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As filed with the Securities and Exchange Commission on July 16, 2021.

Registration No. 333-                

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

THORNE HEALTHTECH, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   2834   27-2877253

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

152 W. 57th Street

New York, New York 10019

(929) 251-6321

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Paul Jacobson

Chief Executive Officer

Thorne HealthTech Inc.

152 W. 57th Street

New York, New York 10019

(929) 251-6321

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

Philip H. Oettinger

Jesse F. Schumaker

Jeffrey E. Nagashima

Wilson Sonsini Goodrich & Rosati

Professional Corporation

650 Page Mill Road

Palo Alto, California 94304

(650) 493-9300

 

Stelios G. Saffos

Alison A. Haggerty

Scott W. Westhoff

Latham & Watkins LLP

885 Third Avenue

New York, New York 10022

(212) 906-1200

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 company  
     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 7(a)(2)(B) of the Securities Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum

Aggregate

Offering Price(1)(2)

 

Amount of

Registration Fee

Common Stock $0.01 par value

  $200,000,000   $21,820

 

 

(1)

Includes offering price of any additional shares of common stock that the underwriters have the option to purchase.

(2)

Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated                , 2021

PROSPECTUS

                Shares

 

LOGO

Common Stock

 

 

This is the initial public offering of shares of common stock of Thorne HealthTech, Inc. We are offering                shares of our common stock.

We expect the public offering price to be between $         and $         per share. Prior to this offering there has been no public market for our common stock. We have applied to list our common stock on the Nasdaq Global Select Market, stock exchange under the symbol “THRN.”

We are an “emerging growth company” and a “smaller reporting company” as defined under the federal securities laws and, as such, have elected to comply with certain reduced reporting requirements.

Investing in our common stock involves risks that are described in the ‘‘Risk Factors’’ section beginning on page 16 of this prospectus.

 

 

 

    

Per Share

    

Total

Public offering price

   $      $

Underwriting discounts and commissions(1)

   $      $

Proceeds, before expenses, to us

   $      $

 

  (1)

See “Underwriting” for additional information regarding total underwriting discounts and commissions and estimated offering expenses.

We have granted the underwriters the option to purchase up to an additional              shares from us, at the public offering price, less the underwriting discount, for 30 days after the date of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The shares will be ready for delivery on or about                , 2021.

 

BofA Securities   Cowen   Evercore ISI

RBC Capital Markets

The date of this prospectus is                     , 2021.


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LOGO

A total sytem for well being. Personalized scientific wellness.


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LOGO

thorne thorne stress test


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LOGO

Thorne HealthTech Ecosystem Thorne Personalized Testing Innovative testing platform Rx Thorne Consumer Health Data+Molecular/Clinical Data Product Innovation New indications, novel formulations, and chemical compound structures Rx Thorne Onegevity


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LOGO

Thorne HealthTech by the Numbers 31% Net sales compound annual growth rate from 2018 to 2020 47% Gross profit for 2020 7.6x Lifetime value to customer acquisition ratio for direct-to-consumer (DTC) customers in 2020 155k Number of active subscriptions as of March 31, 2021 3m+ Estimated total customers from 2018 to 2020* 42k Number of health professionals in our network 272k Square feet in our new Summerville, SC manufacturing facility 300+ Innovative supplements and tests in our portfolio 37 Number of countries we shipped to in 2020 *This is estimated based off of total units sold from 2018 to 2020 and DTC average basket size and order frequency.


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TABLE OF CONTENTS

 

     Page  

LETTER FROM THE CO-FOUNDER AND CEO

     ii  

PROSPECTUS SUMMARY

     1  

THE OFFERING

     12  

RISK FACTORS

     16  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     63  

MARKET, INDUSTRY AND OTHER DATA

     65  

USE OF PROCEEDS

     66  

DIVIDEND POLICY

     68  

CAPITALIZATION

     69  

DILUTION

     71  

SELECTED CONSOLIDATED FINANCIAL DATA

     74  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     76  

BUSINESS

     102  

MANAGEMENT

     137  

EXECUTIVE COMPENSATION

     148  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     164  

PRINCIPAL STOCKHOLDERS

     169  

DESCRIPTION OF CAPITAL STOCK

     171  

SHARES ELIGIBLE FOR FUTURE SALE

     177  

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF OUR COMMON STOCK

     179  

UNDERWRITING

     184  

LEGAL MATTERS

     193  

EXPERTS

     193  

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     193  

FINANCIALS

     F-1  

 

 

Neither we nor the underwriters have authorized anyone to provide you any information or make any representations other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the underwriters are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

For investors outside of the United States: we have not, and the underwriters have not, done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. Persons outside of the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside of the United States.

 

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LETTER FROM PAUL JACOBSON, CO-FOUNDER AND CHIEF EXECUTIVE OFFICER

In the early 2000s, I served on the board of a public biotech company, along with the former Chairman of a major pharma company. He was tired of me asking how big pharma could turn compounds that barely outperformed placebo or natural products into multi-billion-dollar drugs, and one day turned to me and said, “If you think you’re so smart, go start a natural products company. Natural products probably work, but you need proof, and we hate them because you cannot secure patents. Consumers would probably prefer them, and if someone ever does it right, they could be very successful.”

This sparked my interest to determine whether he was correct, driving me to spend several years researching the natural product industry. Finally, in 2010, together with my partners Tom McKenna and Will McCamy, we identified and purchased Thorne. At the time, Thorne was a small company located in Sandpoint, Idaho, that specialized in manufacturing high-quality nutritional supplement products sold directly to healthcare practitioners. With a large percentage of Americans taking supplements of one form or another, the market was ripe for growth – although our ambitions were and continue to be bigger than just expanding the reach of another supplement company. We saw the potential for unparalleled quality, rigorous science and, eventually, an integrated, comprehensive system for wellness.

Ultimately, we knew that we had the ability to go beyond supplements in ways that would enable us to help people get and stay healthier longer – whether they were professional athletes, members of the Armed Forces, working professionals, or individuals seeking to live their best lives. We set our sights on creating a comprehensive system for wellness – taking what we had built with Thorne and our steadfast commitment to delivering high-quality, rigorously tested supplements and moving beyond. We got to the root of the question: “What do I take to improve my health and why?” through Onegevity. Co-founded by leading scientists from Mount Sinai and Weill Cornell, Onegevity was created to offer the benefits of precision wellness and scientific-based evidence, focused on diseases neglected by mainstream, traditional medicine, such as irritable bowel syndrome, Crohn’s disease, and Polycystic Ovary Syndrome. Onegevity is also working with companies to study connections between cognitive functioning and bacterial gut health as well as the largest risk factor to health – aging – which is a fundamental root cause across all diseases.

Together, our 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. Today, we are a trusted luxury consumer brand recommended and used by more than 42,000 healthcare professionals, three million customers, thousands of professional athletes and more than 100 professional sports and 11 U.S. Olympic teams. This trust is a direct result of our unwavering commitment to high-quality, clinically validated products and services designed to help people live their best lives. We continue to be guided by the tenets that have been important to us for the last 11 years, and which remain core to everything we do:

 

   

We seek to bring products with the highest quality and purity, which are clinically validated, to market. Our products are created completely in-house by a highly sophisticated team of 23 scientists and engineers utilizing proprietary technologies, health intelligence systems and Onegevity Discovery. These products are subject to up to four rounds of testing in our two state-of-the-art, in-house laboratories.

 

   

We invest in our employees and our culture. We believe that a company’s internal culture reflects its products in many ways. Our culture is rooted in a focus on our employees because we believe motivated and happy employees lead to satisfied customers. Our employees are the touchpoint for everything we do as a company. By creating a meritocracy built around hiring and rewarding the best people we have been able to recruit some of the best scientific minds in the country. We have built a team that is reflective of our values – our employees value quality, science, and data over short-term monetary decisions, and they understand that prioritizing the needs of our customers always leads to the best outcomes. We place a high priority on taking care

 

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of our hourly workers who provide the backbone of our manufacturing staff. We compensate our people at the high end of the hourly wage scale while offering full healthcare benefits and wellness programs because preventive health is not a product or commodity – it is security and dignity that everyone deserves.

 

   

We do whats right for our business, our community and the environment. We value vertical integration because we know it is the only way to ensure the quality of our products and guarantee our supply chain. By manufacturing in the United States, we retain control over our operations, and, at the same time, we serve our community by providing high-quality, green manufacturing jobs. In 2018, we completed and moved into a new, high-tech manufacturing facility just outside Charleston, South Carolina, which is where we make nearly all of our products. We remain committed to expanding our manufacturing footprint in the United States as we grow. We are very proud of the fact that we made it through COVID-19 without significant supply chain interruptions to date and were able to guarantee a “no backorder” policy for our customers. We also believe that the environment should not be compromised for the sake of profits and we take pride in being a steward of the botanical ingredients we use in our products. If we learn a botanical ingredient is becoming endangered or over-sourcing is diminishing its supply, we look to discontinue its use in our product lines.

Despite all prevailing evidence and studies showing that many chronic diseases are preventable if early action is taken, our healthcare system has chosen to focus on the most expensive way to treat people – a focus on sick-care rather than well-care. The COVID-19 pandemic shone a bright light on the inefficiencies and inadequacies of our healthcare system. Relying on treating disease rather than trying to prevent it in the first place resulted in hundreds of thousands of potentially preventable deaths, as so many people had comorbidities that dramatically heightened the risk and impact of COVID-19. Yet, at the same time, the pandemic has also resulted in a heightened focus on, and a greater commitment to, proactive efforts to maintain health for more people. We are encouraged by this trend and are excited about the opportunity to support more people in their journey to better health and wellness.

Our organization has never been more excited about the future growth potential for and impact of our company as we are today. With the strength of both Thorne and Onegevity, Thorne HealthTech is uniquely positioned to deliver data to help healthcare practitioners, consumers and athletes re-focus on prevention – ultimately delivering the solutions, products and services that offer a comprehensive system of wellness designed to keep people healthier, for longer. We invite you to follow along on our journey as we strive to change the paradigm and create a future focused on better health for more people.

Paul Jacobson

 

LOGO

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the section in this prospectus titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes appearing elsewhere in this prospectus, before making an investment decision. As used in this prospectus, unless the context otherwise requires, references to “we,” “us,” “our,” “our company” and “Thorne” refer to Thorne HealthTech, Inc. and our subsidiaries.

Overview

Our Purpose

We believe that a personalized and scientific approach to wellness can lead to happier and healthier lives. Our goal is to transform the consumer’s approach to health and wellness and empower our customers to live healthier longer, which we refer to as increased health span, through testing, teaching and proactive measures that help our customers avoid chronic health conditions before they occur and achieve peak performance.

Who We Are

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 and peak performance.

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. In early 2021, we completed our acquisition of Onegevity and combined these two complementary companies. During the past ten years, we have evolved to become a transformative consumer brand, trusted by more than 3,000,000 customers, 42,000 healthcare professionals, thousands of professional athletes, more than 100 professional sports teams and 11 U.S. Olympic teams.

We utilize testing and data to create improved product quality and deliver personalized solutions to consumers, health professionals and professional sports teams. We also help pharmaceutical and biotechnology companies repurpose existing drugs and compounds, improve existing medications and develop new products. Today, consumers are faced with a healthcare system that is focused on the treatment of disease rather than a proactive approach to health and wellness. The supplement market is crowded with confusing products that lack clinical validation or brand equity. We have positioned our brands as a paradigm shift from a focus on the treatment of disease to a proactive approach to health and wellness. The benefits of focusing on health can include enhanced performance in daily life, longer health spans, younger biological ages and reduced reliance on the healthcare system and its associated costs. We have developed a subscription platform that seamlessly combines convenient and comprehensive testing methods, proprietary data, personalized wellness education and premium nutritional solutions to focus on the human body and its unique needs. Through our platform of innovative health solutions and proprietary technology, we are building a new category within the health and


 

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wellness market. Our total addressable market consists of the $167.8 billion global nutritional supplement market (as of 2019 and projected to have a compound annual growth rate (CAGR) of 9.0% through 2026, according to FNF Research), the $84.1 billion global digital health market (as of 2019 and projected to have a CAGR of 14.8% through 2026, according to FNF Research), the $69.8 billion drug discovery technology and service market (as of 2020 and projected to have a CAGR of 9.6% through 2025, according to BCC Research) and the $29.5 billion global clinical testing market (as of 2020 and projected to have a CAGR of 11.4% through 2025, according to TechSci Research).

Our novel approach seeks to resolve key pain points in the consumer health journey. Our model of test, teach, transform and iterate ensures that consumers are not only active participants in their healthcare, but also educated and empowered to navigate an overwhelming nutritional supplement marketplace. We are able to personalize nutritional supplement recommendations and protocols because we understand there is no one-size-fits-all solution. Our relentless focus on building a new model of health has resulted in a robust portfolio of science-driven products and high customer satisfaction, as demonstrated by our favorable Net Promoter Score (NPS) of 78 during the first three months of 2021. Our success is not limited to the U.S. market; our Thorne brand was sold in 37 countries in 2020, and we expect to continue to expand internationally.

Our unique go-to-market strategy combines our direct-to-consumer (DTC) and subscription model with an ecosystem of health professionals. We provide customers with direct access to our brand through our mobile, web and Amazon channels. In addition to the DTC channel, our broad range of connected health professionals provides another channel for our products to be marketed and distributed to consumers. We have built our active and growing network to more than 42,000 health professionals, which includes medical doctors, naturopathic doctors, registered dieticians, pharmacists, chiropractors, nutritionists, trainers, acupuncturists and other accredited health professionals.

Our Platform

Our Technology

We seek to transform the health and wellness market by combining our proprietary technology platform, Onegevity, a comprehensive multi-omics database that uses AI and machine learning to provide actionable insights, with our premium nutritional supplements and actionable insights.

We use our Onegevity platform to map, integrate and understand the billions of dynamic biological features that precisely describe the state of an individual’s health to improve our product formulations and make our recommendations to customers more precise. Using Onegevity across our product portfolio creates an unparalleled ecosystem where data collected from customers and our network of health professionals strengthens our AI model.

Thorne Products

Our Thorne products support the optimization of health and include health tests, education and nutritional supplement products support the optimization of health. Customers uncover insights about their health through our tests and we turn those insights into a personalized plan for how to eat, exercise, and choose supplements based on unique test results.

We offer health tests to generate comprehensive, personalized, molecular portraits for our customers. Our extensive portfolio of health tests includes tests focused on sleep, stress, weight management, gut health, heavy metals, biological age and more. Customers can have our tests delivered to their doorstep, collect biological samples at home, and then can drop their free return envelope in nearly any mailbox. Alternatively, customers can go to a diagnostic laboratory, such as Quest Diagnostics, to have their samples collected and tests performed. Onegevity uses the results


 

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of these tests to create personalized recommendations, which we believe provides individuals with greater conviction about what actions they need to take, such as consulting with their physician or nutritionist, making a lifestyle change, or using nutritional supplements. All of our tests are performed by reputable third-party clinical laboratories, and the test results and comprehensive Onegevity-powered analysis and evidence-based recommendations are reviewed by board-certified physicians prior to being delivered to the customer through our website and app.

We have also developed premium, high-quality nutritional supplements that are developed with rigorous science and comprehensive testing from start to finish. Our formulas are of the highest quality offered in the nutritional supplement market, and our manufacturing processes have received among the highest possible ratings in the industry, which is aligned with our unparalleled commitment and adherence to U.S. and international current Good Manufacturing Practice requirements (cGMPs) and quality throughout our entire supply chain. We manage nearly all product formulations, ingredients, production processes, documentation, testing and product release activities at our 272,000 square foot facility in Summerville, South Carolina, which is third-party certified.

Our distinguished science and medical teams are advancing an innovative pipeline of Thorne products, including a series of next-generation products with nicotinamide riboside (NR). We believe NR contains properties that support healthy aging at the cellular level.

Onegevity Services

Onegevity is AI for health. Onegevity combines AI with professional human assistance to map, integrate and understand the billions of dynamic biological features that illustrate the state of an individual’s health. Onegevity’s platform and technology are used by customers to manage their own health and by practitioners and professionals to support patient health and advance their scope of practice. Onegevity’s portfolio of enterprise-ready models coupled with its proprietary multi-omics database is also designed to improve outcomes and reduce the difficulties and costs of AI adoption in health and wellness and can be used in the development of nutritional supplements and pharmaceuticals by our business-to-business (B2B) customers. We separate our Onegevity services into three categories:

Onegevity Health Intelligence: Our platform leverages AI models to provide insights and personalized health recommendations as a part of an individual’s health tests results. Onegevity uses pattern recognition, deep neural networks, bioinformatics and our multi-omics database to provide these personalized recommendations. Designed as a multi-tenant capable service, Onegevity Health Intelligence powers our testing and nutritional supplement channel and also has third-party applications. Pharmacies, health professionals and lifestyle companies can integrate testing and Onegevity Health Intelligence to engage, educate and empower their patients and users to make smarter decisions about their health, all while staying within the third party’s own web portal.

Onegevity Discovery: We have combined AI models with our multi-omics database to create a platform that can be used to develop new nutritional and pharmaceutical products at faster speeds and with higher efficiency than traditional development methods. This capability is achieved through predictive algorithms, informed by an array of biological and chemical factors, that can identify pharmaceutical agents or natural products likely to have the targeted result. Our Onegevity Discovery fuels our product development as well as that of clients in diverse fields, including pharmaceuticals, biotechnology, consumer packaged goods (CPGs) and research clinics. We have helped clients repurpose existing drugs and compounds, improve existing medications and develop new products.

Onegevity Lab: Our Onegevity Lab assessments are being developed to provide an in-person clinical experience powered by AI that embodies the personalized scientific wellness paradigm. We believe that by enabling individuals to obtain a 360-degree snapshot of their health, Onegevity Lab, the potential clinic of the


 

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future, will empower individuals to identify opportunities that preserve their health and optimize performance. As part of the session, a trained independent clinician will guide the patient through a personalized health assessment and consultation that includes highly-validated but understudied modules of health, such as cognitive function, grip strength and balance, which are all leading indicators in long-term health, but rarely evaluated when a patient is healthy.

Vertically Integrated Product Development

We have built our brand on the core pillars of safety, credibility, quality and user experience. The foundation for these pillars comes from our vertically integrated capabilities. We believe that we are one of the only vertically integrated science-based wellness companies in the world, which enables us to provide our customers with premium quality products with ingredient integrity that are manufactured in the United States.

Our vertical integration spans from sourcing the highest quality ingredients, research and development activities, product delivery and continued customer engagement. Our product formulation is driven completely in-house by a team of 23 scientists and engineers utilizing proprietary technologies, health intelligence systems and Onegevity Discovery.

We also believe it is crucial to form relationships with leading industry participants in order to continue to provide innovative products to our customers. Our development ecosystem is comprised of research partners Mayo Clinic, Unilever, Tetra Biopharma, Kyowa Hakko and a global pharmaceutical company; sponsorship of UFC, USA Rugby, Penske Racing, Roush Fenway Racing and the U.S. Army World Class Athlete Program; and high-profile customers such as individual Navy SEALs, teams in the NFL, MLB and NBA and other major athletic organizations.

Our Compelling Value Proposition

Our Value Proposition to Consumers

We believe our personalized approach to health and scientific wellness empowers our customers to improve and extend their health span and enjoy happier and healthier lives. Our customers trust the Thorne brand to meet the highest standards of quality and safety. With our history of continued innovation, consumers have access to new ways to measure how biological age and well-being are calculated and controlled. We have created an intuitive and convenient health testing experience and our tests are designed to produce results that are easy to understand and actionable. Our approach, paired with our emphasis on data and AI, consistently delivers further refined insights, which provides our customers with enhanced information to support and maintain their health.

Our Value Proposition to Professional Athletes

We collaborate with sports organizations and professional athletes to ensure they have the tools and information necessary to help individuals improve health and performance through science-backed education and best-in-class products. The National Sanitation Foundation (NSF) International evaluates product and ingredient safety through its accredited certification and testing services. We currently have one of the most comprehensive lines of NSF Certified for Sports products on the market, with an NSF-Certified manufacturing facility and 23 products in the NSF Certified for Sport program in the United States and 11 products in the NSF Certified for Sport program in Canada, each of which certifies dietary supplements to be free from substances banned by major sporting organizations and helps athletes, dietitians, coaches and consumers make more informed decisions when choosing sports supplements. We believe professional athletes, coaches and teams love and have complete confidence in our NSF Certified for Sport product line because of the thorough testing methods that screen for more than 200 banned substances. Our dedication to science and quality has earned us the trust of


 

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more than 100 professional sports teams and 11 U.S. Olympic Teams. It is our ongoing support and collaboration with these professional organizations that has led to our position as one of the most comprehensive NSF Certified for Sport supplement manufacturers in the United States.

Our Value Proposition to Health Professionals

Our mission is to help health professionals improve patient outcomes by encouraging product use, supplying proper patient education materials and providing a consumer-friendly service. We believe this is increasingly valuable in the current competitive landscape of the health industry where physicians and other health professionals are more transparently reviewed by their peers and patients based on patient outcomes. Our value proposition is demonstrated by our active and growing professional network of more than 42,000 health professionals, including medical doctors, naturopathic doctors, registered dieticians, pharmacists, chiropractors, nutritionists, trainers, acupuncturists and other accredited health professionals who recommend our products and services.

Our B2B Value Proposition

Our Onegevity longitudinal multi-omics database is proprietary, difficult to replicate and generates data insights that can be used for further innovation in the fields of health and wellness. We have the opportunity to monetize our database and our unique analysis model to a variety of interested parties, including:

 

   

corporations benefiting from insights on population health;

 

   

pharmaceutical companies and biotechnology companies seeking additional data for new drug discovery and patient identification for clinical trials;

 

   

CPG companies; and

 

   

health intelligence services for consumers and health professionals.

Our Industry and Opportunity

Industry

We participate in the large and growing multi-billion dollar global wellness industry. The market is highly fragmented, and no company holds more than 5% market share. We are redefining consumer health and building a brand with science-backed personalized products that meet the highest standards of quality, safety and efficacy.

Opportunity

We have a significant opportunity to continue to penetrate the product categories and channels we compete in today. In addition, we believe we benefit from several consumer trends, including:

 

   

consumerization of healthcare and an increase of healthcare in the home;

 

   

a shift to personalized health;

 

   

increased demand for safe nutritional supplements driven by increased consumer education and expanding datasets; and

 

   

increased demand for convenience.


 

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What Sets Us Apart

Our Differentiated Consumer Journey

We believe that we provide consumers with one of the world’s most innovative solutions for a personalized approach to health, delivered through our integrated platform of testing, supplements and digital health content. Our proprietary platform is redefining consumer health through a model of test, teach, transform and iterate to address the consumer pain points that exist in the market today. Consumers struggle to navigate confusing supplement categories and the market is crowded with ineffective, low-grade products. Personalization has been shown to deliver better health outcomes, yet current health solutions continue a “one-size-fits-all” approach. The healthcare system focuses on treatment of disease, but consumers need and want a proactive, empowered approach to health focused on maintaining and supporting health and promoting wellness.

Test: The first step in addressing these consumer pain points is personalized testing and recommendations. We begin with convenient and comprehensive test collections using multi-omics data, which can be for a range of health areas including sleep, stress, weight management, gut health and heavy metals. The testing phase is concluded with a personalized, AI-driven, actionable health plan with diet, activity and supplement recommendations based on the individual’s test results.

Teach: We then build on the testing phase by teaching consumers through an education platform designed to empower and engage consumers through their health journey. The education occurs through both general and personal methods. The general education includes our daily online magazine Take 5 Daily, which includes podcasts, videos and articles, wellness guides and ingredients. The personalized education includes supplemental quizzes, connecting with health professionals in our network and analyzing test results.

Transform: We provide customers with premium nutritional solutions to optimize their body and its unique needs, including products to maintain and support heart health, healthy aging and gut health, among many others.

Iterate: The Onegevity platform uses molecular biology and AI to deliver continuous improvement of the test, teach, and transform model. The sophisticated AI system utilizes pattern recognition, deep neural networks, and bioinformatics to deliver unparalleled molecular insight and personalization. In addition, this technology informs our product development and reformulation process. Together, the data and AI consistently provide further refined insights, which provides our customers with enhanced information and more effective products to improve their health.

We teach individuals about their health and what is occurring in their bodies and why we recommend specific supplement choices. We aim to address an individual’s health needs and deficiencies with our nutritional supplements, as needed. This is an iterative process and provides a differentiated and simplified journey for our customers to navigate the complicated supplement market and improve their health over time.

Trusted Brand, Products and Services

We believe we are a leader in developing high-quality nutritional supplements in a variety of unique form factors. We presently sell over 300 supplements and test SKUs. Our network of tens of thousands of health professionals, trainers, and world-class athletes deepens the credibility of our product portfolio. Our offering is further differentiated by conducting all manufacturing and quality management in the United States. We have strong relationships with our suppliers, predominantly located in Europe and United States, who assist in our product innovation cycle and share our commitment to bringing the highest quality products to our customers. This


 

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commitment has contributed to our position as one of the most comprehensive NSF Certified for Sport supplement manufacturers in the United States.

Powerful Data and AI engine

Our AI model and multi-omics database improve our product formulations and make our recommendations to consumers more precise. We collect and process approximately 600 personalized tests, evaluations and surveys per day and are able to develop actionable insights from that data with our Onegevity platform. The data collected from customers, combined with a powerful AI engine, enhances our ability to provide personalized recommendations and education to our customers, thereby driving higher conversion and retention. Our platform captures this information which is utilized by our algorithms to create better nutritional supplements with optimal safety and quality and also helps our B2B customers develop more personalized solutions. The availability of this data may open further opportunities for us in the future to drive revenue by providing data services as a health intelligence provider.

Scalable Platform

The large number of highly engaged consumers who trust our Thorne brand and Onegevity platform provide a strong foundation for developing new products that extend across the health and wellness markets. This ecosystem uniquely positions us to create and capture value along the continuum of a consumer’s life with safe and innovative formulas that provide support for prenatal development, healthy adult lifestyles and healthy aging. We have achieved a demonstrated ability to develop innovative new products and successfully integrate acquired companies and assets.

Founder-Led, Science-Oriented Team

Our team of pioneers brings unrivaled expertise in science-backed wellness, precision health, systems biology and AI-for-health, and has a proven track record of driving profitable growth. Co-founder Paul Jacobson built this team with a commitment to redefine what it means to be healthy and to push the limits of human potential. Our experienced and highly regarded team of scientists consists of 40 science degrees, including doctorate degrees in 15 specialties, spanning fields such as molecular medicine, neuroscience, immunology and genetics.

Our Growth Strategies

We intend to leverage multiple growth strategies to continue to build our brand and increase our revenue and subscription base, including:

 

   

grow brand awareness;

 

   

launch new products and expand content offerings;

 

   

leverage our multi-omics database and AI with B2B partners;

 

   

continue to improve personalization for a better consumer experience;

 

   

invest in our platform;

 

   

further expand into international markets; and

 

   

selectively pursue acquisitions.


 

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Our Results

We are a fast-growing and scaling health and wellness platform and have experienced significant recent growth. Our compelling financial profile is characterized by accelerated year-over-year growth, improving gross margins, recurring revenue, strong customer retention and efficient customer acquisition.

For the three months ended March 31, 2020 and 2021:

 

   

we generated net sales of $33.1 million and $44.5 million, respectively, representing 34.2% growth from the same period in 2020;

 

   

we generated gross profit of $15.2 million and $23.2 million, respectively, representing 45.9% and 52.1% of net sales, respectively;

 

   

our net loss was $1.2 million for the three months ended March 31, 2020, and our net income was $4.7 million for the three months ended March 31, 2021; and

 

   

our Adjusted EBITDA was $4.5 million and $8.3 million, respectively.

For the twelve months ended December 31, 2019 and 2020:

 

   

we generated net sales of $102.5 million and $138.5 million, respectively, representing 23.0% and 35.0% year-over-year growth, respectively;

 

   

we generated gross profit of $44.7 million and $64.8 million, respectively, representing 43.6% and 46.8% of net sales, respectively;

 

   

our net loss was $18.2 million and $4.0 million, respectively; and

 

   

our Adjusted EBITDA was $8.0 million and $14.4 million, respectively.

See the section titled “Selected Consolidated Financial and Other Data — Adjusted EBITDA and Adjusted EBITDA Margin” for information regarding our use of Adjusted EBITDA and a reconciliation of net loss to Adjusted EBITDA.

Our recent key customer metrics, as defined in the Management Discussion and Analysis section, includes:

 

   

customer acquisition costs (CAC) of $30 and life-time value (LTV) of $136 with 4.5x LTV to CAC in the twelve months ended December 31, 2019, a CAC of $22 and LTV of $170 with 7.6x LTV to CAC in the twelve months ended December 31, 2020, a CAC of $18 and LTV of $130 with 7.1x LTV to CAC in the three months ended March 31, 2020, a CAC of $26 and LTV of $158 with 6.2x LTV to CAC in the three months ended March 31, 2021;

 

   

active subscriptions of 98,809 and 168,483, as of March 31, 2020 and 2021, respectively; and

 

   

orders per customer per year of 2.6 and 2.7, in the twelve months ended December 31, 2019 and 2020, respectively and 1.9 and 1.8 in the three months ended March 31, 2020 and March 31, 2021, respectively.

See the section titled “Management Discussion and Analysis” for information regarding our calculation of CAC, LTV, active subscriptions and orders per customer.

 


 

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Risks Associated with Our Business

Our ability to execute on our business strategy is subject to a number of risks, which are discussed more fully in the section titled “Risk Factors.” You should carefully consider these risks before making an investment in our common stock. These risks include, among others, the following:

 

   

we have a history of operating losses and can provide no assurance that we will achieve profitability;

 

   

our operating results may fluctuate significantly in the future, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations or any guidance we may provide;

 

   

if the market for our products and services does not continue to grow, grows more slowly than we expect, or fails to grow as large as we expect, our business, financial condition, and operating results may be adversely affected;

 

   

if we fail to maintain adequate quality standards for our products and services, or if we fail to comply with applicable regulatory requirements or receive allegations of noncompliance with regulatory requirements, our business may be adversely affected and our reputation harmed;

 

   

our success depends on our ability to maintain the value and reputation of our brand;

 

   

unfavorable publicity or consumer perception of our products and any similar products distributed by other companies could have a material adverse effect on our business;

 

   

we may fail to attract, acquire or retain health professionals and consumers as customers at our current or anticipated future growth rate, or may fail to do so in a cost-effective manner, which would adversely affect our business, financial condition and results of operations;

 

   

our business depends on the effectiveness of our advertising and marketing programs, including the strength of our social media presence, to attract and retain customers;

 

   

if we are unable to anticipate health professional and consumer preferences and successfully develop new and innovative products and services in a timely manner or effectively manage the introduction of new or enhanced products and services, then our business may be adversely affected; and

 

   

if we are unable to sustain pricing levels for our products and services, our business could be adversely affected.

Corporate Information

We were formed in Delaware as a corporation on June 17, 2010 under the name Thorne Holding Corp. On November 13, 2020, we changed our name to Thorne HealthTech, Inc. Our principal executive offices are located at 152 W. 57th Street, New York, New York 10019. Our telephone number is (929) 251-6321. Our website address is www.thorne.com. Information contained on the website is not incorporated by reference into this prospectus and should not be considered to be part of this prospectus.

We use the Thorne logo and other marks, including NSF Certified for Sport, NiaCel, ResveraCel as trademarks in the United States and other countries. This prospectus contains references to our trademarks and


 

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service marks and to those belonging to other entities. Solely for convenience, trademarks and trade names referred to in this prospectus, including logos, artwork and other visual displays, may appear without the TM symbol, but such references are not intended to indicate in any way that we will not assert, to the fullest extent possible under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other entities’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other entity.

Implications of Being an Emerging Growth Company and a Smaller Reporting Company

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, as amended (JOBS Act). We will remain an emerging growth company until the earliest to occur of: (i) the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; (ii) the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; (iii) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period; and (iv) the last day of the fiscal year ending after the fifth anniversary of our initial public offering.

An emerging growth company may take advantage of relief from certain reporting requirements and other burdens that are otherwise applicable generally to public companies. These provisions include:

 

   

presenting only two years of audited financial statements and only two years of selected financial data;

 

   

an exemption from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act);

 

   

reduced disclosure about our executive compensation arrangements in our periodic reports, proxy statements and registration statements; and

 

   

exemptions from the requirements of holding non-binding advisory votes on executive compensation or golden parachute arrangements.

As a result of this status, we have taken advantage of reduced reporting requirements in this prospectus and may elect to take advantage of other reduced reporting requirements in our future filings with the U.S. Securities and Exchange Commission. In particular, in this prospectus, we have provided only two years of audited financial statements and have not included all of the executive compensation related information that would be required if we were not an emerging growth company.

In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards, delaying the adoption of these accounting standards until they would apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards, and, therefore, we will not be subject to the same new or revised accounting standards at the same time as other public companies that are not emerging growth companies or those that have opted out of using such extended transition period, which may make comparison of our financial statements with such other public companies more difficult. We may take advantage of these reporting exemptions until we no longer qualify as an emerging growth company, or, with respect to adoption of certain new or revised accounting standards, until we irrevocably elect to opt out of using the extended transition period. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting standards as of public company effective dates.

We are also a “smaller reporting company,” meaning that the market value of our stock held by non-affiliates plus the proposed aggregate amount of gross proceeds to us as a result of this offering is less than


 

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$700 million and our annual revenue was less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company after this offering if either (i) the market value of our stock held by non-affiliates is less than $250 million or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.


 

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THE OFFERING

 

Common stock offered by us

                 shares (or                 shares if the underwriters exercise their option to purchase additional shares in full).

 

Option to purchase additional shares

We have granted the underwriters an option for a period of 30 days to purchase up to                  additional shares of our common stock.

 

Common stock to be outstanding immediately after this offering

             shares (or                  shares if the underwriters exercise their option to purchase additional shares in full).

 

Use of proceeds

We estimate that the net proceeds from this offering will be approximately $         million (or $         million if the underwriters exercise their option to purchase additional shares in full), assuming an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

  The principal purposes of this offering are to obtain additional capital to support our operations, establish a public market for our common stock and facilitate our future access to the public capital markets.

 

  We currently intend to use the net proceeds from this offering, together with our existing cash to fund (i) additional nutritional supplement product and test development activities, including investment in our Onegevity platform, (ii) expansion of our sales and marketing activities, including expansion into additional international markets, and costs associated with additional warehousing space; (iii) the repayment of current indebtedness, and (iv) working capital, and other general corporate purposes.

 

  We may use a portion of the net proceeds to repay any debt we incur in the future or acquire complimentary products, technologies, intellectual property or businesses; however, we currently do not have any agreements or commitments to complete any such transactions and are not involved in negotiations regarding such transactions.

 

  See the section titled “Use of Proceeds” for more information.

 

Risk factors

See the section titled “Risk Factors” for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock.

 

Reserved share program

At our request, an affiliate of BofA Securities, Inc., a participating underwriter, has reserved for sale, at the initial public offering price, up to 5% of the shares offered by this prospectus for sale to our directors, officers and selected senior managers. If these persons purchase reserved shares, it will reduce the number of shares


 

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available for sale to the general public. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus, see “Underwriting—Reserved Share Program.”

