Honest Company, Inc. 10-K

Item 7A. Quantitative and Qualitative Disclosures about Market Risk We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates and foreign currency exchange rates. Interest Rate Risk We had cash and cash equivalents of $50.8 million as of December 31, 2021, which consisted of bank accounts, money market funds, certificates of deposit and corporate bonds. We had short-term investments of $42.4 million as of December 31, 2021, which consisted of commercial paper, certificates of deposit, corporate bonds and U.S. government and agency securities. Interest-earning instruments carry a degree of interest rate risk. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. Due to the short-term nature of our investments, we have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates. A hypothetical 10% change in interest rates would not result in a material impact on our consolidated financial statements. 65 We are also subject to interest rate risk in connection with our 2021 Credit Facility. See the section titled “—Liquidity and Capital Resources—2021 Credit Facility” above. Based on the average interest rate on the instruments under the 2021 Credit Facility during the year ended December 31, 2021, and to the extent that borrowings were outstanding, we do not believe that a hypothetical 10% change in the interest rate would have a material effect on our results of operations or financial condition for the year ended December 31, 2021. Foreign Currency Exchange Risk Our reporting currency is the U.S. dollar. Gains or losses due to transactions in foreign currencies are reflected in the consolidated statements of comprehensive loss under the line item interest and other income (expense), net. We have not engaged in the hedging of foreign currency transactions to date, although we may choose to do so in the future. We do not believe that an immediate 10% increase or decrease in the relative value of the U.S. dollar to other currencies would have a material effect on our consolidated financial statements. Inflation Risk We have experienced an increase in commodity prices, labor costs, input costs and transportation costs that has continued into fiscal year 2022. In response to these rising prices, we raised prices across a significant portion of our product offerings to consumers and customers. These price increases could impact the price of our products and the demand for our products. If we are unable to offset these changing costs through price increases or cost reductions, our inability or failure to do so could harm our business, results of operations and financial condition. Finished Goods Inventory Pricing Risk The raw materials used for our products include sustainably harvested fluff pulp, plant-based substrate in our baby wipes, and other biobased materials. Some of our supplier contracts allow for finished goods price changes based on significant fluctuations in the price of raw materials that may create price risk on our finished goods inventory. A hypothetical 10% increase or decrease in the weighted-average cost of finished goods inventory as of December 31, 2021 would have resulted in an increase or decrease to cost of revenue for the year ended December 31, 2021 of approximately $6.1 million. We seek to mitigate the impact of raw materials cost increases passed onto us by negotiating pricing agreements with our suppliers and working together with suppliers on productivity initiatives. We strive to offset the impact of finished goods cost increases with a combination of cost savings initiatives and efficiencies and price increases to our customers. 66 Item 8. Consolidated Financial Statements. Index to Financial Statements Page Report of Independent Registered Public Accounting Firm (PCAOB ID 238 ) 68 Consolidated Balance Sheets 69 Consolidated Statements of Comprehensive Loss 70 Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity ( Deficit ) 71 Consolidated Statements of Cash Flows 73 Notes to Consolidated Financial Statements 74 67 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of The Honest Company, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of The Honest Company, Inc. and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of comprehensive loss, of redeemable convertible preferred stock and stockholders' equity (deficit) and of cash flows for each of the three years in the period ended December 31, 2021, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers Los Angeles, California March 28, 2022 We have served as the Company’s auditor since 2012. 68 The Honest Company, Inc. Consolidated Balance Sheets (in thousands, except share and per share amounts) December 31, 2021 December 31, 2020 Assets Current assets Cash and cash equivalents $ 50,791 $ 29,259 Restricted cash — 1,752 Short-term investments 42,388 34,425 Accounts receivable, net 31,784 22,795 Inventories 75,668 76,669 Prepaid expenses and other current assets 13,165 8,657 Total current assets 213,796 173,557 Restricted cash, net of current portion — 6,189 Property and equipment, net 52,952 56,703 Goodwill 2,230 2,230 Intangible assets, net 440 511 Other assets 3,179 1,542 Total assets $ 272,597 $ 240,732 Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) Current liabilities Accounts payable $ 28,743 $ 31,132 Accrued expenses 19,003 22,222 Deferred revenue 731 716 Total current liabilities 48,477 54,070 Long term liabilities Lease financing obligation, net of current portion 37,527 38,426 Other long-term liabilities 7,487 8,657 Total liabilities 93,491 101,153 Commitments and contingencies (Note 11) Redeemable convertible preferred stock, $ 0.0001 par value, 49,192,248 shares authorized at December 31, 2020; 49,100,928 shares issued and outstanding as of December 31, 2020; (liquidation preference of $ 396,726 as of December 31, 2020) — 376,404 Stockholders’ equity (deficit) Preferred stock, $ 0.0001 par value, 20,000,000 shares authorized at December 31, 2021, none issued or outstanding as of December 31, 2021 — — Common stock, $ 0.0001 par value, 1,000,000,000 and 150,000,000 shares authorized at December 31, 2021 and 2020, respectively; 91,512,140 and 34,089,186 shares issued and outstanding as of December 31, 2021 and 2020, respectively 9 3 Additional paid-in capital 570,794 116,055 Accumulated deficit ( 391,656 ) ( 352,977 ) Accumulated other comprehensive income (loss) ( 41 ) 94 Total stockholders’ equity (deficit) 179,106 ( 236,825 ) Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit) $ 272,597 $ 240,732 The accompanying notes are an integral part of these Consolidated Financial Statements. 69 The Honest Company, Inc. Consolidated Statements of Comprehensive Loss (in thousands, except share and per share amounts) For the year ended December 31, 2021 2020 2019 Revenue $ 318,639 $ 300,522 $ 235,587 Cost of revenue 209,467 192,626 159,733 Gross profit 109,172 107,896 75,854 Operating expenses Selling, general and administrative 84,059 71,253 70,310 Marketing 54,260 44,478 31,864 Research and development 7,679 5,705 5,137 Total operating expenses 145,998 121,436 107,311 Operating loss ( 36,826 ) ( 13,540 ) ( 31,457 ) Interest and other income (expense), net ( 1,776 ) ( 837 ) 429 Loss before provision for income taxes ( 38,602 ) ( 14,377 ) ( 31,028 ) Income tax provision 77 89 55 Net loss $ ( 38,679 ) $ ( 14,466 ) $ ( 31,083 ) Net loss per share attributable to common stockholders: Basic and diluted $ ( 0.43 ) $ ( 0.43 ) $ ( 0.92 ) Weighted-average shares used in computing net loss per share attributable to common stockholders: Basic and diluted 71,126,218 34,075,572 33,916,324 Other comprehensive income (loss) Unrealized gain (loss) on short-term investments, net of taxes ( 135 ) ( 28 ) 196 Comprehensive loss $ ( 38,814 ) $ ( 14,494 ) $ ( 30,887 ) The accompanying notes are an integral part of these Consolidated Financial Statements. 70 The Honest Company, Inc. Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) (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, 2018 49,066,658 $ 375,759 33,867,884 $ 3 $ 100,020 $ ( 308,358 ) $ ( 74 ) $ ( 208,409 ) Impact from adoption of ASC 606 — — — — — 930 — 930 Net loss — — — — — ( 31,083 ) — ( 31,083 ) Other comprehensive income — — — — — — 196 196 Issuance of Series D redeemable convertible preferred stock, net 72,852 1,371 — — — — — — Retirement of Series D redeemable convertible preferred stock, net ( 38,582 ) ( 726 ) — — — — — — Stock options exercised — — 165,190 — 252 — — 252 Stock-based compensation — — — — 7,838 — — 7,838 Balances at December 31, 2019 49,100,928 $ 376,404 34,033,074 $ 3 $ 108,109 $ ( 338,511 ) $ 122 $ ( 230,277 ) Net loss — — — — — ( 14,466 ) — ( 14,466 ) Other comprehensive loss — — — — — — ( 28 ) ( 28 ) Stock options exercised — — 56,112 — 41 — — 41 Stock-based compensation — — — — 7,905 — — 7,905 Balances at December 31, 2020 49,100,928 $ 376,404 34,089,186 $ 3 $ 116,055 $ ( 352,977 ) $ 94 $ ( 236,825 ) The accompanying notes are an integral part of these Consolidated Financial Statements. 71 The Honest Company, Inc. Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) (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, 2020 49,100,928 $ 376,404 34,089,186 $ 3 $ 116,055 $ ( 352,977 ) $ 94 $ ( 236,825 ) Net loss — — — — — — ( 38,679 ) — ( 38,679 ) Other comprehensive loss — — — — — — ( 135 ) ( 135 ) Stock options exercised — — 1,170,803 — 5,730 — — 5,730 Stock-based compensation — — — — 16,847 — — 16,847 Vested restricted stock units — — 173,835 — — — — — Dividends paid ($ 0.42 per share) — — — — ( 35,000 ) — — ( 35,000 ) Issuance of common stock pursuant to initial public offering, net of underwriting commissions and discounts and offering costs of $ 12.2 million — — 6,451,613 1 91,038 — — 91,039 Conversion of redeemable convertible preferred stock to common stock upon initial public offering ( 49,100,928 ) ( 376,404 ) 49,649,023 5 376,400 — — 376,405 Shares withheld related to net share settlement of equity awards — — ( 61,810 ) — ( 567 ) — — ( 567 ) Shares issued under employee stock purchase plan — — 39,490 — 291 — — 291 Balance at December 31, 2021 — $ — 91,512,140 $ 9 $ 570,794 $ ( 391,656 ) $ ( 41 ) $ 179,106 The accompanying notes are an integral part of these Consolidated Financial Statements. The Honest Company, Inc. Consolidated Statements of Cash Flows (in thousands) For the year ended December 31, 2021 2020 2019 Cash flows from operating activities Net loss $ ( 38,679 ) $ ( 14,466 ) $ ( 31,083 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 4,146 4,854 7,672 Stock-based compensation 16,847 7,905 8,380 Other 311 166 ( 156 ) Changes in assets and liabilities: Accounts receivable, net ( 8,989 ) 1,461 ( 2,458 ) Inventories 1,001 ( 24,129 ) 4,649 Prepaid expenses and other assets ( 6,114 ) ( 1,496 ) ( 1,421 ) Accounts payable, accrued expenses and other long-term liabilities ( 6,691 ) 13,748 ( 5,163 ) Deferred revenue 14 ( 109 ) ( 412 ) Net cash used in operating activities ( 38,154 ) ( 12,066 ) ( 19,992 ) Cash flows from investing activities Purchases of short-term investments ( 65,267 ) ( 22,462 ) ( 74,433 ) Proceeds from sales of short-term investments 27,394 5,830 4,839 Proceeds from maturities of short-term investments 29,470 53,528 81,262 Purchases of property and equipment ( 220 ) ( 200 ) ( 661 ) Net cash (used in) provided by investing activities ( 8,623 ) 36,696 11,007 Cash flows from financing activities Proceeds from initial public offering, net of underwriting commissions and discounts 96,517 — — Dividends paid ( 35,000 ) — — Proceeds from exercise of stock options 5,730 41 252 Payment of initial public offering costs ( 5,477 ) — — Taxes paid related to net share settlement of equity awards ( 567 ) — — Proceeds from ESPP 291 — — Purchase and retirement of Series D redeemable convertible preferred stock — — ( 285 ) Payments on lease obligations ( 1,126 ) ( 1,014 ) ( 272 ) Net cash provided by (used in) financing activities 60,368 ( 973 ) ( 305 ) Net (decrease) increase in cash, cash equivalents and restricted cash 13,591 23,657 ( 9,290 ) Cash, cash equivalents and restricted cash Beginning of the period 37,200 13,543 22,833 End of the period $ 50,791 $ 37,200 $ 13,543 Reconciliation of cash, cash equivalents and restricted cash to the consolidated balance sheets Cash and cash equivalents $ 50,791 $ 29,259 $ 13,543 Restricted cash, current — 1,752 — Restricted cash, non-current — 6,189 — Total cash, cash equivalents and restricted cash $ 50,791 $ 37,200 $ 13,543 Supplemental disclosures of cash flow information Cash paid during the period for: Interest $ 1,797 $ 1,844 $ 1,724 Income Taxes 76 $ 102 $ 75 Supplemental disclosures of noncash activities Equipment acquired under capital lease obligations $ 123 $ 71 $ 311 Deferred IPO costs included in accounts payable and accrued expenses $ — $ 533 $ — Capital expenditures included in accounts payable and accrued expenses $ 33 $ 44 $ 606 The accompanying notes are an integral part of these Consolidated Financial Statements. 73 The Honest Company, Inc. Notes to Consolidated Financial Statements As of December 31, 2021 (in thousands, except share and per share amounts, percentages and as otherwise indicated) 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 mission-driven lifestyle brand that formulates, designs and sells clean products with a focus on sustainability and thoughtful design. 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. Initial Public Offering The Company’s registration statement on Form S-1 (“IPO Registration Statement”) related to its initial public offering (“IPO”) was declared effective on May 4, 2021, and the Company’s common stock began trading on the Nasdaq Global Select Market on May 5, 2021. On May 7, 2021, the Company completed its IPO of 25,807,000 shares of the Company's common stock, $ 0.0001 par value per share at an offering price of $ 16.00 per share. The Company sold 6,451,613 shares and certain existing stockholders sold an aggregate of 19,355,387 shares. The Company received aggregate net proceeds of approximately $ 91.0 million after deducting underwriting discounts and commissions of $ 6.7 million and other offering expenses of $ 5.5 million. The Company granted the underwriters an option for a period of 30 days to purchase up to an additional 3,871,050 shares of common stock from the selling stockholders at $ 16.00 per share less the underwriting discounts and commissions. In May 2021, the underwriters fully exercised the option to purchase these additional shares from the selling stockholders. The Company did not receive any proceeds from the sale of shares of its common stock by the selling stockholders. Upon completion of the IPO, the Company paid $ 9.5 million in cash bonuses to certain employees including members of management, as well as $ 0.2 million in related payroll taxes and expenses. Cash bonuses of $ 9.1 million were recorded in sales, general and administrative expenses and $ 0.4 million were recorded in research and development expenses in the accompanying consolidated statement of comprehensive loss for the year ended December 31, 2021. In April 2021, the Company's board of directors declared a cash dividend of $ 35.0 million to the holders of record of its common stock and its redeemable convertible preferred stock as of May 3, 2021, which the Company paid on June 29, 2021 Immediately prior to the completion of the IPO, the Company filed an Amended and Restated Certificate of Incorporation, which authorized a total of 1,000,000,000 shares of common stock and 20,000,000 shares of preferred stock. Upon the filing of the Amended and Restated Certificate of Incorporation, 49,100,928 shares of the Company’s redeemable convertible preferred stock then outstanding with a carrying value of $ 376.4 million were automatically converted into 49,649,023 shares of the Company’s common stock. Upon completion of the IPO, the Company recognized a gain on extinguishment of the redeemable convertible preferred stock for earnings per share purposes of $ 29.0 million from the conversion of redeemable convertible preferred stock to common stock. Following the completion of the IPO, the Company has one class of authorized and outstanding common stock. See Note 10 " Redeemable Convertible Preferred Stock and Stockholders’ Deficit" for more information on the Company’s redeemable convertible preferred stock as of December 31, 2020. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The consolidated financial statements include the accounts of the Company, and its wholly owned subsidiaries after elimination of intercompany transactions and balances. Stock Split In April 2021, the Company effected a 1-for-2 forward stock split of its common and redeemable convertible preferred stock. In connection with the forward stock split, each issued and outstanding share of common stock, automatically and without action on the part of the holders, became two shares of common stock and each issued and outstanding share of redeemable convertible preferred stock, automatically and without action on the part of the holders, became two shares of redeemable convertible preferred stock. The par value per share of common and redeemable convertible preferred stock was not adjusted. All share, per share and related information presented in the consolidated financial statements and accompanying notes have been retroactively adjusted, where applicable, to reflect the impact of the stock split. 74 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 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 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 doubtful accounts, valuation of short-term investments, valuation of build-to-suit lease, capitalized software, useful lives associated with long-lived assets, 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 and for the periods prior to the Company's IPO, the fair value of common stock. 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. In March 2020, the World Health Organization declared the outbreak of the novel coronavirus disease (“COVID-19”) a pandemic. The full extent to which the outbreak of the COVID-19 pandemic will impact the Company’s business, results of operations and financial condition is still unknown and will depend on future developments, which are uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. In light of the unknown ultimate duration and severity of COVID-19, the Company faces a greater degree of uncertainty than normal in making certain judgments and estimates needed to apply significant accounting policies. 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 December 31, 2021 and through the date these 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 Household & Wellness trends, consumer demand for sanitizing and disinfecting products has decelerated at a more rapid than expected rate as more consumers have become vaccinated and retailers continue to manage heavy inventories of sanitization and disinfecting products in stores. The Company recorded an inventory write-off of $ 5.6 million throughout the year relating to certain sanitization and disinfecting products as the amount of inventory was significantly in excess of existing demand. In addition, the Company donated $ 0.7 million of face masks to its charitable partner Baby2Baby to assist in getting these products into the hands of families in need. The Company will continue to monitor and evaluate the uncertainty and volatility of these conditions and, in particular, the impact on the amount and valuation of the Company’s inventory in the future. Cash, Cash Equivalents, and Restricted Cash 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. As of December 31, 2020, restricted cash consisted of deposits in a bank account used to collateralize the letters of credit for certain lease arrangements. As of December 31, 2021, the Company is no longer required to post collateral in a restricted cash account. Refer to Note 8 included in these consolidated financial statements for additional information on the restricted cash account. Investments Investments consist of highly liquid investments in debt securities. Investments comprises commercial paper, certificates of deposit, corporate bonds and U.S. government and agency securities, which are classified as available-for-sale investments. The Company includes its available-for-sale investments in current assets because the securities represent investments of cash available for current operations. Available-for-sale investments are recorded at fair value, which is based on quoted market prices for such securities, if available, or is estimated on the basis of quoted market prices of financial instruments with similar characteristics. Unrealized holding gains and losses are excluded from earnings and are reported as a component of comprehensive loss. Realized gains or losses are recorded in interest and other income, net. 75 The Company evaluates the potential impairment through review of unrealized losses associated with its investments to determine if the impairment is “temporary” or “other-than-temporary.” A “temporary” unrealized loss is recorded in the accumulated other comprehensive loss component of stockholders’ deficit. Such an unrealized loss does not reduce net income for the applicable accounting period because the loss is not viewed as “other-than-temporary”. If the impairment is determined to be “other-than-temporary” the loss is recorded as an impairment charge in the period any such determination is made. The factors evaluated to differentiate between “temporary” and “other-than-temporary” include the projected future cash flows, credit rating actions, and assessment of the credit quality of the underlying collateral, as well as other factors. Concentrations Financial instruments that potentially subject the Company to credit risk consist principally of cash, cash equivalents, short-term investments and accounts receivable. The Company places its cash with high credit quality financial institutions, which typically exceed federally insured limits. The Company invests its excess cash primarily in highly rated money market funds and short-term debt instruments, diversifies its investments and, by policy, invests only in highly rated securities to minimize credit risk. The Company’s customers that accounted for 10% or more of total accounts receivable, net, were as follows: As of December 31, 2021 2020 Customer A 48 % 41 % Customer B 24 % 27 % The Company’s customers that accounted for 10% or more of total revenue were as follows: For the Year Ended December 31, 2021 2020 2019 Customer A 28 % 23 % 26 % Customer B 22 % 22 % 14 % The Company currently buys all of its diapers from one supplier. Additionally, the Company currently buys substantially all of its wipes from one supplier. Management believes that other suppliers could provide similar products on reasonable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible inventory shortage and loss of revenue, which would adversely affect the Company's operations. Accounts Receivable Sales made to consumers through the Company’s Honest.com website are conducted with credit cards, and the Company records its credit card sales in transit as accounts receivable at selling price less applicable deductions. The Company also extends credit in the normal course of business to its third-party ecommerce customers and retailers and performs credit evaluations on a case-by-case basis. The Company does not obtain collateral or other security related to its accounts receivable. Accounts receivable is presented net of allowances. 