hnst-20230930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023


☐			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

The Honest Company, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware

90-0750205

(State or Other Jurisdiction of

(I.R.S. Employer

Incorporation or Organization)

Identification No.)

12130 Millennium Drive, #500

Los Angeles, CA

90094

(Address of Principal Executive Offices)

(Zip Code)

(888) 862-8818

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Securities Registered Pursuant to Section 12(b) of the Act:

Trading

Symbol(s)

Title of each class

Name of each exchange on which registered

Common Stock, $0.0001 par value per share

HNST

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒
Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of November 3, 2023, the registrant had 95,469,322 shares of common stock, $0.0001 par value per share outstanding.

The Honest Company, Inc.

Table of Contents


		Page
PART I.	FINANCIAL INFORMATION	3
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Comprehensive Loss	4
	Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit )	5
	Condensed Consolidated Statements of Cash Flows	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35
PART II.	OTHER INFORMATION	36
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3.	Defaults Under Senior Securities	39
Item 4.	Mine Safety Disclosures	40
Item 5.	Other Information	40
Item 6.	Exhibits	41
	Signatures	42

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 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 and gross margin improvement;

•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;

•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.

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements.

The Honest Company, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except share and per share amounts)


	September 30, 2023		December 31, 2022

Assets
Current assets
Cash and cash equivalents	$	23,103	$	9,517
Short-term investments	—		5,650
Accounts receivable, net	38,203		42,334
Inventories	79,507		115,664
Prepaid expenses and other current assets	8,770		15,982
Total current assets	149,583		189,147
Operating lease right-of-use asset	25,266		29,947
Property and equipment, net	13,883		14,327
Goodwill	2,230		2,230
Intangible assets, net	327		370
Other assets	4,249		4,578
Total assets	$	195,538	$	240,599
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	18,491	$	24,755
Accrued expenses	31,164		38,010
Deferred revenue	1,861		815
Total current liabilities	51,516		63,580
Long term liabilities
Operating lease liabilities, net of current portion	23,791		29,842
Other long-term liabilities	222		817
Total liabilities	75,529		94,239
Commitments and contingencies (Note 8)

Stockholders’ equity
Preferred stock, $0.0001 par value, 20,000,000 shares authorized at September 30, 2023 and December 31, 2022, none issued or outstanding as of September 30, 2023 and December 31, 2022	—		—
Common stock, $0.0001 par value, 1,000,000,000 and 150,000,000 shares authorized at September 30, 2023 and December 31, 2022, respectively; 95,562,477 and 92,907,351 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively	9		9
Additional paid-in capital	600,211		586,213
Accumulated deficit	(480,211)		(439,830)
Accumulated other comprehensive loss	—		(32)
Total stockholders’ equity	120,009		146,360
Total liabilities and stockholders’ equity	$	195,538	$	240,599

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

The Honest Company, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(in thousands, except share and per share amounts)


	For the three months ended September 30,				For the nine months ended September 30,
	2023		2022		2023		2022

Revenue	$	86,169	$	84,580	$	254,101	$	231,792
Cost of revenue	58,964		58,963		183,796		161,984
Gross profit	27,205		25,617		70,305		69,808
Operating expenses
Selling, general and administrative	24,146		23,491		74,995		63,068
Marketing	9,110		12,140		28,605		38,121
Restructuring	357		—		2,104		—
Research and development	1,584		1,725		4,638		5,643
Total operating expenses	35,197		37,356		110,342		106,832
Operating loss	(7,992)		(11,739)		(40,037)		(37,024)
Interest and other income (expense), net	(71)		(29)		(269)		657
Loss before provision for income taxes	(8,063)		(11,768)		(40,306)		(36,367)
Income tax provision	35		20		75		60
Net loss	$	(8,098)	$	(11,788)	$	(40,381)	$	(36,427)
Net loss per share attributable to common stockholders:
Basic and diluted	$	(0.09)	$	(0.13)	$	(0.43)	$	(0.40)

Weighted-average shares used in computing net loss per share attributable to common stockholders:
Basic and diluted	95,179,604		92,460,987		94,137,244		92,020,423


Other comprehensive income (loss)
Unrealized gain (loss) on short-term investments, net of taxes	—		37		33		(42)
Comprehensive loss	$	(8,098)	$	(11,751)	$	(40,348)	$	(36,469)

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

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	—	$	—	91,512,140	$	9	$	570,794	$	(391,656)	$	(41)	$	179,106
Net loss	—	—		—	—		—		(14,626)		—		(14,626)
Other comprehensive loss	—	—		—	—		—		—		(77)		(77)
Stock options exercised	—	—		21,556	—		113		—		—		113
Stock-based compensation	—	—		—	—		3,548		—		—		3,548
Vested restricted stock units	—	—		42,125	—		—		—		—		—
Common stock withheld for tax obligation and net settlement	—	—		(3,611)	—		(20)		—		—		(20)
ASC 842 transition effect	—	—		—	—		—		845		—		845
Balances at March 31, 2022	—	$	—	91,572,210	$	9	$	574,435	$	(405,437)	$	(118)	$	168,889
Net loss	—	—		—	—		—		(10,012)		—		(10,012)
Other comprehensive loss	—	—		—	—		—		—		(2)		(2)
Stock options exercised	—	—		22,000	—		9		—		—		9
Stock-based compensation	—	—		—	—		3,912		—		—		3,912
Vested restricted stock	—	—		761,394	—		—		—		—		—
Shares issued under employee stock purchase plan	—	—		58,111	—		157		—		—		157
Common stock withheld for tax obligation and net settlement	—	—		(4,439)	—		(17)		—		—		(17)
Balances at June 30, 2022	—	$	—	92,409,276	$	9	$	578,496	$	(415,449)	$	(120)	$	162,936
Net loss	—	—		—	—		—		(11,788)		—		(11,788)
Other comprehensive income (loss)	—	—		—	—		—		—		37		37
Stock-based compensation	—	—		—	—		3,900		—		—		3,900
Vested restricted stock	—	—		180,951	—		—		—		—		—
Balance at September 30, 2022	—	$	—	92,590,227	$	9	$	582,396	$	(427,237)	$	(83)	$	155,085

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	—	$	—	92,907,351	$	9	$	586,213	$	(439,830)	$	(32)	$	146,360
Net loss	—	—		—	—		—		(18,867)		—		(18,867)
Other comprehensive loss	—	—		—	—		—		—		19		19

Stock-based compensation	—	—		—	—		3,772		—		—		3,772
Vested restricted stock units	—	—		549,484	—		—		—		—		—


