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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549


FORM 10-Q

(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022

OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from    to

Commission File Number: 001-40378

https://cdn.kscope.io/900053005f3ae7c9887ae53f6fb779fb-hnst-20220930_g1.jpg
The Honest Company, Inc.

(Exact Name of Registrant as Specified in its Charter)



Delaware
90-0750205
(State or Other Jurisdiction of
(I.R.S. Employer
Incorporation or Organization)
Identification No.)
12130 Millennium Drive, #500
Los Angeles, CA
90094
(Address of Principal Executive Offices)
(Zip Code)
(888) 862-8818
(Registrant’s Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities Registered Pursuant to Section 12(b) of the Act:
Trading
Symbol(s)
Title of each class
Name of each exchange on which registered
Common Stock, $0.0001 par value per share
HNST
The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒    No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 filerAccelerated filer
Non-accelerated filerSmaller 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 13(a) of the Exchange Act.


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes     No ☒

As of November 8, 2022, the registrant had 92,672,893 shares of common stock, $0.0001 par value per share outstanding.



The Honest Company, Inc.

Table of Contents


Page
PART I.
Item 1.
Item 2.
Item 3.
Item 4.
PART II.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.



1



SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” (within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”)) about us and our industry that involve substantial risks and uncertainties. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will” or “would” or the negative of these words or other similar terms or expressions. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, those set forth in Part II, Item 1A, “Risk Factors,” if any, and other factors set forth in other parts of this Quarterly Report on Form 10-Q. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. These forward-looking statements include, but are not limited to, statements concerning the following:

our expectations regarding our revenue, cost of revenue, operating expenses, gross margin, adjusted EBITDA and other operating results;
our strategic initiatives and priorities, including the timing, focus and cadence of our marketing, innovation, and distribution and costovation strategies;
our ability to offset the high inflationary environment, including commodity prices, labor costs, input cost and transportation cost inflation with price increases, productivity or investing in digital capabilities and a growing revenue base;
our ability to implement our strategy to deliver sustained long-term growth;
the effect of COVID-19 or other public health crises or macroeconomic factors on our business and the global economy, including shifting consumer demand between our Digital and Retail channels and the impact from supply chain disruptions;
economic conditions, including a recession and inflationary pressures and their impact on consumer spending and our profit margin;
our continued revenue growth through our omnichannel strategy and ability to capture growth in whitespace opportunities in the Retail channel;
our ability to effectively manage our growth;
the costs and success of our marketing efforts, and our ability to grow brand awareness and maintain, protect and enhance our brand;
our ability to drive household penetration and increase market share in our product categories;
our investments in innovation and digital capabilities to fuel growth;
the market shift towards clean and natural products and the whitespace opportunity it provides for further market penetration and category growth in the clean and natural segments;
our strategies to address the reduction in demand of certain products in our Household and Wellness product category and the related impact on our business;
our ability to acquire new consumers and successfully retain existing consumers, including their level of spend with us;
our expansion with retail and digital customers;
our ability to retain new distribution partners;
our ability to bring new products to market and to identify and successfully launch new category adjacencies;
anticipated trends, growth rates, and challenges in our business and in the markets in which we operate;
expectations regarding consumer demand and the timing and amount of orders from key customers;
our ability to achieve or sustain our profitability;
our practices, commitments and performance related to environmental, social and governance matters;
future investments in our business, our anticipated capital expenditures and our estimates regarding our capital requirements;
our ability to offset rising consumer uncertainty and tighter inventory management by retailers;
our ability to effectively manage our inventory and maintain sufficient inventory to satisfy customer demands and meet revenue targets;
our ability to liquidate excess inventory related to drops in consumer demand for our products, product discontinuations or product restages;
our ability to gauge consumer trends and changing consumer preferences;
our reliance on key personnel and our ability to identify, recruit and retain skilled personnel;
our ability to obtain, maintain, protect and enforce our intellectual property rights and any costs associated therewith;
our ability to compete effectively with existing competitors and new market entrants;
our ability to successfully enter new markets and expand internationally;
our ability to identify and complete acquisitions that complement and expand our reach and platform;
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seasonality;
the financial condition of, and our relationships with, our suppliers, manufacturers, distributors and retailers;
the ability of our suppliers and manufacturers to comply with safety, environmental or other laws or regulations;
our ability to comply or remain in compliance with laws and regulations that currently apply or become applicable to our business in the United States, such as the U.S. Food and Drug Administration governmental regulation and state regulation, and in other jurisdictions where we elect to do business;
outcome of legal or administrative proceedings; and
the growth rates of the markets in which we compete.


3


PART I—FINANCIAL INFORMATION


Item 1. Condensed Consolidated Financial Statements.

