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 June 30, 2023
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
(Exact Name of Registrant as Specified in its Charter)
(State or Other Jurisdiction of | (I.R.S. Employer | |||||||||||||
Incorporation or Organization) | Identification No.) | |||||||||||||
(Address of Principal Executive Offices) | (Zip Code) | |||||||||||||
( | ||||||||||||||
| (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 | |||||||||||||
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.
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 filer | ☐ | ☒ | |||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 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 August 4, 2023, the registrant had 94,977,997 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 as well as in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “Annual Report”), filed with the Securities and Exchange Commission (“SEC”) on March 16, 2023. 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, including as a result of the Transformation Initiative;
•our expectations regarding the costs, impacts and benefits of the Transformation Initiative;
•our ability to execute a broad-based Transformation Initiative to strengthen the Company’s cost structure and to enable profitable growth;
•our ability to execute the restructuring initiatives to improve margin structure, support a focus on the core of the business, and guide the Company’s allocation of resources to its most critical priorities, including in connection with the Transformation Initiative;
•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 and profitability, including as part of the Transformation Initiative;
•the effect of macroeconomic factors, such as supply chain disruptions and inflation on our business and the global economy, including our costs and expenses and shifting consumer demand between our Digital and Retail channels;
•economic conditions, including a potential recession and inflationary pressures and their impact on consumer spending and our operating results;
•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, including as a result of the Transformation Initiative;
•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;
2
•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;
•our ability to identify and complete acquisitions that complement and expand our reach and platform;
•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.
2
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)
| June 30, 2023 | December 31, 2022 | ||||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short-term investments | |||||||||||
| Accounts receivable, net | |||||||||||
| Inventories | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Operating lease right-of-use asset | |||||||||||
| Property and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses | |||||||||||
| Deferred revenue | |||||||||||
| Total current liabilities | |||||||||||
| Long term liabilities | |||||||||||
| Operating lease liabilities, net of current portion | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 8) | |||||||||||
| Stockholders’ equity | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ||||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
3
The Honest Company, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
(in thousands, except share and per share amounts)
| For the three months ended June 30, | For the six months ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Marketing | |||||||||||||||||||||||
| Restructuring | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Operating loss | ( | ( | ( | ( | |||||||||||||||||||
| Interest and other income (expense), net | ( | ( | |||||||||||||||||||||
| Loss before provision for income taxes | ( | ( | ( | ( | |||||||||||||||||||
| Income tax provision | |||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net loss per share attributable to common stockholders: | |||||||||||||||||||||||
| Basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Weighted-average shares used in computing net loss per share attributable to common stockholders: | |||||||||||||||||||||||
| Basic and diluted | |||||||||||||||||||||||
| Other comprehensive income (loss) | |||||||||||||||||||||||
| Unrealized gain (loss) on short-term investments, net of taxes | ( | ( | |||||||||||||||||||||
| Comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4
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 Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity (Deficit) | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
Balances at December 31, 2021 | — | $ | — | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Stock options exercised | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Vested restricted stock units | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Common stock withheld for tax obligation and net settlement | — | — | ( | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Balances at March 31, 2022 | — | $ | — | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Stock options exercised | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Vested restricted stock | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Shares issued under employee stock purchase plan | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock withheld for tax obligation and net settlement | — | — | ( | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Balances at June 30, 2022 | — | $ | — | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
5
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 Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity (Deficit) | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
Balances at December 31, 2022 | — | $ | — | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Vested restricted stock units | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Balances at March 31, 2023 | — | $ | — | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Stock options exercised | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Vested restricted stock | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Shares issued under employee stock purchase plan | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Balances at June 30, 2023 | — | $ | — | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
6
The Honest Company, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
| For the six months ended June 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Stock-based compensation | |||||||||||
| Other | |||||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable, net | ( | ||||||||||
| Inventories | ( | ||||||||||
| Prepaid expenses and other assets | ( | ||||||||||
| Accounts payable, accrued expenses and other long-term liabilities | ( | ||||||||||
| Deferred revenue | |||||||||||
| Operating lease liabilities | ( | ( | |||||||||
| Net cash provided by (used in) operating activities | ( | ||||||||||
| Cash flows from investing activities | |||||||||||
| Purchases of short-term investments | ( | ||||||||||
| Proceeds from maturities of short-term investments | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Net cash provided by investing activities | |||||||||||
| Cash flows from financing activities | |||||||||||
| Taxes paid related to net share settlement of equity awards | ( | ||||||||||
| Proceeds from exercise of stock options | |||||||||||
| Proceeds from 2021 ESPP | |||||||||||
| Payments on finance lease liabilities | ( | ( | |||||||||
| Net cash provided by financing activities | |||||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents | |||||||||||
| Beginning of the period | |||||||||||
| End of the period | $ | $ | |||||||||
| Supplemental disclosures of noncash activities | |||||||||||
| Capital expenditures included in accounts payable and accrued expenses | $ | $ | |||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
7
The Honest Company, Inc.
Notes to Condensed Consolidated Financial Statements
As of June 30, 2023
(in thousands, except share and per share amounts, percentages and as otherwise indicated)
(Unaudited)
1. Nature of Business
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, 2022. 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, 2022 has been derived from the audited financial statements at that date but does not include all of the disclosures required by GAAP.
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 credit losses, valuation of short-term investments, capitalized software, useful lives associated with long-lived assets, incremental borrowing rates associated with leases, 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. 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.
8
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 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 June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2016-13, Financial Instruments Credit Losses (Accounting Standard Codification 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
9
3.Revenue
Disaggregation of Revenue
Revenue by sales channel: | For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Digital | $ | $ | $ | $ | |||||||||||||||||||
| Retail | |||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
Revenue by product category: | For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Diapers and Wipes | $ | $ | $ | $ | |||||||||||||||||||
| Skin and Personal Care | |||||||||||||||||||||||
| Household and Wellness | |||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
Non-Monetary Transactions
The Company has in the past and may in the future enter into trade agreements with a vendor to exchange excess inventory for future marketing and transportation credits. The Company recognizes revenue reflecting the fair value of the marketing and transportation credits, with the corresponding short and long-term asset included in prepaid expenses and other current assets and other assets 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. During the six months ended June 30, 2023, the Company did not enter into any new trade agreements.
4. Investments
10
The following table summarizes the Company’s available-for-sale investments:
As of December 31, 2022 | |||||||||||||||||||||||
| Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Total Estimated Fair Value | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Corporate bonds | $ | $ | $ | ( | $ | ||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||
| Certificates of deposit | ( | ||||||||||||||||||||||
| Total investments | $ | $ | $ | ( | $ | ||||||||||||||||||
Realized gains and losses on investments in debt securities for the three and six months ended June 30, 2022 were immaterial.
5. Fair Value Measurements
Financial assets measured and recorded at fair value on a recurring basis consist of the following as of:
| June 30, 2023 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Cash equivalents | |||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | |||||||||||||||||||
| Total cash equivalents | $ | $ | $ | $ | |||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Cash equivalents | |||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | |||||||||||||||||||
| Total cash equivalents | $ | $ | $ | $ | |||||||||||||||||||
| Short-term investments | |||||||||||||||||||||||
| Corporate bonds | |||||||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||
| Certificates of deposit | |||||||||||||||||||||||
| Total short-term investments | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
6. Credit Facilities
11
The interest rate applicable to the 2023 Credit Facility is, at the Company’s option, either (a) the Adjusted Term SOFR rate (subject to a 0.00 % floor), plus a margin ranging from 1.50 % to 2.25 % or (b) the CB floating rate, (i) plus a margin of 0.25 % or (ii) minus a margin ranging from 0.25 % to 0.50 %. The margin is based upon the Company’s fixed charge coverage ratio. The CB floating rate is the higher of (a) the Wall Street Journal prime rate and (b) 2.50 %.
The 2023 Credit Facility will terminate and borrowings thereunder, if any, would be due in full on April 30, 2026. Debt under the 2023 Credit Facility is guaranteed by substantially all of the Company’s material domestic subsidiaries and is secured by substantially all of the Company’s and such subsidiaries’ assets.
The 2023 Credit Facility contains covenants that restrict, among other things, the Company's ability to sell assets, make investments and acquisitions, grant liens, change the Company’s lines of business, pay dividends and make certain other restricted payments. The Company is subject to certain affirmative and negative covenants including the requirement that it maintains a minimum total fixed charge coverage ratio during the periods set forth in the 2023 Credit Facility. Failure to do so, unless waived by the lenders under the 2023 Credit Facility pursuant to its terms, as amended, would result in an event of default under the 2023 Credit Facility. As of June 30, 2023, the Company is in compliance with all covenants under the 2023 Credit Facility.
7. Accrued Expenses
Accrued expenses consisted of the following:
| June 30, 2023 | December 31, 2022 | ||||||||||
| (In thousands) | |||||||||||
Payroll and payroll related expenses(1) | $ | $ | |||||||||
| Accrued inventory purchases | |||||||||||
| Accrued returns | |||||||||||
Accrued rent(2) | |||||||||||
Accrued restructuring(3) | |||||||||||
| Other accrued expenses | |||||||||||
| Total accrued expenses | $ | $ | |||||||||
____________________
(1) Includes $4.3 million of CEO transition related expense as of December 31, 2022.
(2) Represents short-term operating lease liabilities. Refer to Note 13, "Leases" 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 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 submitted a refund request for the taxes and interest paid, following the Department's June 9, 2021 decision, that were subject to abatement
12
under the December 2016 Abatement Agreement. The Company recognized $0.7 million in other income in interest and other expense, net on the condensed consolidated statements of comprehensive loss during the year ended December 31, 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. 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. 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. 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. On May 1, 2023, the Lead Plaintiff’s motion for class certification in the consolidated class action was granted in part and denied in part, with the U.S. District Court for the Central District of California limiting the certified class to only those persons and entities that purchased or otherwise acquired the Company’s publicly traded common stock pursuant and traceable to the Company’s IPO offering documents prior to August 19, 2021, as well as all persons and entities that acquired ownership of a trading account, retirement account, or any other similar investment account or portfolio containing the Company’s publicly traded common stock that was purchased or otherwise acquired pursuant and traceable to the IPO offering documents prior to August 19, 2021, and were damaged thereby. The Company 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 loss or make an estimate of the loss or range of loss in these matters.
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. On December 6, 2022, the Company's motion to dismiss was denied. The Company filed a motion to stay on July 25, 2023 pending the Ninth Circuit Court of Appeals’ review of the Central District of California’s decision in Whiteside v. Kimberly-Clark Corp., No. 5:22-cv-1988 JGB (SPx), 2023 WL 4328175 (C.D. Cal. June 1, 2023). 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 June 30, 2023 and December 31, 2022, 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.
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 number 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 number of future payments the Company could be required to make under these indemnification provisions is indeterminable. The Company has never been involved in litigation in connection with these indemnification
13
9.Stock-Based Compensation
Stock Options
The following table summarizes the stock option activity:
| Number of Options | Weighted Average Exercise Price | ||||||||||
Outstanding at December 31, 2022 | $ | ||||||||||
| Granted | $ | ||||||||||
| Exercised | ( | $ | |||||||||
| Forfeited/Cancelled | ( | $ | |||||||||
Outstanding at June 30, 2023 | $ | ||||||||||
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, 2023, 3,713,026 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.
| Number of Shares | Weighted Average Grant Date Fair Value Per Share | ||||||||||||||||||||||
| Non-Employee Directors | Directors, Officers and Employees | Non-Employee Directors | Directors, Officers and Employees | ||||||||||||||||||||
Unvested RSUs at December 31, 2022 | $ | $ | |||||||||||||||||||||
Transfer from Employee to Non-Employee Director(1) | ( | $ | $ | ||||||||||||||||||||
| Granted | $ | $ | |||||||||||||||||||||
Vested(2) | ( | ( | $ | $ | |||||||||||||||||||
| Forfeited | ( | ( | $ | $ | |||||||||||||||||||
Unvested RSUs at June 30, 2023 | $ | $ | |||||||||||||||||||||
14
_____________
(1) Relates to former Chief Executive Officer ("CEO") RSUs that were reclassified to non-employee director shares for disclosure purposes.
