkage costs and inventory valuation adjustments, offset by reductions for promotions and percentage or volume rebates offered by our vendors.
Adjusted EBITDA and Adjusted EBITDA Margin
We calculate Adjusted EBITDA as net income (loss) adjusted to exclude: interest income (expense), net; guarantee fees; other income (expense), net; provision for income taxes; depreciation and amortization expense; stock-based compensation expense; change in fair value of warrant liability; transaction costs related to mergers and acquisitions; and income/loss from equity interest in unconsolidated affiliates. Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by total net sales.
37
We use Adjusted EBITDA and Adjusted EBITDA Margin as measures of operating performance and the operating leverage in our business. We believe that these non-GAAP financial measures are useful to investors for period-to-period comparisons of our business and in understanding and evaluating our operating results for the following reasons:
Our use of Adjusted EBITDA and Adjusted EBITDA Margin have limitations as analytical tools, and you should not consider these measures in isolation or as substitutes for analysis of our financial results as reported under GAAP. Some of these limitations are, or may in the future be, as follows:
Because of these limitations, Adjusted EBITDA and Adjusted EBITDA Margin should be considered along with other operating and financial performance measures presented in accordance with GAAP.
38
The following table presents a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure prepared in accordance with GAAP, for each of the periods indicated:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2021 |
|
|
2022 |
|
||
EBITDA Calculation and Reconciliation |
|
|
|
|
|
|
||
Net income |
|
$ |
4,706,490 |
|
|
$ |
4,711,241 |
|
Depreciation and amortization |
|
|
985,401 |
|
|
|
1,341,850 |
|
Interest expense, net |
|
|
282,645 |
|
|
|
30,157 |
|
Income tax expense |
|
|
40,530 |
|
|
|
32,545 |
|
EBITDA |
|
$ |
6,015,066 |
|
|
$ |
6,115,793 |
|
EBITDA margin |
|
|
13.5 |
% |
|
|
11.2 |
% |
Adjustments |
|
|
|
|
|
|
||
Stock-based compensation |
|
|
510,522 |
|
|
|
2,009,412 |
|
Change in fair value of warrant liability |
|
|
1,627,751 |
|
|
|
65,919 |
|
Guarantee fees |
|
|
138,864 |
|
|
|
— |
|
Loss from equity interest in unconsolidated affiliates |
|
|
57,448 |
|
|
|
— |
|
Acquisition costs |
|
|
— |
|
|
|
460,411 |
|
Adjusted EBITDA |
|
$ |
8,349,651 |
|
|
$ |
8,651,535 |
|
Adjusted EBITDA margin |
|
|
18.8 |
% |
|
|
15.8 |
% |
Free Cash Flow
We define free cash flow as net cash provided by (used in) operating activities, less capital expenditures, which consist of purchases of property and equipment as well as purchase of licensing agreements. Accordingly, we believe that free cash flow provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. Free cash flow may be affected in the near-to medium-term by the timing of capital investments, such as purchases of machinery, information technology and other equipment, the launch of new fulfillment centers, customer service centers and new products, fluctuations in our growth and the effect of such fluctuations on working capital and changes in our cash conversion cycle due to increases or decreases of customer and vendor payment terms as well as inventory turnover. We expect free cash flow to increase over the long term as investments made in prior years drive increased profitability. If we experience an unforeseen increase in demand, we may need to make additional capital investments in manufacturing facility expansion.
The following table presents a reconciliation of free cash flow to net cash provided by (used in) operating activities, the most directly comparable financial measure prepared in accordance with GAAP, for each of the periods indicated:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2021 |
|
|
2022 |
|
||
Free Cash flow Calculation |
|
|
|
|
|
|
||
Net cash provided by (used in) operating activities |
|
$ |
8,786,735 |
|
|
$ |
(4,501,241 |
) |
Purchase of equipment |
|
|
(589,212 |
) |
|
|
(1,492,540 |
) |
Purchase of licensing agreements |
|
|
— |
|
|
|
(375,000 |
) |
Free cash flow |
|
$ |
8,197,523 |
|
|
$ |
(6,368,781 |
) |
Number of Subscriptions
We define subscriptions as orders resulting from direct-to-consumer (DTC) customers opting into automatic refills or orders that are recurring on Thorne.com and Amazon. Our subscription programs on both platforms offer automatic ordering, payment and delivery of our products to a customer’s doorstep.
Subscription Sales as a Percentage of Net DTC Sales
We define subscription sales as sales generated from retail subscription orders on Thorne.com and Amazon within a given period. Subscription sales are taken as a percentage of net sales from all DTC orders in that same period. We view subscription sales as a percentage of net DTC sales as a key indicator of our recurring sales and customer retention.
39
LTV to CAC
We define life-time value (LTV) to customer acquisition costs (CAC) as LTV from a specific 12-month period divided by the CAC of a specific period. LTV is defined as the average gross contribution per purchasing DTC customer within a particular 12-month period divided by one less the customer retention rate (Churn Rate) during the same period. Average gross contribution is defined as the cumulative revenue from our DTC customers during a 12-month period, less the cost of goods, divided by the number of purchasing DTC customers in the same period. To arrive at the LTV for a particular period, we divide the average gross contribution by that period’s Churn Rate. CAC is defined as the total advertising and marketing expenses, less headcount expenses and associated benefit expenses, in a particular period divided by the number of customers who placed their first order during that same timeframe. We view the LTV to CAC ratio as a key indicator for marketing efficiency.
Orders per Customer
We define orders per customers as the total number of sales orders placed by our DTC customers in a given period divided by the total number of DTC customers who purchased within that same period. We view orders per customer as a key indicator of our customers’ purchasing patterns, including their initial and repeat purchase behavior, and as an indication of the desirability of our products to our customers. We expect orders per customer to remain steady or increase modestly over the long term as we continue to grow and acquire new customers and as our customers continue to demand our high-quality products.
Factors Affecting Our Performance
Ability to Increase Brand Awareness and Attract New Customers
Our long-term growth will depend on our continued ability to attract new customers. Our historical growth was largely driven by organic customer acquisition. We are still in the early stages of our growth and believe we can significantly expand our customer base as we increase brand awareness. Growing brand awareness through efficient, impactful communications and through building brand equity and loyalty is central to our marketing and growth strategy. We believe optimizing the message of our brand as one that defies expectations of good health differentiates us and is key to our ability to attract customers and retain them within our ecosystem. As our brand awareness grows, we intend to strengthen our reach across demographics and markets.
Growth in Subscriptions
We offer our customers the ability to opt into recurring automatic refills on Thorne.com and Amazon. A customer can cancel or modify a subscription at any time at no cost to the customer on both platforms. On Thorne.com, customers can subscribe monthly, every 45 days, every two months, every three months, or every four months. For each ordering frequency, a discount of 10% or 20% is offered on retail refill orders, depending on the number of products to which a customer is subscribed, with an average discount of 16%. On Amazon, the discount ranges from 5% to 10% depending on the number of products to which a customer is subscribed, with an average discount of approximately 6%.
We view our growing subscription business on Thorne.com and Amazon as a key driver of profitable future sales growth. Our subscriptions grew from 61,135 at the end of 2018, to 89,178 at the end of 2019, to 155,305 at the end of 2020 and to 257,070 at the end of 2021, representing a compounded annual growth rate of 61.4%. The total number of subscriptions as of March 31, 2021, was 168,483 and as of March 31, 2022, was 265,157, representing 57.4% year-over-year growth. Subscription sales are expected to continue to grow as we continue to invest in brand awareness, innovate new products, and market the convenience and savings of our nutritional supplements and tests.
Efficiency of Spending on Advertising and Marketing
We are disciplined in measuring and managing CAC and LTV of our customers. We are consistently looking for new ways to acquire customers more efficiently, grow revenue per customers, and retain our customers for longer periods of time.
We employ a holistic, full funnel strategy that balances long term brand objectives with performance marketing goals using a mix of paid, owned, and earned media. We take a data-driven approach to managing our marketing campaigns constantly optimizing and adjusting to improve performance. At the end of the first quarter 2022, we launched a 12-week Healthy Aging brand campaign which will leverage and deploy campaign assets across connected TV, YouTube, influencers, out of home, Amazon, search, and social platforms. Despite the campaign’s orientation toward longer-term brand objectives, we anticipate seeing sales acceleration within our DTC channel and new customer acquisition post-campaign in line with the performance achieved in past campaigns, such as our Olympic "Better Health" brand campaign during the second half of 2021, which resulted in a DTC sales acceleration on our
40
website with a 24.8% increase in average daily consumer sales and a 35.6% increase in new weekly DTC customers in the 20 weeks post-campaign, compared to the prior period.
We experience high retention, repeat purchases and low CAC, as seen by our LTV to CAC ratios of 6.2x during each of the three months ended March 31, 2021 and 2022.
Ability to Engage and Retain Our Existing Customers
Our success is impacted not only by efficient and profitable customer acquisition, but also by our ability to retain customers and encourage repeat purchases. In 2021, 51.0% of our DTC sales were generated from new, first-time purchasers versus 49.0% from existing customers. We deepen our relationships with our customers and drive retention by engaging them with digital health content and educational resources. Out of our total DTC sales during the three months ended March 31, 2022, over one-third were recurring subscription sales. We expect the growth in net sales each year to continue as we generate and grow sales from existing customers and from newly acquired customers.
Healthcare Professionals
Our network of 46,000 health professionals helps serve two key purposes. First, it allows us to distinguish our brand by offering both credibility and validation to patients at times when the industry has struggled with trust. Secondly, health professionals carry, promote and distribute our products to consumers. Based on a 2018 survey conducted with 1,188 consumers, primary care physicians were identified as the most common entry point for supplement category consumers with nearly 60% of patients looking to their primary care providers when considering which supplements to buy. Therefore, retention and expansion of our professional network is important to our strategy.