 

Proposed Nasdaq trading symbol

“THRN”

The number of shares of our common stock to be outstanding after this offering is based on                  shares of our common stock outstanding as of March 31, 2021 (including our convertible preferred stock on an- as-converted basis), and excludes:

 

   

                 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2021 with a weighted-average exercise price of $         per share;

 

   

                 shares of common stock issuable upon the exercise of options granted after March 31, 2021 with a weighted-average exercise price of $         per share;

 

   

                 shares of common stock issuable upon the exercise of warrants outstanding as of March 31, 2021;

 

   

                 shares of common stock reserved for future issuance under our 2010 Equity Incentive Plan, as amended (2010 Plan);

 

   

                 shares of common stock reserved for future issuance under our Restated 2020 Onegevity Health Equity Plan, as amended (Onegevity Plan);

 

   

                 shares of common stock reserved for future issuance under our 2021 Equity Incentive Plan (2021 Plan), which will become effective in connection with this offering, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this plan; and

 

   

                 shares of common stock reserved for future issuance under our 2021 Employee Stock Purchase Plan (ESPP), which will become effective in connection with this offering, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this plan.

Unless otherwise indicated or the context otherwise requires, this prospectus assumes or gives effect to the following:

 

   

no exercise of outstanding options described above after March 31, 2021;

 

   

no exercise by the underwriters of their option to purchase additional shares of common stock from us in this offering;

 

   

the conversion of all outstanding shares of our Class B non-voting common stock into shares of a single class of voting common stock;

 

   

the automatic conversion of all outstanding shares of our convertible preferred stock as of March 31, 2021 on a          basis into an aggregate of                  shares of our common stock immediately prior to the completion of this offering; and

 

   

an initial public offering price of $         per share, the midpoint of the estimated public offering price range on the cover of this prospectus.


 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following tables set forth a summary of certain of our consolidated financial data for the periods and as of the dates indicated. We have derived the summary statements of operations data for the years ended December 31, 2019 and 2020, from our audited financial statements appearing elsewhere in this prospectus. We also derived the following summary statements of our unaudited consolidated statement of operations data for the three months ended March 31, 2020 and 2021, and our summary balance sheet data as of March 31, 2021, from our unaudited consolidated financial statements and related notes included elsewhere in this prospectus. Our interim unaudited financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) on the same basis as the annual audited financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of our financial position as of March 31, 2021 and our results of our operations for the three months ended March 31, 2020 and 2021. Our historical results are not necessarily indicative of the results that should be expected for any future period, and our interim results are not necessarily indicative of our results for the full fiscal year. You should read the following summary consolidated financial data together with our financial statements and the related notes appearing elsewhere in this prospectus and the information in the sections titled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     Twelve Months
Ended December 31,
    Three months
Ended March 31,
 

Consolidated Statements of Operations

   2019     2020     2020     2021  
     (in thousands except per share amounts)  

Net Sales

   $ 102,532     $ 138,455     $ 33,144     $ 44,484  

Cost of sales

     57,789       73,667       17,964       21,247  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     44,743       64,788       15,180       23,237  

Operating expenses:

        

Research and development

     3,899       4,225       990       907  

Selling, general, and administrative

     54,751       59,548       13,981       15,476  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (13,907     1,015       209       6,854  

Other expense (income):

        

Interest expense, net

     406       1,125       618       283  

Guarantee fees

     298       243       86       139  

Change in fair value of warrant liability

     1,992       1,912       478       1,628  

Other expense (income), net

     (44     2       —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     2,652       3,282       1,182       2,050  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes and loss from equity interest in unconsolidated affiliates

     (16,559     (2,267     (973     4,804  

Income tax expense

     33       177       1       41  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) before loss from equity interest in unconsolidated affiliates

     (16,592     (2,444     (974     4,763  

Loss from equity interest in unconsolidated affiliates(1)

     1,625       1,510       203       57  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (18,217     (3,954     (1,177     4,706  

Net loss - non-controlling interest(2)

     (1,492     (596     (489      
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Thorne HealthTech, Inc.

     (16,725     (3,358     (688     4,706  

Deemed Dividends

     (4,813     —         —          

Undistributed earnings attributable to Series E convertible preferred stockholders

     —         —         —         (4,706
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders

     (21,538     (3,358     (688     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share:(3)

        

Basic

   $ (1,221   $ (150   $ (39     —    

Diluted

   $ (1,221   $ (150   $ (39     —    

Weighted average common shares outstanding:

        

Basic

     17,638       22,440       17,638       39,663  

Diluted

     17,638       22,440       17,638       39,663  

 

(1)

Represents our proportionate loss arising from our equity interest in Drawbridge and Tecton. For the three months ended March 31, 2021, our portion of Drawbridge’s loss was $0.1 million and for Tecton it was $0. For the three months ended March 31, 2020, our


 

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  portion of Drawbridge’s loss was $0.2 million and for Tecton was $0. For 2020, our portion of Drawbridge’s loss was $0.9 million and for Tecton was $0.5 million. For 2019, our portion of Drawbridge’s loss was $1.2 million and for Tecton was $0.8 million.
(2)

Represents the net loss attributable to the minority shareholders of Onegevity for the three months ended March 31, 2021, and to the minority shareholders of Onegevity and Health Elements for the three months ended March 31, 2020 and for the twelve months ended December 2020 and 2019.

(3)

See Notes to our consolidated financial statements appearing at the end of this prospectus for details on the calculation of basic and diluted net loss per share.

 

     As of March 31, 2021  

Consolidated Balance Sheet Data

   Actual      Pro
Forma(1)
     Pro forma As
Adjusted(2)(3)
 
     (in thousands)  

Cash

   $ 23,334                             

Working capital(4)

     18,025        

Total assets

     133,775        

Total debt

     21,460        

Total liabilities

     81,910        

Series E convertible preferred stock

     133,485        

Total stockholders’ deficit

   $ (81,619      

 

(1)

The pro forma balance sheet data gives effect to the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of                shares of our common stock which will occur immediately prior to the completion of this offering, resulting in an aggregate of                outstanding shares of our common stock.

(2)

The pro forma as adjusted column in the balance sheet data gives effect to (i) the pro forma adjustments described in footnote (1) above and (ii) the issuance and sale of                shares of common stock in this offering at the initial public offering price of $        per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

(3)

Each $1.00 increase or decrease in the assumed initial public offering price of $        per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the pro forma as adjusted amount of each of our cash, working capital, total assets and stockholders’ equity by $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of 1.0 million shares in the number of shares offered by us at the assumed initial public offering price would increase or decrease, as applicable, each of our cash, working capital, total assets, and stockholders’ equity by $         million. The pro forma as adjusted information set forth above is illustrative only and will depend on the actual initial public offering price and other terms of this offering determined at pricing.

(4)

Working capital is defined as current assets less current liabilities. See our financial statements appearing elsewhere in this prospectus for further details regarding our current assets and current liabilities.

 

     Twelve Months Ended
December 31,
    Three Months Ended
March 31,
 
     2019     2020     2020     2021  
     (dollars in thousands)  

Net income (loss)

   $ (18,216   $ (3,954   $ (1,177   $ 4,706  

Adjusted EBITDA (unaudited)

     8,034       14,433       4,515       8,293  

Adjusted EBITDA margin (unaudited)

     7.8     10.4     13.6     18.6

Net cash provided by (used in) operating activities

     (7,621     17,107       2,986       8,787  

Free cash flow (unaudited)

   $ (10,526   $ 14,784     $ 2,515     $ 8,198  

See subsection “Key Financial and Operating Data” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further details.


 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, before making a decision to invest in our common stock. Our business, financial condition, results of operations, or prospects could also be harmed by risks and uncertainties not currently known to us or that we currently do not believe are material. If any of the risks actually occur, our business, financial condition, results of operations, and prospects could be adversely affected. In that event, the market price of our common stock could decline, and you could lose part or all of your investment.

Risks Related to Our Business and Industry

We have a history of operating losses and can provide no assurance that we will achieve profitability.

We have a history of operating losses, including net losses of $18.2 million and $4.0 million for the years ended December 31, 2019 and 2020, respectively. We have an accumulated deficit of $134.7 million as of March 31, 2021. We expect our operating expenses to increase in the future as we increase our sales and marketing efforts, continue to invest in research and development, expand our operating and manufacturing infrastructure and expand into new geographies. Further, as a public company, we will incur additional legal, accounting and other expenses that we did not incur as a private company. These efforts and additional expenses may be more costly than we expect, and we cannot guarantee that we will be able to increase our revenue to offset our operating expenses. As a result, we may need additional financing to meet our future capital requirements. Our revenue growth may slow or our revenue may decline for a number of other reasons, including reduced demand for our products and services, increased competition, a decrease in the growth or reduction in size of our overall market or if we cannot capitalize on growth opportunities. If our revenue does not grow at a greater rate than our operating expenses, we will not be able to maintain profitability.

Our operating results may fluctuate significantly in the future, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations or any guidance we may provide.

Our quarterly and annual operating results may fluctuate significantly, which makes it difficult for us to predict our future operating results. These fluctuations may occur due to a variety of factors, many of which are outside of our control, including, but not limited to:

 

   

our ability to successfully commercialize our products and services on our anticipated timelines;

 

   

the timing and cost of, and level of investment in, new marketing initiatives, research and development and commercialization activities relating to our products and services, which may change from time to time;

 

   

our ability to drive adoption of our products and services in our health and wellness market and our ability to expand into any future target markets or geographies;

 

   

the prices at which we will be able to sell our products and services;

 

   

the timing and amount of expenditures that we may incur to develop, commercialize or acquire additional products or expand our facilities or enter into different geographies;

 

   

seasonal spending patterns of our customers;

 

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any new laws and regulations that become applicable to us;

 

   

future accounting pronouncements or changes in our accounting policies;

 

   

the outcome of any future litigation or governmental investigations involving us, our industry or both;

 

   

the impact of the COVID-19 pandemic on the economy, investment in the health and wellness industry, our business operations, and resources and operations of our customers, suppliers and distributors; and

 

   

general industry, economic and market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors.

The cumulative effects of the factors discussed above could result in large fluctuations and unpredictability in our quarterly and annual operating results. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Investors should not rely on our past results as an indication of our future performance.

The variability and unpredictability of our operating results could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our operating results fall below the expectations of analysts or investors or below any guidance we may provide, or if the guidance we provide is below the expectations of analysts or investors, it could cause the market price of our common stock to decline.

If the market for our products and services does not continue to grow, grows more slowly than we expect, or fails to grow as large as we expect, our business, financial condition and operating results may be adversely affected.

Our success depends substantially on the continued willingness of consumers to adopt health and wellness products and, in particular, to place value in the personalized nature of our platform and scientific evidence we use to market our products and services. To be successful, we will have to continue to significantly invest in educating consumers about our products and services, and provide high-quality products and services that are superior to those offered by our competitors. For example, our customers use our Onegevity platform and take our tests in order to benefit from our nutritional supplement product offerings. The personalized health and wellness market has only recently adopted the use of digital platforms like Onegevity, and it is uncertain whether such service models will sustain high levels of demand or achieve widespread market acceptance. If our customers do not have confidence in our Onegevity platform or the results of the tests they take, they may not act on our recommendations or purchase our products and our revenues will be negatively impacted as a result. In addition, the health and wellness market is heavily saturated, and the demand for and market acceptance of new products and services in the market is uncertain. While we predict that the overall health and wellness market will continue to grow, it is difficult to predict the future growth rates, if any, to the size of our market. We cannot assure you that our market will continue to develop, that the public’s interest in personalized health and wellness will continue or that our products and services will become widely adopted. If our market does not further develop, develops more slowly than expected or becomes saturated with competitors or if our products and services do not achieve market acceptance, our business, financial condition and operating results could be adversely affected.

If we fail to maintain adequate quality standards for our products and services, our business may be adversely affected and our reputation harmed.

Our products, including nutritional supplements and health tests, may contain defects or errors may not perform as intended. These defects or errors could result in a product recall, market withdrawal, negative

 

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publicity or other events that would result in harm to our reputation, loss of customers or revenue, refunds, order cancellations, subscription terminations and lack of market acceptance of our products and services. In addition, Onegevity offers health-related services through Thorne’s digital platform as well as directly to business customers. Our Onegevity engine relies on third-party testing facilities to process the customer tests and generate patient data and physicians to interpret these results. These services may contain undetected defects, errors or vulnerabilities currently or when new versions or enhancements are released. These defects and errors may also result in Onegevity’s engine providing inaccurate recommendations to our customers. As the use of our Onegevity technology grows and we add new features, we may be subject to increased scrutiny, reputational risk and liability should there be a data breach or if our platform fails to perform as anticipated. Any such defects, errors or vulnerabilities would require us to take remedial action, which could require us to allocate significant research and development and customer support resources to address any such problems. Further, as we make acquisitions, we may encounter difficulties in integrating acquired technologies into our services and in augmenting those technologies to meet the quality standards that are consistent with our brand and reputation.

Our agreements with customers, distribution partners and other third parties may include indemnification provisions under which we agree to indemnify or otherwise be liable to them for losses suffered or incurred in connection with any such defects or errors of our products or services, or other liabilities relating to or arising from our products or services. Some of these indemnity agreements provide for uncapped liability for which we would be responsible, and some indemnity provisions survive termination or expiration of the applicable agreement. Large indemnity payments could harm our business, financial condition and results of operations. Although we attempt to contractually limit our liability with respect to such indemnity obligations, we are not always successful and may still incur substantial liability related to such claims. In addition, although we carry general liability insurance, our insurance against this liability may not be adequate to cover a potential claim, and such coverage may not be available to us on acceptable terms, or at all. Any dispute with a customer or other third party with respect to such obligations could have adverse effects on our relationship with such customer or other third party, our reputation and demand for our platform. Any of the foregoing could adversely affect our business, financial condition and results of operations.

Our success depends on our ability to maintain the value and reputation of our brand.

We believe that our customers associate our name with quality products and services and that the strength of our brand is important to attracting and retaining customers. We rely on our trusted brand to differentiate our products and services from those of our competitors in a crowded and saturated market for nutritional supplements and personalized health services. Maintaining, protecting and enhancing our brand depends largely on the success of our marketing efforts, ability to provide consistent, high-quality products, services, features, content and support, and our ability to successfully secure, maintain and defend our rights to use the “Thorne” and “Onegevity” marks and other trademarks important to our brand. We believe that the importance of our brand will increase as competition further intensifies. Accordingly, brand promotion activities aimed at bolstering our brand may require substantial expenditures. Our brand could be harmed if we fail to achieve these objectives or if our public image were to be tarnished by negative publicity. Our brand could also be harmed if any of our key influencers or professional athlete endorsers receive negative publicity, or if our products and services do not perform as intended.

Adulterated or counterfeit products appearing on the market under the Thorne brand may subject us to costs or liabilities or damage our reputation and brand.

We recently became aware of a limited number of adulterated or counterfeit supplement products sold under our brand that did not contain the labeled ingredients intended to be present, did not perform as intended, and may have been placed on the market in an attempt to damage our reputation and brand. Although the ingredients contained in the supplements were harmless, adulterated or counterfeit supplements sold under our brand in the future could contain harmful ingredients or may not perform as intended. Furthermore, a counterfeit test sold may not produce accurate test results. In the future, we could become involved in investigations with the

 

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FDA or other federal and state agencies as a result of adulterated or counterfeit supplements or tests. We may incur costs or liabilities resulting from an investigation or become involved in product liability litigation resulting from adulterated or counterfeit supplements or tests. Even if there is no customer harm, adulterated or counterfeit products that do not perform as intended could damage our reputation and brand and lead to a loss of customer sales as a result.

Unfavorable publicity or customer perception of our products and any similar products distributed by other companies could have a material adverse effect on our business.

We believe the nutritional supplement market is highly dependent upon customer perception regarding the safety, efficacy and quality of nutritional supplements generally, as well as of products distributed by us specifically. Customer perception of our products can be significantly influenced by scientific research or findings, regulatory investigations, litigation, national media attention and other publicity regarding the consumption of nutritional supplements. We cannot assure you that future scientific research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be favorable to the nutritional supplement market or any product, or consistent with earlier publicity. Future research reports, findings, regulatory proceedings, litigation, media attention or other publicity that are perceived as less favorable than, or that question, such earlier research reports, findings or publicity could diminish confidence in our products and services and could result in a material decrease in the demand for our products and consequently harm our business, results of operations, financial condition and cash flows.

Our dependence upon customer perceptions means that adverse scientific research reports, findings, regulatory proceedings, litigation, media attention or other publicity could have a material adverse effect on the demand for our products, the availability and pricing of our ingredients and our business, results of operations, financial condition and cash flows. Further, adverse public reports or other media attention regarding the safety, efficacy and quality of nutritional supplements in general, or our products specifically, or associating the consumption of nutritional supplements with illness, could have a material adverse effect on our business. Any such adverse public reports or other media attention could arise even if the adverse effects associated with such products resulted from consumers’ failure to use such products as directed and the content of such public reports and other media attention may be beyond our control.

We may fail to attract, acquire or retain health professionals and consumers as customers at our current or anticipated future growth rate, or may fail to do so in a cost-effective manner, which would adversely affect our business, financial condition and results of operations.

Our continued growth depends, in part, on our ability to attract, acquire and retain consumers and health professionals as customers in a cost-effective manner. Numerous factors, however, may impede our ability to attract, acquire or retain consumers and health professionals as customers, including our failure to attract, effectively train, retain and motivate sales and marketing personnel, our failure to educate customers and health professionals about the benefits of our products, our failure to develop or expand relationships with our distribution partners, our inability to convert initial adoption into ongoing recurring revenue and our failure to provide customer support once products are delivered.

Our DTC success depends, in part, on our existing customers continuing to purchase our products and purchase our subscription services. Our customers have no obligation to purchase our products or renew their subscriptions, and in the normal course of business, some customers may decide to purchase less or none of our products or may decide not to renew their product subscriptions. If we acquire fewer customers than expected, or fewer customers purchase our existing products, try our new products or renew their subscriptions, then our business, financial condition and results of operations would be adversely affected.

In addition, our ability to expand our relationship with our health professional customers depends in large part on our ability to provide new and innovative products and train these professionals on the utility of

 

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such products. We believe that our health professional customers place a premium on the efficacy of our products and may not continue to recommend our products to their patients if we do not continue to provide scientific evidence of efficacy for new products and services or if our products fail to achieve the intended patient results. If we are unable to successfully develop new products, educate and train our health professional customers on the benefits of our products and demonstrate a successful value proposition for these health professional customers, then our business, financial condition and results of operations would be adversely affected.

Our business depends on the effectiveness of our advertising and marketing programs, including the strength of our social media presence, to attract and retain customers.

Our business success depends on our ability to attract and retain customers. Our ability to attract and retain customers depends significantly on the effectiveness of our advertising and marketing practices. From time-to-time, we use the success stories of our customers, and utilize brand ambassadors, spokespersons and social media influencers, including in some cases celebrities, in our advertising and marketing programs to communicate on a personal level with consumers. Any actions taken by these individuals that harm their personal reputation or image, or their decision to stop using our products and services, could have an adverse impact on the advertising and marketing campaigns in which they are featured. We and our brand ambassadors, spokespersons and social media influencers also use social media channels as a means of communicating with customers. Unauthorized or inappropriate use of these channels could result in harmful publicity or negative consumer experiences, which could have an adverse impact on the effectiveness of our marketing in these channels. In addition, substantial negative commentary by others on social media platforms could have an adverse impact on our brand, reputation and ability to attract and retain customers. If our advertising and marketing campaigns do not generate a sufficient number of customers, our business, financial condition and results of operations will be adversely affected.

If we are unable to anticipate health professional and consumer preferences and successfully develop new and innovative products and services in a timely manner or effectively manage the introduction of new or enhanced products and services, then our business may be adversely affected.

Part of our success is our ability to innovate and introduce new products focused on our health professional and consumer demands. To maintain our success and increase our customer base, we must continue to develop products and services and anticipate and react to changing health professional and consumer demands in a timely manner. Our products and services are subject to changing consumer preferences that cannot be predicted with certainty. If we are unable to introduce new or enhanced products in a timely manner, or our new or enhanced products are not accepted by our customers, then our competitors may introduce competitive products faster than us, which could negatively affect our rate of growth. Moreover, our new products may not receive customer acceptance because preferences could shift rapidly to alternative nutritional supplements, and our future success depends in part on our ability to anticipate and respond to these changes. Failure to anticipate and respond in a timely manner to changing customer preferences could lead to, among other things, lower sales and subscriptions, pricing pressure, lower gross margins, and excess inventory. Even if we are successful in anticipating consumer preferences, our ability to adequately react to and address them will partially depend upon our continued ability to develop and introduce innovative, high-quality product and services offerings. Development of new or enhanced products and services may require significant time and financial investment, which could result in increased costs and a reduction in our profit margins.

If we are unable to sustain pricing levels for our products and services, our business could be adversely affected.

The prices for our nutritional supplement products reflect their high quality, safety and efficacy. If we are unable to sustain pricing levels for our products and services, whether due to competitive pressure or otherwise, then our gross profits could be reduced. Further, our decisions regarding the development of new products and services are based on assumptions about future pricing. If there is price compression in the market

 

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after these decisions are made, then it could lower our gross profits and have a negative effect on our results of operations.

We operate in a highly competitive market and we may be unable to compete successfully against existing and future competitors.

We face significant competition in the health and wellness market. Due to our comprehensive approach to health and wellness, we currently compete with different health and wellness companies in different markets, such as Nestle Health Science and Metagenics in the nutritional supplement market, Hims, 23andMe and Livongo in the health services and online testing market, and companies like Schrodinger and SEMA4 in the AI-driven healthcare market. We believe that the principal competitive factors in our market are product quality, consumer experience, brand awareness and loyalty, reliability and trust in the quality of our products and services.

Some of our current competitors are large publicly-traded companies, or are divisions of large publicly-traded companies, and may enjoy a number of competitive advantages over us, including:

 

   

greater name and brand recognition;

 

   

greater financial and human resources;

 

   

broader and deeper product lines and services;

 

   

larger sales forces and more established distributor networks;

 

   

substantial intellectual property portfolios;

 

   

larger and more established customer bases and relationships; and

 

   

better established, larger scale and lower cost manufacturing capabilities.

Our competitors may develop, or have already developed, products, features, services and technologies that are similar to ours or that achieve greater acceptance. They may undertake more successful product development efforts, create more compelling employment opportunities or marketing campaigns and may adopt more aggressive pricing policies. Our competitors may also develop or acquire, or have already developed or acquired, intellectual property rights that significantly limit or prevent our ability to compete effectively in the public marketplace. In addition, our competitors may have significantly greater resources than us, allowing them to identify and capitalize more efficiently upon opportunities in new markets and consumer preferences and trends, quickly transition and adapt their products and services, devote greater resources to marketing and advertising and be better positioned to withstand substantial price competition. We cannot assure investors that our products will compete favorably or that we will be successful in the face of increasing competition from products, services and technologies introduced by our existing or future competitors, or developed by our distributors or healthcare professionals. In addition, we cannot assure investors that our competitors do not have or will not develop products or services with better outcomes or at lower costs than ours. Any failure to compete effectively could materially and adversely affect our business, financial condition and operating results.

We have grown rapidly in recent years and have limited operating experience at our current scale of operations. If we are unable to manage our growth effectively, our brand, company culture and financial performance may suffer.

We have expanded our operations rapidly and have limited operating experience at our current size. We have never had an investor relations function and we expect we will need to hire new personnel or train existing personnel to support that function or outsource those activities. We also expect to hire additional personnel to support our finance, legal and compliance department as we adapt to operating as a public company.

 

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As we grow, our business will become increasingly complex. To effectively manage and capitalize on our growth, we must also continue to expand our sales and marketing capabilities, focus on innovative products and services, upgrade our information management systems and other processes and expand our facilities. Our continued growth could strain our existing resources, and we could experience ongoing operating difficulties in managing our business across numerous geographies, including difficulties in hiring, training and managing a decentralized and growing employee base. Failure to scale and preserve our company culture during this high-growth period could harm our future success, including our ability to retain and recruit personnel and to effectively focus on and pursue our corporate objectives. Moreover, the vertically integrated nature of our business, where we design and manufacture most of our products, develop our own software services and sell our products through our own sales teams and e-commerce sites, exposes us to risk and disruption at many points that are critical to successfully operating our business and may make it more difficult for us to scale our business. If we do not adapt to meet these evolving challenges, or if our management team does not effectively scale with our growth, we may experience erosion to our brand, the quality of our products and services may suffer, and our company culture may be harmed.

Our growth strategy anticipates a significant increase in our advertising and other marketing costs. Successful implementation of our growth strategy will require significant expenditures and we cannot guarantee that these increased investments will result in corresponding and offsetting revenue growth. Because we have a limited history operating our business at its current scale, it is difficult for us to evaluate our current business and future prospects, including our ability to plan for and model future growth. Our limited operating experience at this scale, combined with the rapidly evolving nature of the health and wellness market in which we sell our products and services, substantial uncertainty concerning how these markets may develop, and other economic factors beyond our control, reduces our ability to accurately forecast quarterly or annual revenue. Failure to manage our future growth effectively could have an adverse effect on our business, financial condition and operating results.

We may choose to raise additional funding in order to develop future products, acquire other companies or technologies or expand into other geographies.

We expect that the net proceeds from this offering, together with our existing cash as of the date of this prospectus, will be sufficient to fund our operating expenses and capital expenditures for at least the next 12 months. Our future capital requirements will depend on and could increase significantly as a result of many factors, including:

 

   

the number and type of products we develop and commercialize;

 

   

the cost of intellectual property proceedings and any intellectual property litigation involving us;

 

   

the success of any collaborations and joint ventures that we enter into with third parties and the ability to maintain them thereafter;

 

   

the extent to which we acquire or invest in businesses, products and technologies;

 

   

the rate at which we expand internationally and offer our products in additional geographies;

 

   

our headcount growth and associated costs as we expand our business operations and our research and development and manufacturing activities;

 

   

the impact of any business interruptions to our operations or to operations of our manufacturers, suppliers or other vendors resulting from the COVID-19 pandemic or a similar public health crisis or other force majeure event; and

 

   

the costs of operating as a public company.

 

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We may need to access additional financing to achieve our business objectives and additional financing may or may not be available to us at the time we need it. The inability to raise additional capital when needed would have a material and adverse effect on our business, financial condition and results of operations.

Any additional fundraising efforts may divert our management from day-to-day activities, which may adversely affect our ability to develop and commercialize our products and services, and we can provide no assurance that such funding will be available on terms that are acceptable to us, or at all.

If we need additional financing in the future, we cannot guarantee that it will be available in sufficient amounts or on terms acceptable to us, if at all. Moreover, the terms of any financing may adversely affect the holdings or the rights of our stockholders and the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our common stock to decline. To the extent that we raise additional capital through the sale of common stock or securities convertible or exchangeable into common stock, your ownership interest will be diluted, and the terms of those securities may include liquidation or other preferences that materially adversely affect your rights as a common stockholder. The incurrence of indebtedness would result in increased fixed payment obligations and we may be required to agree to certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to make capital expenditures, declare dividends or otherwise conduct our business. If we are unable to obtain any funding we need on a timely basis, we may be required to significantly curtail, delay or discontinue research or development of new products or our digital platform and the commercialization of our products or expansion into new geographies, any of which could materially affect our business, financial condition, and results of operations.

Unfavorable U.S. or global economic conditions as a result of the COVID-19 pandemic, or otherwise, could adversely affect our ability to raise capital and our business, results of operations and financial condition.

While the potential economic impact brought by, and the duration of, the COVID-19 pandemic is difficult to assess or predict, the COVID-19 pandemic has resulted in, and may continue to result in, extreme volatility and disruptions in the capital and credit markets, reducing our ability to raise additional capital through equity, equity-linked or debt financings, which could negatively impact our short-term and long-term liquidity and our ability to operate in accordance with our operating plan, or at all. Additionally, our results of operations could be adversely affected by general conditions in the global economy and financial markets. A severe or prolonged economic downturn could result in a variety of risks to our business, including weakened demand for our products and services our ability to raise additional capital when needed on favorable terms, if at all. A weak or declining economy could strain our customers’ budgets or cause delays in their payments to us. Any of the foregoing could harm our business, and we cannot anticipate all of the ways in which the current economic climate and financial market conditions could adversely impact our ability to raise capital, business, results of operations and financial condition.

An economic downturn or economic uncertainty may adversely affect customer discretionary spending and demand for our products and services.

Some customers may consider our products and services to be discretionary. Factors affecting the level of consumer spending for such discretionary items include current economic conditions, customer confidence in future economic conditions, fears of recession, the availability and cost of customer credit, levels of unemployment and tax rates. In recent years, the United States and other significant economic markets have experienced cyclical downturns and worldwide economic conditions remain uncertain. As global economic conditions continue to be volatile or economic uncertainty remains, trends in customer discretionary spending also remain unpredictable and subject to reductions. To date, our business has operated almost exclusively in a relatively strong economic environment or in the COVID-19 pandemic where healthcare is a priority and, therefore, we cannot be sure the extent to which we may be affected by recessionary conditions without a

 

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pandemic. Unfavorable economic conditions may lead customers to delay or reduce purchases of our products and services and customer demand for our products and services may not grow as we expect. Sensitivity to economic cycles and any related fluctuation in customer demand for our products and services could have an adverse effect on our business, financial condition and operating results.

Our nutrition-oriented educational activities may be impacted by government regulation or our inability to secure adequate professional liability insurance.

We provide nutrition-oriented education and supplement plans to our customers, and these activities may be subject to state and federal regulation and oversight by professional organizations. In the past, the FDA has expressed concerns regarding summarized health and nutrition-related information that (i) does not, in the FDA’s view, accurately present such information, (ii) diverts a consumer’s attention and focus from FDA-required nutrition labeling and information or (iii) impermissibly promotes drug-type disease-related benefits. If our employees, consultants or the other third parties we engage to provide this information do not act in accordance with regulatory requirements, we may become subject to penalties that could have a material adverse effect on our business. We believe we are currently in compliance with relevant regulatory requirements, and we maintain professional liability insurance in order to mitigate risks associated with this nutrition-oriented education. However, we cannot predict the nature of future government regulation and oversight, including the potential impact of any such regulation on this activity. Furthermore, the availability of professional liability insurance or the scope of such coverage may change, or our insurance coverage may prove inadequate, which may adversely impact the ability of our customer educators to provide some information to our customers. The occurrence of any such developments could negatively impact the perception of our brand, our sales and our ability to attract new customers.

We may initiate product recalls or withdrawals, may be subject to regulatory enforcement actions or incur material product liability claims, any of which could increase our costs and adversely affect our reputation and our results of operations.

As a manufacturer, marketer and retailer of products designed for human consumption, we may initiate product recalls or withdrawals, or may be subject to seizures and adverse public relations if our products are contaminated, adulterated, mislabeled, misbranded or fail to achieve expected stability or shelf life, are alleged to cause injury or illness, or if we are alleged to have violated governmental regulations in the manufacture, labeling, promotion, sale or distribution of any of our products, whether caused by us or someone in our manufacturing or supply chain. Our products primarily consist primarily of nutritional supplements and, in most cases, are not necessarily subject to pre-market regulatory review or approval in the United States. The raw materials used to make certain of our products may be vulnerable to spoilage and contamination by naturally occurring molds and pathogens. Additionally, some of our products contain ingredients that do not have long histories of human consumption. Previously unknown adverse reactions resulting from human consumption of these ingredients could occur. Some of the products we sell are produced by third-party manufacturers.

A product recall, withdrawal or seizure could result in destruction of product inventory and inventory write-off, negative publicity, temporary facility closings for us or our contract manufacturers, supply chain interruption, fines and substantial and unexpected expenditures, any of which would reduce operating profit and cash flow. In addition, a product recall, withdrawal or seizure may require significant management attention. Product recalls may materially and adversely affect consumer confidence in our brands, hurt the value of our brands and lead to decreased demand for our products. Product recalls, withdrawals or seizures also may lead to increased scrutiny by federal, state or international regulatory agencies of our operations and increased litigation and could have a material adverse effect on our business, results of operations, financial condition and cash flows.

We have been in the past, and may be in the future, be subject to various product liability claims, including, among others, that our products include inadequate instructions for use or inadequate warnings

 

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concerning possible side effects and interactions with other substances. Any such product liability claims may also include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a breach of warranties. Claims could also be asserted under state consumer protection laws. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our existing products. As a marketer of products manufactured by third parties, we also may be liable for various product liability claims for products we do not manufacture. Even successful defense would require significant financial and management resources.

Regardless of the merits or eventual outcome, liability claims may result in any of the following:

 

   

decreased demand for our products or products that we may develop in the future;

 

   

decline in price charged for our products;

 

   

loss of revenue;

 

   

injury to our reputation;

 

   

initiation of investigations by regulators;

 

   

costs to defend the related litigation;

 

   

a diversion of management’s time and our resources;

 

   

substantial monetary awards to trial participants;

 

   

product recalls or withdrawals;

 

   

labeling, packaging, marketing or promotional modifications or restrictions;

 

   

exhaustion of any available insurance and our capital resources;

 

   

the inability to commercialize our existing or future products; and

 

   

a decline in our stock price.

The cost of any product liability litigation or other proceeding, even if resolved in our favor, could be substantial. In addition, our inability to obtain or maintain sufficient insurance coverage at an acceptable cost or to otherwise protect against potential product liability claims could prevent or inhibit the development and commercial production and sale of our products, which could adversely affect our business, financial condition, results of operations, and prospects. Insurance policies may also have various exclusions, and we may be subject to a product liability claim for which we have no or inadequate coverage. We may have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts. Even if our agreements with any future corporate collaborators entitle us to indemnification against losses, such indemnification may not be available or adequate should any claim arise.

If our products do not have the effects intended or cause undesirable side effects, our business may suffer.

Although many of the ingredients in our current dietary supplement products are vitamins, minerals and other substances for which there is a long history of human consumption, they also contain innovative ingredients or combinations of ingredients. Although we believe all of such products and the combinations of

 

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ingredients in them are safe when taken as directed, the products could have certain undesirable side effects if not taken as directed or if taken by a consumer that has certain medical conditions. In addition, such products may not have the effect intended if they are not taken in accordance with certain instructions, which include certain dietary restrictions. Furthermore, there can be no assurance that any of the products, even when used as directed, will have the effects intended or will not have harmful side effects in an unforeseen way or affect populations differently. If any of our products or products we develop or commercialize in the future are shown to be harmful or generate negative publicity from perceived harmful effects, our business, financial condition, results of operations and prospects would be harmed significantly.

Increases in ingredient costs, long lead times, supply shortages and supply changes could disrupt our supply chain and have an adverse effect on our business, financial condition and operating results.

