Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K, filed on March 31, 2023. This discussion contains forward-looking statements that involve risks and uncertainties, including those described in the section titled “Special Note Regarding Forward-Looking Statements.” Our actual results and the timing of selected events could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those set forth under the section titled “Risk Factors.”
Overview
We are a science-driven wellness company delivering innovative solutions for a personalized approach to health and wellness. We seek to bring the scientific rigor of biopharma to the prevention space to help people live longer, healthier lives. As a vertically integrated company, Thorne leverages artificial intelligence models to provide insights and personalized data, products, and services that help individuals take a proactive and actionable approach to improve and maintain their health over a 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.
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. Since that acquisition, we have evolved to become a transformative consumer brand, trusted by more than 5 million customers, 47,000 healthcare professionals, thousands of professional athletes, more than 100 professional sports teams and multiple 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;
•2020-2021: Thorne HealthTech, Inc. facilitated the merger of Thorne and Onegevity; and
•On September 27, 2021, we closed our IPO of 7,000,000 shares of common stock. The public offering price of the shares sold in the offering was $10.00 per share. The total gross proceeds from the offering were $70.0 million. After deducting underwriting discounts and commissions of approximately $4.9 million and offering expenses paid or payable by us of approximately $5.1 million, the net proceeds from the offering were approximately $60.0 million;
•2022: Completed the acquisition of Nutrativa LLC (Nutrativa) and its high-speed printing technology, adding quick-dissolving, environmentally friendly supplement discs to our product offerings;
•2022: Completed large-scale surveillance study confirming the reliability of the OneDraw™ blood collection device in remote blood sample collection at home;
•2022: Relaunched our Gut Health Test with first-to-market, user-friendly microbiome wipe technology that revolutionizes the testing experience;
•2023: Completed the acquisition of PreCon Health, Inc., strengthening our brain health portfolio.
38
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, 2023 and 2022:
•we generated net sales of $65.2 million and $54.0 million, respectively, representing 20.7% year-over-year growth;
•we generated gross profit of $34.3 million and $29.5 million, respectively, representing 52.5% and 54.6% of net sales, respectively;
•we generated net loss of $(0.4) million and net income of $4.7 million, respectively; and
•our adjusted EBITDA was $6.1 million and $8.8 million, respectively.
The recent key customer metrics of our business included:
•for the three months ended March 31, 2023 and 2022, customer acquisition costs (CAC) of $31 and $27, respectively, and life-time value (LTV) of $174 and $169, respectively, resulting in LTV-to-CAC of 5.6x and 6.2x, respectively;
•active subscriptions of 402,526 and 265,157, as of March 31, 2023 and 2022, respectively; and
•for the three months ended March 31, 2023 and 2022 average orders per customer of 1.8 and 1.7, 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 Quarterly Report, we have used certain non-GAAP financial measures, including Adjusted EBITDA, Adjusted EBITDA Margin and free cash flow. These measures are derived on the basis of methodologies other than in accordance with GAAP. Non-GAAP financial measures used by us may be calculated differently from, and therefore may not be comparable to, similarly titled measures used by other companies. We have provided a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure. These non-GAAP financial measures should be considered along with, but not as alternatives to, the operating performance measures as prescribed by GAAP.
Key Financial and Operating Data
Our financial profile is characterized by high growth, recurring revenue, improving gross margins, efficient customer acquisition, and free cash flow.
We measure our business using both financial and operational data and use the following metrics to assess the near-term and long-term performance of our brands and business. These metrics serve as guidance for identifying trends, formulating financial projections, making strategic decisions, assessing operational efficiencies, and monitoring our business.
Net Sales
We define net sales as sales of our goods and services and related shipping fees less discounts and returns following the accounting guidelines in accordance with Financial Accounting Standards Board (FASB), Topic 606, “Revenue from Contracts with Customers,” (ASC 606). Our net sales consist of sales of our nutritional supplements, health tests and sales associated with our services leveraging our AI and multi-omics databases, such as product development services. We recognize revenues when control of the promised goods or services is transferred to our customers in an amount that reflects the consideration we expect to be entitled in exchange for those goods or services. We consider several factors in determining when control transfers to the customer upon shipment, or upon delivery for certain customers. These factors include when legal title transfers to the customer, if we have a present right to payment and whether the customer has assumed the risks and rewards of ownership at the time of shipment. Shipping and handling costs are considered a fulfillment activity and are expensed as incurred. We view net sales as a key indicator of demand for our products and services.
Gross Profit
We define gross profit as net sales less cost of sales. Cost of sales consists of depreciation and amortization, product and packaging costs, including manufacturing costs, inventory freight, testing costs of all raw materials and finished goods, inventory shrinkage costs and inventory valuation adjustments, offset by reductions for promotions and percentage or volume rebates offered by our vendors.