Ability to Invest
We expect to continue to make investments across our business to drive growth and therefore we expect expenses to increase. We plan to continue to invest in sales and marketing to drive demand for our products and services. We expect to continue to invest in research and development to enhance our platform, develop new nutritional supplements, expand our testing portfolio, grow our multi-omics database and AI capabilities and improve our brand ecosystem’s infrastructure.
Ability to Grow in New Geographies
Entering new geographic markets requires us to invest in distribution and marketing, infrastructure and personnel. Our international growth will depend on our ability to sell in international markets. In 2021, we shipped to 32 countries. We believe capital investment coupled with our regulatory expertise will lead to promising results. However, international sales are dependent upon local regulations and custom practices, which both change continuously.
Components of our Operating Results
Net Sales
Our net sales consist of sales of our nutritional supplements, health tests and sales associated with our services leveraging our AI and multi-omics databases, such as product development services. We recognize net sales when control over the product has transferred to customers in accordance with our revenue recognition policy.
Cost of Sales
Cost of sales consists of depreciation and amortization, product and packaging costs, including manufacturing costs, inventory freight, testing costs of all raw materials and finished goods, inventory shrinkage costs and inventory valuation adjustments, offset by reductions for promotions and percentage or volume rebates offered by our vendors, which may depend on reaching minimum purchase thresholds. We expect cost of sales to increase on an absolute dollar basis and improve as a percentage of net sales over the long term.
Operating Expenses
Operating expenses consist of
41
Marketing expenses consist of performance marketing media spend, asset creation, and other brand creation, as well as sales and marketing personnel-related expenses. We intend to continue to invest in our sales and marketing capabilities in the future and expect this increase in absolute dollars in future periods as we release new products and expand internationally. Sales and marketing expense as a percentage of net sales may fluctuate from period to period based on net sales and the timing of our investments in our sales and marketing functions as these investments may vary in scope and scale over future periods.
Our research and development expenses support our efforts to add new features to our existing solutions and to ensure the reliability and scalability of our product development and testing. Research and development expenses consist of personnel expenses, including salaries, bonuses, stock-based compensation expense and benefits for employees and contractors for our engineering, product, and design teams and allocated overhead costs. We have expensed our research and development costs as they were incurred, except those costs that have been capitalized as software development costs.
We plan to hire employees for our science and engineering team to support our research and development efforts. We expect that research and development expenses will increase on an absolute dollar basis in the foreseeable future as we continue to increase investments in our technology platform. However, our research and development expenses may fluctuate as a percentage of revenue from period to period due to the timing and amount of these expenses.
Fulfillment costs represent costs incurred in operating, manufacturing, staffing order fulfillment, and customer service teams, including costs attributable to buying, receiving, inspecting and warehousing inventories, picking, packaging and preparing customer orders for shipment, payment processing and related transaction costs and responding to inquiries from customers. Included within fulfillment costs are merchant processing fees charged by third parties that provide merchant processing services for credit cards.
We expect to incur additional expenses as a result of operating as a public company, including expenses to comply with the rules and regulations applicable to companies listed on the Nasdaq, expenses related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, as well as higher expenses for general and director and officer insurance, investor relations and professional services. We also anticipate that fulfillment costs will fluctuate as a percentage of net sales over the long term. Overall, as we continue to grow as a company, we expect that our selling, general and administrative costs will increase on an absolute dollar basis but decrease as a percentage of net sales over the long term.
Interest expense, net
Interest expense, net consists primarily of interest earned on cash we hold, and interest incurred on borrowings.
Income Tax Provision
Our income tax provision consists of an estimate of federal and state income taxes based on enacted federal and state tax rates, as adjusted for allowable credits, deductions and uncertain tax positions. Because we have experienced net losses we have fully reserved for all deferred tax assets and liabilities. Our income tax provision consists of cash taxes paid during the year in review.
42
Results of Operations
The following table summarizes our results of operations for each of the periods indicated:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2021 |
|
|
2022 |
|
||
|
|
|
|
|
|
|
||
Net sales |
|
$ |
44,483,740 |
|
|
$ |
54,668,198 |
|
Cost of sales |
|
|
21,246,522 |
|
|
|
24,550,591 |
|
Gross profit |
|
|
23,237,218 |
|
|
|
30,117,607 |
|
Gross margin |
|
|
52.2 |
% |
|
|
55.1 |
% |
Operating expenses: |
|
|
|
|
|
|
||
Research and development |
|
|
907,170 |
|
|
|
1,967,666 |
|
Marketing |
|
|
4,239,017 |
|
|
|
5,730,253 |
|
Selling, general and administrative |
|
|
11,237,303 |
|
|
|
17,637,681 |
|
Income from operations |
|
|
6,853,728 |
|
|
|
4,782,007 |
|
Other income (expense): |
|
|
|
|
|
|
||
Interest expense, net |
|
|
(282,645 |
) |
|
|
(30,157 |
) |
Guarantee fees |
|
|
(138,864 |
) |
|
|
— |
|
Change in fair value of warrant liability |
|
|
(1,627,751 |
) |
|
|
(65,919 |
) |
Other income (expense), net |
|
|
— |
|
|
|
57,855 |
|
Total other income (expense), net |
|
|
(2,049,260 |
) |
|
|
(38,221 |
) |
Income before income taxes and loss from equity interest in unconsolidated affiliates |
|
|
4,804,468 |
|
|
|
4,743,786 |
|
Income tax expense |
|
|
40,530 |
|
|
|
32,545 |
|
Net income before loss from equity interest in unconsolidated affiliates |
|
|
4,763,938 |
|
|
|
4,711,241 |
|
Loss from equity interest in unconsolidated affiliates |
|
|
(57,448 |
) |
|
|
— |
|
Net income |
|
|
4,706,490 |
|
|
|
4,711,241 |
|
Net income — non-controlling interest |
|
|
— |
|
|
|
(267,818 |
) |
Net income attributable to Thorne HealthTech, Inc |
|
|
4,706,490 |
|
|
|
4,979,059 |
|
Undistributed earnings attributable to Series E convertible preferred stockholders |
|
|
(4,706,490 |
) |
|
|
— |
|
Net income attributable to common stock—basic |
|
$ |
— |
|
|
$ |
4,979,059 |
|
Net income attributable to common stockholders—diluted |
|
$ |
— |
|
|
$ |
4,979,059 |
|
Earnings per share: |
|
|
|
|
|
|
||
Basic |
|
$ |
— |
|
|
$ |
0.09 |
|
Diluted |
|
$ |
— |
|
|
$ |
0.09 |
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
||
Basic |
|
|
17,650,035 |
|
|
|
52,564,779 |
|
Diluted |
|
|
17,650,035 |
|
|
|
52,624,951 |
|
Net sales
Net sales for the three months ended March 31, 2022, increased by $10.2 million, or 22.9%, to $54.7 million, compared to $44.5 million during the three months ended March 31, 2021. Net sales were driven by continued double-digit growth across both the DTC and B2B business. Our DTC sales were $25.8 million for the three months ended March 31, 2022, compared to $19.4 million for the three months ended March 31, 2021, which represents a $6.4 million increase, or 33.0% year-over-year growth. B2B net sales for the three months ended March 31, 2022 were $28.9 million, an increase of $3.8 million, or 15.1%, over the same prior year period.
Cost of Sales and Gross Profit
The following table summarizes our cost of sales and gross profit for the periods indicated:
|
|
Three Months Ended March 31, |
|
|||||||||||||
|
|
2021 |
|
|
2022 |
|
|
Change |
|
|
Percent Change |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net sales |
|
$ |
44,483,740 |
|
|
$ |
54,668,198 |
|
|
$ |
10,184,458 |
|
|
|
22.9 |
% |
Cost of sales |
|
|
21,246,522 |
|
|
|
24,550,591 |
|
|
|
3,304,069 |
|
|
|
15.6 |
% |
Percent of net sales |
|
|
47.8 |
% |
|
|
44.9 |
% |
|
|
-290 bps |
|
|
|
(6.0 |
)% |
Gross profit |
|
$ |
23,237,218 |
|
|
$ |
30,117,607 |
|
|
$ |
6,880,389 |
|
|
|
29.6 |
% |
Percent of net sales |
|
|
52.2 |
% |
|
|
55.1 |
% |
|
|
290 bps |
|
|
|
5.5 |
% |
43
Cost of sales for the three months ended March 31, 2022, increased by $3.3 million, or 15.6%, to $24.6 million, compared to $21.2 million during the three months ended March 31, 2021. This increase in cost of sales was primarily due to a 22.9% increase in net sales and associated product costs, partially offset by continued reductions in our product manufacturing costs. The increase in cost of sales was lower than the increase in revenues on a percentage basis, primarily due to lower production costs.
Gross profit for the three months ended March 31, 2022, increased by $6.9 million, or 29.6%, to $30.1 million, compared to $23.2 million during the three months ended March 31, 2021. This increase was primarily due to the increase in net sales described above and additional efficiencies in our manufacturing processes, including increased capacity, increased batch sizes and improved fixed cost leverage. Gross profit as a percentage of net sales for the three months ended March 31, 2022, was 55.1%, an increase of 290 basis points, or 5.5%, compared to the three months ended March 31, 2021.