(2) As a result of the Company's former CEO not being re-nominated for election by the Board in connection with the annual stockholder meeting in May 2023, the vesting of the remaining shares, prorated through December 31, 2023, under the Company's former CEO RSU award granted on May 26, 2021 and March 24, 2022 accelerated to May 24, 2023. As such, the Company recognized the related stock-based compensation during the three months ended June 30, 2023.
As of June 30, 2023, there was $26.9 million of unrecognized stock-based compensation expense related to unvested RSUs, which is expected to be recognized over a weighted-average period of 3.1 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, 2023, 928,256 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 . For the three and six months ended June 30, 2023, 68,962 2,814,479 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 six months ended June 30, 2023 | |||||
| Expected life of options (in years) | |||||
| Expected stock price volatility | |||||
| Risk free interest rate | |||||
| Expected dividend yield | |||||
| Weighted average grant-date fair value per share | $ | ||||
2023 Inducement Plan
In March 2023, the Company's Compensation Committee adopted the 2023 Inducement Plan (the “Inducement Plan”). The Inducement Plan reserved 4,000,000 shares of the Company’s common stock for issuance under the Inducement Plan to individuals who satisfy the standards for inducement grants under the relevant Nasdaq Stock Market rules.
Stock-Based Compensation Expense
Stock-based compensation expense related to RSU awards, 2021 ESPP purchases and stock options, as applicable, are as follows:
| For the three months ended June 30, | For the six months ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
Selling, general and administrative(1) | $ | $ | $ | $ | |||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Total stock-based compensation expense | $ | $ | $ | $ | |||||||||||||||||||
__________________
15
10.Net Income (Loss) per Share Attributable to Common Stockholders
The Company computes net income (loss) per share using the two-class method required for participating securities. The two-class method requires net income be allocated between common stock and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. In periods where the Company has net losses, losses are not allocated to participating securities as they are not required to fund the losses. The Company considers its redeemable convertible preferred stock to be participating securities as preferred stockholders have rights to participate in dividends with the common stockholders.
Basic net income (loss) attributable to common stockholders per share is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock outstanding. The Company computes diluted net income per share under a two-class method where income is reallocated between common stock, potential common stock and participating securities. Diluted net income (loss) per share attributable to common stockholders adjusts the basic net income (loss) per share attributable to common stockholders and the weighted-average number of shares of common stock outstanding for the potentially dilutive impact of stock options using the treasury stock method.
The following table sets forth the computation of the Company’s basic and diluted net loss per share attributable to common stockholders:
For the three months ended June 30, | For the six months ended June 30, | ||||||||||||||||||||||
| (In thousands, except for share and per share values) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net loss attributable to common stockholders - basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted average shares of common stock outstanding - basic | |||||||||||||||||||||||
| Weighted average shares of common stock outstanding - diluted | |||||||||||||||||||||||
| Net loss per share, attributable to common shareholders: | |||||||||||||||||||||||
| Basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
The following potentially dilutive shares were excluded from the computation of diluted net income (loss) per share because including them would have been antidilutive:
For the three months ended June 30, | For the six months ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Stock options to purchase common stock | |||||||||||||||||||||||
| Unvested restricted stock units | |||||||||||||||||||||||
| Employee stock purchase plan | |||||||||||||||||||||||
| Total | |||||||||||||||||||||||
11. Income Taxes
16
The Company has evaluated the available positive and negative evidence supporting the realization of its gross deferred tax assets, including cumulative losses, and the amount and timing of future taxable income, and has determined it is more likely than not that the assets will not be realized. Accordingly, the Company has recorded a full valuation allowance against the U.S. federal and state deferred tax assets as of each balance sheet date presented.
On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (the “Act”), which contains provisions that became effective on January 1, 2023, including a 15% corporate minimum tax and a 1% excise tax on stock buybacks. While the Company is still evaluating the impact of the Act, the Company does not currently expect any material changes on its consolidated financial position, results of operations and cash flows.
During the three and six months ended June 30, 2023 and 2022, the Company has no no
12. Related Party Transactions
13. Leases
The Company’s lease portfolio includes both real estate and non-real estate type leases which are accounted for as either finance or operating leases. Real estate leases generally include office and warehouse facilities and non-real estate leases generally include office equipment and machinery. The Company determines if a contract is or contains a lease at inception. The Company’s leases have remaining lease terms of less than to six years
The components of lease expense were as follows (in thousands):
| For the three months ended June 30, | For the six months ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Finance lease expense: | |||||||||||||||||||||||
| Amortization | $ | $ | $ | $ | |||||||||||||||||||
| Interest on lease liabilities | |||||||||||||||||||||||
| Operating lease expense: | |||||||||||||||||||||||
Operating lease expense(1) | |||||||||||||||||||||||
| Sublease income | ( | ( | ( | ( | |||||||||||||||||||
| Total lease expense, net | $ | $ | $ | $ | |||||||||||||||||||
______________________
Based on the nature of the Right-of-Use ("ROU") asset, amortization of finance leases and amortization of operating ROU assets, operating lease expense and other lease expense are recorded within either cost of revenue or selling, general and administrative expenses and interest on finance lease liabilities is recorded within interest and other expense, net in the condensed consolidated statements of comprehensive loss.
17
The following tables set forth the amount of lease assets and lease liabilities included in the Company’s condensed consolidated balance sheets (in thousands):
| Assets | Financial Statement Line Item | June 30, 2023 | ||||||||||||
| Finance lease assets | $ | |||||||||||||
| Operating lease assets | Operating lease right-of-use asset | |||||||||||||
| Total lease assets | $ | |||||||||||||
| Liabilities | ||||||||||||||
| Current | ||||||||||||||
| Finance lease liabilities | $ | |||||||||||||
| Operating lease liabilities | ||||||||||||||
| Non-current | ||||||||||||||
| Finance lease liabilities | ||||||||||||||
| Operating lease liabilities | Operating lease liabilities, net of current portion | |||||||||||||
| Total lease liabilities | $ | |||||||||||||
Supplemental information related to the Company’s leases for the six months ended June 30, 2023 was as follows:
| Weighted-average remaining lease term (in years) | |||||
| Finance leases | |||||
| Operating leases | |||||
| Weighted-average discount rate | |||||
| Finance leases | % | ||||
| Operating leases | % | ||||
| Cash paid for amounts included in the measurement of lease liabilities (in thousands) | |||||
| Operating cash flows used in finance leases | $ | ||||
| Operating cash flows used in operating leases | $ | ||||
| Finance cash flows used in finance leases | $ | ||||
14. Restructuring
Transformation Initiative
In the first quarter of 2023, the Company began executing a broad-based Transformation Initiative designed to build the Honest brand and drive growth in higher-margin areas of the portfolio, strengthen the Company’s cost structure, drive focus on the most productive areas of our business, deliver greater impact from brand-building investments, and improve executional excellence across the enterprise.
Restructuring costs are one of the elements of the Transformation Initiative and are included in restructuring on the condensed consolidated statements of comprehensive loss:
•Employee-Related Costs – Employee-related costs are primarily comprised of severance and other post-employment benefit costs, calculated based on salary levels, prior service and other statutory minimum benefits, if applicable.
•Asset-Related Costs – Asset-related costs consist of accelerated amortization related to visual merchandise in an international retail store taken out of service prior to its existing useful life as a direct result of the restructuring initiatives.
•Contract Terminations – Costs related to contract terminations include continuing payments to a third party after the Company has ceased benefiting from the rights conveyed in the contract, or a payment made to terminate a contract prior to its expiration.
Other costs associated with the Transformation Initiative are comprised of the following:
18
•Sales Returns and Cost of Revenue – Product returns, chargebacks and markdowns are recorded as a reduction to revenue and inventory write-offs, write-downs or destruction costs as a direct result of the restructuring initiatives to exit certain products or geographic locations are recorded as a component of cost of revenue on the condensed consolidated statements of comprehensive loss when estimable and reasonably assured.
•Other Costs – The Company incurred other costs related to the restructuring initiatives, which are included in selling, general and administrative expense on the condensed consolidated statements of comprehensive loss and primarily include the following:
▪Donation expenses, including tariffs, and
▪Consulting and other professional services.
Costs associated with the Transformation Initiative for the three and six months ended June 30, 2023 were as follows (in thousands):
For the three months ended June 30, 2023 | For the six months ended June 30, 2023 | |||||||||||||
Net Revenue(1) | $ | $ | ||||||||||||
| Cost of Revenue | ||||||||||||||
Restructuring Costs(2) | ||||||||||||||
Other Costs(3) | ||||||||||||||
| Total | $ | $ | ||||||||||||
______________
(1) Relates to product markdowns.
(2) Refer to the table below for further details of operating expenses included in restructuring costs.
(3) Refer to description above for types of operating expenses included in Other Costs.
| Restructuring Costs | |||||||||||||||||||||||
| Employee-Related Costs | Asset-Related Costs | Contract Terminations | Total | ||||||||||||||||||||
Cumulative through June 30, 2023 | $ | $ | $ | $ | |||||||||||||||||||
Changes in accrued expenses as of June 30, 2023 relating to the Transformation Initiative were:
| Restructuring Costs | |||||||||||||||||||||||||||||
Employee-Related Costs(1) | Asset-Related Costs | Contract Terminations | Inventory Reserves | Total | |||||||||||||||||||||||||
Balance at December 31, 2022 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Charges (adjustments) | |||||||||||||||||||||||||||||
| Cash payments | ( | ( | |||||||||||||||||||||||||||
| Non-cash asset write-offs | ( | ( | |||||||||||||||||||||||||||
Balance at June 30, 2023 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
___________
15. Subsequent Events
As part of the Company's Transformation Initiative to focus on our North American customers, on July 26, 2023, the Company terminated its agreement with its Asian distributor, SuperOrdinary.
On July 31, 2023, the Company exited its fulfillment center in the Netherlands that was operated by Geodis Logistics, LLC.
19
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 condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “Annual Report”), filed with the Securities and Exchange Commission (“SEC”) on March 16, 2023. This discussion, particularly information with respect to our future results of operations or financial condition, business strategy and plans, and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading “Special Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q. You should review the disclosure under the heading “Risk Factors” in this Quarterly Report on Form 10-Q as well as in the Annual Report for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements. Unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to “we,” “us,” “our,” “our company,” "the Company" and “Honest” refer to The Honest Company, Inc. and its consolidated subsidiaries.