39
Non-GAAP Financial Measures
We calculate Adjusted EBITDA and Adjusted net income are calculated as net income adjusted to exclude: interest expense, net; other income, net; provision for income taxes; depreciation and amortization expense; stock-based compensation expense; non-cash lease expense; change in fair value of warrant liability; gain/loss from equity interest in unconsolidated affiliates; and acquisition costs. During the three months ended March 31, 2023, the Company updated its calculation of Adjusted EBITDA and Adjusted net income for the three months ended March 31, 2023 and 2022 to exclude non-cash lease expense directly related to the amortization of right-of-use assets for finance leases under ASC 842, which has been increasing in connection with the Company’s financing activities associated with capital expenditures. Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by net sales. Adjusted diluted earnings per share is calculated by dividing Adjusted net income by diluted weighted average common shares outstanding.
We use Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted net income, and Adjusted diluted earnings per share 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, Adjusted EBITDA Margin, Adjusted net income, and Adjusted diluted earnings per share 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, non-cash lease expense, interest expense, net, other income, 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, Adjusted EBITDA Margin, Adjusted net income, and Adjusted diluted earnings per share 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, Adjusted EBITDA Margin, Adjusted net income, and Adjusted diluted earnings per share 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 EBITDA, EBITDA margin, net income (loss), diluted earnings per share, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted net income, and Adjusted diluted earnings per share 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, Adjusted EBITDA Margin, Adjusted net income, and Adjusted diluted earnings per share do not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
•Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted net income, and Adjusted diluted earnings per share exclude stock-based compensation expense, which is a recurring expense for our business and an important part of our compensation strategy;
•Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted net income, and Adjusted diluted earnings per share 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 are non-cash items that can have an impact on GAAP performance, but may not reflect the continuing operating results of our business; and
•the expenses and other items that we exclude in our calculation of Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted net income, and Adjusted diluted earnings per share may differ from the expenses and other items, if any, that other companies may exclude from Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted net income, and Adjusted diluted earnings per share 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.
40
Because of these limitations, Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted net income, and Adjusted diluted earnings per share 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, Adjusted EBITDA Margin, Adjusted net income, and Adjusted diluted earnings per share to net income (loss) and diluted earnings (loss) per share, the most directly comparable financial measures prepared in accordance with GAAP, for each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
EBITDA and Adjusted EBITDA Reconciliation |
|
|
|
|
|
|
Net (loss) income |
|
$ |
(531,488 |
) |
|
$ |
4,711,241 |
|
Net (loss) income margin |
|
|
(0.8 |
)% |
|
|
8.7 |
% |
Depreciation and amortization |
|
|
1,561,019 |
|
|
|
1,341,850 |
|
Interest expense, net |
|
|
394,999 |
|
|
|
30,157 |
|
Income tax expense |
|
|
29,000 |
|
|
|
32,545 |
|
EBITDA |
|
|
1,453,530 |
|
|
|
6,115,793 |
|
EBITDA margin |
|
|
2.2 |
% |
|
|
11.3 |
% |
Adjustments: |
|
|
|
|
|
|
Stock-based compensation |
|
|
3,748,135 |
|
|
|
2,009,412 |
|
Non-cash lease expense |
|
|
491,168 |
|
|
|
108,904 |
|
Change in fair value of warrant liability |
|
|
338,356 |
|
|
|
65,919 |
|
Loss from equity interests in unconsolidated affiliates |
|
|
88,934 |
|
|
|
— |
|
Acquisition costs |
|
|
— |
|
|
|
460,411 |
|
Adjusted EBITDA |
|
$ |
6,120,123 |
|
|
$ |
8,760,439 |
|
Adjusted EBITDA Margin |
|
|
9.4 |
% |
|
|
16.2 |
% |
|
|
|
|
|
|
|
Adjusted Net Income (Loss) Reconciliation |
|
|
|
|
|
|
Net (loss) income |
|
|
(531,488 |
) |
|
|
4,711,241 |
|
Income tax expense |
|
|
29,000 |
|
|
|
32,545 |
|
Stock-based compensation |
|
|
3,748,135 |
|
|
|
2,009,412 |
|
Non-cash lease expense |
|
|
491,168 |
|
|
|
108,904 |
|
Change in fair value of warrant liability |
|
|
338,356 |
|
|
|
65,919 |
|
Loss from equity interests in unconsolidated affiliates |
|
|
88,934 |
|
|
|
— |
|
Acquisition costs |
|
|
— |
|
|
|
460,411 |
|
Adjusted net income before adjusted tax expense |
|
|
4,164,105 |
|
|
|
7,388,432 |
|
Adjusted income tax expense |
|
|
1,082,667 |
|
|
|
738,843 |
|
Adjusted net income |
|
$ |
3,081,438 |
|
|
$ |
6,649,589 |
|
|
|
|
|
|
|
|
Diluted weighted-average shares outstanding |
|
|
53,342,837 |
|
|
|
52,624,951 |
|
Adjusted diluted earnings per share |
|
$ |
0.06 |
|
|
$ |
0.13 |
|
41
Free Cash Flow
We define free cash flow as net cash provided by operating activities less capital expenditures, which consist of purchases of property and equipment as well as purchase of licensing agreements. Accordingly, we believe that free cash flow provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. Free cash flow may be affected in the near-to medium-term by the timing of capital investments, such as purchases of machinery, information technology and other equipment, the launch of new fulfillment centers, customer service centers and new products, fluctuations in our growth and the effect of such fluctuations on working capital and changes in our cash conversion cycle due to increases or decreases of customer and vendor payment terms as well as inventory turnover. We expect free cash flow to increase over the long term as investments made in prior years drive increased profitability. If we experience an unforeseen increase in demand, we may need to make additional capital investments in manufacturing facility expansion.
