The Honest pany(HNST) - 2025 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's analysis of financial performance Item 1. Condensed Consolidated Financial Statements (Unaudited) This section presents the Company's unaudited condensed consolidated financial statements and related notes Condensed Consolidated Balance Sheets This table provides a snapshot of the Company's assets, liabilities, and equity at specific dates | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :-------------------------------- | :----------------------------- | :------------------------------- | | Total assets | $249,028 | $247,393 | | Total liabilities | $62,000 | $73,086 | | Total stockholders' equity | $187,028 | $174,307 | | Cash and cash equivalents | $72,077 | $75,435 | | Inventories | $95,033 | $85,266 | | Accounts payable | $21,171 | $22,807 | | Accrued expenses | $31,092 | $35,869 | Condensed Consolidated Statements of Comprehensive Income (Loss) This table details the Company's revenues, expenses, and net income or loss over specific periods | Metric (in thousands) | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Six months ended June 30, 2025 | Six months ended June 30, 2024 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | $93,459 | $93,049 | $190,709 | $179,266 | | Gross profit | $37,752 | $35,612 | $75,422 | $67,494 | | Operating income (loss) | $2,888 | $(4,045) | $5,395 | $(5,359) | | Net income (loss) | $3,870 | $(4,077) | $7,123 | $(5,479) | | Basic EPS | $0.03 | $(0.04) | $0.06 | $(0.06) | | Diluted EPS | $0.03 | $(0.04) | $0.06 | $(0.06) | Condensed Consolidated Statements of Stockholders' Equity (Deficit) This table outlines changes in the Company's equity, including accumulated deficit and common stock | Metric (in thousands) | December 31, 2024 | March 31, 2025 | June 30, 2025 | | :-------------------- | :---------------- | :------------- | :------------ | | Total Stockholders' Equity | $174,307 | $180,357 | $187,028 | | Accumulated Deficit | $(485,192) | $(481,938) | $(478,068) | | Common Stock Shares Outstanding | 109,159,697 | 110,488,696 | 111,600,237 | Condensed Consolidated Statements of Cash Flows This table summarizes the Company's cash flows from operating, investing, and financing activities | Cash Flow Activity (in thousands) | Six months ended June 30, 2025 | Six months ended June 30, 2024 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash (used in) provided by operating activities | $(3,683) | $3,281 | | Net cash used in investing activities | $(143) | $(91) | | Net cash provided by financing activities | $468 | $576 | | Net (decrease) increase in cash and cash equivalents | $(3,358) | $3,766 | | Cash and cash equivalents, end of period | $72,077 | $36,593 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed financial statements 1. Nature of Business This note describes the Company's core business activities and its re-incorporation details - The Honest Company, Inc. was re-incorporated in Delaware on May 23, 2012, and focuses on creating cleanly-formulated and sustainably-designed personal care products[24] 2. Summary of Significant Accounting Policies This note outlines the key accounting principles and policies applied in preparing the financial statements - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP and SEC rules for interim financial information, with certain disclosures condensed or omitted[25] - The Company operates as one operating segment, with the CEO as the chief operating decision maker, and substantially all revenue and long-lived assets are located in the United States[27][28] - As an "emerging growth company," the Company has elected to delay the adoption of new or revised accounting pronouncements applicable to public companies until they apply to private companies[36][167] - ASU No. 2023-09 (Income Taxes) is effective for annual periods beginning after December 15, 2024, and is not expected to have a material impact. ASU No. 2024-03 (Income Statement Expenses) is effective for annual periods beginning after December 15, 2026, and its impact is currently being evaluated[39][40] 3. Revenue This note details the Company's revenue recognition policies and provides a breakdown of revenue by channel - Revenue is recognized when control of promised goods is transferred to customers, either at shipment/delivery for retail and third-party e-commerce, or at delivery to the carrier for direct-to-consumer sales[41][42] Honest.com Revenue as % of Total Revenue | Channel | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Six months ended June 30, 2025 | Six months ended June 30, 2024 | | :------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Honest.com Revenue as % of Total Revenue | 11% | 