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 allowances as necessary for doubtful accounts. The allowance for doubtful accounts was $ 0.2 million and $ 1.4 million, respectively, as of December 31, 2021 and 2020. Inventories Inventories consist of finished goods and are stated at the lower of cost or estimated net realizable value. Cost is computed based on weighted average historical costs. The Company allocates certain overhead costs to the carrying value of its finished goods. The carrying value of inventories is reduced for any excess and obsolete inventory. Excess and obsolete inventory reductions are determined based on assumptions about future demand and sales prices, estimates of the impact of competition, and the age of inventory. If actual conditions are less favorable than those previously estimated by management, additional inventory write-downs could be required. 76 Property and Equipment, Net Property and equipment are stated at cost, net of accumulated depreciation and amortization. Repairs and maintenance costs are expensed as incurred. When assets are retired or otherwise disposed of, the cost and the related accumulated depreciation are removed from the respective accounts and any resulting gain or loss is reflected in the consolidated statements of comprehensive loss. Depreciation and amortization are recorded using the straight-line method over the estimated useful lives of the assets as follows: Machinery and equipment 3 - 20 years Computer and office equipment 3 - 5 years Capitalized software and website development costs 1 - 5 years Furniture and fixtures 3 - 5 years Building 40 years Leasehold improvements Lesser of the estimated useful life or the remaining lease term Deferred IPO Costs Deferred offering costs consisted of costs incurred in connection with the sale of the Company’s common stock in its IPO, including certain legal, accounting, and other IPO-related expenses. Immediately upon the completion of the Company's IPO, deferred offering costs of $ 5.5 million were reclassified into stockholders’ equity from other assets as a reduction from the proceeds of the offering. Leases The Company accounts for leases in accordance with Accounting Standards Codification (“ASC”) No. 840, Leases . The Company leases certain equipment under capital lease agreements. The assets and liabilities under capital lease are recorded at the lesser of the present value of aggregate future minimum lease payments, including estimated bargain purchase options, or the fair value of the asset under lease. Assets under capital lease are amortized using the straight-line method over the estimated useful life of the asset. Rent expense on operating leases is recorded on a straight-line basis over the lease term. Deferred rent represents the difference between rent amounts paid and amounts recognized as straight-line expense. The excess of straight-line rent expense over lease payments due is recorded as a deferred rent liability in accrued expenses, for the current portion, and other long-term liabilities, for the noncurrent portion, in the consolidated balance sheets. As of December 31, 2021, the Company recorded deferred rent liabilities of $ 1.0 million in accrued expenses and $ 7.4 million in other long-term liabilities. As of December 31, 2020, the Company recorded deferred rent liabilities of $ 0.9 million in accrued expenses and $ 8.4 million in other long-term liabilities. Build-to-Suit Lease The Company records assets and liabilities for the fair value of buildings under lease when it is considered the owner for accounting purposes only, or build-to-suit leases, to the extent it is involved in the construction of structural improvements or takes construction risk prior to commencement of a lease. Upon completion of construction of facilities under build-to-suit leases, the Company assesses whether these arrangements qualify for sales recognition under the sale-leaseback accounting guidance. If the Company continues to be the deemed owner, the facilities are accounted for as financing obligations. Upon completion of construction, the fair value of the lease property is depreciated over the building’s estimated useful life. At the conclusion of the lease term, the Company will de-recognize both the then carrying values of the asset and financing obligation. Capitalized Software and Website Development Costs The Company accounts for its internal-use software costs and website development costs in accordance with ASC No. 350-40, Internal-Use Software , and ASC No. 350-50, Website Development Costs , respectively. The Company capitalizes costs to purchase and develop its websites and internal-use software and amortizes such costs on a straight-line basis over the estimated useful life of the software once it is available for its intended use. Capitalization of internal-use costs begins when the preliminary project stage is completed, management with the relevant authority authorizes and commits to the funding of the project, and it is probable that the project will be completed and will be used to perform the function intended. Capitalization of these costs ceases once the project is substantially complete and the software is ready for its intended purpose. Capitalized internal-use software and 77 website development costs, including purchased software, is recorded in property and equipment, net in the consolidated balance sheets. For cloud-computing service arrangements, the Company capitalizes implementation costs consistent with internal-use software costs. Such capitalized costs are included within prepaid expenses and other current assets, for the current portion, and other assets, for the noncurrent portion, in the consolidated balance sheets and are expensed on a straight-line basis over the term of the service arrangement as selling, general and administrative expense. Capitalized implementation costs from cloud computing service arrangements was $ 0.9 million, net of $ 1.2 million of accumulated amortization as of December 31, 2021 and $ 0.9 million, net of $ 0.6 million of accumulated amortization as of December 31, 2020. Goodwill Goodwill represents the excess of purchase price over the fair value of net assets acquired in a business combination. Goodwill is not amortized but evaluated for impairment at least annually at the reporting unit level or whenever events or changes in circumstances indicate that the value may not be recoverable. Events or changes in circumstances which could trigger an impairment review include significant adverse changes in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner in which the Company uses the acquired assets or the strategy for the Company’s overall business, significant industry or economic trends, or significant underperformance relevant to expected historical or projected future results of operations. Goodwill is assessed for possible impairment by performing a qualitative analysis to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then additional impairment testing is not required. However, if the Company concludes otherwise, then the Company is required to perform the first of a two-step impairment test. The first step involves comparing the estimated fair value of a reporting unit with its respective book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired and no additional steps are necessary. If, however, the fair value of the reporting unit is less than its book value, then the carrying amount of the goodwill is compared with its implied fair value. The estimate of implied fair value of goodwill may require valuations of certain internally generated and unrecognized intangible assets. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. The Company tests goodwill for impairment annually at October 31. The Company performed its annual goodwill impairment test as of October 31, 2021 no impairment was identified. Intangible Assets, Net Intangible assets are stated at cost, net of accumulated amortization. Intangible assets consist of tradenames and domain names. Tradenames and domain names are amortized on a straight-line basis, which approximates the pattern in which the economic benefits are consumed, over the estimated useful lives of the assets of 15 years. Impairment of Long-Lived Assets The Company assesses the carrying value of its long-lived assets, consisting primarily of property and equipment and intangible assets, when there is evidence that events or changes in circumstances indicate that the carrying value of an asset or group of assets may not be recoverable. Such events or changes in circumstances may include a significant decrease in the market price of a long-lived asset, a significant change in the extent or manner in which an asset is used, a significant change in legal factors or in the business climate, a significant deterioration in the amount of revenue or cash flows expected to be generated from a group of assets, a current expectation that, more likely than not a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life, or any other significant adverse change that would indicate that the carrying value of an asset or group of assets may not be recoverable. The Company performs impairment testing at the asset group level that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable and the expected undiscounted future cash flows attributable to the asset group are less than the carrying amount of the asset group, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded. 78 Income Taxes Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities and are measured using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates or tax law on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. A valuation allowance is provided on deferred tax assets when it is determined that it is more likely than not that some portion or all of the net deferred tax assets will not be realized. The Company recognizes the tax benefit from uncertain tax positions only if it is more likely than not that the tax positions will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefit is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company recognizes interest and penalties related to income tax matters in income tax expense. Foreign Currency Transactions The Company records foreign currency gains or losses in other income, net in the consolidated statements of comprehensive loss, related to transactions denominated in currencies other than the U.S. dollar. During the years ended December 31, 2021, 2020 and 2019, realized and unrealized foreign currency (losses) and gains, net were $( 0.1 ) million, $ 0.1 million and $ 0.1 million, respectively. Contingent Liabilities If a potential loss contingency is considered probable, and the amount can be reasonably estimated, the Company accrues a liability for an estimated loss. If the reasonable estimate of the loss is a range and no amount within the range is a better estimate, the minimum amount of the range is recorded as a liability. The Company does not accrue for contingent losses that, in its judgment, are considered to be reasonably possible. However, if the Company determines that a contingent loss is reasonably possible and the loss or range of loss can be estimated, the Company discloses the possible loss in the consolidated financial statements. Legal costs are expensed as incurred. Stock-Based Compensation The Company recognizes stock-based compensation expense for employees and non-employees based on the grant-date fair value of stock award over the applicable service period. For awards that vest based on continued service, stock-based compensation cost is recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the awards. For awards with performance vesting conditions, stock-based compensation cost is recognized on a graded vesting basis over the requisite service period when it is probable the performance condition will be achieved. The grant date fair value of stock options that contain service or performance conditions is estimated using the Black-Scholes option-pricing model. The grant date fair value of restricted stock awards that contain service vesting conditions is estimated based on the fair value of the underlying shares on grant date. For awards with market vesting conditions, the fair value is estimated using a Monte Carlo simulation model, which incorporates the likelihood of achieving the market condition. The Company has granted certain stock option awards that contain service and performance vesting conditions. For these awards, the Company commences recognition of stock-based compensation cost once it is probable that the performance condition will be achieved. Once it is probable that the performance condition will be achieved, the Company recognizes stock-based compensation cost over the remaining requisite service period under a graded vesting model, with a cumulative adjustment for the portion of the service period that occurred for the period prior to the performance condition becoming probable of being achieved. The Company has granted certain stock option awards that contain service, performance and market vesting conditions, where the performance condition is an initial public offering or a change in control event. This performance condition is not probable of being achieved for accounting purposes until the event occurs. Thereafter, expense is recognized when the event occurs even if the market condition was not or is not achieved, provided the employee continues to satisfy the service condition. Determining the fair value of stock-based awards requires judgment. The Black-Scholes option-pricing model is used to estimate the fair value of stock options that have service and/or performance vesting conditions. The Monte Carlo simulation 79 model is used to estimate the fair value of stock options that have market vesting conditions. The assumptions used in these option-pricing models require the input of subjective assumptions which are as follows: • Fair value - Prior to the Company's IPO, the fair value of the common stock underlying the Company’s stock-based awards was determined by the Company’s Board of Directors (the “Board”). The Company’s Board determined the common stock fair value at the stock option grant date by considering several objective and subjective factors, including the price paid for its common and preferred stock, actual and forecasted operating and financial performance, market conditions and performance of comparable publicly traded companies, developments and milestones within the Company, the rights, preferences, and privileges of its common and preferred stock, and the likelihood of achieving a liquidity event. Subsequent to the Company's IPO, the fair value of the the Company's common stock is determined based on the closing stock price on the date of grant. • Expected volatility - Expected volatility is based on historical volatilities of a publicly traded peer group based on weekly price observations over a period equivalent to the expected term of the stock option grants. • Expected term - For stock options with only service vesting conditions the expected term is determined using the simplified method, which estimates the expected term using the contractual life of the option and the vesting period. For stock options with performance or market conditions, the term is estimated in consideration of the time period expected to achieve the performance or market condition, the contractual term of the award, and estimates of future exercise behavior. • Risk-free interest rate - The risk-free interest rate is based on the U.S. Treasury yield of treasury bonds with a maturity that approximates the expected term of the options. • Expected dividend yield - The dividend yield is based on the Company’s current expectations of dividend payouts. The Company has never declared or paid any cash dividends on its common stock, and the Company does not anticipate paying any cash dividends in the foreseeable future. The determination of stock-based compensation cost is inherently uncertain and subjective and involves the application of valuation models and assumptions requiring the use of judgment. If the Company had made different assumptions, its stock-based compensation expense and its net loss could have been significantly different. New shares are issued from authorized shares of common stock upon the exercise of stock options. 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. Revenue Recognition 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. The digital sales channel includes direct-to-consumer sales through the Company’s website and sales to third-party ecommerce customers, who resell the Company’s products through their 80 own online platforms. The retail sales channel includes sales to traditional brick and mortar retailers, who may also resell the Company’s products through their own online platforms. The Company accounts for revenue contracts with customers by applying the following steps in accordance with ASC No. 606, Revenue from Contracts with Customers : • Identification of the contract, or contracts, with a customer • Identification of the performance obligations in the contract • Determination of the transaction price • Allocation of the transaction price to the performance obligations in the contract • Recognition of revenue when, or as, the Company satisfies a performance obligation The Company elected as an accounting policy to record all shipping and handling costs as fulfillment costs. The Company accrues the cost of shipping and handling and recognizes revenue and costs at the point in time that control of the goods transfers to the customer. Direct-to-Consumer For direct sales to the consumer through the Company’s website, the Company’s performance obligation consists of the sale of finished goods to the consumer. Consumers may purchase products at any time or enter into subscription arrangements. Consumers place orders online in accordance with the Company’s standard terms and conditions and authorize payment when the order is placed. Credit cards are charged at the time of shipment. For subscription arrangements, consumers sign up to receive products on a periodic basis. Subscriptions are cancellable at any time without penalty, and no amounts are collected from the consumer until products are shipped. Revenue is recognized when transfer of control to the consumer takes place which is when the product is delivered to the carrier. Sales taxes collected from consumers are accounted for on a net basis and are excluded from revenue. Consumers may purchase gift cards, which are recorded as deferred revenue at the time of purchase. The Company recognizes revenue when these gift cards are redeemed for products and the revenue recognition criteria as described above have been met. For the year ended December 31, 2021, revenue recognized from the use of gift cards was $ 0.9 million. For the years ended December 31, 2020 and 2019, revenue recognized from the use of gift cards were no t material. Deferred revenue related to gift card purchases was $ 0.7 million as of December 31, 2021. Deferred revenue related to gift card purchases as of December 31, 2020 was no t material. Retail and Third-Party Ecommerce For retail and third-party ecommerce sales, the Company’s performance obligation consists of the sale of finished goods to retailers and third-party ecommerce customers. Revenue is recognized when control of the promised goods is transferred to those customers at time of shipment or delivery, depending on the contract terms. After the completion of the performance obligation, the Company has the right to consideration as outlined in the contract. Payment terms vary among the retail and third-party ecommerce customers although terms generally include a requirement of payment within 30 to 45 days of product shipment. Sales Returns and Allowances For direct-to-consumer, retail, and third-party ecommerce sales, the Company records estimated sales returns in the same period that the related revenue is recorded. The Company uses the expected value method to estimate returns, taking into consideration assumptions of demand based on historical data and historical returns rates. When estimating returns, the Company also considers future business initiatives and relevant anticipated future events. Estimated sales returns and ultimate losses may vary from actual results, which could be material to the consolidated financial statements. The estimated sales returns allowance is recorded as a reduction of revenue. For direct-to-consumer, retail and third-party ecommerce sales, the Company offers credits in the form of discounts, which are recorded as reductions in revenue and are allocated to products on a relative basis based on their respective standalone selling price. 