Operating Expenses
The following table summarizes our operating expenses for periods indicated:
|
|
Three Months Ended March 31, |
|
|||||||||||||
|
|
2021 |
|
|
2022 |
|
|
Change |
|
|
Percent Change |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net sales |
|
$ |
44,483,740 |
|
|
$ |
54,668,198 |
|
|
$ |
10,184,458 |
|
|
|
22.9 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Research and development |
|
|
907,170 |
|
|
|
1,967,666 |
|
|
$ |
1,060,496 |
|
|
|
116.9 |
% |
Percent of net sales |
|
|
2.0 |
% |
|
|
3.6 |
% |
|
|
160 bps |
|
|
|
76.5 |
% |
Marketing |
|
|
4,239,017 |
|
|
|
5,730,253 |
|
|
$ |
1,491,236 |
|
|
|
35.2 |
% |
Percent of net sales |
|
|
9.5 |
% |
|
|
10.5 |
% |
|
|
100 bps |
|
|
|
10.0 |
% |
Stock-based compensation |
|
|
510,522 |
|
|
|
2,009,412 |
|
|
$ |
1,498,890 |
|
|
|
293.6 |
% |
Percent of net sales |
|
|
1.1 |
% |
|
|
3.7 |
% |
|
|
250 bps |
|
|
|
220.3 |
% |
Depreciation and amortization |
|
|
985,401 |
|
|
|
1,341,850 |
|
|
$ |
356,449 |
|
|
|
36.2 |
% |
Percent of net sales |
|
|
2.2 |
% |
|
|
2.5 |
% |
|
|
20 bps |
|
|
|
10.8 |
% |
Other selling, general and administrative expenses |
|
|
9,741,380 |
|
|
|
14,286,419 |
|
|
$ |
4,545,039 |
|
|
|
46.7 |
% |
Percent of net sales |
|
|
21.9 |
% |
|
|
26.1 |
% |
|
|
420 bps |
|
|
|
19.3 |
% |
Total operating expenses for the three months ended March 31, 2022 increased by $8.9 million, or 54.6%, to $25.3 million, compared to $16.4 million during the three months ended March 31, 2021.
Research and development expense for the three months ended March 31, 2022, increased by $1.1 million, or 116.9%, to $2.0 million, compared to $0.9 million during the three months ended March 31, 2021. The increase was primarily due to achieving the objective to increase research spending as a percent of sales to drive new product development and clinical trial investments.
Marketing expenses for the three months ended March 31, 2022, increased by $1.5 million, or 35.2%, to $5.7 million, compared to $4.2 million during the three months ended March 31, 2021. The increase was due to our investment in paid, working media as we continue with our strategy to increase brand awareness, as well as investment in creative assets to support our Health Aging campaign which will run through the second quarter of 2022.
Other selling, general and administrative expenses for the three months ended March 31, 2022, increased by $4.5 million, or 46.6%, to $14.3 million, compared to $9.7 million during the three months ended March 31, 2021. The increase in selling, general and administrative expense during the three months ended March 31, 2022, are primarily a result of the increased DTC sales activity where we incurred higher distribution costs of $1.9 million due to increased transactions and shipment volume, as well as higher credit card processing fees of $200 thousand, as a result of increased online checkout activity for our DTC customers. We also incurred nearly $1.4 million of incremental public company costs during the three months ended March 31, 2022, driven by higher D&O insurance premiums, professional and legal fees, board costs, and audit related costs. Selling, general and administrative expenses during the three months ended March 31, 2022 were also impacted by $1.1 million of incremental selling, general and administrative expenses attributable to our acquired businesses that were not present during the three months ended March 31, 2021, including Drawbridge (acquired in Q2 2021), Nutrativa (acquired in Q1 2022), and our consolidated Thorne Asia JV (formed in Q1 2022).
44
Other Income (Expense)
The following table summarizes our other income (expense) for the periods indicated:
|
|
Three Months Ended March 31, |
|
|||||||||||||
|
|
2021 |
|
|
2022 |
|
|
Change |
|
|
Percent Change |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense, net |
|
$ |
(282,645 |
) |
|
$ |
(30,157 |
) |
|
$ |
252,488 |
|
|
|
(89.3 |
)% |
Percent of net sales |
|
|
(0.6 |
)% |
|
|
(0.1 |
)% |
|
|
60 bps |
|
|
|
(91.3 |
)% |
Guarantee fees |
|
|
(138,864 |
) |
|
|
— |
|
|
$ |
138,864 |
|
|
|
(100.0 |
)% |
Percent of net sales |
|
|
(0.3 |
)% |
|
|
0.0 |
% |
|
|
30 bps |
|
|
|
(100.0 |
)% |
Change in fair value of warrant liability |
|
|
(1,627,751 |
) |
|
|
(65,919 |
) |
|
$ |
1,561,832 |
|
|
|
(96.0 |
)% |
Percent of net sales |
|
|
(3.7 |
)% |
|
|
(0.1 |
)% |
|
|
350 bps |
|
|
|
(96.7 |
)% |
Other income (expense), net |
|
|
— |
|
|
|
57,855 |
|
|
$ |
57,855 |
|
|
|
100.0 |
% |
Percent of net sales |
|
|
0.0 |
% |
|
|
0.1 |
% |
|
|
10 bps |
|
|
|
100.0 |
% |
Interest expense, net for the three months ended March 31, 2022 decreased by $0.3 million, or 89.3%, to $30 thousand, compared to $0.3 million for the three months ended March 31, 2021. This decrease was primarily due to the repayment of the $20.0 million loan in October 2021.
Liquidity and Capital Resources
SMBC Revolving Credit Line
On February 14, 2020, we entered into an Uncommitted and Revolving Credit Line Agreement, by and among us as the borrower and Sumitomo Mitsui Banking Corporation (SMBC) as the lender (2020 Credit Agreement). Upon the closing of the 2020 Credit Agreement, we borrowed $20.0 million from the revolving line of credit.
On February 12, 2021, we entered into an Uncommitted and Revolving Credit Line Agreement, by and among us as the borrower and SMBC as the lender (2021 Credit Agreement), to refinance and replace the 2020 Credit Agreement. The terms of the 2021 Credit Agreement are substantially similar to the terms of the 2020 Credit Agreement. Under the 2021 Credit Agreement, SMBC may in its sole discretion elect to make unsecured loans to us until February 11, 2022, in an aggregate principal amount up to but not exceeding $20.0 million at any time. Each loan made under the 2021 Credit Agreement may have a maturity date that is not less than one day and not more than twelve months after the date that such loan is disbursed, as we and SMBC may mutually agree. SMBC may, in its sole discretion at any time, terminate in whole or partially reduce the unused portion of the credit line under the 2021 Credit Agreement. SMBC is not obligated to make any loan under the 2021 Credit Agreement.
We may prepay any outstanding loans under the 2021 Credit Agreement in whole or in part at any time without penalty, other than customary prepayment fees or additional costs as determined by SMBC. On February 12, 2021, we drew down the full $20.0 million under the 2021 Credit Agreement to refinance our outstanding loans under the 2020 Credit Agreement.
The loan under the 2021 Credit Agreement bears interest at a per annum rate quoted by SMBC and agreed to by us when such loan is made. Interest on a loan is payable in arrears on the maturity date of such loan. Principal of a loan is due on such loan’s maturity date. We are also obligated to pay other expenses and indemnities customary for a credit facility of this size and type.
Our obligations under the 2021 Credit Agreement are guaranteed by Kirin and Mitsui. We are required to pay each guarantor an annual fee equal to 1.20% of each of their $10-million guarantees annually and upon the occurrence of any change of control in respect of our company. We recorded $99 thousand of related expense during the three months ended March 31, 2021, which are included in guarantee fees in the condensed consolidated statements of operations.
On October 4, 2021, we fully repaid the $20.0 million of outstanding borrowings, plus all accrued and unpaid interest 2021 Credit Agreement through the date of repayment. We incurred incremental fees related to the payoff totaling $7 thousand. Upon repayment of the outstanding borrowings under the 2021 Credit Agreement, the related Mitsui and Kirin guarantees were released and terminated.
45
Bank of America Loan Agreement
On April 8, 2022, we entered into a Loan Agreement (BofA Loan Agreement) with Bank of America, N.A. (BofA), with an effective date of March 31, 2022. Under the terms of the Loan Agreement, the BofA will provide a revolving line of credit to the Company in the amount of $15.0 million (the Line of Credit). Under the Loan Agreement, we may repay principal amounts and reborrow them as necessary, up through March 31, 2027 (the Expiration Date). Outstanding borrowings under the Loan Agreement will be subject to interest at a rate equal to the Bloomberg Short-Term Bank Yield Index rate (BSBY), plus 1.50 percentage points, adjusted on the first day of each month (the Adjustment Date). Interest is calculated on the basis of a 360-day year and the actual number of days elapsed. We will pay interest on any outstanding borrowings beginning April 31, 2022, and then on the same day of each month thereafter, until all principal outstanding is repaid under the Loan Agreement. Should the first day of a calendar month fall on a day that is not a banking day, then the Adjustment Date shall be the first banking day immediately following thereafter. The Line of Credit is subject to an Unused Commitment Fee equal to 0.2% per year. The Unused Commitment Fee is due on May 1, 2022, and on the same day each following quarter until the expiration of the Loan Agreement.
As a sub-facility under the Line of Credit, the Lender will provide up to $6.0 million in commercial and standby letters of credit (the Letters of Credit). Any outstanding and undrawn Letters of Credit shall be reserved under the Line of Credit and such amount shall not be available for borrowings. Letters of Credit issued under the Loan Agreement are subject to BofA’s customary issuance, presentation, amendment and other processing fees, and other standard costs and charges.
All borrowings under the Loan Agreement are guaranteed by our subsidiary, Thorne Research, Inc., and secured by substantially all personal property of the company, including depository accounts, receivables, inventory, equipment, general intangibles, and other unencumbered assets.
Upon the occurrence of any default, all outstanding and unpaid amounts, including unpaid interest, fees, or costs will bear interest at a rate equal the then effective interest rate, plus 6.0 percentage points.