Meeting customer demand partially depends on our ability to obtain timely and adequate delivery of ingredients for our nutritional supplement products. Certain ingredients that get incorporated into our nutritional supplement products are sourced from a limited number of third-party suppliers, and some of these ingredients are provided by a single supplier. These suppliers may breach or otherwise terminate our supply agreements, or their capabilities to deliver adequate ingredients to us may be affected by other factors such as fluctuations in the market, litigation or regulatory issues or force majeure events, and in any of the cases, the sourcing and commercialization of our products can be adversely affected. For example, there is considerable patent and other intellectual property development activity in the personalized health and wellness products industry, and litigation, based on allegations of infringement or other violations of intellectual property, is frequent in this industry. If our suppliers are sued, their capabilities to deliver adequate ingredients to us may be adversely affected. We are therefore subject to the risk of shortages and long lead times in the supply of these ingredients and the risk that our suppliers discontinue or modify ingredients. In addition, the lead times associated with certain ingredients are lengthy and preclude rapid changes in quantities and delivery schedules. We have experienced supply shortages and resulting longer lead-times in the past and may in the future experience ingredient shortages, and the predictability of the availability of these ingredients may be limited. In the event of an ingredient shortage or a supply interruption from suppliers of these ingredients, we may not be able to develop alternate sources of supply in a timely manner. Developing alternate sources of supply for these ingredients may be time-consuming, difficult and costly and we may not be able to source these ingredients on terms that are acceptable to us, or at all, which may undermine our ability to fill our orders in a timely manner. Any interruption or delay in the supply of any of these ingredients, or the inability to obtain these ingredients from alternate sources at acceptable prices and within a reasonable amount of time, would harm our ability to meet our scheduled product deliveries to our customers. In addition, increases in our ingredient costs could have a material effect on our gross margins. The loss of a significant supplier, an increase in ingredient costs, or delays or disruptions in the delivery of ingredients, could adversely impact our ability to generate future revenue and earnings and have an adverse effect on our business, financial condition and operating results.

Our operating results could be adversely affected if we are unable to accurately forecast customer demand for our products and services and adequately manage our inventory.

To ensure adequate inventory supply, we must forecast inventory needs and expenses and place orders sufficiently in advance with our suppliers, based on our estimates of future demand for particular products and services. Failure to accurately forecast our needs may result in manufacturing delays or increased costs. Our ability to accurately forecast demand could be affected by many factors, including changes in customer demand for our products and services, changes in demand for the products and services of our competitors, widespread acceptance of personalized health recommendations and nutritional supplements, unanticipated changes in general market conditions and the weakening of economic conditions or consumer confidence in future economic conditions. This risk may be exacerbated by the fact that we may not carry a significant amount of inventory and may not be able to satisfy short-term demand increases. If we fail to accurately forecast customer demand, we may experience excess inventory levels or a shortage of products available for sale. Inventory levels in excess of customer demand may result in inventory write-downs or write-offs and the sale of excess inventory at

 

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discounted prices, which would cause our gross margins to suffer and could impair the strength and our brand. Further, lower than forecasted demand could also result in excess manufacturing capacity or reduced manufacturing efficiencies, which could result in lower margins. Conversely, if we underestimate customer demand, our suppliers and manufacturers may not be able to deliver products to meet our requirements or we may be subject to higher costs in order to secure the necessary production capacity. An inability to meet customer demand and delays in the delivery of our products to our customers could result in reputational harm and damaged customer relationships and have an adverse effect on our business, financial condition and operating results.

We acquire ingredients for our products from foreign suppliers and may be negatively affected by the risks associated with international trade and importation issues.

We acquire ingredients for a number of our products from suppliers outside of the United States. Accordingly, the acquisition of these ingredients is subject to the risks generally associated with importing raw materials, including, among other factors, delays in shipments, changes in economic and political conditions, quality assurance, health pandemics affecting the region of such suppliers, including COVID-19, nonconformity to specifications or laws and regulations, tariffs, trade disputes and foreign currency fluctuations. While we audit and inspect our suppliers’ and manufacturers’ facilities as necessary both in the United States and internationally, we cannot assure you that raw materials received from suppliers or finished products from manufacturers outside of the United States will conform to all specifications, laws and regulations or our internal standards. There have in the past been quality and safety issues in our industry with certain items imported from overseas. We may incur additional expenses and experience shipment delays due to preventative measures adopted by the U.S. governments, our suppliers and our company.

Our success will depend on our ability to use the data our Onegevity platform collects and the ability of our proprietary algorithm and network of medical doctors to interpret test results accurately and consistently, and our failure to do so would have an adverse effect on our operating results and business, harm our reputation and could result in substantial liabilities that exceed our resources.

Our success depends on our ability to provide reliable, high-quality tests that incorporate rapidly evolving information about the role of various risk factors in disease and aging. Errors, including if our tests fail to perform with high accuracy, or mistakes in the interpretation of those results, could have a significant adverse impact on our business. A substantial amount of judgment is required in order to interpret testing results for an individual patient and to develop appropriate, customized customer recommendations. We also rely on medical doctors to interpret the data that we collect and to incorporate specific information about an individual customer into their profile.

We do not provide recommendations regarding disease. The marketing, sale and use of our Onegevity platform testing service could subject us to liability for errors in, misunderstandings of, or inappropriate reliance on information we provide, and could lead to claims against us if someone were to allege that our tests failed to perform as it was designed or if our medical doctors failed to correctly interpret the data. A product liability or professional liability claim could result in substantial damages and be costly and time-consuming for us to defend. Although we maintain liability insurance, including for errors and omissions, we cannot assure you that our insurance would fully protect us from the financial impact of defending against these types of claims or any judgments, fines or settlement costs arising out of any such claims. Any liability claim, including an errors and omissions liability claim, brought against us, with or without merit, could increase our insurance rates or prevent us from securing insurance coverage in the future. Additionally, any liability lawsuit could cause injury to our reputation or cause us to suspend the use of the Onegevity platform or sales of our products and tests. The occurrence of any of these events could have an adverse effect on our business, reputation and results of operations.

 

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We depend on key personnel, the loss of any of which could negatively affect our business.

We depend greatly on our executive team, including Paul F. Jacobson, our Chief Executive Officer, Will C. McCamy, our President, Tom P. McKenna, our Chief Operating Officer, Michelle L. Crow, our Chief Marketing Officer, Stephen M. Phipps, our Chief Innovation Officer, Bodi Zhang, our Chief Science Officer for Onegevity, Nathan D. Price, Chief Executive Officer for Onegevity, Scott R. Hurth, our Chief Technology Officer and Daniel McEvoy, our President of Onegevity. We rely heavily on the continued service and performance of our senior management team, which provides leadership, contributes to the core areas of our business and helps us to efficiently execute our business. We also depend greatly on other key employees, including key scientific personnel and health professionals. In general, only highly qualified and trained scientists and health professionals have the necessary skills to develop and market our products and provide our services. In addition, some of our manufacturing, quality control, safety and compliance, information technology, sales and e-commerce related positions are highly technical as well. Also imperative to our success are our influencers, who we rely on to market our products and services, and who act as brand ambassadors. If the senior management team, including any new hires that we make, fails to work together effectively and to execute our plans and strategies on a timely basis, then our business and future growth prospects could be harmed.

Additionally, the loss of any key personnel could make it more difficult to manage our operations and research and development activities, reduce our employee retention and revenue, and impair our ability to compete. Although we have entered into employment offer letters with our key personnel, these agreements have no specific duration and constitute at-will employment. We do not maintain key person life insurance policies on any of our employees. The loss of services of our senior management team or key employees that may be hired in the future may have a material and adverse effect on our business.

Our future success depends on our ability to attract and retain highly skilled personnel and senior management.

Our future success depends, in part, on our ability to continue to identify, attract, develop, integrate and retain qualified and highly skilled personnel, including senior management, engineers, scientists, product managers, logistics and supply chain and quality control personnel. Competition for highly skilled personnel is often intense. We may not be successful in attracting, integrating or retaining qualified personnel to fulfill our current or future needs. We have from time to time experienced, and we expect to continue to experience, difficulty in hiring highly skilled employees with appropriate qualifications. In addition, job candidates and existing employees often consider the value of the equity awards they receive in connection with their employment. If the perceived value of our common stock declines, it may adversely affect our ability to hire or retain highly skilled employees. In addition, we may periodically change our equity compensation practices, which may include reducing the number of employees eligible for equity awards or reducing the size of equity awards granted per employee. If we are unable to attract, integrate, or retain the qualified and highly skilled personnel required to fulfill our current or future needs, our business and future growth prospects could be harmed.

We face intense competition for these professionals from our competitors, customers, marketing partners and other companies throughout the industries in which we compete. Our success will depend, in part, upon our ability to attract and retain additional skilled personnel, which may require substantial additional funds. There can be no assurance that we will be able to find and attract additional qualified employees or retain any such personnel. Our inability to hire qualified personnel may have a material and adverse effect on our business.

Our passion and focus on delivering a high-quality consumer experience may not maximize short-term financial results, which may yield results that conflict with the market’s expectations and could result in our stock price being negatively affected.

We are committed to our focus on producing high-quality products and engaging our customers through personalized recommendations and investment in our platform, which may not necessarily maximize short-term

 

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financial results. We frequently make business decisions that may reduce our short-term financial results, such as sourcing higher quality ingredients and investing substantially in product research and development, if we believe that the decisions are consistent with our goals. We believe this will improve our financial results over the long term as we deliver actionable recommendations and quality products to our customers. These decisions may not be consistent with managing costs and the short-term expectations of our stockholders and may not produce the long-term benefits that we expect, in which case our growth and consumer engagement, and our business, financial condition and operating results could be harmed.

We plan to expand into international markets, which will expose us to significant risks.

We are currently expanding our operations to other countries, which requires significant resources and management attention and subjects us to regulatory, economic, and political risks in addition to those we already face in our primary markets of the United States, Canada, the United Kingdom, Australia, China, and the European Union. There are significant risks and costs inherent in doing business in international markets, including:

 

   

difficulty establishing and managing international operations and the increased operations, travel, infrastructure, including establishment of local delivery service and customer service operations and legal compliance costs associated with locations in different countries or regions;

 

   

the need to vary pricing and margins to effectively compete in international markets;

 

   

the need to adapt and localize products for specific countries, including obtaining rights to third-party intellectual property used in each country;

 

   

increased competition from local providers of similar products and services;

 

   

the ability to protect and enforce intellectual property rights abroad;

 

   

the need to offer customer support in various languages;

 

   

the challenges of negotiating with foreign distributors;

 

   

difficulties in understanding and complying with local laws, regulations and customs in other jurisdictions;

 

   

compliance with anti-bribery laws, such as the U.S. Foreign Corrupt Practices Act (FCPA), and the U.K. Bribery Act 2010 (U.K. Bribery Act), by us, our employees and our business partners;

 

   

complexity and other risks associated with current and future legal requirements in other countries, including legal requirements related to consumer protection, consumer product safety and data privacy and data protection frameworks, such as the E.U. General Data Protection Regulation (GDPR);

 

   

tariffs and other non-tariff barriers, such as quotas and local content rules, as well as tax consequences;

 

   

fluctuations in currency exchange rates and the requirements of currency control regulations, which might restrict or prohibit conversion of other currencies into U.S. dollars; and

 

   

political or social unrest or economic instability in a specific country or region in which we operate, including, for example, the effects of “Brexit,” which could have an adverse impact on our operations in the United Kingdom and E.U.

 

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We have limited experience with international regulatory environments and market practices and may not be able to penetrate or successfully operate in the markets we choose to enter. In addition, we may incur significant expenses as a result of our international expansion, and we may not be successful. We may face limited brand recognition in certain parts of the world that could lead to non-acceptance or delayed acceptance of our products and services by customers in new markets. We may also face challenges to acceptance of our health and wellness content in new markets. Our failure to successfully manage these risks could harm our international operations and have an adverse effect on our business, financial condition and operating results.

A substantial portion of our sales are through distributors and health professionals, and we do not have direct control over the efforts these distributors and health professionals may use to sell our products. If our relationships with these third-party distributors or health professionals deteriorate, or if these third-party distributors or health professionals fail to sell our products or engage in activities that harm our reputation, or fail to adhere to applicable regulations, our financial results may be adversely affected.

Our sales model depends on our ability to sell our products through health professionals and through distributors. Our network of health professionals typically receive a discount from list price or rebate on the products their patients purchase from us. We can provide no assurance that these health professionals will continue to recommend our products at their current levels, or at all. Additionally, we may be unable to continue to grow our network of health professionals and therefore may not continue to achieve revenue growth through this channel.

In the United States, we have select strategic distributors in addition to our DTC and health professional channels. We also rely on a third-party reseller to manage our sales and fulfillment through the Amazon platform for operational convenience. The loss of these third-party providers in the United States may result in delayed revenue as we seek alternative providers or transition those activities to a direct model.

A significant portion of our international sales are through distributors. We believe that our reliance on distributors internationally improves the economics of our business, as we do not carry the high fixed costs of a direct sales force in any of the countries in which our products are sold, with the exception of Canada. It is part of our strategy to partner with local distributors in foreign countries, such as Australia, New Zealand, United Kingdom, among others, to resell our products as those distributors are most familiar with the local market and regulations.

If we are unable to maintain or enter into such distribution arrangements on acceptable terms, or at all, we may not be able to successfully commercialize our products in certain countries. Furthermore, distributors can choose the level of effort that they apply to selling our products relative to others in their portfolio. The selection, training and compensation of employees of our distributors are within their control rather than our own and may vary significantly in quality from distributor to distributor.

In addition, although our contract terms require our distributors to comply with all applicable laws regarding the sale of our products, including anti-competition, anti-money laundering, sanctions laws and FDA regulations, we may not be able to ensure proper compliance. If our distributors fail to effectively market and sell our products to our expectations or in full compliance with applicable laws, our results of operations and business may suffer.

Our business depends on network and mobile infrastructure and our ability to maintain and scale our technology. Any significant interruptions or delays in service on our apps or websites or any undetected errors or design faults, including flaws in security design, could result in limited capacity, reduced demand, processing delays and loss of customers.

A key element of our strategy is to generate a significant number of visitors to, and increase their use of, our apps and websites. Our reputation and ability to acquire, retain and serve our customer are dependent upon

 

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the reliable performance of our apps and websites and the underlying network infrastructure. As our base of customer and the amount of information shared on our apps and websites continue to grow, we will need an increasing amount of network capacity and computing power. We have spent and expect to continue to spend substantial amounts on computing, including cloud computing and the related infrastructure, to handle the traffic on our apps and websites. The operation of these systems is complex and could result in operational failures. In the event that the traffic of our consumers exceeds the capacity of our current network infrastructure or in the event that our base of consumers or the amount of traffic on our apps and websites grows more quickly than anticipated, we may be required to incur significant additional costs to enhance the underlying network infrastructure. Interruptions or delays in these systems, whether due to system failures, computer viruses, physical or electronic break-ins, undetected errors, design faults or other unexpected events or causes, could affect the security or availability of our apps and websites and prevent our consumers from accessing our apps and websites. If sustained or repeated, these performance issues could reduce the attractiveness of our product and service offerings. In addition, the costs and complexities involved in expanding and upgrading our systems may prevent us from doing so in a timely manner and may prevent us from adequately meeting the demand placed on our systems. Any internet or mobile platform interruption or inadequacy that causes performance issues or interruptions in the availability of our apps or websites could reduce customer satisfaction and result in a reduction in the number of customers using our offerings.

We depend on the development and maintenance of the internet and mobile infrastructure. This includes maintenance of reliable internet and mobile infrastructure with the necessary speed, data capacity and security, as well as timely development of complementary offerings, for providing reliable internet and mobile access. Our business, financial condition and results of operations could be materially and adversely affected if for any reason the reliability of our internet and mobile infrastructure is compromised.

We currently rely upon third-party data storage providers, including cloud storage solution providers, such as Amazon Web Services. Nearly all of our data storage and analytics are conducted on, and the data and content we create associated with sales on our apps and websites are processed through, servers hosted by these providers, particularly Amazon Web Services. We also rely on email service providers, bandwidth providers, internet service providers and mobile networks to deliver email and “push” communications to consumers and to allow consumers to access our websites. If our third-party vendors are unable or unwilling to provide the services necessary to support our business, or if our agreements with such vendors are terminated, our operations could be significantly disrupted. Some of our vendor agreements may be unilaterally terminated by the licensor for convenience, including our agreement with Amazon Web Services, and if such agreements are terminated, we may not be able to enter into similar relationships in the future on reasonable terms or at all.

Any damage to, or failure of, our systems or the systems of our third-party data centers or our other third-party providers could result in interruptions to the availability or functionality of our apps and websites. As a result, we could lose consumer data and miss opportunities to acquire and retain consumers, which could result in decreased revenue. If for any reason our arrangements with our data centers or third-party providers are terminated or interrupted, such termination or interruption could adversely affect our business, financial condition and results of operations. We exercise little control over these providers, which increases our vulnerability to problems with the services they provide. We could experience additional expense in arranging for new facilities, technology, services and support. In addition, the failure of our third-party data centers or any other third-party providers to meet our capacity requirements could result in interruption in the availability or functionality of our apps and websites.

The satisfactory performance, reliability and availability of our apps, websites, transaction processing systems and technology infrastructure are critical to our reputation and our ability to acquire and retain customers, as well as to maintain adequate customer service levels. If the interface on our app is not considered user friendly by our customers or our app does not function correctly our customers may become frustrated and not order our products. Our revenue depends in part on the number of customers that visit and use our apps and websites in fulfilling their health and wellness needs. Unavailability of our apps or websites could materially and adversely affect consumer perception of our brand.

 

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The occurrence of a natural disaster, power loss, telecommunications failure, data loss, computer virus, an act of terrorism, cyberattack, vandalism or sabotage, act of war or any similar event, or a decision to close our third-party data centers on which we normally operate or the facilities of any other third-party provider without adequate notice or other unanticipated problems at these facilities could result in lengthy interruptions in the availability of our apps and websites. Cloud computing, in particular, is dependent upon having access to an internet connection in order to retrieve data. If a natural disaster, blackout or other unforeseen event were to occur that disrupted the ability to obtain an internet connection, we may experience a slowdown or delay in our operations. While we have disaster recovery arrangements in place, our preparations may not be adequate to account for disasters or similar events that may occur in the future and may not effectively permit us to continue operating in the event of any problems with respect to our systems or those of our third-party data centers or any other third-party facilities. Our disaster recovery and data redundancy plans may be inadequate, and our business interruption insurance may not be sufficient to compensate us for the losses that could occur. If any such event were to occur to our business, our operations could be impaired and our business, financial condition and results of operations may be materially and adversely affected.

Covenants in the loan documents governing our revolving credit facility and our letter of credit facility may restrict our operations, and if we do not effectively manage our business to comply with these covenants, our financial condition could be adversely impacted.

We entered into an uncommitted and revolving credit line agreement (Credit Agreement), with Sumitomo Mitsui Banking Corporation (SMBC) on February 12, 2021, providing for an unsecured revolving credit facility of $20 million. The revolving credit facility is guaranteed by each of Kirin Holdings Company, Limited and Mitsui & Co., Ltd., each a holder of 5% or more of our common stock, for which we pay each guarantor an annual fee equal to $120,000. We are also party to a Reimbursement Agreement with Sumitomo Mitsui Banking Corporation (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. Kirin and Mitsui guarantee our obligations under the LC Reimbursement Agreement in exchange for fees that are more fully described in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Letter of Credit Reimbursement Agreement”. The Credit Agreement and the LC Reimbursement Agreement contain various restrictive covenants, including, among other things, restrictions on our ability to merge or consolidate with any other entity, dispose of all or substantially all of our assets, dissolve or liquidate and incur liens. These restrictions may restrict our current and future operations, particularly our ability to respond to certain changes in our business or industry or take future actions.

Our ability to meet these restrictive covenants can be impacted by events beyond our control and we may be unable to do so. Our Credit Agreement and LC Reimbursement Agreement provide that our breach or failure to satisfy certain covenants constitutes an event of default. Upon the occurrence of an event of default, our lenders could elect to declare all amounts outstanding under our Credit Agreement and LC Reimbursement Agreement, as applicable, to be immediately due and payable. If the outstanding debt under our Credit Agreement or LC Reimbursement Agreement was to be accelerated, we may not have sufficient cash on hand to repay it, which would have an immediate adverse effect on our business and operating results. This could potentially cause us to cease operations and result in a complete loss of your investment in our common stock.

We are subject to payment processing risk.

Our customers pay for our products and services using a variety of different payment methods, including credit and debit cards, gift cards and online wallets. We rely on internal systems as well as those of third parties to process payment. Acceptance and processing of these payment methods are subject to certain rules and regulations and require payment of interchange and other fees. To the extent there are disruptions in our payment processing systems, increases in payment processing fees, material changes in the payment ecosystem, such as large re-issuances of payment cards, delays in receiving payments from payment processors, or changes

 

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to rules or regulations concerning payment processing, our revenue, operating expenses and results of operation could be adversely impacted. Compliance with the Payment Card Industry Data Security Standard and implementing related procedures, technology and information security measures requires significant resources and ongoing attention, and any security incident involving cardholder data could subject us to significant penalties and liability. We leverage our third party payment processors to bill customers on our behalf. If these third parties become unwilling or unable to continue processing payments on our behalf, we would have to find alternative methods of collecting payments, which could adversely impact customer acquisition and retention. In addition, from time to time, we encounter fraudulent use of payment methods, which could impact our results of operations and if not adequately controlled and managed could create negative customer perceptions of our service.

Our ability to use our net operating loss to offset future taxable income may be subject to certain limitations.

As of December 31, 2020, we had U.S. federal net operating loss carryforwards (NOLs) and state NOLs of approximately $50.1 million and $51.3 million, respectively, due to prior period losses that if not utilized will begin to expire for federal and state purposes beginning in 2035. Realization of these NOLs depends on future income, and there is a risk that our existing NOLs could expire unused and be unavailable to offset future income tax liabilities, which could adversely affect our operating results.

In general, under Section 382 of the Internal Revenue Code of 1986, as amended (Code), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs to offset future taxable income. We may have undergone an ownership change in connection with our 2018 series E convertible stock financing. In addition, this offering, as well as future changes in our stock ownership, the causes of which may be outside of our control, could result in an additional ownership change under Section 382 of the Code. If we underwent an ownership change in 2018 or if we undergo an ownership change in connection with or after this offering, our NOLs arising before such an ownership change may be subject to one or more Section 382 limitations that materially limit the use of such NOLs to offset our taxable income. While we have not undertaken a Section 382 study to determine whether we have undergone any ownership changes in the past, we expect to complete one following this offering. Our ability to utilize NOLs of companies that we have acquired or may acquire in the future may also be subject to limitations. Further, our NOLs may be impaired under state laws. In addition, under the 2017 Tax Cuts and Jobs Act (Tax Act), as modified by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), NOLs arising in taxable years beginning after December 31, 2020 may not be carried back, and NOLs generated in taxable years beginning after December 31, 2017 may be carried forward indefinitely, but the deductibility of such NOLs generally will be limited in taxable years beginning after December 31, 2020 to 80% of the current year taxable income. This change may require us to pay federal income taxes in future years even if our NOLs were otherwise sufficient to offset our federal taxable income in such years. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities. For these reasons, we may not be able to realize, in whole or in part, a tax benefit from the use of our NOLs, whether or not we attain profitability.

We may engage in merger and acquisition activities, which could require significant management attention, disrupt our business, dilute stockholder value and adversely affect our operating results.

As part of our business strategy, we may periodically acquire or make investments in companies that we believe will enhance our products, services or technology in the future. We may not be able to find suitable acquisition candidates and we may not be able to complete acquisitions on favorable terms, if at all, in the future. If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, and any acquisitions we complete could be viewed negatively by customers or investors. An acquisition, investment or business relationship may result in unforeseen operating difficulties and expenditures, including disrupting our ongoing operations, diverting management from their primary responsibilities, subjecting us to additional liabilities, increasing our expenses and adversely impacting our business, financial condition and

 

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operating results. In addition, we may be exposed to unknown liabilities and the anticipated benefits of any acquisition, investment or business relationship may not be realized, if, for example, we fail to successfully integrate such acquisitions, or the technologies associated with such acquisitions, into our company.

To pay for any such acquisitions, we would have to use cash, incur debt, or issue equity securities, each of which may affect our financial condition or the value of our capital stock and could result in dilution to our stockholders. If we incur more debt it would result in increased fixed obligations and could also subject us to covenants or other restrictions that would impede our ability to manage our operations.

Additionally, we may receive indications of interest from other parties interested in acquiring some or all of our business. The time required to evaluate such indications of interest could require significant attention from management, disrupt the ordinary functioning of our business, and could have an adverse effect on our business, financial condition, and operating results.

We have identified material weaknesses in our internal control over financial reporting. If our remediation measures are ineffective, or if we experience additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls in the future, we may not be able to report our financial condition or results of operations accurately or on a timely basis, which may adversely affect investor confidence in us and, as a result, the value of our common stock.

To date, we have never conducted a review of our internal control for the purpose of providing the reports required by the Sarbanes-Oxley Act. During our review and testing, we may identify deficiencies and be unable to remediate them before we must provide the required reports. In connection with the audit of our financial statements for the year ended December 31, 2020, we identified material weaknesses in our internal control over financial reporting related to an insufficient complement of personnel possessing the appropriate accounting and financial reporting knowledge and experience and we did not maintain effective controls relating to revenue recognition, accounting for significant and unusual transactions and our financial statement close process, which have not been remediated.

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 financial statements will not be prevented or detected on a timely basis.

We have begun to take certain actions to address the control deficiencies in our financial reporting, including by hiring additional qualified accounting and financial reporting personnel, and the development and implementation of processes and controls. We have also begun to review and document our accounting and financial processes and internal controls, build out our financial management and reporting systems infrastructure, and further develop and formalize our accounting policies and financial reporting procedures, which includes ongoing senior management review and establishing our audit committee oversight. While we have begun taking measures and plan to continue to take measures to design and implement an effective control environment, we cannot assure you that the measures we have taken to date and other remediation and internal control measures we implement in the future will be sufficient to remediate our current material weaknesses or prevent future material weaknesses. We may discover additional weaknesses in our system of internal financial and accounting controls and procedures that could result in a material misstatement of our financial statements. Our internal control over financial reporting will not prevent or detect all errors 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. 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 will be detected.

If we are unable to successfully maintain internal control over financial reporting, or identify any additional material weaknesses, the accuracy and timing of our financial reporting may be adversely affected. In

 

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addition, if we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, when required, investors may lose confidence in the accuracy and completeness of our financial reports, we may face restricted access to the capital markets, and our stock price may be materially adversely affected. Moreover, we could become subject to investigations by regulatory authorities, which could require additional financial and management resources.

If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, we may not be able to accurately report our financial results in a timely manner or prevent fraud, which would harm our business.

Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could cause us to fail to meet our reporting obligations in a timely manner, or at all. In addition, any testing by us conducted in connection with Section 404(a) of SOX or any subsequent testing by our independent registered public accounting firm in connection with Section 404(b) of SOX, may reveal deficiencies in our internal controls over financial reporting that are deemed to be significant deficiencies or material weaknesses or that may require prospective or retroactive changes to our financial statements or identify other areas for further attention or improvement. As discussed above, we have identified material weaknesses in the past which we are in the process of remedying. However, our efforts to remediate previous material weaknesses may not be effective or prevent any future deficiency in our internal control over financial reporting. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.

We will be required to disclose material changes made in our internal controls over financing reporting and procedures on a quarterly basis and our management will be required to assess the effectiveness of these controls annually. Beginning with our second annual report on Form 10-K after we become a public company, we will be required to make a formal assessment of the effectiveness of our internal control over financial reporting, and once we cease to be an emerging growth company, we will be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. However, for as long as we are an “emerging growth company” under the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal controls over financial reporting pursuant to Section 404(b).

To achieve compliance with Section 404(a) within the prescribed period, we will be engaging in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a plan to assess and document the adequacy of our internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are designed and operating effectively and implement a continuous reporting and improvement process for internal control over financial reporting.

We could be an “emerging growth company” for up to five years. An independent assessment of the effectiveness of our internal controls could detect problems that our management’s assessment might not identify. Undetected material weaknesses in our internal controls could lead to financial statement restatements and require us to incur the expense of remediation.

 

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If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our results of operation could fall below our publicly announced guidance or the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. We base our estimates on historical experience and estimates and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenue and expenses that are not readily apparent from other sources. For example, in connection with the implementation of the new revenue accounting standard, management makes judgments and assumptions based on our interpretation of the new standard. The new standard is principle-based and interpretation of those principles may vary from company to company based on their unique circumstances. It is possible that interpretation, industry practice and guidance may evolve as we apply the new standard. If our assumptions underlying our estimates and judgements relating to our critical accounting policies change or if actual circumstances differ from our assumptions, estimates or judgements, our operating results may be adversely affected and could fall below our publicly announced guidance or the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock.

Risks Related to Regulation

We are subject to regulation by various federal, state and foreign agencies that require us to comply with a wide variety of regulations, including those regarding the manufacture of products, advertising and product label claims, the distribution of our products and environmental matters. Failure to comply with these regulations could subject us to fines, penalties and additional costs.

Some of our operations are subject to regulation by various United States federal agencies and similar state and international agencies, including the Department of Commerce, the FDA, the Federal Trade Commission (FTC), the Department of Transportation, the U.S. Environmental Protection Agency and the U.S. Department of Agriculture (USDA). These regulations govern a wide variety of product activities, from design and development to labeling, manufacturing, handling, sales and distribution of products. If we fail to comply with any of these regulations, we may be subject to fines or penalties, have to recall products or cease their manufacture and distribution, any of which would increase our costs and reduce our sales.

For example, the FDA may regulate medical or health-related software, including machine learning functionality and predictive algorithms, if such software falls within the definition of a “medical device” under the federal Drug Food and Cosmetic Act (FDCA). However, the FDA exercises enforcement discretion for certain low-risk software, as described in its guidance documents for Mobile Medical Applications, General Wellness: Policy for Low Risk Devices, and Medical Device Data Systems, Medical Image Storage Devices, and Medical Image Communications Devices. In addition, the 21st Century Cures Act includes exemptions for certain medical-related software, including software used for administrative support functions at a healthcare facility, software intended for maintaining or encouraging a healthy lifestyle, EHR software, software for transferring, storing, or displaying medical device data or in vitro diagnostic data, and certain clinical decision support software. The FDA has also issued guidance documents to clarify how it intends to interpret and apply the exemptions under the 21st Century Cures Act. Although we believe that our software products are currently not subject to active FDA regulation, we continue to follow the FDA’s developments in this area. There is a risk that the FDA could disagree with our determination or that the FDA could develop new final guidance documents that would subject our products to active FDA oversight. If FDA determines that any of our current or future software products are regulated as medical devices, we would become subject to various requirements under the FDCA and the FDA’s implementing regulations, including the potential for both premarket and post-market requirements, and we would need to bring our software offerings into compliance with such requirements. Depending on the functionality and FDA classification of our software products, we may be required to register and list our products with the FDA and seek marketing authorization from FDA through a 510(k) clearance, De Novo classification, or Premarket Approval application pathway prior to marketing our software.

 

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We are also subject to various federal, state, local and international laws and regulations that govern the handling, transportation, manufacture, use and sale of substances that are or could be classified as toxic or hazardous substances. Some risk of environmental damage is inherent in our operations and the products we manufacture, sell or distribute. Any failure by us to comply with the applicable government regulations could also result in product recalls, market withdrawals or impositions of fines and restrictions on our ability to carry on with or expand in a portion or possibly all of our operations. If we fail to comply with any or all of these regulations, we may be subject to fines or penalties, have to recall or withdraw products or cease their manufacture and distribution, which would increase our costs and reduce our sales.

Changes in the way that the FDA and other agencies regulate the tests and other products and services we offer, or FDA’s disagreement as to the regulatory classification of our tests or other products, could result in the delay or additional expense in offering the tests or products, or otherwise impact our business.

Governmental agencies throughout the world, including in the United States, strictly regulate the pharmaceutical, dietary supplement, medical device, food and cosmetic industries. Our business involves manufacturing dietary supplements, developing health and wellness products, and offering testing performed by independent laboratories certified under the Clinical Laboratory Improvement Amendments of 1988 (CLIA) and accredited by the College of American Pathologists (CAP). Changes in regulation or application of regulatory requirements that we have difficulty satisfying or that make our services less competitive, could eliminate or substantially reduce the demand for our tests, products and services or could impact our marketing practices relating to the relevant tests or products, which in turn may have an adverse impact on our business, financial condition and results of operations.

Laboratory-developed tests (LDTs) are in vitro diagnostic tests that are intended for clinical use and are designed, manufactured and used within a single laboratory. Although LDTs are classified as medical devices and the FDA has statutory authority to ensure that medical devices are safe and effective for their intended uses, the FDA has historically exercised enforcement discretion and has not enforced certain applicable FDA requirements, including premarket review, with respect to LDTs. Moreover, in August 2020, the U.S. Department of Health and Human Services (HHS), announced that FDA will not require premarket review of LDTs absent notice-and-comment rulemaking.

Legislative and administrative proposals proposing to amend the FDA’s oversight of LDTs have been introduced in recent years and we expect that new legislative and administrative proposals will continue to be introduced from time to time. It is possible that legislation could be enacted into law or regulations or guidance could be issued by the FDA which may result in new or increased regulatory requirements for us to continue to offer our tests or to develop and introduce new tests as LDTs. For example, the FDA could modify its current approach to LDTs in a way that would subject our tests that we market as LDTs to the enforcement of additional regulatory requirements. In recent years, the FDA has stated its intention to modify its enforcement discretion policy with respect to LDTs. Specifically, on July 31, 2014, the FDA notified Congress of its intent to modify, in a risk-based manner, its policy of enforcement discretion with respect to LDTs. On October 3, 2014, the FDA issued two draft guidance documents entitled “Framework for Regulatory Oversight of Laboratory Developed Tests (LDTs),” or the Framework Guidance, and “FDA Notification and Medical Device Reporting for Laboratory Developed Tests (LDTs),” or the Reporting Guidance. The FDA halted finalization of the guidance in November 2016 to allow for further public discussion on an appropriate oversight approach to LDTs and to give congressional authorizing committees the opportunity to develop a legislative solution, and FDA issued a discussion paper on possible approaches to LDT regulation in January 2017.

In addition, the FDA and Congress have considered a number of proposals to end the FDA’s enforcement discretion policy for LDTs and subject LDTs to additional regulatory requirements. For example, Congress has recently been working on legislation to create an LDT and in vitro diagnostic regulatory framework for all in vitro clinical tests (IVCTs), that would be separate and distinct from the existing medical device regulatory framework. In March 2020, members of the U.S. House of Representatives formally introduced the

 

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Verifying Accurate Leading-edge IVCT Development Act of 2020 (the VALID Act) in the House and an identical version of the bill was introduced in the U.S. Senate. The VALID Act would create a new category of medical products separate from IVCTs, and subject all such products to FDA oversight. As proposed, the bill grandfathers many existing tests from the proposed premarket approval, quality systems, and labeling requirements, but would require such tests to comply with other regulatory requirements (for example, registration and notification, adverse event reporting). The bill also provides for IVCTs introduced before the effective date, drafted to be approximately four years after the enactment date, to be transitional and remain on the market subject to certain conditions. It is unclear whether the VALID Act or any other legislative proposals would be passed by Congress or signed into law by the President. Depending on the approach adopted under any legislation, certain LDTs, likely those of higher risk, could become subject to some form of premarket review, potentially with a transition period for compliance and a grandfathering provision.