The following table presents a reconciliation of free cash flow to net cash provided by operating activities, the most directly comparable financial measure prepared in accordance with GAAP, for each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
Net cash used in operating activities |
|
$ |
(5,725,866 |
) |
|
$ |
(4,501,241 |
) |
Purchase of property and equipment |
|
|
(13,173,073 |
) |
|
|
(1,492,540 |
) |
Purchase of license agreements |
|
|
(187,500 |
) |
|
|
(375,000 |
) |
Free cash flow |
|
$ |
(19,086,439 |
) |
|
$ |
(6,368,781 |
) |
Number of Subscriptions
We define subscriptions as orders resulting from direct-to-consumer (DTC) customers opting in to automatic refills or orders that are recurring on Thorne.com and on Amazon.com via our authorized reseller. 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 Sales to DTC Customers
We define subscription sales as sales generated from retail subscription orders on Thorne.com and on Amazon.com via our authorized reseller within a given period. Subscription sales are taken as a percentage of net sales from all orders from customers purchasing product on Thorne.com and on Amazon.com via our authorized reseller (DTC Customers) in that same period. We view subscription sales as a percentage of net sales from DTC customers 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, inclusive of cooperative advertising costs treated as a reduction of net sales, less headcount and associated benefit expenses as well as costs attributed to value-in-kind, product samples, and sponsorships for professional and B2B customers, divided by the number of DTC Customers who placed their first order during that same calendar year. We view the annual LTV to CAC ratio as a key indicator for marketing efficiency.
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.
42
Factors Affecting Our Performance
Ability to Increase Brand Awareness and Attract New Customers
Our long-term growth will depend on our continued ability to attract new customers. Our historical growth was largely driven by organic customer acquisition. We are still in the early stages of our growth and believe we can significantly expand our customer base as we increase brand awareness. Growing brand awareness through efficient, impactful communications and through building brand equity and loyalty is central to our marketing and growth strategy. We believe optimizing the message of our brand as one that defies expectations of good health differentiates us and is key to our ability to attract customers and retain them within our ecosystem. As our brand awareness grows, we intend to strengthen our reach across demographics and markets.
Growth in Subscriptions
We offer our customers the ability to opt in to recurring automatic refills on both our website and on Amazon.com via our authorized reseller. 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 when a customer is subscribed to 1 to 2 products, and a 20% discount when subscribed to 3 or more products, with an average discount of approximately 16.8%. On Amazon.com, the discount ranges from 5% to 10% to 15% depending on the product and the number of products to which a customer is subscribed, with an average discount of approximately 6.2%.
We view our growing subscription business on Thorne.com and on Amazon.com via our authorized reseller as a key driver of future sales growth. Our subscriptions grew from 265,157 as of March 31, 2022, to 402,526 as of March 31, 2023, representing 51.8% year-over-year growth. We expect subscription sales to continue to grow as we continue to invest in brand awareness, innovate new products and solutions, 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 customer, and retain our customers for longer periods of time. We employ a holistic, full funnel strategy that balances long term brand objectives with performance marketing goals using a mix of paid, owned, and earned media. We take a data-driven approach to managing our marketing campaigns, constantly optimizing and adjusting to improve performance.
We experience high retention, repeat purchases and low CAC, as seen by our 2023 and 2022 LTV to CAC ratios of 5.6x and 6.2x for the three months ended March 31, 2023 and 2022, respectively.