81 For retail and third-party ecommerce sales, the Company routinely commits to one-time or ongoing sales incentive programs with its customers that may require the Company to estimate and accrue the expected costs of such programs, including trade promotion activities and contractual allowances. The Company records these programs as a reduction to revenue unless it receives a distinct benefit in exchange for credits claimed by the customer and can reasonably estimate the fair value of the benefit received, in which case the Company records it as a marketing expense. The Company recognizes a liability or a reduction to accounts receivable, and reduces revenue based on the estimated amount of credits that will be claimed by customers. An allowance is recorded as a reduction to accounts receivable if the customer can deduct the program amount from outstanding invoices. Estimates for these sales incentive programs are developed using the most likely amount and are included in the transaction price to the extent that a significant reversal of revenue would not result once the uncertainty is resolved. In developing its estimate, the Company uses historical analysis and contractual rates in determining the accruals for these activities. The Company also considers the susceptibility of the incentive to outside influences, the length of time until the uncertainty is resolved and the Company’s experience with similar contracts. Judgment is required to determine the timing and amount of recognition of sales incentive program accruals which the Company estimates based on past practice with similar arrangements. The following table summarizes the changes in the allowance for sales incentive programs for retail and third-party ecommerce customers: For the year ended December 31, (In thousands) 2021 2020 2019 Beginning balance $ 8,207 $ 8,428 $ 4,455 Charged to revenue 47,290 35,465 27,529 Charged to marketing expense 16,150 10,906 7,889 Utilization of accrual for trade promotions ( 65,153 ) ( 46,592 ) ( 31,445 ) Ending balance $ 6,494 $ 8,207 $ 8,428 At December 31, 2021 and 2020 , $ 6.1 million and $ 7.8 million of the ending allowance balances were recorded as a reduction to accounts receivable, respectively. Contract Assets There are no material assets related to incremental costs to obtain or fulfill customer contracts. 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, allocated overhead and direct and indirect labor for warehouse personnel. 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 expense. Selling, general and administrative expenses also include technology expenses, professional fees, facility costs, including insurance, utilities and rent relating to our headquarters, depreciation and amortization, and overhead costs. Marketing Marketing expenses includes costs related to the Company’s branding initiatives, retail customer marketing activities, point of purchase displays, targeted online advertising through sponsored search, display advertising, email marketing campaigns, market research, content production and other public relations and promotional initiatives. Advertising costs are expensed as incurred. Media production costs are expensed the first time the advertisement is aired. Deferred advertising costs consist mainly of point of purchase displays that are specifically branded for the Company’s products and provided to retailers in order to facilitate the marketing of the Company’s products within retail stores. The point of purchase display costs are capitalized as deferred advertising costs and charged to marketing expense over the expected period of benefit, which generally ranges from one to three years . As of December 31, 2021 and 2020 , the current portion of deferred advertising costs was $ 1.0 million and $ 1.4 million, respectively, which is included in prepaid expenses and other current assets. As of 82 December 31, 2021 and 2020 , the noncurrent portion of deferred advertising costs was $ 0.1 million and $ 0.2 million, respectively, which is included in other assets. Advertising expense was $ 49.2 million, $ 41.1 million and $ 28.9 million for the years ended December 31, 2021, 2020 and 2019. Research and Development Research and development expenses relate to 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. Research and development expenses consist primarily of personnel-related expenses, including salaries, bonuses, benefits and stock-based compensation expense. Research and development expenses also include allocated depreciation and amortization and overhead costs. The Company expenses research and development costs in the period they are incurred. 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 Issued Accounting Pronouncements – Not Yet Adopted In February 2016, the Financial Accounting Standards Board (the "FASB") issued ASU No 2016-02, Leases (Topic 842), as subsequently amended, collectively codified under Topic 842. Topic 842 requires lessees to recognize on the balance sheet assets and liabilities for leases with lease terms of more than twelve months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP which requires only capital leases to be recognized on the balance sheet, the new ASU will require both types of leases to be recognized on the balance sheet. ASU 2016-02 was effective for public business entities for fiscal years beginning after December 15, 2018. In June 2020, FASB issued ASU No. 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842) – Effective Dates for Certain Entities , which extended the effective date of this guidance for certain non-public entities for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted. The Company plans to adopt this guidance in the first quarter of 2022 on a modified retrospective basis. The Company also plans to elect the package of practical expedients to leases that commenced before the effective date whereby the Company will elect to not reassess the following: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. Also, for leases with lease terms less than twelve months, an entity is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The Company intends to make this election for all classes of assets. The Company also elected to combine lease and non-lease components on its leases into a single lease component. Upon adoption of this guidance on January 1, 2022, the Company expects to recognize approximately $ 36.1 million in right of use assets, and corresponding lease liabilities of approximately $ 44.5 million on its consolidated balance sheet. In addition, the Company expects a decrease to assets and liabilities of $ 37.6 million and $ 38.4 million, respectively, and a decrease to beginning accumulated deficit of $ 0.9 million, as a result of the derecognition of its build-to-suit arrangement that was reassessed to be a operating lease under the new guidance. The Company does not believe that the adoption of this guidance will have a material impact on the Company's consolidated statements of comprehensive loss or the consolidated statements of cash flows. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments Credit Losses (Topic 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, 83 including interim periods within those fiscal years. The Company is evaluating the adoption of this guidance and the potential effects on the consolidated financial statements. In January 2017, the FASB issued ASU No. 2017-04, Intangibles Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASC 350"). The amendments in this guidance eliminate Step 2 from the goodwill impairment test, whereby an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under this amendment, an entity should perform its goodwill impairment test by comparing the value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In November 2019, the FASB issued ASU No. 2019-10 which delayed the effective dates of this guidance. This guidance is effective for public business entities excluding entities eligible to be SRCs for annual and any interim impairment test performed for periods beginning after December 15, 2019. For all other entities the guidance is effective for fiscal years beginning after December 15, 2022. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASC 350 to have a material impact on the Company’s consolidated financial statements. In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASC 740") . This standard simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 740 as well as by improving consistent application of the topic by clarifying and amending existing guidance. For public business entities, the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption must adopt all the amendments in the same period. The Company does not expect the adoption of ASC 740 to have a material impact on the Company’s consolidated financial statements. 3. Revenue Disaggregation of Revenue Revenue by sales channel: For the year ended December 31, 2021 2020 2019 (In thousands) Digital $ 157,546 $ 166,733 $ 128,716 Retail 161,093 133,789 106,871 Total revenue $ 318,639 $ 300,522 $ 235,587 Revenue by product category: For the year ended December 31, 2021 2020 2019 (In thousands) Diapers and wipes $ 200,923 $ 188,452 $ 161,855 Skin and personal care 101,697 79,542 58,706 Household and wellness 16,019 32,528 15,026 Total revenue $ 318,639 $ 300,522 $ 235,587 Non-Monetary Transactions In March 2021 and September 2021, the Company entered into $ 4.0 million and $ 0.7 million, respectively, in trade agreements with a vendor for the exchange of legacy beauty inventory for future marketing and transportation credits. The fair value of the marketing and transportation credits are recognized as revenue, with the corresponding asset included in prepaid expenses and other current assets and other assets in the accompanying 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. For the year ended December 31, 2021, the Company recognized $ 4.2 million of revenue and $ 2.2 million of associated cost of revenue based on timing of delivery of goods. The Company assesses the recoverability of the marketing and transportation credits periodically. Factors considered in evaluating the recoverability include management’s 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 are determinable. During the year ended December 31, 2021, the Company recorded no impairment losses related to these credits and $ 0.4 million of credits have been used. 84 4. Intangible Assets, Net Intangible assets consisted of the following: As of December 31, 2021 Gross Carrying Amount Accumulated Amortization Intangible Assets, Net (in thousands) Tradenames $ 770 $ ( 438 ) $ 332 Domain names 287 ( 179 ) 108 Total intangible assets, net $ 1,057 $ ( 617 ) $ 440 As of December 31, 2020 Gross Carrying Amount Accumulated Amortization Intangible Assets, Net (in thousands) Tradenames $ 770 $ ( 386 ) $ 384 Domain names 287 ( 160 ) 127 Total intangible assets, net $ 1,057 $ ( 546 ) $ 