Even if the FDA does not modify its policy of enforcement discretion, whether due to changes in FDA policy or legislative action, the FDA may disagree that our tests are properly classified as LDTs within the scope of its policy of enforcement discretion and may impose significant regulatory requirements, including the requirement for premarket review and clearance or approval. We may also be required to conduct clinical studies to support our currently marketed products or planned product launches.

If this were to happen, we or our suppliers may be required to obtain premarket clearance or approval of the tests we offer, or our marketing practices relating to the relevant tests may be impacted. The process of obtaining regulatory clearances or approvals to market a medical device can be costly and time consuming, and our suppliers may not be able to obtain these clearances or approvals on a timely basis, if at all. If we or our suppliers are required to conduct clinical trials, delays in the commencement or completion of clinical testing could significantly increase our test development costs and delay commercialization of any currently-marketed tests that we may be required to cease selling or the commercialization of any future tests that we may develop. Many of the factors that may cause or lead to a delay in the commencement or completion of clinical trials may also ultimately lead to delay or denial of regulatory clearance or approval. The commencement of clinical trials may be delayed due to insufficient patient enrollment, which is a function of many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the clinical trial.

Even if regulatory clearance or approval of a product is required and granted, such clearance or approval may be subject to limitations on the intended uses for which the product may be offered and reduce our potential to successfully commercialize and generate revenue from the test results. If the FDA determines that our promotional materials, labeling, training or other marketing or educational activities constitute promotion of an uncleared or unapproved use, it could request that we cease or modify our training or promotional materials or subject us to regulatory enforcement action.

We and our suppliers are also subject to other federal, state, and foreign regulation concerning the manufacture and sale of the tests we offer. Failure to comply with U.S. federal, state and foreign governmental regulations could lead to the issuance of warning letters or untitled letters, the imposition of injunctions, suspensions or loss of regulatory clearance or approvals, product recalls, termination of distribution, product seizures or civil penalties. In the most extreme cases, criminal sanctions or closure of our suppliers’ manufacturing facilities are possible. The occurrence of any of these events may have an adverse impact on our business, financial condition and results of operations.

 

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We and our suppliers are subject to numerous laws and regulations that apply to the manufacture, sale and marketing of nutritional supplements, and compliance with these laws and regulations, as they currently exist or as modified in the future, may increase our costs, limit or eliminate our ability to sell certain products, subject us or our suppliers to the risk of enforcement action, or otherwise adversely affect our business, results of operations and financial condition.

As a manufacturer of nutritional supplements, we are subject to numerous health and safety laws and regulations. Our suppliers are also subject to such laws and regulations. These laws and regulations apply to many aspects of our business, including the manufacturing, packaging, labeling, distribution, advertising, sale, quality and safety of products we sell, as well as the health and safety of our team members and the protection of the environment. We are subject to regulation by various government agencies, including the FDA, the USDA, the FTC, the Occupational Safety and Health Administration, the Consumer Product Safety Commission and the U.S. Environmental Protection Agency, as well as various state and local agencies. For example, our products are subject to numerous and extensive laws and regulations governing the type of claims we can make regarding our products, the product constituents that can be used to manufacture our products, and whether our product constituents or the products themselves require pre-market review or pre-market notification. Outside the United States, our activities and products are also subject to numerous similar statutes and regulations. Many of these laws and regulations involve a high level of subjectivity, are inherently fact-based and subject to interpretation, and vary significantly from market to market.

Dietary supplements are regulated under the Dietary Supplement Health and Education Act of 1994 (DSHEA), a statute which is administered by the FDA which amended the FDCA. DSHEA expressly permits supplements to bear statements describing how a product affects the structure, function or general well-being of the body. However, no statement may expressly or implicitly represent that a supplement will diagnose, cure, mitigate, treat or prevent a disease. DSHEA has not been materially amended since it was enacted in 1994 but the newly constituted U.S. Congress or executive branch could decide to revisit whether changes are necessary to modernize this legislation.

Our dietary supplement products are required to be manufactured in compliance with current Good Manufacturing Practices (cGMP) requirements. As a result, the facilities used by us or any of our current or future suppliers must be compliant with cGMPs. Our manufacturing facilities are subject to ongoing periodic unannounced inspections by the FDA and corresponding state and international authorities for compliance with cGMPs and similar regulatory requirements. If we or our manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA and any applicable foreign regulatory authority, our products may be deemed noncompliant, and we could face sanctions being imposed on us, including fines, injunctions, civil penalties, delays, operating restrictions, interruptions in supply, recalls, withdrawals, issuance of safety alerts and criminal prosecutions, any of which could have a material adverse impact on our business, financial condition, results of operations and prospects. Finally, we also could experience manufacturing delays if our contractors give greater priority to the manufacture and supply of other products over our products or otherwise do not satisfactorily perform according to the terms of their agreements with us.

The FDA has broad authority to enforce the provisions of the FDCA applicable to the safety, labeling, manufacturing and promotion dietary supplements, including powers to issue a public warning letter to a company, publicize information about illegal products, institute an administrative detention, request or order a recall of illegal products from the market and request the Department of Justice to initiate a seizure action, an injunction action or a criminal prosecution in the U.S. courts. Pursuant to the Food Safety Modernization Act (FSMA), the FDA also has the power to refuse the import of dietary supplement from a foreign supplier that is not appropriately verified as in compliance with all FDA laws and regulations. Moreover, the FDA has the authority to administratively suspend the registration of any facility producing dietary supplements, deemed to present a reasonable probability of causing serious adverse health consequences.

 

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In connection with the marketing and advertisement of products we sell, we could be the target of claims relating to false or deceptive advertising, including under the auspices of the FTC and the consumer protection statutes of some states. Furthermore, in recent years, the FDA has been aggressive in enforcing its regulations with respect to nutrient content claims, unauthorized “health claims,” which are defined as claims that characterize the relationship between a food or food ingredient and a disease or health condition, and other claims that impermissibly suggest therapeutic benefits for certain products including dietary supplements. These events could interrupt the marketing and sales of our products, severely damage our brand reputation and public image, increase the cost of our products, result in product recalls, market withdrawals or litigation and impede our ability to deliver our products, any of which could result in a material adverse effect on our business, financial condition and results of operations.

As is common in our industry, we rely on our suppliers to ensure that the products they manufacture and sell to us comply with all applicable regulatory and legislative requirements. In general, we seek certifications of compliance, representations and warranties, indemnification and insurance from our suppliers. However, even with adequate insurance and indemnification, any claims of non-compliance could significantly damage our reputation and consumer confidence in our products.

We cannot predict the nature of future laws, regulations, interpretations or applications, or determine what effect either additional government regulations or administrative orders, when and if promulgated, or disparate federal, state and local regulatory schemes would have on our business in the future. They could, however, increase our costs or require the reformulation of certain products to meet new standards, the recall or discontinuance of certain products not able to be reformulated, additional recordkeeping, expanded documentation of the properties of certain products, expanded or different labeling or scientific substantiation. Another example is that the FDA could require the production of efficacy data for nutritional supplements. Any or all of such requirements could have a material adverse effect on our business, financial condition and results or operation.

Our use, disclosure, and other processing of personal information, including health information, is subject to the Health Insurance Portability and Accountability Act (HIPAA), and other federal, state, and foreign data privacy and security laws and regulations, and our failure to comply with those laws and regulations or to appropriately secure the information we hold could result in significant liability or reputational harm and, in turn, a material adverse effect on our client base, customer base and revenue.

In the course of offering personalized health and wellness recommendations, we collect a substantial amount of personalized health information. Numerous state and federal laws and regulations govern the collection, dissemination, use, privacy, confidentiality, security, availability, integrity and other processing of protected health information (PHI), and other types of personal information. For example, HIPAA establishes a set of national privacy and security standards for the protection PHI by health plans, healthcare clearinghouses and certain healthcare providers, referred to as covered entities, and the business associates with whom such covered entities contract for services, as well as their covered subcontractors. When we act in the capacity of a business associate under HIPAA, we execute business associate agreements with our clients.

HIPAA requires covered entities and business associates, such as us, to develop and maintain policies and procedures with respect to PHI that is used or disclosed, including the adoption of administrative, physical and technical safeguards to protect such information.

Violations of HIPAA may result in significant civil and criminal penalties. HIPAA also authorizes state attorneys general to file suit on behalf of their residents. Courts may award damages, costs and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to sue us in civil court for violations of HIPAA, its standards have been used as the basis for duty of care in state civil suits such as those for negligence or recklessness in the misuse or breach of duties related to PHI.

 

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In addition, HIPAA mandates that the Secretary of HHS conduct periodic compliance audits of HIPAA covered entities and business associates for compliance with the HIPAA privacy and security rules.

HIPAA further requires that patients be notified of any unauthorized acquisition, access, use or disclosure of their unsecured PHI that compromises the privacy or security of such information, with certain exceptions related to unintentional or inadvertent use or disclosure by employees or authorized individuals. HIPAA requires such notifications to be made “without unreasonable delay and in no case later than 60 calendar days after discovery of the breach.” If a breach affects 500 patients or more, it must be reported to HHS without unreasonable delay, and HHS will post the name of the breaching entity on its public web site. Breaches affecting 500 patients or more in the same state or jurisdiction must also be reported to the local media. If a breach involves fewer than 500 people, the covered entity must record it in a log and notify HHS at least annually.

In addition to HIPAA, numerous other federal, state, and foreign laws and regulations protect the confidentiality, privacy, availability, integrity and security of health-related and other personal information. These laws and regulations in many cases are more restrictive than, and may not be preempted by, HIPAA and its implementing rules. These laws and regulations are often uncertain, contradictory, and subject to changed or differing interpretations, and we expect new laws, rules and regulations regarding privacy, data protection, and to be proposed and enacted in the future. Further, the and many state attorneys general are interpreting existing federal and state consumer protection laws to impose evolving standards for the online collection, use, dissemination and security of health-related and other personal information. Courts may also adopt the standards for fair information practices promulgated by the FTC, which concern consumer notice, choice, security and access. Consumer protection laws require us to publish statements that describe how we handle personal information and choices individuals may have about the way we handle their personal information. If such information that we publish is considered untrue, we may be subject to government claims of unfair or deceptive trade practices, which could lead to significant liabilities and consequences. Furthermore, according to the FTC, violating consumers’ privacy rights or failing to take appropriate steps to keep consumers’ personal information secure may constitute unfair acts or practices in or affecting commerce in violation of Section 5(a) of the FTC Act.

California also has enacted the California Consumer Privacy Act (CCPA), which came into effect on January 1, 2020. Pursuant to the CCPA, certain businesses are required, among other things, to make certain enhanced disclosures related to California residents regarding the use or disclosure of their personal information, allow California residents to opt-out of certain uses and disclosures of their personal information without penalty, provide California residents with other choices related to personal information in our possession, and obtain opt-in consent before engaging in certain uses of personal information relating to California residents under the age of 16. The California Attorney General may seek substantial monetary penalties and injunctive relief in the event of our non-compliance with the CCPA. The CCPA also allows for private lawsuits from Californians in the event of certain data breaches. Moreover, the California Privacy Rights Act (CPRA), was recently passed in California. The CPRA significantly modifies the CCPA, creating additional data protection obligations relating to consumer data on covered businesses, including additional consumer rights processes, limitations on data uses, new audit requirements for higher risk data, and opt outs for certain uses of sensitive data. It will also create a new California data protection agency authorized to issue substantive regulations and could result in increased privacy and information security enforcement. The majority of the provisions will go into effect on January 1, 2023, with enforcement beginning July 1, 2023. Aspects of the CCPA and CPRA remain uncertain, and we may be required to make modifications to our policies or practices in efforts to comply. Other states are considering similar legislation. A broad range of legislative measures also have been introduced at the federal level.

In Europe, the collection, use, disclosure, transfer or other processing of personal data regarding individuals, including personal health data and employee data, is subject to the GDPR, which took effect in May 2018. The GDPR is wide-ranging in scope and imposes numerous requirements on companies that process personal data of individuals within the European Economic Area (EEA), including requirements relating to processing health and other sensitive data, obtaining consent of the individuals to whom the personal data relates, providing information to individuals regarding data processing activities, implementing safeguards to protect the

 

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security and confidentiality of personal data, providing notification of data breaches, and taking certain measures when engaging third-party processors. In addition, the GDPR imposes strict rules on the transfer of personal data to countries outside the EEA, including the United States and, as a result, increases the scrutiny that such rules should apply to transfers of personal data from the EEA to the United States. The GDPR also permits data protection authorities to require destruction of improperly gathered or used personal information and/or impose substantial fines for violations of the GDPR, which can be up to the greater of four percent of global revenues or €20 million, and confers a private right of action on data subjects and consumer associations to lodge complaints with supervisory authorities, seek judicial remedies, and obtain compensation for damages resulting from violations of the GDPR. In addition, the GDPR provides that European Union member states may make their own further laws and regulations limiting the processing of personal data, including genetic, biometric, or health data.

Further, the United Kingdom exited the EU effective January 31, 2020, subject to a transition period that ended December 31, 2020. Brexit has created uncertainty with regard to the regulation of data protection in the United Kingdom. The United Kingdom has implemented legislation that substantially implements the GDPR, with penalties of up to the greater of four percent of global revenues or £17.5 million. Currently there is a four to six-month grace period agreed in the EU and United Kingdom Trade and Cooperation Agreement, ending June 30, 2021, at the latest, whilst the parties discuss an adequacy decision. The European Commission published a draft of adequacy decision on February 19, 2021. If adopted, the decision will enable data transfers from EU member states to the United Kingdom for a four-year period, subject to subsequent extensions.

This complex, dynamic legal landscape regarding privacy, data protection, and information security creates significant compliance issues for us and our clients and potentially exposes us to additional expense, adverse publicity and liability. While we have implemented data privacy and security measures in an effort to comply with applicable laws and regulations relating to privacy, data protection and information security, PHI and other personal information is processed for us or transmitted to us by third parties, who may not implement adequate security and privacy measures, and it is possible that laws, rules or regulations relating to privacy, data protection, or information security may be interpreted and applied in a manner that is inconsistent with our practices or those of third parties who perform services for us or transmit PHI and other personal information to us. Any failure or perceived failure by us or these third parties to comply with laws, regulations, rules or other obligations relating to privacy, data protection or information security, may result in governmental investigations or enforcement actions, litigation, claims and other proceedings, and could result in significant fines, penalties, and other liability. Additionally, defending against any claims, litigation, regulatory proceedings, or other proceedings can be costly, time-consuming and may require significant financial and personnel resources. Therefore, even if we are successful in defending against any such actions or proceedings that may be brought against us, our business may be impaired, and we may suffer reputational and other harm. Further, complying with these various laws, regulations, and other obligations could cause us to incur substantial costs or require us to change our business practices, systems and compliance procedures in a manner adverse to our business.

Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations and policies that are applicable to the businesses of our clients may limit the use and adoption of, and reduce the overall demand for, our platform. Even the perception of privacy concerns, whether or not valid, may harm our reputation and inhibit use and adoption of our platform. Further, if any information that we collect from or otherwise process about our customers is used, accessed or disclosed in an unauthorized manner, or if this is reported or perceived to have occurred, customers may not want to provide such information to us, which could prevent us from providing recommendations, subject us to liability or damage our reputation and brand. Any of the foregoing consequences could have a material adverse impact on our business and our financial results.

 

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From time to time, we may be subject to legal proceedings, regulatory disputes, and governmental inquiries that could cause us to incur significant expenses, divert our management’s attention, and materially harm our business, financial condition and operating results.

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 of these legal proceedings may result in significant settlement costs or judgments, penalties and fines, or require us to modify our products or services, make content unavailable, or require us to stop offering certain features, all of which could negatively affect our membership and revenue growth.

We are aware of third-party issued U.S. patents with claims relating to compositions of nicotinamide riboside, a component of some of our products, owned by the Trustees of Dartmouth and licensed to ChromaDex Corporation (ChromaDex). We have filed petitions for inter partes review against these patents at the Patent Trial and Appeal Board to seek to invalidate these patents. In May 2021, the Trustees of Dartmouth and ChromaDex initiated infringement proceedings against us. The complaint seeks to enjoin us from selling our nutritional supplement products that contain nicotinamide riboside, including our NiaCel suite of supplements, and further seeks monetary damages for alleged infringement. The results of litigation, investigations, claims, and regulatory proceedings cannot be predicted with certainty, and determining reserves for pending litigation and other legal and regulatory matters requires significant judgment. There can be no assurance that our expectations will prove correct, and even if these matters are resolved in our favor or without significant cash settlements, these matters, and the time and resources necessary to litigate or resolve them, could harm our business, financial condition, and operating results.

If we fail to comply with governmental regulations, we could face substantial penalties and our business, financial condition and results of operations could be adversely affected.

Although our offerings are not currently covered by any third-party payor, including any commercial payor or government healthcare program, our business activities may nonetheless be subject to regulation and enforcement by the FDA, U.S. Department of Justice, HHS and other federal and state governmental authorities.

Our employees, consultants and commercial partners may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements. Federal and state laws and regulations that may affect our ability to conduct business include, without limitation:

 

   

the federal Anti-Kickback Statute, which prohibits, among other things, persons or entities from knowingly and willfully soliciting, offering, receiving or paying any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, lease, order, or arranging for or recommending the purchase, lease or order of, any item or service, for which payment may be made, in whole or in part, under federal healthcare programs such as Medicare and Medicaid. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;

 

   

the federal civil false claims laws, including without limitation the federal False Claims Act, which can be enforced through “qui tam,” or whistleblower actions, by private citizens, on behalf of the federal government, and civil monetary penalties laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, false or fraudulent

 

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claims for payment of government funds, or knowingly making or using or causing to be made or used, a false record or statement material to an obligation to pay money to the government or knowingly and improperly avoiding, decreasing or concealing an obligation to pay money to the federal government. In addition, the government may assert that a claim including items and services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the civil False Claims Act;

 

   

federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;

 

   

the healthcare fraud statutes under HIPAA, which impose criminal and civil liability for, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, or knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement, in connection with the delivery of, or payment for healthcare benefits, items or services by a healthcare benefit program, which includes both government and privately funded benefits programs. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;

 

   

the federal Physician Payment Sunshine Act, which require certain manufacturers of drugs, devices, biologicals, and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program to report annually to HHS under the Open Payments Program, information related to payments or other transfers of value made to teaching hospitals, physicians and, effective January 1, 2022, for transfers of value made during the prior year to certain other healthcare practitioners, as well as ownership and investment interests held by such physicians and their immediate family members;

 

   

medical device regulations pursuant to the FDCA, which require, among other things, pre-market clearances, approved labelling, medical device adverse event reporting, and on-going post-market monitoring and quality assurance;

 

   

federal consumer protection and unfair competition laws, which broadly regulate platform activities and activities that potentially harm consumers;

 

   

state law equivalents of each of the above federal laws, such as anti-kickback, self-referral and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers, and self-pay patients; and

 

   

state laws governing the corporate practice of medicine and other healthcare professions and related fee-splitting laws.

Because of the breadth of these laws and the narrowness of available statutory and regulatory exemptions, it is possible that some of our activities, including our arrangements with our network of health professionals who receive a payment for the products their patients purchase from us, could be subject to challenge under one or more of such laws.

We may face claims and proceedings by private parties, and claims, investigations and other proceedings by governmental authorities, relating to allegations that our business practices do not comply with current or future laws or regulations involving applicable fraud and abuse or other healthcare laws and regulations, and it is possible that courts or governmental authorities may conclude that we have not complied with applicable laws, or that we may find it necessary or appropriate to settle any such claims or other proceedings. The growth of our business and sales organization and our future expansion outside of the

 

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United States may increase the potential of violating these laws or our internal policies and procedures. The risk of our being found in violation of these or other laws and regulations is further increased by the fact that many have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Any action brought against us for violation of these or other laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. If our operations are found to be in violation of any federal, state or foreign laws described above or other laws and regulations that apply to us, we may be subject to claims and proceedings by private parties, investigations and other proceedings by governmental authorities, as well as penalties, including significant criminal, civil and administrative penalties, damages and fines, disgorgement, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of noncompliance with these laws or regulations, imprisonment for individuals and exclusion from participation in government programs, such as Medicare and Medicaid, as well as contractual damages and reputational harm. We could also be required to curtail or cease our operations. We may be required to undertake additional policies or measures in order to comply with these or other applicable laws. Any of the foregoing could seriously harm our business and our financial results.

We are dependent on our relationships with healthcare professionals to provide healthcare services, and our business would be adversely affected if those relationships were disrupted.

Our contractual relationships with our network of healthcare professionals which provide for consulting and other services may implicate certain state laws in the United States that generally prohibit non-physician entities from practicing medicine, exercising control over physicians or engaging in certain practices such as fee-splitting with physicians. Although we believe that we have structured our arrangements to ensure that the healthcare professionals maintain exclusive authority regarding the delivery of medical care and the ordering of our tests when deemed clinically appropriate, there can be no assurance that these laws will be interpreted in a manner consistent with our practices or that other laws or regulations will not be enacted in the future that could have a material and adverse effect on our business, financial condition and results of operations. Regulatory authorities, state medical boards of medicine, state attorneys general and other parties, including our affiliated healthcare professionals, may assert that we are engaged in the prohibited corporate practice of medicine, or that our arrangements with our network of healthcare professionals constitute unlawful fee-splitting. If a state’s prohibition on the corporate practice of medicine or fee-splitting law is interpreted in a manner that is inconsistent with our practices, we would be required to restructure or terminate our relationship with our healthcare professionals to bring our activities into compliance with such laws. A determination of non-compliance, or the termination of or failure to successfully restructure these relationships could result in disciplinary action, penalties, damages, fines, and a loss of revenue, any of which could have a material and adverse effect on our business, financial condition and results of operations. State corporate practice of medicine doctrines and fee-splitting prohibitions also often impose penalties on healthcare professionals for aiding the corporate practice of medicine, which could discourage physicians and other healthcare professionals from participating in our network of providers.

Failure to comply with anti-corruption and anti-money laundering laws, including the FCPA and similar laws associated with our activities outside of the United States, could subject us to penalties and other adverse consequences.

We operate a global business and may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities. We are subject to the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, the U.K. Bribery Act, the Canadian Corruption of Finance Public Officials Act and possibly other anti-corruption and anti-money laundering laws in countries in which we conduct activities. The FCPA prohibits providing, offering, promising, or authorizing, directly or indirectly, anything of value to government officials, political parties, or political candidates for the purposes of obtaining or retaining business or securing any improper business advantage. The provisions of the U.K. Bribery Act extend beyond bribery of government officials and create offenses in relation

 

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to commercial bribery including private sector recipients. The provisions of the U.K. Bribery Act also create offenses for accepting bribes in addition to bribing another person. In addition, U.S. public companies are required to maintain records that accurately and fairly represent their transactions and have an adequate system of internal accounting controls. In many foreign countries, including countries in which we may conduct business, it may be a local custom that businesses engage in practices that are prohibited by the FCPA, U.K. Bribery Act, or other applicable laws and regulations. We face significant risks if we or any of our directors, officers, employees, contractors, agents or other partners or representatives fail to comply with these laws and governmental authorities in the United States, U.K. and elsewhere could seek to impose substantial civil and/or criminal fines and penalties which could have a material adverse effect on our business, reputation, operating results, prospects and financial condition.

We have begun to implement an anti-corruption compliance program and policies, procedures and training designed to foster compliance with these laws, including the FCPA, the U.K. Bribery Act, the Canadian Corruption of Finance Public Officials Act, and others. However, our directors, officers, employees, contractors, agents, and other partners to which we outsource certain of our business operations, may take actions in violation of our policies or applicable law. Any such violation could have an adverse effect on our reputation, business, operating results, prospects and financial conditions.

Any violation of the FCPA, U.K. Bribery Act, the Canadian Corruption of Finance Public Officials Act other applicable anti-corruption laws, or anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions and, in the case of the FCPA, suspension or debarment from U.S. government contracts, any of which could have a materially adverse effect on our reputation, business, operating results, prospects and financial condition. In addition, responding to any enforcement action or internal investigation related to alleged misconduct may result in a significant diversion of management’s attention and resources and significant defense costs and other professional fees.

The applicability of sales, use and other tax laws or regulations on our business is uncertain. Adverse tax laws or regulations could be enacted or existing laws could be applied to us or our clients, which could subject us to additional tax liability and related interest and penalties, increase the costs of our solution and adversely impact our business.

The application of tax laws to e-commerce services is evolving. New income, sales, use, value-added or other tax laws, statutes, rules, regulations, or ordinances could be enacted at any time, possibly with retroactive effect, and could be applied solely or disproportionately to services provided over the internet or could otherwise materially affect our financial position and results of operations.

In addition, state, local and foreign tax jurisdictions have differing rules and regulations governing sales, use, value-added and other taxes, and these rules and regulations can be complex and are subject to varying interpretations that may change over time. Existing tax laws, statutes, rules, regulations, or ordinances could be interpreted, changed, modified, or applied adversely to us, possibly with retroactive effect. One or more states may seek to impose incremental or new sales, use, value added or other tax collection obligations on us, including for past sales by us or our resellers and other partners. A successful assertion by a state, country or other jurisdiction that we should have been or should be collecting additional sales, use, value added or other taxes on our solutions could, among other things, result in substantial tax liabilities for past sales, create significant administrative burdens for us, discourage users from utilizing our solutions or otherwise harm our business, results of operations and financial condition. Our resellers are responsible for collecting and paying the taxes on sales of our products to end-users. We are responsible for collecting and paying taxes on product sales made directly to end users. If it is determined that we have not collected and remitted the appropriate amount of taxes to governmental authorities we could be subject to potential sales tax liabilities including interest and penalties, which could have an adverse impact on our results of operations and our cash balance.

 

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Risks Related 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 to defend ourselves, and could in the future require us to pay substantial damages or prevent us from selling our products or services or impact our stock price, any of which could have a material adverse effect.

Our commercial success will depend in part on our avoiding infringement of patents and infringement, misappropriation or other violations of other proprietary rights of third parties, including, for example, the intellectual property rights, such as trademarks, trade dress and name and likeness, of competitors, marketing partners and other third parties. The personalized health and wellness industries are in a crowded patent space, and there are numerous U.S. and foreign issued patents and pending patent applications owned by third parties that exist in the fields in which we operate. It may not be clear to us whether our products or methods of manufacturing, or other processes that we use may infringe the patents of third parties. Identification of third-party patent rights that may be relevant to our products and operations can be difficult because patent searching is imperfect due to differences in terminology among patents, incomplete databases and the difficulty in assessing the meaning of patent claims. We also may not have the resources to perform extensive analysis of potentially relevant third party patents, especially given the wide range of our product offerings. Furthermore, there is extensive and frequent intellectual property litigation in the personalized health and wellness products industry. Our activities may be subject to claims that we infringe or otherwise violate patents owned or controlled by third parties. We cannot assure you that our operations do not, or will not in the future, infringe existing or future patents.

For example, we are aware of third-party issued U.S. patents with claims relating to compositions of nicotinamide riboside, a component of some of our products, owned by the Trustees of Dartmouth and licensed to ChromaDex. We have filed petitions for inter partes review against these patents at the Patent Trial and Appeal Board to seek to invalidate the patents, but the outcome of such proceedings is uncertain. In May 2021, the Trustees of Dartmouth and ChromaDex initiated infringement proceedings against us. The complaint seeks to enjoin us from selling our nutritional supplement products that contain nicotinamide riboside, including our NiaCel suite of supplements, and further seeks monetary damages for alleged infringement. If we are unsuccessful in our challenge of the validity of the patent related to compositions of nicotinamide riboside, we could be required to pay damages and ongoing royalty payments or alternatively we may need to delay the sale of certain nutritional supplement products in the U.S. until 2026, when such patents will expire.

There may also be patent applications owned by third parties that, if issued as patents, could be asserted against us. Patent applications in the United States and elsewhere are typically published approximately 18 months after the earliest filing for which priority is claimed, with such earliest filing date being commonly referred to as the priority date. Certain U.S. patent applications that will not be filed outside the United States can remain confidential until patents issue. Therefore, patent applications covering our products and services could have been filed by third parties without our knowledge. Additionally, pending patent applications that have been published can, subject to certain limitations, be later amended in a manner that could cover our products and services, and their use. The scope of a patent claim is determined by an interpretation of the law, the written disclosure in a patent and the patent’s prosecution history and can involve other factors such as expert opinion. Our interpretation of the relevance or the scope of claims in a patent or a pending application may be incorrect, which may negatively impact our ability to market our products and services. Further, we may incorrectly determine that our products or services are not covered by a third-party patent or may incorrectly predict whether a third party’s pending patent application will issue with claims of relevant scope. Our determination of the expiration date of any patent in the United States or abroad that we consider relevant may be incorrect, which may negatively impact our ability to develop and market our products or services. Third-party intellectual property right holders may also actively bring infringement or other intellectual property-related claims against us, even if we have received patent protection for our products and services.

With respect to non-patent intellectual property rights of third parties, such as trademarks, names and likeness, we are at risk of claims by third parties of infringing or misappropriating such intellectual property

 

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rights. For example, we tout our relationships with many third parties, including social influencers, marketing partners, customers, athletes, sports teams, sports leagues, research institutions, universities, consumer products companies, pharmaceutical companies and collaborators to market and promote our products and services, including on our website and in our marketing literature. We do not have formal engagement or agreement with many of these third parties that we characterize as our partners or collaborators, nor do we have agreements with them regarding to the terms or conditions under which we may use their trademarks, name and likeness to market and promote our products and services. These third parties may claim that we infringed their trademarks, or that we misappropriated their name and likeness and mischaracterized our relationships with them. For third parties with whom we have current agreements concerning our rights to use their name and likeness for marketing and promotional purposes, there are restrictions on how we may characterize our relationships with them and other terms and conditions under which we may disclose our relationships with them, such as, for example, their right to pre-approve instances of our use of their names in our promotional and marketing materials. These third parties may claim that we are in violation of our agreements with them and may seek damages or terminate their relationship with us. We could be found liable for significant monetary damages, including potential treble damages, disgorgement of profits, and attorneys’ fees, if we are found to have willfully infringed a trademark or other intellectual property rights of third parties.

Regardless of the merit of third parties claims against us for infringement, misappropriation or violations of their intellectual property rights, such third parties may seek and obtain injunctive or other equitable relief, which could effectively block our ability to sell our products or services or perform our tests. Further, if a patent infringement suit were brought against us, we could be forced to stop or delay our development or sales or other activities that are the subject of such suit. Defense of these claims, even if such claims are resolved in our favor, could cause us to incur substantial expenses and be a substantial diversion of our employee resources even if we are ultimately successful. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the market price of our common stock. Any adverse ruling or perception of an adverse ruling in defending ourselves could have a material adverse impact on our cash position and stock price. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources and more mature and developed intellectual property portfolios.

As we continue to commercialize our products in their current or an updated form, launch new products and services and enter new markets, other competitors might claim that our products or services infringe, misappropriate or violate their intellectual property rights as part of business strategies designed to impede our successful commercialization and entry into new markets. If such a suit were brought, regardless of merit, there is no assurance that a court would find in our favor on questions of infringement, validity, enforceability or priority. Even if we are successful in defending against such suit, we could incur substantial costs and diversion of the attention of our management and technical personnel in defending ourselves against such claims. A court of competent jurisdiction could hold that third-party patents asserted against us are valid, enforceable, and infringed, which could materially and adversely affect our ability to commercialize any products or services we may develop and any other technologies covered by the asserted third-party patents and any adverse ruling or perception of an adverse ruling in defending ourselves could have a material adverse impact on our cash position and stock price. If we are found to infringe, misappropriate or otherwise violate a third party’s intellectual property rights, and we are unsuccessful in demonstrating that such rights are invalid or unenforceable, we may be required to pay substantial damages, including treble damages and attorneys’ fees for willful infringement; obtain one or more licenses from third parties in order to continue developing and marketing our products and services, which may not be available on commercially reasonable terms, if at all, or may be non-exclusive, thereby giving our competitors and other third parties access to the same technologies licensed to us; pay substantial royalties and other fees; and redesign any infringing tests or other activities, which may be impossible

 

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or require substantial time and monetary expenditure, or be prohibited from commercializing certain tests, all of which could have a material adverse effect on our business, financial condition, results of operations, and prospects.

We may be subject to claims that we have wrongfully hired an employee from a competitor or that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties.

As is common in the personalized health and wellness products industries, in addition to our employees, we engage the services of consultants, outside scientific collaborators, third-party manufacturers, advisors, potential partners, and other third parties to assist us in the development of our products. We have entered into and may enter in the future into non-disclosure and confidentiality agreements to protect the proprietary positions of these third parties. Many of these third party individuals, and many of our employees, were previously employed at, or may have previously provided or may be currently providing consulting services or other services to, other nutritional supplements companies including our competitors or potential competitors. We could in the future be subject to claims that we or our employees or third parties that we hire to provide consulting or other services have inadvertently or otherwise used or disclosed alleged trade secrets or other confidential information of former employers or competitors. Although we try to ensure that our employees and contractors do not use the intellectual property, proprietary information, know-how or trade secrets of others in their work for us, we may become subject to claims that we caused an employee to breach the terms of his or her non-competition or non-solicitation agreement, that we wrongfully hired an employee from a competitor, or that we or these individuals have, inadvertently or otherwise, used or disclosed the alleged trade secrets or other proprietary information of a former employer or competitor.

In addition, while it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property that we regard as our own. The assignment of intellectual property rights may not be self-executing, or the assignment agreements may be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against us, to determine the ownership of what we regard as our intellectual property. Such claims could have a material adverse effect on our business, financial condition, results of operations, and prospects.

While we may litigate to defend ourselves against these claims, even if we are successful, litigation could result in substantial costs and could be a distraction to management. If our defenses to these claims fail, in addition to requiring us to pay monetary damages, a court could prohibit us from using technologies or features that are essential to our products, if such technologies or features are found to incorporate or be derived from the trade secrets or other proprietary information of the former employers. Parties making claims against us may be able to sustain the costs of complex litigation more effectively than we can because they have substantially greater resources. Moreover, any such litigation or the threat thereof may adversely affect our reputation, our ability to form strategic alliances or sublicense our rights to collaborators, engage with scientific advisors or hire employees or consultants, any of which would have an adverse effect on our business, results of operations, financial condition and prospects. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.

If we are unable to protect the confidentiality of our trade secrets and know-how, our business and competitive position may be harmed.

Our ability to compete effectively will depend, in part, on our ability to maintain the proprietary nature of our products, manufacturing processes and services. We rely on manufacturing and other know-how, trade secrets, license agreements and contractual provisions to establish our intellectual property rights and protect our products, manufacturing processes and services. If our efforts to protect our intellectual property rights are not

 

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sufficient or effective, or if our licenses are terminated and any of our intellectual property rights are challenged, this could result in those rights being narrowed in scope, terminated or declared invalid or unenforceable and sales of our products or services may suffer as a result and our ability to generate revenue could be severely impacted.