13% | 11% | 14% | - The Company did not recognize any revenue or associated cost of revenue related to marketing and transportation credits for the three and six months ended June 30, 2025 and 2024. $0.3 million of credits were used for the six months ended June 30, 2025, compared to $1.5 million in the prior year[44] 4. Fair Value Measurements This note describes the Company's fair value measurements for financial assets, primarily money market funds Financial Asset (in thousands) | Financial Asset (in thousands) | June 30, 2025 (Level 1) | December 31, 2024 (Level 1) | | :----------------------------- | :---------------------- | :-------------------------- | | Money market funds | $56,452 | $55,280 | - Fair value measurements are categorized into a three-level hierarchy, with money market funds primarily measured using Level 1 inputs (quoted market prices in active markets)[35] 5. Credit Facilities This note details the Company's revolving credit facility, including its terms and outstanding balance - The Company has a $35.0 million revolving credit facility (2023 Credit Facility) maturing on April 30, 2026, with $31.3 million available to be drawn as of June 30, 2025[48] - As of June 30, 2025, there was no outstanding balance under the 2023 Credit Facility, and the Company was in compliance with all covenants[48][51] 6. Accrued Expenses This note provides a breakdown of the Company's accrued expenses at specific reporting dates Accrued Expense (in thousands) | Accrued Expense (in thousands) | June 30, 2025 | December 31, 2024 | | :----------------------------- | :------------ | :---------------- | | Total accrued expenses | $31,092 | $35,869 | | Accrued inventory purchases | $10,886 | $13,095 | | Accrued rent | $8,765 | $8,541 | | Payroll and payroll related expenses | $4,549 | $8,410 | 7. Commitments and Contingencies This note discloses the Company's legal proceedings and other contingent liabilities - In the Prop 65 litigation, the Court granted the Company's motion for summary judgment on January 23, 2025, but CAPA filed a Notice of Appeal on April 8, 2025; the outcome remains uncertain[54] - The Securities Litigation Case was preliminarily settled for $20.0 million, fully funded by the Company's insurance carriers, with a final order and judgment entered by the court on July 30, 2025[55][84] - Multiple derivative complaints alleging breach of fiduciary duties and other violations are in preliminary stages and currently stayed, with uncertain outcomes[56][57] 8. Stock-Based Compensation This note details the Company's stock-based compensation expense and outstanding equity awards Stock-Based Compensation Expense (in thousands) | Stock-Based Compensation Expense (in thousands) | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Six months ended June 30, 2025 | Six months ended June 30, 2024 | | :---------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Selling, general and administrative | $2,495 | $8,739 | $4,736 | $11,153 | | Research and development | $221 | $166 | $392 | $275 | | Total stock-based compensation expense | $2,716 | $8,905 | $5,128 | $11,428 | - As of June 30, 2025, there were 3,559,136 stock options outstanding with a weighted average exercise price of $5.45[60] - Unrecognized stock-based compensation expense related to unvested RSUs was $22.8 million as of June 30, 2025, expected to be recognized over a weighted-average period of 1.4 years[65] - On January 1, 2025, 4,356,092 additional shares were reserved for issuance under the 2021 Equity Incentive Plan, and 1,089,023 additional shares under the 2021 ESPP[61][66] 9. Net Income (Loss) per Share Attributable to Common Stockholders This note presents the basic and diluted net income or loss per share for common stockholders EPS Metric | EPS Metric | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Six months ended June 30, 2025 | Six months ended June 30, 2024 | | :--------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Basic | $0.03 | $(0.04) | $0.06 | $(0.06) | | Diluted | $0.03 | $(0.04) | $0.06 | $(0.06) | - Potentially dilutive shares totaling 4,179,494 for the three months and 2,280,805 for the six months ended June 30, 2025, were excluded from diluted EPS computation because their inclusion would have been antidilutive[71] 10. Income Taxes This note discusses the Company's income tax position, including deferred tax assets and valuation allowance - The Company maintains a full valuation allowance against its U.S. federal and state deferred tax assets due to cumulative losses, but believes there is a reasonable possibility of releasing a portion of this allowance in the near term due to recent profitability[74] - The 'One Big Beautiful Bill Act of 2025' was