Item 1. Business
Item 1. Business
Overview Of Business
The Honest Company (the "Company," which may also be referred to as “we,” “us” or “our”) is a digitally-native consumer products company born in the Gen Z era to make purpose-driven consumer products designed for all people . Our commitment to our core values, continual innovation and engaging our community has differentiated and elevated our brand and our products. Since our launch in 2012, we have been dedicated to developing clean, sustainable, effective and thoughtfully designed products. By doing so with transparency, we have cultivated deep trust around what matters most to our consumers: their health, their families and their homes. We are an omnichannel brand, ensuring our products are available wherever our consumers shop through our Retail and Digital channels. Our differentiated platform positions us for continued growth through our trusted brand, award-winning multi-category product offering, deep digital-first connection with consumers and omnichannel accessibility.
We completed the initial public offering ("IPO") of our common stock on May 7, 2021, and our common stock began trading on the Nasdaq Global Select Market on May 5, 2021.
Our Products and Product Categories
Our 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. Our three product categories are Diapers and Wipes, Skin and Personal Care and Household and Wellness, which represented 64%, 28%, and 8% of our 2022 revenue, respectively.
• Diapers and Wipes. Primary components of our Clean Conscious™ diapers are made with sustainably harvested, chlorine-free fluff pulp and other plant-derived materials. Our diapers are also packaged with a more efficient design than our previous diaper product that uses less material. Our diapers serve as a strategic customer acquisition tool, as new parents often proceed to also purchase baby wipes and products from our Skin and Personal Care and Household and Wellness categories.
• Skin and Personal Care. We use clean and safe ingredients, including many naturally-derived ingredients that, most-importantly, are effective. We have an extensive line of bath, body, skincare and beauty products designed for a range of skin types and concerns, many of which are certified by trusted experts and institutions, including the National Eczema Association. Our products are formulated to perform and our ingredients and formulas are toxicologist-audited for potential health concerns. For example, our award-winning (1) Fresh Flex Concealer is made without harmful parabens or paraffin, synthetic fragrances, cyclomethicone or mineral oil and our Clean Power Technology™ to create lasting wear.
• Household and Wellness. We offer clean products that are designed to be safe for the whole family without compromising efficacy. Some of the category products include baby clothing, pre and post natal vitamins, wellness supplements, sanitizing wipes, and hand sanitizer made with key plant-based ingredients. In 2022, we introduced new product innovation that has diversified our offering in this category, including our wellness supplement line and Honest Baby Clothing ® .
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(1) Allure's 2022 "Best of Beauty" award winner in the "Clean Beauty" category.
Our Integrated Omnichannel Presence
Since our launch, we have built a well-integrated omnichannel presence by expanding our product availability across both Digital and Retail channels, including the launch of strategic partnerships with Target, Amazon and Walmart in 2014, 2017 and 2022, respectively. This business model has allowed us to efficiently scale our business while remaining agnostic as to the channel where consumers purchase our products.
• Digital Channel. In 2022, we generated 45% of revenue through our Digital channel, which includes our flagship digital platform, Honest.com, and third-party pureplay ecommerce sites. Through Honest.com, we are able to establish a direct relationship with our consumers, to more effectively influence brand experience and better understand consumer
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preferences and behavior. Our website showcases the entirety of our product portfolio, offers exclusive products and services including our subscription service and loyalty program Honest Rewards™, houses branded content featured on product detail pages and our blog, and facilitates new product feedback via exclusive pre-launch access across all our channels. In addition to shopping our products a la carte, consumers have the option to subscribe to our popular Diapers and Wipes bundle subscription, as well as customizable single item subscriptions. In 2022, 25% of our revenue was generated from Honest.com. In January 2023, we launched Honest Rewards™ loyalty program aimed to increase long-term customer value with the brand through consumer incentives.
Additionally, we have strong relationships with Amazon and other third-party ecommerce platforms which allow us to further our brand experience and leverage engaging assets and content featured on Honest.com. We leverage first-party data on Amazon to improve the efficiency of our marketing spend and inform our growth strategy. These relationships also enable us to participate in important key retailer-specific programs, leading to increased awareness with a new set of consumers. We believe our Digital channel provides our consumers with the highest level of brand experience and further builds consumer loyalty.
• Retail Channel. In 2022, we generated 55% of revenue through our Retail channel via strategic partnerships with leading omnichannel retailers that sell our products through brick and mortar stores and often on their own websites as well. Our retail partnerships expand brand awareness and product accessibility, creating meaningful marketing efficiencies as we continue to scale. Additionally, these partnerships support our differentiated value proposition by making our products conveniently accessible in the many places where our consumer shops. As of December 31, 2022, our products can be found in approximately 50,000 retail locations across the United States, Canada and Europe.
