The Honest pany(HNST) - 2024 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) The company's financial statements show a significant reduction in net loss and comprehensive loss, driven by improved gross profit and resulting in increased stockholders' equity Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets | Metric | June 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :--------------------------- | :----------------------------- | :------------------------------- | | Total Assets | $200,154 | $201,621 | | Total Liabilities | $70,473 | $78,482 | | Total Stockholders' Equity | $129,681 | $123,139 | Condensed Consolidated Statements of Comprehensive Loss Condensed Consolidated Statements of Comprehensive Loss | Metric (in thousands) | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :-------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Revenue | $93,049 | $84,544 | $179,266 | $167,933 | | Cost of Revenue | $57,437 | $61,646 | $111,772 | $124,832 | | Gross Profit | $35,612 | $22,898 | $67,494 | $43,101 | | Operating Loss | $(4,045) | $(13,387) | $(5,359) | $(32,044) | | Net Loss | $(4,077) | $(13,416) | $(5,479) | $(32,282) | - Gross profit increased by 55.5% for the three months ended June 30, 2024, and by 56.6% for the six months ended June 30, 2024, compared to the prior year[10] Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit) Stockholders' Equity (Deficit) | Metric (in thousands) | December 31, 2023 | June 30, 2024 | | :-------------------- | :---------------- | :------------ | | Common Stock Amount | $9 | $9 | | Additional Paid-in Capital | $602,198 | $614,220 | | Accumulated Deficit | $(479,068) | $(484,548) | | Total Stockholders' Equity (Deficit) | $123,139 | $129,681 | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows | Cash Flow Activity (in thousands) | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :-------------------------------- | :--------------------------- | :--------------------------- | | Net cash provided by operating activities | $3,281 | $3,758 | | Net cash (used in) provided by investing activities | $(91) | $4,497 | | Net cash provided by financing activities | $576 | $73 | Notes to Condensed Consolidated Financial Statements 1. Nature of Business - The Honest Company, Inc is a personal care company focused on creating clean- and sustainably-designed products[18] 2. Summary of Significant Accounting Policies - The financial statements are prepared in accordance with GAAP and SEC rules for interim financial information, with certain disclosures condensed or omitted[19] - The company operates as a single operating segment, with substantially all revenue and long-lived assets located in the United States[21] - As an 'emerging growth company,' the company has elected to delay the adoption of new or revised accounting pronouncements to align with private company adoption dates[28] 3. Revenue - In Q1 2024, the company changed its revenue disaggregation from product category to direct-to-consumer and retail/third-party ecommerce customers to align with its 'Brand Maximization' strategy[30] - Direct-to-Consumer revenue accounted for 13% of total revenue for the three months ended June 30, 2024, down from 19% in the prior year[31] 4. Fair Value Measurements - The company uses a three-level hierarchy for fair value measurements, with cash equivalents (money market funds) primarily valued using Level 1 inputs (quoted prices in active markets)[26][27] 5. Credit Facilities - The company has a $35.0 million revolving credit facility maturing on April 30, 2026, with an uncommitted accordion feature for an additional $35.0 million[37] - As of June 30, 2024, there was no outstanding balance under the credit facility, with $20.5 million available to be drawn upon[37] - The company was in compliance with all covenants under the 2023 Credit Facility as of June 30, 2024[39] 6. Accrued Expenses Accrued Expenses | Accrued Expense (in thousands) | June 30, 2024 | December 31, 2023 | | :----------------------------- | :------------ | :---------------- | | Payroll and payroll related expenses | $5,864 | $8,007 | | Accrued inventory purchases | $9,339 | $9,368 | | Accrued rent | $8,335 | $8,105 | | Other accrued expenses | $7,149 | $6,104 | | Total Accrued Expenses | $31,332 | $32,209 | 7. Commitments and Contingencies - The company is involved in various legal proceedings, including a Prop 65 claim, federal securities law class actions related to its IPO, and derivative complaints, with outcomes currently uncertain[42][43] - A putative class action complaint regarding plant-based claims on certain wipes products was settled on an individual, non-class basis as of July 2, 2024[45] - No liability has been accrued for indemnification arrangements as the likelihood of incurring a payment obligation is