We rely upon unpatented trade secret protection, unpatented or unpatentable know-how and continuing technological innovation to develop and maintain our competitive position. Trade secrets, including unpatented know-know, and other proprietary information, can be difficult to trace, protect and enforce. We seek to protect our proprietary technology and processes, in part, by entering into confidentiality agreements with our vendors, employees, consultants and others who may have access to proprietary information. We may not be able to prevent the unauthorized disclosure or use of information which we consider to be confidential, our technical know-how or other trade secrets by the parties to these agreements, however, despite the existence generally of confidentiality agreements and other contractual restrictions. Monitoring unauthorized uses and disclosures is difficult, and we do not know whether the steps we have taken to protect our proprietary technologies will be effective. If any of the vendors, employees, consultants and others who are parties to these agreements breaches or violates the terms of any of these agreements, we may not have adequate remedies for any such breach or violation, and we could lose our trade secrets as a result. If one of our employees publicly discloses information that we believe to be confidential or a trade secret we may be unable to protect it in the future. Any disclosure, either intentional or unintentional, by our employees, the employees of third parties with whom we share our facilities or outside scientific collaborators, suppliers, third-party manufacturers, consultants, advisors, and vendors that we engage to perform research or manufacturing activities, or misappropriation by third parties, such as through a cybersecurity breach, of our trade secrets or proprietary information could enable competitors to duplicate or surpass our technological achievements, thus eroding our competitive positions in our market. Even where remedies are available, enforcing a claim that a party illegally disclosed or misappropriated our trade secrets, like patent litigation, is expensive and time consuming, and the outcome is unpredictable.

We also try to protect the confidential nature of our trade secrets and other proprietary information by using reasonable physical and technological security measures. Such security measures may not provide adequate protection for our proprietary information. Our security measures may not prevent an employee, outside scientific collaborator, contract research organization, third-party manufacturer, consultant, advisor, potential partner, and other third party from misappropriating our trade secrets and providing them to a competitor.

We may need to share our proprietary information, including trade secrets, with our current and future business partners, collaborators, contractors and others located in countries at heightened risk of theft of trade secrets, including through direct intrusion by private parties or foreign actors, and those affiliated with or controlled by state actors. If any of these events occurs or if we otherwise lose protection for our trade secrets, the value of this information may be greatly reduced, and our competitive position would be harmed. In addition, the criteria for protection of trade secrets can vary among different jurisdictions and courts outside the United States are sometimes less willing to protect trade secrets. Trade secrets may be independently developed by others in a manner that could prevent legal recourse by us. Trade secrets will over time be disseminated within the industry through independent development, the publication of journal articles, and the movement of personnel skilled in the art from company to company or academic to industry scientific positions. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor or other third party, we would have no right to prevent them, or those to whom they communicate it, from using that technology or information to compete with us. Though our agreements with third parties typically restrict the ability of our employees, outside scientific collaborators, suppliers, third-party manufacturers, consultants, advisors, potential partners, and other third parties, to publish data potentially relating to our trade secrets, our agreements may contain certain limited publication rights that may allow disclosure of our trade secrets.

 

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If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected.

We rely on trademarks and tradenames to build brand recognition and to promote and market our products. Our current or future trademarks or trade names may be challenged, opposed, infringed, circumvented or declared generic or descriptive, determined to be not entitled to registration, or determined to be infringing on other marks. We may not be able to protect our rights to these trademarks and trade names or may be forced to stop using these names, which we need for name recognition by potential partners or customers in our markets of interest. During trademark registration proceedings, we may receive rejections of our applications by the USPTO or in other foreign jurisdictions. Although we would be given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, in the USPTO and in comparable agencies in many foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our trademarks, and our trademarks may not survive such proceedings. If we are unable to establish name recognition based on our trademarks and trade names, we may not be able to compete effectively, and our business may be adversely affected. We may license our trademarks and trade names to third parties, such as distributors. Although these license agreements may provide guidelines for how our trademarks and trade names may be used, a breach of these agreements or misuse of our trademarks and tradenames by our licensees may jeopardize our rights in or diminish the goodwill associated with our trademarks and trade names. Our efforts to enforce or protect our proprietary rights related to trademarks, trade names, and service marks may be ineffective and could result in substantial costs and diversion of resources and could adversely affect our financial condition or results of operations.

Trademark litigation can be expensive and the outcome can be highly uncertain. Furthermore, in many countries, owning and maintaining a trademark registration may not provide an adequate defense against a subsequent infringement claim asserted by the owner of a senior trademark. At times, competitors or other third parties may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of our registered or unregistered trademarks or trade names. If we assert trademark infringement claims, a court may determine that the marks we have asserted are invalid or unenforceable, or that the party against whom we have asserted trademark infringement has superior rights to the marks in question. In this case, we could ultimately be forced to cease use of such trademarks.

We may not be able to protect our intellectual property rights throughout the world.

The laws of some foreign countries do not protect intellectual property rights in the same manner and to the same extent as laws in the United States. Consequently, competitors may use our technologies in jurisdictions where we have no meaningful intellectual property protection to develop their own products. These products may compete with our products in these jurisdictions. Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets, trademarks, and other intellectual property protection, particularly those relating to nutritional supplement products, which could make it difficult for us to enforce our proprietary rights generally. Proceedings to enforce our trade secret rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, or could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

 

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In the future, we may need to obtain licenses of third-party technology that may not be available to us or are available only on commercially unreasonable terms, and which may cause us to operate our business in a more costly or otherwise adverse manner that was not anticipated.

From time to time, we may be required to license technologies or trademarks relating to our promotional and collaborative programs from third parties to further develop or commercialize our products. Should we be required to obtain licenses to any third-party technology or trademarks, including any patents required to manufacture, use or sell our products, such licenses may not be available to us on commercially reasonable terms, or at all. The inability to obtain any third-party license required to develop or commercialize any of our products could cause us to abandon any related efforts, which could seriously harm our business and operations.

Because of the expense and uncertainty of litigation, we may not be in a position to enforce our intellectual property rights against third parties.

Because of the expense and uncertainty of litigation, we may not be in a position to enforce our intellectual property rights against third parties and we may conclude that even if a third party is infringing our intellectual property, the risk-adjusted cost of bringing and enforcing such a claim or action may be too high or not in the best interest of our company or our stockholders. Our competitors or other third parties may be able to sustain the costs of complex patent litigation or proceedings more effectively than we can because of their greater financial resources and more mature and developed intellectual property portfolios. In addition, the uncertainties associated with litigation could compromise our ability to raise the funds necessary to continue our internal research programs, in-license needed technology or other products, or enter into development partnerships that would help us bring our product to market. In such cases, we may decide that the more prudent course of action is to simply monitor the situation or initiate or seek some other non-litigious action or solution.

We may not be able to partner with others for technological capabilities and new products and services.

Our ability to remain competitive may depend, in part, on our ability to seek partners that can offer technological improvements and improve existing products and services offered to our customers. We are committed to attempting to keep pace with changes in the nutritional supplement and health and wellness industries, and to stay abreast of technology changes and to look for partners that will develop new products and services for our customer base. We cannot assure prospective investors that we will be successful in finding partners or be able to continue to incorporate new developments in technology, to improve existing products and services, or to develop successful new products and services. We also cannot be certain that newly-developed products and services will perform satisfactorily or be widely accepted in the marketplace or that the costs involved in these efforts will not be substantial.

Our use of “open source” software could subject our proprietary software to general release, adversely affect our ability to sell our products, and subject us to possible litigation.

A portion of our proprietary software that we use to perform services as part of our product offering incorporate so-called “open source” software and we may incorporate open source software into other products or technologies in the future. Such open source software is generally licensed by its authors or other third parties under open source licenses. Some open source licenses contain requirements that we disclose source code for modifications we make to the open source software and that we license such modifications to third parties at no cost. In some circumstances, distribution of our software in connection with open source software could require that we disclose and license some or all of our proprietary code in that software as well as distribute our products that use particular open source software at no cost to the user. We monitor our use of open source software in an effort to avoid uses in a manner that would require us to disclose or grant licenses under our proprietary source code, however, there can be no assurance that such efforts will be successful. Open source license terms are often ambiguous and such use could inadvertently occur. There is little legal precedent governing the interpretation of many of the terms of certain of these licenses, and the potential impact of these terms on our business may result

 

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in unanticipated obligations regarding our products and technologies. Companies that incorporate open source software into their products have, in the past, faced claims seeking enforcement of open source license provisions and claims asserting ownership of open source software incorporated into their product. If an author or other third party that distributes such open source software were to allege that we had not complied with the conditions of an open source license, we could incur significant legal costs defending ourselves against such allegations. In the event such claims were successful, we could be subject to significant damages or be enjoined from the distribution of our products. In addition, if we combine our proprietary software with open source software in certain ways, under some open source licenses we could be required to release the source code of our proprietary software, which could substantially help our competitors develop products that are similar to or better than ours and otherwise have a material adverse effect on our business.

Risks Related to This Offering

Prior to this offering, there has been no public market for shares of our common stock and an active trading market for our common stock may never develop or be sustained.

Prior to this offering, there has been no public market for shares of our common stock. We have applied to list our common stock with the Nasdaq Global Select Market (Nasdaq), under the symbol “THRN.” However, we cannot assure you that an active trading market for our common stock will develop on that exchange or elsewhere or, if developed, that any market will be sustained. Accordingly, we cannot assure you that an active trading market for our common stock will develop or be maintained, the liquidity of any trading market, your ability to sell your shares of our common stock when desired, or the prices that you may obtain for your shares of our common stock.

The market price of our common stock may be volatile, and you could lose all or part of your investment.

The initial public offering price of our common stock will be determined through negotiation among us and the underwriters. This price does not necessarily reflect the price at which investors in the market will be willing to buy and sell shares of our common stock following this offering. In addition, the market price of our common stock following this offering is likely to be volatile and could be subject to fluctuations in response to various factors, some of which are beyond our control. These fluctuations could cause you to lose all or part of your investment in our common stock since you might be unable to sell your shares at or above the price you paid in this offering. Factors that could cause fluctuations in the market price of our common stock include the following:

 

   

price and volume fluctuations in the overall stock market from time to time;

 

   

volatility in the market prices and trading volumes of health and wellness stocks;

 

   

changes in operating performance and stock market valuations of other health and wellness companies generally, or those in our industry in particular;

 

   

sales of shares of our common stock by us or our stockholders, as well as the anticipation of lock-up releases;

 

   

failure of securities analysts to maintain coverage of us, changes in financial estimates by securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

 

   

the financial projections we may provide to the public, any changes in those projections, or our failure to meet those projections;

 

   

announcements by us or our competitors of new products or services;

 

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the public’s reaction to our press releases, other public announcements, and filings with the SEC;

 

   

rumors and market speculation involving us or other companies in our industry;

 

   

short selling of our common stock or related derivative securities;

 

   

actual or anticipated changes in our results of operations or fluctuations in our results of operations;

 

   

actual or anticipated developments in our business, our competitors’ businesses or the competitive landscape generally;

 

   

announced or completed acquisitions of businesses, offerings or technologies by us or our competitors;

 

   

developments or disputes concerning our intellectual property or other proprietary rights;

 

   

litigation involving us, our industry, or both, or investigations by regulators into our operations or those of our competitors;

 

   

actual or perceived incidents relating to privacy, data protection or information security;

 

   

new laws or regulations, or new interpretations of existing laws or regulations applicable to our business;

 

   

changes in accounting standards, policies, guidelines, interpretations or principles;

 

   

any significant change in our management;

 

   

the COVID-19 pandemic, natural disasters or major catastrophic events; and

 

   

general economic conditions and slow or negative growth of our markets.

In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities action litigation has often been instituted against these companies. This litigation, if instituted against us, would result in substantial costs and a diversion of our management’s attention and resources.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about us, our business, or our market, or if they change their recommendations regarding our common stock adversely, the market price and trading volume of our common stock could decline.

The trading market for our common stock will depend, in part, on the research and reports that securities or industry analysts publish about us, our business, our market or our competitors. The analyst estimates are based upon their own opinions and are often different from our estimates or expectations. If any of the analysts who cover us change their recommendation regarding our common stock adversely, provide more favorable relative recommendations about our competitors, or publish inaccurate or unfavorable research about our business, the price of our securities would likely decline. If few securities analysts commence coverage of us, or if one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets and demand for our securities could decrease, which could cause the price and trading volume of our common stock to decline.

 

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We will incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could adversely affect our business, results of operations, and financial condition.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (Exchange Act), the listing standards of Nasdaq, and other applicable securities rules and regulations. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time-consuming and costly, and place significant strain on our personnel, systems and resources. For example, the Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and results of operations. As a result of the complexity involved in complying with the rules and regulations applicable to public companies, our management’s attention may be diverted from other business concerns, which could harm our business, results of operations and financial condition. We may need to hire more personnel in the future or engage outside consultants, which will increase our operating expenses, to assist us in complying with these requirements.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs, and making some activities more time-consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest substantial resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from business operations to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us, and our business may be harmed.

We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which may result in an increased risk of threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and results of operations could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business, results of operations, and financial condition.

We have broad discretion over the use of the net proceeds from this offering and we may not use them effectively.

We cannot specify with any certainty the particular uses of the net proceeds that we will receive from this offering. Our management will have broad discretion in the application of the net proceeds from this offering, including for any of the purposes described in the section titled “Use of Proceeds,” and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. The failure by our management to apply these proceeds effectively could adversely affect our business, financial condition and

 

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results of operations. Pending their use, we may invest our proceeds in a manner that does not produce income or that loses value. Our investments may not yield a favorable return to our investors and may negatively impact the price of our common stock.

Upon completion of this offering, our executive officers, directors, and holders of 5% or more of our common stock will collectively beneficially own approximately    % of the outstanding shares of our common stock and continue to have substantial control over us, which will limit your ability to influence the outcome of important transactions, including a change in control.

Upon completion of this offering, our executive officers, directors and each of our stockholders who own 5% or more of our outstanding common stock and their affiliates, in the aggregate, will beneficially own approximately     % of the outstanding shares of our common stock, based on the number of shares outstanding as of March 31, 2021. As a result, these stockholders, if acting together, will be able to influence or control matters requiring approval by our stockholders, including the election of directors and the approval of mergers, acquisitions or other extraordinary transactions. They may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. This concentration of ownership may have the effect of delaying, preventing or deterring a change in control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.

The issuance of additional stock in connection with financings, acquisitions, investments, our equity incentive plans, or otherwise will dilute all other stockholders.

Our amended and restated certificate of incorporation that will be in effect upon completion of this offering authorizes us to issue up to                  shares of common stock and up to                 shares of preferred stock with such rights and preferences as may be determined by our board of directors. Subject to compliance with applicable rules and regulations, we may issue shares of common stock or securities convertible into shares of our common stock from time to time in connection with a financing, acquisition, investment, our equity incentive plans, or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and cause the market price of our common stock to decline.

Sales, directly or indirectly, of a substantial amount of our common stock in the public markets by our existing security holders may cause the price of our common stock to decline.

Sales of a substantial number of shares of our common stock into the public market, particularly sales by our directors, executive officers, and principal stockholders, or the perception that these sales might occur, could cause the market price of our common stock to decline and could impair our ability to raise capital through the sale of additional equity securities. Many of our existing security holders have substantial unrecognized gains on the value of the equity they hold, and may take, or attempt to take, steps to sell, directly or indirectly, their shares or otherwise secure, or limit the risk to, the value of their unrecognized gains on those shares.

All of the shares of common stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act except that any shares held by our affiliates, as defined in Rule 144 under the Securities Act, would only be able to be sold in compliance with Rule 144 and any applicable lock-up agreements described below. Approximately                  shares of common stock, assuming no exercise of outstanding options, will be immediately available for sale in the public market. Approximately                  shares of our common stock are also subject to the lock-up agreement or market standoff agreements described below.

In connection with this offering, subject to certain customary exceptions, we, all of our directors and executive officers, and substantially all of the holders of our common stock, or securities exercisable for or convertible into our common stock outstanding immediately prior to this offering, have entered into market standoff agreements with us or lock-up agreements with the underwriters that prohibit them from selling,

 

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contracting to sell, granting any option for the sale of, transferring, or otherwise disposing of any shares of common stock, stock options, or any security or instrument related to common stock permission of BofA Securities, Inc., Cowen and Company, LLC and Evercore Group L.L.C. on behalf of the underwriters for a period of 180 days from the date of this prospectus, subject to early termination as described below.

When the applicable lock-up and market standoff periods described above expire, we and our security holders subject to a lock-up agreement or market standoff agreement will be able to sell our shares in the public market. In addition, BofA Securities, Inc., Cowen and Company, LLC and Evercore Group L.L.C., on behalf of the underwriters, may, in their sole discretion, release all or some portion of the shares subject to lock-up agreements prior to the expiration of the lock-up period. Sales of a substantial number of such shares upon expiration of the lock-up and market standoff agreements, or the perception that such sales may occur, or early release of these agreements, could cause our market price to fall or make it more difficult for you to sell your common stock at a time and price that you deem appropriate.

In addition, as of March 31, 2021, we had stock options outstanding that, if fully exercised, would result in the issuance of 22,177 shares of common stock. All of the shares of common stock issuable upon the exercise of stock options, and the shares reserved for future issuance under our equity incentive plans, will be registered for public resale under the Securities Act of 1933, as amended (the Securities Act). Accordingly, these shares will be able to be freely sold in the public market upon issuance subject to existing lock-up or market standoff agreements and applicable vesting requirements.

Immediately following this offering, the holders of                shares of our common stock will have rights, subject to some conditions, to require us to file registration statements for the public resale of the common stock issuable upon conversion of such shares or to include such shares in registration statements that we may file for us or other stockholders.

We may also issue our shares of common stock or securities convertible into shares of our common stock from time to time in connection with a financing, acquisition, investment, or otherwise. Any further issuance could result in substantial dilution to our existing stockholders and cause the market price of our common stock to decline.

Our amended and restated bylaws designate a state or federal court located within the State of Delaware as the exclusive forum for substantially all disputes between us and our stockholders, and also provide that the federal district courts will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act of 1933, as amended, each of which could limit our stockholders’ ability to choose the judicial forum for disputes with us or our directors, officers, stockholders, or employees.

Our amended and restated certificate of incorporation specifies that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for (a) any derivative action or proceeding brought on our behalf, (b) any action asserting a claim of breach of a fiduciary duty owed by any of our current or former directors, stockholders, officers, or other employees to us or our stockholders, (c) any action or proceeding asserting a claim arising pursuant to, or seeking to enforce any right, obligation or remedy under, any provision of the Delaware General Corporation Law, our amended and restated certificate of incorporation, or our amended and restated bylaws, (d) any action or proceeding as to which the Delaware General Corporation Law confers jurisdiction on the Court of Chancery of the State of Delaware, or (e) any action or proceeding asserting a claim that is governed by the internal affairs doctrine shall be the Court of Chancery of the State of Delaware, or, if the Court of Chancery does not have jurisdiction, another state court in Delaware or, if no state court in Delaware has jurisdiction, the federal district court for the District of Delaware, and any appellate court therefrom, in all cases subject to the court having jurisdiction over the claims at issue and the indispensable parties; provided that the exclusive forum provision will not apply to suits brought to enforce any liability or duty created by the Exchange Act.

 

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Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated bylaws also provide that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act.

Any person or entity purchasing or otherwise acquiring or holding or owning, or continuing to hold or own, any interest in any of our securities shall be deemed to have notice of and consented to the foregoing bylaw provisions. Although we believe these exclusive forum provisions benefit us by providing increased consistency in the application of Delaware law and federal securities laws in the types of lawsuits to which each applies, the exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum of its choosing for disputes with us or any of our directors, officers, stockholders, or other employees, which may discourage lawsuits with respect to such claims against us and our current and former directors, officers, stockholders, or other employees. Our stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder as a result of our exclusive forum provisions. Further, in the event a court finds either exclusive forum provision contained in our amended and restated bylaws to be unenforceable or inapplicable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our results of operations.

Delaware law and provisions in our amended and restated certificate of incorporation and amended and restated bylaws might discourage, delay or prevent a change in control of our company or changes in our management and, therefore, depress the trading price of our common stock.

Our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our restated certificate of incorporation and restated bylaws contain provisions that may make the acquisition of our company more difficult, including the following:

 

   

our board of directors is classified into three classes of directors with staggered three-year terms and directors will only be able to be removed from office for cause by the affirmative vote of holders of at least two-thirds of the voting power of our then outstanding capital stock;

 

   

certain amendments to our amended and restated certificate of incorporation require the approval of stockholders holding two-thirds of the voting power of our then outstanding capital stock;

 

   

any stockholder-proposed amendment to our amended and restated bylaws require the approval of stockholders holding two-thirds of the voting power of our then outstanding capital stock;

 

   

our stockholders may only be able to take action at a meeting of stockholders and may not be able to take action by written consent for any matter;

 

   

our stockholders are be able to act by written consent only if the action is first recommended or approved by the board of directors;

 

   

vacancies on our board of directors may be filled only by our board of directors and not by stockholders;

 

   

only the chair of the board of directors, chief executive officer or a majority of the board of directors are authorized to call a special meeting of stockholders;

 

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certain litigation against us can only be brought in Delaware;

 

   

our restated certificate of incorporation authorizes undesignated preferred stock, the terms of which may be established and shares of which may be issued, without the approval of the holders of our capital stock; and

 

   

advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders.

These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and to cause us to take other corporate actions they desire, any of which, under certain circumstances, could limit the opportunity for our stockholders to receive a premium for their shares of our capital stock and could also affect the price that some investors are willing to pay for our common stock.

If you purchase our common stock in this offering, you will incur immediate and substantial dilution as a result of this offering.

If you purchase our common stock in this offering, you will incur immediate and substantial dilution of $         per share, representing the difference between the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, and our pro forma net tangible book value per share after giving effect to (i) the filing and effectiveness of our amended and restated certificate of incorporation, (ii) the automatic conversion of all shares of our convertible preferred stock outstanding as of March 31, 2021 into                shares of common stock and (iii) the issuance and sale of                shares of common stock by us in this offering. As of March 31, 2021, there were                shares of our common stock subject to outstanding stock options with a weighted-average exercise price of $         per share. To the extent that these outstanding stock options and warrants are ultimately exercised or the underwriters exercise their option to purchase additional shares of our common stock, you will incur further dilution. See the section titled “Dilution” for more information.

We do not intend to pay dividends for the foreseeable future.

We have never declared or paid any cash dividends on our common stock and do not intend to pay any cash dividends in the foreseeable future. Additionally, our ability to pay dividends on our common stock is limited by the restrictions under the terms of our loan and security agreement. We anticipate that for the foreseeable future we will retain all of our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.

We are an “emerging growth company” and a “smaller reporting company” and the reduced disclosure requirements applicable to emerging growth companies and smaller reporting companies may make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act. For so long as we remain an emerging growth company, we are permitted by SEC rules and plan to rely on exemptions from certain disclosure requirements that are applicable to other SEC registered public companies that are not emerging growth companies. These exemptions include not being required to comply with the auditor attestation requirements of Section 404 of the SOX, not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to

 

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the auditor’s report providing additional information about the audit and the financial statements, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. As a result, the information we provide stockholders will be different than the information that is available with respect to other public companies. In this prospectus, we have not included all of the executive compensation related information that would be required if we were not an emerging growth company. To the extent that we continue to qualify as a “smaller reporting company,” as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, after we cease to qualify as an emerging growth company, we will continue to be permitted to make certain reduced disclosures in our periodic reports and other documents that we file with the SEC. We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company,” which would allow us to continue to take advantage of many of the same exemptions from disclosure requirements, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

General Risks

Our business is subject to the risk of hurricanes, earthquakes, fire, power outages, floods, and other catastrophic events, and to interruption by manmade problems such as terrorism.

Our business is vulnerable to damage or interruption from hurricanes, earthquakes, fires, floods, power losses, telecommunications failures, terrorist attacks, acts of war, human errors, break-ins, and similar events. The third-party systems and operations and manufacturers we rely on are subject to similar risks. For example, a significant natural disaster, such as a hurricane affecting our South Carolina facilities, an earthquake affecting our California facilities, or a fire, or flood, could have an adverse effect on our business, financial condition and operating results, and our insurance coverage may be insufficient to compensate us for losses that may occur. Acts of terrorism, which may be targeted at metropolitan areas that have higher population density than rural areas, such as New York City where our corporate headquarters is located, could also cause disruptions in our business or the economy as a whole. We may not have sufficient protection or recovery plans in some circumstances, such as natural disasters affecting locations that store significant inventory of our products, that house our servers, or from which we generate content. As we rely heavily on our computer and communications systems, and the internet to conduct our business and provide high-quality customer service, these disruptions could negatively impact our ability to run our business and either directly or indirectly disrupt suppliers’ and manufacturers’ businesses, which could have an adverse effect on our business, financial condition, and operating results. In addition, the COVID-19 pandemic and widespread shelter-in-place and other governmental restrictions have caused most of our employees to work remotely. Given these widespread remote work arrangements, if a natural disaster, power outage, connectivity issue, or other event occurs that impacts our

 

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employees’ ability to work remotely, it may be difficult or, in certain cases, impossible, for us to continue our business and provide high-quality customer service for a substantial period of time.

Cybersecurity risks could adversely affect our business and disrupt our operations.

We rely, or will rely, on information technology systems to keep financial records and other sensitive business, information, including personal information about our employees, customers and other third parties, facilitate our research and development initiatives, manage our manufacturing operations, maintain quality control, communicate with customers, fulfill customer orders, maintain corporate records, communicate with staff and external parties and operate other critical functions. While we take measures to safeguard and protect this information, including using methods such as multi-layer firewalls, intrusion detection systems, content filtering, endpoint security, centralized logging and alerting, email security mechanisms, and access control mechanisms, threats to network and data security are increasingly diverse and sophisticated. We also continue to pursue independent third-party assessments and validations of our security and compliance capabilities, including through obtaining industry-standard certification like SOC 2. Despite our efforts and processes to prevent security breaches and incidents, our products and services, as well as our servers, computer systems, and those of third parties that we use in our operations are vulnerable to cybersecurity risks, including cyberattacks such as viruses and worms, phishing attacks and other forms of social engineering, denial-of-service attacks, ransomware attacks, physical or electronic break-ins, third-party or employee theft or misuse, and other negligent actions, errors or malfeasance by employees or other third parties, and similar disruptions from unauthorized tampering with our servers and computer systems or those of third parties that we use in our operations, which could lead to interruptions, delays, loss or corruption of critical data, unauthorized access to or acquisition of health-related and other personal information and loss of customer confidence. In addition, we may be the target of email scams and other social engineering attacks that attempt to acquire personal information or company assets or access to our systems. Despite our efforts to create security barriers to such threats, we may not be able to entirely mitigate these risks. Our third-party service providers face similar risks. Any cyberattack that attempts to obtain our or our customers’ data or assets, disrupt our service, or otherwise access our systems, or those of third parties we use, or any other security breach or incident, could adversely affect our business, and financial condition and operating results, be expensive to remedy, and damage our reputation. We and our third-party service providers may face difficulties or delays in identifying or otherwise responding to any attacks or actual or potential security breaches or security incidents. We may incur significant costs and operational consequences of investigating, remediating, eliminating and putting in place additional tools and devices designed to prevent actual or perceived security breaches and other security incidents, including in response to any actual or perceived incident we may suffer, and substantial costs to comply with any notification or other legal obligations resulting from any security breaches or other security incidents. In addition, any such breaches or incidents, or the perception that they have occurred, may result in negative publicity, and adversely affect our brand and market perception of our platform and our company, impacting demand for our products and services, and could have an adverse effect on our business, financial condition and operating results.

Although we maintain insurance coverage that may cover certain liabilities in connection with security breaches and other security incidents, we cannot be certain our insurance coverage will be adequate for liabilities actually incurred, that insurance will continue to be available to us on commercially reasonable terms, if at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, or denials of coverage, could have a material adverse effect on our business, including our financial condition, results of operations and reputation.

 

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We rely heavily on third parties for most of our computing, storage, processing, and similar services. Any disruption of or interference with our use of these third-party services could have an adverse effect on our business, financial condition, and operating results.

We have outsourced our cloud infrastructure to third-party providers, and we currently use these providers to host and stream our customer-facing services and content. We are therefore vulnerable to service interruptions experienced by these providers and we expect to experience interruptions, delays or outages in service availability in the future due to a variety of factors, including infrastructure changes, human, hardware or software errors, hosting disruptions and capacity constraints. Outages and capacity constraints could arise from a number of causes such as technical failures, natural disasters, fraud or security attacks. The level of service provided by these providers, or regular or prolonged interruptions in that service, could also affect the use of, and our customers’ satisfaction with, our products and services and could harm our business and reputation. In addition, hosting costs will increase as our customer base grows, which could harm our business if we are unable to grow our revenue faster than the cost of using these services or the services of similar providers.

Furthermore, our providers have broad discretion to change and interpret the terms of service and other policies with respect to us, and those actions may be unfavorable to our business operations. Our providers may also take actions beyond our control that could seriously harm our business, including discontinuing or limiting our access to one or more services, increasing pricing terms, terminating or seeking to terminate our contractual relationship altogether, or altering how we are able to analyze data in a way that is unfavorable or costly to us. Although we expect that we could obtain similar services from other third parties, if our arrangements with our current providers were terminated, we could experience interruptions of our services, as well as delays and additional expenses in arranging for alternative cloud infrastructure services. Any of these factors could further reduce our revenue, subject us to liability, and cause a loss of customers, any of which could have an adverse effect on our business, financial condition, and operating results.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. All statements other than statements of historical facts contained in this prospectus, including, without limitation, statements regarding the conditions of our industry, our future results of operations and financial position, business strategy, development plans, expected research and development costs, regulatory strategy, product and service development, sales and marketing activities, international expansion efforts, timing and likelihood of success, as well as plans and objectives of management for future operations, are 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,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions. Forward-looking statements contained in this prospectus include, but are not limited to, statements about:

 

   

our business, business strategy, products and services we may offer in the future;

 

   

our ability to increase brand awareness, attract and retain customers and sell additional products and services to new and existing customers;

 

   

our ability to convert customers into recurring subscribers;

 

   

our ability to develop new products and services or improve existing products and services;

 

   

our future financial performance, including trends in revenue, costs of revenue, gross profit, operating expenses and free cash flow;

 

   

expectations about industry trends, such as a shift towards personalized healthcare and increasing demand for convenience;

 

   

our ability to efficiently spend on advertising and marketing;

 

   

our ability to maintain profitability;

 

   

our ability to compete successfully in competitive markets and expand internationally;

 

   

our ability to maintain relationships with key distributors, ingredient suppliers, influencers and research institutions;

 

   

our ability to respond to rapid technological changes;

 

   

our expectations and management of future growth;

 

   

expectations about legal and regulatory changes;

 

   

our ability to attract and retain key personnel and highly qualified personnel;

 

   

our ability to protect our brand and maintain our NPS score;

 

   

our ability to maintain key certifications, such as our NSF Certified Facility;

 

   

our ability to maintain, protect and enhance our intellectual property, including our multi-omics database and trade secrets;

 

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restrictions and penalties as a result of privacy and data protection laws;

 

   

our ability to successfully identify, acquire and integrate companies, technologies and assets;

 

   

the increased expenses associated with being a public company;

 

   

the outcome and impact of litigation, including litigation associated with the filings of IPRs;

 

   

the timing and results of future regulatory filings;

 

   

our anticipated use of our existing resources and the proceeds from this offering; and

 

   

other risks and uncertainties, including those listed under the caption “Risk Factors.”

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 speak only as of the date of this prospectus and are subject to a number of risks, uncertainties and assumptions described in the section titled “Risk Factors” and elsewhere in this prospectus. 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 until after we distribute this prospectus, 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 prospectus, 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.

 

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MARKET, INDUSTRY AND OTHER DATA

This prospectus contains estimates, projections and other information concerning our industry, our business and the markets for our products and services, including data regarding the estimated size of such markets. We obtained the industry, market and similar data set forth in this prospectus from our internal estimates and research and from academic and industry research, publications, surveys and studies conducted by third parties, including governmental agencies. In some cases, we do not expressly refer to the sources from which this data is derived. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances that are assumed in this information. While we believe that the data we use from third parties are reliable, we have not separately verified this data. Any industry forecasts are based on data, including third-party data, models and experience of various professionals and are based on various assumptions, all of which are subject to change without notice. Further, while we believe our internal research is reliable, such research has not been verified by any third party. While we are not aware of any misstatements regarding the market data presented herein, industry forecasts and projections involve risks and uncertainties are subject to change based on various factors, including those discussed under the heading “Risk Factors.”

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of the shares of our common stock in this offering will be approximately $         million, or approximately $         million if the underwriters exercise their option to purchase additional shares in full, based upon the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

Each $1.00 increase or decrease in the assumed initial public offering price of $         per share would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $         million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of 1.0 million shares in the number of shares offered by us would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $         million, assuming the assumed initial public offering price remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purposes of this offering are to obtain additional capital to support our operations, establish a public market for our common stock and facilitate our future access to the public capital markets.

We currently intend to use the net proceeds from this offering, together with our existing cash, as follows:

 

   

approximately $         million to $         million to fund additional nutritional supplement product and test development activities, including investment in our Onegevity platform;

 

   

approximately $         million to $         million to fund expansion of our sales and marketing activities including expansion into additional international markets and costs associated with additional warehousing space;

 

   

approximately $ 20.0 million to repay all outstanding indebtedness under our Credit and Security Agreement with Sumitomo Mitsui Banking Corporation, which matures in February 2022 and accrues interest on the principal amount outstanding at rate of 0.71% and release the guarantees from two shareholders for which we currently pay an annual fee equal to 1.2%; and

 

   

the remaining amounts to fund working capital, other general corporate purposes.

We may use a portion of the net proceeds to repay debt or acquire complimentary products, technologies, intellectual property or businesses; however, we currently do not have any agreements or commitments to complete any such transactions and are not involved in negotiations regarding such transactions.

Based on our current operating plan, we believe that the net proceeds from this offering, together with our existing cash as of the date of this prospectus, will be sufficient to fund our operating expenses and capital expenditures for at least the next 12 months.

Our expected use of the net proceeds from this offering represents our intentions based upon our current plans and business conditions. We cannot predict with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering or the amounts that we will actually spend on the uses set forth above and we may require additional funds in order to fully accomplish the specified uses listed above. As a result, our management will have broad discretion over the use of the net proceeds from this offering.

 

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Pending their use, we intend to invest the net proceeds of this offering in short- and intermediate-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government, subject to applicable regulatory restrictions. We cannot predict whether the proceeds invested will yield a favorable return.

 

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DIVIDEND POLICY

We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions and other factors that our board of directors may deem relevant, including restrictions in our current and future debt instruments, our future earnings, capital requirements, financial condition, prospects, and applicable Delaware law, which provides that dividends are only payable out of surplus or current net profits.