All-commodity volume ("ACV") is the measurement of a product’s distribution weighted by the overall dollar retail sales attributable to the retail location distributing such product; a retail location would be counted as having sold the product or product group if at least one unit of the product was scanned for sale within the relevant time period. This metric provides a measurement of retail penetration that takes into account the importance of selling through retail locations with higher overall retail sales volumes, and as a result we believe that our competitors generally use the same measurement. For the 13-weeks ended January 1, 2023, in total we had approximately 72 points ACV in national multi-outlet stores, as compared with 49 points in the year ago period, primarily driven by the launch of diapers, wipes, and personal care products into over 2,500 Walmart stores. Below is our ACV weighted distribution for the 13-week period ended:
Our Growth Strategy
Marketing Strategy
The core of our Content, Community, Commerce marketing strategy is centered upon creating a brand for all people that leverages rich content to drive brand awareness around clean, conscious living through marketplaces where our products are sold. Included in our Content, Community, Commerce marketing strategy is our digital strategy that is geared towards creating lifetime value while fueling our omnichannel growth by converting one-time purchasers to a community of like-minded consumers
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aligned with Honest’s mission (the "Digital Strategy"). This conversion will be facilitated through the curation of value-driven digital experiences, including personalized shopping experiences, loyalty rewards, optimized mobile and desktop experiences and overall improvements within our digital assets to delight and excite our consumers.
Innovation Strategy
We use connectivity to our community of consumers to provide valuable insights that power innovation across categories. We use innovation to support our growth objectives across our portfolio, as highlighted in the three core pillars of our Innovation Framework: that we bring product innovation that 1) feeds and nurtures our core values, 2) expands within our existing product categories, and 3) grows into new potential product categories adjacent to existing categories that fit with our value proposition to the consumer.
We continue to innovate in each of our product categories in areas such as breakthrough new product formulations, innovative packaging, costovation (defined below) and marketing strategy, with a focus on driving “big bets” across potential product adjacencies where we have: 1) ability to build on our premium positioning, 2) ability to lead and win in a category, and 3) the opportunity to expand into more places within an existing Honest home while positioning ourselves as a premium brand. We are also focused on building a portfolio of products in complementary categories through our Innovation Strategy and the investment in our Digital Strategy. We are building an Honest community with the goal of creating a more holistic clean, conscious home for consumers and customers alike. We strive for continuous improvement in our existing products’ safety, sustainability, efficacy and design profile while achieving better performance often at lower cost, which we refer to as costovation.
Omnichannel Strategy
We reach our consumers through a strategic omnichannel approach across complementary Digital and Retail channels to maximize consumers’ connection, experience and access to our brand. We are enhancing our technology to allow digital orders to be delivered to customers faster and providing content and community digital offerings to take advantage of our subscriptions program. Our integrated omnichannel approach provides a meaningful benefit to our consumers who can shop our brand however they want, engendering further “stickiness” and loyalty. Our omnichannel approach seeks to meet consumers however they want to shop, balancing deep consumer connection with broad convenience and accessibility.
10 Years of Growth
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Supply Chain and Operations
We manage a global supply chain of highly qualified, third-party manufacturing and logistics partners to produce and distribute our products. We look to manufacturing partners who share our commitment to quality, Current Good Manufacturing Practices ("cGMPs"), sustainability, and design. We conduct quality audits of our third-party manufacturing partners and require that they follow our high standards of controlled documentation, cleaning and safety protocols, and laboratory controls. Our third-party manufacturing partners are located in various locations including the United States, Mexico and China. Our supply chain team manages these relationships and processes and, with the support of our innovation team, researches materials and equipment, approves and manages purchasing plans, and oversees product fulfillment.
The primary raw materials and components of our products include sustainably harvested fluff pulp in our diapers and plant-based substrate in our baby wipes, among other materials. Just as important as what goes into our products, we actively work with suppliers to avoid certain materials, including parabens, paraffins, synthetic fragrances, and mineral oil, that don’t meet our standards but are commonly used by mainstream brands.
Our distribution network includes three warehouses in Nevada, Pennsylvania and the Netherlands and other short-term inventory storage locations with retail and direct-to-consumer ("DTC") fulfillment capabilities and value-added services operated by GEODIS Logistics LLC, or GEODIS. The warehouse in Las Vegas is a state-of-the-art facility leased by Honest with a focus on automated large scale DTC fulfillment. We manage inventory by forecasting demand, analyzing product sell-through, and analyzing our supply chain to ensure sufficient capacity to support demand. As a result of the COVID-19 pandemic and other macroeconomic trends, we and our distribution partners have in the past experienced and may experience in the future some disruptions to the operations of our fulfillment centers.