not probable or reasonably estimable[46] 8. Stock-Based Compensation - As of June 30, 2024, there was $21.5 million of unrecognized stock-based compensation expense related to unvested RSUs, expected to be recognized over a weighted-average period of 3.0 years[49] Stock-Based Compensation Expense | Stock-Based Compensation Expense (in thousands) | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :---------------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Selling, general and administrative | $8,739 | $6,327 | $11,153 | $10,040 | | Research and development | $166 | $86 | $275 | $145 | | Total | $8,905 | $6,413 | $11,428 | $10,185 | 9. Net Income (Loss) per Share Attributable to Common Stockholders Net Loss per Share (Basic and Diluted) | Net Loss per Share (Basic and Diluted) | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net Loss per Share | $(0.04) | $(0.14) | $(0.06) | $(0.34) | 10. Income Taxes - The company has recorded a full valuation allowance against its U.S. federal and state deferred tax assets, as it is not more likely than not that these assets will be realized[60] 11. Related Party Transactions - The company incurred immaterial advertising costs from a related-party consultant (Summit House Studios LLC) for the three and six months ended June 30, 2024, and 2023[61] 12. Leases Lease Assets and Liabilities | Lease Metric (in thousands) | June 30, 2024 | | :-------------------------- | :------------ | | Operating lease right-of-use asset | $20,528 | | Operating lease liabilities, net of current portion | $17,537 | | Total lease liabilities | $25,872 | Lease Expense | Lease Expense (in thousands) | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2024 | | :--------------------------- | :--------------------------- | :--------------------------- | | Operating lease expense, net | $1,292 | $2,589 | 13. Restructuring - The restructuring element of the Transformation Initiative was substantially completed by December 31, 2023[68] - The company did not incur any restructuring costs for the three and six months ended June 30, 2024[69] - Accrued restructuring expenses were $0.2 million as of June 30, 2024, primarily related to severance costs[69][70] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The company's Transformation Initiative drove significant financial improvement, with increased revenue and gross profit, a narrowed operating loss, and a strong liquidity position Overview - The Honest Company is a personal care company dedicated to creating clean- and sustainably-designed products, operating as an omnichannel brand[72] - Products are available in approximately 50,000 retail locations across the United States and Canada, including strategic partnerships with Target, Amazon, and Walmart[75] Transformation Initiative - The 2023 Transformation Initiative, substantially completed by December 31, 2023, focuses on three pillars: Brand Maximization, Margin Enhancement, and Operating Discipline[76][77] - Brand Maximization aims to drive growth through innovation, margin-accretive products, and marketing effectiveness, including pricing increases[76] - Margin Enhancement includes focusing resources on North America, exiting low-margin businesses in Europe/Asia and cleaning/sanitization, and SKU rationalization[77] Key Factors Affecting Our Performance - Growth is dependent on increasing brand awareness, continuous innovation in clean products, and prioritizing higher-margin products like skincare[79][80][82] - Effective execution of the omnichannel strategy, including leveraging Honest.com and retail partnerships, is crucial for consumer reach and brand awareness[83] - The company faces challenges from macroeconomic trends, including inflationary pressures, increased product and labor costs, and higher transportation costs affecting the supply chain[87][88] Components of Results of Operations - Revenue is generated from direct-to-consumer sales via Honest.com, sales to brick-and-mortar retailers, and third-party ecommerce customers, recognized net of allowances[90] - Cost of revenue includes merchandise purchase price, shipping, freight, duties, packaging, credit card fees, warehouse fulfillment costs, depreciation, allocated overhead, and inventory reserves[92] - Operating expenses comprise selling, general and administrative, marketing, and research and development expenses[94] Results of Operations Results of Operations | Metric (in thousands) | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :-------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Revenue | $93,049 | $84,544 | $179,266 | $167,933 | | Gross Profit | $35,612 | $22,898 | $67,494 | $43,101 | | Operating Loss | $(4,045) | $(13,387) | $(5,359) | $(32,044) | | Net Loss | $(4,077) | $(13,416) | $(5,479) | $(32,282) | - Revenue increased