The Honest Company, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except share and per share amounts)
September 30, 2022December 31, 2021
Assets
Current assets
Cash and cash equivalents$24,087 $50,791 
Short-term investments16,744 42,388 
Accounts receivable, net38,871 31,784 
Inventories100,278 75,668 
Prepaid expenses and other current assets14,435 13,165 
Total current assets194,415 213,796 
Operating lease right-of-use asset31,486 — 
Property and equipment, net14,891 52,952 
Goodwill2,230 2,230 
Intangible assets, net387 440 
Other assets4,951 3,179 
Total assets$248,360 $272,597 
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable$30,703 $28,743 
Accrued expenses29,968 19,003 
Deferred revenue781 731 
Total current liabilities61,452 48,477 
Long term liabilities
Lease financing obligation, net of current portion— 37,527 
Operating lease liabilities, net of current portion31,790 — 
Other long-term liabilities33 7,487 
Total liabilities93,275 93,491 
Commitments and contingencies
Stockholders’ equity (deficit)
Preferred stock, $0.0001 par value, 20,000,000 shares authorized at September 30, 2022 and December 31, 2021, none issued or outstanding as of September 30, 2022 and December 31, 2021
  
Common stock, $0.0001 par value, 1,000,000,000 and 150,000,000 shares authorized at September 30, 2022 and December 31, 2021, respectively; 92,590,227 and 91,512,140 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively
9 9 
Additional paid-in capital582,396 570,794 
Accumulated deficit(427,237)(391,656)
Accumulated other comprehensive loss(83)(41)
Total stockholders’ equity 155,085 179,106 
Total liabilities and stockholders’ equity$248,360 $272,597 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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The Honest Company, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
(in thousands, except share and per share amounts)

For the three months ended September 30,For the nine months ended September 30,
2022202120222021
Revenue$84,580 $82,651 $231,792 $238,258 
Cost of revenue58,963 52,892 161,984 153,177 
Gross profit25,617 29,759 69,808 85,081 
Operating expenses
Selling, general and administrative23,491 18,568 63,068 65,356 
Marketing12,140 13,687 38,121 41,868 
Research and development1,725 2,092 5,643 6,082 
Total operating expenses37,356 34,347 106,832 113,306 
Operating loss(11,739)(4,588)(37,024)(28,225)
Interest and other income (expense), net(29)(526)657 (1,362)
Loss before provision for income taxes(11,768)(5,114)(36,367)(29,587)
Income tax provision20 22 60 67 
Net loss$(11,788)$(5,136)$(36,427)$(29,654)
Net loss per share attributable to common stockholders:
Basic and diluted$(0.13)$(0.06)$(0.40)$(0.33)
Weighted-average shares used in computing net loss per share attributable to common stockholders:
Basic and diluted92,460,987 90,397,409 92,020,423 64,399,183 
Other comprehensive income (loss)
Unrealized gain (loss) on short-term investments, net of taxes37 10 (42)(96)
Comprehensive loss$(11,751)$(5,126)$(36,469)$(29,750)

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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The Honest Company, Inc.
Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(Unaudited)
(in thousands, except share amounts)
Redeemable Convertible Preferred Stock Common Stock Additional Paid-in CapitalAccumulated DeficitAccumulated Other Comprehensive Income (Loss)Total Stockholders' Equity (Deficit)
Shares Amount Shares Amount
Balances at December 31, 202049,100,928 $376,404 34,089,186 $3 $116,055 $(352,977)$94 $(236,825)
Net loss— — — — — (4,484)— (4,484)
Other comprehensive loss— — — — — — (82)(82)
Stock options exercised— — 38,188 — 33 — — 33 
Stock-based compensation— — — — 1,838 — — 1,838 
Balances at March 31, 202149,100,928 $376,404 34,127,374 $3 $117,926 $(357,461)$12 $(239,520)
Net loss— — — — — (20,034)— (20,034)
Other comprehensive loss— — — — — — (24)(24)
Stock options exercised— — 53,694 — 295 — — 295 
Dividends paid ($0.42 per share)
— — — — (35,000)— — (35,000)
Issuance of common stock pursuant to initial public offering, net of underwriting commissions and discounts and offering costs of $12.2 million
— — 6,451,613 1 91,038 — — 91,039 
Conversion of redeemable convertible preferred stock to common stock upon initial public offering(49,100,928)(376,404)49,649,023 5 376,400 — 376,405 
Vested restricted stock units— — 6,703 — — — — — 
Stock-based compensation— — — — 6,626 — — 6,626 
Balances at June 30, 2021 $ 90,288,407 $9 $557,285 $(377,495)$(12)$179,787 
Net loss— — — — — (5,136)— (5,136)
Other comprehensive income (loss)— — — — — — 10 10 
Stock options exercised— — 139,299 — 613 — — 613 
Vested restricted stock— — 162,462 — — — — — 
Common stock withheld for tax obligation and net settlement— — (61,722)— (565)— — (565)
Stock-based compensation— — — — 4,776 — — 4,776 
Balance at September 30, 2021 $ 90,528,446 $9 $562,109 $(382,631)$(2)$179,485 
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The Honest Company, Inc.
Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(Unaudited)
(in thousands, except share amounts)
Redeemable Convertible Preferred StockCommon Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity (Deficit)
Shares Amount Shares Amount
Balances at December 31, 2021
— $— 91,512,140 $9 $570,794 $(391,656)$(41)$179,106 
Net loss— — — — — (14,626)— (14,626)
Other comprehensive loss— — — — — — (77)(77)
Stock options exercised— — 21,556 — 113 — — 113 
Stock-based compensation— — — — 3,548 — — 3,548 
Vested restricted stock units— — 42,125 — — — — — 
Shares withheld related to net share settlement of equity awards— — (3,611)— (20)— — (20)
ASC 842 transition effect— — — — — 845 — 845 
Balances at March 31, 2022— $— 91,572,210 $9 $574,435 $(405,437)$(118)$168,889 
Net loss— — — — — (10,012)— (10,012)
Other comprehensive loss— — — — — — (2)(2)
Stock options exercised— — 22,000 — 9 — — 9 
Stock-based compensation— — — — 3,912 — — 3,912 
Vested restricted stock— — 761,394 — — — — — 
Shares issued under employee stock purchase plan— — 58,111 — 157 — — 157 
Common stock withheld for tax obligation and net settlement— — (4,439)— (17)— — (17)
Balances at June 30, 2022— $— 92,409,276 $9 $578,496 $(415,449)$(120)$162,936 
Net loss— — — — — (11,788)— (11,788)
Other comprehensive income (loss)— — — — — — 37 37 
Stock options exercised— —  —  — —  
Stock-based compensation— — — — 3,900 — — 3,900 
Vested restricted stock— — 180,951 — — — — — 
Shares issued under employee stock purchase plan— —  —  — —  
Common stock withheld for tax obligation and net settlement— —  —  — —  
Balance at September 30, 2022— $— 92,590,227 $9 $582,396 $(427,237)$(83)$155,085 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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The Honest Company, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
For the nine months ended September 30,
20222021
Cash flows from operating activities
Net loss$(36,427)$(29,654)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization2,025 3,135 
Stock-based compensation11,360 13,240 
Other4,805 204 
Changes in assets and liabilities:
Accounts receivable, net(7,087)(8,859)
Inventories(24,609)(1,188)
Prepaid expenses and other assets(3,228)(7,552)
Accounts payable, accrued expenses and other long-term liabilities7,604 (5,783)
Deferred revenue49 98 
Operating lease liabilities (5,161)— 
Net cash used in operating activities(50,669)(36,359)
Cash flows from investing activities
Purchases of short-term investments(12,782)(65,267)
Proceeds from sales of short-term investments 26,858 
Proceeds from maturities of short-term investments38,219 9,862 
Purchases of property and equipment(1,433)(187)
Net cash provided by (used in) investing activities24,004 (28,734)
Cash flows from financing activities
Proceeds from initial public offering, net of underwriting commissions and discounts 96,517 
Taxes paid related to net share settlement of equity awards (37)(565)
Dividends paid  (35,000)
Proceeds from exercise of stock options122 941 
Payment of initial public offering costs (5,477)
Proceeds from 2021 ESPP157  
Payments on finance lease liabilities(281)(857)
Net cash provided by (used in) financing activities(39)55,559 
Net decrease in cash and cash equivalents(26,704)(9,534)
Cash and cash equivalents
Beginning of the period50,791 37,200 
End of the period$24,087 $27,666 
Supplemental disclosures of noncash activities
Equipment acquired under capital lease obligations$— $105 
Capital expenditures included in accounts payable and accrued expenses$92 $27 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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The Honest Company, Inc.
Notes to Condensed Consolidated Financial Statements
As of September 30, 2022
(in thousands, except share and per share amounts, percentages and as otherwise indicated)
(Unaudited)
1.     Nature of Business