Balances at March 31, 2023	—	$	—	93,456,835	$	9	$	589,985	$	(458,697)	$	(13)	$	131,284
Net loss	—	—		—	—		—		(13,416)		—		(13,416)
Other comprehensive loss	—	—		—	—		—		—		13		13
Stock options exercised	—	—		2,300	—		4		—		—		4
Stock-based compensation	—	—		—	—		6,413		—		—		6,413
Vested restricted stock	—	—		1,532,507	—		—		—		—		—
Shares issued under employee stock purchase plan	—	—		68,884	—		102		—		—		102
Balances at June 30, 2023	—	$	—	95,060,526	$	9	$	596,504	$	(472,113)	$	—	$	124,400
Net loss	—	—		—	—		—		(8,098)		—		(8,098)


Stock-based compensation	—	—		—	—		3,707		—		—		3,707
Vested restricted stock	—	—		501,951	—		—		—		—		—
Balance at September 30, 2023	—	$	—	95,562,477	$	9	$	600,211	$	(480,211)	$	—	$	120,009

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

The Honest Company, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)


	For the nine months ended September 30,
	2023		2022
Cash flows from operating activities
Net loss	$	(40,381)	$	(36,427)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	2,021		2,025
Stock-based compensation	13,892		11,360

Other	4,680		4,805
Changes in assets and liabilities:
Accounts receivable, net	4,132		(7,087)
Inventories	36,158		(24,609)
Prepaid expenses and other assets	7,498		(3,228)
Accounts payable, accrued expenses and other long-term liabilities	(13,875)		7,604
Deferred revenue	1,046		49
Operating lease liabilities	(5,740)		(5,161)
Net cash provided by (used in) operating activities	9,431		(50,669)
Cash flows from investing activities
Purchases of short-term investments	—		(12,782)

Proceeds from maturities of short-term investments	5,683		38,219
Purchases of property and equipment	(1,588)		(1,433)
Net cash provided by investing activities	4,095		24,004
Cash flows from financing activities
Taxes paid related to net share settlement of equity awards	—		(37)
Proceeds from exercise of stock options	4		122
Proceeds from 2021 ESPP	102		157
Payments on finance lease liabilities	(46)		(281)
Net cash provided by (used in) financing activities	60		(39)
Net increase (decrease) in cash and cash equivalents	13,586		(26,704)
Cash and cash equivalents
Beginning of the period	9,517		50,791
End of the period	$	23,103	$	24,087











Supplemental disclosures of noncash activities


Capital expenditures included in accounts payable and accrued expenses	$	25	$	92

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

The Honest Company, Inc.

Notes to Condensed Consolidated Financial Statements

As of September 30, 2023

(in thousands, except share and per share amounts, percentages and as otherwise indicated)

(Unaudited)

1. Nature of Business

The Honest Company, Inc. (the “Company”) was incorporated in the State of California on July 19, 2011 and on May 23, 2012 was re-incorporated in the State of Delaware under the same name. The Company is a digitally-native consumer products company dedicated to creating clean- and sustainably-designed products spanning baby care, beauty, personal care, wellness and household care. The Company sells its products through digital and retail sales channels in the following product categories: Diapers and Wipes, Skin and Personal Care, and Household and Wellness.

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.

The condensed consolidated financial statements include the accounts of the Company, and its wholly owned subsidiaries after elimination of intercompany transactions and balances.

Restructuring

The Company incurs restructuring costs in connection with the exiting of certain products and geographical locations, workforce reductions, and other actions. Such costs include employee termination benefits (one-time arrangements), termination of contractual obligations, non-cash asset charges, including asset impairments, and other direct incremental costs. The Company records employee termination liabilities once they are both probable and estimable for severance provided under the Company’s existing severance policy. Other costs associated with a restructuring initiative, such as consulting and professional fees, product or geographical exit costs, accelerated amortization associated with a restructuring initiative, are recognized in the period in which the liability is incurred. Accrued restructuring costs are recorded within Accrued Expenses in the condensed consolidated balance sheets. Refer to Note 14, "Restructuring" included in these condensed consolidated financial statements for more information on the Company's restructuring initiatives.

Segment Reporting and Geographic Information

The Company’s Chief Executive Officer, as the chief operating decision maker, organizes the Company, manages resource allocations, and measures performance on the basis of one operating segment. All of the Company’s long-lived assets are located in the United States and substantially all of the Company’s revenue is from customers located in the United States.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and contingent liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s estimates, which are subject to varying degrees of judgment, include the valuation of inventories, sales returns and allowances, allowances for 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.

The Company assessed certain accounting matters and estimates that generally require consideration of forecasted information in context with the information reasonably available to the Company as of September 30, 2023 and through the date these condensed consolidated financial statements were issued. Management is not aware of any specific event or circumstance that would require an update to estimates or judgments or a revision to the carrying value of assets or liabilities. However, these estimates and judgments may change as new events occur and additional information is obtained, which may result in changes being recognized in the Company’s consolidated financial statements in future periods. For example, based on macro trends within our Household and Wellness product category, consumer demand for sanitizing and disinfecting products decreased over the past few years. As a result, the Company made a decision to exit certain elements of these products during the quarter ended March 31, 2023. Refer to Note 14, "Restructuring" included in these condensed consolidated financial statements for more information on the Company's restructuring initiatives.

Cash and Cash Equivalents

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

Accounts Receivable

Accounts receivable is presented as net of allowance for credit losses. The Company does not accrue interest on its trade receivables. On a periodic basis, the Company evaluates accounts receivable estimated to be uncollectible, and provides an allowance for credit losses, as necessary. The Company considers factors in its allowance for accounts receivable such as historical analysis, credit quality of customers, the age of the accounts receivable balances and current macroeconomic conditions that may impact on our customer's ability to pay. The allowance for credit losses was $0.9 million and $0.5 million as of September 30, 2023 and December 31, 2022, respectively.

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 beginning after December 15, 2019 and all other entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Effective January 1, 2023, the Company adopted this standard, which did not have a material impact on the Company’s consolidated financial statements.

3.Revenue

Disaggregation of Revenue


Revenue by sales channel:	For the three months ended September 30,				For the nine months ended September 30,
	2023		2022		2023		2022
(In thousands)
Digital	$	40,103	$	33,782	$	123,648	$	105,913
Retail	46,066		50,798		130,453		125,879
Total revenue	$	86,169	$	84,580	$	254,101	$	231,792


Revenue by product category:	For the three months ended September 30,				For the nine months ended September 30,
	2023		2022		2023		2022
(In thousands)
Diapers and Wipes	$	52,584	$	55,222	$	160,917	$	150,411
Skin and Personal Care	21,221		21,992		66,748		66,534
Household and Wellness	12,364		7,366		26,436		14,847
Total revenue	$	86,169	$	84,580	$	254,101	$	231,792

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 upon delivery of goods, 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 nine months ended September 30, 2023, the Company did not enter into any new trade agreements.