Overview
The Honest Company, Inc. (“Honest” and, together with its consolidated subsidiaries, the “Company,” “we,” “us” and “our”) is a digitally-native consumer products company dedicated to creating clean- and sustainably-designed products spanning baby care, beauty, personal care, wellness and household care. Our commitment to our core values, continual innovation and engaging our community has differentiated and elevated our brand and our products. Since our launch in 2012, we have been dedicated to developing clean, sustainable, effective and thoughtfully-designed products. By doing so with transparency, we have cultivated deep trust around what matters most to our consumers: their health, their families and their homes. We are an omnichannel brand, ensuring our products are available wherever our consumers shop. Our differentiated platform positions us for continued growth through our trusted brand, award-winning multi-category product offerings, deep digital-first connection with consumers and omnichannel accessibility.
Our integrated multi-category product architecture is intentionally designed to serve our consumers every day, at every age and through every life stage, no matter where they are on their journey. Our three product categories are Diapers and Wipes, Skin and Personal Care, and Household and Wellness, which represented 65%, 27%, and 8%, respectively, of our revenue for the three months ended June 30, 2023, compared to 66%, 30%, and 4%, respectively, of our revenue for the three months ended June 30, 2022, and 65%, 27%, and 8%, respectively, of our revenue for the six months ended June 30, 2023, compared to 65%, 30%, and 5%, respectively, of our revenue for the six months ended June 30, 2022. At the center of our product ecosystem are our diapers, which are a strategic consumer acquisition tool that acts as an entry point for our portfolio, as new parents often go on to purchase products from our other categories for their everyday family needs. Our integrated multi-category product architecture is designed to drive loyalty, increase our consumer wallet share and generate attractive consumer lifetime value.
We believe that our consumers are modern, aspirational, conscious and style-forward and that they seek out high quality, effective and thoughtfully-designed products. We believe that they are passionate about living a conscious life and are enthusiastic ambassadors for brands they trust. As purpose-driven consumers, they transcend any one demographic, spanning gender, age, geography, ethnicity and household income. Honest consumers are often young, mobile-centric and digitally-inclined. We build relationships with these consumers through a disruptive digital marketing strategy that engages them with “snackable” digital content (short-form, easily digestible content), immerses them in our brand values, and inspires them to join the Honest community. Our direct connection with our community enables us to understand what consumers’ needs are and inspires our product innovation pipeline, generating a significant competitive advantage over more traditional consumer packaged goods, or CPG, peers.
Our omnichannel approach seeks to meet consumers wherever they want to shop, balancing deep consumer connection with broad convenience and accessibility. Since our launch, we have built a well-integrated omnichannel presence by expanding our product accessibility across both Digital and Retail channels, including the launch of strategic partnerships with Target, Amazon and Walmart in 2014, 2017 and 2022, respectively. For the three months ended June 30, 2023, we generated 49% and 51% of our revenue from our Digital and Retail channels, respectively, compared to 48% and 52%, respectively, for the three months ended June 30, 2022. For the six months ended June 30, 2023, we generated 50% and 50% of our revenue from our Digital and Retail channels, respectively, compared to 49% and 51%, respectively, for the six months ended June 30, 2022.
We maintain direct relationships with our consumers via our flagship digital platform, Honest.com, which allows us to influence brand experience and better understand consumer preferences and behavior. We increase accessibility of our products to more consumers through both the third-party pureplay ecommerce sites that, with Honest.com, comprise our Digital channel, and our Retail channel, which includes leading retailers and their websites. As of June 30, 2023, our products can be found in approximately 51,000 retail locations across the United States, Canada and Europe. In the first quarter of 2023, as part of the Transformation Initiative we announced that we plan to focus on our North American customers and are actively reducing the portfolio of products we will offer for sale in certain regions, including retail locations in Europe. Refer to
20
Note 15, “Subsequent Events,” included in our condensed consolidated financial statements included in Part I, Item 1 for an update on our international contract terminated as part of our plan to exit low-margin business in Asia. Our integrated omnichannel presence provides meaningful benefits to our consumers which we believe are not easily replicated by our competitors. This distinctive business model has allowed us to efficiently scale our business while remaining agnostic as to the channel where consumers purchase our products.
Transformation Initiative
In the first quarter of 2023, we began executing a broad-based Transformation Initiative designed to build the Honest brand and drive growth in higher-margin areas of the portfolio, strengthen our cost structure, drive focus on the most productive areas of our business, deliver greater impact from brand-building investments, and improve executional excellence across the enterprise.
The Transformation Initiative is projected to result in the following:
•Costs associated with the Transformation Initiative, including restructuring costs, are expected to be approximately $10.0 million to $13.0 million for the full year 2023, with $1.4 million and $8.3 million, respectively, recognized during the three and six months ended June 30, 2023. Refer to discussion under "Results of Operations" below.
◦Restructuring costs, which include employee-related costs, asset-related costs and contract terminations related to exiting retail and online stores in unprofitable geographical locations, in Asia and Europe, were $0.4 million and $1.7 million, respectively, in the three and six months ended June 30, 2023 and were reflected in restructuring on the condensed consolidated statements of comprehensive loss.
•The Transformation Initiative is expected to result in annualized benefits to adjusted EBITDA(1) in the range of $15.0 million to $20.0 million, and we expect to begin seeing benefits in late 2023. These benefits include reduction in costs of revenue, reduction in operating expenses and increase in revenue.
•The cash impact of costs related to the Transformation Initiative is expected to be in the range of $4.0 million to $5.0 million for the full year 2023, with $0.5 million and $0.6 million, respectively, recognized during the three and six months ended June 30, 2023 and the remainder throughout 2023.
•We expect the restructuring element of the Transformation Initiative to be substantially completed by December 31, 2023.
_____________
(1) We do not provide guidance for the most directly comparable GAAP measure, net loss, and similarly cannot provide a reconciliation between our adjusted EBITDA outlook and net loss without unreasonable effort due to the unavailability of reliable estimates for certain components of net loss, including interest and other (income) expense, net, and the respective reconciliations. These items are not within our control and may vary greatly between periods and could significantly impact our financial results calculated in accordance with GAAP.
We may incur other charges or cash expenditures not currently contemplated that may occur as a result of or in connection with the Transformation Initiative.
We believe specific value drivers of the Transformation Initiative include:
1) Brand Maximization
•Leveraging the strength of the Honest brand to drive growth through innovation, margin-accretive products, and marketing effectiveness.
•Executing additional pricing increases across the majority of our product portfolio throughout 2023, following pricing increases in 2022 and in the first half of 2023 that resulted in revenue growth driven by both volume and pricing.
2) Margin Enhancement
•Focusing our resources on North America, which includes exiting our low-margin business in Europe and Asia.
•Exiting low-margin elements of the cleaning and sanitization business (included in Household and Wellness product category).
•Executing an inventory, or stock-keeping unit ("SKU"), rationalization program.
•Re-directing resources to accelerate cost savings, including optimization of our contract manufacturing strategies, reduced shipping and logistic costs, and product costs.
•Realigning resources to reflect the prioritization of higher-margin opportunities.
3) Operating Discipline
•Building a culture that emphasizes returns across growth drivers, including marketing, trade promotion, and innovation.
•Managing working capital including the reduction of inventory.
21
For further details on the Transformation Initiative, refer to Note 14, "Restructuring" included in these condensed consolidated financial statements.
Key Factors Affecting Our Performance
We believe that the growth of our business and our future success are dependent on many factors. While each of these factors presents significant opportunities for us, they also pose important challenges that we must successfully address to enable us to sustain the growth of our business and improve our operations while staying true to our mission, including those discussed below and in the section of this Quarterly Report on Form 10-Q titled “Risk Factors.”
Ability to Grow Our Brand Awareness
Our brand is integral to the growth of our business and is essential to our ability to engage and stay connected with the growing clean products consumer. In order to increase the share of wallet of existing conscious consumers and to attract new consumers, our brand has to maintain its trustworthiness and authenticity. Our ability to attract new consumers will depend, among other things, on our ability to successfully produce products that are free of defects and communicate the value of those products as clean, sustainable and effective, the efficacy of our marketing efforts and the offerings of our competitors. Beyond preserving the integrity of our brand, our performance will depend on our ability to augment our reach and increase the number of consumers aware of Honest and our product portfolio. Given higher costs of digital marketing and increased retail distribution, we have and expect to continue to shift the focus of our marketing spend towards supporting retail marketing programs and to make changes in our marketing initiatives to increase brand awareness. As part of the Transformation Initiative, we are improving the return on marketing by reducing marketing spend on low-return campaigns and emphasizing best-selling items, focusing on the most profitable areas of our business. We believe our brand strength will enable us to expand across categories and channels, allowing us to deepen relationships with consumers. Our performance depends significantly on factors that may affect the level and pattern of consumer spending in the product categories in which we operate.
Continued Innovation
Research, development and innovation are core elements underpinning our growth strategy. Through our in-house research and development laboratories, we are able to access the latest advancements in clean ingredients and continue to innovate in the clean conscious space. Based in Los Angeles, California, our research and development team, including chemists, an in-house toxicologist and an eco-toxicologist, develops innovative clean products based on the latest green technology. At Honest, product innovation never stops. The improvement of existing products and the introduction of new products have been, and continue to be, integral to our growth. We have made significant investments in our product development capabilities and plan to continue to do so in the future. We believe our rigorous approach to product innovation has helped redefine and grow the clean and natural product categories in which we operate. Our continued focus on research and development will be central to attracting and retaining consumers in the future. Our ability to successfully develop, market and sell new products will depend on a variety of factors, including our continued investment in innovation, integrated business planning processes and capabilities.
We use connectivity to our community of consumers to provide valuable insights that power innovation across categories. We use innovation to support our growth objectives across our product portfolio, as highlighted in the three core pillars of our Innovation Framework: that we bring product innovation that 1) feeds and nurtures our core values, 2) expands within our existing product categories, and 3) grows into new potential product categories adjacent to existing categories that fit with our value proposition to the consumer.
We continue to innovate in each of our product categories in areas such as breakthrough new product formulations, innovative packaging, costovation (defined below) and marketing strategy, with a focus on driving “big bets” across potential product adjacencies where we have: 1) ability to build on our premium positioning, 2) ability to lead and win in a category, and 3) the opportunity to expand into more places within an existing Honest home while positioning ourselves as a premium brand. We are also focused on building a portfolio of products in complementary categories through our Innovation Strategy and the investment in our Digital Strategy. We are building an Honest community with the goal of creating a more holistic clean, conscious home for consumers and customers alike. We strive for continuous improvement in our existing products’ safety, sustainability, efficacy and design profile while achieving better performance often at lower cost, which we refer to as costovation.
Continued Product Category Growth
Our product mix is a driver of our financial performance given our focus on accretive product launches and innovation to increase product margins. Even though our growth strategy aims to boost sales across all product categories, we intend to prioritize growth in Skin and Personal Care given its attractive margin characteristics and leverage our brand equity and consumer insights to extend into new adjacent product categories. Since we launched our Innovation Strategy, we have enhanced our product portfolio by strategically discontinuing certain products and making calculated extensions within our three product categories. These product changes have contributed to new revenue and brought higher margin products into our portfolio.
22
Continued Execution of Omnichannel Strategy
The continued execution of our omnichannel strategy impacts our financial performance. We intend to continue leveraging our marketing strategy to drive increased consumer awareness and leverage our flagship digital platform, Honest.com, to create direct connections with our consumers, influence brand experience and understand consumer preference and behavior. Our partnerships with leading third-party retail platforms and national retailers have broadened our consumer reach, raised our brand awareness and enhanced our margins through operating leverage. We will continue to pursue partnerships with a wide variety of retailers, including mass retailers, online retailers, club retailers, grocery stores, drugstores and specialty retailers. Our ability to execute this strategy will depend on a number of factors, such as competitive dynamics and retailers’ satisfaction with the sales and profitability of our products, channel shifts of their customers, and their own supply chain, order timing, and inventory needs, which may fluctuate from period to period.