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 2022, 42.7% of our sales to DTC Customers were generated from new, first-time purchasers versus 57.3% from existing DTC Customers on Thorne.com. We deepen our relationships with our customers and drive retention by engaging them with digital health content and educational resources. We expect the growth in net sales each year to continue as we generate and grow sales from existing customers and from newly acquired customers.
Health Professionals
Our network of 47,000 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.
43
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 2022, we shipped to 29 countries. We believe capital investment coupled with our regulatory expertise will lead to promising results. However, international sales are dependent upon local regulations and custom practices, which both change continuously.
Components of our Operating Results
Net Sales
Our net sales consist of sales of our nutritional supplements, health tests and sales associated with our services leveraging our AI and multi-omics databases, such as product development services. We recognize net sales when control over the product has transferred to customers in accordance with our revenue recognition policy.
Cost of Sales
Cost of sales consists of depreciation and amortization, product and packaging costs, including manufacturing costs, inventory freight, testing costs of all raw materials and finished goods, inventory shrinkage costs and inventory valuation adjustments, offset by reductions for promotions and percentage or volume rebates offered by our vendors, which may depend on reaching minimum purchase thresholds. We expect cost of sales to increase on an absolute dollar basis and improve as a percentage of net sales over the long term.
Operating Expenses
Operating expenses consist of
•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
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.
44
We plan to hire employees for our science and engineering team to support our research and development efforts. We expect that research and development expenses will increase on an absolute dollar basis in the foreseeable future as we continue to increase investments in our technology platform. However, our research and development expenses may fluctuate as a percentage of revenue from period to period due to the timing and amount of these expenses.
Fulfillment costs represent costs incurred in operating, manufacturing, staffing order fulfillment and customer service teams, including costs attributable to buying, receiving, inspecting and warehousing inventories, picking, packaging and preparing customer orders for shipment, payment processing and related transaction costs and responding to inquiries from customers. Included within fulfillment costs are merchant processing fees charged by third parties that provide merchant processing services for credit cards.
We expect to incur additional expenses as a result of operating as a public company, including expenses to comply with the rules and regulations applicable to companies listed on the Nasdaq, expenses related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, as well as higher expenses for general and director and officer insurance, investor relations and professional services. We also anticipate that fulfillment costs will fluctuate as a percentage of net sales over the long term. Overall, as we continue to grow as a company, we expect that our selling, general and administrative costs will increase on an absolute dollar basis but decrease as a percentage of net sales over the long term.
Interest expense, net
Interest expense, net consists primarily of interest earned on cash we hold, and interest incurred on borrowings.
Income Tax Provision
Our income tax provision consists of an estimate of federal and state income taxes based on enacted federal and state tax rates, as adjusted for allowable credits, deductions and uncertain tax positions. Our income tax provision consists of cash taxes paid during the year in review.
45
Results of Operations
The following table summarizes our results of operations for each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
Net sales |
|
$ |
65,237,779 |
|
|
$ |
54,029,700 |
|
Cost of sales |
|
|
30,964,189 |
|
|
|
24,550,591 |
|
Gross profit |
|
|
34,273,590 |
|
|
|
29,479,109 |
|
Gross margin |
|
|
52.5 |
% |
|
|
54.6 |
% |
Operating expenses: |
|
|
|
|
|
|
Research and development |
|
|
1,772,089 |
|
|
|
1,967,666 |
|
Marketing |
|
|
8,938,691 |
|
|
|
4,800,961 |
|
Selling, general and administrative |
|
|
23,577,540 |
|
|
|
17,928,475 |
|
Income from operations |
|
|
(14,730 |
) |
|
|
4,782,007 |
|
Other income (expense), net: |
|
|
|
|
|
|
Interest expense, net |
|
|
(394,999 |
) |
|
|
(30,157 |
) |
Change in fair value of warrant liability |
|
|
(338,356 |
) |
|
|
(65,919 |
) |
Other income, net |
|
|
334,531 |
|
|
|
57,855 |
|
Total other income (expense), net |
|
|
(398,824 |
) |
|
|
(38,221 |
) |
(Loss) income before income taxes and loss from equity interests in unconsolidated affiliates |
|
|
(413,554 |
) |
|
|
4,743,786 |
|
Income tax expense |
|
|
29,000 |
|
|
|
32,545 |
|
Net (loss) income before loss from equity interests in unconsolidated affiliates |
|
|
(442,554 |
) |
|
|
4,711,241 |
|
Loss from equity interests in unconsolidated affiliates |
|
|
(88,934 |
) |
|
|
— |
|
Net (loss) income |
|
|
(531,488 |
) |
|
|
4,711,241 |
|
Net loss — non-controlling interests |
|
|
(129,324 |
) |
|
|
(267,818 |
) |
Net (loss) income attributable to Thorne HealthTech, Inc. |
|
$ |
(402,164 |
) |
|
$ |
4,979,059 |
|
Earnings per share: |
|
|
|
|
|
|
Basic |
|
$ |
(0.01 |
) |
|
$ |
0.09 |
|
Diluted |
|
$ |
(0.01 |
) |
|
$ |
0.09 |
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
Basic |
|
|
53,342,837 |
|
|
|
52,564,779 |
|
Diluted |
|
|
53,342,837 |
|
|
|
52,624,951 |
|
Net sales
Net sales consist of sales of our products and services, net of discounts and customer returns. We enter into transactions and makes payments to certain of our customers related to advertising, some of which involve cooperative relationships with customers. When no distinct good or service is received in exchange for consideration, or if the fair value of the benefit cannot be reasonably estimated, the Company records its share of the costs for these transactions paid to customers as a reduction of the transaction price within net sales. The Company recorded $3.4 million and $2.2 million of cooperative advertising costs as a reduction of net sales for the three months ended March 31, 2023 and 2022, respectively.