For the three and nine months ended September 30, 2023, the Company did not recognize any revenue or associated cost of revenue related to these marketing and transportation credits. For the three and nine months ended September 30, 2022, the Company recognized $1.6 million and $2.9 million, respectively, of revenue and $0.8 million and $1.6 million, respectively, of associated cost of revenue based on the timing of delivery of goods, related to these marketing and transportation credits. The Company assesses the recoverability of the marketing and transportation credits periodically. Factors considered in evaluating the recoverability include management’s history of credit usage and future plans with respect to advertising, freight and other services for which these credits can be used. Any impairment losses are charged to operations as they become determinable. During the nine months ended September 30, 2023, the Company recorded no impairment losses related to these credits and used an aggregate of $0.2 million of credits.

4. Investments

As of September 30, 2023, the Company did not hold any investments in debt securities. As of December 31, 2022, all investments in debt securities were classified as available-for-sale investments. All investments were reported within current assets because the securities represent investments of cash available for current operations. As of December 31, 2022, the Company held $5.7 million of investments with contractual maturities of less than one year. As of December 31, 2022, the Company did not have any investments with contractual maturities between one and two years. Available-for-sale investments are recorded at fair value, and unrealized holding gains and losses are recorded as a component of other comprehensive income (loss).

The following table summarizes the Company’s available-for-sale investments:


	As of December 31, 2022
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Total Estimated Fair Value
(In thousands)
Corporate bonds	$	3,216	$	—	$	(24)	$	3,193
Commercial paper	582		—		—		582
Certificates of deposit	1,884		—		(9)		1,875

Total investments	$	5,682	$	—	$	(33)	$	5,650

Realized gains and losses on investments in debt securities for the three and nine months ended September 30, 2023 and 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:


	September 30, 2023
	Level 1		Level 2		Level 3		Total
(In thousands)
Cash equivalents
Money market funds	$	5,517	$	—	$	—	$	5,517


Total cash equivalents	$	5,517	$	—	$	—	$	5,517


	December 31, 2022
	Level 1		Level 2		Level 3		Total
(In thousands)
Cash equivalents
Money market funds	$	9,595	$	—	$	—	$	9,595
Total cash equivalents	$	9,595	$	—	$	—	$	9,595
Short-term investments
Corporate bonds	—		3,193		—		3,193
Commercial paper	—		582		—		582
Certificates of deposit	—		1,875		—		1,875

Total short-term investments	—		5,650		—		5,650
Total	$	9,595	$	5,650	$	—	$	15,245

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

6. Credit Facilities

In January 2023, the Company 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 sub-facility 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 the Company’s accounts receivable and inventory as reduced by an availability block and certain reserves, if any. 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. The Company recognizes the commitment fee as incurred in interest and other income (expense), net in the condensed consolidated statements of comprehensive loss. For the three and nine months ended September 30, 2023, the commitment fee incurred was immaterial. As of September 30, 2023, there were $3.9 million outstanding letters of credit and $19.2 million available to be drawn upon.

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 September 30, 2023, the Company is in compliance with all covenants under the 2023 Credit Facility.

7. Accrued Expenses

Accrued expenses consisted of the following:


	September 30, 2023		December 31, 2022
(In thousands)
Payroll and payroll related expenses(1)	$	6,245	$	6,790
Accrued inventory purchases	7,545		17,050
Accrued returns	273		318
Accrued rent(2)	7,999		7,688
Accrued restructuring(3)	384		—
Other accrued expenses	8,718		6,164
Total accrued expenses	$	31,164	$	38,010

____________________

(1) Includes $1.7 million and $4.3 million of executive transition related expense as of September 30, 2023 and December 31, 2022, respectively.

(2) Represents short-term operating lease liabilities. Refer to Note 13, "Leases" included in these condensed consolidated financial statements for more information on leases.

(3) Refer to Note 14, "Restructuring" included in these condensed consolidated financial statements for more information on the Company's restructuring initiative.

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 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. 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. On August 14, 2023 the Lead Plaintiff filed an amended consolidated class action complaint naming as additional defendants Catterton Management Company L.L.C., L Catterton VIII, L.P., L. Catterton VIII Offshore, L.P., THC Shared Abacus, LP, Catterton Managing Partner VIII, L.L.C., and C8 Management, L.L.C. On October 16, 2023 those additional defendants filed a motion to dismiss the Second Amended Complaint with respect to the claims against them, and that motion is scheduled for a hearing on December 18, 2023. 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. 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’s motion to stay 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) was denied on September 5, 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 September 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 arrangements. As of September 30, 2023 and December 31, 2022, the Company has not accrued a liability for these guarantees as the likelihood of incurring a payment obligation, if any, in connection with these guarantees is not probable or reasonably estimable due to the unique facts and circumstances involved.

9.Stock-Based Compensation

Stock Options

The following table summarizes the stock option activity:


	Number of Options	Weighted Average Exercise Price



















Outstanding at December 31, 2022	14,888,007	$	5.24
Granted	—	$	—
Exercised	(2,300)	$	1.70
Forfeited/Cancelled	(1,550,149)	$	5.16
Outstanding at September 30, 2023	13,335,558	$	5.25

During the three months ended September 30, 2023, the Company extended the post-termination exercise period for each outstanding stock option held by certain former executives such that the post-termination exercise period will end on the earlier of (i) the original expiration date of the stock option, or (ii) the date that is the 3-year anniversary of certain former executives no longer providing services to the Company. There were no changes to the exercise price or other terms of these stock options, and these stock options were already fully vested prior to the modification. As a result of this modification, we recognized incremental stock-based compensation expense of $0.5 million for the three and nine months ended September 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.

The following table summarizes the RSU activity:


	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	452,951	4,165,403	$	3.44	$	8.09
Transfer from Employee to Non-Employee Director(1)	1,147,566	(1,147,566)	$	9.02	$	9.02
Granted	882,862	6,295,701	$	1.74	$	1.82
Vested(2)	(1,358,421)	(1,225,521)	$	5.89	$	6.35
Forfeited	(388,147)	(1,430,377)	$	10.51	$	5.62
Unvested RSUs at September 30, 2023	736,811	6,657,640	$	1.85	$	2.85

_____________

(1) Relates to former Chief Executive Officer ("CEO") RSUs that were reclassified to non-employee director shares for disclosure purposes. The former CEO was not re-nominated for election by the Board in connection with the annual stockholder meeting in May 2023.

(2) Includes accelerated vesting of certain former executives' outstanding RSUs, including the former CEO and CFO. As such, the Company recognized the related stock-based compensation expense during the three and nine months ended September 30, 2023.