The Honest Company, Inc. (the “Company”) was incorporated in the State of California on July 19, 2011 and on May 23, 2012 was re-incorporated in the State of Delaware under the same name. The Company is a mission-driven lifestyle brand that formulates, designs and sells clean products with a focus on sustainability and thoughtful design. The Company sells its products through digital and retail sales channels in the following product categories: Diapers and Wipes, Skin and Personal Care, and Household and Wellness.
Initial Public Offering

The Company’s registration statement on Form S-1 (“IPO Registration Statement”) related to its initial public offering (“IPO”) was declared effective on May 4, 2021, and the Company’s common stock began trading on the Nasdaq Global Select Market on May 5, 2021. On May 7, 2021, the Company completed its IPO of 25,807,000 shares of the Company's common stock, $0.0001 par value per share at an offering price of $16.00 per share. The Company sold 6,451,613 shares and certain existing stockholders sold an aggregate of 19,355,387 shares. The Company received aggregate net proceeds of approximately $91.0 million after deducting underwriting discounts and commissions of $6.7 million and other offering expenses of $5.5 million. The Company granted the underwriters an option for a period of 30 days to purchase up to an additional 3,871,050 shares of common stock from the selling stockholders at $16.00 per share less the underwriting discounts and commissions. In May 2021, the underwriters fully exercised the option to purchase these additional shares from the selling stockholders. The Company did not receive any proceeds from the sale of shares of its common stock by the selling stockholders.

Upon completion of the IPO, the Company paid $9.5 million in cash bonuses to certain employees including members of management, as well as $0.2 million in related payroll taxes and expenses. Cash bonuses of $9.1 million were recorded in sales, general and administrative expenses and $0.4 million were recorded in research and development expenses in the accompanying condensed consolidated statements of comprehensive loss upon completion of the IPO.

In April 2021, the Company’s board of directors declared a cash dividend of $35.0 million to the holders of record of its common stock and its redeemable convertible preferred stock as of May 3, 2021, which the Company paid on June 29, 2021.

Immediately prior to the completion of the IPO, the Company filed an Amended and Restated Certificate of Incorporation, which authorized a total of 1,000,000,000 shares of common stock and 20,000,000 shares of preferred stock. Upon the filing of the Amended and Restated Certificate of Incorporation, 49,100,928 shares of the Company’s redeemable convertible preferred stock then outstanding with a carrying value of $376.4 million were automatically converted into 49,649,023 shares of the Company’s common stock. Upon completion of the IPO, the Company recognized a gain on extinguishment of the redeemable convertible preferred stock for earnings per share purposes of $29.0 million from the conversion of redeemable convertible preferred stock to common stock. Following the completion of the IPO, the Company has one class of authorized and outstanding common stock.