The Loan Agreement is subject to customary covenants, including the following financial covenants:
The Company incurred and paid an origination loan fee at the closing on April 8, 2022, of $15,000. As of May 12, 2022, we have not drawn any amounts or initiated any borrowings and have the full $15.0 million available under the Loan Agreement.
Letter of Credit Reimbursement Agreement
On October 31, 2018, we entered into a Reimbursement Agreement with SMBC (LC Reimbursement Agreement), under which we may request SMBC to issue up to $4.9 million in letters of credit in the aggregate and we agree to reimburse SMBC for any drawings under such letters of credit. Our obligations under the LC Reimbursement Agreement are guaranteed by Kirin and Mitsui. We pay each guarantor an annual fee equal to 12-month LIBOR, plus 3.0%, of $2,450,000 for such guarantees annually and upon the occurrence of any change of control in respect of our company. In consideration of the future cessation of LIBOR interest rates, we are discussing with Kirin and Mitsui shifting to a SOFR based rate on terms yet to be negotiated. The 12-month LIBOR rate was last set on February 12, 2021. Under the Fee Letter dated November 30, 2018, between us and Mitsui (2018 Mitsui Fee Letter), amounts paid by Mitsui under its guarantee shall be deemed made for our benefit in consideration for our debt or equity securities on terms reasonably satisfactory to Mitsui and us. Under the Fee Letter dated November 30, 2018 between us and Kirin (2018 Kirin Fee Letter), amounts paid by Kirin under its guarantee shall be deemed made for our benefit in consideration for our debt or equity securities on terms reasonably satisfactory to Kirin and us.
The LC Reimbursement Agreement contains customary affirmative covenants, including covenants regarding the payment of taxes and other obligations, reporting requirements and compliance with applicable laws and regulations, and customary negative covenants limiting our ability, among other things, to merge or consolidate, dispose of all or substantially all of its assets, liquidate or dissolve. Upon the occurrence and during the continuance of an event of default, SMBC may declare all outstanding obligations
46
owing under the LC Reimbursement Agreement immediately due and payable and may exercise the other rights and remedies provided for under the LC Reimbursement Agreement and related documents. The events of default under the LC Reimbursement Agreement include, subject to grace periods in certain instances, payment defaults, cross defaults with other indebtedness, certain material judgments, breaches of covenants or representations and warranties, a material adverse effect as defined in the LC Reimbursement Agreement and certain bankruptcy and insolvency events.
To support the obligation of our subsidiary, Thorne Research, Inc., to make a security deposit under its facility lease in Summerville, South Carolina, SMBC has issued an irrevocable standby letter of credit pursuant to the LC Reimbursement Agreement in the amount of $4.9 million with an original expiration date of December 3, 2019 and automatic renewals until October 31, 2037. This letter of credit has an annual fee of $19,946. We incurred guarantee fees of $40 thousand for this letter of credit under the 2018 Mitsui Fee Letter and the 2018 Kirin Fee Letter during the three months ended March 31, 2021. These fees are included in guarantee fees in the consolidated statements of operations.
On October 29, 2021, we deposited $4.9 million into a restricted interest-bearing account with SMBC to fund the standby letter of credit and release guarantees provided by Kirin and Mitsui.
Sources and Uses of Our Cash and Cash Equivalents
Operating Activities
Cash provided by operating activities consisted of net income (loss), adjusted for non-cash items, including depreciation and amortization, stock-based compensation, change in fair value of warrant liability and certain other non-cash items, as well as the effect of changes in working capital and other activities.
Net cash used in operating activities was $4.5 million for the three months ended March 31, 2022, primarily consisting of net income of $4.7 million, plus depreciation and amortization expense of $1.3 million, $2.0 million of stock-based compensation expense, non-cash lease expense of $1.6 million, the change in fair value of warrant liability of $65 thousand, as well as a $14.2 million decrease in cash due to changes in working capital amounts, primarily related to an increase in inventories of $9.4 million as we continue to build raw materials inventories to support continued sales growth and manage supply chain constraints.
Net cash provided by operating activities was $8.8 million for the three months ended March 31, 2021, primarily consisting of $4.7 million of net income adjusted for certain non-cash items, which primarily included depreciation and amortization expense of $1.0 million, $0.5 million of stock-based compensation expense, the loss from equity interest in unconsolidated affiliates of $0.1 million, non-cash lease expense of $1.5 million, change in fair value of warrant liability of $1.6 million, as well as a $0.5 million decrease in cash provided by an increase in working capital.
Investing Activities
Our primary investing activities consisted of purchases of property and equipment, mainly to increase our manufacturing and fulfillment capabilities to support our growth, as well as leasehold improvements. Use of cash for investing activities also includes payments to support agreements with non-consolidated subsidiaries and the purchase and use of certain license and research agreements.
Net cash used in investing activities was $17.7 million during the three months ended March 31, 2022, primarily as a result of the acquisition of Nutrativa for $14.9 million, as well as $1.5 million in additional equipment to support our continued growth, investment in an unconsolidated subsidiary of $1.0 million, and the entry into certain licensing and research agreements with Mayo Clinic of $0.4 million.
Net cash used in investing activities was $0.6 million during the three months ended March 31, 2021, due to capital spending to support our growth.
Financing Activities
Net cash provided by financing activities was $2.6 million for the three months ended March 31, 2022, primarily consisting of gross proceeds from the issuance of ownership interest in Thorne Asia JV of $2.6 million and proceeds from employee exercises of stock options of $224 thousand, reduced by payments for finance leases of $227 thousand.
Net cash used in financing activities was $126 thousand for the three months ended March 31, 2021, due to payments for finance leases of $126 thousand.
47
Contractual Obligations and Commitments
We have contractual obligations in the form of noncancelable leases and equipment loans. Future minimum payments due in the next 12 months under our leases and outstanding equipment loans are $2.1 million and $0.5 million, respectively. With the completion of our IPO in September 2021, we raised $60.0 million of net proceeds. As of December 31, 2021, we had $51.1 million of unrestricted cash. During the three months ended March 31, 2022, we used $14.9 million to purchase Nutrativa and had negative free cash flow of $6.4 million during the three months ended March 31, 2022. As of March 31, 2022, we had $31.4 million of unrestricted cash.
Considering recent market conditions, including inflation, supply chain disruptions, rising interest rates, rising energy costs, the war in Ukraine, and the ongoing COVID-19 pandemic, we have reevaluated our operating cash flows and cash requirements and continue to believe that current cash balance and future cash flows from operating activities, together with the available borrowings under the BofA Loan Agreement, will be sufficient to meet our anticipated cash needs, including working capital needs, capital expenditures, and contractual obligations for at least 12 months from the issuance date of the consolidated financial statements included herein.
Our future capital requirements will depend on many factors, including our revenue growth rate, our working capital needs primarily for inventory build, our global footprint, the expansion of our marketing activities, the timing and extent of spending to support product development efforts, the introduction of new and enhanced products and the continued market consumption of our products. We may seek additional equity or debt financing in the future in order to acquire or invest in complementary businesses, products and/or new supportive infrastructures. In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or general cash flows necessary to expand our operations and invest in continued product innovation, we may not be able to compete successfully, which would harm our business, operations, and financial condition.
Off Balance Sheet Arrangements
We currently do not have, and did not have during the periods presented, any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
The preparation of our unaudited condensed consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. We have discussed the policies and estimates that we believe are critical and require the use of complex judgment in their application in our Annual Report on Form 10-K filed on March 16, 2022, and, during the three months ended March 31, 2022, there were no material changes to those previously disclosed.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Disclosure
We do not hold market risk-sensitive trading instruments, nor do we use financial instruments for trading purposes. All sales, operating items and balance sheet data are denominated in U.S. dollars; therefore, we have no significant foreign currency exchange rate risk.
We use many different commodities such as Vitamin C and Vitamin D. Commodities are subject to price volatility caused by commodity market fluctuations, supply and demand and currency fluctuations. Commodity price increases will result in increases in raw material costs and operating costs.
In the ordinary course of our business, we enter into commitments to purchase raw materials over a period of time, generally six months or less at contracted prices. As of March 31, 2022, these future commitments were not at prices in excess of current market, or in quantities in excess of normal requirements. We do not utilize derivative contracts either to hedge existing risks or for speculative purposes.
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Interest Rate Risk
We invest excess cash in variable income investments consisting of cash equivalents. The magnitude of the interest income generated by these cash equivalents is affected by market interest rates. We do not use marketable securities or derivative financial instruments in our investment portfolio.
The interest payable on our bank line of credit is based on variable interest rates and therefore is affected by changes in market interest rates.
Currency Risk
For the three months ended March 31, 2022, and 2021, we did not sell any product or services for payment in currency other than U.S. dollars.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains a set of disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) designed to ensure that information required to be disclosed by the Company in reports it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. The design of disclosure controls and procedures is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under potential future conditions. Controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. In accordance with Rule 13a-15(b) of the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures, as of the end of the period covered by this Quarterly Report on Form 10-Q, were not effective at a reasonable assurance level as of March 31, 2022 because of the material weakness in internal controls further discussed below. Notwithstanding the material weakness, our management, including our CEO and CFO, has concluded that our unaudited consolidated financial statements, included in this Quarterly Report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles.
Under standards established by the Public Company Accounting Oversight Board (PCAOB), a material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected and corrected on a timely basis.
Specifically, our management determined that, as of March 31, 2022, we have material weaknesses in each of the following components of the “Internal Control—Integrated Framework” (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission:
These material weaknesses could result in a misstatement of account balances or disclosures that would result in a material misstatement of our annual or interim consolidated financial statements that may not be prevented or detected, and accordingly, it was determined that these control deficiencies constitute material weaknesses.