As of September 30, 2023, there was $16.7 million of unrecognized stock-based compensation expense related to unvested RSUs, which is expected to be recognized over a weighted-average period of 2.9 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 nine months ended September 30, 2023, 68,962 shares were purchased under the 2021 ESPP. As of September 30, 2023, the Company had 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 nine months ended September 30, 2023
Expected life of options (in years)			0.50
Expected stock price volatility			86.19%
Risk free interest rate			5.36%
Expected dividend yield			—%
Weighted average grant-date fair value per share			$0.67

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 September 30,				For the nine months ended September 30,
	2023		2022		2023		2022
(In thousands)
Selling, general and administrative(1)	$	3,608	$	3,852	$	13,648	$	10,929
Research and development	99		48		244		431
Total stock-based compensation expense	$	3,707	$	3,900	$	13,892	$	11,360

__________________

(1) The Company extended the post-termination stock option exercise period for certain former executives, resulting in stock-based compensation expense of $0.5 million during the three months ended September 30, 2023. Additionally, the Company modified certain former executives' RSUs to accelerate vesting, including $0.5 million and $3.1 million during the three and nine months ended September 30, 2023.

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 September 30,				For the nine months ended September 30,
(In thousands, except for share and per share values)	2023		2022		2023		2022
Numerator:
Net loss	$	(8,098)	$	(11,788)	$	(40,381)	$	(36,427)
Net loss attributable to common stockholders - basic and diluted	$	(8,098)	$	(11,788)	$	(40,381)	$	(36,427)



Denominator:
Weighted average shares of common stock outstanding - basic	95,179,604		92,460,987		94,137,244		92,020,423

Weighted average shares of common stock outstanding - diluted	95,179,604		92,460,987		94,137,244		92,020,423

Net loss per share, attributable to common shareholders:
Basic and diluted	$	(0.09)	$	(0.13)	$	(0.43)	$	(0.40)

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 September 30,		For the nine months ended September 30,
	2023	2022	2023	2022

Stock options to purchase common stock	13,335,558	15,015,298	13,335,558	15,015,298
Unvested restricted stock units	7,394,451	4,835,801	7,394,451	4,835,801
Employee stock purchase plan	68,962	68,497	68,962	68,497
Total	20,798,971	19,919,596	20,798,971	19,919,596

11. Income Taxes

In determining quarterly provisions for income taxes, the Company uses the annual estimated effective tax rate applied to the actual year-to-date loss, adjusted for discrete items arising in that quarter. The Company’s annual estimated effective tax rate differs from the U.S. federal statutory rate of 21% primarily as a result of a valuation allowance against net deferred tax assets, stock-based compensation, state taxes, nondeductible executive compensation and other permanent differences.

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 nine months ended September 30, 2023 and 2022, the Company has not recorded any uncertain tax positions and has not recognized interest or penalties in the condensed consolidated statements of comprehensive loss.

12. Related Party Transactions

In April 2020, the Company engaged Summit House Studios LLC, a third-party consultant, to provide digital ad production services. Summit House Studios LLC is owned by a major shareholder of the Company. Based on services provided, the Company incurred immaterial advertising costs for this related party during the three and nine months ended September 30, 2023 and 2022, which was reported as marketing expense in the Company’s condensed consolidated statements of comprehensive loss.

In May 2022, the Company engaged Vault Co., a third-party consultant, to develop and deliver an ongoing brand tracker for the Company. Vault Co. is owned by a major shareholder of the Company. Based on services provided, the Company incurred immaterial advertising costs for this related party during the three and nine months ended September 30, 2023 and 2022, which is reported as marketing expense in the Company’s consolidated statements of comprehensive loss.

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 one to six years.

The components of lease expense were as follows (in thousands):


	For the three months ended September 30,				For the nine months ended September 30,
	2023		2022		2023		2022
Finance lease expense:
Amortization	$	12	$	62	$	42	$	241
Interest on lease liabilities	—		1		—		7
Operating lease expense:
Operating lease expense(1)	1,792		1,795		5,376		5,362
Sublease income	(501)		(501)		(1,503)		(1,504)
Total lease expense, net	$	1,303	$	1,357	$	3,915	$	4,106

______________________

(1) Represents the straight-line lease expense of operating leases, inclusive of amortization of ROU assets and the interest component of operating lease liabilities.

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.

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

September 30, 2023

Finance lease assets

Property and equipment, net

Operating lease assets

Operating lease right-of-use asset

25,266

Total lease assets

25,294

Liabilities

Current

Finance lease liabilities

Accrued expenses

Operating lease liabilities

Accrued expenses

7,999

Non-current

Finance lease liabilities

Other long-term liabilities

Operating lease liabilities

Operating lease liabilities, net of current portion

23,791

Total lease liabilities

31,825

Supplemental information related to the Company’s leases for the nine months ended September 30, 2023 was as follows:


Weighted-average remaining lease term (in years)
Finance leases	0.9
Operating leases	3.8
Weighted-average discount rate
Finance leases	3.00		%
Operating leases	2.29		%
Cash paid for amounts included in the measurement of lease liabilities (in thousands)
Operating cash flows used in finance leases	$	1
Operating cash flows used in operating leases	$	5,740
Finance cash flows used in finance leases	$	46

The Company did not have any non-cash ROU assets obtained in exchange for lease liabilities during the nine months ended September 30, 2023 for either finance or operating 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, as well as asset impairments related to technology taken out of service.

•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:

•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 related to inventory reserves, including tariffs, and

▪Consulting and other professional services.

Costs associated with the Transformation Initiative for the three and nine months ended September 30, 2023 were as follows (in thousands):


	For the three months ended September 30, 2023		For the nine months ended September 30, 2023
Net Revenue(1)	$	(117)	$	339
Cost of Revenue	586		3,873
Restructuring Costs(2)	357		2,104
Other Costs(3)	1,365		4,207
Total	$	2,191	$	10,523

______________

(1) Relates to estimated product markdowns and true-up of prior quarter estimates.

(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
Three months ended September 30, 2023	$	285	$	72	$	—	$	357
Cumulative through September 30, 2023	$	1,041	$	193	$	870	$	2,104

Changes in accrued expenses as of September 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)	1,041		—		479		5,198		6,718
Cash payments	(661)		—		(116)		—		(777)
Non-cash asset write-offs	—		—		—		(1,788)		(1,788)
Balance at September 30, 2023	$	380	$	—	$	363	$	3,410	$	4,153

___________

(1) Included in accrued expenses as of September 30, 2023. Refer to Note 7, "Accrued Expenses" included elsewhere in these condensed consolidated financial statements.

The Company records costs associated with the restructuring initiatives once the relevant accounting criteria have been met. Accrued restructuring costs of $0.4 million related to severance costs and contract terminations as of September 30, 2023 are expected to result in cash expenditures funded from cash provided by operations in future periods and is included in accrued expenses on the condensed consolidated balance sheets.