2.    Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial information. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2021. The condensed consolidated financial statements are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on a basis consistent with that used to prepare the audited annual consolidated financial statements and include, in the opinion of management, all adjustments, consisting of normal recurring items, necessary for the fair statement of the condensed consolidated financial statements. The consolidated balance sheet as of December 31, 2021 has been derived from the audited financial statements at that date but does not include all of the disclosures required by GAAP.     
The condensed consolidated financial statements include the accounts of the Company, and its wholly owned subsidiaries after elimination of intercompany transactions and balances. The Company had a change in accounting policy from those disclosed in the audited consolidated financial statements and related notes for the year ended December 31, 2021 related to the
9


adoption of ASC 842 (defined below). Refer to “Recently Adopted Accounting Pronouncements” below and Note 13 included in these condensed consolidated financial statements for more information on leases.

Stock Split

In April 2021, the Company effected a 1-for-2 forward stock split of its common and redeemable convertible preferred stock. In connection with the forward stock split, each issued and outstanding share of common stock, automatically and without action on the part of the holders, became two shares of common stock and each issued and outstanding share of redeemable convertible preferred stock, automatically and without action on the part of the holders, became two shares of redeemable convertible preferred stock. The par value per share of common and redeemable convertible preferred stock was not adjusted. All share, per share and related information presented in the condensed consolidated financial statements and accompanying notes have been retroactively adjusted, where applicable, to reflect the impact of the stock split.

Segment Reporting and Geographic Information

The Company’s Chief Executive Officer, as the chief operating decision maker, organizes the Company, manages resource allocations, and measures performance on the basis of one operating segment. All of the Company’s long-lived assets are located in the United States and substantially all of the Company’s revenue is from customers located in the United States.
Use of Estimates
    
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and contingent liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s estimates, which are subject to varying degrees of judgment, include the valuation of inventories, sales returns and allowances, allowances for doubtful accounts, valuation of short-term investments, capitalized software, useful lives associated with long-lived assets, valuation allowances with respect to deferred tax assets, accruals and contingencies, recoverability of non-cash marketing credits, recoverability of goodwill and long-lived assets, and the valuation and assumptions underlying stock-based compensation and for the periods prior to the Company’s IPO, the fair value of common stock. On an ongoing basis, the Company evaluates its estimates compared to historical experience and trends, which form the basis for making judgments about the carrying value of assets and liabilities.
In March 2020, the World Health Organization declared the outbreak of the novel coronavirus disease (“COVID-19”) a pandemic. The full extent to which the outbreak of the COVID-19 pandemic and any COVID-19 variants will impact the Company’s business, results of operations and financial condition is still unknown and will depend on future developments, which are uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak of COVID-19 and its variants, their severity, the actions to contain the virus and its variants or treat their impact, and how quickly and to what extent normal economic and operating conditions can resume.
In light of the unknown ultimate duration and severity of COVID-19 and the impact of any COVID-19 variants, the Company faces a greater degree of uncertainty than normal in making certain judgments and estimates needed to apply significant accounting policies. The Company assessed certain accounting matters and estimates that generally require consideration of forecasted information in context with the information reasonably available to the Company as of September 30, 2022 and through the date these condensed consolidated financial statements were issued. Management is not aware of any specific event or circumstance that would require an update to estimates or judgments or a revision to the carrying value of assets or liabilities. However, these estimates and judgments may change as new events occur and additional information is obtained, which may result in changes being recognized in the Company’s consolidated financial statements in future periods. For example, based on macro trends within our Household and Wellness product category, consumer demand for sanitizing and disinfecting products has decelerated at a more rapid than expected rate as more consumers are vaccinated and retailers continue to manage heavy inventories of sanitization and disinfecting products in stores. The Company recorded an inventory write-down of $0.8 million during the nine months ended September 30, 2022 and $5.6 million for the year ended December 31, 2021 relating to certain sanitization and disinfecting products as the amount of inventory was significantly in excess of the decreasing demand. During the three months ended September 30, 2022, the Company donated $1.5 million of excess sanitization products. The Company will continue to monitor and evaluate the uncertainty and volatility of these conditions, in particular, the impact on the amount and valuation of the Company’s inventory in the future.

Cash and Cash Equivalents

Cash equivalents consist of short-term, highly liquid investments with stated maturities of three months or less from the date of purchase. Cash equivalents comprise amounts invested in money market funds.

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Accounts Receivable

Accounts receivable is presented net of allowances. The Company does not accrue interest on its trade receivables. On a periodic basis, the Company evaluates accounts receivable estimated to be uncollectible, and provides allowances as necessary for doubtful accounts. The allowance for doubtful accounts was $0.2 million as of both September 30, 2022 and December 31, 2021.
Deferred IPO Costs
Deferred offering costs consisted of costs incurred in connection with the sale of the Company’s common stock in its IPO, including certain legal, accounting, and other IPO-related expenses. Immediately upon the completion of the Company's IPO, deferred offering costs of $5.5 million were reclassified into stockholders’ equity from other assets as a reduction from the proceeds of the offering.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses the following hierarchy in measuring the fair value of the Company’s assets and liabilities, focusing on the most observable inputs when available:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 quoted prices, such as quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active for identical or similar assets and liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Valuations are based on inputs that are unobservable and significant to the overall fair value measurement of the assets or liabilities. Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

Fair value is based on quoted market prices, if available. If listed prices or quotes are not available, fair value is based on internally developed models that primarily use market-based or independently sourced market parameters as inputs. Cash equivalents, consisting primarily of money market funds, represent highly liquid investments with maturities of three months or less at purchase. Market prices, which are Level 1 in the fair value hierarchy, are used to determine the fair value of the money market funds. Investments in debt securities are measured using broker provided indicative prices developed using observable market data, which are considered Level 2 in the fair value hierarchy. Certain assets, including long-lived assets, goodwill and intangible assets are also subject to measurement at fair value on a non-recurring basis if they are deemed to be impaired as a result of an impairment review. The fair value is measured using Level 3 inputs in the fair value hierarchy.
Recent Accounting Pronouncements

As an “emerging growth company,” the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”), allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. The Company has elected to use the adoption dates applicable to private companies. As a result, the Company’s financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective date for new or revised accounting standards that are applicable to public companies.