enacted on July 4, 2025, and the Company is currently evaluating its impact on consolidated financial statements[76] 11. Leases This note provides information on the Company's operating leases, including right-of-use assets and liabilities Lease Metric (in thousands) | Lease Metric (in thousands) | June 30, 2025 | | :-------------------------- | :------------ | | Operating lease right-of-use asset | $13,946 | | Total lease liabilities | $17,507 | - The weighted-average remaining lease term for operating leases is 2.1 years, with a weighted-average discount rate of 2.29%[83] - Cash paid for operating leases for the six months ended June 30, 2025, was $4.23 million[83] 12. Subsequent Events This note discloses significant events occurring after the balance sheet date - On July 30, 2025, the court entered a final order and judgment disposing of the Securities Litigation Case, following preliminary approval of the class settlement[84] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of financial condition, operational results, and capital resources Overview This section introduces the Company's business model, product categories, and omnichannel strategy - The Honest Company is a personal care company dedicated to creating cleanly-formulated and sustainably-designed products across categories like diapers, wipes, baby personal care, beauty, apparel, household care, and wellness[86] - The Company's omnichannel presence includes strategic partnerships with Target, Amazon, and Walmart. Beyond 2025, Honest.com will transition away from being a shipping and fulfillment channel, focusing on consumer education and driving purchases through leading retailers[90] Transformation Initiative This section outlines the Company's strategic initiative to enhance brand, margins, and operational discipline - In 2023, the Company executed a broad-based Transformation Initiative to build the Honest brand, drive growth in higher-margin areas, strengthen its cost structure, and improve executional excellence[91] - The initiative is guided by three Transformation Pillars: Brand Maximization (leveraging brand strength, pricing strategy, North America focus), Margin Enhancement (exiting low-margin businesses, SKU rationalization, optimizing manufacturing), and Operating Discipline (realigning resources to higher-margin opportunities, managing working capital)[92][95] Key Factors Affecting Our Performance This section discusses critical internal and external factors influencing the Company's financial performance - Growth depends on improving operational and marketing efficiency, increasing physical availability through expanded retail partnerships, and prioritizing growth in higher-margin products like wipes[94][97][98] - Continued innovation through in-house R&D and maintaining brand awareness are crucial for attracting and retaining consumers in the clean products market[99][100] - Macroeconomic trends, including inflationary pressures and tariffs, have adversely affected the supply chain, leading to increased product and labor costs. The Company expects increased purchase costs from its diaper manufacturer to negatively impact cost of revenue in 2025[103][104] - Inventory levels were increased in the first half of 2025 to mitigate the impact of incremental tariffs. Past inventory write-offs occurred due to the termination of the Likeness Agreement with Jessica Alba[107][108] - Discussions with Butterblu, LLC regarding the supplier services agreement for baby apparel, which runs until December 31, 2026, could result in early termination, disputes, and related costs[109][110] Components of Results of Operations This section defines the key financial line items and their drivers within the Company's income statement - Revenue is generated from product sales through retailers, third-party e-commerce, and Honest.com, recognized net of allowances[111] - Cost of revenue includes merchandise purchase price, shipping, freight, duties, packaging, credit card fees, warehouse costs, depreciation, allocated overhead, labor, and inventory reserves[112] - Operating expenses consist of selling, general and administrative (SG&A), marketing, and research and development (R&D). SG&A is expected to decrease as a percentage of revenue, while R&D expenses are expected to increase in absolute dollars[114][115][118] - Interest and other income (expense), net, primarily includes interest income from investments and fees from the 2023 Credit Facility[119] - The Company maintains a full valuation allowance for its federal and state deferred tax assets due to historical net losses[121] Results of Operations This section provides a detailed comparative analysis of the Company's financial performance