We are working to remediate the material weaknesses and are taking steps to strengthen our internal control over financial reporting through the hiring of additional finance and accounting personnel. With the additional personnel, we intend to take appropriate and reasonable steps to remediate these material weaknesses through the implementation of appropriate segregation of duties, formalization of accounting policies and controls and retention of appropriate expertise for complex accounting transactions.
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However, we cannot assure you that these measures will significantly improve or remediate the material weaknesses described above. As of March 31, 2022, the material weaknesses have not been remediated.
Inherent Limitations on Effectiveness of Controls
Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Changes in Internal Control Over Financial Reporting
Except for the remediation of previously reported material weakness described below, there has been no change in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting, except for the following:
Remediation of Previously Reported Material Weakness
As described in our prior periodic filings, as of December 31, 2021, we reported a material weakness in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) promulgated under the Exchange Act) because of a material weakness in insufficient controls related to the accounting for complex, non-routine and significant and unusual transactions. Our remediation efforts began in the first quarter of 2022 and we have devoted significant efforts and resources to the remediation of the previously reported material weakness and to the improvement of our internal control over financial reporting generally. While we have processes to identify and apply accounting guidance pertaining to significant and unusual transactions, we have enhanced the design of control activities that we anticipate will better enable our understanding of the nuances of increasingly complex accounting standards and their application. In addition, we have hired additional personnel in our accounting department with technical expertise to assist in accounting for significant and unusual transactions, expanded access to accounting research databases and enhanced assessment, scoping and involvement of highly qualified consultative third party professionals regarding potentially complex accounting matters.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may be subject to claims, lawsuits, government investigations and other proceedings involving products liability, competition and antitrust, intellectual property, privacy, data protection, information security, customer protection, securities, tax, labor and employment, commercial disputes and other matters that could adversely affect our business operations and financial condition. Litigation and regulatory proceedings, and particularly the intellectual property infringement matters that we are currently facing or could face, may be protracted and expensive, and the results are difficult to predict. Certain of these matters include speculative claims for substantial or indeterminate amounts of damages and include claims for injunctive relief. Additionally, our litigation costs could be significant. Adverse outcomes with respect to litigation or any legal proceedings may result in significant settlement costs or judgments, penalties, and fines, or require us to modify products or services, make content unavailable, or require us to stop offering certain features, all of which could negatively affect our customer base and revenue growth.
We are aware of two third-party U.S. patents that have claims relating to compositions of Nicotinamide Riboside – an ingredient contained in several of the Company’s nutritional supplement products – issued to the Trustees of Dartmouth College and licensed to ChromaDex Corporation (ChromaDex), of Los Angeles, California. On December 1, 2020, and February 1, 2021, the Company filed separate petitions for inter partes review against U.S. Patent No. 8,383,086 and U.S. Patent No. 8,197,807, respectively, at the Patent Trial and Appeal Board to seek to invalidate these two patents. On June 10, 2021, the Patent Trial and Appeal Board issued a decision granting institution of inter partes review against U.S. Patent No. 8,383,086, and on August 12, 2021, the Patent Trial and Appeal Board issued a decision granting institution of inter partes review against U.S. Patent No. 8,197,807. On May 12, 2021, the Trustees of Dartmouth College and ChromaDex filed a complaint against the Company in the U.S. District Court for the Southern District of New York, alleging the Company’s infringement of U.S. Patent Nos. 8,383,086 and 8,197,807. The complaint seeks to enjoin us from selling its nutritional supplement products that contain Nicotinamide Riboside and further seeks monetary damages for alleged infringement of the patents. On August 20, 2021, the trial judge in the patent infringement litigation issued an Order to Stay the litigation during the pendency of the two inter partes review, in which decisions will likely be made in mid-2022. On September 21, 2021, the U.S. District Court for the District of Delaware issued a summary judgment holding that U.S. Patent Nos. 8,383,086 and 8,197,807 are invalid in ChromaDex, Inc. and Trustees of Dartmouth College v. Elysium Health, Inc. We have not recorded a loss in connection with this matter because the Company believes that a loss is currently neither probable nor estimable.
For further information regarding Legal Proceedings please see “Risk Factors—Risks Relating to our Intellectual Property—Litigation or other proceedings or third-party claims of intellectual property infringement, misappropriation or other violations may require us to spend significant time and money, and could in the future prevent us from selling our products or services or impact our stock price, any of which could have a material adverse effect,” previously described the Company’s Annual Report on Form 10-K, filed March 16, 2022.
Item 1A. Risk Factors
See the risk factors previously described the Company’s Annual Report on Form 10-K, filed March 16, 2022.
Supplemental Risk Factor
Our business, financial condition and results of operations could be adversely affected by disruptions in the global economy caused by Russia’s ongoing war with Ukraine.
Russia’s invasion of Ukraine has negatively affected the global economy. Financial and economic sanctions imposed on certain industry sectors and parties in Russia by the U.S., United Kingdom and European Union, as well as potential retaliatory actions by Russia, could also have a negative impact on the global economy. Although our operations in Russia and Ukraine are not material to our financial results, the broader consequences of this conflict, including rising energy prices and shortages of and increased costs for food, goods and services and transportation or further escalation in adjacent areas could have negative downstream effects on our business and operations. Further expansion or escalation of military confrontations or related geopolitical tensions, including increased restrictions on global trade, could result in, among other things, lower travel demand, cyberattacks, terrorist activities, supply disruptions and changes to foreign currency exchange rates and constraints, volatility or disruption in financial markets, any of which may adversely affect the global economy and our business. In addition, the effects of the ongoing war could intensify or otherwise affect many of our other risk factors that are included in “Part I—Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on March 16, 2022.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Unregistered Sales of Equity Securities
None.
(b) Use of Proceeds
None.
(c) Issuer Purchases of Equity Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
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Item 6. Exhibits
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Incorporated by Reference |
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Exhibit Number |
Description |
Form |
Date |
Number |
Filed Herewith |
3.1 |
Amended and Restated Certificate of Incorporation of the Registrant, dated September 27, 2021. |
10-Q |
11/10/21 |
3.1 |
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3.2 |
Amended and Restated Bylaws of the Registrant, dated September 27, 2021. |
10-Q |
11/10/21 |
3.2 |
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4.1 |
S-1/A |
9/21/21 |
4.1 |
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4.2 |
S-1 |
7/16/21 |
4.2 |
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4.3 |
S-1 |
7/16/21 |
4.3 |
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4.4 |
S-1/A |
9/21/21 |
4.4 |
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4.5 |
S-1/A |
9/21/21 |
4.5 |
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4.6 |
S-1/A |
9/21/21 |
4.6 |
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4.7 |
S-1/A |
9/21/21 |
4.7 |
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4.8 |
S-1/A |
9/21/21 |
4.8 |
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4.9 |
S-1/A |
9/21/21 |
4.9 |
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10.1 |
8-K |
4/12/22 |
10.1 |
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10.2 |
8-K |
4/12/22 |
10.2 |
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10.3 |
Continuing and Unconditional Guaranty, dated March 31, 2022, by Thorne Research, Inc., as guarantor. |
8-K |
4/12/22 |
10.3 |
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10.4 |
Authorized Reseller Agreement between Registrant and Pattern, Inc., dated April 21, 2022. |
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X |
31.1 |
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X |
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31.2 |
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X |
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32.1* |
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X |
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32.2* |
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X |
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101 |
The following financial information from Thorne HealthTech Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 formatted in Inline XBRL (Extensible Business Reporting Language) includes: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit), (v) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to the Condensed Consolidated Financial Statements. |
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X |
104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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X |
* The certifications filed as Exhibits 32.1 and 32.2 are not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of the Company under the Securities Exchange Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof irrespective of any general incorporation by reference language contained in any such filing, except to the extent that the registrant specifically incorporates it by reference.
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made
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solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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THORNE HEALTHTECH, INC. |
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By: |
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/s/ Paul F. Jacobson |
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Name: |
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Paul F. Jacobson |
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Chief Executive Officer |
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By: |
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/s/ Bryan K. Conley |
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Name: |
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Bryan K. Conley |
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Chief Financial Officer |
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Date: May 12, 2022
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AUTHORIZED RESELLER AGREEMENT
THIS AUTHORIZED RESELLER AGREEMENT (this “Agreement”) is entered into as of April 18, 2022 (the “Effective Date”), by and between Thorne Research, Inc., a South Carolina corporation (“Thorne”), and Pattern Inc., a Utah corporation (“Pattern”). Thorne and Pattern are referred to individually as a “Party” and collectively as the “Parties.”
RECITALS
WHEREAS, Thorne is a manufacturer of a product line of nutritional supplement products (“Products”) that it sells through direct online sales to customers and sales to resellers who resell Products to consumers; and
WHEREAS, Pattern is an online retailer with expertise in selling products on the retail websites named on the Market Schedules, as defined below (the “Retail Platform”), as well as having expertise in content management, listing management, product feedback management, search engine optimization, advertising management, and unauthorized seller compliance; and
WHEREAS, Thorne and Pattern have, at various times since 2015, entered into Authorized Reseller Agreements, with the most recent Authorized Reseller Agreement having an effective date of November 25, 2019, as amended on two previous occasions (the “2019 Agreement”); and
WHEREAS, the Parties desire to revise various terms and conditions of the 2019 Agreement, and thus replace and supersede the 2019 Agreement, as well as all prior agreements between the Parties, with this Agreement.
NOW, THEREFORE, in consideration of these Recitals and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties, intending to be legally bound, agree as follows:
To be counted toward the Product order guarantees in this Section 1, Pattern must submit Product orders on or before December 15 of the relevant calendar year.
If to Thorne:
Thorne Research, Inc.
Attention: Deputy General Counsel
620 Omni Industrial Blvd., Summerville, South Carolina 29486
email: [***]
If to Pattern:
Pattern Inc.
