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Summary of Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2022

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

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 & Development

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:

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Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

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Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or that can be corroborated by observable market data.

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Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

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:

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identify the contract, or contracts, with a customer;

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identify the performance obligations in the contract;

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determine the transaction price;

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allocate the transaction price to the identified performance obligations; and

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recognize revenue when, or as, the Company satisfies the performance obligations.

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

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

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 of Total			Amount		Percentage of Total
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 of Total			Amount		Percentage of Total
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

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

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.