Metric (in thousands) | Metric (in thousands) | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Six months ended June 30, 2025 | Six months ended June 30, 2024 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | $93,459 | $93,049 | $190,709 | $179,266 | | Cost of revenue | $55,707 | $57,437 | $115,287 | $111,772 | | Gross profit | $37,752 | $35,612 | $75,422 | $67,494 | | Selling, general and administrative | $20,352 | $26,431 | $41,393 | $48,850 | | Marketing | $12,552 | $11,512 | $24,822 | $20,608 | | Research and development | $1,960 | $1,714 | $3,812 | $3,395 | | Operating income (loss) | $2,888 | $(4,045) | $5,395 | $(5,359) | | Interest and other income (expense), net | $1,026 | $(19) | $1,812 | $(82) | | Net income (loss) | $3,870 | $(4,077) | $7,123 | $(5,479) | - Revenue increased by 0.4% for Q2 2025 and 6.4% for YTD 2025, primarily driven by retail revenue (wipes), partially offset by declines in diaper and adult facial care revenue, and Honest.com revenue[125][126] - Gross profit increased by 6.0% for Q2 2025 and 11.7% for YTD 2025, mainly due to changes in inventory reserves, sales volume growth, and supply chain cost savings, partially offset by tariff costs[131][132] - Selling, general and administrative expenses decreased by 23.0% for Q2 2025 and 15.3% for YTD 2025, primarily due to a significant decrease in stock-based compensation expense (related to RSU acceleration for a former officer in 2024) and reduced legal expenses[133][134] - Marketing expenses increased by 9.0% for Q2 2025 and 20.4% for YTD 2025, driven by higher retail marketing and direct brand advertising[135][136] - Interest and other income (expense), net, shifted from a net expense to a net income of $1.0 million for Q2 2025 and $1.8 million for YTD 2025, primarily due to increased interest income on money market accounts[139][140] Liquidity and Capital Resources This section assesses the Company's ability to meet its financial obligations and fund operations - As of June 30, 2025, the Company had $72.1 million in cash and cash equivalents and believes existing cash and cash generated from operations will be sufficient to meet short-term projected operations for the next 12 months[141] - The 2023 Credit Facility provides a $35.0 million revolving credit facility, with $31.3 million available to be drawn as of June 30, 2025, and no outstanding balance[142][143] Cash Flow Activity (in thousands) | Cash Flow Activity (in thousands) | Six months ended June 30, 2025 | Six months ended June 30, 2024 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash (used in) provided by operating activities | $(3,683) | $3,281 | | Net cash used in investing activities | $(143) | $(91) | | Net cash provided by financing activities | $468 | $576 | - Net cash used in operating activities for the six months ended June 30, 2025, was $3.7 million, primarily due to increases in inventory and accounts receivable, and decreases in accounts payable and accrued expenses[150] - The Company does not anticipate declaring or paying any cash dividends in the foreseeable future, and the 2023 Credit Facility contains restrictions on dividend payments[157] Non-GAAP Financial Measure This section defines and reconciles Adjusted EBITDA, a non-GAAP metric for performance assessment - Adjusted EBITDA is a non-GAAP financial measure used by management to evaluate operating performance, excluding interest, taxes, depreciation, amortization, stock-based compensation, litigation/settlement fees, and executive officer transition expenses[159][160] Adjusted EBITDA (in thousands) | Adjusted EBITDA (in thousands) | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Six months ended June 30, 2025 | Six months ended June 30, 2024 | | :----------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Adjusted EBITDA | $7,617 | $7,595 | $14,545 | $10,239 | - Adjusted EBITDA has limitations as an analytical tool and should be considered alongside GAAP financial measures[161] Material Cash Requirements This section confirms no material changes to the Company's cash requirements since the last annual report - As of June 30, 2025, there were no material changes to the Company's cash requirements from those described in its Annual Report[163] Critical Accounting Policies and Estimates This section addresses significant accounting judgments and estimates used in financial statement preparation - The preparation of condensed consolidated financial statements requires management to make estimates and assumptions, which are detailed in the Annual Report. No material changes to these critical accounting estimates occurred during the three and six months ended June 30, 2025[164][165] Recent Accounting Pronouncements