Attention: Legal Department
1441 West Innovation Way, Suite 500, Lehi, Utah 84043
email: [***]
[Remainder of Page Intentionally Left Blank]
IN WITNESS WHEREOF, the Parties have caused this Authorized Reseller Agreement to be executed as of the Effective Date.
FOR THORNE RESEARCH, INC.
By: /s/ Thomas P. McKenna Date: April 19, 2022
Name: Thomas P. McKenna
Title: Chief Operating Officer
FOR PATTERN INC.
By: /s/ Jason Beesley Date: April 21, 2022
Name: Jason Beesley
Title: Chief Financial Officer
EXHIBIT A
Form of Market Schedule
Market Schedule to Authorized Reseller Agreement
Between Pattern Inc. and Thorne Research, Inc.
Effective Date:
Retail Platform(s):
Countries Served/Territory:
Exclusivity:
Market-Specific Commercial Terms:
Market Schedule to Authorized Reseller Agreement
Between Pattern Inc. and Thorne Research, Inc.
Effective Date: The effective date of the Agreement.
Retail Platforms: [***]
Countries Served/Territory: USA
Exclusivity: Exclusive Product Reselling. Pattern will resell Products on the Retail Platforms named in this Market Schedule, on behalf of Thorne. In accordance therewith, Thorne hereby appoints Pattern, and Pattern hereby accepts the appointment, to act as the exclusive reseller of Products on the Retail Platforms named in this Market Schedule. The Parties understand and acknowledge the difficulty on the part of Thorne in ensuring strict exclusivity. Accordingly, the exclusivity granted to Pattern pursuant to this Market Schedule will be interpreted as an agreement by and obligation of Thorne to, for the entirety of the Term, (i) not sell, on its own behalf or through any affiliate, any Products on the Retail Platforms named in this Market Schedule, (ii) not grant to any Party the right to resell Products on the Retail Platforms named in this Market Schedule other than (A) Pattern and (B) [***] (directly or through sales agents) solely on [***], and (iii) use commercially reasonable efforts to ensure and maintain Pattern’s rights of exclusivity.
Further, Pattern is authorized to sell Products solely to End Users. An “End User” is any purchaser of the Product who is the ultimate consumer for whom the Product was designed and who does not intend to resell Product to any third party. Pattern will not knowingly sell or transfer to anyone a quantity of Products greater than that generally purchased by an individual for personal use. Pattern will not knowingly sell or transfer any of Products to any person or entity for purposes of resale without the prior written consent of Thorne. This prohibition includes sales to any B2B accounts, wholesalers, freight forwarders/drop shippers for other resellers, or any other person or entity Pattern knows or has reason to know intends to resell Products.
Market-Specific Commercial Terms:
Additional Services. Pattern will provide information and assistance to Thorne's outside counsel, Vorys, Sater, Seymour and Pease LLP, or other such law firm engaged by Thorne to pursue legal action against unauthorized sellers of Products on the Retail Platforms named in this Market Schedule ("Thorne's Outside Counsel"); provided, however, that (a) Thorne will be solely and exclusively responsible for determining if a seller identified by Pattern is an unauthorized seller and, if so, instructing, directing, and approving all strategies and actions proposed by Thorne's Outside Counsel, and (b) Pattern will be solely responsible for any and all costs, fees, and expenses incurred by Thorne’s Outside Counsel incurred in pursuing legal action against unauthorized sellers of Products on the Retail Platforms.
Product Quality Controls. Pattern agrees to abide by all instructions provided by Thorne regarding the storage, handling, shipping, disposal, or other aspect of Products, including (A) instructions provided on the Product labels; (B) the Product Quality Controls and Fulfillment Guidelines attached hereto as Exhibit A to this Market Schedule, as may be amended by Thorne at any time; and (C) the Quality Control Checklist for Thorne Products Sold on Online Marketplaces, attached hereto as Exhibit B to this Market Schedule, as may be amended by Thorne at any time. Pattern agrees to provide all records related to Pattern’s compliance with its obligations under this Section upon Thorne’s request and to retain any such records for a period of at least five years following the date of creation or submission of any such record, to the extent legally permitted. Pattern acknowledges and agrees that, unless the Parties agree separately in writing, its compliance with this Section will be at its sole cost and expense.
Proposition 65. Thorne will take all reasonable steps to ensure that Products are compliant with California's Prop 65 (Cal. Health & Safety Code §§ 25249.5 - 25249.14, et seq,) which prohibits the knowing and intentional exposure of any individual to a chemical known to the State of California to cause cancer or reproductive toxicity without first giving clear and reasonable warning to such individual. Thorne may comply with Prop 65 ("Prop 65 Compliance") by either: (1) ensuring that Products do not require a Prop 65 warning or; (2) providing a warning that complies with all requirements of Prop 65 and related regulations. Thorne expressly represents and warrants Prop 65 Compliance with respect to each Product. If Thorne elects to achieve Prop 65 Compliance through the provision of a warning (subsection (2), above) that is provided through Retail Platforms named in this Market Schedule, Thorne will in writing provide to Pattern all specifications concerning the warning, including the text, font size, color and content of the warning for display on Retail Platforms named in this Market Schedule and any other communication, if any, to be sent to the end customers of Products residing in the State of California. Pattern’s duties with respect to complying with Prop 65 are expressly limited to adhering with Thorne's written directives and instructions concerning warnings and allowing customers to return any Products that Thorne reasonably believes are not Prop 65 Complaint for a full refund (including all shipping and handling fees). Thorne will defend and indemnify Pattern with respect to any claim asserting a violation of Prop 65 by Products.
EXHIBIT 1
To the
Market Schedule for Sales on [***] and [***] in the USA
Attached to the Authorized Reseller Agreement
Between Pattern Inc. and Thorne Research, Inc.
.
PRODUCT QUALITY CONTROLS AND FULFILLMENT GUIDELINES
For purposes of these Product Quality Controls and Fulfillment Guidelines, the “Authorized Storefront(s)” will be those Retail Platforms identified in the Market Schedule to Authorized Reseller Agreement Between Pattern Inc. and Thorne Research Inc. applicable to the USA.
EXHIBIT 2
To the Market Schedule for Sales on [***] and [***] in the USA
Attached to the Authorized Reseller Agreement Between Pattern Inc.
and Thorne Research, Inc.
QUALITY CONTROL CHECKLIST FOR THORNE PRODUCTS SOLD ON ONLINE MARKETPLACES
To promote and protect the quality of Thorne Research, Inc. products (collectively, “Thorne products”) sold on online marketplaces for, protect consumers from the confusion caused by the widespread problem of counterfeit, damaged, and poor-quality products sold online marketplaces, and protect the goodwill associated with Thorne products, Pattern employees will carry out the following steps for all shipments of Thorne products that Pattern receives, processes, and ships to and ships to third-party locations:
No less than once per month, a supervisor at Pattern’s warehouse in Hebron, Kentucky will review the steps that employees are conducting to process and inspect shipments of Thorne’s products to confirm that they comply with procedures described herein. If the supervisor discovers any non-compliance, the supervisor will promptly take remedial action. The supervisor will complete the Certification of Compliance with Quality Control Checklist for Thorne Products Sold on Online Marketplaces chart following each review.
By completing the Certification of Compliance with Quality Control Procedures for Processing and Inspecting Thorne Products chart, the supervisor certifies on behalf of Pattern, that (1) the supervisor reviewed the procedures; (2) that remedial action was taken promptly to address any noncompliance discovered during the review; and (3) all requirements in the Quality Control Checklist for Thorne Products Sold on Online Marketplaces are being followed.
Effective August 1, 2020
Certification of Compliance with Quality Control Checklist for Thorne Products Sold on Online Marketplaces |
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Name and Title |
Signature |
Date of Review |
Date of Certification |
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Market Schedule to Authorized Reseller Agreement
Between Pattern Inc. and Thorne Research, Inc.
Effective Date: The effective date of the Agreement.
Retail Platforms: [***]
Countries Served/Territory: Canada
Exclusivity: Exclusive Product Reselling. Pattern will resell Products on the Retail Platforms named in this Market Schedule, on behalf of Thorne. In accordance therewith, Thorne hereby appoints Pattern, and Pattern hereby accepts the appointment, to act as the exclusive reseller of Products on the Retail Platforms named in this Market Schedule. The Parties understand and acknowledge the difficulty on the part of Thorne in ensuring strict exclusivity. Accordingly, the exclusivity granted to Pattern pursuant to this Market Schedule will be interpreted as an agreement by and obligation of Thorne to, for the entirety of the Term, (i) not sell, on its own behalf or through any affiliate, any Products on the Retail Platforms named in this Market Schedule, (ii) not grant to any Party other than Pattern the right to resell Products on the Retail Platforms named in this Market Schedule, and (iii) use commercially reasonable efforts to ensure and maintain Pattern’s rights of exclusivity.
Market-Specific Commercial Terms:
Shipping. Products will be shipped by Thorne via common carrier, FOB Origin, i.e., title to the goods will pass to buyer upon shipment of the goods from Thorne’s facilities. Thorne will be responsible for the costs of shipping the Products to a location in the United States designated by Pattern. Pattern will be responsible for all costs of going directly to market in the Territory from any Pattern United States facility, or directly from Thorne to the market in the Territory, including taxes, tariffs, VAT, and shipping to the Territory.
Minimum Advertised Price. Thorne has established a Minimum Advertised Price Policy that applies to all authorized resellers of Products located in Canada (the “MAP Policy”). Pattern may set the retail prices for Products in the Territory, provided however, that no Product will be advertised at a retail price less than the U.S. Suggested Retail Price then in effect for that Product. Pattern acknowledges that such MAP Policy applies to sales of the Products in Canada and that Pattern is subject to all terms and conditions of the MAP Policy.