511 As of December 31, 2021 and 2020, the weighted average remaining useful lives for tradenames and domain names was 7.1 years and 5.8 years, respectively, and 7.9 years and 6.8 years, respectively. Amortization expense was $ 0.1 million for each of the years ended December 31, 2021, 2020 and 2019, respectively. Estimated future amortization expense for each of the following five years ending December 31 and thereafter is as follows: (in thousands) 2022 $ 70 2023 70 2024 70 2025 70 2026 70 Thereafter 90 $ 440 5. Property and Equipment, Net Property and equipment consisted of the following : As of December 31, 2021 2020 (in thousands) Machinery and equipment $ 12,064 $ 12,030 Computer and office equipment 1,461 1,356 Capitalized software 4,906 4,924 Furniture and fixtures 4,304 4,204 Leasehold improvements 15,839 15,833 Building 42,146 42,147 80,720 80,494 Accumulated depreciation and amortization ( 27,768 ) ( 23,791 ) Total property and equipment, net $ 52,952 $ 56,703 85 The Company capitalizes the fair value of buildings under build-to-suit lease arrangements where it is considered the owner for accounting purposes only. See Note 11 – "Commitments and Contingencies" for additional information. The Company enters into capital lease agreements for certain equipment. During the years ended December 31, 2021, 2020 and 2019, the gross assets recorded under capital leases were $ 1.7 million, $ 1.7 million and $ 1.6 million, respectively. For the year ended December 31, 2021, depreciation of equipment under capital lease obligations was $ 0.4 million. For each of the years ended December 31, 2020 and 2019, depreciation of equipment under capital lease obligations was $ 0.3 million. Total depreciation and amortization expense for property and equipment, inclusive of depreciation expense for equipment under capital lease obligations, consisted of the following: For the year ended December 31, 2021 2020 2019 (In thousands) Cost of revenues $ 2,198 $ 2,295 $ 2,322 Research and development 186 251 244 Selling, general and administrative 1,697 2,237 5,027 Total depreciation and amortization expense $ 4,081 $ 4,783 $ 7,593 6. Investments As of December 31, 2021 and 2020 , all investments in debt securities are classified as available-for-sale investments. All investments are reported within current assets because the securities represent investments of cash available for current operations. As of December 31, 2021 and 2020 , the Company held $ 36.4 million and $ 27.5 million, respectively, of investments with contractual maturities of less than one year. As of December 31, 2021 and 2020 , the Company held $ 6.0 million and $ 6.9 million, respectively, of 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, 2021 Cost or Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Total Estimated Fair Value (In thousands) Corporate bonds $ 18,605 $ — $ ( 28 ) $ 18,577 Certificates of deposit 17,099 — ( 5 ) 17,095 U.S. government and agency securities 6,725 — ( 9 ) 6,716 Total investments $ 42,429 $ — $ ( 42 ) $ 42,388 As of December 31, 2020 Cost or Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Total Estimated Fair Value (In thousands) Corporate bonds $ 22,894 $ 58 $ ( 3 ) $ 22,949 Commercial paper 538 — — 538 Certificates of deposit 4,447 1 — 4,448 U.S. government and agency securities 6,452 38 — 6,490 Total investments $ 34,331 $ 97 $ ( 3 ) $ 34,425 Realized gains and losses on investments in debt securities were immaterial for the years ended December 31, 2021, 2020 and 2019 . 86 7. Fair Value Measurements Financial assets measured and recorded at fair value on a recurring basis consist of the following as of: December 31, 2021 Level 1 Level 2 Level 3 Total (In thousands) Cash equivalents Money market funds $ 29,411 $ — $ — $ 29,411 Total cash equivalents 29,411 — — 29,411 Short-term investments Corporate bonds — 18,577 — 18,577 Certificates of deposit — 17,095 — 17,095 U.S. government and agency securities — 6,716 — 6,716 Total short-term investments — 42,388 — 42,388 Total $ 29,411 $ 42,388 $ — $ 71,799 December 31, 2020 Level 1 Level 2 Level 3 Total (In thousands) Cash equivalents Money market funds $ 12,696 $ — $ — $ 12,696 Total cash equivalents 12,696 — — 12,696 Short-term investments Corporate bonds — 22,949 — 22,949 Commercial paper — 538 — 538 Certificates of deposit — 4,448 — 4,448 U.S. government and agency securities — 6,490 — 6,490 Total short-term investments — 34,425 — 34,425 Total $ 12,696 $ 34,425 $ — $ 47,121 The carrying amounts for the Company’s cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value due to their short maturities. 8. Credit Facilities On June 4, 2020, the Company terminated its Asset Backed Loan facility (“ABL Revolver”). The Company had no outstanding borrowings under the ABL Revolver immediately prior to termination. Upon termination of the ABL Revolver, the Company was required to post collateral of $ 7.9 million in a restricted cash account to collateralize the letters of credit related to certain facility leases. As of December 31, 2020, the letters of credit issued related to facility leases of $ 7.7 million were collateralized by the Company’s restricted cash of $ 7.9 million. Upon entering into the 2021 Credit Facility (defined below), the Company is no longer required to maintain collateral in a restricted cash account. 2021 Credit Facility In April 2021, the Company entered into a first lien credit agreement (“2021 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 2021 Credit Facility includes a subfacility that provides for the issuance of letters of credit in an amount of up to $ 10.0 million at any time outstanding, which reduces the amount available under the 2021 Credit Facility. As of December 31, 2021, there was $ 28.7 million available to be drawn upon. The 2021 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 revolving credit facility. The Company expensed the commitment fee and included it in interest and other expense, net in the consolidated statement of comprehensive loss. For the year ended December 31, 2021, the commitment fee incurred was 87 immaterial. The interest rate applicable to the 2021 Credit Facility is, at the Company’s option, either (a) the LIBOR (or a replacement rate established in accordance with the terms of the 2021 Credit Facility) (subject to a 0.00 % LIBOR floor), plus a margin of 1.50 % or (b) the CB floating rate minus a margin of 0.50 %. The CB floating rate is the higher of (a) the Wall Street Journal prime rate and (b)(i) 2.50 % plus (ii) the adjusted LIBOR rate for a one-month interest period. As of December 31, 2021, there was no outstanding balance under the 2021 Credit Facility. The Company is subject to certain affirmative and negative covenants including the requirement that it maintains a total net leverage ratio of not more than 3.50 :1.00 during the periods set forth in the 2021 Credit Facility. The 2021 Credit Facility contains covenants that restrict, among other things, the Company's ability to sell assets, make investments and acquisitions, make capital expenditures, grant liens, pay dividends and make certain other restricted payments. Failure to do so, unless waived by the lenders under the 2021 Credit Facility pursuant to its terms, as amended, would result in an event of default under the 2021 Credit Facility. As of December 31, 2021, the Company was in compliance with the net leverage ratio covenant. 9. Accrued Expenses Accrued expenses consisted of the following: As of December 31, 2021 2020 (In thousands) Payroll and payroll related expenses $ 2,497 $ 6,115 Accrued inventory purchases 8,838 4,588 Accrued returns 1,455 2,585 Other accrued expenses 6,213 8,934 Total accrued expenses $ 19,003 $ 22,222 10. Redeemable Convertible Preferred Stock and Stockholders’ Deficit Immediately prior to the completion of the IPO, the Company filed an Amended and Restated Certificate of Incorporation, which authorized a total of 1,000,000,000 shares of common stock and 20,000,000 shares of preferred stock. Upon the filing of the Amended and Restated Certificate of Incorporation, 49,100,928 shares of the Company’s redeemable convertible preferred stock then outstanding with a carrying value of $ 376.4 million were automatically converted into 49,649,023 shares of the Company’s common stock. Upon completion of the IPO, the Company recognized a gain on extinguishment of the redeemable convertible preferred stock for earnings per share purposes of $ 29.0 million from the conversion of redeemable convertible preferred stock to common stock. Following the completion of the IPO, the Company has one class of authorized and outstanding common stock. The following table summarizes the Company's redeemable convertible preferred stock information as of December 31, 2020: Authorized Shares Issued and Outstanding Shares Carrying Value Liquidation Preference Series A Redeemable Convertible Preferred Stock 11,347,518 11,347,518 $ 6,000 $ 6,000 Series A-1 Redeemable Convertible Preferred Stock 11,554,016 11,554,016 20,796 21,000 Series B Redeemable Convertible Preferred Stock 4,551,572 4,551,572 42,106 50,000 Series C Redeemable Convertible Preferred Stock 5,174,204 5,174,204 90,586 100,000 Series D Redeemable Convertible Preferred Stock 4,545,944 4,454,624 101,239 101,911 Series E Redeemable Convertible Preferred Stock 6,918,204 6,918,204 67,685 67,815 Series F Redeemable Convertible Preferred Stock 5,100,790 5,100,790 47,992 50,000 Total 49,192,248 49,100,928 $ 376,404 $ 396,726 Shares Available for Issuance Immediately prior to the completion of the IPO, the Company filed an Amended and Restated Certificate of Incorporation, which authorized a total of 1,000,000,000 shares of common stock and 20,000,000 shares of preferred stock. 88 As of December 31, 2021, there were no shares of Series A, Series A-1, Series B, Series C, Series D, Series E, or Series F redeemable convertible preferred stock available for issuance. As of December 31, 2020, the number of common shares available for issuance under the Company’s amended certificate of incorporation were as follows: Authorized number of common shares 110,000,000 Common shares outstanding ( 34,089,186 ) Stock awards outstanding under the 2011 Plan ( 18,038,042 ) Stock awards available for grant under the 2011 Plan ( 2,595,078 ) Reserve for the conversion of preferred stock ( 49,100,928 ) Available for issuance 6,176,766 11. Commitments and Contingencies Litigation From time to time, the Company is subject to various claims and contingencies which are in the scope of ordinary and routine litigation incidental to its business, including those related to regulation, business transactions, employee-related matters and taxes, among others. When the Company becomes aware of a claim or potential claim, the likelihood of any loss or exposure is assessed. If it is probable that a loss will result and the amount or range of the loss can be reasonably estimated, the Company records a liability for the loss and discloses the possible loss in the consolidated financial statements . Legal costs are expensed as incurred. On September 17, 2019, the Nevada Department of Taxation (the “Department”) issued a Deficiency Notice against the Company to initiate administrative legal proceedings before the Department for the alleged non-compliance with employee retention requirements provided in exchange for tax benefits in establishing the Company’s Las Vegas distribution center in a December 2016 Abatement Agreement the Company had executed with the State of Nevada via its Governor’s Office of Economic Development. The Company has denied the allegations. An administrative hearing was held in the matter on January 15, 2021. On June 9, 2021 the court upheld the Department's Deficiency Notice against the Company in its entirety. The loss resulting from this matter was $ 0.7 million including penalties and interest, for which the Company has paid $ 0.6 million as of December 31, 2021. During the year ended December 31, 2021, the Company recorded interest expense of $ 0.1 million in interest and other expense, net on the consolidated statement of comprehensive loss. The Company filed its Notice of Appeal on July 1, 2021 and its opening brief on January 28, 2022. The Department filed its answering brief on March 4, 2022 and the Company filed its reply brief on March 23, 2022. 