Net sales for the three months ended March 31, 2023, increased by $11.2 million, or 20.7%, to $65.2 million, compared to $54.0 million during the three months ended March 31, 2022. The increase in net sales was primarily attributable to organic growth from progress executing our core growth strategies, resulting in sales growth within our DTC and Professional/B2B channels.
The DTC channel continued to be a significant growth catalyst through efficient new customer acquisition, including an increasing base of active subscriptions, strong customer satisfaction metrics and stable retention. Our DTC sales were $33.8 million for the three months ended March 31, 2023, compared to $24.0 million for the three months ended March 31, 2022, which represents an increase of $9.8 million, or 41.0% compared to the corresponding period in the prior year. We believe our steady pace of innovation with the launch of new premium offerings and customer engagement tools has increased our value proposition to customers.
Similarly, Professional/B2B channel sales benefited from heightened brand awareness and ongoing delivery of science-backed solutions that increase personalization and improve user experiences. Our B2B net sales were $31.4 million for the three months ended March 31, 2023, compared to $30.0 million for the three months ended March 31, 2022, which represents an increase of $1.4 million, or 4.6% compared to the corresponding period in the prior year. As heightened awareness of the benefits of a healthy lifestyle and the
46
consumerization of healthcare on a global scale have significantly increased the size of our end markets, we believe successful execution of our core strategies will continue to drive significant increases in net sales above industry growth rates.
Cost of Sales and Gross Profit
The following table summarizes our cost of sales and gross profit for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
Change |
|
|
Percent Change |
|
Net sales |
|
$ |
65,237,779 |
|
|
$ |
54,029,700 |
|
|
$ |
11,208,079 |
|
|
|
20.7 |
% |
Cost of Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Other cost of sales |
|
|
29,759,790 |
|
|
|
23,741,395 |
|
|
|
6,018,395 |
|
|
|
25.3 |
% |
Percent of net sales |
|
|
45.6 |
% |
|
|
43.9 |
% |
|
|
170 bps |
|
|
|
3.8 |
% |
Depreciation and amortization |
|
|
701,486 |
|
|
|
717,885 |
|
|
|
(16,399 |
) |
|
|
-2.3 |
% |
Percent of net sales |
|
|
1.1 |
% |
|
|
1.3 |
% |
|
|
-30 bps |
|
|
|
-19.1 |
% |
Stock-based compensation |
|
|
92,840 |
|
|
|
91,311 |
|
|
|
1,529 |
|
|
n.m. |
|
Percent of net sales |
|
|
0.1 |
% |
|
|
0.2 |
% |
|
|
0 bps |
|
|
n.m. |
|
Non-cash lease expense |
|
|
410,073 |
|
|
|
— |
|
|
|
410,073 |
|
|
|
100.0 |
% |
Percent of net sales |
|
|
0.6 |
% |
|
|
0.0 |
% |
|
|
60 bps |
|
|
|
100.0 |
% |
Cost of Sales |
|
$ |
30,964,189 |
|
|
$ |
24,550,591 |
|
|
$ |
6,413,598 |
|
|
|
26.1 |
% |
Percent of net sales |
|
|
47.5 |
% |
|
|
45.4 |
% |
|
|
200 bps |
|
|
|
4.5 |
% |
Gross profit |
|
$ |
34,273,590 |
|
|
$ |
29,479,109 |
|
|
$ |
4,794,481 |
|
|
|
16.3 |
% |
Percent of net sales |
|
|
52.5 |
% |
|
|
54.6 |
% |
|
|
-200 bps |
|
|
|
(3.7 |
)% |
(1) Changes in percentages throughout this “Management’s Discussion and Analysis” are presented in basis points (bps).