 

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CAPITALIZATION

The following table sets forth our cash and capitalization as of March 31, 2021:

 

   

on an actual basis;

 

   

on a pro forma basis, giving effect to (1) the automatic conversion of all outstanding shares of our convertible preferred stock on a          basis into an aggregate of                  shares of common stock immediately prior to the completion of this offering and (2) the filing and effectiveness of our amended and restated certificate of incorporation immediately prior to the completion of this offering; and

 

   

on a pro forma as adjusted basis to reflect (1) the pro forma adjustments set forth above and (2) our issuance and sale of                  shares of common stock in this offering at the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The pro forma as adjusted information set forth below is illustrative only and will depend on the actual initial public offering price and other terms of this offering determined at pricing. You should read this information in conjunction with our financial statements and the related notes appearing elsewhere in this prospectus, as well as the sections titled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    

As of March 31, 2021

 

 
    

Actual

 

   

Pro Forma

 

    

Pro Forma
as adjusted

 

 
     (in thousands except per share amounts)  

Cash

   $ 23,334     $                        $                    
  

 

 

   

 

 

    

 

 

 

Debt

   $ 21,460       

Convertible preferred stock, $0.01 par value per share; 60,700 shares authorized, 60,700 issued and outstanding, actual;                  shares authorized,                  shares issued and outstanding, pro forma and pro forma as adjusted

     133,485       

Stockholders’ (deficit) equity

       

Preferred stock, par value $0.01 per share: no shares authorized, issued and outstanding, actual;                  shares authorized and no shares issued and outstanding, pro forma and pro forma as adjusted

     —         

Class A common stock, par value $0.01 per share: 142,000 shares authorized, 27,694 issued and outstanding, actual;                  shares authorized,                  shares issued and outstanding, pro forma; and                  shares authorized,                  shares issued and outstanding, pro forma as adjusted

     —         

Class B common stock, no par value per share: 20,000 shares authorized, 13,886 issued and outstanding, actual; no shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

     —         

Additional paid-in capital

     53,085       

Accumulated deficit

     (134,704     

Total stockholders’ (deficit) equity

     (81,619     

Total capitalization

   $ 73,326     $        $    
  

 

 

   

 

 

    

 

 

 

 

(1)

Each $1.00 increase or decrease in the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, each of our pro forma as adjusted cash,

 

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  additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $         million, assuming that the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of 1.0 million shares in the number of shares of common stock offered by us would increase or decrease, as applicable, each of our pro forma as adjusted cash, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $         million, assuming the assumed initial public offering price of $         per share, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their option to purchase additional shares in full, our pro forma as adjusted cash, additional paid-in capital, total stockholders’ (deficit) equity, and total capitalization as of March 31, 2021, would be $         million, $         million, $         million, and $         million, respectively.

The number of shares of our common stock issued and outstanding, pro forma and pro forma as adjusted in the table above is based on                  shares of our common stock outstanding as of March 31, 2021 (including our convertible preferred stock on an as-converted basis), and excludes:

 

   

                 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2021, with a weighted-average exercise price of $         per share;

 

   

                 shares of common stock issuable upon the exercise of options granted after March 31, 2021, with a weighted-average exercise price of $         per share;

 

   

                 shares of common stock issuable upon the exercise of warrants outstanding as of March 31, 2021;

 

   

                 shares of common stock available for future issuance under the 2010 Plan, as of March 31, 2021;

 

   

                 shares of common stock reserved for future issuance under our Onegevity Plan;

 

   

                 shares of common stock reserved for future issuance under our 2021 Plan, which will become effective in connection with this offering, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this plan; and

 

   

                 shares of common stock reserved for future issuance under our ESPP, which will become effective in connection with this offering, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this plan.

 

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DILUTION

Investors purchasing our common stock in this offering will experience immediate and substantial dilution in the pro forma as adjusted net tangible book value of their shares of common stock. Dilution in pro forma as adjusted net tangible book value represents the difference between the initial public offering price of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after the offering.

Our historical net tangible book deficit as of March 31, 2021, was $         million, or $         per share of our common stock. Our historical net tangible book value (deficit) is the amount of our total tangible assets less our total liabilities and convertible preferred stock, which is not included within our stockholders’ (deficit) equity. Historical net tangible book value (deficit) per share represents historical net tangible book value (deficit) divided by the number of shares of our common stock outstanding as of March 31, 2021.

Our pro forma net tangible book value as of March 31, 2021, was $         million, or $         per share of our common stock. Pro forma net tangible book value represents the amount of our total tangible assets less our total liabilities. Pro forma net tangible book value per share represents pro forma net tangible book value divided by the total number of shares outstanding as of March 31, 2021, after giving effect to the automatic conversion of all outstanding shares of our convertible preferred stock as of March 31, 2021 on a                  basis into an aggregate of                 shares of our common stock immediately prior to the completion of this offering as if such conversion had occurred on March 31, 2021.

After giving further effect to our sale of                 shares of common stock in this offering at the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2021, would have been approximately $         million, or approximately $         per share. This represents an immediate increase in pro forma net tangible book value per share of approximately $          to our existing stockholders and an immediate dilution in pro forma net tangible book value per share of approximately $         to investors purchasing shares of common stock in this offering.

The following table illustrates this dilution on a per share basis to new investors (without giving effect to any exercise by the underwriters of their option to purchase additional shares):

 

Assumed initial public offering price per share

      $            

Pro forma net tangible book value per share as of March 31, 2021

   $               
     

Increase in pro forma net tangible book value per share attributable to investors purchasing shares of common stock in this offering

   $       
  

 

 

    

Pro forma as adjusted net tangible book value per share

     
     

 

 

 

Dilution per share to investors participating in this offering

      $    
     

 

 

 

Each $1.00 increase or decrease in the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the pro forma as adjusted net tangible book value per share after this offering by approximately $         per share and the dilution to investors purchasing shares of common stock in this offering by approximately $         per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase of 1.0 million shares in the number of shares offered by us would increase the pro forma as adjusted net tangible book value per share after this offering by approximately $         and decrease the dilution per share to investors purchasing shares of common stock in this

 

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offering by approximately $        , assuming no change in the assumed initial public offering price and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each decrease of 1.0 million shares in the number of shares offered by us would decrease the pro forma as adjusted net tangible book value per share after this offering by approximately $         and increase the dilution per share to investors purchasing shares of common stock in this offering by approximately $        , assuming no change in the assumed initial public offering price and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their option to purchase                additional shares of common stock in full at the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus and assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, the pro forma as adjusted net tangible book value per share after this offering would be approximately $         per share, and the dilution per share to investors purchasing shares of common stock in this offering would be approximately $         per share.

The following table summarizes, on the pro forma as adjusted basis described above, as of March 31, 2021, the number of shares of common stock purchased from us, the total consideration paid, or to be paid, and the weighted-average price per share paid, or to be paid, by existing stockholders and by investors purchasing shares in this offering at the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

    

Shares purchased

   

Total consideration

   

Weighted average
price per sale

 

(dollar in thousands, except per share amounts)

  

Number

    

Percent

   

Amount

    

Percent

 

Existing stockholders before this offering

                                                                     $                    

Investors purchasing shares in this offering

                           $    

Total

        100        100  

The table above assumes no exercise of the underwriters’ option to purchase                 additional shares in this offering. If the underwriters’ exercise their option to purchase additional shares in full, the number of shares of our common stock held by existing stockholders would be reduced to     % of the total number of shares of our common stock outstanding after this offering, and the number of shares of common stock held by investors purchasing shares of common stock in the offering would be increased to      % of the total number of shares outstanding after this offering.

Each $1.00 increase or decrease in the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover          page of this prospectus, would increase or decrease, as applicable, the total consideration paid by investors purchasing shares in this offering by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. Similarly, each increase or decrease of 1.0 million shares in the number of shares offered by us would increase or decrease, as applicable, the total consideration paid by investors purchasing shares in this offering by approximately $         million, assuming no change in the assumed initial public offering price.

The foregoing tables and calculations (other than the historical net tangible book value calculation) are based on the                shares of our common stock outstanding as of March 31, 2021 (including our convertible preferred stock on an as-converted basis), and excludes:

 

   

                 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2021, with a weighted-average exercise price of $         per share;

 

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                 shares of common stock issuable upon the exercise of options granted after March 31, 2021, with a weighted-average exercise price of $         per share;

 

   

                 shares of common stock issuable upon the exercise of warrants outstanding as of March 31, 2021;

 

   

                 shares of common stock for future issuance under our 2010 Plan as of March 31, 2021;

 

   

                 shares of common stock reserved for future issuance under our Onegevity Plan as of March 31, 2021;

 

   

                 shares of common stock reserved for future issuance under our 2021 Plan, which will become effective in connection with this offering as well as any automatic increases in the number of shares of common stock reserved for future issuance under this plan; and

 

   

                 shares of common stock reserved for future issuance under our ESPP, which will become effective in connection with this offering as well as any automatic increases in the number of shares of common stock reserved for future issuance under this plan.

To the extent that any outstanding options are exercised or new options are issued under our equity benefit plans, or we issue additional shares of common stock or other securities convertible into or exercisable or exchangeable for shares of our capital stock in the future, there will be further dilution to investors purchasing shares of common stock in this offering.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following tables summarize our selected consolidated financial data for the periods and as of the dates indicated. We derived the following summary statements of our operations data for the three months ended March 31, 2020 and 2021, and our summary balance sheet data as of March 31, 2021 from our unaudited consolidated financial statements and related notes included elsewhere in this prospectus. Our interim unaudited financial statements have been prepared in accordance with GAAP on the same basis as the annual audited financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of our financial position as of March 31, 2021, and our results of our operations for the three months ended March 31, 2020 and 2021. We also have derived our selected statements of operations data for the years ended December 31, 2019 and 2020, from our audited financial statements appearing elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future, and our interim results are not necessarily indicative of our results for the full fiscal year. You should read the following selected consolidated financial data together with our financial statements and the related notes appearing elsewhere in this prospectus and the information in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     Twelve Months Ended
December 31,
    Three Months Ended
March
 31,
 

Consolidated Statements of Operations

   2019     2020     2020     2021  
     (in thousands except per share amounts)  

Net Sales

   $ 102,532     $ 138,455     $ 33,144     $ 44,484  

Cost of sales

     57,789       73,667       17,964       21,247  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     44,743       64,788       15,180       23,237  

Operating expenses:

        

Research and development

     3,899       4,225       990       907  

Selling, general, and administrative

     54,751       59,548       13,981       15,476  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (13,907     1,015       209       6,854  

Other expense (income):

        

Interest expense, net

     406       1,125       618       283  

Guarantee fees

     298       243       86       139  

Change in fair value of warrant liability

     1,992       1,912       478       1,628  

Other expense (income), net

     (44     2       —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     2,652       3,282       1,182       2,050  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes and loss from equity interest in unconsolidated affiliates

     (16,559     (2,267     (973     4,804  

Income tax expense

     33       177       1       41  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) before loss from equity interest in unconsolidated affiliates

     (16,592     (2,444     (974     4,763  

Loss from equity interest in unconsolidated affiliates(1)

     1,625       1,510       203       57  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (18,217     (3,954     (1,177     4,706  

Net income (loss) - non-controlling interest(2)

     (1,492     (596     (489     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Thorne HealthTech, Inc.

     (16,725     (3,358     (688     4,706  

Deemed Dividends

     (4,813     —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Undistributed earnings attributable to Series E convertible preferred stockholders

     —         —         —         (4,706

Net income (loss) attributable to common stockholders

     (21,538     (3,358     (688     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share:(3)

        

Basic

   $ (1,221   $ (150   $ (39     —    

Diluted

   $ (1,221   $ (150   $ (39     —    

Weighted average common shares outstanding:

        

Basic

     17,638       22,440       17,638       39,663  

Diluted

     17,638       22,440       17,638       39,663  

 

(1)

Represents our proportionate loss arising from our equity interest in Drawbridge and Tecton. For the three months ended March 31, 2021, our portion of Drawbridge’s loss was $0.1 million and for Tecton it was $0. For the three months ended March 31, 2020, our

 

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  portion of Drawbridge’s loss was $0.2 million and for Tecton was $0. For 2020, our portion of Drawbridge’s loss was $0.9 million and for Tecton was $0.5 million. For 2019, our portion of Drawbridge’s loss was $1.2 million and for Tecton was $0.8 million.
(2)

Represents the net loss attributable to the minority shareholders of Onegevity for the three months ended March 31, 2021, and to the minority shareholders of Onegevity and Health Elements for the three months ended March 31, 2020 and for the twelve months ended December 2020 and 2019.

(3)

See Note 20 to our consolidated financial statements appearing at the end of this prospectus for details on the calculation of basic and diluted net loss per share.

 

     As of March 31, 2021  

Consolidated Balance Sheet Data

   Actual      Pro Forma      Pro forma As
Adjusted
 
     (in thousands)  

Cash

   $ 23,334                             

Working capital(4)

     18,025        

Total assets

     133,775        

Total debt

     21,460        

Total liabilities

     81,910        

Series E convertible preferred stock

     133,485        

Total stockholders’ deficit

   $ (81,619      

 

(1)

The pro forma balance sheet data gives effect to the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of                 shares of our common stock which will occur immediately prior to the completion of this offering, resulting in an aggregate of                  outstanding shares of our common stock.

(2)

The pro forma as adjusted column in the balance sheet data gives effect to (i) the pro forma adjustments described in footnote (1) above and (ii) the issuance and sale of                  shares of common stock in this offering at the initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

(3)

Each $1.00 increase or decrease in the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the pro forma as adjusted amount of each of our cash, working capital, total assets and stockholders’ equity by $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of 1.0 million shares in the number of shares offered by us at the assumed initial public offering price would increase or decrease, as applicable, each of our cash, working capital, total assets, and stockholders’ equity by $         million. The pro forma as adjusted information set forth above is illustrative only and will depend on the actual initial public offering price and other terms of this offering determined at pricing.

(4)

Working capital is defined as current assets less current liabilities. See our financial statements appearing elsewhere in this prospectus for further details regarding our current assets and current liabilities.

 

    

Twelve Months Ended

December 31,

   

Three Months Ended

March 31,

 
     2019     2020     2020     2021  
     (dollars in thousands)  

Net income (loss)

   $ (18,216   $ (3,954   $ (1,177   $ 4,706  

Adjusted EBITDA (unaudited)

     8,034       14,433       4,515       8,293  

Adjusted EBITDA margin (unaudited)

     7.8     10.4     13.6     18.6

Net cash provided by (used in) operating activities

     (7,621     17,107       2,986       8,787  

Free cash flow (unaudited)

   $ (10,526   $ 14,784     $ 2,515     $ 8,198  

See subsection “Key Financial and Operating Data” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further details.

 

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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 financial statements and the related notes appearing elsewhere in this prospectus and in the section titled “Selected Consolidated Financial Data.” Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, includes forward-looking statements that involve risks, uncertainties and assumptions. As a result of many factors, including those factors set forth in the section titled “Risk Factors,” our actual results could differ materially from the results described in or implied by these forward-looking statements. You should carefully read the section titled “Risk Factors” to gain an understanding of the factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section titled “Special Note Regarding Forward-Looking Statements.”

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 and peak performance.

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 ten years, we have evolved to become a transformative consumer brand, trusted by more than 3,000,000 customers, 42,000 healthcare professionals, thousands of professional athletes, more than 100 professional sports teams and 11 U.S. Olympic teams.

Key milestones in our growth history include:

 

   

2011: Strategic ingredient and botanical agreement with Indena, a company dedicated to the identification, development and production of high-quality active principles derived from plants, for use in the pharmaceutical and health-food industries;

 

   

2014: Clinical Study Agreement with Mayo Clinic to design and conduct clinical trials of our dietary supplements;

 

   

2017: Launch of NSF Certified for Sport product line;

 

   

2018: Onegevity founded; we expanded capacity by moving to a new, state-of-the-art 272,000 square foot facility in South Carolina;

 

   

2019-2020: Sponsorships of the U.S. Army World Class Athlete Program, UFC, USA Rugby, and Penske Racing; and

 

   

2020-2021: Thorne HealthTech, Inc. facilitated the merger of Thorne and Onegevity.

 

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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, 2020 and 2021:

 

   

we generated net sales of $33.1 million and $44.5 million, respectively, representing 34.2% growth from the same period in 2020;

 

   

we generated gross profit of $15.2 million and $23.2 million, respectively, representing 45.9% and 51.1% of net sales, respectively;

 

   

our net loss was $1.2 million for the three months ended March 31, 2020, and our net income was $4.7 million for the three months ended March 31, 2021; and

 

   

our Adjusted EBITDA was $4.5 million and $8.3 million, respectively.

For the twelve months ended December 31, 2019 and 2020:

 

   

we generated net sales of $102.5 million and $138.5 million, respectively, representing 23.0% and 35.0% year-over-year growth, respectively;

 

   

we generated gross profit of $44.7 million and $64.8 million, respectively, representing 43.6% and 46.8% of net sales, respectively;

 

   

our net loss was $18.2 million and $4.0 million, respectively; and

 

   

our Adjusted EBITDA was $8.0 million and $14.4 million, respectively.

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 prospectus, 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. The SEC has adopted rules to regulate the use of “non-GAAP financial measures” in filings with the SEC and in other public disclosures. 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 used in this prospectus 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 measure 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),

 

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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 or when a service contract’s term is ended. We consider several factors in determining that 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; net loss from non-controlling interest; and the costs of relocating our production facility from Idaho to South Carolina and the associated start-up costs of the new facility. Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by total revenue.

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:

 

   

Adjusted EBITDA and Adjusted EBITDA Margin are widely used by investors and securities analysts to measure a company’s operating performance without regard to items such as stock-based compensation expense, depreciation and amortization expense, interest expense, net, other (income) expense, net, loss from non-controlling interest and provision for income taxes, each of which can vary substantially from company to company depending upon their financing, capital structures and the method by which assets are acquired;

 

   

our management uses Adjusted EBITDA and Adjusted EBITDA Margin in conjunction with financial measures prepared in accordance with GAAP for planning purposes, including the preparation of our annual operating budget, as a measure of our core operating results and the effectiveness of our business strategy, and in evaluating our financial performance; and

 

   

Adjusted EBITDA and Adjusted EBITDA Margin provide consistency and comparability with our past financial performance, facilitate period-to-period comparisons of our core operating results, and also facilitate comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results.

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:

 

   

although depreciation and amortization expense are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA and Adjusted EBITDA

 

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Margin do not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

 

   

Adjusted EBITDA and Adjusted EBITDA Margin exclude stock-based compensation expense, which is a recurring expense for our business and an important part of our compensation strategy;

 

   

Adjusted EBITDA and Adjusted EBITDA Margin do not reflect: (1) changes in, or cash requirements for, our working capital needs; (2) interest expense, or the cash requirements necessary to service interest or principal payments on our debt, which reduces cash available to us; (3) tax payments that may represent a reduction in cash available to us; or (4) the use of net operating loss (NOL) carryforwards and the full valuation reserve against deferred tax assets and liabilities are non-cash items that can have an impact on GAAP performance, but may not reflect the continuing operating results of our business;

 

   

Adjusted EBITDA and Adjusted EBITDA Margin do not reflect certain one-time relocation costs from Idaho to South Carolina where significant cash was expended to relocate personnel, relocate equipment, purchase new equipment and start up a newly built facility that has never operated previously; and

 

   

the expenses and other items that we exclude in our calculation of Adjusted EBITDA and Adjusted EBITDA Margin may differ from the expenses and other items, if any, that other companies may exclude from Adjusted EBITDA when they report their operating results and we may, in the future, exclude other significant, unusual or non-recurring expenses or other items from these financial measures.

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.

The following table presents a reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure prepared in accordance with GAAP, for each of the periods indicated (in thousands except margin figures):

 

    

Twelve Months Ended
December 31,

 

   

Three Months Ended
March 31,

 

 
    

2019

 

   

2020

 

   

2020

 

   

2021

 

 

EBITDA Calculation

        

Net income (loss)

   $ (18,216   $ (3,954   $ (1,177   $ 4,706  

Depreciation and amortization

     4,598       4,296       947       985  

Interest expense, net

     406       1,125       618       283  

Income tax expense

     33       177       1       41  
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

   $ (13,179   $ 1,644     $ 389     $ 6,015  

EBITDA margin

     (12.9 )%      1.2     1.2     13.5

Adjustments:

        

Stock-based compensation

     12,226       10,037       3,073       511  

Change in fair value of warrant liability

     1,992       1,912       478       1,628  

Plant start up costs

     5,044       —         —         —    

Guarantee fees

     298       243       86       139  

Net loss - non-controlling interest

     1,492       596       489       —    

Relocation expenses

     161       —         —         —    

IPO related costs

     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 8,034     $ 14,432     $ 4,515     $ 8,293  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA margin

     7.8     10.4     13.6     18.6

 

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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, the most directly comparable financial measure prepared in accordance with GAAP, for each of the periods indicated (in thousands):

 

     Twelve Months Ended
December 31,
     Three Months Ended
March 31,
 
     2019      2020      2020      2021  

Free Cash flow Calculation

                           

Net cash provided by (used in) operating activities

   $ (7,621    $ 17,107      $ 2,986      $ 8,787  

Purchase of equipment

     (1,655      (1,194      (371      (589

Purchase of licensing agreements

     (1,250      (1,129      (100      —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Free cash flow

   $ (10,526    $ 14,784      $ 2,515      $ 8,198  
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

Annual LTV to CAC

We define annual life-time value (LTV) to customer acquisition costs (CAC) as LTV from a specific calendar year divided by the CAC of that same year. Annual LTV is defined as the average gross contribution per purchasing DTC customer within a particular calendar year 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 calendar year less the cost of goods divided by the number of purchasing DTC customers in the same period. To arrive at the annual LTV for a particular calendar year, we divide the average gross contribution by that year’s Churn Rate. Annual CAC is defined as the total advertising and marketing expenses, less headcount expenses and associated benefit expenses, in a particular calendar year divided by the number of customers who placed their first order during that same year. We view the annual LTV to CAC ratio as a key indicator for marketing efficiency.

 

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Orders per Customer per Year

We define orders per customers per year as the total number of sales orders placed by our DTC customers in a given year divided by the total number of DTC customers who purchased within that same period. We view orders per customer per year 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 per year 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 Our Subscriptions

We offer our customers the ability to opt into recurring automatic refills on both our website and Amazon. On both platforms, a customer can cancel or modify a subscription at any time at no cost to the customer. On our website, we allow customers to subscribe monthly, every 45 days, every two months, every three months, or every four months. For all these frequencies, we offer a 10% discount on retail refill orders. 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 8%.

We view our growing subscription business on Thorne.com and Amazon as a key driver of profitable future sales growth. The chart below shows active subscription numbers and subscription sales as a percentage of net DTC sales by quarter from 2018 to 2020.

 

 

LOGO

Our total number of subscriptions grew from 61,135 at the end of 2018, to 89,178 at the end of 2019 and to 155,305 at the end of 2020, representing a compounded annual growth rate of 59.4%. Our total number of

 

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subscriptions in the first three months of 2020 was 98,809 and in the first three months of 2021 was 168,483, representing 70.5% year-over-year growth. We expect subscription sales 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.

Five years ago, we opened our website to consumers to allow them to purchase products directly from us rather than exclusively through health professionals. The years immediately following this shift were marked by significant organic customer acquisition. More recently, to accelerate new DTC customer growth from 18.4% year-over-year in 2017 to 55.3% year-over-year in 2020, we increased our advertising and marketing budget from 1.9% of total sales in 2016, to 9.5% in 2019 and to 8.0% in 2020, directing a significant portion of the spend to direct response and customer acquisition efforts. Since a significant portion of our spending on advertising and marketing is on digital platforms, we are able to manage and track the effectiveness of our spending. In the second half of 2019 and in the second half of 2020, we invested more heavily than prior years in brand response and brand awareness efforts. Although brand awareness spending may result in higher CAC costs during a period, the long-term impact on customer acquisition and net sales is shown in our attractive LTV to CAC ratio. For example, in the second half of 2019 we launched our “Frontier Within” brand campaign, which increased our brand marketing spend and included deploying campaign assets across connected TV, YouTube, influencers, search, and social platforms as well as an experiential live event in New York City. Despite the campaign’s orientation toward longer-term brand objectives, the DTC sales acceleration was evident on our website with a 24.8% increase in average daily consumer sales during the 22-week campaign compared to the prior period.

We experience high retention, repeat purchases and low CAC as seen by our 2019 and 2020 LTV to CAC ratios of 4.5x and 7.6x, respectively, and by our LTV to CAC ratios of 7.1x and 6.2x for the first three months of 2020 and 2021, respectively. This annual LTV is calculated by taking the average gross contribution per purchasing DTC customer in a rolling twelve-month period and dividing it by the same period’s Churn Rate. Our retention rate is calculated by taking the number of customers at the end of the period minus the number of new customers during the period divided by the number of customers at the beginning of the time period. We calculated our 2020 retention rate as the number of total customers at the end of 2020 less the number of customers acquired during the year divided by the number of customers at the end of 2019. We calculated our retention rate for the first three months of 2021 as the number of total customers at March 31, 2021 less the number of customers acquired during the prior twelve-month period divided by the number of customers at March 31, 2020. Average gross profit contribution is defined as cumulative sales from DTC customers during a twelve-month period less cost of goods divided by the number of purchasing DTC customers in the same period. CAC is calculated as total advertising and marketing expenses less advertising and marketing payroll and associated benefit expenses in a period divided by the total number of customers during that same period. For 2019 and 2020 CAC, we calculated it on a calendar year basis, and for the CAC for the first three months of 2021 we calculated it using the same method for the period January 1, 2021 to March 31, 2021. To arrive at the LTV to CAC ratio, we divide LTV by CAC.

 

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To illustrate our successful customer acquisition strategy, we have included charts below that compare the LTV to CAC ratio of the quarterly cohorts we acquired and tracked from January 1, 2019 to March 31, 2021. A cohort refers to the DTC customers grouped in the quarter in which they first placed an order. This cohort analysis tracks those groups by examining their spend in the first quarter they were acquired and their cumulative gross contribution in each calendar quarter thereafter. Each cohort’s spend is multiplied by the gross margins to arrive at the gross contribution of that cohort. This gross contribution is divided by the cohort size LTV which is then divided by the CAC in the respective quarter to arrive at the ratios below.

 

 

LOGO

As shown in the table above, for all quarters across the 2020 and 2021 cohorts, our LTV to CAC ratio is greater than one, making us first quarter profitable on new customer acquisitions. Our more recent cohorts have similar behavior in spending to our prior cohorts. In each cohort, our LTV to CAC consistently grew as our newly acquired customers continued to purchase from us, growing the LTV of our customers. From January 1, 2019 to March 31, 2021, our CAC has fluctuated from quarter-to-quarter based on the timing of our brand campaigns; however, despite fluctuations, our CAC has remained consistently efficient.

 

LOGO

The graph above demonstrates that we have highly efficient customer acquisition with strong, compelling LTV to CAC ratios over time. Our LTV to CAC ratios are a testament to our ability to acquire and retain customers efficiently and profitably. Maintaining our efficient acquisition and strong customer value will be critical to our profitable growth in the future.

 

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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 2020, 45.6% of our DTC sales were generated from new, first-time purchasers versus 54.4% from existing customers. We deepen our relationships with our customers and drive retention by engaging them with digital health content and educational resources. Usage of our products and engaging with our content has resulted in our strong annual DTC retention rate of 68% in 2020. We calculate annual retention rate by subtracting the number of customers acquired during the period from the number of purchasing customers at the end of the period and dividing that number by the number of customers at the start of the period. Out of our total 2020 DTC sales, nearly one-third were recurring subscription sales. We expect the growth in net sales in each year to continue as we generate and grow sales from existing customers and from newly acquired customers.

Health Professionals

Our network of 42,000 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.

 

 

LOGO

As seen in the chart above, in 2020, our annual retention rate of health professionals was 85.3%, up from 74.1% in 2018.

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 2020, we shipped to 37

 

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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

Selling, general and administrative expenses consist of

 

   

sales and marketing;

 

   

research and development;

 

   

payroll and related expenses for employees involved in general corporate functions, including accounting, finance, tax, legal and human resources;

 

   

costs associated with use by these functions, such as depreciation expense and rent relating to facilities and equipment;

 

   

professional fees and other general corporate costs;

 

   

stock-based compensation; and

 

   

fulfillment costs.

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.

 

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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. We expect interest expense, net to increase in the future in connection with any borrowings under the new revolving credit facility.

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.

 

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Results of Operations

The following table summarizes our results of operations for each of the periods indicated:

 

     Twelve Months Ended
December 31,
     Three Months
March 31,
 
     2019      2020      2020      2021  
     (in thousands except per share amounts)  

Net Sales

   $ 102,532      $ 138,455      $ 33,144      $ 44,484  

Cost of sales

     57,789        73,667        17,964        21,247  
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     44,743        64,788        15,180        23,237  

Operating expenses:

           

Research and development

     3,899        4,225        990        907  

Selling, general, and administrative

     54,751        59,548        13,981        15,476  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) from operations

     (13,907      1,015        209        6,854  

Other expense (income):

           

Interest expense, net

     406        1,125        618        283  

Guarantee fees

     298        243        86        139  

Change in fair value of warrant liability

     1,992        1,912        478        1,628  

Other expense (income), net

     (44      2                
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other expense, net

     2,652        3,282        1,182        2,050  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) before income taxes and loss from equity interest in unconsolidated affiliates

     (16,559      (2,267      (973      4,804  

Income tax expense

     33        177        1        41  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) before loss from equity interest in unconsolidated affiliates

     (16,592      (2,444      (974      4,763  

Loss from equity interest in unconsolidated affiliates

     1,625        1,510        203        57  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

     (18,217      (3,954      (1,177      4,706  

Net income (loss) - non-controlling interest

     (1,492      (596      (489       
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to Thorne HealthTech, Inc.

     (16,725      (3,358      (688      4,706  

Deemed Dividends

     (4,813                     

Undistributed earnings attributable to Series E convertible preferred stockholders

     —          —          —          (4,706
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to common stockholders

     (21,538      (3,358      (688      —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings (loss) per share:

           

Basic

   $ (1,221    $ (150    $ (39      —    

Diluted

   $ (1,221    $ (150    $ (39      —    

Weighted average common shares outstanding:

           

Basic

     17,638        22,440        17,638        39,663  

Diluted

     17,638        22,440        17,638        39,663  

Net sales

Net sales for the three months ended March 31, 2021 increased by $11.3 million, or 34.2%, to $44.5 million compared to $33.1 million for the same period in 2020. This growth was largely driven by an increase in our DTC customers. The introduction of new innovative products along with a continued increase in demand for our immune suite products helped drive sales and new customers, while the expansion of our health evaluations with quizzes and tests increased the conversion of those participants to new customers.

Net sales for the twelve months ended December 31, 2020 increased by $35.9 million, or 35.0%, to $138.5 million compared to $102.5 million in the twelve months ended December 31, 2019. This growth was largely driven by growth in our DTC customers. Our DTC sales were $53.7 million in the twelve months ended December 31, 2020 compared to $34.9 million for the twelve months ended December 31, 2019, which represents 53.9% year-over-year growth. The introduction of new innovative products along with an increase in demand for our immune suite products helped drive sales and new customers, while the expansion of our health evaluations with quizzes and tests increased the conversion of those new customers.

 

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Cost of Sales and Gross Profit

The following table summarizes our cost of goods sold and gross profit for the periods indicated (in thousands except percentage figures):

 

     Twelve Months Ended
December 31,
    Change     Percent
Change
    Three Months Ended
March 31,
    Change     Percent
Change
 
     2019     2020     2020     2021  

Net Sales

   $ 102,532     $ 138,455     $ 35,923       35.0   $ 33,144     $ 44,484     $ 11,340       34.2

Cost of sales

     57,789       73,667       15,878       27.5     17,964       21,247       3,283       18.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percent of net sales

     56.4     53.2     (3.2 )%      (5.6 )%      54.2     47.8     (6.4 )%      (11.9 )% 

Gross profit

   $ 44,743     $ 64,788     $ 20,045       44.8   $ 15,180     $ 23,237     $ 8,057       53.1

Percent of net sales

     43.6     46.8     3.2     7.2     45.8     52.2     6.4     14.1

Cost of sales for the three months ended March 31, 2021 increased by $3.3 million, or 18.3%, to $21.2 million compared to $18.0 million for the same period in 2020. This increase in cost of sales was primarily due to a 34.2% increase in net sales and associated product costs, partially offset by additional efficiencies in our manufacturing processes, including increased capacity, increased batch sizes and improved fixed cost leverage. 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, 2021 increased by $8.1 million, or 53.1%, to $23.2 million compared to $15.2 million for the same period in 2020. 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 sales for the first three months of 2021 increased by 14.1% compared to the same period of 2020.

Cost of sales for the twelve months ended December 31, 2020 increased by $15.9 million, or 27.5%, to $73.7 million compared to $57.8 million in the twelve months ended December 31, 2019. This increase in cost of sales was primarily due to a 35.0% increase in net sales and associated product costs, partially offset by a reduction of our cost to manufacture our products. 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 twelve months ended December 31, 2020 increased by $20.0 million, or 44.8%, to $64.8 million compared to $44.7 million in the twelve months ended December 31, 2019. This increase was primarily due to an increase in net sales as described above as well as obtaining efficiencies operating, including increased capacity and increased batch sizes. Gross profit as a percentage of sales for the twelve months ended December 31, 2020 increased by 7.2% compared to the twelve months ended December 31, 2019.

 

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Selling, General and Administrative Expenses

The following table summarizes our selling, general and administrative expenses for periods indicated: (in thousands except percentage figures):

 

     Twelve Months Ended
December 31,
                Three Months Ended
March 31,
             
     2019     2020     Change     Percent
Change
    2020     2021     Change     Percent
Change
 

Total operating expenses

   $ 58,650     $ 63,773     $ 5,123       8.7   $ 14,971     $ 16,383     $ 1,412       9.4

Percent of net sales

     57.2     46.1     (11.1 )%      (19.5 )%      45.2     36.8     (8.3 )%      (18.5 )% 

Marketing

   $ 9,792     $ 11,151     $ 1,359       13.9   $ 1,551     $ 4,239     $ 2,688       173.3

Percent of net sales

     9.6     8.1     (1.5 )%      (15.7 )%      4.7     9.5     4.8     103.6

Research and development

   $ 3,899     $ 4,225     $ 326       8.4   $ 990     $ 907     $ (83     (8.4 )% 

Percent of net sales

     3.8     3.1     (0.8 )%      (19.8 )%      3.0     2.0     (0.9 )%      (31.7 )% 

Other operating expenses

     44,959       48,397       3,438       7.6     12,430       11,237       (1,193     (9.6 )% 

Percent of net sales

     43.8     35.0     (8.9 )%      (20.3 )%      37.5     25.3     (12.2 )%      (32.6 )% 

Total selling, general and administrative expenses for the three months ended March 31, 2021 increased by $1.4 million, or 9.4%, to $16.4 million compared to $15.0 million for the same period in 2020. This increase was primarily due to an increase in marketing expenses. Marketing expenses for the quarter ended March 31, 2021 increased by $2.7 million, or 173.3%, to $4.2 million, compared to $1.6 million for the same period in 2020. The increase was primarily due to our investment in paid, working media. The increased investment in our paid media efforts is part of our mission to increase brand awareness and spread our message to reach and acquire more consumers, particularly to the Thorne website. Research and development expense for the three months ended March 31, 2021 decreased by $0.1 million, or 8.4%, to $0.9 million compared to $1.0 million for the same period in 2020. The decrease was primarily due to the timing associated with spending on new product development and clinical trial investments.