Operational and Marketing Efficiency
To grow our business, we intend to continue to improve our operational and marketing efficiency, which includes attracting new consumers, increasing community engagement and improving fulfillment and distribution operations. We invest significant resources in marketing and content generation, use a variety of brand and performance marketing channels and work continuously to improve brand exposure at our retail customers to acquire new consumers. It is important to maintain reasonable costs for these marketing efforts relative to the revenue we expect to derive from our consumers. We leverage our proprietary data and systems to generate valuable consumer insights that guide our omnichannel strategy and inform our marketing spend optimization. Our future success depends in part on our ability to effectively attract consumers on a cost-efficient basis and achieve efficiencies in our operations. In addition, we expect that we will be able to achieve some operational and marketing efficiency as part of cost savings in connection with our Transformation Initiative.
Our paid advertising includes search engine marketing, display, paid social media and product placement and traditional advertising, such as direct mail, television, radio and magazine advertising. We drive a significant amount of traffic to our website via search engines and, therefore, rely heavily on search engines. Paid advertising costs significantly increased industry-wide during the past few years, which negatively impacted our ability to cost-effectively drive traffic to Honest.com. As a result, we have shifted marketing spend into support for retail and other digital customers that has allowed us to increase marketing efficiency.
Overall Macro Trends
We have strategically positioned ourselves to benefit from several macro trends related to changes in consumer behavior. We believe consumers’ increasing interest in purpose-designed products has contributed to higher demand for certain of our products. At the same time, changes in macro-level consumer spending trends, including as a result of the COVID-19 pandemic or broader macroeconomic conditions, such as inflation, have resulted and could in the future result in fluctuations in our operating results.
Business Operations
Global economic and political uncertainty have increased due to the impact of continued inflationary pressures, adverse impact on confidence in financial markets and geopolitical events, including the conflict in Ukraine. Additionally, the extent of the impact of macroeconomic trends on the Company’s operational and financial performance in the future will depend on future developments. Prolonged unfavorable economic conditions, including as a result of global pandemics, rising inflation and interest rates and any resulting recession or slowed economic growth, have had and may continue to have an adverse effect on our sales and profitability. All of these factors are difficult to predict considering the rapidly evolving landscape as the Company continues to expect a variable operating environment going forward.
Supply Chain Disruptions
There has been and continues to be an adverse impact on global economic conditions and consumer confidence and spending, which has adversely affected our supply chain as well as the demand for our products and has impacted our revenue and ability to service our customer orders. We have taken measures to bolster key aspects of our supply chain, such as ensuring sufficient inventory to support our continued growth, new distribution and longer lead times. In addition, as a result of the supply chain impacts, other macroeconomic trends and high inventory levels, we have experienced increased fulfillment costs. One of our fulfillment partners passed on increased service and inflation related costs to us, including warehouse labor cost, which negatively impacted our cost of revenue for the six months ended June 30, 2023. If we are not successful in negotiating future renewals such that these renewals are at increased costs to us, our business, financial condition, results of operations and prospects could be adversely affected.
23
We continue to work with our existing manufacturing, logistics and other supply chain partners to ensure our ability to service our consumers and retail and third-party ecommerce customers. We have experienced and anticipate continued increases in commodity prices, labor costs, input costs and transportation costs, which has and could continue to hamper our ability to drive margin expansion. In 2022, we negotiated and agreed to higher purchase prices with two of our third-party manufacturers which has negatively impacted our cost of revenue in the past and will continue to have a negative impact on our results of operations. Due to continued elevated input costs, we could face further escalation of purchase costs and cost of revenue in the future. We implemented price increases that took effect in 2022 and in the first half of 2023 and plan to implement additional pricing increases in 2023 and in the future as needed to offset current and future input cost inflation and to pursue productivity initiatives to offset inflation. However, we may not be able to increase our prices or productivity sufficiently enough to offset these costs. Customer demand for our products may change based on price increases.
Consumer Preferences
Our revenue is relatively balanced between our Digital and Retail channels which demonstrates the power of our omni-channel distribution model. We believe consumers value the flexibility in terms of where and when they choose to purchase Honest products. We also believe that consumers recognize the quality of Honest products, knowing that there are over 3,500 chemicals and materials that we choose not to formulate with.
Inventory
Inventory is reflected at net realizable value which includes a reserve for excess inventory. We estimate reserve requirements based on current and forecasted demand, including the ability to liquidate excess inventory and estimated liquidation value. Depending on future consumer behavior in relation to the macroeconomic environment or otherwise and related aging of inventory, among other factors, we may incur inventory write-downs, customer returns or incur donation expense or disposal costs as we reduce excess inventory. The decline in demand for our sanitization and disinfecting products included in the Household and Wellness product category has led to our plan to exit low-margin household products as part of the Transformation Initiative. Additionally, we implemented an inventory, or SKU rationalization program, as part of the Transformation Initiative. For the three and six months ended June 30, 2023, we recorded an inventory write-down, inclusive of overhead costs and tariffs, of $0.6 million and $3.3 million, respectively, mainly related to international product exits and SKU rationalization, which is included in cost of revenue on the condensed consolidated statements of comprehensive loss. Additionally, we earmarked donations of $2.5 million, mainly related to the liquidation of low-margin household products during the six months ended June 30, 2023, which is included in selling, general and administrative expense on the condensed consolidated statements of comprehensive loss.
Due to increasing supply chain lead times, new retail distribution, and expectation of supplier price increases that took effect in early 2023, we increased our inventory levels in 2022 to ensure in-stock position to service customers and consumers. In addition, inflation in input costs, including higher product costs, inbound shipping and warehouse labor, has resulted in a higher dollar value of inventory. We have reduced our inventory levels during the three and six months ended June 30, 2023 and expect future reduction of inventory in 2023, as part of our disciplined inventory management.
Inflation Reduction Act of 2022
On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (the “Act”), which contains provisions that became effective on January 1, 2023, including a 15% corporate minimum tax and a 1% excise tax on stock buybacks. While we are still evaluating the impact of the Act, we do not currently expect any material changes on our consolidated financial position, results of operations and cash flows.
Components of Results of Operations
Revenue
We generate revenue through the sale of our products through Digital and Retail channels in the following product categories: Diapers and Wipes, Skin and Personal Care, and Household and Wellness. The Digital channel includes direct sales to the consumer through our website and sales to third-party ecommerce customers, who resell our products through their own online platforms. The Retail channel includes sales to traditional brick and mortar retailers and their respective websites, who may also resell our products through their own online platforms. Our revenue is recognized net of allowances for returns, discounts, credits and any taxes collected from consumers.
Cost of Revenue
Cost of revenue includes the purchase price of merchandise sold to customers, inbound and outbound shipping and handling costs, freight and duties, shipping and packaging supplies, credit card processing fees and warehouse fulfillment costs incurred in operating and staffing warehouses, including rent. Cost of revenue also includes depreciation and amortization for
24
warehouse fulfillment facilities and equipment, allocated overhead and direct and indirect labor for warehouse personnel, inventory reserves and destruction costs.
Gross Profit and Gross Margin
Gross profit represents revenue less cost of revenue. Gross margin is gross profit expressed as a percentage of revenue. Our gross margin may in the future fluctuate from period to period based on a number of factors, including commodity costs, manufacturing costs, warehousing and transportation rates, the promotional environment in the marketplace, the mix of products we sell, the channel through which we sell our products, and innovation initiatives we undertake in each product category, among other factors.
Operating Expenses
Our operating expenses consist of selling, general and administrative, marketing and research and development expenses.
Selling, General and Administrative
Selling, general and administrative expenses consist primarily of personnel costs, principally for our selling and administrative functions. These include personnel-related expenses, including salaries, bonuses, benefits and stock-based compensation expenses. Selling, general and administrative expenses also include technology expenses; professional fees including audit and legal expenses; donation expenses including tariffs; facility costs, including insurance, utilities and rent relating to our headquarters; third-party service fees related to Honest Baby Clothing®; and depreciation and amortization expense. We expect our general and administrative expenses to increase in absolute dollars as we continue to grow our business and organizational capabilities. Since our IPO, we have also incurred additional costs for employees and third-party professional fees related to operating as a public company and costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations, and increased expenses for insurance, investor relations and professional services.
Marketing
Marketing expenses include costs related to our branding initiatives, retail customer marketing activities, point of purchase displays, targeted online advertising through sponsored search, display advertising, email and influencer marketing campaigns, market research, content production and other public relations and promotional initiatives. Given higher costs in digital marketing and increased retail distribution, we have shifted the focus of our marketing spend towards supporting retail marketing programs and top of funnel marketing activities. We will continue to invest in marketing initiatives in our product categories and best selling products with key retailers, as well as expand brand awareness, introduce new product innovation across multiple product categories and implement new marketing strategies in the United States. As we launch new products, we expect to make marketing investments to build brand awareness, drive trial and set the foundation for future revenue growth.
Research and Development
Research and development expenses consist primarily of personnel-related expenses for our research and development team. Research and development expenses also include costs incurred for the development of new products, improvement in the quality of existing products and the development and implementation of new technologies to enhance the quality and value of products. This includes the expense related to claims and clinical trials as well as formulation and packaging testing. Research and development expenses also include allocated depreciation and amortization and overhead costs. We expect research and development expenses to increase in absolute dollars as we invest in the enhancement of our product offerings through innovation and the introduction of new adjacent product categories.
Interest and Other Income (Expense), Net
Interest income consists primarily of interest income earned on our short-term investments and our cash and cash equivalents balances. Interest expense includes fees incurred under our 2023 Credit Facility, including commitment fees and debt issuance costs.
Other income (expense), net consists of our foreign currency exchange gains, losses relating to transactions denominated in currencies other than the U.S. dollar and contingent gains. We expect our foreign currency gains and losses to continue to fluctuate in the future due to changes in both the volume of foreign currency transactions and foreign currency exchange rates.
Income Tax Provision
We are subject to federal and state income taxes in the United States. Our annual estimated tax rate differed from the U.S. federal statutory rate of 21% primarily as a result of a valuation allowance against deferred tax assets, stock-based
25
compensation, state taxes, nondeductible executive compensation and other permanent differences. We maintain a full valuation allowance for our federal and state deferred tax assets, including net operating loss carryforwards, as we have concluded that it is not more likely than not that the deferred tax assets will be realized.