(2) Not meaningful (n.m.) year-over-year comparison as there is no comparative in the corresponding period in the prior year.
We currently believe that the benefit of our anticipated net sales growth, product pricing strategies, sales mix shift towards the DTC channel and new product innovations will be partially offset by sustained higher costs in the near term. However, we also currently believe that gross profit as a percentage of net sales will increase over time primarily from (i) incremental improvements in macroeconomic conditions and (ii) as we begin realizing the benefits of greater scale and operational efficiencies expected to be achieved following completion of the construction of our new world-class production facility, which is currently in progress.
Cost of sales for the three months ended March 31, 2023, increased by $6.4 million, or 26.1%, to $31.0 million, compared to $24.6 million during the three months ended March 31, 2022. The increase in cost of sales was due to the sell-through of higher cost of raw materials due to inflation along with the impact of product mix.
Gross profit for the three months ended March 31, 2023, increased by $4.8 million or 16.3%, to $34.3 million, compared to $29.5 million during the three months ended March 31, 2022. This increase was primarily due to the increase in net sales, partially offset by the increase in cost of sales and changing product mix. Gross profit as a percentage of net sales for the three months ended March 31, 2023, was 52.5%, a decrease of 400 bps, or a 4% change, compared to the corresponding period in the prior year.
47
Operating Expenses
The following table summarizes our operating expenses for periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
Change |
|
|
Percent Change (1) |
|
Net sales |
|
$ |
65,237,779 |
|
|
$ |
54,029,700 |
|
|
$ |
11,208,079 |
|
|
|
20.7 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
3,655,295 |
|
|
|
1,918,101 |
|
|
|
1,737,194 |
|
|
|
90.6 |
% |
Percent of net sales |
|
|
5.6 |
% |
|
|
3.6 |
% |
|
|
210 bps |
|
|
|
57.8 |
% |
Depreciation and amortization |
|
|
859,533 |
|
|
|
623,965 |
|
|
|
235,568 |
|
|
|
37.8 |
% |
Percent of net sales |
|
|
1.3 |
% |
|
|
1.2 |
% |
|
|
20 bps |
|
|
|
14.1 |
% |
Non-cash lease expense |
|
|
81,095 |
|
|
|
108,904 |
|
|
n.m. |
|
|
n.m. |
|
Percent of net sales |
|
|
0.1 |
% |
|
|
0.2 |
% |
|
n.m. |
|
|
n.m. |
|
Other marketing |
|
|
8,677,899 |
|
|
|
4,610,991 |
|
|
|
4,066,908 |
|
|
|
88.2 |
% |
Percent of net sales |
|
|
13.3 |
% |
|
|
8.5 |
% |
|
|
480 bps |
|
|
|
55.9 |
% |
Other research and development |
|
|
1,505,780 |
|
|
|
1,729,987 |
|
|
$ |
(224,207 |
) |
|
|
(13.0 |
)% |
Percent of net sales |
|
|
2.3 |
% |
|
|
3.2 |
% |
|
|
-90 bps |
|
|
|
(27.9 |
)% |
Other selling, general and administrative |
|
|
19,219,302 |
|
|
|
14,240,301 |
|
|
|
4,979,001 |
|
|
|
35.0 |
% |
Percent of net sales |
|
|
29.5 |
% |
|
|
26.4 |
% |
|
|
310 bps |
|
|
|
11.8 |
% |
Total Operating expenses |
|
$ |
33,998,904 |
|
|
$ |
23,232,249 |
|
|
$ |
10,766,655 |
|
|
|
46.3 |
% |
Percent of net sales |
|
|
52.1 |
% |
|
|
43.0 |
% |
|
|
910 bps |
|
|
|
21.2 |
% |
(1) Not meaningful (n.m.) year-over-year comparison as there is no comparative in the corresponding period in the prior year.
Total operating expenses for the three months ended March 31, 2023 increased by $10.8 million, or 46.3%, to $34.0 million, compared to $23.2 million during the three months ended March 31, 2022.
Stock-based compensation expense for the three months ended March 31, 2023 was $0.3 million, $0.2 million, and $3.2 million recorded within marketing expenses; research and development expenses; and selling, general, and administrative expenses, respectively. Stock-based compensation expense for the three months ended March 31, 2022 was $0.2 million, $0.2 million, and $1.6 million recorded within marketing expenses; research and development expenses; and selling, general, and administrative expenses, respectively.