Total selling, general and administrative expenses for the twelve months ended December 31, 2020 increased by $5.1 million, or 8.7%, to $63.8 million compared to $58.6 million in the twelve months ended December 31, 2019. This increase was primarily due to an increase in marketing expenses, research and development and headcount focused on research and medical support. Marketing expense for the twelve months ended December 31, 2020 increased by $1.4 million, or 13.9%, to $11.2 million, compared to $9.8 million in the twelve months ended December 31, 2019. The increase was primarily due to our investment in paid, working media year-over-year. The increased investment in our paid media efforts is part of our mission to increase the brand awareness and spread our message to reach more and acquire more consumers. Research and development expense for the twelve months ended December 31, 2020 increased by $0.3 million, or 8.4%, to $4.2 million compared to $3.9 million in the twelve months ended December 31, 2019. The increase was primarily due to an increase in new product development and clinical trial investments.

Interest Expense, Net

The following table summarizes our interest expense, net for the periods indicated: (in thousands except percentage figures):

 

     Twelve Months Ended
December 31,
                Three Months Ended
March 31,
             
     2019     2020     Change     Percent
Change
    2020     2021     Change     Percent
Change
 

Interest expense, net

   $ 406     $ 1,125     $ 719       177.1   $ 618     $ 283     $ (335     (54.2 )% 

Percent of net sales

     0.4     0.8     0.4     105.2     1.9     0.6     (1.2 )%      (65.9 )% 

 

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Interest expense, net for the three months ended March 31, 2021 decreased by $0.3 million, or 54.2%, to $0.3 million compared to $0.6 million for the same period in 2020. This decrease was primarily due to the lower interest rate associated with a $20.0 million loan obtained beginning in February 2020 and repayment of our existing loan.

Interest expense, net for the twelve months ended December 31, 2020 increased by $0.7 million, or 175.0%, to $1.1 million compared to $0.4 in the twelve months ended December 31, 2019. This increase was primarily due to additional borrowing from banks that increased from $11.2 million to $20.0 million beginning in February 2020.

Quarterly Results of Operations and Key Metrics

Quarterly Trends

Since we moved into our new facility and moved nearly all production in-house which, did not fully occur until the first three months of 2020, our financial results have been consistently improving with significant positive growth in earnings, free cash flow and sales. We believe that our 2020 results more accurately reflect our business on a go forward basis now that we are in control of manufacturing, which allows us to focus spending on marketing, new product development and growth opportunities.

Our 2019 financial performance was significantly impacted by the continued efforts dedicated to the move of our manufacturing and distribution facility from Idaho to South Carolina. This move was necessary to meet the significant increase in demand of products. In 2019, the move had a negative impact of $5.2 million on earnings. In connection with the move, we also incurred retention costs and additional expenses with hiring and training. Moving facilities required that we outsource production for up to 30% of our products, which increased our variable cost of sales by $5.0 million in 2019. Due to outsourcing, we spread our fixed production costs across a lower production volume, further impacting margins.

Net Sales

Our revenue is generally not materially impacted by seasonal fluctuations. Our first three months are typically strong because our customers implement New Year’s resolutions. In addition, sales from health professionals tend to slow in the summer months as they go on vacation. Subscription revenue increased in each of the quarters presented above primarily due to new DTC customer growth and high retention rates.

Cost of Sales

Our cost of sales has fluctuated in line with our revenue for all periods presented due primarily to costs associated with sales of our products.

Selling, General and Administrative Expenses

Selling, general and administrative expenses is relatively stable and tends to increase based on marketing and research and development expenditures. Research and development expense increased primarily due to new product development and clinical trials. We have focused our research and development efforts on fewer products that will have a larger positive impact on net sales, and help maintain manufacturing efficiencies. Sales and marketing expense fluctuate quarterly based on the timing of brand marketing campaign investments; however, generally marketing as a percentage of sales remains relatively constant over time. Variations in quarter-to-quarter expenses are driven by fluctuations in paid media spend.

 

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Liquidity and Capital Resources

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). Under the 2020 Credit Agreement, we borrowed $20.0 million in loans, the maximum amount available. We used the proceeds of these loans to pay the Series D dividend discussed below, plus accrued interest, totaling approximately $3.3 million, to repay our outstanding $3.1 million loan from Kirin and we used the balance of the proceeds, totaling approximately $13.9 million, to repay the principal and accrued interest on our loan with SunTrust Bank.

Our obligations under the 2020 Credit Agreement were guaranteed by Kirin Holdings Company, Limited (Kirin) and Mitsui & Co., Ltd. (Mitsui). We paid each guarantor an annual fee equal to two percent of $10 million for such guarantees annually and upon the occurrence of any change of control in respect of our company. Under the Fee Letter dated February 14, 2020 between us and Mitsui (2020 Mitsui Fee Letter), we also agreed to reimburse Mitsui in cash for any amounts that Mitsui paid under its guarantee of the 2020 Credit Agreement. However, if we were not able to wholly or partially reimburse such amounts to Mitsui, then we and Mitsui agreed to deem such unreimbursed amount to have been made for the benefit of our company in consideration for our debt or equity securities on terms reasonably satisfactory to Mitsui and us. We paid the Series D dividend plus accrued interest for a total of $3.3 million in February 2020.

Under the Fee Letter dated February 14, 2020 between us and Kirin (2020 Kirin Fee Letter), we agreed to reimburse Kirin in cash for any amounts that Kirin paid under its guarantee of the 2020 Credit Agreement. If we were not able to wholly or partially reimburse such amounts to Kirin, however, then we and Kirin agreed to deem such unreimbursed amount to have been made for our benefit in consideration for our debt or equity securities on terms reasonably satisfactory to Kirin and us.

In February 2021, we replaced and refinanced the 2020 Credit Agreement and all loans outstanding thereunder with a new uncommitted revolving credit line from SMBC having substantially similar terms, as further described below and under Note 21 to our consolidated financial statements.

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 breakfunding or additional costs as determined by SMBC. As of February 12, 2021, we have fully drawn down $20.0 million under the 2021 Credit Agreement to refinance our outstanding loans under the 2020 Credit Agreement. As a result, under the $20.0 million maximum credit line, no additional amount is available to be borrowed.

A 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.

 

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Our obligations under the 2021 Credit Agreement are guaranteed by Kirin and Mitsui. We 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 the Company. Under the Fee Letter dated February 12, 2021 between us and Mitsui (2021 Mitsui Fee Letter), we also agree to reimburse Mitsui in cash for any amounts that Mitsui pays under its guarantee of the 2021 Credit Agreement. However, if we are not able to wholly or partially reimburse such amounts to Mitsui, then we and Mitsui may agree to deem such unreimbursed amount to be 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 February 12, 2021 between us and Kirin (2021 Kirin Fee Letter), we agreed to reimburse Kirin in cash for any amounts that Kirin pays under its guarantee of the 2021 Credit Agreement. If we are not able to wholly or partially reimburse such amounts to Kirin, however, then we and Kirin may agree to deem such unreimbursed amount to be made for our benefit in consideration for our debt or equity securities on terms reasonably satisfactory to Kirin and us. After the closing of this offering, we intend to negotiate with SMBC to pay off our existing debt under the 2021 Credit Agreement. If we pay off our existing debt under the 2021 Credit Agreement, then the related Mitsui and Kirin guarantees may also be released and terminated. There is no guarantee, however, that our negotiations will be successful.

The 2021 Credit Agreement contains customary affirmative covenants, including covenants regarding the payment of taxes and other obligations, maintenance of insurance, 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, and grant liens, subject to certain exceptions. Upon the occurrence and during the continuance of an event of default, SMBC may declare all outstanding principal of, and accrued and unpaid interest on, loans made under the 2021 Credit Agreement immediately due and payable and may exercise the other rights and remedies provided for under the 2021 Credit Agreement and related loan documents. The events of default under the 2021 Credit Agreement include, subject to grace periods in certain instances, payment defaults, cross defaults with certain other material indebtedness, certain material judgments, breaches of covenants or representations and warranties, change in control of our company, a material adverse change as defined in the 2021 Credit Agreement, and certain bankruptcy and insolvency events.

On June 2, 2020, we entered into an Unconditional Guaranty (the Truist Guaranty), pursuant to which we guaranteed the obligations of our subsidiary, Thorne Research, Inc., owing to Truist Bank. In 2020, this Truist Guaranty was terminated.

The foregoing description of the 2021 and 2020 Credit Agreements, the 2021 and 2020 Mitsui Fee Letters, and 2021 Kirin Fee Letters and Truist Guaranty does not purport to be complete and is qualified in its entirety by reference to the 2021 and 2020 Credit Agreements, the 2021 and 2020 Mitsui Fee Letters and 2021 Kirin Fee Letters attached hereto as exhibits.

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 twelve-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 light 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 twelve-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

 

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(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 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 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. The guarantee fee expense for this letter of credit under the 2018 Mitsui Fee Letter and the 2018 Kirin Fee Letter for the years ended December 31, 2020 and 2019 were $297,920 and $297,920, respectively. All of these guarantee fees are included in the financial expenses in the consolidated statements of operations. After the closing of this offering, we intend to negotiate with the applicable landlord to attempt to remove the requirement for such letter of credit. If we succeed in negotiating such removal or a replacement credit support, then the related supporting Mitsui and Kirin guarantees may also not be required. There is no guarantee, however, that the applicable landlord will agree to remove the letter of credit or to accept an alternative, replacement credit support.

Copies of the LC Reimbursement Agreement, 2018 Mitsui Fee Letter and 2018 Kirin Fee Letter are attached hereto as exhibits. The foregoing description of the LC Reimbursement Agreement, 2018 Mitsui Fee Letter and 2018 Kirin Fee Letter does not purport to be complete and is qualified in its entirety by reference to the LC Reimbursement Agreement, 2018 Mitsui Fee Letter and 2018 Kirin Fee Letter.

Cash Flows

Operating Activities

Cash provided by operating activities consisted of net 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.

For the three months ended March 31, 2021, net cash provided by operating activities was $8.8 million, primarily consisting of net income of $4.7 million plus depreciation and amortization expense of $1.0 million, $0.5 million of stock-based compensation expense and a $1.6 million change in fair value of warrant liability. Working capital increased by $0.4 million primary due to an increase in inventory offset by an increase in accounts payable.

For the three months ended March 31, 2020, net cash provided by operating activities was $3.0 million, primarily consisting of a net loss of $1.1 million, depreciation and amortization expense of $1.0 million, $3.1 million of stock-based compensation expense and a $1.0 million change in fair value of warrant liability. Working capital decreased by $1.6 million primarily due to a decrease in accounts receivable of $1.3 million, offset by a decrease in accounts payable of $1.1 million

Net cash provided by operating activities was $17.1 million for 2020, primarily consisting of $4.0 million of net loss adjusted for certain non-cash items, which primarily included depreciation and

 

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amortization expense of $4.3 million and $10.0 million of stock-based compensation expense, non-cash lease expense of $5.3 million, change in fair value of warrant liability of $1.9 million as well as a $2.3 million decrease in cash provided by a reduction in working capital primarily driven by a decrease in our operating lease liabilities and accounts receivable and increase in accounts payable.

Net cash used in operating activities was $7.6 million for 2019, primarily consisting of $18.2 million of net loss, adjusted for certain non-cash items, which primarily included depreciation and amortization expense of $4.6 million and $12.2 million of stock-based compensation expense, as well as a $12.5 million decrease in cash consumed by working capital primarily driven by an increase in our inventory, accounts receivable and payable.

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 $3.7 million for 2020, primarily consisting of investing in unconsolidated subsidiary and equity method investments of $1.4 million, capital spending to support our growth of $1.2 million and the entry into certain licensing and research agreements with Mayo Clinic of $1.1 million.

Net cash used in investing activities was $4.2 million for fiscal year 2019, primarily consisting of $1.7 million of capital expenditures to support our growth, investment in unconsolidated subsidiaries of $1.3 million and the purchase of certain licensing and research agreements with Mayo Clinic of $1.3 million.

Financing Activities

Net cash provided by financing activities was $1.4 million for 2020, primarily consisting of a $20.0 million revolving line of credit from SMBC and the exercise of certain warrants by our stockholders, offset by $11.2 million of principal repayments to SunTrust Bank, the exercise of certain stock options that were set to expire, the repurchase of common stock from management, payment of a one-time deal flow dividend of $3.0 million to Mitsui, and a one-time loan from Kirin during plant construction of $3.0 million, both of which are current stockholders.

Net cash provided by financing activities was $11.7 million for 2019, primarily consisting of borrowing $8.8 million on our line of credit and a one-time loan from Kirin of $3.0 million.

Contractual Obligations and Other Commitments

The following table summarizes our contractual obligations as of March 31, 2021 (in thousands):

 

    

Payments Due by Period

 
    

Total

    

<1 Year

    

1-3 Years

    

3-5 Years

    

>5 Years

 

Operating Lease Obligations

   $ 58,759      $ 3,960      $ 12,208      $ 6,885      $ 35,706  

Finance Lease Obligations

     1,037        295        687        55         

Line of Credit

     20,000        20,000                       

Notes Payable

     1,399        296        1,103                
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 78,755      $ 6,085      $ 28,204      $ 5,849      $ 38,617  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We lease all of our manufacturing and distribution facilities, corporate offices and certain equipment under non-cancelable operating and finance leases. These leases expire at various dates through 2047.

 

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Off Balance Sheet Arrangements

We currently do not have, and did not have during the periods presented, any off-balance sheet arrangements.

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. At December 31, 2020, 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.

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

During 2020, we did not sell any product or services for payment in currency other than U.S. dollars.

Critical Accounting Policies and Estimates

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). The preparation of our consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, costs and expenses, and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events, and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing at the end of this prospectus, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements.

 

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Revenue Recognition

On January 1, 2019 we adopted ASC 606 using the modified retrospective method for all contracts not completed as of the date of adoption. Revenues for 2019 are presented under ASC 606, while 2018 revenues are not adjusted and continue to be reported under the accounting standards for 2018.

Under ASC 606, we account for revenue using the following steps:

 

   

identify the contract, or contracts with a customer;

 

   

identify the performance obligations in the contract;

 

   

determine the transaction price;

 

   

allocate the transaction price to the identified performance obligations; and

 

   

recognize revenue when, or as, we satisfy the performance obligations.

We recognize revenues when control of the promised goods or services is transferred to its 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 that control transfers to the customer upon shipment. These factors include that legal title transfers to the customer, we have a present right to payment, and 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. Our standard business practice is to collect upfront payment for its products for direct to consumer sales and to recognize a receivable for sales to distributors when the performance obligation is satisfied.

Certain distributors resell our 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 typically 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. We use standard business practices and standard price lists in determining the transaction price. Any discounts stated or implied are allocated entirely to the sole performance obligation. We primarily sell to customers throughout the United States but also sell to international markets. Regardless of customer location, all customer payments are required to be made in U.S. dollars. Given the inherent nature of selling to international markets, there is a risk of higher volatility pertaining to collecting payment on account; however, we review each customer account for collectability and provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment. This process of assessing for collectability is performed for all on account customers, both international and domestic.

We have elected to exclude sales tax for non-exempt customers from the transaction price and is therefore excluded from revenue. For certain sales, we incur incremental costs of obtaining the contract through the form of sales commissions. The sales commissions incurred are directly correlated to the sales generated and are therefore expensed as incurred as the amortization period of the asset that otherwise would have been recognized is one year or less.

We also have a variable consideration element related to most of our contracts in the form of product return rights. 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, a credit or a replacement product. If the customer purchased the product on Amazon, the product must be returned to Amazon and if purchased through our website, returned to us. The request must be submitted within 60 days of the date of purchase. We analyze all returns and, as of the balance sheet date, and record a sales return accrual within accrued liabilities for the amount we expect to credit back to our customers based on our analysis.

 

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With regard to our subscription offering, we offer our customers the ability to opt into recurring automatic refills on both Thorne.com and Amazon.com. We recognize revenue under our 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 and no cost. The discount offered under the subscription plan reduces revenue at the time the product ships to the customer. On our website, we allow customers to subscribe monthly, every 45 days, every two months, every three months, or every four months. For all these frequencies, we offer a 10% discount on retail refill orders. On Amazon, 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 our subscriptions is approximately 8%.

There are no material differences in our revenue recognition policy between the DTC subscription program and the DTC transaction program.

Stock-Based Compensation

We measure the cost of employee services received in exchange for an award of stock-based compensation based on the grant-date calculated value of the award. We use historical volatility based on an industry sector index as an input in the Black-Scholes option pricing model. No compensation cost is recognized for awards that are forfeited prior to vesting. Compensation expense is recognized on a straight-line basis over the total requisite service period of each award or as performance conditions are met. We did not make any option grants in 2019 or 2020 or in the first three months of 2021.

As recorded in our stock-based compensation expense in our consolidated financial statements, certain members of management entered into an agreement with us whereby certain members of management received a put right from us, in which management could receive cash from the Company for the fair value of 5,704 common stock options, with an exercise price of $380 per share. Per the terms of this agreement, the fair value to be paid in cash equaled the fair value of the underlying common stock less the exercise price of the stock options. These put rights expired in 2020.

Warrant Liability

We determine the accounting classification of a warrant, as either liability or equity, by first assessing whether the warrant meets liability classification in accordance with ASC 480, Distinguishing Liabilities from Equity (ASC 480), and then in accordance with ASC 815-40, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock (ASC 815-40). If the warrant does not meet liability classification under ASC 480, we assess the requirements under ASC 815-40, including whether the warrant is indexed to our common stock and whether the warrant meets the other requirements to be classified as equity under ASC 815-40. After all relevant assessments are made, we conclude whether the warrant should be classified as liability or equity.

We have warrants that are classified as a liability on our consolidated balance sheet. The warrants classified as a liability are measured at fair value using the Black-Scholes pricing model which takes into account, as of the valuation date, factors including the current exercise price, the contractual life of the warrant, the current fair value of the underlying stock, its expected volatility, and the risk-free interest rate for the term of the warrant. The warrant liability is revalued at each reporting period and changes in fair value are recognized in the consolidated statements of operations. The selection of the appropriate valuation model and the inputs and assumptions that are required to determine the valuation requires significant judgment and requires management to make estimates and assumptions that affect the reported amount of the related liability and reported amounts of the change in fair value. Actual results could differ from those estimates, and changes in these estimates are recorded when known. As the warrant liability is required to be measured at fair value at each reporting date, it is reasonably possible that these estimates and assumptions could change in the near term.

 

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Equity-Classified Warrants

We have common stock warrants that are equity-classified on our consolidated balance sheet. We concluded that these warrants do not meet the requirements to be accounted for as liability under ASC 480 as they are for a fixed number of shares and do not contain provisions that require us to cash-settle the warrants. Additionally, we determined that these warrants are indexed to our stock as they do not contain exercise contingencies or adjustments to exercise price that are not an input to a fixed-for-fixed model. The warrants also meet the other equity-classification criteria under ASC 815-40. Equity classified warrants are accounted for at fair value on the issuance date and are not remeasured every reporting period.

Common Stock Valuations

The fair value of our equity instruments has historically been determined based on information available at the time of granting. Given the absence of a public trading market for our equity, and in accordance with the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately Held Company Equity Securities Issued as Compensation, our management has exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of our equity instruments at each grant date.

These factors included:

 

   

our operating and financial performance;

 

   

current business conditions and projections;

 

   

the lack of marketability of our shares;

 

   

using third party experts to support the valuation of the shares; and

 

   

the market performance of comparable publicly traded companies.

In valuing our equity instruments, we determined the equity value of our business using a weighted blend of the income and market approaches. The income approach estimates the fair value of a company based on the present value of such company’s future estimated cash flows and the residual value of such company beyond the forecast period. These future values are discounted to their present values to reflect the risks inherent in such company achieving these estimated cash flows.

Significant inputs of the income approach, in addition to our estimated future cash flows themselves, include the long-term growth rate assumed in the residual value, discount rate and normalized long-term operating margin. The terminal value was calculated to estimate our value beyond the forecast period by applying valuation metrics to the final year of our forecasted net sales and discounting that value to the present value using the same weighted average cost of capital applied to the forecasted periods.

Application of these approaches involves the use of estimates, judgment and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, expenses and future cash flows, discount rates, market multiples, the selection of comparable companies and the probability of possible future events. Changes in any or all of these estimates and assumptions or the relationships between those assumptions impact our valuations as of each valuation date and may have a material impact on the valuation of our common stock.

Income Taxes

Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based

 

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on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. A valuation allowance is provided when it is more likely than not that some portion or all of the net deferred tax assets will not be realized. We recognize the tax benefit from uncertain tax positions if it is more likely than not the tax positions will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefit is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. We recognize interest and penalties related to income tax matters in income tax expense. Health Elements, LLC made a previous election to be taxed as a Subchapter C corporation. As such, a provision for income taxes has been made for our investment in this entity and is included in the accompanying consolidated financial statements.

In general, under Section 382 of the Internal Revenue Code of 1986, as amended (Code), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs to offset future taxable income. We may have undergone an ownership change in connection with our 2018 series E convertible stock financing. If we underwent an ownership change in 2018 or if we undergo an ownership change in connection with or after this offering, our NOLs arising before such an ownership change may be subject to one or more Section 382 limitations that materially limit the use of such NOLs to offset our taxable income. While we have not undertaken a Section 382 study to determine whether we have undergone any ownership changes in the past, we expect to complete one following this offering.

As of December 31, 2020, we had U.S. federal net operating loss carryforwards (NOLs) and state NOLs of approximately $50.1 million and $51.3 million, respectively, due to prior period losses that if not utilized will begin to expire for federal and state purposes beginning in 2035. Realization of these NOLs depends on future income, and there is a risk that our existing NOLs could expire unused and be unavailable to offset future income tax liabilities, which could adversely affect our operating results.

In general, under Section 382 of the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs to offset future taxable income. We may have undergone an ownership change in connection with our 2018 series E convertible stock financing. In addition, this offering, as well as future changes in our stock ownership, the causes of which may be outside of our control, could result in an additional ownership change under Section 382 of the Code. If we underwent an ownership change in 2018 or if we undergo an ownership change in connection with or after this offering, our NOLs arising before such an ownership change may be subject to one or more Section 382 limitations that materially limit the use of such NOLs to offset our taxable income. While we have not undertaken a Section 382 study to determine whether we have undergone any ownership changes in the past, we expect to complete one following this offering. Our ability to utilize NOLs of companies that we have acquired or may acquire in the future may also be subject to limitations. Further, our NOLs may be impaired under state laws. In addition, under the 2017 Tax Cuts and Jobs Act (Tax Act), as modified by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), NOLs arising in taxable years beginning after December 31, 2020 may not be carried back, and NOLs generated in taxable years beginning after December 31, 2017 may be carried forward indefinitely, but the deductibility of such NOLs generally will be limited in taxable years beginning after December 31, 2020 to 80% of the current year taxable income. This change may require us to pay federal income taxes in future years even if our NOLs were otherwise sufficient to offset our federal taxable income in such years. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities. For these reasons, we may not be able to realize, in whole or in part, a tax benefit from the use of our NOLs, whether or not we attain profitability.

Recent Accounting Pronouncements

Recently issued accounting pronouncements that we have adopted or are currently evaluating are included in Note 2, Recent Accounting Pronouncements, of the notes to our consolidated financial statements included elsewhere in this prospectus.

 

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COVID-19 Pandemic

On January 30, 2020, the World Health Organization (WHO) announced a global health emergency because of a new strain of coronavirus (COVID-19) and the risks to the international community as the virus spreads globally. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic.

We are a manufacturer of nutritional supplement products, a category of food that is regulated by the U.S. Food and Drug Administration. Based on guidance issued by the U.S. Department of Homeland Security and the Cybersecurity and Infrastructure Security Agency, and in particular, specific guidance therein regarding the food and agriculture industries, our manufacturing facility has been designated as “Essential Critical Infrastructure Workers” and would therefore be exempt from any “shelter in place” restrictions that might be imposed by the State of South Carolina.

The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. As such, it is uncertain as to the impact this pandemic on the Company’s financial condition. Management is actively monitoring the impact of this virus on its financial condition, liquidity, operations, suppliers, customers and workforce.

Our 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 consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented.

Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. As a result of becoming a public company, we will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, as amended, to furnish a report by our management on, among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of the registration statement of which this prospectus is a part or the date we are no longer an “emerging growth company” (EGC) as defined in the Jumpstart Our Business Startups Act of 2012 (JOBS Act), if we take advantage (as we expect to do) of the exemptions for EGCs contained in the JOBS Act. This assessment will need to include disclosures of any material weaknesses identified by our management in our internal control over financial reporting.

In connection with the audits of our financial statements included elsewhere in this prospectus, we identified material weaknesses related to:

 

   

an insufficient complement of personnel possessing the appropriate accounting and financial reporting knowledge and experience; and

 

   

we did not maintain effective controls relating to revenue recognition, accounting for significant and unusual transactions and our financial statement close process, which have not been remediated.

Under standards established by the Public Company Accounting Oversight Board, a material weakness is a deficiency, or 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.

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

 

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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. However, we cannot assure you that these measures will significantly improve or remediate the material weaknesses described above. As of March 31, 2021, the material weaknesses have not been remediated.

The actions that we are taking are subject to ongoing executive management review, and will also be subject to audit committee oversight. If we are unable to successfully remediate the material weakness, or if in the future, we identify further material weaknesses in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated.

Emerging Growth Company and Smaller Reporting Company Status

We are an “emerging growth company,” as defined in the JOBS Act. We will remain an emerging growth company until the earlier of (i) December 31, 2026 (the last day of the fiscal year following the fifth anniversary of our initial public offering), (ii) the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion, (iii) the last day of the fiscal year in which we are deemed to be a “large accelerated filer,” as defined in the rules under the Exchange Act, and (iv) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

We have elected to take advantage of certain of the reduced disclosure obligations in this prospectus and may elect to take advantage of other reduced reporting requirements in our future filings with the SEC. As a result, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity interests. In particular, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this extended transition period and, as a result, we will not adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies until required by private company accounting standards.

We are also a “smaller reporting company” meaning that the market value of our stock held by non-affiliates plus the proposed aggregate amount of gross proceeds to us as a result of this offering is less than $700 million and our annual revenue was less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company after this offering if either (i) the market value of our stock held by non-affiliates is less than $250 million or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation and other matters.

 

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BUSINESS

Our Purpose

We believe that a personalized and scientific approach to wellness can lead to happier and healthier lives. Our goal is to transform the consumer’s approach to health and wellness and empower our customers to live healthier longer, which we refer to as increased health span, through testing, teaching and proactive measures that help our customers avoid chronic health conditions before they occur and achieve peak performance.

Who We Are

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 and peak performance.

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. In early 2021, we completed our acquisition of Onegevity and combined these two complementary companies. During the past ten years, we have evolved to become a transformative consumer brand, trusted by more than 3,000,000 customers, 42,000 healthcare professionals, thousands of professional athletes, more than 100 professional sports teams and 11 U.S. Olympic teams.

We utilize testing and data to create improved product quality and deliver personalized solutions to consumers, health professionals and professional sports teams. We also help pharmaceutical and biotechnology companies repurpose existing drugs and compounds, improve existing medications and develop new products. Today, consumers are faced with a healthcare system that is focused on the treatment of disease rather than a proactive approach to health and wellness. The supplement market is crowded with confusing products that lack clinical validation or brand equity. We have positioned our brands as a paradigm shift from a focus on the treatment of disease to a proactive approach to health and wellness. The benefits of focusing on health can include enhanced performance in daily life, longer health spans, younger biological ages and reduced reliance on the healthcare system and its associated costs. We have developed a subscription platform that seamlessly combines convenient and comprehensive testing methods, proprietary data, personalized wellness education and premium nutritional solutions to focus on the human body and its unique needs. Through our platform of innovative health solutions and proprietary technology, we are building a new category within the health and wellness market. Our total addressable market consists of the $167.8 billion global nutritional supplement market (as of 2019 and projected to have a CAGR of 9.0% through 2026, according to FNF Research), the $84.1 billion global digital health market (as of 2019 and projected to have a CAGR of 14.8% through 2026, according to FNF Research), the $69.8 billion drug discovery technology and service market (as of 2020 and projected to have a CAGR of 9.6% through 2025, according to BCC Research) and the $29.5 billion global clinical testing market (as of 2020 and projected to have a CAGR of 11.4% through 2025, according to TechSci Research).

Our novel approach seeks to resolve key pain points in the consumer health journey. Our model of test, teach, transform and iterate ensures that consumers are not only active participants in their healthcare, but also educated and empowered to navigate an overwhelming nutritional supplement marketplace. We are able to

 

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personalize nutritional supplement recommendations and protocols because we understand there is no one-size-fits-all solution. Our relentless focus on building a new model of health has resulted in a robust portfolio of science-driven products and high customer satisfaction, as demonstrated by our favorable Net Promoter Score (NPS) of 78 during the first three months of 2021. Our success is not limited to the U.S. market; our Thorne brand was sold in 37 countries in 2020, and we expect to continue to expand internationally.

Our unique go-to-market strategy combines our direct-to-consumer (DTC) and subscription model with an ecosystem of health professionals. We provide customers with direct access to our brand through our mobile, web and Amazon channels. In addition to the DTC channel, our broad range of connected health professionals provides another channel for our products to be marketed and distributed to consumers. We have built our active and growing network to more than 42,000 health professionals, which includes medical doctors, naturopathic doctors, registered dieticians, pharmacists, chiropractors, nutritionists, trainers, acupuncturists and other accredited health professionals.

Thorne: Thorne provides health tests, education, and products that support the optimization of health. We offer health tests to generate comprehensive, personalized molecular portraits for our customers. Our proprietary multi-omic platform, Onegevity, uses the results of these tests to create personalized recommendations, which we believe provide individuals greater conviction about what actions they need to take, such as consulting with their physician or nutritionist, making a lifestyle change, or using nutritional supplements. All of our tests are performed by reputable third-party clinical laboratories, and the test results and Onegevity-powered AI actionable insights are reviewed by board-certified physicians prior to being delivered to the customer through our website and app.

We have also developed premium, high-quality nutritional supplements through our trusted brand, Thorne. We believe that we have established industry leading sourcing, production and testing standards, which are designed to meet or exceed U.S. and international current Good Manufacturing Practice requirements (cGMPs), all of which are subject to third-party certification and audit. We manage nearly all product formulations, ingredients, production processes, documentation, testing and product activities at our facility in Summerville, South Carolina. Our distinguished science and medical teams are advancing an innovative pipeline of products, including a series of next-generation products with nicotinamide riboside (NR), a compound involved in cellular metabolism, which we believe contains properties that support healthy aging at the cellular level.

Onegevity: Onegevity is AI for health. Onegevity combines AI with professional human assistance to map, integrate and understand the billions of dynamic biological features that illustrate the state of an individual’s health. Onegevity’s platform and technology are used by customers to manage their own health, and by practitioners and professionals to support patient health and advance their scope of practice.

Onegevity’s proprietary engine also allows us to offer a business-to-business (B2B) solution that combines our AI models with our multi-omics database to create a platform to be used for both the pharmaceutical and nutritional supplement industries to develop new products at faster speeds and with higher efficiency, repurpose existing drugs and compounds for new and innovative uses and improve existing medications.

These breakthroughs in health and wellness have the potential to translate to better products for our customers, for example:

 

   

a top-tier global pharmaceutical company used our AI platform service to repurpose a drug that had failed clinical trials for a new potential indication;

 

   

a premier global CPG company that is utilizing our services to develop a personalized skin-care testing platform. Upon completion, the platform would provide advanced detection and location prediction of acne breakouts and offer personalized cosmetics; and

 

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we have contracted with Indena S.p.A., an Italian pharmaceutical company, to screen their comprehensive botanical libraries for compounds that could lead to new natural products.

Finally, in the future we plan to offer Onegevity’s insights as a service to physicians and other health professionals in our network to enhance routine in-person clinical evaluations of their patients. We believe that Onegevity can help create a “clinic of the future” and provide a personalized clinical experience to deliver a 360-degree snapshot of personal health in-office.

We have developed an innovative, proprietary platform that provides our customers with a differentiated and personalized journey to better health through our integrated platform of nutritional products and AI-driven services. Our model of test, teach, transform and iterate ensures that consumers are not only active participants in their healthcare, but are also educated and empowered to navigate the crowded and confusing supplement market. We believe our customers can apply our philosophy of continuous improvement to their health by contributing to and benefitting from our multi-omics databases while leveraging our premium products and network of professionals to focus on prevention and wellness.

We are a fast-growing and scaling wellness platform and have experienced significant recent growth. Our compelling financial profile is characterized by accelerated year-over-year growth, improving gross margin, strong customer retention and efficient customer acquisition.

For the three months ended March 31, 2020 and 2021:

 

   

we generated net sales of $33.1 million and $44.5 million, respectively, representing 34.2% growth from the same period in 2020;

 

   

we generated gross profit of $15.2 million and $23.2 million, respectively, representing 45.9% and 52.1% of net sales, respectively;

 

   

our net loss was $1.2 million for the three months ended March 31, 2020, and our net income was $4.7 million for the three months ended March 31, 2021; and

 

   

our Adjusted EBITDA was $4.5 million and $8.3 million, respectively.

For the twelve months ended December 31, 2019 and 2020:

 

   

We generated net sales of $102.5 million and $138.5 million, respectively, representing 23.0% and 35.0% year-over-year growth, respectively;

 

   

We generated gross profit of $44.7 million and $64.8 million, respectively, representing 43.6% and 46.8% of net sales respectively;

 

   

Our net loss was $18.2 million and $4.0 million, respectively; and

 

   

Our Adjusted EBITDA was $8.0 million and $14.4 million, respectively.

See the section titled “Selected Consolidated Financial and Other Data—Adjusted EBITDA and Adjusted EBITDA Margin” for information regarding our use of Adjusted EBITDA and a reconciliation of net loss to Adjusted EBITDA.

The recent key customer metrics of our business included:

 

   

customer acquisition costs (CAC) of $30 and life-time value (LTV) of $136 with 4.5x LTV to CAC In the twelve months ended December 31, 2019, a CAC of $22 and LTV of $170 with 7.6x LTV to

 

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CAC in the twelve months ended December 31, 2020, a CAC of $18 and LTV of $130 with 7.1x LTV to CAC in the three months ended March 31, 2020, a CAC of $26 and LTV of $158 with 6.2x LTV to CAC in the three months ended March 31, 2021;

 

   

active subscriptions of 98,809 and 168,483, as of March 31, 2020 and 2021, respectively; and

 

   

orders per customer per year of 2.6 and 2.7, in the twelve months ended December 31, 2019 and 2020, respectively and 1.9 and 1.8 in the three months ended March 31, 2020 and March 31, 2021, respectively.

Our management team has decades of experience in the health and wellness industry and our executive team has been with Thorne for the past ten years. Our scientific team has authored more than 2,800 peer-reviewed publications in top-tier technical journals and has more than 470 years of combined scientific industry and research experience.

Thorne HealthTech Platform

Our Technology

We seek to transform the health and wellness market by combining our proprietary technology platform, Onegevity, a comprehensive multi-omics database that uses powerful AI platform and machine learning to map, integrate, and understand the billions of dynamic biological features that describe the state of an individual’s health with our premium nutritional supplements. Onegevity provides a comprehensive molecular portrait and personalized recommendations for an individual’s health, based on integrated analysis of longitudinal blood, genetics and gut microbiome profiles.