Results of Operations
The following table sets forth our condensed consolidated statements of operations data for each of the periods indicated:
For the three months ended June 30, | For the six months ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Revenue | $ | 84,544 | $ | 78,493 | $ | 167,933 | $ | 147,212 | |||||||||||||||
| Cost of revenue | 61,646 | 54,929 | 124,832 | 103,021 | |||||||||||||||||||
| Gross profit | 22,898 | 23,564 | 43,101 | 44,191 | |||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
Selling, general and administrative(1) | 25,032 | 19,965 | 50,849 | 39,576 | |||||||||||||||||||
| Marketing | 9,261 | 12,515 | 19,495 | 25,981 | |||||||||||||||||||
| Restructuring | 397 | — | 1,747 | — | |||||||||||||||||||
Research and development(1) | 1,595 | 1,823 | 3,054 | 3,919 | |||||||||||||||||||
| Total operating expenses | 36,285 | 34,303 | 75,145 | 69,476 | |||||||||||||||||||
| Operating loss | (13,387) | (10,739) | (32,044) | (25,285) | |||||||||||||||||||
| Interest and other income (expense), net | (9) | 747 | (198) | 686 | |||||||||||||||||||
| Loss before provision for income taxes | (13,396) | (9,992) | (32,242) | (24,599) | |||||||||||||||||||
| Income tax provision | 20 | 20 | 40 | 40 | |||||||||||||||||||
| Net loss | $ | (13,416) | $ | (10,012) | $ | (32,282) | $ | (24,639) | |||||||||||||||
__________________________
(1) Includes stock-based compensation expense as follows:
| For the three months ended June 30, | For the six months ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Selling, general and administrative | $ | 6,327 | $ | 3,707 | $ | 10,040 | $ | 7,078 | |||||||||||||||
| Research and development | 86 | 205 | 145 | 382 | |||||||||||||||||||
| Total | $ | 6,413 | $ | 3,912 | $ | 10,185 | $ | 7,460 | |||||||||||||||
26
The following table sets forth our condensed consolidated statements of operations data expressed as a percentage of revenue*:
For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| (as a percentage of revenue) | ||||||||||||||||||||||||||
| Revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||||
| Cost of revenue | 72.9 | 70.0 | 74.3 | 70.0 | ||||||||||||||||||||||
| Gross profit | 27.1 | 30.0 | 25.7 | 30.0 | ||||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||||
| Selling, general and administrative | 29.6 | 25.4 | 30.3 | 26.9 | ||||||||||||||||||||||
| Marketing | 11.0 | 15.9 | 11.6 | 17.6 | ||||||||||||||||||||||
| Restructuring | 0.5 | — | 1.0 | — | ||||||||||||||||||||||
| Research and development | 1.9 | 2.3 | 1.8 | 2.7 | ||||||||||||||||||||||
| Total operating expenses | 42.9 | 43.7 | 44.7 | 47.2 | ||||||||||||||||||||||
| Operating loss | (15.8) | (13.7) | (19.1) | (17.2) | ||||||||||||||||||||||
| Interest and other income (expense), net | — | 1.0 | (0.1) | 0.5 | ||||||||||||||||||||||
| Loss before provision for income taxes | (15.8) | (12.7) | (19.2) | (16.7) | ||||||||||||||||||||||
| Income tax provision | — | — | — | — | ||||||||||||||||||||||
| Net loss | (15.9) | % | (12.8) | % | (19.2) | % | (16.7) | % | ||||||||||||||||||
______________
* Amounts may not sum due to rounding.
Comparison of the Three and Six Months Ended June 30, 2023 and 2022
Revenue
For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||||
2023 | 2022 | $ change | % change | 2023 | 2022 | $ change | % change | |||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| By Product Category | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Diapers and Wipes | $ | 55,256 | $ | 51,901 | $ | 3,355 | 6.5 | % | $ | 108,333 | $ | 95,190 | $ | 13,143 | 13.8 | % | ||||||||||||||||||||||||||||||||||
| Skin and Personal Care | 22,735 | 23,275 | (540) | (2.3) | 45,528 | 44,541 | 987 | 2.2 | ||||||||||||||||||||||||||||||||||||||||||
| Household and Wellness | 6,553 | 3,317 | 3,236 | 97.6 | 14,072 | 7,481 | 6,591 | 88.1 | ||||||||||||||||||||||||||||||||||||||||||
| Total Revenue | $ | 84,544 | $ | 78,493 | $ | 6,051 | 7.7 | % | $ | 167,933 | $ | 147,212 | $ | 20,721 | 14.1 | % | ||||||||||||||||||||||||||||||||||
For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||||
2023 | 2022 | $ change | % change | 2023 | 2022 | $ change | % change | |||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| By Channel | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Digital | $ | 41,731 | $ | 37,871 | $ | 3,860 | 10.2 | % | $ | 83,545 | $ | 72,132 | $ | 11,413 | 15.8 | % | ||||||||||||||||||||||||||||||||||
| Retail | 42,813 | 40,622 | 2,191 | 5.4 | 84,388 | 75,080 | 9,308 | 12.4 | ||||||||||||||||||||||||||||||||||||||||||
| Total Revenue | $ | 84,544 | $ | 78,493 | $ | 6,051 | 7.7 | % | $ | 167,933 | $ | 147,212 | $ | 20,721 | 14.1 | % | ||||||||||||||||||||||||||||||||||
27
Revenue was $84.5 million for the three months ended June 30, 2023, as compared to $78.5 million for the three months ended June 30, 2022. The increase of $6.1 million, or 7.7%, reflects an increase of $3.4 million and $3.2 million in Diapers and Wipes and Household and Wellness product categories, respectively, offset by a decrease of $0.5 million in Skin and Personal Care product category. The revenue increase in Diapers and Wipes was primarily driven by an increase in diapers and wipes consumption due to $2.8 million of revenue from new distribution and $1.7 million in price increases, offset by a decline in Honest.com sales. The Skin and Personal Care revenue decrease was primarily driven by a decrease of $3.9 million in personal care products as we scaled back low-margin personal care products in the club channel, offset by an increase in beauty revenue due to strong consumption and new distribution. The revenue increase in Household and Wellness was primarily driven by $2.8 million in revenue from Honest Baby Clothing due to the integration of baby clothing in the third quarter of 2022.
We estimate that pricing increases taken in 2022 and the first half of 2023 contributed $2.5 million to revenue for the three months ended June 30, 2023.
Revenue was $167.9 million for the six months ended June 30, 2023, as compared to $147.2 million for the six months ended June 30, 2022. The increase of $20.7 million, or 14.1%, reflects an increase of $13.1 million, $1.0 million and $6.6 million in Diapers and Wipes, Skin and Personal Care products, and Household and Wellness product categories, respectively. The revenue increase in Diapers and Wipes was primarily driven by an increase in diapers and wipes consumption due to $6.8 million in revenue from new distribution and $2.9 million in price increases, offset by a decline in Honest.com sales. The Skin and Personal Care revenue increase was primarily driven by an increase in beauty revenue due to strong consumption in the Retail and Digital channel and new distribution, offset by a decrease of $3.9 million in personal care products due to lower club channel sales. The revenue increase in Household and Wellness was primarily driven by $8.6 million in revenue from Honest Baby Clothing.
We estimate that pricing increases taken in 2022 and the first half of 2023 contributed $4.5 million to revenue for the six months ended June 30, 2023.
The increase in revenue in our Retail channel for the three months ended June 30, 2023, compared to the three months ended June 30, 2022, was primarily driven by new distribution and strong consumption, offset by a decline of $3.9 million in revenue due to lower club channel sales. The increase in revenue in our Digital channel for the three months ended June 30, 2023, compared to the three months ended June 30, 2022, was primarily driven by an $7.3 million increase in revenue by our key digital customer driven by strong consumption, as well as $3.0 million in Honest Baby Clothing revenue, offset by a decrease in revenue at Honest.com due to lower digital marketing spend which resulted in lower traffic to Honest.com.
The increase in revenue in our Retail channel for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, was primarily driven by new distribution and strong consumption, offset by a decline of $3.9 million in revenue due to lower club channel sales. The increase in revenue in our Digital channel for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, was primarily driven by an increase in revenue of $18.3 million by our key digital customer driven by strong consumption, as well as $7.8 million in Honest Baby Clothing revenue, offset by a decrease in revenue at Honest.com due to lower digital marketing spend which resulted in lower traffic to Honest.com.
Cost of Revenue and Gross Profit
| For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ change | % change | 2023 | 2022 | $ change | % change | |||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of revenue | $ | 61,646 | $ | 54,929 | $ | 6,717 | 12.2 | % | $ | 124,832 | $ | 103,021 | $ | 21,811 | 21.2 | % | ||||||||||||||||||||||||||||||||||
| Gross profit | $ | 22,898 | $ | 23,564 | $ | (666) | (2.8) | % | $ | 43,101 | $ | 44,191 | $ | (1,090) | (2.5) | % | ||||||||||||||||||||||||||||||||||
Cost of revenue was $61.6 million for the three months ended June 30, 2023, as compared to $54.9 million for the three months ended June 30, 2022. The increase of $6.7 million, or 12.2%, was primarily driven by a 7.7% increase in revenue and $2.2 million of higher product and $2.2 million of higher transportation costs. Cost of revenue as a percentage of revenue increased by 294 basis points.
Gross profit was $22.9 million for the three months ended June 30, 2023, as compared to $23.6 million for the three months ended June 30, 2022. The decrease was mainly related to higher product and transportation costs, partially offset by price increases of $1.8 million and reduced trade spending of $0.9 million.
Cost of revenue was $124.8 million for the six months ended June 30, 2023, as compared to $103.0 million for the six months ended June 30, 2022. The increase of $21.8 million, or 21.2%, was primarily driven by a 14.1% increase in revenue, $3.3 million in inventory reserves related to the Transformation Initiative and $4.4 million of higher product and $2.9 million of higher
28
transportation costs. Cost of revenue as a percentage of revenue increased by 435 basis points primarily due to primarily due to actions taken in connection with the Transformation Initiatives and higher input costs.
Gross profit was $43.1 million for the six months ended June 30, 2023, as compared to $44.2 million for the six months ended June 30, 2022. The decrease was mainly related to costs related to the Transformation Initiative, including inventory reserves related to product exits and SKU rationalization and higher product and transportation costs, partially offset by price increases of $3.3 million and reduced trade spending of $3.4 million.
Operating Expenses
Selling, General and Administrative Expenses
| For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ change | % change | 2023 | 2022 | $ change | % change | |||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative | $ | 25,032 | $ | 19,965 | $ | 5,067 | 25.4 | % | $ | 50,849 | $ | 39,576 | $ | 11,273 | 28.5 | % | ||||||||||||||||||||||||||||||||||
Selling, general and administrative expenses were $25.0 million for the three months ended June 30, 2023, as compared to $20.0 million for the three months ended June 30, 2022. The increase of $5.1 million, or 25.4%, was primarily due to $2.6 million increase in stock-based compensation expense mainly related to the acceleration of the prior CEO's RSUs, $1.3 million increase in legal expenses primarily related to securities litigation, $0.7 million increase in service fees related to Honest Baby Clothing, and $0.6 million increase in employee-related expenses. Refer to Note 9, “Stock-Based Compensation,” included in our condensed consolidated financial statements in Part I, Item 1 for more information on the prior CEO's RSUs.
Selling, general and administrative expenses were $50.8 million for the six months ended June 30, 2023, as compared to $39.6 million for the six months ended June 30, 2022. The increase of $11.3 million, or 28.5%, was primarily due $3.0 million increase in stock-based compensation expense mainly related to the acceleration of the prior CEO's RSUs, $2.5 million increase in donation expenses related to the Transformation Initiative, $1.7 million increase in service fees related to Honest Baby Clothing, $1.7 million increase in legal expenses primarily related to securities litigation, $1.3 million in CEO transition expenses, and $1.3 million increase in employee-related expenses.
Marketing Expenses
| For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ change | % change | 2023 | 2022 | $ change | % change | |||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Marketing | $ | 9,261 | $ | 12,515 | $ | (3,254) | (26.0) | % | $ | 19,495 | $ | 25,981 | $ | (6,486) | (25.0) | % | ||||||||||||||||||||||||||||||||||
Marketing expenses were $9.3 million for the three months ended June 30, 2023, as compared to $12.5 million for the three months ended June 30, 2022. The decrease of $3.3 million, or 26.0%, was primarily due to a decrease of $1.2 million in public relations activities, a $1.0 million reduction in retail marketing, and a $0.8 million shift and reduction in digital advertising.