Depreciation and amortization expense for the three months ended March 31, 2023 was $0.1 million and $0.8 million recorded within research and development expenses and selling, general, and administrative expenses, respectively. Depreciation and amortization expense for the three months ended March 31, 2022 was $0.1 million and $0.6 million recorded within research and development expenses and selling, general, and administrative expenses, respectively.
Non-cash lease expense for the three months ended March 31, 2023 was $0.4 million and $1.6 million, respectively, recorded within selling, general, and administrative expenses.
Other selling, general and administrative expenses for the three months ended March 31, 2023, increased $5.0 million, or 35.0%, to $19.2 million, compared to $14.2 million in the three months ended March 31, 2022. The increase was primarily due to increased selling costs correlated with the increase in net sales and increased employee compensation costs.
Other research and development expense for the three months ended March 31, 2023 decreased by $0.2 million, or 13.0%, to $1.5 million, compared to $1.7 million during the three months ended March 31, 2022. The decrease was primarily driven by a decrease in costs associated with external consultants.
Other marketing expenses for the three months ended March 31, 2023 increased by $4.1 million or 88.2%, to $8.7 million, compared to $4.6 million during the three months ended March 31, 2022. At 13.3% of net sales for the three months ended March 31, 2023, the $4.1 million increase was in line with the Company’s planned marketing spend for 2023.
48
Interest Expense, Net
The following table summarizes our interest expense, net for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
Change |
|
|
Percent Change |
|
Interest expense, net |
|
$ |
394,999 |
|
|
$ |
30,157 |
|
|
$ |
364,842 |
|
|
|
1209.8 |
% |
Percent of net sales |
|
|
0.6 |
% |
|
|
0.1 |
% |
|
|
50 bps |
|
|
|
984.8 |
% |
Interest expense, net for the three months ended March 31, 2023 increased by $0.4 million, or 1209.8%, to $0.4 million, compared to $30 thousand for the three months ended March 31, 2022. This increase was primarily due to interest incurred during the three months ended March 31, 2023 on the outstanding proceeds received under the 2022 Credit Agreement as of and during the three month period ended March 31, 2023. The Company received proceeds of $12 million from the 2022 Term loan during the three months ended December 31, 2022, of which the full $12 million remained outstanding as of March 31, 2023. Additionally, the Company received proceeds of $30 million during the three months ended March 31, 2023 from the Revolver, of which the Company made repayments of $15 million during the three months ended March 31, 2023. See note 10 included within our condensed consolidated financial statements for additional information and “Liquidity and Capital Resources” below.
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
Change |
|
|
Percent Change |
|
Income tax expense |
|
$ |
29,000 |
|
|
$ |
32,545 |
|
|
$ |
(3,545 |
) |
|
|
(10.9 |
)% |
Percent of net sales |
|
|
0.0 |
% |
|
|
0.1 |
% |
|
|
0 bps |
|
|
|
(26.2 |
)% |
Our effective tax rate was (7.0%) for the three months ended March 31, 2023, compared to 0.7% for the three months ended March 31, 2022.
Liquidity and Capital Resources
Historically and through March 31, 2023, we have financed our operations and business development efforts primarily from product sales, public sales of equity securities, and the proceeds of secured borrowings.
Based on current conditions, we believe we have sufficient financial resources to fund our activities and execute our business plans. However, the cost of obtaining financing for our projects needs may increase significantly or such financing may be difficult to obtain.
As of March 31, 2023, we had access to: (i) $11.1 million in cash and cash equivalents; (ii) $20.6 million in cash in escrow restricted for use for our Summerville, South Carolina expansion project, (iii) $8.0 million of allowance to be received from the lessor upon commencement of the lease amendment for the New Expansion of our South Carolina manufacturing and distribution facility, and (iv) $25.1 million of available borrowing capacity under our Revolver, with an option to obtain an additional $15.0 million, subject to agreement by the lender.
As of March 31, 2023, $30.0 million in the aggregate was outstanding under credit arrangements with several banks. For a description of our credit arrangements, refer to Note 12 in the Notes to Consolidated Financial Statements.
Our capital expenditures primarily relate to our Summerville, South Carolina expansion which includes leasehold improvements and footprint expansion for our manufacturing and warehousing and distribution facilities. We have planned $55.0 million in total capital expenditures, of which $32.0 million has been incurred through the period ended March 31, 2023. We expect to invest approximately $23.0 million during the remainder of 2023 and early 2024.
Other capital expenditure needs in the ordinary course of business is planned to be $5.0 million, annually. Of this, $1.0 million has been spent during the three months ended March 31, 2023, with the balance of $4.0 million to be invested during the remainder of 2023.