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 Divsion. The Company intends to vigorously defend itself in this matter. The matter’s outcome and materiality are uncertain at this time. Therefore, the Company cannot estimate the probability of loss or make an estimate of the loss or range of loss in this matter. On September 15, 2021, Cody Dixon filed a putative class action complaint in the U.S. District Court for the Central District of California alleging federal securities law violations by the Company, certain current officers and directors, and certain underwriters in connection with the Company's IPO. A second putative class action complaint containing similar allegations against the Company and certain current officers and directors was filed by Stephen Gambino on October 8, 2021 in the U.S. District Court for the Central District of California. These related complaints have been transferred to the same court and a Lead Plaintiff has been appointed in the matter, and a putative consolidated class action complaint was filed by the Lead Plaintiff on February 21, 2022. A derivative complaint was filed by Hayato Ono on behalf of the Company on November 29, 2021 in the U.S. District Court for the Central District of California, alleging breach of fiduciary duties, unjust enrichment, waste, gross mismanagement, and federal securities law violations by the Company’s directors and certain officers. On December 17, 2021, a second derivative complaint containing similar allegations against the Company’s directors and certain officers was filed by Mike Wang in the U.S. District Court for the Central District of California. These two federal derivative cases have been transferred to the same judge who is presiding over the securities class action complaints. A third derivative complaint was filed by Leah Bisch and Raluca Corobana in California Superior Court for the County of Los Angeles on January 3, 2022 with similar allegations. The federal and state court derivative cases have been stayed pending the outcome of a motion to dismiss in the securities class action. Defendants’ motion to dismiss the putative consolidated class action complaint was filed on March 14, 2022. The Lead Plaintiff’s opposition to the motion to dismiss will be due by March 28, 2022, and defendants’ replies will be due by April 4, 2022. The Company believes the securities and derivative complaints are without merit and intends to vigorously defend itself against these 89 allegations. These matters are in the preliminary stages of litigation with uncertain outcomes at this time. Therefore, the Company cannot estimate the probability of the loss or make an estimate of the loss or range of loss in these matters. As of December 31, 2021 and 2020, the Company was not subject to any other currently pending legal matters or claims that based on its current evaluation is 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 amount 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 amount of future payments the Company could be required to make under these indemnification provisions is indeterminable. The Company has never paid a material claim, nor has the Company been involved in litigation in connection with these indemnification arrangements. As of December 31, 2021 and 2020, 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. Leases The Company leases warehouse and office facilities under operating lease agreements, some of which contain free rent periods and escalation clauses. Rent expense is recorded on a straight-line basis over the lease term with the difference between the rent paid and the straight-line rent expense recorded as a deferred rent liability. On November 16, 2016, the Company entered into a warehouse facility lease in Las Vegas, Nevada. The lease term is ten years and four months, commencing on August 15, 2017. The lease contains both free rent periods and escalation clauses, which update every twelve months. The lease contains two renewal options each with a period for up to five years . The Company concluded that it was deemed the owner, for accounting purposes only, of the warehouse facility under build-to-suit lease accounting due to its involvement in the construction activities of the facility. The fair market value of the building was capitalized as a noncash transaction, offset by a corresponding liability on the consolidated balance sheets. Upon completion of construction, the Company retained the fair value of the leased property and the obligation on its consolidated balance sheets as it did not qualify for sales recognition under the sale-leaseback accounting guidance due to continuing involvement in the leased property. Accordingly, the Company accounted for the facility as a financing arrangement. As of December 31, 2021, the Company has capitalized $ 37.6 million in property and equipment, net and a corresponding current and noncurrent financing obligation of $ 38.4 million in relation to this arrangement. On January 15, 2016, the Company entered into a second amendment of its warehouse facility lease in Ontario, California, in order to exercise the option to extend the lease term by five years through October 31, 2021. The Company’s warehouse facility lease contains a further renewal option period for up to five years . In November 2017, the Company entered into an agreement to sublease this facility for a term of three years and nine months beginning February 1, 2018. The Company did not renew this lease or sublease upon its expiration on October 31, 2021. On July 8, 2015, the Company entered into an office facility lease for its headquarters. The lease term is an eleven-year period commencing on March 1, 2016 and contains both free rent periods and escalation clauses, which update every twelve months . The Company’s headquarters lease contains two renewal options each with a period for up to five years . In May 2017, the Company entered into an agreement to sublease a portion of this facility for a term of five years beginning June 1, 2017. In December 2018, the Company amended the sublease agreement to sublease a larger portion of this facility through July 2022. In September 2021, the Company entered into an amendment to extend the sublease four years and seven months beginning August 1, 2022 through the term of the lease which expires February 28, 2027. As of December 31, 2021, the future minimum rental payments under noncancelable leases with offsetting sublease revenue are as follows: 90 (in thousands) Facility Leases Subleases Build-to-Suit Lease Capital Leases Years Ending December 31, 2022 $ 5,231 $ ( 1,936 ) $ 2,639 $ 280 2023 5,754 ( 1,994 ) 2,714 57 2024 5,916 ( 2,054 ) 2,788 21 2025 6,082 ( 2,115 ) 2,868 — 2026 6,253 ( 2,179 ) 2,948 — Thereafter 1,357 ( 369 ) 2,888 — Future minimum lease payments (income) $ 30,593 $ ( 10,647 ) $ 16,845 $ 358 Less: Amount representing interest ( 8 ) Present value of future lease payments $ 350 Rent expense totaled $ 5.0 million for the year ended December 31, 2021 and $ 5.2 million for each of the years ended December 31, 2020 and 2019. Sublease rent income totaled $ 2.5 million for the year ended December 31, 2021 and $ 2.7 million for each of the years ended December 31, 2020 and 2019. In connection with three of the Company’s facilities leases, the Company is required to obtain irrevocable letters of credit in lieu of security deposits. The letters of credit totaled $ 6.3 million and $ 7.7 million as of December 31, 2021 and 2020, respectively, and expire within a set number of days after the expirations of the facilities leases. In connection with the Company’s office facility lease, following the fourth year of the lease, the letter of credit balance can be reduced annually by a stated amount in the lease agreement, so long as the Company complies with certain covenants. In connection with the Company’s warehouse lease, the letter of credit balance is reduced annually by a stated amount in the lease agreement, so long as the Company complies with certain covenants. Purchase Commitments The Company has unconditional purchase commitments for software service subscriptions, advertising services and certain other services. Future minimum payments under these unconditional purchase commitments are as follows: (In thousands) Years Ending December 31, 2022 $ 1,999 2023 1,080 2024 199 2025 — 2026 — Thereafter — Future minimum payments $ 3,278 91 12. Stock-Based Compensation Stock Options The Company’s 2011 Stock Incentive Plan (the “2011 Plan”), which is stockholder-approved, permits the grant of incentive and nonqualified stock options, stock awards, stock units or stock appreciation rights of common stock. Generally, stock options vest 25 % on the first anniversary of the vesting commencement date and then monthly thereafter for 36 months, or pursuant to another vesting schedule as approved by the Board and set forth in the option agreement. Certain options and share awards provide for accelerated vesting upon certain events as described in the terms of the option and award agreements. Stock options have a maximum term of ten years. Prior to the IPO, all of the stock options and restricted stock units the Company granted were made pursuant to the 2011 Plan. Following the IPO, the Company grants equity incentive awards under the terms of the 2021 Plan (defined below). The following table summarizes the stock option activity: Number of Options Weighted Average Exercise Price Weighted Average Contractual Term (Years) Intrinsic Value (in thousands) Outstanding at December 31, 2020 18,038,042 $ 5.23 6.3 $ 8,635 Granted — $ — Exercised ( 1,170,803 ) $ 4.89 Forfeited ( 426,700 ) $ 5.20 Outstanding at December 31, 2021 16,440,539 $ 5.26 5.4 $ 46,589 Exercisable at December 31, 2021 14,959,779 $ 5.23 5.1 $ 42,792 From 2018 to 2020, the Company granted stock options that vest based upon achieving a qualifying liquidity event, provided the employee remains employed on the date the vesting condition is satisfied. In conjunction with the IPO, 2,442,918 stock option awards with a weighted average exercise price of $ 5.54 vested based on the achievement of the IPO qualifying liquidity event, which resulted in the recognition of stock-based compensation expense of $ 3.1 million upon the effective date of the IPO registration statement. The intrinsic value of options exercised during the years ended December 31, 2021, 2020 and 2019 were $ 6.0 million, $ 0.3 million and $ 0.7 million, respectively. This intrinsic value represents the difference between the fair value of the Company’s common stock on the date of exercise and the exercise price of each option. The total fair value of options vested during the years ended December 31, 2021, 2020 and 2019 were $ 7.9 million, $ 7.6 million and $ 8.3 million, respectively. As of December 31, 2021, there was $ 3.9 million of unrecognized stock-based compensation expense related to unvested stock options, which is expected to be recognized over a weighted-average period of 1.8 years. 