by 10.1% for the three months and 6.7% for the six months ended June 30, 2024, primarily due to increases in baby apparel, wipes, and baby personal care revenue, and lower trade spend[104][105] - Gross profit increased by 55.5% for the three months and 56.6% for the six months ended June 30, 2024, driven by cost savings, price increases, volume growth, and efficient trade spend[107][108] Liquidity and Capital Resources - As of June 30, 2024, the company had $36.6 million in cash and cash equivalents[117] - The company has a $35.0 million revolving credit facility, with $20.5 million available to be drawn as of June 30, 2024, and no outstanding balance[118] - Net cash provided by operating activities for the six months ended June 30, 2024, was $3.3 million, a slight decrease from $3.8 million in the prior year[123] Non-GAAP Financial Measure - Adjusted EBITDA is used by management to evaluate performance, excluding interest, taxes, depreciation, amortization, stock-based compensation, litigation fees, CEO/CCO transition expenses, and restructuring costs[128] Adjusted EBITDA Reconciliation | Adjusted EBITDA (in thousands) | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :----------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Adjusted EBITDA | $7,595 | $(4,099) | $10,239 | $(14,432) | Material Cash Requirements - There were no material changes to the company's cash requirements as of June 30, 2024, from those described in its Annual Report[132] Critical Accounting Policies and Estimates - No material changes to critical accounting estimates were reported for the three and six months ended June 30, 2024, from those discussed in the Annual Report[134] Recent Accounting Pronouncements - Information on recently issued and adopted accounting pronouncements is detailed in Note 2, 'Summary of Significant Accounting Policies'[135] Emerging Growth Company Status - As an emerging growth company, the company has elected to use the extended transition period for complying with new or revised accounting standards, which may affect comparability with other public companies[136] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, The Honest Company is exempt from providing quantitative and qualitative disclosures about market risk - The company is not required to provide information on market risk as it qualifies as a smaller reporting company under SEC rules and regulations[137] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2024 - The principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2024[138] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2024[139] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section incorporates by reference the detailed information on legal proceedings from Note 7 of the condensed consolidated financial statements - Legal proceedings information is incorporated by reference from the 'Litigation' section in Note 7 of the condensed consolidated financial statements[141] Item 1A. Risk Factors The company faces risks in growth management, competition, and consumer retention, with new risks arising from senior management changes - Key risks include managing future growth, fluctuating quarterly operating results, intense competition, cybersecurity vulnerabilities, and the impact of macroeconomic trends[143] - The departure of Jessica Warren as Chief Creative Officer and the termination of her likeness agreement could adversely affect the business, financial condition, and results of operations[146] - The company's future success is highly dependent on retaining senior management and other key personnel, including CEO Carla Vernón, and attracting qualified employees[147] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds for the period - No unregistered sales of equity securities or use of proceeds were reported[152] Item 3. Defaults Under Senior Securities The company reported no defaults under senior securities for the period - No defaults under senior securities were reported[152] Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - This item is not applicable to the company[152] Item 5. Other Information No other information was reported under this item - No other information was reported[152] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents and officer certifications - Key exhibits include the Amended and Restated Articles of Incorporation and Bylaws, and the Mutual Separation Agreement with Jessica M (Alba) Warren dated April 8, 2024[154] - Certifications from the Principal Executive Officer and Principal Financial Officer are included as exhibits 31.1, 31.2, 32.1, and 32.2[154] Signatures The report was duly signed on August 8, 2024, by the Chief Executive Officer and Chief Financial Officer - The report was signed by Carla Vernón (CEO) and David Loretta (CFO) on August 8, 2024[156]