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 61%, 25%, and 14%, respectively, of our revenue for the three months ended September 30, 2023, compared to 65%, 26%, and 9%, respectively, of our revenue for the three months ended September 30, 2022, and 63%, 27%, and 10%, respectively, of our revenue for the nine months ended September 30, 2023, compared to 65%, 29%, and 6%, respectively, of our revenue for the nine months ended September 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 September 30, 2023, we generated 47% and 53% of our revenue from our Digital and Retail channels, respectively, compared to 40% and 60%, respectively, for the three months ended September 30, 2022. For the nine months ended September 30, 2023, we generated 49% and 51% of our revenue from our Digital and Retail channels, respectively, compared to 46% and 54%, respectively, for the nine months ended September 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 September 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. 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

The Transformation Initiative is projected to result in the following:

•Costs associated with the Transformation Initiative, including restructuring costs, are expected to be approximately $11.0 million to $13.0 million for the full year 2023, with $2.2 million and $10.5 million, respectively, recognized during the three and nine months ended September 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

$2.1 million, respectively, in the three and nine months ended September 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 are starting to see 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 $1.0 million and $1.8 million, respectively, recognized during the three and nine months ended September 30, 2023 and the remainder in the fourth quarter of 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 three quarters 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.

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.

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 decreased and shifted marketing spend into support for retail and other digital customers that has allowed us to increase marketing efficiency, while maintaining revenue growth.

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 global pandemics or other 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 and the Israel-Hamas war. 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 experienced and anticipate continued increases in labor costs, product costs and transportation costs, which has and could continue to hamper our ability to drive margin expansion. 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 in 2022, we have experienced increased fulfillment costs in 2022 but have seen lower fulfillment costs in the three and nine months ended September 30, 2023, as we reduced inventory levels. 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 nine months ended September 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. 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. 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 three quarters of 2023 and plan to implement additional pricing increases before the end of 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 the implementation of 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 nine months ended September 30, 2023, we recorded an inventory write-down, inclusive of overhead costs and tariffs, of $3.4 million 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 $3.1 million, mainly related to the liquidation of low-margin household products during the nine months ended September 30, 2023, which is included in selling, general and administrative expense on the condensed consolidated statements of comprehensive loss.

Due to increased 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 as of September 30, 2023. We have reduced our inventory levels during the three and nine months ended September 30, 2023 and expect future reduction of inventory for the remainder of 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 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 be immaterial but 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 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 September 30,				For the nine months ended September 30,
	2023		2022		2023		2022
(In thousands)
Revenue	$	86,169	$	84,580	$	254,101	$	231,792
Cost of revenue	58,964		58,963		183,796		161,984
Gross profit	27,205		25,617		70,305		69,808
Operating expenses
Selling, general and administrative(1)	24,146		23,491		74,995		63,068
Marketing	9,110		12,140		28,605		38,121
Restructuring	357		—		2,104		—
Research and development(1)	1,584		1,725		4,638		5,643
Total operating expenses	35,197		37,356		110,342		106,832
Operating loss	(7,992)		(11,739)		(40,037)		(37,024)
Interest and other income (expense), net	(71)		(29)		(269)		657
Loss before provision for income taxes	(8,063)		(11,768)		(40,306)		(36,367)
Income tax provision	35		20		75		60
Net loss	$	(8,098)	$	(11,788)	$	(40,381)	$	(36,427)

__________________________

(1) Includes stock-based compensation expense as follows:


	For the three months ended September 30,				For the nine months ended September 30,
	2023		2022		2023		2022
(In thousands)
Selling, general and administrative	$	3,608	$	3,852	$	13,648	$	10,929
Research and development	99		48		244		431
Total	$	3,707	$	3,900	$	13,892	$	11,360

The following table sets forth our condensed consolidated statements of operations data expressed as a percentage of revenue*:


	For the three months ended September 30,				For the nine months ended September 30,
	2023		2022		2023		2022
	(as a percentage of revenue)
Revenue	100.0	%	100.0	%	100.0	%	100.0	%
Cost of revenue	68.4		69.7		72.3		69.9
Gross profit	31.6		30.3		27.7		30.1
Operating expenses
Selling, general and administrative	28.0		27.8		29.5		27.2
Marketing	10.6		14.4		11.3		16.4
Restructuring	0.4		—		0.8		—
Research and development	1.8		2.0		1.8		2.4
Total operating expenses	40.8		44.2		43.4		46.1
Operating loss	(9.3)		(13.9)		(15.8)		(16.0)
Interest and other income (expense), net	(0.1)		—		(0.1)		0.3
Loss before provision for income taxes	(9.4)		(13.9)		(15.9)		(15.7)
Income tax provision	—		—		—		—
Net loss	(9.4)	%	(13.9)	%	(15.9)	%	(15.7)	%

______________

* Amounts may not sum due to rounding.

Comparison of the Three and Nine Months Ended September 30, 2023 and 2022

Revenue


	For the three months ended September 30,								For the nine months ended September 30,
	2023		2022		$ change		% change		2023		2022		$ change		% change
(In thousands, except percentages)
By Product Category
Diapers and Wipes	$	52,584	$	55,222	$	(2,638)	(4.8)	%	$	160,917	$	150,411	$	10,506	7.0	%
Skin and Personal Care	21,221		21,992		(771)		(3.5)		66,748		66,534		214		0.3
Household and Wellness	12,364		7,366		4,998		67.9		26,436		14,847		11,589		78.1
Total Revenue	$	86,169	$	84,580	$	1,589	1.9	%	$	254,101	$	231,792	$	22,309	9.6	%


	For the three months ended September 30,								For the nine months ended September 30,
	2023		2022		$ change		% change		2023		2022		$ change		% change
(In thousands, except percentages)
By Channel
Digital	$	40,103	$	33,782	$	6,321	18.7	%	$	123,648	$	105,913	$	17,735	16.7	%
Retail	46,066		50,798		(4,732)		(9.3)		130,453		125,879		4,574		3.6
Total Revenue	$	86,169	$	84,580	$	1,589	1.9	%	$	254,101	$	231,792	$	22,309	9.6	%

Revenue was $86.2 million for the three months ended September 30, 2023, as compared to $84.6 million for the three months ended September 30, 2022. The increase of $1.6 million, or 1.9%, reflects an increase of $5.0 million in Household and Wellness product category, offset by a decrease of $2.6 million in Diapers and Wipes and a decrease of $0.8 million in Skin and Personal Care product categories, respectively. The revenue increase in Household and Wellness was primarily driven by $6.0 million in revenue from Honest Baby Clothing due to a Retail channel launch and strong consumption with our key digital customer. The revenue decrease in Diapers and Wipes was primarily driven by a $4.1 million decline in diaper revenue due to decline in Retail channel sales compared to expanded distribution during the three months ended September 30, 2022, offset by an increase of $2.0 million in wipes revenue with our key digital customer due to increased wipes consumption. The Skin and Personal Care revenue decrease was primarily driven by a decrease of $1.1 million in baby personal care products as we scaled back low-margin baby personal care products in the club channel, offset by strong baby personal care products consumption with our key digital customer.