Sustainability is a key component of our supply chain and distribution. We have transitioned to 100% pre-consumer or post-consumer recycled ("PCR") cardboard shipping cartons for our Honest.com shipments.
Competition
The markets in which we operate are highly competitive and rapidly evolving, with many new brands and product offerings emerging in the marketplace. We face significant competition from both established, well-known legacy c onsumer packaged goods, or CPG players and emerging DTC brands.
• Diapers and Wipes. Select competitors include Kimberly-Clark Corporation (maker of Huggies), Procter & Gamble Company (maker of Pampers, Pampers Pure and Luvs), WaterWipes UC and other private label brands.
• Skin and Personal Care. Select competitors include Johnson & Johnson Consumer Inc. (maker of Johnson’s Baby and Aveeno), The Clorox Company (parent company of Burt’s Bees, Inc.), Unilever PLC (maker of Shea Moisture), LVMH Moët Hennessy Louis Vuitton (maker of Benefit Cosmetics LLC), Estée Lauder Inc., L’Oréal S.A. and Pacifica Beauty LLC.
• Household and Wellness. Select competitors include Carter's Inc., The Clorox Company, Reckitt Benckiser Group plc (maker of Lysol) and Unilever PLC (maker of Seventh Generation products).
We compete based on various product attributes including clean formulation, sustainability, effectiveness and design, as well as our ability to establish direct relationships with our consumers through digital channels. We believe that we compete favorably across these factors taken as a whole.
Our Industry
We believe that the “clean and natural” product categories of the Diapers and Wipes, Skin and Personal Care and Household and Wellness markets are growing at outsized rates, as a result of the increasing shift in consumer demand for “better-for-you” products. Based on independent third-party consumption data for the 52 weeks ended January 1, 2023, the dollar amount of sales of the clean and natural products of Honest wipes, diaper and baby personal care grew 22.9%, 15.2% and 12.8%, respectively, significantly outpacing the products in the industry as a whole which grew in diapers and wipes 7.7% and 7.1%, respectively, and declined in baby personal care by 1.6%.
We believe that certain historical leading brands that have produced products in these categories for decades generally focus on single categories and offer products made with conventional ingredients that are less aligned with increasing consumer preference for clean and natural solutions. We believe that given consumers’ growing focus on their health and wellness, reducing waste and promoting social impact, we are well-positioned to continue to take market share from these legacy brands.
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We believe that this market shift towards clean and natural products is in its early stages and provides whitespace opportunity for further market penetration and category growth in the clean and natural product categories.
Our Purpose-Driven Organization
At Honest, we prioritize transparency, trust, safety and human health in all that we do. Our purpose-driven mission has always been guided by our commitment to philanthropic partnerships and community engagement with a focus on diversity and inclusion. Our Environmental, Social and Governance ("ESG") initiatives are focused around three key pillars, Planet; Products; and People. We recently published an Investor tear sheet on our investor relations website that aligns with both the Sustainability Accounting Standards Board ("SASB") and the Task Force on Climate-related Financial Disclosures ("TCFD") frameworks.
The Nominating and Corporate Governance Committee is responsible for overseeing management of risk related to our ESG practices, including risks related to our operations and our supply chain. In 2022, we also formed an ESG Council which comprises certain executive management and various cross-functional leaders across the organization that share oversight of ESG matters.
PLANET
• We strive for sustainable packaging. Our commitment to environmental sustainability shows up through our product development, packaging processes and in all parts of our business on a daily basis. For example, we use sustainable cartons in some of our Skin & Personal Care products that are environmentally-friendly, Forest Stewardship Council ("FSC")-certified, and made from 100% recycled, PCW (pre/post consumer waste) materials.
• We strive to lessen our environmental footprint—minimizing our impact by offsetting carbon emissions and working to responsibly source materials and packaging. We have transitioned our Honest.com shipping cartons to 100% PCR cardboard. In 2020, Honest entered into an agreement to participate in a six-month carbon offset program to reduce greenhouse gas emissions resulting from our domestic Honest.com shipments. We began our participation in this program in 2020 and have participated in consecutive six-month periods through 2021 and 2022. We plan to continue to participate in this six-month program through the end of 2023. Our Clean Conscious™ diaper features an innovative design including our plant-based backsheet, sustainably harvested fluff pulp and a more efficient design than our previous diaper product that uses less material helping to avoid using over 7,000 trees every single year.
• We prioritize waste reduction, focusing on reusable, refillable and recyclable materials. 100% of our baby personal care and household cleaning bottles are recyclable or include recycled materials and we are regularly looking to increase the amount of post-consumer resin in our components. We eliminated plastic in many of our Skin and Personal Care products by moving to aluminum tubes, refillable tin compacts and glass jars.