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Market Schedule to Authorized Reseller Agreement
Between Pattern Inc. and Thorne Research, Inc.
Effective Date: The effective date of the Agreement.
Retail Platforms: [***]
Countries/Territories Served: United Kingdom; European Union; Turkey
Exclusivity: Thorne appoints Pattern as an exclusive reseller of Products on the Retail Platforms named in this Market Schedule. The Parties understand and acknowledge the difficulty on the part of Thorne in ensuring strict exclusivity. Accordingly, the exclusivity granted to Pattern pursuant to this clause will be interpreted as an agreement by and obligation of Thorne to, for the entirety of the Term;
Nothing in this clause will prevent Thorne from selling Product on its own (i) B2C website (ii) allowing other resellers to sell Product on the reseller’s own B2C website or (iii) on any other platform other than the Retail Platform.
Market-Specific Commercial Terms:
Shipping. Products will be shipped by Thorne via common carrier, FOB Origin, i.e., title to the goods will pass to buyer upon shipment of the goods from Thorne’s facilities. Thorne will be responsible for the costs of shipping the Products to a location in the United States designated by Pattern. Pattern will be responsible for all costs of going directly to market in the Territory from any Pattern United States facility, or directly from Thorne to the market in the Territory, including taxes, tariffs, VAT, and shipping to the Territory.
Import Licences. Pattern will be responsible for obtaining any necessary import licences or permits necessary for the entry of Products into the Countries Served/Territory and Thorne will use commercially reasonable efforts to provide supporting documentation in a timely and professional manner as requested by Pattern.
VAT. All sums payable under this Agreement, or otherwise payable by any Party to any other Party under this Agreement are exclusive of any VAT chargeable on the supplies for which such sums (or any part of them) are the whole or part of the consideration for VAT purposes.
Data Protection.
Agreed Purposes: as required under this Agreement.
Controller, data controller, processor, data processor, data subject, personal data, processing and appropriate technical and organisational measures: as set out in the Data Protection Legislation in force at the time.
Data Protection Legislation: the UK Data Protection Legislation and any other European Union legislation relating to personal data and all other legislation and regulatory requirements in force from time to time which apply to a Party relating to the use of personal data (including, without limitation, the privacy of electronic communications); and the guidance and codes of practice issued by the relevant data protection or supervisory authority and applicable to a Party.
Permitted Recipients: the Parties to this Agreement, the employees of each Party, any third Parties engaged to perform obligations in connection with this Agreement.
Shared Personal Data: the personal data to be shared between the Parties under this Agreement. Shared Personal Data will be confined to the following categories of information relevant to the following categories of data subject: customers of Products via the Retail Platform and personnel of either Party. The type of data will relate to contact data, financial data and transaction data.
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UK Data Protection Legislation: all applicable data protection and privacy legislation in force from time to time in the UK including the General Data Protection Regulation ((EU) 2016/679); the Data Protection Act 2018; the Privacy and Electronic Communications Directive 2002/58/EC (as updated by Directive 2009/136/EC) and the Privacy and Electronic Communications Regulations 2003 (SI 2003/2426) as amended.
ensure that it has all necessary consents and notices in place to enable lawful transfer of the Shared Personal Data to the Data Recipient for the Agreed Purposes;
give full information to any data subject whose personal data may be processed under this Agreement of the nature such processing. This includes giving notice that, on the termination of this Agreement, personal data relating to them may be retained by or, as the case may be, transferred to one or more of the Permitted Recipients, their successors and assignees;
process the Shared Personal Data only for the Agreed Purposes;
not disclose or allow access to the Shared Personal Data to anyone other than the Permitted Recipients;
ensure that all Permitted Recipients are subject to written contractual obligations concerning the Shared Personal Data (including obligations of confidentiality) which are no less demanding than those imposed by this Agreement;
ensure that it has in place appropriate technical and organisational measures, reviewed and approved by the other Party, to protect against unauthorised or unlawful processing of personal data and against accidental loss or destruction of, or damage to, personal data;
not transfer any personal data outside of the European Economic Area unless the transferor:
complies with the provisions of Article 26 of the General Data Protection Regulation (in the event the third Party is a joint controller); and
ensures that (i) the transfer is to a country approved by the European Commission as providing adequate protection pursuant to Article 45 of the General Data Protection Regulation; (ii) there are appropriate safeguards in place pursuant to Article 46 of the General Data Protection Regulation; or (iii) one of the derogations for specific situations in Article 49 of the General Data Protection Regulation applies to the transfer.
consult with the other Party about any notices given to data subjects in relation to the Shared Personal Data;
promptly inform the other Party about the receipt of any data subject access request;
provide the other Party with reasonable assistance in complying with any data subject access request;
not disclose or release any Shared Personal Data in response to a data subject access request without first consulting the other Party wherever possible; assist the other Party, at the cost of the other Party, in responding to any request from a data subject and in ensuring compliance with its obligations under the Data Protection Legislation with respect to security, breach notifications, impact assessments and consultations with supervisory authorities or regulators;
notify the other Party without undue delay on becoming aware of any breach of the Data Protection Legislation;
at the written direction of the Data Discloser, delete or return Shared Personal Data and copies thereof to the Data Discloser on termination of this Agreement unless required by law to store the personal data;
use compatible technology for the processing of Shared Personal Data to ensure that there is no lack of accuracy resulting from personal data transfers;
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maintain complete and accurate records and information to demonstrate its compliance with this clause 15 and allow for audits by the other Party or the other Party's designated auditor; and
provide the other Party with contact details of at least one employee as point of contact and responsible manager for all issues arising out of the Data Protection Legislation, including the joint training of relevant staff, the procedures to be followed in the event of a data security breach, and the regular review of the Parties' compliance with the Data Protection Legislation.
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Market Schedule to Authorized Reseller Agreement
Between Pattern Inc. and Thorne Research, Inc.
Effective Date: The effective date of the Agreement.
Retail Platforms: [***]
Countries/Territories Served: China; Hong Kong
Exclusivity: Pattern will resell Products on the Retail Platforms named in this Market Schedule on behalf of Thorne. In accordance therewith, Thorne hereby appoints Pattern, and Pattern hereby accepts the appointment, to act as a non-exclusive reseller of Products on the Retail Platforms named in this Market Schedule.
Market-Specific Commercial Terms:
Shipping. Products will be shipped by Thorne via common carrier, FOB Origin, i.e., title to the goods will pass to buyer upon shipment of the goods from Thorne’s facilities. Thorne will be responsible for the costs of shipping the Products to a location in the United States designated by Pattern. Pattern will be responsible for all costs of going directly to market in the Territory from any Pattern United States facility, or directly from Thorne to the market in the Territory, including taxes, tariffs, VAT, and shipping to the Territory.
Import Licences. Pattern will be responsible for obtaining any necessary import licences or permits necessary for the entry of Products into the Countries Served/Territory and Thorne will use commercially reasonable efforts to provide supporting documentation in a timely and professional manner as requested by Pattern.
Minimum Advertised Price. Thorne has established a Minimum Advertised Price Policy that applies to all authorized resellers of Products located in China and Hong Kong (the “MAP Policy”). Pattern may set the retail prices, provided that no Product will be advertised at a retail price less than the U.S. Suggested Retail Price then in effect for that Product. Pattern acknowledges that such Policy applies to sales of the Products in China and Hong Kong and that Pattern is subject to all terms and conditions of the MAP Policy.
Market Schedule to Authorized Reseller Agreement
Between Pattern Inc. and Thorne Research, Inc.
Effective Date: Effective Date of the Agreement
Retail Platforms: [***]
Countries Served/Territory: Australia
Exclusivity: Thorne appoints Pattern as an exclusive reseller of the Products on the Retail Platforms named in this Market Schedule. The Parties understand and acknowledge the difficulty on the part of Thorne in ensuring strict exclusivity. Accordingly, the exclusivity granted to Pattern pursuant to this clause shall be interpreted as an agreement by and obligation of Thorne to, for the entirety of the Term;
Nothing in this provision shall prevent Thorne from (i) selling the Products on its own B2C website, (ii) allowing other resellers to sell the Products on their own B2C websites, or (iii) selling the Products on any platform other than the Retail Platforms.
Market-Specific Commercial Terms:
Shipping. Products will be shipped by Thorne via common carrier, FOB Origin, i.e., title to the goods will pass to buyer upon shipment of the goods from Thorne’s facilities. Thorne will be responsible for the costs of shipping the Products to a location in the United States designated by Pattern. Pattern will be responsible for all costs of going directly to market in the Territory from any Pattern United States facility, or directly from Thorne to the market in the Territory, including taxes, tariffs, VAT, and shipping to the Territory.
Import licenses/permits: Pattern shall be responsible for obtaining any import licenses or permits necessary for the entry of the Products into the Countries Served/Territory and Thorne shall use commercially reasonable efforts to provide supporting documentation in a timely and professional manner as requested by Pattern.
Market Schedule to Authorized Reseller Agreement
Between Pattern Inc. and Thorne Research, Inc.
Effective Date: The date of the Agreement.
Retail Platforms: [***]
Countries/Territories Served: UAE; Saudi Arabia
Exclusivity: Thorne appoints Pattern as an exclusive reseller of the Products on the Retail Platforms named in this Market Schedule. The Parties understand and acknowledge the difficulty on the part of Thorne in ensuring strict exclusivity. Accordingly, the exclusivity granted to Pattern pursuant to this clause shall be interpreted as an agreement by and obligation of Thorne to, for the entirety of the Term;
Nothing in this clause shall prevent Thorne from selling Product on its own (i) B2C website (ii) allowing other resellers to sell Product on the reseller’s own B2C website or (iii) on any other platform other than the Retail Platform.