Our AI model and multi-omics database improves our product formulations and makes our recommendations to customers more precise. Using Onegevity across our product portfolio creates an unparalleled ecosystem where data collected from customers and our network of health professionals strengthens our AI model. We collect and analyze approximately 600 personalized tests, evaluations and surveys per day and are able to develop actionable insights from that data on our platform. The data collected from consumers, combined with a powerful AI engine enhances our ability to provide personalized recommendations and education to our customers, driving higher conversion and retention. This system enables us to create better products because we have access to multi-omics datasets, while also helping other businesses, such as those in the pharmaceutical, food and skin care industries, to develop more personalized solutions with our data analytics. The availability of this data may open further opportunities for us in the future to drive revenue by providing data services as a health intelligence provider.

Our Biological Age test, powered by Onegevity, is designed to be a simple, quick and affordable evaluation to determine one’s biological age versus chronological age and to assess the age of an individual’s organs system. The straightforward, easily understood results are designed to guide the recommendations made to optimize wellness and decrease biological age.

Our Products

Nutritional Supplements: We offer premium, high-quality nutritional supplements that are developed with rigorous science and comprehensive testing from start to finish. This includes a suite of nutritional supplement products centered around a novel ingredient, NR, which we believe contains properties that support healthy aging at the cellular level. Onegevity fuels our evidence-based nutritional product development. Our confidence that each product we formulate and manufacture will deliver the intended outcome is based on extensive clinical research and medical literature. All of our research and development for the formulation of new products is conducted in-house, in collaboration with leading research institutions from around the world. We have a robust product pipeline focused on future high market growth indications and personalization.

 

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Our formulas are of the highest quality offered in the nutritional supplement market, and our manufacturing processes have received among the highest possible ratings in the industry, which is aligned with our unparalleled commitment and adherence to cGMPs and quality throughout our entire supply chain. The quality control and quality assurance for all products is done in-house in our two state-of-the-art laboratories. We manufacture our products in our 272,000 square foot Summerville, South Carolina facility which is third-party certified. To ensure supply chain consistency and to meet the highest quality standards we thoroughly and frequently test our ingredients for contaminants. We manufacture more than 20 NSF-Certified for Sport products, which gives athletes complete confidence that our nutritional supplements do not include any banned substances. No single nutritional supplement represented more than 5% of total sales during the trailing twelve months ended March 31, 2021.

We approach the formulation and manufacturing of each product in a scientific, data-driven way, using clinical research and medical literature to support the inclusion of each ingredient in individual formulas. Since our inception, we have built and continue to maintain a database of technical evidence, scientific literature, and industry research that we use to substantiate the structure and function claims we make in support of the indications of use, safety, and efficacy of our nutritional supplement products. We focus on using ingredients in our products that are supported by clinical trial data or other scientific research.

Moreover, we have conducted additional clinical studies on approximately 15% of our product portfolio (45 products) by ourselves or in concert with our strategic partner Indena. This includes studies on botanical extracts and small molecule products, including vitamin analogs, such as nicotinamide riboside, and conjugated materials, such as ketogenic esters. Currently, we are participating in 23 ongoing clinical trials by supplying product, offering technical advisement or participating as the principal investigators. We do not view the clinical studies on any one of our products as being material to our business.

A few key examples of our clinically-studied products include:

 

   

Meriva-500 SF, one of our most studied ingredients, was developed as a phytosome to increase the bioavailability of turmeric. There have been 35 clinical studies to date on Meriva-500 SF itself, alongside studies that we have participated in, which includes five completed studies and three ongoing studies, including one pediatric study on liver health.

 

   

Quercetin Phytosome, a phytosome technology intended to increase bioavailability, is undergoing work through Mayo Clinic, which is currently exploring quercetin in combination as a senolytic for healthy aging. There have been two completed trials and there are six ongoing trials focusing on Quercetin Phytosome.

 

   

Crucera, a patented broccoli extract that delivers glucoraphanin, is a precursor to the NRF2 activator, sulforaphane. Sulforaphane is a compound that reduces cellular oxidative stress, a phenomena which increases in frequency as we age. There has been one completed trial regarding aging and inflammation in the skin and there is one ongoing trial studying sulforaphane’s bioavailability.

 

   

NiaCel, our exclusively developed nicotinamide riboside malate salt, is intended as a platform for aging and as a supporter of Nicotinamide adenine dinucleotide levels within the body. Currently, two trials are planned to further understand the ability to increase NAD levels.

 

   

AB-free Kava is intended to reduce the liver risks that are typically associated with whole Kava extract use. We are participating in two ongoing trials in mood and health.

Health Tests: Customers uncover insights about their health through our tests and we turn those insights into a personalized plan for how to eat, exercise and choose supplements, based on unique test results. Customers can have our tests delivered to their doorstep, collect biological samples at home, and then can drop their free

 

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return envelope in nearly any mailbox. Alternatively, customers can go to a diagnostic laboratory, such as Quest Diagnostics, to have their samples collected and tests performed. After a licensed professional reviews the results, customers receive their comprehensive Onegevity-powered results and evidence-based recommendations online. Our extensive portfolio of health tests includes tests focused on sleep, stress, weight management, gut health, heavy metals, biological age and more.

Our health tests’ collection method, measurements and markers are set forth below:

 

Test   

Collection

Method

  

What we

Measure

  

Number of

Markers

Biological Age    Blood Draw    Biological Age, Age Rate, Blood Age, Lipid Age, Liver Age, Kidney Age, Metabolic Age    36
Fertility    Blood Spot & Saliva    Reproductive Hormones, Thyroid Hormones, Adrenal Hormones    12
Gut Health    Stool    Intestinal Permeability, Gut Dysbiosis, Digestion, Inflammation, Enteric Nervous System Imbalance, Diversity, Micronutrients, Short-Chain Fatty Acids, Immune Readiness, Pathogens    90
Heavy Metals    Blood Spot    Heavy Metals, Essential Minerals    8
Menopause    Saliva    Reproductive Hormones, Adrenal Hormones    5
Sleep    Urine    Melatonin, Cortisol    2
Stress    Saliva    Cortisol x4, DHEA    2
Thyroid    Blood Spot    Thyroid Hormones, Thyroid Antibodies    4
Vitamin D    Blood Spot    Vitamin D    1
Weight Management    Blood Spot & Saliva    Reproductive Hormones, Adrenal Hormones, Blood Sugar Metabolism, Vitamin D, Thyroid Hormones    9

As discussed below, our analytical software, powered by Onegevity Health Intelligence, produces medically supervised, AI-driven recommendations, and presents the results in an easy-to-read, consumer-friendly digital dashboard. The insights found on the dashboard help individuals identify health trends and potential future health concerns by providing actionable, meaningful insights about the individual’s results.

Gut Health Test: Our Gut Health Test is a metagenomic-based, fecal sample sequencing test to evaluate gut bacteria and its impact on human health. Based on an individual’s gut microbiome test results, we create a protocol that includes a regimen of our supplements. Our protocols are aimed at addressing common gastrointestinal (GI) issues, including constipation or diarrhea, with product intervention. Based on our protocols,

 

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we conducted a clinical study aiming to investigate the benefit of our protocol to consumers with Irritable Bowel Syndrome (IBS) which was published in the peer-reviewed journal Precision Clinical Medicine.

IBS is the most prevalent functional GI disorder worldwide, and the most common reason for referral to gastroenterology clinics. However, the pathophysiology is still not fully understood and consequently current management guidelines are very symptom-specific, leading to mixed results. In our study, we presented our analysis of data from 88 individuals with IBS who had baseline sequencing of their gut microbiome (stool samples), received targeted interventions that included dietary, supplement, prebiotic/probiotic and lifestyle recommendations for a 30-day period, and then a follow-up sequencing of their gut microbiome. The study’s objectives were to demonstrate unique metagenomic signatures across the IBS phenotypes and to validate whether metagenomic-guided interventions could lead to improvement of symptom scores in individuals with IBS. Enrolled subjects also completed a baseline and post-intervention questionnaire that assessed their symptom scores. The average symptom score of an individual with IBS at baseline was 160 and at the endpoint of the study the average symptom score of the cohort was 100.9. The mixed IBS subtype showed the most significant reduction in symptom scores across the different subtypes (average decrease by 102 points, P = 0.005). The investigators found that metagenomics analysis reveals shifts in the microbiome post-intervention that have been cross-validated with the literature as being associated with improvement of IBS symptoms. Given the complex nature of IBS, further studies with larger sample sizes, more targeted analyses and a broader population cohort are needed to explore these results further.

 

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The graph above illustrates symptom score reduction. The difference between day 30 (post-treatment) and day 0 (pre-treatment) demonstrates individual symptom score reduction of participants with IBS.

See Meydan C, et al. Improved gastrointestinal health for irritable bowel syndrome with metagenome-guided interventions. Precis Clin Med. 2020 Jun;3(2):136-146.

Our Services

Onegevity is AI for health. Onegevity combines AI with professional human assistance to map, integrate and understand the billions of dynamic biological features that illustrate the state of an individual’s health. Onegevity’s platform and technology are used by customers to manage their own health, and by practitioners and professionals to support patient health and advance their scope of practice. Onegevity’s portfolio of enterprise-ready models coupled with its proprietary multi-omics database is also designed to improve outcomes and reduce the difficulties and costs of AI adoption in health and wellness and can be used in the development of nutritional supplements and pharmaceuticals by our business-to-business customers.

 

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Onegevity Health Intelligence: Our platform leverages AI models to provide insights and personalized health recommendations as a part of an individual’s health test results. Onegevity uses pattern recognition, deep neural networks, bioinformatics and our multi-omics database to provide these personalized recommendations. Designed as a multi-tenant capable service, Onegevity Health Intelligence powers our testing and nutritional supplement channel and also has third-party applications. Pharmacies, health professionals and lifestyle companies can integrate testing and Onegevity Health Intelligence to engage, educate and empower their patients and users to make smarter decisions about their health, all while staying within the third party’s own web portal. We put individuals at the center of control of their health journey with direct access to convenient molecular diagnostics and intelligent digital analytics to develop personalized and highly

actionable plans to achieve desired health goals.

Onegevity Discovery: We have combined AI models with our multi-omics database to create a platform that can be used to develop new nutritional and pharmaceutical products at faster speeds and with higher efficiency than traditional development methods. This capability is achieved through predictive algorithms, informed by an array of biological and chemical factors, that can identify pharmaceutical agents or natural products likely to have the targeted result. Our Onegevity Discovery fuels our product development as well as that of clients in diverse fields, including pharmaceuticals, biotechnology, consumer packaged goods (CPGs) and research clinics. We have helped clients repurpose existing drugs and compounds, improve existing medications and develop new products.

Onegevity Lab: Our Onegevity Lab assessments are being developed to provide the an in-person clinical experience powered by AI that embodies the personalized scientific wellness paradigm. We believe that by enabling individuals to obtain a 360-degree snapshot of their health, Onegevity Lab, the potential clinic of the future, will empower individuals to identify opportunities that preserve their health and optimize performance. As part of the session, a trained independent clinician will guide the patient through a personalized health assessment and consultation that includes highly validated but understudied modules of health such as cognitive function, grip strength and balance, which are all leading indicators in long-term health, but rarely evaluated when a patient is healthy.

Powerful Health Professional Network

Our network of 42,000 health professionals includes medical doctors, naturopathic doctors, registered dieticians, pharmacists, chiropractors, nutritionists, trainers, acupuncturists and other accredited health professionals. Our annual retention rate with these health professionals was 85% in 2020. Backed by this strong network, we offer convenient testing and data-driven, personalized nutrition, clinically studied supplements and pre- and pro-biotics designed to lower healthcare costs and improve wellness for health professionals and consumers.

Vertically Integrated Product Development Platform

We have built our brand on the core pillars of safety, credibility, quality and user experience. The foundation for these pillars comes from our vertically integrated capabilities. We believe that we are one of the only vertically integrated science-based wellness companies in the world, which enables us to provide our customers with premium quality products with ingredient integrity that are manufactured in the United States. Our platform also provides fixed-cost leverage on increased volumes and optimizes our ability to efficiently monitor inventory management.

Bringing high-quality products to market starts at the source. Our research and development team searches the globe to find only the highest-quality ingredients to use in our nutritional supplements. We source high-quality ingredients that have been clinically tested, allowing us to better understand each ingredients’ safety and quality. To us, “clean” describes supplements that do not contain any harmful, banned or unnecessary ingredients. Our “No” List guides us every day in choosing which ingredients to source and how to formulate

 

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new products. We have access to Indena’s comprehensive botanical compound libraries which enables throughput functional molecule screening. We partner with suppliers whose practices emphasize quality, science, and environmental responsibility. Our single largest provider of botanical material is Indena S.p.A., a company based in Milan, Italy, which is well-known for its identification, development and production of high-quality actives derived from plants.

Our vertical integration spans from sourcing the highest quality ingredients, research and development activities, product delivery and continued customer engagement. Our product formulation is driven completely in-house by a team of 23 scientists and engineers utilizing proprietary technologies, health intelligence systems and our Onegevity Discovery. This capability drives our data-centric approach to evidence-based nutritional product formulations. The Onegevity Discovery AI Platform delivers molecular insights and personalized health mapping. This system has a one-of-a-kind gene expression library that consists of over 800 unique signatures and is one of the world’s most comprehensive multi-omics databases for precision wellness. It has been used to track one of the largest microbiome datasets from skin and gut health and has resulted in over 18,000 data points covering multiple key diseases. These databases are integrated with product targets and statistical and analytical methods that have been published in top peer reviewed journals, including Nature, Science, and Proceedings of the National Academy of Sciences.

We develop the optimal product formula to meet the needs of our customers and have the proper facility to maintain control of the manufacturing process. In 2019, we opened our state-of-the-art 272,000 square-foot facility in Summerville, South Carolina. This facility provides significant enhancements to our manufacturing capacity and production efficiencies, research and development platform and in-house laboratory and testing capabilities. We have substantial capacity to meet near-term production requirements and can expand our facility without the need for substantial capital expenditures. This facility demonstrates our commitment to manufacturing all our products in the United States and ensures a quality product is delivered to our growing and loyal customer base.

Our vertically integrated platform has also enabled the development of a suite of nutritional supplement products centered around a novel ingredient, NR, which we believe contains properties that support healthy aging at the cellular level. Whether it be older consumers looking to stay healthy longer, or younger consumers focusing on their wellness earlier in life, many individuals are seeking new ways to promote healthy aging. This is a concept we refer to as “aging well.” We believe NR addresses these demands and presents a significant market opportunity. Through our integrated platform, we have leveraged the trust and manufacturing expertise of Thorne and the power of Onegevity’s engine and multi-omics database to develop and launch our NR-based NiaCel suite of products.

Our NiaCel suite currently consists of three products: NiaCel 200, which is designed to promote basic healthy aging support; Niacel 400, which is designed for advanced support; and ResveraCel, our premier healthy aging supplements. In addition, using Onegevity’s insight, we intend to develop a NiaCel-based cosmetic product and a NiaCel-based ketone ester beverage product. Unlike other NR products on the market, we believe NiaCel holds several key advantages over our competitors. First, our price point is significantly lower than competitive products. Second, our NR ingredient is exclusively manufactured for our NiaCel suite allowing us more control over product quality and our supply chain. Although we do not typically compete on price, our significant advantages in manufacturing and supply chain in this market allows us to offer a premium product in a price competitive manner. Third, our NR ingredient, as all subsequent formulations in the NiaCel line, is exclusively paired with a complementary ingredient that acts as a methyl donor, allowing for improved quality and safety based off supporting research.

We believe it is crucial to form relationships with leading industry participants in order to continue to provide innovative products to our customers. Our development ecosystem is comprised of research partners Mayo Clinic, Unilever, Tetra Biopharma, Kyowa Hakko and a global pharmaceutical company; sponsorship of UFC, USA Rugby, Penske Racing, Roush Fenway Racing and the U.S. Army World Class Athlete Program; and

 

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high-profile customers such as individual Navy SEALs, teams in the NFL, MLB and NBA and other major athletic organizations.

Our products are subject to four rounds of testing in our two state-of-the-art, in-house laboratories. This process includes testing of raw materials and components, which screens for contaminants; in-process testing, which helps to ensure the correct amount of ingredients are used in our formulations; finished product testing, which confirms the identity, potency, purity of the ingredients, and that no microbiological contamination occurred during manufacturing; and in-house stability testing, which confirms each product will meet its label claims at its expiration date.

During the trailing twelve months ended March 31, 2021, over 90% of our sales were generated by products that we manufactured in-house. We make strategic decisions to use outside contract manufacturers for products like probiotics that cannot be made in the same facility as all our other supplements due to the risk of contamination.

Our Compelling Value Proposition

Our Value Proposition to Consumers

We believe our personalized approach to health and scientific wellness empowers our customers to improve and extend their health span and enjoy happier and healthier lives. Our customers trust the Thorne brand to meet the highest standards of quality and safety. With our history of continued innovation, consumers have access to new ways to measure how biological age and well-being are calculated and controlled. We have created an intuitive and convenient health testing experience and our tests are designed to produce results that are easy to understand and actionable. Our approach, paired with our emphasis on data and AI, consistently delivers further refined insights, which provides our customers with enhanced information to support and maintain their health.

Our Value Proposition to Professional Athletes

We collaborate with sports organizations and professional athletes to ensure they have the tools and information necessary to help individuals improve health and performance through science-backed education and best-in-class products. Within our NSF-Certified facility, we manufacture one of the most comprehensive line of NSF Certified for Sport products on the market, with over 20 products. We believe professional athletes, coaches and teams love and have complete confidence in our NSF Certified for Sport product line because of the thorough testing methods that screen for more than 200 banned substances.

Our dedication to science and quality has earned us the trust of 11 U.S. Olympic Teams and more than 100 professional sports teams. We also sponsor world-class performance organizations, such as UFC, USA Rugby, Penske Racing and the U.S. Army World Class Athlete Program. It is our ongoing support and collaboration with these professional organizations that has led to our position as one of the most comprehensive NSF Certified for Sport supplement manufacturers in the United States.

Our Value Proposition to Health Professionals

Our mission is to help health professionals improve patient outcomes by encouraging product use, supplying proper patient education materials and providing a consumer-friendly service. We believe this is increasingly valuable in the current competitive landscape of the health industry where physicians and other health professionals are more transparently reviewed by their peers and patients based on patient outcomes. Our value proposition is demonstrated by our active and growing professional network of more than 42,000 health professionals, including medical doctors, naturopathic doctors, registered dieticians, pharmacists, chiropractors, nutritionists, trainers, acupuncturists and other accredited health professionals who recommend our products and services.

 

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Our B2B Value Proposition

Our Onegevity longitudinal multi-omics database is proprietary, difficult to replicate and generates data insights that can be used for further innovation in the fields of health and wellness. We have the opportunity to monetize our database and our unique analysis model to, or partner with, a variety of interested parties, including:

 

   

corporations benefiting from insights on population health;

 

   

pharmaceutical companies and biotechnology companies seeking additional data for new drug discovery and patient identification for clinical trials;

 

   

CPGs companies; and

 

   

health intelligence services for consumers and health professionals.

Our Industry and Opportunity

Industry

We participate in the large and growing multi-billion dollar global wellness industry. The market is highly fragmented, and no company holds more than 5% market share. We are redefining consumer health and building a brand with science-backed personalized products that meet the highest standards of quality, safety and efficacy.

Opportunity

We have a significant opportunity to continue to penetrate the product categories and channels we compete in today. In addition, we believe we benefit from several consumer trends.

Consumerization of Healthcare and an Increase of Healthcare in the Home: We believe that in the last ten years there has been a shift from individuals viewing themselves as patients to viewing themselves as consumers in the healthcare market. This has been demonstrated by the growth of the home healthcare market and increased competition in the healthcare provider marketplace. In an always-connected world of data, individuals expect and demand from healthcare what they are accustomed to in their everyday lives. They demand a personalized and holistic approach to daily wellness and long-term health combined with the convenience of products and services being available at their fingertips, all from the comfort and safety of their home. We believe successfully achieving this approach is only possible through the convergence of medicine and technology. COVID-19 has accelerated the trend of healthcare moving to the home, placing a greater impetus on individuals to find new ways to protect their health and fueling resiliency with limited person-to-person interaction.

Shift to Personalized Health: Personalized health tailors interventions for preventing and treating disease to the individual characteristics of each patient. The complete sequencing of the human genome, which was completed in 2003, ushered in the era of personalized medicine by providing a greater understanding of how an individual’s unique molecular and genetic profile makes him or her predisposed to certain diseases. As demonstrated by the rise in targeted gene therapies and cancer treatments, health care is evolving from a reactive, “one-size-fits-all” approach to a distinctively proactive, personalized and integrative approach. We believe the dietary supplement market can be personalized in the same way. Such an approach will focus on the optimal selection of treatments and preventative measures that best address a patient’s unique medical attributes, vulnerabilities and predispositions.

 

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Increased Demand for Safe Nutritional Supplements Driven by Increased Consumer Education and Expanding Datasets: Physicians and other health professionals are motivated to help patients, and increasingly, are measured by patient outcomes. Traditional practitioners are more likely to study and prescribe nutritional supplements due to growing of evidence of the positive impact of supplement use and their safety profile. For example, traditional medical doctors have become an increased focus and now account for one-third our customer base in 2020, thanks to our continued growth initiatives and increased demand from patients.

Demand for Convenience: Consumers are increasingly placing more value on an exceptional user experience and a demonstrated willingness to invest in bringing premium products and services into their daily lives. Preferences for digital platforms and subscription-based products and services have increased in demand in recent years. Customers want simplicity and an easily available online option from a trusted and clinically validated brand. Our offerings are built to provide an unmatched user experience and provide information to consumers in a way they can easily understand and manage. Consumers can complete personalized testing, create and update their subscription and learn more about their recommended product suite, all from the comfort of their own home. Our omni-channel distribution model can deliver products to most consumers in the U.S. within two days or allow them to leverage our network of health professionals to receive their products at their local doctor’s office. We make our test results and recommendations easy to understand. For example, our Biological Age test and resulting recommendations provide consumers with one easily understood number and an actionable plan with the goal of helping consumers to reduce their biological age and extend their health span.

What Sets Us Apart

Our Differentiated Consumer Journey

We believe that we provide consumers with one of the world’s most innovative solutions for a personalized approach to health, delivered through our integrated platform of testing, supplements and digital health content. Our proprietary platform is redefining consumer health through a model of test, teach, transform and iterate to address the consumer pain points that exist in the market today. Consumers struggle to navigate confusing supplement categories and the market is crowded with ineffective, low-grade products. Personalization has been shown to deliver better health outcomes, yet current health solutions continue a “one-size-fits-all” approach. The healthcare system focuses on treatment of disease, but consumers need and want a proactive, empowered approach to health focused on maintaining and supporting health and promoting wellness.

Test: The first step in addressing these consumer pain points is to test. We begin with convenient and comprehensive test collections using multi-omics data, which can be for a range of health areas including sleep, stress, weight management, gut health and heavy metals. The testing phase is concluded with a personalized, AI-driven, actionable health plan with diet, activity and supplement recommendations based on the individual’s test results.

Teach: We then build on the testing phase by teaching consumers through an education platform designed to empower and engage consumers through their health journey. The education occurs through both general and personal methods. The general education includes our daily online magazine Take 5 Daily, which includes podcasts, videos and articles, wellness guides and ingredients. The personalized education includes supplemental quizzes, connecting with health professionals in our network and analyzing test results.

Transform: We provide customers with premium nutritional solutions to optimize their body and its unique needs, including products to maintain and support heart health, healthy aging and gut health, among many others.

Iterate: The Onegevity platform uses molecular biology and AI to deliver continuous improvement of the test, teach, and transform model. The sophisticated AI system utilizes pattern recognition, deep neural networks, and bioinformatics to deliver unparalleled molecular insight and personalization. In addition, this

 

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technology informs our product development and reformulation process. Together, the data and AI consistently provide further refined insights, which provides our customers with enhanced information and more effective products to improve their health.

We teach individuals about their health and what is occurring in their bodies and why we recommend specific supplement choices. We aim to address an individual’s health needs and deficiencies with our nutritional supplements, as needed. This is an iterative process and provides a differentiated and simplified journey for our customers to navigate the complicated supplement market and improve their health over time.

Trusted Brand, Products and Services

We believe we are a leader in developing high-quality nutritional supplements in a variety of unique form factors. We presently sell over 300 supplements and test SKUs. Our network of tens of thousands of health professionals, trainers, and world-class athletes deepens the credibility of our product portfolio. Our offering is further differentiated by conducting all manufacturing and quality management in the United States. We have strong relationships with our suppliers, predominantly located in Europe and United States, who assist in our product innovation cycle and share our commitment to bringing the highest quality products to our customers.

This commitment to quality has contributed to our position as one of the most comprehensive NSF Certified for Sport supplement manufacturers in the United States. We believe that our line of supplements is one of the most extensive lines of NSF Certified for Sport supplement products based on publicly available data for the number of certified products by manufacturer, regardless of whether the products are currently on the market; however, there is no publicly available volume or revenue data regarding our competitors’ NSF Certified for Sport supplement products. We currently have 23 products in the NSF Certified for Sport program in the United States and 11 products in the NSF Certified for Sport program Canada, each of which certifies dietary supplements to be free from substances banned by major sporting organizations and helps athletes, dietitians, coaches and consumers make more informed decisions when choosing sports supplements. While we plan to continue to seek and maintain NSF certification for certain of our trusted brand of products, we face competition from other manufacturers that have similarly broad lines of NSF Certified for Sport supplement products and target the professional athlete market.

The National Sanitation Foundation (NSF) International evaluates product and ingredient safety through its accredited certification and testing services. The NSF Dietary Supplement Certification Program certifies dietary supplements that meet the requirements of the official American National Standard for Dietary Supplements (NSF/ANSI Standard 173). The certification process includes a toxicology and label review to verify product formulation, testing to identify and quantify dietary ingredients declared on the product label, testing to ensure the product does not contain unacceptable levels of contaminants and annual current Good Manufacturing Practices (cGMP) facility inspections. Our facility has been cGMP certified through NSF since 2015. As part of this certification, our Quality Management system, which includes onsite and third-party laboratory operations, is audited to ensure compliance to cGMPs.

Powerful Data and AI engine

Our AI model and multi-omics database improve our product formulations and make our recommendations to consumers more precise. We collect and process approximately 600 personalized tests, evaluations and surveys per day and are able to develop actionable insights from that data with our Onegevity platform. The data collected from customers, combined with a powerful AI engine, enhances our ability to provide personalized recommendations and education to our customers, thereby driving higher conversion and retention. Our platform captures this information which is utilized by our algorithms to create better nutritional supplements with optimal safety and quality and also helps our B2B customers develop more personalized solutions. The availability of this data may open further opportunities for us in the future to drive revenue by providing data services as a health intelligence provider.

 

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Scalable Platform

The large number of highly engaged consumers who trust our Thorne brand and Onegevity platform provide a strong foundation for developing new products that extend across the health and wellness markets. This ecosystem uniquely positions us to create and capture value along the continuum of a consumer’s life with safe and innovative formulas that provide support for prenatal development, healthy adult lifestyles and healthy aging. We have achieved a demonstrated ability to develop innovative new products and successfully integrate acquired companies and assets.

Founder-Led, Science-Oriented Team

Our team of pioneers brings expertise in science-backed wellness, precision health, systems biology and AI-for-health, and has a proven track record of driving profitable growth. Co-Founder Paul Jacobson built this team with a commitment to redefine what it means to be healthy and to push the limits of human potential. Our experienced and highly regarded team of scientists consists of 40 science degrees, including doctorate degrees in 15 specialties, spanning fields such as molecular medicine, neuroscience, immunology and genetics.

Growth Strategies

Grow Brand Awareness

We have a significant opportunity to continue to penetrate the product categories and channels we compete in today. We intend to leverage our existing brand strength and reputation among health professionals and consumers, which will drive growth through an integrated, omni-channel marketing strategy.

Launch New Products and Expand Content Offerings

We will innovate and launch new products focused on unmet clinical needs. We will continue to invest in evidence-based nutritional supplement development powered by Onegevity’s engine and multi-omics database. For example, we recently contributed to the development of Effusio, the brand associated with dissolvable discs that enrich any beverage with nutrients. We are also utilizing Onegevity’s engine and multi-omics database to enable innovation in pharmaceutical markets at faster speeds, with potential to produce more effective and safer drugs.

Leverage Our Multi-Omics Database and AI with B2B Partners

Our longitudinal multi-omics database is proprietary, difficult to replicate, and generates unprecedented data insights. We have the opportunity to monetize our database and unique analysis model to, or partner with, a variety of interested parties, including: corporations benefiting from insights on population health; pharmaceutical companies and biotechnology companies seeking additional data for new drug discovery and patient identification for clinical trials; consumer packaged goods companies; and health intelligence services for consumers and healthcare providers.

Continue to Improve Personalization for a Better Consumer Experience

Our personalized approach to health, delivered through a customized platform of testing, supplements and digital health content continues to contribute to our favorable NPS score and subscription retention rates. We will improve our outstanding track record by further enhancing our AI solutions and consumer engagement to provide tailored, personalized solutions to our customers.

Invest in Our Platform

We will continue to invest in technology and the infrastructure to support the growth of our integrated Thorne and Onegevity platform. We will build on our innovative testing system to collect data and better

 

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understand consumer health by investing in our AI system to process more powerful data sets. We will also invest in developing innovative ingredients and compounds that can support our platform and the health of our customers.

Further Expand into International Markets

We will continue to build on our network of distributors across Asia, Europe and South America. We believe that we have the regulatory expertise to execute on this initiative and to accelerate international growth.

Selectively Pursue Acquisitions

Our comprehensive platform will enable us to selectively pursue strategic and complementary assets that support our customers’ needs. We have a track record of successfully identifying and integrating acquisitions. Our March 2021, acquisition of Onegevity Health strategically expanded our testing and education offerings. We intend to augment and scale the breadth of our platform and offerings through continued strong organic growth opportunities and the acquisition of complementary products and services.

Sales and Marketing

Our vertical integration contributes to our sales and marketing strategy. We have built our brand around what is best for the customer. This approach has bolstered customer perception of our products, helping to drive our world class NPS score of 78 during the first three months of 2021, a leading indicator of brand loyalty. Our customers trust that when they purchase our products, they are ingesting naturally derived ingredients that were developed with a science-backed approach. These factors are synergistic to customer acquisition since existing customers tend to recommend our products to new customers.

We take an integrated approach to marketing that spans the entire customer journey. This allows us to build efficient reach, raise awareness to promote acquisition and foster loyalty and retention. Our proprietary data and analytics are at the center of our marketing strategy and efforts. In addition to our brand building activities, such as thought leadership, out-of-home and video advertising, we have sophisticated performance marketing tactics, including retargeting, paid search and product listing ads, affiliate marketing, paid social media, search engine optimization, personalized email marketing and a referral program. All paid media efforts and ad buying are executed in-house, which is more cost-effective and provides the ability to be more agile in optimizing marketing activities based on real-time data. Together these efforts support our efficient customer acquisition cost and our attractive lifetime value and retention metrics.

Net Promoter Score (NPS) is a widely used market research metric that typically takes the form of a single survey question asking respondents to rate the likelihood that they would recommend a company, product, or a service to a friend or colleague on a scale of one to ten. Customers who respond to our survey with a score of nine or ten after they have purchased our Thorne supplement and health test products and health tests are classified as “promoters” and considered loyal enthusiasts who will keep buying and refer others, thereby fueling growth. Those who respond with a score of seven or eight are considered as “passives” and considered satisfied, but unenthusiastic customers who are vulnerable to competitive offerings. Those with response scores of zero to six are classified as “detractors” and considered to be unhappy customers who can impede growth through negative word of mouth. An NPS score is calculated by taking the percent of promoters less the percent of detractors. We consider the NPS score as an important indicator of customer satisfaction. We take pride in our NPS score, given that the average digital retailer’s NPS score in 2020 was 34.9, as reported in Forrester’s US Net Promoter Benchmarks 2020 report. As a company that is heavily dependent upon its brand equity, NPS is critical to our business in order to benchmark our performance and customer satisfaction. Objectively measuring customer loyalty and brand advocacy through the NPS survey is critical. Our NPS score allows us to compare our brand performance over time as well as compare our performance to that of our competitors. We use NPS as a customer feedback tool, and we distribute the data to our marketing, sales and product development teams.

 

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Additionally, our network of over 42,000 health professionals provides us with a sales channel that provides immediate credibility with new customers. Health professionals in our network are equipped with educational materials, which allow them to better inform their patients about our products. This approach also improves our DTC organic growth and retention and further promotes brand awareness and trust from our customers.

We have also grown our customer base largely through organic methods. We find that by focusing on creating great products through vertical integration, our customers reorder and refer others. Part of our focus has been to educate consumers about the health benefits of nutritional supplements. Our education platform was developed with this in mind, and it acts as a powerful tool for empowering, engaging and retaining customers through their health journey. We publish both general and personalized education including online articles, wellness guides, podcasts and videos. Our daily online magazine, Take 5 Daily, has been our #1 customer acquisition channel. Our wellness guides have been downloaded over 100,000 times and our quizzes have been completed over 475,000 times. We continue to leverage this platform as a key source for customer acquisition.

Omni-Channel Sales Model

Customers can purchase our products through our omni-channel model consisting of both our DTC platform and our large network of health professionals.

There are two typical consumer pathways to purchasing Thorne supplement products for the first time through our DTC channel. The first common pathway is through our Thorne educational platform, where a consumer searches for a specific ingredient, health concern or product, and due to targeted advertising or positive media content, they land on our website to learn more. Once on our site, the consumer may read one to two Take 5 Daily blog articles or take a product quiz to help determine the best product to meet his or her needs. An interested consumer typically purchases one to two nutritional supplement products on average, with an average unit price of $30.70, either through our website, app or third-party site such as Amazon. We have an average rating of 4.5 stars across our products on Amazon, which we believe to be among the highest in the industry. Our platform also enables customers to easily choose personalized plans through our subscription service.

The second path occurs when a consumer searches for a data-driven approach to determine the best product to meet his or her needs. These consumers also typically find our website due to targeted advertising or positive media content and purchase one health test for an average price of $182.30 through our website or app. This consumer then collects a bio sample, mails the sample to a third-party laboratory, and receives his or her test results on Thorne.com within seven to ten business days. Within the results, the consumer can review his or her health insights and personalized recommendations on diet, lifestyle and supplementation. From there, the consumer converts and purchases on average one to two of our supplement products. After taking one of our tests, over 30% of consumers convert to using our recommended products. For customers in this second pathway, we receive revenue from the testing fee and from our supplement product sales. As a result of our merger with Onegevity, we expect that the traffic to our websites through this second pathway to continue to increase and to realize increasing revenue as a result of the synergy with our Thorne products.

Our platform enables customers to easily choose personalized plans through our subscription service. After taking one of our tests, over 30% of consumers convert to using our recommended products. Our website has garnered increasing popularity, with total users increasing by 89.5% from 2019 to 2020 and total subscriptions growing from 89,178 in 2019 to 155,305 in 2020, a 74.2% year-over-year growth rate. We plan to further expand this channel in order to build a strong recurring revenue stream. We have made significant investments in our supply chain logistics in order to offer shipping anywhe