Marketing expenses were $19.5 million for the six months ended June 30, 2023, as compared to $26.0 million for the six months ended June 30, 2022. The decrease of $6.5 million, or 25.0%, was primarily due to a $4.3 million shift and reduction in digital advertising, and a decrease of $1.6 million in public relations activities.
29
Restructuring Expenses
| For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ change | % change | 2023 | 2022 | $ change | % change | |||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Restructuring | $ | 397 | $ | — | $ | 397 | 100.0 | % | $ | 1,747 | $ | — | $ | 1,747 | 100.0 | % | ||||||||||||||||||||||||||||||||||
Restructuring expenses were $0.4 million and $1.7 million, respectively, for the three and six months ended June 30, 2023. Restructuring costs are one of the elements of the Transformation Initiative. For the three months ended June 30, 2023, restructuring costs include employee-related costs of $0.3 million and contract termination costs of $0.1 million. For the six months ended June 30, 2023, restructuring costs include contract termination costs of $0.9 million, employee-related costs of $0.8 million, and asset-related costs of $0.1 million. For further details on the Transformation Initiative, refer to Note 14, "Restructuring" included in these condensed consolidated financial statements.
Research and Development Expenses
| For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ change | % change | 2023 | 2022 | $ change | % change | |||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except percentages) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Research and development | $ | 1,595 | $ | 1,823 | $ | (228) | (12.5) | % | $ | 3,054 | $ | 3,919 | $ | (865) | (22.1) | % | ||||||||||||||||||||||||||||||||||
Research and development expenses were $1.6 million for the three months ended June 30, 2023, as compared to $1.8 million for the three months ended June 30, 2022. The decrease of $0.2 million, or 12.5%, was primarily related to a decrease in research and development spend, as we realign resources to reflect the prioritization of higher-margin opportunities as part of our Transformation Initiative.
Research and development expenses were $3.1 million for the six months ended June 30, 2023, as compared to $3.9 million for the six months ended June 30, 2022. The decrease of $0.9 million, or 22.1%, was primarily related to a decrease in research and development spend, as we realign resources to reflect the prioritization of higher-margin opportunities as part of our Transformation Initiative.
Interest and Other Income (Expense), Net
| For the three months ended June 30, | For the six months ended June 30, | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ change | 2023 | 2022 | $ change | ||||||||||||||||||||||||||||||
| (In thousands, except percentages) | |||||||||||||||||||||||||||||||||||
| Interest income (expense), net | $ | (40) | $ | 160 | $ | (200) | $ | (227) | $ | 182 | $ | (409) | |||||||||||||||||||||||
| Other income (expense), net | 31 | 587 | (556) | 29 | 504 | (475) | |||||||||||||||||||||||||||||
| Interest and other income (expense), net | $ | (9) | $ | 747 | $ | (756) | $ | (198) | $ | 686 | $ | (884) | |||||||||||||||||||||||
Interest and other income (expense), net was net expense of $9.0 thousand for the three months ended June 30, 2023, as compared to net income of $0.7 million for the three months ended June 30, 2022. The decrease of $0.8 million was primarily due $0.7 million of other income related to the recognition of taxes and interest to be refunded from the Nevada Department of Taxation legal settlement during the three months ended June 30, 2022.
Interest and other income (expense), net was net expense of $0.2 million for the six months ended June 30, 2023, as compared to net income of $0.7 million for the six months ended June 30, 2022. The decrease of $0.9 million was primarily due to $0.7 million of other income related to the recognition of taxes and interest to be refunded from the Nevada Department of Taxation legal settlement during the six months ended June 30, 2022 and the write-off of unamortized debt issuance costs as we entered into the new 2023 Credit Facility.
30
Liquidity and Capital Resources
We have incurred net losses and net cash outflows from operating activities since our inception. As of June 30, 2023, we had $17.8 million of cash and cash equivalents. Although we are dependent on our ability to generate sufficient cash flow from operations or raise capital to achieve our business objectives, we believe our existing cash, cash equivalents, and short-term investments will be sufficient to meet our short-term projected operations for the next 12 months from the date of issuance of our unaudited consolidated financial statements and long-term working capital and capital expenditure needs, given our plan to generate positive cash flow from reducing our inventory, managing our working capital and achieving our Transformation Initiative. We also have availability under our 2023 Credit Facility which was not drawn as of June 30, 2023. Future capital requirements will depend on many factors, including our rate of revenue growth, gross margin and the level of expenditures in all areas of the Company. To the extent that existing capital resources and sales growth are not sufficient to fund future activities, we will need to raise capital through additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all. Failure to raise additional capital, if and when needed, could have a material adverse effect on our financial position, results of operations, and cash flows.
2023 Credit Facility
In January 2023, we entered into a first lien credit agreement (the “2023 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 2023 Credit Facility includes a subfacility that provides for the issuance of letters of credit in an amount of up to $15.0 million at any time outstanding. Availability of the 2023 Credit Facility is based upon a borrowing base formula and periodic borrowing base certifications valuing certain of our accounts receivable and inventory as reduced by an availability block and certain reserves. The 2023 Credit Facility includes an uncommitted accordion feature that allows for increases in the revolving commitment to as much as an additional $35.0 million, for up to $70.0 million in potential revolving commitment. The 2023 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 2023 Credit Facility. We recognize the commitment fee as incurred in interest and other income (expense), net in the condensed consolidated statements of comprehensive loss. For the three and six months ended June 30, 2023, the commitment fee incurred was immaterial. As of June 30, 2023, there were $3.9 million outstanding letters of credit and $19.3 million available to be drawn upon.
The interest rate applicable to the 2023 Credit Facility is, at our option, either (a) the Adjusted Term SOFR rate (subject to a 0.00% floor), plus a margin ranging from 1.50% to 2.25% or (b) the CB floating rate, (i) plus a margin of 0.25% or (ii) minus a margin ranging from 0.25% to 0.50%. The margin is based upon our fixed charge coverage ratio. The CB floating rate is the higher of (a) the Wall Street Journal prime rate and (b) 2.50%.
The 2023 Credit Facility will terminate and borrowings thereunder, if any, would be due in full on April 30, 2026. Debt under the 2023 Credit Facility is guaranteed by substantially all of our material domestic subsidiaries and is secured by substantially all of our and such subsidiaries’ assets.
The 2023 Credit Facility contains covenants that restrict, among other things, our ability to sell assets, make investments and acquisitions, grant liens, change our lines of business, pay dividends and make certain other restricted payments. We are subject to certain affirmative and negative covenants including the requirement that we maintain a minimum total fixed charge coverage ratio during the periods set forth in the 2023 Credit Facility. Failure to do so, unless waived by the lenders under the 2023 Credit Facility pursuant to its terms, as amended, would result in an event of default under the 2023 Credit Facility. As of June 30, 2023, we are in compliance with all covenants under the 2023 Credit Facility.
Refer to Note 6 "Credit Facilities" included in our condensed consolidated financial statements in Part I, Item 1 for more information on the 2023 Credit Facility.
Cash Flows
The following table summarizes our cash flows for the periods presented:
| For the six months ended June 30, | |||||||||||
| (In thousands) | 2023 | 2022 | |||||||||
| Net cash provided by (used in) operating activities | $ | 3,758 | $ | (25,402) | |||||||
| Net cash provided by investing activities | $ | 4,497 | $ | 14,920 | |||||||
| Net cash provided by financing activities | $ | 73 | $ | 39 | |||||||
31
Operating Activities
Our largest source of operating cash is from the sales of our products through Digital and Retail channels to our consumers and customers. Our primary uses of cash from operating activities are for cost of revenue expenses, selling, general and administrative expenses, marketing expenses and research and development expenses. We have generated negative cash flows from operating activities and have supplemented working capital requirements through net proceeds from the sale and maturity of short-term investments in the past.
Net cash provided by operating activities of $3.8 million for the six months ended June 30, 2023 was primarily due to net loss of $32.3 million, non-cash adjustments of $14.6 million and a net increase in cash related to changes in operating assets and liabilities of $21.4 million. Non-cash adjustments primarily consisted of stock-based compensation of $10.2 million, amortization of operating Right-of-Use ("ROU") assets of $3.1 million and depreciation and amortization of $1.3 million. Changes in cash flows related to operating assets and liabilities primarily consisted of cash provided by a $33.6 million decrease in inventory, a $7.4 million decrease in prepaid expenses and other assets and a $6.5 million decrease in accounts receivable due to improved collection efforts, offset by $23.1 million lower accounts payable and accrued expenses driven by lower inventory purchases in the six months ended June 30, 2023 due to our disciplined inventory management.
Net cash used in operating activities of $25.4 million for the six months ended June 30, 2022 was primarily due to net loss of $24.6 million, non-cash adjustments of $12.1 million and a net decrease in cash related to changes in operating assets and liabilities of $12.9 million. Non-cash adjustments primarily consisted of stock-based compensation of $7.5 million, amortization of operating ROU assets of $3.1 million and depreciation and amortization of $1.4 million. Changes in cash flows related to operating assets and liabilities primarily consisted of a $12.7 million increase in inventory to increase weeks of supply due to longer lead times and in advance of new distribution, a $5.3 million increase in accounts receivable due to timing of shipments to customers and receipt of payments and a $3.3 million use of cash due to operating lease obligations, offset by a $8.8 million increase in accounts payable due to higher inventory purchases and cost inflation, as well as the timing of payments in the six months ended June 30, 2022.
Investing Activities
Our primary source of investing cash is the sale and maturity of short-term investments and our primary use of investing cash is the purchase of short-term investments and property and equipment.
Net cash provided by investing activities of $4.5 million for the six months ended June 30, 2023 was primarily due to proceeds from maturities of short-term investments of $5.7 million, offset by purchases of property and equipment of $1.2 million.
Net cash provided by investing activities of $14.9 million for the six months ended June 30, 2022 was primarily due to purchases of short-term investments of $11.3 million, offset by maturities of short-term investments of $27.0 million.
Financing Activities
Our financing activities primarily consisted of proceeds from sales of securities, proceeds from stock option award exercises and principal payments of financing lease obligations.
Net cash provided by financing activities of $73 thousand for the six months ended June 30, 2023 consisted of proceeds from the 2021 Employee Stock Purchase Plan (“2021 ESPP”), partially offset by principal payments of financing lease obligations.
Net cash provided by financing activities of $39 thousand for the six months ended June 30, 2022 primarily consisted of proceeds from stock option exercises and the 2021 ESPP, partially offset by principal payments of financing lease obligations and taxes paid related to net share settlement of equity awards.
Dividends
We do not anticipate declaring or paying any cash dividends in the foreseeable future. Any future determination regarding the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions (including any restrictions in our then-existing debt arrangements), capital requirements, business prospects and other factors our board of directors may deem relevant. The 2023 Credit Facility contains restrictions on our ability to pay dividends.
32
Non-GAAP Financial Measure
We prepare and present our condensed consolidated financial statements in accordance with GAAP. However, management believes that adjusted EBITDA, a non-GAAP financial measure, provides investors with additional useful information in evaluating our performance.
We calculate adjusted EBITDA as net income (loss), adjusted to exclude: (1) interest and other (income) expense, net; (2) income tax provision; (3) depreciation and amortization; (4) stock-based compensation expense, including payroll tax; (5) litigation and settlement fees associated with certain non-ordinary course securities litigation claims; (6) CEO transition expenses and (7) restructuring expenses in connection with the Transformation Initiative.
Adjusted EBITDA is a financial measure that is not required by, or presented in accordance with GAAP. We believe that adjusted EBITDA, when taken together with our financial results presented in accordance with GAAP, provides meaningful supplemental information regarding our operating performance and facilitates internal comparisons of our historical operating performance on a more consistent basis by excluding certain items that may not be indicative of our business, results of operations or outlook. In particular, we believe that the use of adjusted EBITDA is helpful to our investors as it is a measure used by management in assessing the health of our business, determining incentive compensation and evaluating our operating performance, as well as for internal planning and forecasting purposes.
Adjusted EBITDA is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. Some of the limitations of adjusted EBITDA include that (1) it does not reflect capital commitments to be paid in the future; (2) although depreciation and amortization are non-cash charges, the underlying assets may need to be replaced and adjusted EBITDA does not reflect these capital expenditures; (3) it does not consider the impact of stock-based compensation expense; (4) it does not reflect other non-operating expenses, including interest expense; (5) it does not reflect tax payments that may represent a reduction in cash available to us; and (6) does not include certain non-ordinary cash expenses that we do not believe are representative of our business on a steady-state basis, such as CEO transition expenses and restructuring expenses in connection with the Transformation Initiative. In addition, our use of adjusted EBITDA may not be comparable to similarly titled measures of other companies because they may not calculate adjusted EBITDA in the same manner, limiting its usefulness as a comparative measure. Because of these limitations, when evaluating our performance, you should consider adjusted EBITDA alongside other financial measures, including our net income (loss), revenue and other results stated in accordance with GAAP.
The following table presents a reconciliation of net income (loss), the most directly comparable financial measure stated in accordance with GAAP, to adjusted EBITDA, for each of the periods presented:
For the three months ended June 30, | For the six months ended June 30, | ||||||||||||||||||||||
| (In thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Reconciliation of Net Loss to Adjusted EBITDA | |||||||||||||||||||||||
| Net loss | $ | (13,416) | $ | (10,012) | $ | (32,282) | $ | (24,639) | |||||||||||||||
| Interest and other (income) expense, net | 9 | (747) | 198 | (686) | |||||||||||||||||||
| Income tax provision | 20 | 20 | 40 | 40 | |||||||||||||||||||
| Depreciation and amortization | 672 | 666 | 1,340 | 1,386 | |||||||||||||||||||
Stock-based compensation(1) | 6,413 | 3,912 | 10,185 | 7,460 | |||||||||||||||||||
| Securities litigation expense | 1,773 | 783 | 2,951 | 995 | |||||||||||||||||||
CEO transition expense(2) | — | — | 1,277 | — | |||||||||||||||||||
Restructuring costs(3) | 397 | — | 1,747 | — | |||||||||||||||||||
| Payroll tax expense related to stock-based compensation | 33 | 53 | 112 | 66 | |||||||||||||||||||
| Adjusted EBITDA | $ | (4,099) | $ | (5,325) | $ | (14,432) | $ | (15,378) | |||||||||||||||
__________________
(1) Includes $2.6 million of accelerated equity awards related to prior separation agreement with our former CEO in the second quarter of 2023.
(2) Includes sign-on bonus, relocation, legal and severance costs.
(3) See Note 14 “Restructuring” in our unaudited condensed consolidated financial statements for items included in restructuring expense.
33
Material Cash Requirements
As of June 30, 2023, there were no changes to our material cash requirements from those described under “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report, apart from the material cash outlay of $4.0 million to $5.0 million expected in 2023 as part of our Transformation Initiative.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q are prepared in accordance with GAAP. The preparation of condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from our estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.
Our critical accounting estimates are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report and the notes to the audited consolidated financial statements appearing in our Annual Report. During the three and six months ended June 30, 2023, there were no material changes to our critical accounting estimates from those discussed in our Annual Report. Refer to Note 2,
"Summary of Significant Accounting Policies" to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a discussion of the adoption of Accounting Standard Codification 326 and related policy changes.
Recent Accounting Pronouncements
Refer to Note 2, "Summary of Significant Accounting Policies" to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a discussion of recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted, as applicable.
Emerging Growth Company Status
In April 2012, the JOBS Act was enacted. Section 107(b) of the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the extended transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of the accounting standards election, we are not subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies which may make comparison of our financials to those of other public companies more difficult.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Under SEC rules and regulations, as a smaller reporting company, we are not required to provide the information required by this item.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Our management, with the participation of our principal executive officer and principal financial officer, evaluated, as of the period ended June 30, 2023, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.
Changes in Internal Control over Financial Reporting
There was no change in the Company's internal control over financial reporting that occurred during the quarter ended June 30, 2023 that has materially affected, or is reasonably likely to materially affect the Company's internal control over financial reporting.
34
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. Our management, including our principal executive officer and principal financial officer, believe that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud.
35
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
The information contained under the heading “Litigation” in Note 8 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q is incorporated by reference into this Item.
Item 1A. Risk Factors.
RISK FACTOR SUMMARY
Our business is subject to numerous risks. The following summary highlights some of the risks you should consider with respect to our business and prospects. You should carefully consider the risks and uncertainties described in our Annual Report, together with all of the other information in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes as disclosed in our Annual Report. The risks and uncertainties described in our Annual Report and in this Quarterly Report on Form 10-Q are not the only ones we face. Additional risk and uncertainties that we are unaware of or that we deem immaterial may also become important factors that adversely affect our business. The realization of any of these risks and uncertainties could have a material adverse effect on our reputation, business, financial condition, results of operations, growth and future prospects as well as our ability to accomplish our strategic objectives. In that event, the market price of our common stock could decline and you could lose part or all of your investment.
Investing in our common stock involves substantial risks. Some of the more significant risks include the following:
•We have incurred net losses each year since our inception and we may not be able to achieve or maintain profitability in the future.
•Our growth may not be indicative of our future growth and we may not be able to effectively manage our growth or evaluate our future prospects. If we fail to effectively manage our future growth or evaluate our future prospects, our business could be adversely affected.
•Our quarterly operating results may fluctuate, which could cause our stock price to decline.
•Economic conditions, including a potential recession and inflationary pressures such as price increases in commodity prices, labor costs, input costs and transportation costs and their impact on consumer spending and our operating results.
•Our strategic initiatives to reduce our costs could have long-term adverse effects on our business, financial condition, results of operations and prospects, could result in total costs and expenses that are greater than expected, and we may not realize the anticipated operational or financial benefits from such actions.
•Consolidation of retail customers, the loss of a significant retail or third-party ecommerce customer or a significant change in such customers' historical purchasing patterns could negatively impact our sales and ability to achieve or maintain profitability.
•Our business, including our costs and supply chain, is subject to risks associated with sourcing, manufacturing, warehousing and logistics, and the loss of any of our key suppliers or logistical service providers could negatively impact our business.
•We may not be able to compete successfully in our highly competitive market.
•Our cash, cash equivalents and short-term investments may not meet our liquidity needs.
•If we fail to cost-effectively acquire new consumers or retain our existing consumers, our business could be adversely affected. Our sales and profit are dependent upon our ability to expand our existing consumer relationships and acquire new consumers.
•We must expend resources to maintain consumer awareness of our brand, build brand loyalty and generate interest in our products. Our marketing strategies and channels will evolve and our efforts may or may not be successful.
•Increasing scrutiny and evolving expectations from stakeholders with respect to our environmental, social and governance (ESG) practices, performance and disclosures.
•Our brand and reputation may be diminished due to real or perceived quality, safety, efficacy or environmental impact issues with our products, which could have an adverse effect on our business, financial condition, results of operations and prospects.
•Our ability to maintain our competitive position is largely dependent on the services of our senior management and other key personnel, including our founder and Chief Creative Officer, Jessica Warren and our Chief Executive Officer, Carla Vernón.
•A disruption in our operations could have an adverse effect on our business.
•Pandemics or disease outbreaks, such as the continuing effects of the COVID-19 pandemic and overall macroeconomic trends have had and may continue to have an adverse effect on our business, financial condition, results of operations and prospects.
•Adverse developments affecting the financial services industry, such as actual events or concerns involving liquidity, defaults or non-performance by financial institutions could adversely affect our current financial condition and projected business operations.
•We rely on third-party suppliers, manufacturers, retail and ecommerce customers and other vendors, and they may not continue to produce products or provide services that are consistent with our standards or applicable regulatory requirements, which could harm our brand, cause consumer dissatisfaction, and require us to find alternative suppliers of our products or services.
•Health and safety incidents or advertising inaccuracies or product mislabeling may have an adverse effect on our business by exposing us to lawsuits, product recalls or regulatory enforcement actions, increasing our operating costs and reducing demand for our product offerings.
•International trade disputes and the U.S. government’s trade policy could adversely affect our business.
36
•Our business may be adversely affected if we are unable to provide our consumers with a technology platform that is able to respond and adapt to rapid changes in technology.
RISK FACTORS
Other than the risk factors set forth below, there have been no material changes to the risk factors set forth in the section titled “Risk Factors” included in our Annual Report.
Our strategic initiatives to reduce our costs could have long-term adverse effects on our business, financial condition, results of operations and prospects, could result in total costs and expenses that are greater than expected, and we may not realize the operational or financial benefits from such actions.
In the first quarter of 2023, we began executing a broad-based Transformation Initiative designed to build the Honest brand and drive growth in higher-margin areas of the portfolio, strengthen our cost structure, drive focus on the most productive areas of our business, deliver greater impact from brand-building investments, and improve executional excellence across the enterprise. This Transformation Initiative and the timing and success of such efforts are subject to many risks and uncertainties, including, without limitation, our ability to reduce costs and achieve positive gross margins; meet certain revenue and operating expense targets; and monetize inventory and manage working capital. We may not be successful in implementing these initiatives or realizing our anticipated savings and efficiencies, including as a result of factors beyond our control. In addition, any changes we make to reduce our cost structure, including changes to our products, formulations, or packaging, may result in reduced consumer demand for our products and increased carrying costs. Our future financial performance will depend, in part, on our ability to effectively manage any future growth or restructuring, as applicable. We may not realize, in full or in part, the anticipated benefits, savings and improvements in our cost structure from the Transformation Initiative due to unforeseen difficulties, delays or unexpected costs. If we are unable to realize the anticipated savings and efficiencies of our strategic initiatives, or if they result in unintended consequences, then our operating and financial results would be adversely affected and could differ materially from our expectations.
Additionally, the Transformation Initiative has resulted in the loss of institutional knowledge and expertise, as well as the reallocation and combination of certain roles and responsibilities across the Company, all of which could adversely affect our operations. These effects could have a material adverse effect on our ability to execute on our updated business model. There can be no assurance that we will be successful in implementing the Transformation Initiative. The Transformation Initiative may also be disruptive to our operations. For example, our headcount reductions could yield unanticipated consequences, such as increased difficulties in implementing our business strategy, including retention of our remaining employees, adverse effects on employee morale, diversion of management attention, and adverse effects on our reputation as an employer. Future growth would impose significant added responsibilities on members of management, including the need to identify, recruit, maintain and integrate additional employees. Due to our limited resources, we may not be able to effectively manage our operations or recruit and retain qualified personnel, which may result in weaknesses in our infrastructure and operations, risks that we may not be able to comply with legal and regulatory requirements, and loss of employees and reduced productivity among remaining employees.