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update ("ASU") No 2016-02, Leases (Topic 842), as subsequently amended, collectively codified under Topic 842. Topic 842 requires lessees to recognize on the balance sheet assets and liabilities for leases with lease terms of more than twelve months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike prior guidance which requires only capital leases to be recognized on the balance sheet, the new ASU requires both types of leases to be recognized on the balance sheet. ASU 2016-02 was effective for public business entities for fiscal years beginning after December 15, 2018. In June 2020, FASB issued ASU No. 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842) – Effective Dates for Certain Entities, which extended the effective date of this guidance for certain non-public entities for fiscal years beginning
11


after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted.

The Company adopted this guidance on January 1, 2022 on a modified retrospective basis under ASU 2018-11. As such, prior periods were not respectively adjusted. The Company also elected the package of practical expedients to leases that commenced before the effective date whereby the Company elected to not reassess the following:

(i) whether any expired or existing contracts contain leases;
(ii) the lease classification for any expired or existing leases; and
(iii) initial direct costs for any existing leases.

The Company made an accounting policy election to not recognize lease assets and lease liabilities for leases in all asset classes with lease terms less than twelve months. The Company recognizes lease expense for such leases generally on a straight-line basis over the lease term. The Company also elected to combine lease and non-lease components on its leases into a single lease component.

Upon adoption of this guidance on January 1, 2022, the Company recognized $36.1 million in right-of-use assets (“ROU”) and corresponding lease liabilities of $37.5 million, net of the current portion of lease liability of $7.0 million, on its condensed consolidated balance sheet. In addition, the Company recognized a decrease to assets and liabilities of $37.6 million and $38.4 million, respectively, and a decrease to the beginning accumulated deficit of $0.8 million, as a result of the derecognition of its build-to-suit arrangement that was reassessed to be an operating lease under the new guidance. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated statements of comprehensive loss or the condensed consolidated statements of cash flows. Refer to Note 13 included in these condensed consolidated financial statements for more information on leases.

Recently Issued Accounting Pronouncements – Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to amend the accounting for credit losses for certain financial instruments. This guidance replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses. In November 2019, FASB issued ASU No. 2019-10 which delayed the effective dates of the guidance. This guidance is effective for public business entities that meet the definition of an SEC filer, excluding entities eligible to be smaller reporting companies (“SRC”) for fiscal years beginning after December 15, 2019 and all other entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is evaluating the adoption of this guidance and the potential effects on the consolidated financial statements.

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3.Revenue

Disaggregation of Revenue

Revenue by sales channel:
For the three months ended September 30,For the nine months ended September 30,
2022202120222021
(In thousands)
Digital$33,782 $39,114 $105,913 $116,395 
Retail50,798 43,537 125,879 121,863 
Total revenue$84,580 $82,651 $231,792 $238,258 
Revenue by product category:
For the three months ended September 30,
For the nine months ended September 30,
2022202120222021
(In thousands)
Diapers and Wipes$55,222 $53,847 $150,411 $151,251 
Skin and Personal Care21,992 25,375 66,534 75,486 
Household and Wellness7,366 3,429 14,847 11,521 
Total revenue$84,580 $82,651 $231,792 $238,258 
Non-Monetary Transactions

During the three and nine months ended September 30, 2022, the Company entered into trade agreements with a vendor to exchange excess inventory for future marketing and transportation credits. The Company recognized revenue reflecting the fair value of the marketing and transportation credits, with the corresponding asset included in prepaid expenses and other current assets and other assets, respectively, in the accompanying condensed consolidated balance sheets. The Company may use the marketing and transportation credits over four years from the date of the respective agreement, with an option to extend for another two years if agreed upon by both parties. For the three and nine months ended September 30, 2022, the Company recognized $1.6 million and $2.9 million, respectively, of revenue and $0.8 million and $1.6 million, respectively, of associated cost of revenue based on the timing of delivery of goods. For the three and nine months ended September 30, 2021, the Company recognized $0.6 million and $4.5 million, respectively, of revenue and $0.4 million and $3.8 million, respectively, of associated cost of revenue based on the timing of delivery of goods. The Company assesses the recoverability of the marketing and transportation credits periodically. Factors considered in evaluating the recoverability include management’s history of credit usage and future plans with respect to advertising, freight and other services for which these credits can be used. Any impairment losses are charged to operations as they become determinable. During the nine months ended September 30, 2022, the Company recorded no impairment losses related to these credits and used an aggregate of $1.2 million of credits.