We expect to finance these requirements with (i) the sources of liquidity described above; (ii) positive cash flows from our operations; and (iii) future project financings and re-financings. Management believes that, based on the current stage of implementation of our business plan, the sources of liquidity and capital resources described above will address our anticipated liquidity, capital expenditures, and other investment requirements.
49
Sources and Uses of Our Cash and Cash Equivalents
The following table summarizes our cash and cash equivalents and changes in our cash flows for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
|
Change |
|
Cash and cash equivalents |
|
$ |
11,061,732 |
|
|
$ |
36,024,847 |
|
|
$ |
(24,963,115 |
) |
Restricted cash |
|
|
20,599,989 |
|
|
|
4,900,000 |
|
|
|
15,699,989 |
|
Cash and restricted cash |
|
$ |
31,661,721 |
|
|
$ |
40,924,847 |
|
|
$ |
(9,263,126 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
Change |
|
Net cash used in operating activities |
|
$ |
(5,725,866 |
) |
|
$ |
(4,501,241 |
) |
|
$ |
(1,224,625 |
) |
Net cash used in investing activities |
|
$ |
(17,360,573 |
) |
|
$ |
(17,729,827 |
) |
|
$ |
369,254 |
|
Net cash provided by financing activities |
|
$ |
13,807,906 |
|
|
$ |
2,598,872 |
|
|
$ |
11,209,034 |
|
Operating Activities
Cash provided by operating activities consisted of net income, adjusted for non-cash items, including depreciation and amortization, change in fair value of warrant liability, non-cash lease expense, stock-based compensation and certain other non-cash items, as well as the effect of changes in working capital and other activities.
Net cash used in operating activities increased $1.2 million for the three months ended March 31, 2023, compared to the corresponding period in the prior year. The increase in cash used is primarily due to a net decrease in operating assets and liabilities of $11.9 million, offset by an increase in cash of $3.7 million related to stock based compensation and $1.6 million in depreciation and amortization. These changes in operating assets and liabilities are primarily driven by timing of collections and vendor payments, offset by a decrease in the purchases of inventory as compared to the previous three months ended March 31, 2022.
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 for acquisitions and the purchase and use of certain license and research agreements.
Net cash used in investing activities decreased $0.4 million for the three months ended March 31, 2023, compared to the corresponding period in the prior year. The decrease is primarily driven by the acquisition of PreCon Health of $4.0 million during the three months ended March 31, 2023 as compared to the acquisition of Nutrativa for $14.9 million during the three months ended March 31, 2022. The decrease is primarily offset by purchases of property and equipment of $13.2 million during the three months ended March 31, 2023 as compared to $1.5 million during the three months ended March 31, 2022.
Financing Activities
Net cash provided by financing activities increased $11.2 million for the three months ended March 31, 2023, compared to the corresponding period in the prior year. This increase in cash provided is primarily related to proceeds of the Revolving Line of Credit of $30.0 million, offset by payments on the Revolving Line of Credit of $(15.0) million.
50
Contractual Obligations and Commitments
We have contractual obligations in the form of noncancelable leases, equipment loans which incur interest and commitments related to certain agreements. Future minimum payments due in the next 12 months under our leases and outstanding equipment loans are $5.8 million and $0.9 million, respectively. Thereafter, we have remaining obligations totaling $48.5 million and $1.6 million, respectively. As of March 31, 2023, we had unrestricted cash of $11.1 million and accounts receivable of $19.0 million.
Considering recent market conditions, we have reevaluated our operating cash flows and cash requirements and continue to believe that current cash and future cash flows from operating activities will be sufficient to meet our anticipated cash needs, including working capital needs, capital expenditures, and contractual obligations for at least 12 months from the issuance date of the consolidated financial statements included herein.
Our future capital requirements will depend on many factors, including our revenue growth rate, our working capital needs primarily for inventory build, our global footprint, the expansion of our marketing activities, the timing and extent of spending to support product development efforts, the introduction of new and enhanced products and the continued market consumption of our products. We may seek additional equity or debt financing in the future in order to acquire or invest in complementary businesses, products and/or new supportive infrastructures. In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or general cash flows necessary to expand our operations and invest in continued product innovation, we may not be able to compete successfully, which would harm our business, operations, and financial condition.
Off Balance Sheet Arrangements
We currently do not have, and did not have during the periods presented, any off-balance sheet arrangements.
Critical Accounting Estimates
The preparation of our unaudited condensed consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. We have discussed the estimates that we believe are critical and require the use of complex judgment in their application in our Annual Report on Form 10-K filed on March 31, 2023, and, during the three months ended March 31, 2023, there were no material changes to those previously disclosed.