We have a history of net losses and we may not be able to achieve or maintain profitability in the future.
We have incurred net losses each year since our inception and we may not be able to achieve or maintain profitability in the future. Our expenses will likely increase as a result of implementing the Transformation Initiative. Even as we try to manage our expenses and implement the Transformation Initiative, these efforts may be more costly than we expect and may not result in increased revenue or growth or margin improvements in our business. Any failure to increase our revenue sufficiently to keep pace with our investments and other expenses could prevent us from achieving or maintaining profitability or positive cash flow on a consistent basis. If we are unable to successfully address these risks and challenges as we encounter them, our business, financial condition, results of operations and prospects could be adversely affected. If we are unable to generate adequate revenue growth and manage our expenses, we are likely to continue to incur significant losses and may not be able to achieve or maintain profitability.
If we cannot successfully execute changes in our international strategy, we may not be successful in managing our operations outside the United States.
We currently sell products through retailers in Canada, Asia, the United Kingdom and certain countries in the European Union. We announced that we plan to focus on our North American customers and are actively reducing the portfolio of products we will offer for sale in certain regions such as Europe and Asia. Refer to Note 15, “Subsequent Events,” included in our condensed consolidated financial statements included in Part I, Item 1 for an update on our international contract terminated as part of our plan to exit low-margin business in Asia. If we cannot successfully execute this change in our international strategy, this strategy may negatively impact our operations internationally, including our relationships with international customers and brand resonance with international consumers, which could have a material adverse effect on our reputation, business, financial condition, results of operations, growth and future prospects as well as our ability to accomplish our strategic objectives.
37
We may be unable to accurately forecast revenue, gross margin or operating expenses and appropriately plan our expenses in the future.
Revenue and results of operations are difficult to forecast because they generally depend on the volume, timing and type of orders we receive across our various channels, all of which are uncertain. Forecasts have been and may continue to be particularly challenging in the current macroeconomic environment, in particular as we implement margin-enhancing and cost-cutting programs. We base our expense levels and investment plans on our estimates of revenue and gross margin. We cannot be sure prior growth rates and trends are meaningful predictors of future growth. For example, in the third quarter of 2022, some of our digital and retail customers began to reduce inventory on hand and have changed fulfillment schedules, which has negatively impacted our fulfillment operations and our revenue and is expected to continue to do so in the future. If our assumptions prove to be wrong, we may generate lower revenue or gross margin than anticipated or may spend more than we anticipate acquiring and retaining consumers either of which could have an adverse effect on our business, financial condition, results of operations and prospects.
Our ability to maintain our competitive position is largely dependent on the services of our senior management and other key personnel, including our founder and Chief Creative Officer, Jessica Warren, and our Chief Executive Officer, Carla Vernón.
Our ability to maintain our competitive position is largely dependent on the services of our senior management and other key personnel, including our founder and Chief Creative Officer, Jessica Warren, and our Chief Executive Officer, Carla Vernón. The loss of the services of either of these persons could have an adverse effect on our business, financial condition, results of operations and prospects.
Jessica Warren is a globally recognized Latina business leader, entrepreneur, advocate, actress, and New York Times bestselling author. We believe that the success of our brand depends in part on our ongoing affiliation with Jessica Warren. We have an agreement with Jessica Warren, or the Likeness Agreement, which, among other things, includes a license for her likeness and imposes various obligations on us. Ms. Warren has the right to terminate the Likeness Agreement at any time upon prior written notice, and the Likeness Agreement will immediately terminate in the event we become insolvent. Upon termination of the Likeness Agreement, we could, among other things, be required to pay damages to Ms. Warren, lose our ability to associate the brand with Ms. Warren, including the ability to sell existing inventory using the licensed intellectual property, and sustain reputational damage. We are currently renegotiating the Likeness Agreement with Ms. Warren. The termination of the Likeness Agreement or other new terms negotiated upon renegotiation of the Likeness Agreement could result in a reduction of our operating margins and cash flow from operations or otherwise adversely affect our business. Additionally, the loss of our ability to use Ms. Warren’s likeness could result in marketplace confusion, loss of goodwill and/or similar negative consequences. We depend on Ms. Warren’s social media reach and influence to connect with consumers and provide insight on current trends. If Ms. Warren objects to a proposed use of the licensed property, we may be prevented from implementing our business plan in a timely manner, or at all, outside of previously approved usages or usages consistent with certain pre-approved product guidelines. The loss of the services of Ms. Warren, or the loss of our ability to use Ms. Warren’s likeness, could have an adverse effect on our business, financial condition, results of operations and prospects.
Our brand may also depend on the positive image and public popularity of Ms. Warren to maintain and increase brand recognition. Ms. Warren’s social media presence and approximately 48 million followers as of July 2023 across all of her social media channels combined represent a large social following and potential audience for our social media reach. Consumers may be drawn to our products because of her involvement with us. If Ms. Warren’s image, reputation or popularity is materially and adversely affected, this could negatively affect the marketability and sales of our products and could have an adverse effect on our business, financial condition, results of operations and prospects.
In addition, our future success depends on our continued ability to attract, develop, motivate and retain highly qualified and skilled employees, including Carla Vernón, who became our new Chief Executive Officer effective January 9, 2023. The market for such positions is competitive. Qualified individuals, like Ms. Vernón with her extensive experience in CPG and with founder-built businesses, are in high demand and we may incur significant costs to attract them. In addition, the loss of any of our senior management or other key employees or our inability to recruit and develop mid-level managers could adversely affect our ability to execute our business plan and we may be unable to find adequate replacements. All of our employees are at-will employees, meaning that they may terminate their employment relationship with us at any time, and their knowledge of our business and industry would be extremely difficult to replace. If we fail to retain talented senior management and other key personnel, or if we do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our business, financial condition, results of operations and prospects could be adversely affected.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
38
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
39
Item 6. Exhibits.
EXHIBIT INDEX
| Exhibit Number | Exhibit Description | |||||||
Amended and Restated Articles of Incorporation, as currently in effect (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-40378), filed with the SEC on May 11, 2021). | ||||||||
Amended and Restated Bylaws, as currently in effect (incorporated herein by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K (File No. 001-40378), filed with the SEC on March 16, 2023). | ||||||||
| Amendment Twenty-Five to the Logistics Services Agreement, dated as of June 30, 2023 by and between the Company and Geodis Logistics, LLC | ||||||||
| Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||||||||
| Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||||||||
32.1* | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||||||
32.2* | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||||||
101.INS 101.SCH 101.CAL | Inline XBRL Instance Document Inline XBRL Taxonomy Extension Schema Document Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
101.LAB 101.PRE 101.DEF | Inline XBRL Taxonomy Extension Label Linkbase Document Inline XBRL Taxonomy Extension Presentation Linkbase Document Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | |||||||
* Furnished herewith and not deemed to be “filed” for purposes of Section 18 of the Exchange Act, and shall not be deemed to be incorporated by reference into any filing under the Securities Act, or the Exchange Act (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.
40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| The Honest Company, Inc. | ||||||||
Date: August 8, 2023 | By: | /s/ Carla Vernón | ||||||
Carla Vernón Chief Executive Officer and Director | ||||||||
| (Principal Executive Officer) | ||||||||
Date: August 8, 2023 | By: | /s/ Kelly J. Kennedy | ||||||
Kelly J. Kennedy Executive Vice President, Chief Financial Officer | ||||||||
| (Principal Financial Officer and Accounting Officer) | ||||||||
41
Exhibit 10.1
AMENDMENT TWENTY–FIVE
TO THE LOGISTICS SERVICES AGREEMENT
This AMENDMENT TWENTY–FIVE TO THE LOGISTICS SERVICES
AGREEMENT (the “Amendment”) is entered into as of June 30, 2023 (the “Amendment Date”), by and between The Honest Company, Inc. (“CLIENT”) and GEODIS Logistics LLC (“GEODIS,” collectively referred to as the “Parties,” and each a “Party”).
RECITALS:
A.The Parties entered into that certain Logistics Services Agreement dated January 27, 2014, as amended from time-to-time (the “Agreement”);
B.Pursuant to the Agreement, GEODIS provides logistics and warehousing services for CLIENT at the facility located at 5550 Donovan Way, Las Vegas, NV 89081(the “Las Vegas Facility”) and the facility located at 651 Boulder Drive, Breinigsville, PA 18031 (the “PA Facility”); and
C.The Parties desire to amend Agreement as set forth herein.
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree to amend the Agreement as follows:
1.Effective April 1, 2023, Section 3 – Warehouse Cost of Amendment Thirteen is hereby deleted in its entirety and replaced with the following:
Warehouse Cost. GEODIS will charge CLIENT $1.017 per square foot (the “Baseline Cost”) for space utilized for the PA Services in the PA Facility. CLIENT will be charged for 350,000 square feet unless CLIENT elects to reduce its space commitment in accordance with Section 4 of this Amendment. To the extent possible, GEODIS shall use commercially reasonable efforts to utilize such space in an efficient manner that minimizes costs to CLIENT (e.g. including by double stacking to the extent reasonable).
2.Any capitalized terms not defined herein shall have the meanings set forth in the Agreement, as amended. Except as provided herein, the Agreement shall remain unchanged and in full force and effect in accordance with its terms. It is specifically understood and agreed that the foregoing shall not be deemed to be a waiver or amendment of any other provision of the Agreement or either Party’s rights or remedies under the Agreement.
IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed by their duly authorized representatives as of the Amendment Date set forth above.
THE HONEST COMPANY, INC. | GEODIS LOGISTICS LLC | |||||||
By: /s/ Kelly Kennedy | By: /s/ Anthony Jordan | |||||||
| Name: Kelly Kennedy | Name: Anthony Jordan | |||||||
| Title: Chief Financial Officer | Title: Chief Operating Officer | |||||||
| Date: 7/5/2023 | Date: 6/30/2023 | |||||||
Exhibit 31.1
CERTIFICATION
I, Carla Vernón, certify that:
1.I have reviewed this Form 10-Q of The Honest Company, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 8, 2023 | By: | /s/ Carla Vernón | ||||||
| Carla Vernón | ||||||||
| Chief Executive Officer and Director | ||||||||
| (Principal Executive Officer) | ||||||||
Exhibit 31.2
CERTIFICATION
I, Kelly J. Kennedy, certify that:
1.I have reviewed this Form 10-Q of The Honest Company, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 8, 2023 | By: | /s/ Kelly J. Kennedy | ||||||
Kelly J. Kennedy Executive Vice President, Chief Financial Officer | ||||||||
(Principal Financial Officer and Accounting Officer) | ||||||||
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of The Honest Company, Inc. (the “Company”) for the period ended June 30, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Carla Vernón, Chief Executive Officer of the Company, certify, pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) and 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 8, 2023 | By: | /s/ Carla Vernón | ||||||
| Carla Vernón | ||||||||
| Chief Executive Officer and Director | ||||||||
| (Principal Executive Officer) | ||||||||
This certification shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of Section 18 of the Exchange Act. Such certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of The Honest Company, Inc. (the “Company”) for the period ended June 30, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kelly J. Kennedy, Chief Financial Officer of the Company, certify, pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) and 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 8, 2023 | By: | /s/ Kelly J. Kennedy | ||||||
Kelly J. Kennedy Executive Vice President, Chief Financial Officer | ||||||||
| (Principal Financial Officer and Accounting Officer) | ||||||||
This certification shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of Section 18 of the Exchange Act. Such certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.