This section refers to Note 2 for details on recently issued accounting standards - Refer to Note 2, "Summary of Significant Accounting Policies," for a discussion of recently issued accounting pronouncements[166] Emerging Growth Company Status This section confirms the Company's election to use the extended transition period for new accounting standards - The Company has elected to take advantage of the extended transition period for complying with new or revised accounting standards available to emerging growth companies under the JOBS Act[167] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, the Company is not required to provide market risk disclosures - The Company, as a smaller reporting company, is not required to provide the information regarding quantitative and qualitative disclosures about market risk[170] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2025, with no material changes - Management, with the participation of the principal executive officer and principal financial officer, concluded that the Company's disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2025[171] - There was no change in the Company's internal control over financial reporting that materially affected, or is reasonably likely to materially affect, internal control over financial reporting during the quarter ended June 30, 2025[172] - Management acknowledges that controls and procedures, no matter how well designed, can only provide reasonable assurance and may not prevent all errors and fraud[173] PART II. OTHER INFORMATION This section provides additional disclosures on legal proceedings, risk factors, and other corporate information Item 1. Legal Proceedings This section incorporates by reference information on legal proceedings from Note 7 to the financial statements - Information regarding legal proceedings is incorporated by reference from Note 7 of the condensed consolidated financial statements[175] Item 1A. Risk Factors This section outlines significant risks to the Company's business, including growth, operations, retail, trade, and supply chain - Key risks include the ability to effectively manage future growth, potential fluctuations in quarterly operating results, dependence on achieving long-term strategy, and the impact of retail customer consolidation or loss[178] - International trade disputes and U.S. government trade policy, including recently enacted tariffs (e.g., 10% baseline, additional 145% on China goods, 25% on Mexico/Canada goods in April 2025, later reduced for China), could increase product costs, impact gross margin, and lead to supply chain disruptions[178][182][183] - The Company relies on third-party suppliers and manufacturers, and issues such as raw material availability, price increases, quality control problems, or failure to meet standards could harm the brand and business[186][187][189] - Inability to accurately forecast revenue, gross margin, or operating expenses, especially in the current macroeconomic environment, poses a significant risk to financial performance[190] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item reports no unregistered sales of equity securities or use of proceeds during the period - There were no unregistered sales of equity securities and no use of proceeds to report[191] Item 3. Defaults Under Senior Securities This item reports no defaults under senior securities during the period - There were no defaults under senior securities to report[192] Item 4. Mine Safety Disclosures This item states that mine safety disclosures are not applicable to the Company - Mine safety disclosures are not applicable to the Company[193] Item 5. Other Information This section details Rule 10b5-1 trading arrangements adopted by officers during the quarter - Kate Barton, Chief Growth Officer, adopted a Rule 10b5-1 trading arrangement on May 12, 2025, to sell up to 55,671 shares of common stock[194] - Etienne von Kunssberg, SVP, Supply Chain, entered into a sell-to-cover arrangement adopted pursuant to Rule 10b5-1 on June 16, 2025, to satisfy tax withholding obligations from RSU vesting[198] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents and certifications - Exhibits include Amended and Restated Articles of Incorporation, Amended and Restated Bylaws, Employment Agreement for Curtiss Bruce, Retirement Agreement for Dave Loretta, and certifications from the Principal Executive and Financial Officers[200] Signatures The report was duly signed on August 6, 2025, by the Chief Executive Officer and Chief Financial Officer - The report was signed on August 6, 2025, by Carla Vernón (Chief Executive Officer and Director) and Curtiss Bruce (Executive Vice President, Chief Financial Officer)[204]