4.     Investments

As of September 30, 2022 and December 31, 2021, all investments in debt securities are classified as available-for-sale investments. All investments are reported within current assets because the securities represent investments of cash available for current operations. As of September 30, 2022 and December 31, 2021, the Company held $16.7 million and $36.4 million, respectively, of investments with contractual maturities of less than one year. As of September 30, 2022, the Company did not have any investments with contractual maturities between one and two years. As of December 31, 2021, the Company held $6.0 million of investments with contractual maturities between one and two years. Available-for-sale investments are recorded at fair value, and unrealized holding gains and losses are recorded as a component of other comprehensive income (loss).
The following table summarizes the Company’s available-for-sale investments:
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As of September 30, 2022
Cost or Amortized CostGross Unrealized GainsGross Unrealized LossesTotal Estimated Fair Value
(In thousands)
Corporate bonds$10,966 $ $(59)$10,907 
Commercial paper576   576 
Certificates of deposit2,984  (13)2,971 
U.S. government and agency securities2,301  (11)2,290 
Total investments$16,827 $ $(83)$16,744 

As of December 31, 2021
Cost or Amortized CostGross Unrealized GainsGross Unrealized LossesTotal Estimated Fair Value
(In thousands)
Corporate bonds$18,605 $ $(28)$18,577 
Certificates of deposit17,099  (5)17,095 
U.S. government and agency securities6,725  (9)6,716 
Total investments$42,429 $ $(42)$42,388 

Realized gains and losses on investments in debt securities were immaterial for the three and nine months ended September 30, 2022 and 2021.

5.     Fair Value Measurements

Financial assets measured and recorded at fair value on a recurring basis consist of the following as of:
September 30, 2022
Level 1Level 2Level 3Total
(In thousands)
Cash equivalents
Money market funds$15,236 $ $ $15,236 
Total cash equivalents15,236   15,236 
Short-term investments
Corporate bonds 10,907  10,907 
Commercial paper 576  576 
Certificates of deposit 2,971  2,971 
U.S. government and agency securities 2,290  2,290 
Total short-term investments 16,744  16,744 
Total$15,236 $16,744 $ $31,980 
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December 31, 2021
Level 1Level 2Level 3Total
(In thousands)
Cash equivalents
Money market funds$29,411 $ $ $29,411 
Total cash equivalents29,411   29,411 
Short-term investments
Corporate bonds 18,577  18,577 
Certificates of deposit 17,095  17,095 
U.S. government and agency securities 6,716  6,716 
Total short-term investments 42,388  42,388 
Total$29,411 $42,388 $ $71,799 

The carrying amounts for the Company’s cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value due to their short maturities.


6.     Credit Facilities

In April 2021, the Company entered into a first lien credit agreement (“2021 Credit Facility”), with JPMorgan Chase Bank, N.A., as administrative agent and lender, and the other lenders party thereto, which provides for a $35.0 million revolving credit facility that matures on April 30, 2026. The 2021 Credit Facility includes a subfacility that provides for the issuance of letters of credit in an amount of up to $10.0 million at any time outstanding, which reduces the amount available under the 2021 Credit Facility. As of September 30, 2022, there were outstanding standby letters of credit of $4.8 million related to lease obligations with $30.2 million available to be drawn upon. The 2021 Credit Facility is subject to customary fees for loan facilities of this type, including a commitment fee based on the average daily undrawn portion of the revolving credit facility. The Company recognizes the commitment fee as incurred in interest and other expense, net in the condensed consolidated statements of comprehensive loss. For the three and nine months ended September 30, 2022, the commitment fee incurred was immaterial. The interest rate applicable to the 2021 Credit Facility is, at the Company’s option, either (a) the LIBOR (or a replacement rate established in accordance with the terms of the 2021 Credit Facility) (subject to a 0.00% LIBOR floor), plus a margin of 1.50% or (b) the CB floating rate minus a margin of 0.50%. The CB floating rate is the higher of (a) the Wall Street Journal prime rate and (b)(i) 2.50% plus (ii) the adjusted LIBOR rate for a one-month interest period. As of September 30, 2022, there was no outstanding balance under the 2021 Credit Facility.

The 2021 Credit Facility contains covenants that restrict, among other things, the Company's ability to sell assets, make investments and acquisitions, make capital expenditures, grant liens, pay dividends and make certain other restricted payments. The Company is also subject to certain affirmative and negative covenants including the requirement that it maintains a total net leverage ratio of not more than 3.50:1.00 during the periods set forth in the 2021 Credit Facility. Failure to do so, unless waived by the lenders under the 2021 Credit Facility pursuant to its terms, as amended, would result in an event of default under the 2021 Credit Facility. As of September 30, 2022, the Company was in compliance with the net leverage ratio covenant.


7.     Accrued Expenses

Accrued expenses consisted of the following as of:
September 30, 2022December 31, 2021
(In thousands)
Payroll and payroll related expenses$3,014 $2,497 
Accrued inventory purchases14,277 8,838 
Accrued returns161 1,455 
Accrued rent(1)
7,587  
Other accrued expenses4,929 6,213 
Total accrued expenses$29,968 $19,003 
____________________

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(1) Represents short-term operating lease liabilities upon adoption of ASC 842. Refer to Note 13 included in these condensed consolidated financial statements for more information on leases.

8. Commitments and Contingencies

Litigation

From time to time, the Company is subject to various claims and contingencies which are in the scope of ordinary and routine litigation incidental to its business, including those related to regulation, business transactions, employee-related matters and taxes, among others. When the Company becomes aware of a claim or potential claim, the likelihood of any loss or exposure is assessed. If it is probable that a loss will result and the amount or range of the loss can be reasonably estimated, the Company records a liability for the loss and discloses the possible loss in the consolidated financial statements. Legal costs are expensed as incurred.

On September 17, 2019, the Nevada Department of Taxation (the “Department”) issued a Deficiency Notice against the Company to initiate administrative legal proceedings before the Department for the alleged non-compliance with employee retention requirements provided in exchange for tax benefits in establishing the Company’s Las Vegas distribution center in a December 2016 Abatement Agreement the Company had executed with the State of Nevada via its Governor’s Office of Economic Development. The Company has denied the allegations. An administrative hearing was held in the matter on January 15, 2021. On June 9, 2021 the court upheld the Department's Deficiency Notice against the Company in its entirety. The loss resulting from this matter was $0.7 million including penalties and interest, for which the Company has paid $0.6 million as of December 31, 2021. During the year ended December 31, 2021, the Company recorded interest expense of $0.1 million in interest and other income (expense), net on the condensed consolidated statements of comprehensive loss. The Company filed its Notice of Appeal on July 1, 2021 and its opening brief on January 28, 2022. The Department filed its answering brief on March 4, 2022 and the Company filed its reply brief on March 23, 2022. The Nevada Tax Commission heard the appeal on May 2, 2022. The Nevada Tax Commission upheld the Company's appeal and overturned the Department's Deficiency Notice. The Company intends to submit a refund request for the taxes and interest paid, following the Department's June 9, 2021 decision, that were subject to abatement under the December 2016 Abatement Agreement. The Company recognized $0.7 million in other income in interest and other income (expense), net on the condensed consolidated statements of comprehensive loss during the nine months ended September 30, 2022 related to the anticipated refund of taxes and interest paid.

On September 23, 2020, the Center for Advanced Public Awareness (“CAPA”) served a 60-Day Notice of Violation on the Company, alleging that the Company violated California’s Health and Safety Code (“Prop 65”) because of the amount of lead in the Company’s Diaper Rash Cream and seeking statutory penalties and product warnings available under Prop 65. On October 22, 2021, CAPA filed a complaint in California Superior Court in the County of San Francisco (the “Court”) for the alleged Prop 65 violations contained in its 60-Day Notice of Violation. The Company filed its answer and notice of related cases against Prestige Consumer Healthcare, Inc., Burt's Bees, Inc., and Hain Celestial Group, Inc. on January 7, 2022 and has stipulated to relate these cases and transfer them to the Court's Complex Division. The Company intends to vigorously defend itself in this matter. The matter’s outcome and materiality are uncertain at this time. Therefore, the Company cannot estimate the probability of loss or make an estimate of the loss or range of loss in this matter.

On September 15, 2021, Cody Dixon filed a putative class action complaint in the U.S. District Court for the Central District of California alleging federal securities law violations by the Company, certain current officers and directors, and certain underwriters in connection with the Company’s IPO. A second putative class action complaint containing similar allegations against the Company and certain current officers and directors was filed by Stephen Gambino on October 8, 2021 in the U.S. District Court for the Central District of California. These related complaints have been transferred to the same court and a Lead Plaintiff has been appointed in the matter, and a putative consolidated class action complaint was filed by the Lead Plaintiff on February 21, 2022. A derivative complaint was filed by Hayato Ono on behalf of the Company on November 29, 2021 in the U.S. District Court for the Central District of California, alleging breach of fiduciary duties, unjust enrichment, waste, gross mismanagement, and federal securities law violations by the Company’s directors and certain officers. On December 17, 2021, a second derivative complaint containing similar allegations against the Company’s directors and certain officers was filed by Mike Wang in the U.S. District Court for the Central District of California. These two federal derivative cases have been transferred to the same judge who is presiding over the securities class action complaints. A third derivative complaint was filed by Leah Bisch and Raluca Corobana in California Superior Court for the County of Los Angeles on January 3, 2022 with similar allegations. Each of these federal and state court derivative cases have been stayed pending the outcome of a motion for summary judgment in the securities class action. The Company is also aware that a fourth derivative complaint was filed by David Butler in the U.S. District Court for the District of Delaware on October 19, 2022 with similar allegations, but that complaint has not yet been served on the Company. Defendants’ motion to dismiss the putative consolidated class action complaint was filed on March 14, 2022. On July 18, 2022, the Company's motion to dismiss was granted in part and denied in part. The Company believes the securities complaints are without merit and intends to vigorously defend itself against these allegations. These matters are in the preliminary stages of litigation with uncertain outcomes at this time. Therefore, the Company cannot estimate the probability of the loss or make an estimate of the loss or range of loss in these matters.

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On August 10, 2022, Catrice Sida and Kris Yerby filed a putative class action complaint in the U.S. District Court for the Northern District of California alleging violations of California’s Unfair Competition Law, False Advertising Law, Consumers Legal Remedies Act, breach of warranty, and unjust enrichment related to plant-based claims on certain of the Company’s wipes products and seeking declaratory relief, injunctive relief, monetary damages, punitive damages and statutory penalties, and attorneys’ fees and costs. The Company filed its motion to dismiss on October 17, 2022. Plaintiffs filed their opposition to the Company's motion to dismiss on November 1, 2022 and the Company's reply was filed on November 8, 2022. The Company believes this complaint is without merit and intends to vigorously defend itself in this matter. The matter is in the preliminary stages of litigation and its outcome is uncertain at this time. Therefore, the Company cannot estimate the probability of loss or make an estimate of the range of loss in this matter.

As of September 30, 2022 and December 31, 2021, the Company was not subject to any other currently pending legal matters or claims that based on its current evaluation are expected to have a material adverse effect on its financial position, results of operations, or cash flows should such matters be resolved unfavorably. Refer to Note 14 included in these condensed consolidated financial statements for more information on a litigation matter.