We estimate that pricing increases taken in 2022 and the first three quarters of 2023 contributed $3.0 million to revenue for the three months ended September 30, 2023.

Revenue was $254.1 million for the nine months ended September 30, 2023, as compared to $231.8 million for the nine months ended September 30, 2022. The increase of $22.3 million, or 9.6%, reflects an increase of $11.6 million, $10.5 million and $0.2 million in Household and Wellness, Diapers and Wipes, and Skin and Personal Care products categories, respectively. The revenue increase in Household and Wellness was primarily driven by $14.6 million in revenue from Honest Baby Clothing due to a Retail channel launch and strong consumption with our key digital customer. The revenue increase in Diapers and Wipes was primarily driven by an increase in wipes consumption due to $5.6 million in revenue growth in the Retail channel, as well as a slight increase in diaper revenue in our Retail channel, and $13.3 million in revenue growth with a key digital partner in both diapers and wipes, offset by a decline in diaper sales on Honest.com. The Skin and Personal Care revenue increase was primarily driven by an increase in baby personal care products revenue due to strong consumption in the Digital channel, a $2.4 million increase in beauty revenue, as well as new distribution, offset by a decrease of $3.5 million in baby personal care products in our Retail channel, primarily due to lower club channel sales.

We estimate that pricing increases taken in 2022 and the first three quarters of 2023 contributed $7.5 million to revenue for the nine months ended September 30, 2023.

The decrease in revenue in our Retail channel for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, was primarily driven by a decline of $4.4 million in revenue due to timing of shipments at a key retail customer, loss of revenue of $3.0 million due to a customer bankruptcy, and a decline of $1.1 million in revenue due to lower club channel sales, offset by new distribution, price increases and strong consumption. The increase in revenue in our Digital channel for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, was primarily driven by an $8.9 million increase in revenue by our key digital customer driven by strong consumption, 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 nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, was primarily driven by new distribution of $10.3 million, slight growth of $2.3 million at one of our key retailers and price increases, offset by a decline of $5.0 million in revenue due to lower club channel sales and loss of revenue of $4.0 million due to a customer bankruptcy. The increase in revenue in our Digital channel for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, was primarily driven by an increase in revenue of $27.1 million by our key digital customer driven by strong consumption, 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 September 30,								For the nine months ended September 30,
	2023		2022		$ change		% change		2023		2022		$ change		% change
(In thousands, except percentages)
Cost of revenue	$	58,964	$	58,963	$	1	0.0	%	$	183,796	$	161,984	$	21,812	13.5	%
Gross profit	$	27,205	$	25,617	$	1,588	6.2	%	$	70,305	$	69,808	$	497	0.7	%

Cost of revenue was $59.0 million for the three months ended September 30, 2023, as compared to $59.0 million for the three months ended September 30, 2022. The increase was primarily driven by a 1.9% increase in revenue, $1.1 million of higher product costs and $1.5 million increase in transportation costs, partially offset by $0.8 million of lower fulfillment costs and other cost savings. Cost of revenue as a percentage of revenue decreased by 128 basis points due to lower fulfillment costs, price increases and other cost savings.

Gross profit was $27.2 million for the three months ended September 30, 2023, as compared to $25.6 million for the three months ended September 30, 2022. The increase was mainly related to price increases of $2.1 million, reduced trade spending of $1.5 million and other cost savings, offset by the higher transportation and product costs described above.

Cost of revenue was $183.8 million for the nine months ended September 30, 2023, as compared to $162.0 million for the nine months ended September 30, 2022. The increase of $21.8 million, or 13.5%, was primarily driven by a 9.6% increase in revenue, $7.6 million of higher product costs and $6.6 million of higher transportation costs. Cost of revenue as a percentage of revenue increased by 245 basis points primarily due to costs from actions taken in connection with the Transformation Initiatives and higher input costs.

Gross profit was $70.3 million for the nine months ended September 30, 2023, as compared to $69.8 million for the nine months ended September 30, 2022. The increase was mainly related to price increases of $7.2 million and reduced trade spending of $5.8 million, offset by costs related to the Transformation Initiative, including inventory reserves related to product exits and SKU rationalization and higher product and transportation costs.

Operating Expenses

Selling, General and Administrative Expenses


	For the three months ended September 30,								For the nine months ended September 30,
	2023		2022		$ change		% change		2023		2022		$ change		% change
(In thousands, except percentages)
Selling, general and administrative	$	24,146	$	23,491	$	655	2.8	%	$	74,995	$	63,068	$	11,927	18.9	%

Selling, general and administrative expenses were $24.1 million for the three months ended September 30, 2023, as compared to $23.5 million for the three months ended September 30, 2022. The increase of $0.7 million, or 2.8%, was primarily due to a $1.5 million increase in service fees related to Honest Baby Clothing and $0.8 million in CFO transition expenses, offset by a decrease in donation expense of $0.6 million, a decrease of $0.4 million related to employee expenses, and a decrease in vendor violation charges of $0.6 million related to the implementation of a new order management system.

Selling, general and administrative expenses were $75.0 million for the nine months ended September 30, 2023, as compared to $63.1 million for the nine months ended September 30, 2022. The increase of $11.9 million, or 18.9%, was primarily due to a $3.5 million increase in service fees related to Honest Baby Clothing, $2.7 million increase in stock-based compensation expense mainly related to the acceleration of the former CEO's and CFO's RSUs, $2.1 million in CEO and CFO transition expenses, $1.7 million increase in donation expense, $1.7 million increase in legal expenses primarily related to securities litigation, and $0.8 million increase in employee-related expenses, offset by a $1.2 million decrease in consulting fees. 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 and CFO's RSUs.

Marketing Expenses


	For the three months ended September 30,								For the nine months ended September 30,
	2023		2022		$ change		% change		2023		2022		$ change		% change
(In thousands, except percentages)
Marketing	$	9,110	$	12,140	$	(3,030)	(25.0)	%	$	28,605	$	38,121	$	(9,516)	(25.0)	%

Marketing expenses were $9.1 million for the three months ended September 30, 2023, as compared to $12.1 million for the three months ended September 30, 2022. The decrease of $3.0 million, or 25.0%, was primarily due to a $1.6 million reduction in retail marketing, decrease of $0.9 million in public relations activities, and a decrease of $0.3 million in photo and video production expenses.