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 will be 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. 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. 92 RSU Awards 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, 2020 — — $ — $ — Granted (1) 118,651 3,032,939 $ 15.92 $ 13.64 Vested (2) ( 15,090 ) ( 158,745 ) $ 15.41 $ 14.66 Forfeited — ( 6,888 ) $ — $ 14.66 Unvested RSUs at December 31, 2021 103,561 2,867,306 $ 16.00 $ 13.58 (1) Includes 200,000 RSUs granted to an officer of the Company in February 2021 under the 2011 Stock Incentive Plan. (2) Includes 61,810 shares of common stock that were withheld to cover taxes on the release of vested RSUs and became available for future grants pursuant to the 2021 Plan. As of December 31, 2021, there was $ 34.2 million of unrecognized stock-based compensation expense related to unvested RSUs, which is expected to be recognized over a weighted-average period of 4.0 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). 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. The first offering period under the 2021 ESPP commenced in May 2021 and the second offering in November 2021. For the year ended December 31, 2021, employees who elected to participate in the ESPP purchased 39,490 shares of common stock under the 2021 ESPP, resulting in cash proceeds to the Company of $ 0.3 million. The weighted average price at purchase was $ 7.37 per share. As of December 31, 2021, the Company has 1,135,510 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 Year Ended December 31, 2021 Expected life of options (in years) 0.50 Expected stock price volatility 54.83 % — 76.80 % Risk free interest rate 0.04 % — 0.06 % Expected dividend yield — % Weighted average grant-date fair value per share $ 3.06 — $ 4.86 Stock-based Compensation Expense Stock-based compensation expense related to RSU awards, ESPP purchases and stock options, as applicable, are as follows: For the year ended December 31, 2021 2020 2019 (In thousands) Selling, general and administrative $ 15,820 $ 7,558 $ 8,052 Research and development 1,027 347 328 Total stock-based compensation expense $ 16,847 $ 7,905 $ 8,380 93 13. 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 year ended December 31, (In thousands, except for share and per share values) 2021 2020 2019 Numerator: Net loss $ ( 38,679 ) $ ( 14,466 ) $ ( 31,083 ) Add: gain on conversion of preferred stock (1) 28,994 — — Less: dividends paid to preferred stockholders (2) ( 20,637 ) — — Net loss attributable to common stockholders - basic and diluted $ ( 30,322 ) $ ( 14,466 ) $ ( 31,083 ) Add: undistributed earnings reallocated to common stockholders — — — Net loss attributable to common stockholders - diluted $ ( 30,322 ) $ ( 14,466 ) $ ( 31,083 ) Denominator: Weighted average shares of common stock outstanding - basic 71,126,218 34,075,572 33,916,324 Add: effect of conversion of preferred stock — — — Add: effect of dilutive stock options — — — Weighted average shares of common stock outstanding - diluted 71,126,218 34,075,572 33,916,324 Net loss per share, attributable to common shareholders: Basic and diluted $ ( 0.43 ) $ ( 0.43 ) $ ( 0.92 ) (1) The conversion price of the Company’s Series C and Series D redeemable convertible preferred stock was adjusted as the offering price in the initial public offering was below a certain threshold resulting in the preferred stockholders receiving a fixed dollar amount on conversion settled into a variable number of shares, or a stock-settled redemption feature. Upon the settlement of this redemption feature, the Company recorded a gain on extinguishment of the redeemable convertible preferred stock of $ 29.0 million as an adjustment to net loss to arrive at net loss attributable to common stockholders to calculate earnings per share. The extinguishment gain was measured as the difference between the carrying amount of the redeemable convertible preferred stock and the fair value of common stock upon the IPO date that the preferred stock converted into. (2) In April 2021, the Company's board of directors declared a cash dividend of $ 35.0 million to the holders of record of our common stock as of May 3, 2021, that was contingent upon the closing of the Company's IPO. On June 29, 2021, the Company paid the dividend, of which $ 20.6 million was paid to the holders of the Company's redeemable convertible preferred stock. 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 year ended December 31, 2021 2020 2019 Redeemable convertible preferred stock (1) — 49,100,928 49,100,928 Stock options to purchase common stock 16,440,539 18,038,042 16,674,470 Unvested restricted stock units 2,970,867 — — Employee stock purchase plan 39,157 — — Total 19,450,563 67,138,970 65,775,398 (1) Immediately prior to the completion of the IPO, 49,100,928 outstanding shares of redeemable convertible preferred stock with a carrying value of $ 376.4 million converted into 49,649,023 shares of common stock. 94 14. Income Taxes The components of income tax provision consisted of the following: For the year ended December 31, 2021 2020 2019 (In thousands) Current Federal $ — $ — $ — State 77 89 55 Foreign — — — 77 89 55 Deferred Federal — — — State — — — Foreign — — — — — — Income tax provision $ 77 $ 89 $ 55 The reconciliation of the income tax benefit computed at the U.S. federal statutory rate of 21% to the Company’s income tax provision is as follows: For the year ended December 31, 2021 2020 2019 (In thousands) Income tax benefit at the federal statutory rate $ ( 8,106 ) $ ( 3,019 ) $ ( 6,534 ) State income taxes, net of federal benefit ( 143 ) 831 ( 2,015 ) Permanent differences for equity compensation 5,156 2,353 ( 120 ) Nondeductible items 84 82 387 Nondeductible compensation 1,349 — — Change in valuation allowance 1,737 ( 158 ) 8,337 Income tax provision $ 77 $ 89 $ 55 The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities were as follows: As of December 31, (In thousands) 2021 2020 Deferred tax assets Intangible assets $ 122 $ 141 Accrued expenses 2,602 3,958 Deferred revenue 13 — Allowances, reserves and other 2,915 2,970 Stock-based compensation 9,592 13,648 Net operating loss and other carryforwards 77,548 69,905 Total deferred tax assets 92,792 90,622 Valuation allowance ( 86,659 ) ( 84,934 ) Net deferred tax assets 6,133 5,688 Deferred tax liabilities Deferred revenue — ( 6 ) Property and equipment ( 544 ) ( 481 ) Prepaid expenses ( 539 ) ( 224 ) State taxes ( 5,050 ) ( 4,977 ) Total deferred tax liabilities ( 6,133 ) ( 5,688 ) Net deferred taxes $ — $ — 95 As of December 31, 2021 and 2020 , the Company had federal and state net operating loss carryforwards of $ 271.0 million and $ 248.0 million, respectively, and $ 243.0 million and $ 220.0 million, respectively. Federal and state net operating loss carryforwards begin to expire in 2032. As of December 31, 2021 , the Company had state tax credits of $ 0.1 million, which began to expire in 2021. Federal NOLs generated after January 1, 2018 would not expire, but would only be available to offset up to 80% of the Company’s future taxable income. The Internal Revenue Code of 1986, as amended, imposes substantial restrictions on the utilization of net operating losses and other tax attributes in the event of an “ownership change” of a corporation. Accordingly, a company’s ability to use pre-change net operating loss and research tax credits may be limited as prescribed under IRC Sections 382 and 383. Events which may cause limitation in the amount of the net operating losses and credits that the Company utilizes in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. The Company performed a study to determine whether net operating losses and credit carryover limitations exist under Section 382 as of December 31, 2020, and determined that a portion of the net operating losses that were generated during 2013 and prior are subject to Section 382 annual limitations. As of December 31, 2021, these limitations did not cause any of the limited net operating losses to be permanently lost. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible or includable in taxable income. Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2021 . Such objective evidence limits the ability to consider other subjective evidence such as its projections for future growth. On the basis of this evaluation, at December 31, 2021 , a full valuation allowance has been recorded since it is more likely than not that the deferred tax assets will not be realized. The following table summarizes the changes in the valuation allowance: For the year ended December 31, 2021 2020 2019 (In thousands) Beginning balance $ 84,934 $ 85,083 $ 77,073 Increase (decrease) to valuation allowance 1,737 ( 158 ) 8,337 Decrease due to adoption of ASC 606 — — ( 254 ) Other increases (decreases) ( 12 ) 9 ( 73 ) Ending balance $ 86,659 $ 84,934 $ 85,083 The Company is subject to taxation in the U.S. federal and various state jurisdictions. During the years ended December 31, 2021 and 2020, the Company has no t recorded any uncertain tax positions and has no t recognized interest or penalties in the consolidated statement of comprehensive loss. The Company is subject to examination from federal tax authorities for years 2018, 2019, 2020 and 2021. To the extent allowed by law, the federal and state tax authorities may have the right to examine prior periods where net operating losses or tax credits were generated and carried forward and make adjustments up to the amount of the net operating loss or credit carryforward. 96 15. 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 $ 0.6 million and $ 0.3 million, respectively, of advertising costs for the year ended December 31, 2021 and 2020, which is reported as marketing expense in the Company’s consolidated statements of comprehensive loss. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures