The Honest pany(HNST) - 2025 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements The company reported a $3.3 million net income in Q1 2025, a turnaround from a $1.4 million net loss, with total assets increasing to $265.3 million and operating cash flow at -$2.9 million Notes to Financial Statements - The company operates as a single reportable segment, with its CEO reviewing performance at the consolidated entity level, and substantially all revenue is from customers in the United States[26][27] - Revenue from the Direct-to-Consumer (DTC) channel, Honest.com, constituted 11% of total revenue in Q1 2025, down from 15% in Q1 2024, reflecting a strategic shift[41] - The company has a $35.0 million revolving credit facility (2023 Credit Facility) maturing in April 2026, with no outstanding balance and $30.3 million available to be drawn as of March 31, 2025[47] - A securities litigation case was settled for $20 million, fully funded by the company's insurance carriers, with preliminary court approval on April 14, 2025[58][83] - As of March 31, 2025, there was $26.5 million of unrecognized stock-based compensation expense related to unvested RSUs, expected to be recognized over a weighted-average period of 2.7 years[67] - Subsequent to the quarter end, on May 7, 2025, the company announced the appointment of Curtiss Bruce as the new Chief Financial Officer, effective June 2, 2025[84] Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Cash and cash equivalents | $72,818 | $75,435 | | Inventories | $90,262 | $85,266 | | Total current assets | $234,621 | $213,918 | | Total assets | $265,304 | $247,393 | | Total current liabilities | $73,957 | $59,889 | | Total liabilities | $84,947 | $73,086 | | Total stockholders' equity | $180,357 | $174,307 | Condensed Consolidated Statements of Comprehensive Income (Loss) (in thousands) | Account | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Revenue | $97,250 | $86,217 | | Gross profit | $37,670 | $31,882 | | Operating income (loss) | $2,507 | $(1,315) | | Net income (loss) | $3,254 | $(1,403) | | Diluted EPS | $0.03 | $(0.01) | Condensed Consolidated Statements of Cash Flows (in thousands) | Activity | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(2,938) | $336 | | Net cash used in investing activities | $(62) | $(76) | | Net cash provided by financing activities | $383 | $498 | | Net (decrease) increase in cash | $(2,617) | $758 | Management's Discussion and Analysis (MD&A) Management attributes 12.8% revenue growth to increased wipes and baby personal care sales, with gross margin improving to 38.7% and Adjusted EBITDA rising to $6.9 million Transformation Initiative and Strategy - The company is executing a Transformation Initiative focused on three pillars: Brand Maximization, Margin Enhancement, and Operating Discipline, including a strategic shift away from the DTC channel[92][93][100] - A core growth strategy is to increase physical availability in retail stores, with plans to transition Honest.com to consumer education and marketing beyond 2025[96] Results of Operations Comparison of Q1 2025 and Q1 2024 (in thousands) | Metric | Q1 2025 | Q1 2024 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenue | $97,250 | $86,217 | $11,033 | 12.8% | | Cost of Revenue | $59,580 | $54,335 | $5,245 | 9.7% | | Gross Profit | $37,670 | $31,882 | $5,788 | 18.2% | | Gross Margin | 38.7% | 37.0% | N/A | +170 bps | | SG&A | $21,041 | $22,420 | $(1,379) | (6.2)% | | Marketing | $12,270 | $9,096 | $3,174 | 34.9% | | R&D | $1,852 | $1,681 | $171 | 10.2% | | Operating Income (Loss) | $2,507 | $(1,315) | $3,822 | N/A | - Revenue growth was primarily driven by a $9.7 million increase in wipes revenue and a $2.6 million increase in baby personal care revenue[126] - Gross profit improvement was driven by sales volume growth, supply chain cost savings, and product mix, partially offset by a $3.0 million inventory write-down related to a new diaper renovation[109][128] - The 34.9% increase in marketing expense was due to a $1.6 million increase in digital brand advertising and a $1.5 million increase in retail marketing[132] Liquidity and Capital Resources - As of March 31, 2025, the company had $72.8 million in cash and cash equivalents and believes this is sufficient to meet operational needs for the next 12 months[135] Cash Flow Summary (in thousands) | Activity | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Net cash from operating activities | $(2,938) | $336 | | Net cash from investing activities | $(62) | $(76) | | Net cash from financing activities | $383 | $498 | - The $2.9 million cash used in operating activities in Q1 2025 was primarily due to a $5.8 million increase in inventory and a $5.8 million decrease in accounts payable and accrued expenses, partially offset by net income and non-cash adjustments[145] Non-GAAP Financial Measures Reconciliation of Net Income (Loss) to Adjusted EBITDA (in thousands) | Reconciliation Item | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Net income (loss) | $3,254 | $(1,403) | | Interest and other (income) expense, net | $(787) | $63 | | Income tax provision | $40 | $25 | | Depreciation and amortization | $717 | $717 | | Stock-based compensation | $2,412 | $2,523 | | Securities litigation expense | $1,036 | $402 | | Founder/CCO transition expense | $— | $158 | | Payroll tax expense related to stock-based compensation | $257 | $157 | | Adjusted EBITDA | $6,929 | $2,642 | Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2025, with no material changes to internal control over financial reporting during the quarter - Based on an evaluation as of March 31, 2025, the principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective[169] - There were no changes in the company's internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, these controls[170] PART II. OTHER INFORMATION Risk Factors The company faces significant risks, including new tariffs on goods from China (up to 145%) and North America (25%), alongside competition, customer reliance, and supply chain disruptions - A significant new risk factor relates to international trade disputes and tariffs, with the U.S. government announcing new tariffs in April 2025, including an additional 145% on certain goods from China and 25% on certain goods from Mexico and Canada[179] - These tariffs could directly impact key products, as baby wipes are imported from China and diapers are imported from Mexico, potentially leading to increased costs, price increases for consumers, or the need to shift manufacturing[179] - Other significant risks include potential loss of a major retail customer, failure to cost-effectively acquire and retain consumers, intense market competition, and the successful execution of strategic initiatives like the Transformation Initiative[175] Other Information This section incorporates legal proceedings by reference, confirms no unregistered equity sales or senior security defaults, and notes no new 10b5-1 trading plans by officers or directors - Legal proceedings information is incorporated by reference from Note 7 of the financial statements[172] - No officers or directors entered into a 10b5-1 trading plan during the three months ended March 31, 2025[186]