Market-Specific Commercial Terms:
Shipping. Products will be shipped by Thorne via common carrier, FOB Origin, i.e., title to the goods will pass to buyer upon shipment of the goods from Thorne’s facilities. Thorne will be responsible for the costs of shipping the Products to a location in the United States designated by Pattern. Pattern will be responsible for all costs of going directly to market in the Territory from any Pattern United States facility, or directly from Thorne to the market in the Territory, including taxes, tariffs, VAT, and shipping to the Territory.
Import Licences. Pattern shall be responsible for obtaining any necessary import licences or permits necessary for the entry of the Products into the Countries Served/Territory and Thorne shall use commercially reasonable efforts to provide supporting documentation in a timely and professional manner as requested by Pattern.
Representations and Warranties. Thorne hereby warrants and represents to Pattern that the sale of the products by Pattern shall not infringe upon the distribution or sale rights of any third party to any profit share or commission in respect of any such sales.
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Market Schedule to Authorized Reseller Agreement
Between Pattern Inc. and Thorne Research, Inc.
Effective Date: Effective Date of the Agreement
Retail Platforms: Retail distribution into brick-and-mortar and associated websites
Countries/Territories Served: UAE
Exclusivity: Thorne appoints Pattern as a non-exclusive distributor of the Products on the Retail Platforms named in this Market Schedule. Nothing in this clause shall prevent Thorne from selling Product on its own (i) B2C website (ii) allowing other distributors to sell Product on the reseller’s own B2C website or (iii) allowing other distributors to distribute the Products on any other platform other than the Retail Platform.
Market-Specific Commercial Terms:
Shipping. Products will be shipped by Thorne via common carrier, FOB Origin, i.e., title to the goods will pass to buyer upon shipment of the goods from Thorne’s facilities. Thorne will be responsible for the costs of shipping the Products to a location in the United States designated by Pattern. Pattern will be responsible for all costs of going directly to market in the Territory from any Pattern United States facility, or directly from Thorne to the market in the Territory, including taxes, tariffs, VAT, and shipping to the Territory.
Import Licences. Pattern shall be responsible for obtaining any necessary import licences or permits necessary for the entry of the Products into the Countries Served/Territory and Thorne shall use commercially reasonable efforts to provide supporting documentation in a timely and professional manner as requested by Pattern.
Representations and Warranties. Thorne hereby warrants and represents to Pattern that the sale of the Products by Pattern shall not infringe upon the distribution or sale rights of any third party to any profit share or commission in respect of any such sales.
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Market Schedule to Authorized Reseller Agreement
Between Pattern Inc. and Thorne Research, Inc.
Effective Date: Date of the Agreement
Retail Platforms: [***]
Countries/Territories Served: Japan; Singapore; Malaysia; Thailand; Indonesia; Vietnam; Philippines
Exclusivity: Pattern shall resell the Products on the Retail Platforms named in this Market Schedule on behalf of Thorne. In accordance therewith, Thorne hereby appoints Pattern, and Pattern hereby accepts the appointment, to act as a non-exclusive reseller of the Products on the Retail Platforms named in this Market Schedule.
Market-Specific Commercial Terms:
Shipping. Products will be shipped by Thorne via common carrier, FOB Origin, i.e., title to the goods will pass to buyer upon shipment of the goods from Thorne’s facilities. Thorne will be responsible for the costs of shipping the Products to a location in the United States designated by Pattern. Pattern will be responsible for all costs of going directly to market in the Territory from any Pattern United States facility, or directly from Thorne to the market in the Territory, including taxes, tariffs, VAT, and shipping to the Territory.
Import Licences. Pattern shall be responsible for obtaining any necessary import licences or permits necessary for the entry of the Products into the Countries/Territories Served and Thorne shall use commercially reasonable efforts to provide supporting documentation in a timely and professional manner as requested by Pattern.
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Market Schedule to Authorized Reseller Agreement
Between Pattern Inc. and Thorne Research, Inc.
Effective Date: Effective Date of the Agreement
Retail Platforms: [***]
Countries Served/Territory: Brazil
Exclusivity: Pattern shall resell the Products on the Retail Platforms named in this Market Schedule, on behalf of Thorne. In accordance therewith, Thorne hereby appoints Pattern, and Pattern hereby accepts the appointment, to act as the exclusive reseller of the Products on the Retail Platforms named in this Market Schedule. The Parties understand and acknowledge the difficulty on the part of Thorne in ensuring strict exclusivity. Accordingly, the exclusivity granted to Pattern pursuant to this Market Schedule shall be interpreted as an agreement by and obligation of Thorne to, for the entirety of the Term, (i) not sell, on its own behalf or through any affiliate, any Products on the Retail Platforms named in this Market Schedule, (ii) not grant to any Party other than Pattern the right to resell the Products on the Retail Platforms named in this Market Schedule, and (iii) use commercially reasonable efforts to ensure and maintain Pattern’s rights of exclusivity.
Nothing in this provision shall prevent Thorne from (i) selling the Products on its own B2C website, (ii) allowing other resellers to sell the Products on their own.
Market-Specific Commercial Terms:
Shipping. Products will be shipped by Thorne via common carrier, FOB Origin, i.e., title to the goods will pass to buyer upon shipment of the goods from Thorne’s facilities. Thorne will be responsible for the costs of shipping the Products to a location in the United States designated by Pattern. Pattern will be responsible for all costs of going directly to market in the Territory from any Pattern United States facility, or directly from Thorne to the market in the Territory, including taxes, tariffs, VAT, and shipping to the Territory.
Import licenses/permits: Pattern shall be responsible for obtaining any import licenses or permits necessary for the entry of the Products into the Countries Served/Territory and Thorne shall use commercially reasonable efforts to provide supporting documentation in a timely and professional manner as requested by Pattern.
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Market Schedule to Authorized Reseller Agreement
Between Pattern Inc. and Thorne Research, Inc.
Effective Date: The date of the Agreement.
Retail Platforms: [***]
Countries Served/Territory: Mexico
Exclusivity: Exclusive Product Reselling. Pattern shall resell the Products on the Retail Platforms named in this Market Schedule, on behalf of Thorne. In accordance therewith, Thorne hereby appoints Pattern, and Pattern hereby accepts the appointment, to act as the exclusive reseller of the Products on the Retail Platforms named in this Market Schedule. The Parties understand and acknowledge the difficulty on the part of Thorne in ensuring strict exclusivity. Accordingly, the exclusivity granted to Pattern pursuant to this Market Schedule shall be interpreted as an agreement by and obligation of Thorne to, for the entirety of the Term, (i) not sell, on its own behalf or through any affiliate, any Products on the Retail Platforms named in this Market Schedule, (ii) not grant to any Party other than Pattern the right to resell the Products on the Retail Platforms named in this Market Schedule, and (iii) use commercially reasonable efforts to ensure and maintain Pattern’s rights of exclusivity.
Nothing in this provision shall prevent Thorne from (i) selling the Products on its own B2C website, (ii) allowing other resellers to sell the Products on their own B2C websites, or (iii) selling the Products on any platform other than the Retail Platforms.
Market-Specific Commercial Terms:
Additional Services. Pattern will provide information and assistance to Thorne’s outside counsel engaged to pursue legal action against unauthorized sellers of the Products on the Retail Platform named in this Market Schedule (“Thorne’s Outside Counsel”); provided, however, that Thorne shall be solely and exclusively responsible for instructing, directing, and approving all strategies and actions proposed by Thorne’s Outside Counsel.
Shipping. Products will be shipped by Thorne via common carrier, FOB Origin, i.e., title to the goods will pass to buyer upon shipment of the goods from Thorne’s facilities. Thorne will be responsible for the costs of shipping the Products to a location in the United States designated by Pattern. Pattern will be responsible for all costs of going directly to market in the Territory from any Pattern United States facility, or directly from Thorne to the market in the Territory, including taxes, tariffs, VAT, and shipping to the Territory.
Import licenses/permits: Pattern shall be responsible for obtaining any import licenses or permits necessary for the entry of the Products into the Countries Served/Territory and Thorne shall use commercially reasonable efforts to provide supporting documentation in a timely and professional manner as requested by Pattern.
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Paul F. Jacobson, certify that:
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By: |
/s/ Paul F. Jacobson |
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Paul F. Jacobson |
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Chief Executive Officer |
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(Principal Executive Officer) |
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May 12, 2022 |
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Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Bryan K. Conley, certify that:
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By: |
/s/ Bryan K. Conley |
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Bryan K. Conley |
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Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
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May 12, 2022 |
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Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Thorne HealthTech, Inc. (the "Company") for the fiscal quarter ended March 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Paul F. Jacobson, President and Chief Executive Officer of the Company, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
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By: |
/s/ Paul F. Jacobson |
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Paul F. Jacobson |
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Chief Executive Officer |
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(Principal Executive Officer) |
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May 12, 2022
The foregoing certification is being furnished as an exhibit to the Report pursuant to Item 601(b)(32) of Regulation S-K and Section 1350 of Title 18 of the United States Code and, accordingly, is not being filed with the U.S. Securities and Exchange Commission as part of the Report and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made before or after the date of the Report, irrespective of any general incorporation language contained in such filing).
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Thorne HealthTech, Inc. (the "Company") for the fiscal quarter ended March 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Bryan K. Conley, Chief Financial Officer of the Company, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
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By: |
/s/ Bryan K. Conley |
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Bryan K. Conley |
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Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
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May 12, 2022
The foregoing certification is being furnished as an exhibit to the Report pursuant to Item 601(b)(32) of Regulation S-K and Section 1350 of Title 18 of the United States Code and, accordingly, is not being filed with the U.S. Securities and Exchange Commission as part of the Report and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made before or after the date of the Report, irrespective of any general incorporation language contained in such filing).