Indemnifications

In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to investors, directors and officers with respect to certain matters, including, but not limited to, losses arising out of the Company’s breach of such agreements, services to be provided by the Company, or from intellectual property infringement claims made by third parties. These indemnifications may survive termination of the underlying agreement and the maximum potential amount of future payments the Company could be required to make under these indemnification provisions may not be subject to maximum loss clauses. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is indeterminable. The Company has never paid a material claim, nor has the Company been involved in litigation in connection with these indemnification arrangements. As of September 30, 2022 and December 31, 2021, the Company has not accrued a liability for these guarantees as the likelihood of incurring a payment obligation, if any, in connection with these guarantees is not probable or reasonably estimable due to the unique facts and circumstances involved.

9.Stock-Based Compensation

Stock Options

The following table summarizes the stock option activity:

Number of OptionsWeighted Average Exercise Price
Outstanding at December 31, 2021
16,440,539 $5.26 
Granted $ 
Exercised(43,556)$2.81 
Forfeited/Cancelled(1,381,685)$5.52 
Outstanding at September 30, 2022
15,015,298 $5.24 

2021 Equity Incentive Plan

In April 2021, the Company’s board of directors adopted the Company’s 2021 Equity Incentive Plan (the “2021 Plan”), which became effective in connection with the IPO. All equity-based awards granted on or after the effectiveness of the 2021 Plan are granted under the 2021 Plan. The 2021 Plan provides for grants of incentive stock options (“ISOs”) within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), to the Company’s employees and its parent and subsidiary corporations’ employees, and for the grant of nonstatutory stock options (“NSOs”), stock appreciation rights, restricted stock awards, restricted stock units (“RSUs”) awards, performance awards and other forms of awards to the Company’s employees, directors and consultants and any of its affiliates’ employees and consultants. Initially, the maximum number of shares of the Company’s common stock that may be issued under its 2021 Plan will not exceed 25,025,580 shares of the Company’s common stock. In addition, the number of shares of the Company’s common stock reserved for issuance under its 2021 Plan will automatically increase on January 1 of each year for a period of ten years, beginning on January 1, 2022 and continuing through January 1, 2031, in an amount equal to (1) 4% of the total number of shares of the Company’s common stock outstanding on December 31 of the immediately preceding year, or (2) a lesser number of shares determined by the Company’s board of directors prior to the date of the increase. On January 1, 2022, 3,660,485 additional shares were reserved for issuance pursuant to this provision. The maximum number of shares of the Company’s common stock that may be issued on the exercise of ISOs under its 2021 Plan is 75,100,000 shares.
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The following table summarizes the RSU activity:
Number of SharesWeighted Average Grant Date Fair Value Per Share
Non-Employee DirectorsOfficers and Employees Non-Employee DirectorsOfficers and Employees
Unvested RSUs at December 31, 2021
103,561 2,867,306 $16.00 $13.58 
Granted485,806 3,030,953 $3.51 $5.11 
Vested(1)
(121,256)(863,214)$13.84 $12.96 
Forfeited(4,641)(662,714)$8.09 $10.80 
Unvested RSUs at September 30, 2022
463,470 4,372,331 $3.55 $8.25 
__________________________

(1) Includes 8,050 shares of common stock that were withheld to cover taxes on the release of vested RSUs and became available for future grants pursuant to the 2021 Plan.

As of September 30, 2022, there was $34.5 million of unrecognized stock-based compensation expense related to unvested RSUs, which is expected to be recognized over a weighted-average period of 2.7 years.

2021 Employee Stock Purchase Plan

In April 2021, the Company’s board of directors adopted the Company’s 2021 Employee Stock Purchase Plan (the “2021 ESPP”). The Company authorized the issuance of 1,175,000 shares of common stock under the 2021 ESPP. In addition, the number of shares available for issuance under the 2021 ESPP will be annually increased on January 1 of each year for a period of ten years, beginning on January 1, 2022 and continuing through January 1, 2031 by the lesser of (i) 1% of the total number of shares of common stock outstanding on December 31 of the immediately preceding year; and (ii) 3,525,000 shares, except before the date of any such increase, the Company’s board of directors may determine that such increase will be less than the amount set forth in clauses (i) and (ii). On January 1, 2022, 915,121 additional shares were reserved for issuance pursuant to this provision. Subject to any limitations contained therein, the 2021 ESPP allows eligible employees to contribute (in the form of payroll deductions or otherwise to the extent permitted by the administrator) an amount established by the administrator from time to time in its discretion to purchase common stock at a discounted price per share.

Under the 2021 ESPP, eligible employees are granted the right to purchase shares of common stock at the lower of 85% of the fair value at the time of grant or 85% of the fair value at the time of exercise. The right to purchase shares of common stock is granted in May and November of each year for an offering period of approximately six months. The first offering period under the 2021 ESPP commenced in May 2021 and the second offering in November 2021. For the three months ended September 30, 2022, no shares were purchased under the 2021 ESPP. For the nine months ended September 30, 2022, 58,111 shares were purchased under the 2021 ESPP. As of September 30, 2022, the Company had 1,992,520 remaining authorized shares available for purchase.

The following table summarizes the key input assumptions used in the Black-Scholes option-pricing model to estimate the grant-date fair value of the 2021 ESPP:

          For the nine months ended September 30, 2022
Expected life of options (in years)0.50
Expected stock price volatility