Marketing expenses were $28.6 million for the nine months ended September 30, 2023, as compared to $38.1 million for the nine months ended September 30, 2022. The decrease of $9.5 million, or 25.0%, was primarily due to a $4.2 million shift and reduction in digital advertising, a decrease of $2.5 million in public relations activities, and a $1.9 million reduction in retail marketing.

Restructuring Expenses


	For the three months ended September 30,								For the nine months ended September 30,
	2023		2022		$ change		% change		2023		2022		$ change		% change
(In thousands, except percentages)
Restructuring	$	357	$	—	$	357	100.0	%	$	2,104	$	—	$	2,104	100.0	%

Restructuring expenses were $0.4 million and $2.1 million, respectively, for the three and nine months ended September 30, 2023. Restructuring costs are one of the elements of the Transformation Initiative. For the three months ended September 30, 2023, restructuring costs included employee-related costs of $0.3 million. For the nine months ended September 30, 2023, restructuring costs included employee-related costs of $1.0 million, contract termination costs of $0.9 million, and asset-related costs of $0.2 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 September 30,								For the nine months ended September 30,
	2023		2022		$ change		% change		2023		2022		$ change		% change
(In thousands, except percentages)
Research and development	$	1,584	$	1,725	$	(141)	(8.2)	%	$	4,638	$	5,643	$	(1,005)	(17.8)	%

Research and development expenses were $1.6 million for the three months ended September 30, 2023, as compared to $1.7 million for the three months ended September 30, 2022.

Research and development expenses were $4.6 million for the nine months ended September 30, 2023, as compared to $5.6 million for the nine months ended September 30, 2022. The decrease of $1.0 million, or 17.8%, 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 September 30,						For the nine months ended September 30,
	2023		2022		$ change			2023		2022		$ change
(In thousands, except percentages)
Interest income (expense), net	$	(27)	$	140	$	(167)		$	(253)	$	322	$	(575)
Other income (expense), net	(44)		(169)		125			(16)		335		(351)
Interest and other income (expense), net	$	(71)	$	(29)	$	(42)		$	(269)	$	657	$	(926)

Interest and other income (expense), net was net expense of $71 thousand for the three months ended September 30, 2023, as compared to net expense of $29 thousand for the three months ended September 30, 2022.

Interest and other income (expense), net was net expense of $0.3 million for the nine months ended September 30, 2023, as compared to net income of $0.7 million for the nine months ended September 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 nine months ended September 30, 2022 and the write-off of unamortized debt issuance costs as we entered into the new 2023 Credit Facility.

Liquidity and Capital Resources

We have incurred net losses and net cash outflows from operating activities since our inception. As of September 30, 2023, we had $23.1 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 operating activities 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 September 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 nine months ended September 30, 2023, the commitment fee incurred was immaterial. As of September 30, 2023, there were $3.9 million outstanding letters of credit and $19.2 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 September 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 nine months ended September 30,
(In thousands)	2023		2022
Net cash provided by (used in) operating activities	$	9,431	$	(50,669)
Net cash provided by investing activities	$	4,095	$	24,004
Net cash provided by (used in) financing activities	$	60	$	(39)

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 $9.4 million for the nine months ended September 30, 2023 was primarily due to net loss of $40.4 million, non-cash adjustments of $20.6 million and a net increase in cash related to changes in operating assets and liabilities of $29.2 million. Non-cash adjustments primarily consisted of stock-based compensation of $13.9 million, amortization of operating Right-of-Use ("ROU") assets of $4.7 million and depreciation and amortization of $2.0 million. Changes in cash flows related to operating assets and liabilities primarily consisted of cash provided by a $36.2 million decrease in inventory, a $7.5 million decrease in prepaid expenses and other assets and a $4.1 million decrease in accounts receivable due to improved collection efforts, offset by $13.9 million lower accounts payable and accrued expenses driven by lower inventory purchases due to our disciplined inventory management and a $5.7 million use of cash due to operating lease obligations in the nine months ended September 30, 2023.

Net cash used in operating activities of $50.7 million for the nine months ended September 30, 2022 was primarily due to net loss of $36.4 million, non-cash adjustments of $18.2 million and a net decrease in cash related to changes in operating assets and liabilities of $32.4 million. Non-cash adjustments primarily consisted of stock-based compensation of $11.4 million, amortization of operating ROU assets of $4.6 million and depreciation and amortization of $2.0 million. Changes in cash flows related to operating assets and liabilities primarily consisted of a $24.6 million increase in inventory reflecting cost inflation, the purchase of $5.5 million of Honest Baby Clothing inventory from Butterblu and an increase in weeks of supply due to longer lead times and in advance of new distribution, a $7.1 million increase in accounts receivable due to growth in Retail channel revenue, a $5.2 million use of cash due to operating lease obligations and a $3.2 million increase in prepaid expenses and other assets, offset by a $7.6 million increase in accounts payable due to higher inventory purchases and cost inflation in the nine months ended September 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 $4.1 million for the nine months ended September 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 $1.6 million.

Net cash provided by investing activities of $24.0 million for the nine months ended September 30, 2022 was primarily due to proceeds from maturities of short-term investments of $38.2 million, offset by purchases of short-term investments of $12.8 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 $60 thousand for the nine months ended September 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 used in financing activities of $39 thousand for the nine months ended September 30, 2022 primarily consisted of principal payments of financing lease obligations, partially offset by proceeds from stock option exercises and purchases under the 2021 ESPP.

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.

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 and CFO 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 and CFO 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 September 30,				For the nine months ended September 30,
(In thousands)	2023		2022		2023		2022
Reconciliation of Net Loss to Adjusted EBITDA
Net loss	$	(8,098)	$	(11,788)	$	(40,381)	$	(36,427)
Interest and other (income) expense, net	71		29		269		(657)
Income tax provision	35		20		75		60
Depreciation and amortization	681		639		2,021		2,025
Stock-based compensation(1)	3,707		3,900		13,892		11,360
Securities litigation expense	1,374		1,612		4,325		2,607
CEO and CFO transition expense(2)	808		—		2,085		—
Restructuring costs(3)	357		—		2,104		—
Payroll tax expense related to stock-based compensation	9		14		122		81
Adjusted EBITDA	$	(1,056)	$	(5,574)	$	(15,488)	$	(20,951)

__________________

(1) Includes accelerated equity awards related to prior separation agreements of $0.5 million and $3.1 million with our former CEO and CFO during the three and nine months ended September 30, 2023, respectively. Additionally, includes extension of post-termination stock option exercise periods for certain former executives, resulting in stock-based compensation expense of $0.5 million during the three months ended September 30, 2023.

(2) Includes sign-on bonus, relocation, legal, recruiting and separation costs.

(3) See Note 14 “Restructuring” in our unaudited condensed consolidated financial statements for items included in restructuring expense.

Material Cash Requirements

As of September 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 nine months ended September 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, (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 September 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 September 30, 2023 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

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.

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, commitments and disclosures may impact our reputation, increase our costs and impact our access to capital.

•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, 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.

•SEC regulations governing cybersecurity disclosure about risk management, strategy and governance and requirements for reporting of cybersecurity incidents may increase our compliance costs.

•International trade disputes and the U.S. government’s trade policy could adversely affect our business.

•Our business may be adversely affected if we are unable to provide our consumers with a technological 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.

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. 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 50 million followers as of October 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 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.

If we are unable to maintain listing of our securities on the Nasdaq Capital Market or another reputable stock exchange, it may be more difficult for our stockholders to sell their securities.

Nasdaq requires listing issuers to comply with certain standards in order to remain listed on its exchange. If we fail to satisfy the continued listing requirements of Nasdaq, such as the minimum closing bid price requirement, Nasdaq may take steps to delist our common stock.

For example, if at any time the bid price of our common stock closes at below $1.00 per share for more than 30 consecutive trading days, we may be subject to delisting from the Nasdaq Capital Market. If we receive a delisting notice, we would have 180 calendar days to regain compliance (subject to any additional 180-day compliance period which may be available to us), which would mean having a bid price above the minimum of $1.00 for at least 10 consecutive days in the 180-day period. During this 180-day period, we would anticipate reviewing our options to regain compliance with the minimum bid requirements, including conducting a reverse stock split. To the extent that we are unable to resolve any listing deficiency, there is a risk that our common stock may be delisted from Nasdaq, which would adversely impact liquidity of our common stock and potentially result in even lower bid prices for our common stock. On October 27, 2023, the closing price of our common stock was $1.11 per share.

If, for any reason, Nasdaq should delist our securities from trading on its exchange and we are unable to obtain listing on another reputable national securities exchange, such a delisting would likely have a negative effect on the price of our common stock and would impair your ability to sell or purchase our common stock when you wish to do so. In the event of a delisting, we

can provide no assurance that any action taken by us to restore compliance with listing requirements would allow our common stock to become listed again, stabilize the market price or improve the liquidity of our common stock, prevent our common stock from dropping below the Nasdaq minimum bid price requirement or prevent future non-compliance with the listing requirements of Nasdaq, each of which could materially adversely affect our stockholders.

Increasing scrutiny and evolving expectations from stakeholders with respect to our ESG practices, performance, commitments and disclosures may impact our reputation, increase our costs and impact our access to capital.

Stakeholder scrutiny related to our ESG practices, commitments, performance and disclosures continues to increase. We have adopted certain policies and programs, including with respect to responsible ingredients and sustainability, safety and health, human capital management, social performance and community relations, diversity and inclusion and supply chain code of conduct. Our stakeholders might not be satisfied with our ESG practices, commitments, performance and/or disclosures, or the speed of their adoption, implementation and measurable success. Investor advocacy groups, certain institutional investors, investment funds, creditors and other influential investors are increasingly focused on our ESG practices and in recent years have placed increasing importance on the ESG implications of their investments and lending decisions. If we do not meet our stakeholders’ evolving expectations, our reputation, access to and cost of capital, and stock price could be negatively impacted.

Organizations that provide information to investors and financial institutions on ESG performance and related matters have developed quantitative and qualitative data collection processes and ratings processes for evaluating companies on their approach to ESG matters. Such ratings are used by some investors to inform their investment and voting decisions. In addition, many investors have created their own proprietary ratings that inform their investment and voting decisions. Unfavorable ratings or assessment of our ESG practices, including our compliance with certain disclosure standards and frameworks, may lead to negative investor sentiment toward us, which could have a negative impact on our stock price and our access to and cost of capital.

As we continue to focus on our ESG practices, commitments, performance and disclosures, and as ESG-related regulations and disclosure standards and frameworks continue to evolve, we have expanded our public disclosures in these areas. Such disclosures may reflect goals, aspirations, commitments, cost estimates and other expectations and assumptions, including over long timeframes, which are necessarily uncertain and may not be realized.

New government regulations could also result in new or more stringent forms of ESG oversight and expanded disclosure. The SEC proposed climate-change related disclosure rules that, if adopted, would require significant disclosure regarding GHG emissions and would require significant time and expense to collect and prepare the information which may need to be gathered to satisfy such new disclosure requirements and any regulatory requirements for independent attestation as to such disclosures. In addition, the Company may become subject to climate or other ESG reporting regulations in jurisdictions such as California or the European Union, or may be subject to pressure from customers, investors, and other stakeholders to provide ESG-related data or adopt certain ESG policies, which may impose additional financial and administrative burdens. In addition, our climate or other ESG claims or goals could result in additional disclosure obligations under regulations in California or other jurisdictions, or expose the Company to regulatory, customer, or other stakeholder scrutiny. Further, the voluntary disclosure standards or frameworks we choose to align with are evolving and may change over time and our interpretation of such disclosure standards and frameworks may differ from those of others, either of which may result in a lack of consistent or meaningful comparative data from period to period and/or significant revisions to our goals and aspirations or reported progress in achieving such goals and aspirations.

Ensuring that there are adequate systems and processes in place to comply with the various ESG tracking and disclosure obligations will require management’s time and expense. If we do not adapt to or comply with government regulations, investor or stakeholder expectations, including with respect to evolving disclosure standards and frameworks, or if we are perceived to have not responded appropriately, regardless of whether there is a legal requirement to do so, we may suffer from reputational damage and our business, financial condition, cost of capital and/or stock price could be adversely affected.

Further, being associated with activities by suppliers, contractors or other affiliates that have or are perceived to have individual or cumulative adverse impacts on the environment, climate, biodiversity and land management, water access and management, human rights or cultural heritage could negatively affect our reputation and impose additional costs.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

EXHIBIT INDEX


Exhibit Number						Exhibit Description
3.1						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).
3.2						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).
10.1						Employment Agreement, dated August 31, 2023, by and between the Company and Dave Loretta.
10.2						Separation Agreement and Release of Claims, dated September 29, 2023, by and between the Company and Kelly Kennedy.
10.3						Amendment Twenty-Six to the Logistics Services Agreement, dated as of August 31, 2023 by and between the Company and Geodis Logistics, LLC
10.4						Amendment Twenty-Seven to the Logistics Services Agreement, dated as of October 26, 2023 by and between the Company and Geodis Logistics, LLC
31.1						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
31.2						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.

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: November 8, 2023	By:	/s/ Carla Vernón
		Carla Vernón Chief Executive Officer and Director
		(Principal Executive Officer)
Date: November 8, 2023	By:	/s/ David Loretta
		David Loretta Executive Vice President, Chief Financial Officer
		(Principal Financial Officer and Accounting Officer)