PRODUCTS
• We are committed to the health, safety and well-being of our consumers by providing clean, effective, well-designed products consumers can feel great about using. We place an emphasis on ingredient and formula assessments, including external third-party certifications and in-house Toxicologist and Eco-toxicologist Audit protocols where we review the final formula for potential chemical hazards, dose-response, and anticipated exposure to determine if our products meet a health-protective margin of safety, not only for single product use, but over the consumer’s lifetime. Our NO List™ contains over 3,500 chemicals and materials we choose not to use, including parabens, sulfate surfactants, phthalates, formaldehyde donors and synthetic fragrances.
• We prioritize naturally-derived resources over synthetic, petroleum-derived ingredients in our product formulas and designs. The majority of our Baby Personal Care and Mama Care formulas meet the United States Department of Agriculture's ("USDA") BioPreferred® Program requirements for biobased content. The alcohol used in our alcohol wipes, hand sanitizer gel and hand sanitizer spray is plant-derived and our fragrances are naturally derived, never synthetic. Primary components of our diapers are made with sustainably harvested, chlorine-free fluff pulp and other plant-derived materials, including our plant-based backsheet. Our baby clothing is made with organic cotton.
• We comply with the requirements of many independent organizations or certification authorities for several of our products. This includes the USDA's, National Organic Program, the USDA’s BioPreferred® Program for biobased content, the National Eczema Association’s Seal of Acceptance, EWG Verified™, the U.S. EPA’s Safer Choice Program, Green Seal®, the NSF/ANSI 305 standards set by Quality Assurance International and the Global Organic Textile Standard for organic cotton in our baby clothing and bedding. We have over 100 EWG Verified™ SKUs across
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the organization, which are products that do not include EWG's chemicals of concern while also meeting their strict health-based guidelines.
• We conduct quality audits of our third-party manufacturing partners. We require our third-party manufacturers to follow our high standards of controlled documentation, cleaning and safety protocols, and laboratory controls.
• We partner with trusted science-based industry groups driving change in green chemistry. In 2022, we announced our Co-Design Partnership with ChemFORWARD, a nonprofit value chain collaboration increasing access to data on chemical hazards and safer alternatives. We are also members of the Green Chemistry & Commerce Council (GC3), a multi-stakeholder collaboration driving for commercial adoption of green chemistry by forging meaningful connections across the supply and value chain.
PEOPLE
Community Impact
We work closely with our charity partners, including Baby2Baby, to help provide children and families around the world with the basic essentials and resources they need to live healthy lives. Since the start of our relationship with Baby2Baby and other partners, we have donated more than 28 million family personal care, feminine care, clean beauty products and other essentials to those in need and our compassionate team has volunteered countless hours giving back to our communities and providing disaster relief.
Our partnership with March of Dimes helps fund research, advocacy and service programs addressing maternal and infant mortality with critical healthcare and support. The partnership will also fund the creation of new advocacy content about environmental justice for moms and babies, helping further spread the important work this organization has set out to do. In 2022, we announced that our Head of Toxicology co-authored the Personal Care Product & Beauty Justice brief through March of Dimes' Mom and Baby Action Network (M-BAN), highlighting cosmetic ingredients of potential concern for a pregnant person and their unborn child as well as inequities experienced by marginalized populations; the brief is expected to be published in 2023. Through this partnership, we have donated more than $0.4 million, reaching more than an estimated 455,000 mothers with health education and programs to support the organization, including its new Mom and Baby Action Network.
Human Capital Management
Our Board of Directors and Compensation Committee provide important oversight on certain human capital matters, including the strategic direction for various people-related business goals and strategies, such as compensation and benefit programs, leadership succession planning, culture and talent development.
Employees
Our human capital planning process strategically aligns our business needs with the goal of ensuring we have the capability and capacity we need to meet consumer demand. As of December 31, 2022, we had a total of 198 full-time employee equivalents, as well as a limited number of temporary employees and consultants. In building our high-performing teams, we have invested in leadership, marketing, digital and technology capabilities. Embedded in the Honest culture are core values that honor diversity and inclusion, making The Honest Company a workplace that values different perspectives and ideas. Honest offers a competitive compensation and benefits program, and our award-winning learning and development platform, Honest University, delivers opportunities for all employees to grow and develop personally, professionally and financially. Our corporate social responsibility efforts provide opportunities for employees to give back to communities in need through volunteerism, donation matching and paid volunteer time off. We foster an environment of community and support within our organization through our employee resource groups (discussed below), which offer a safe forum to inspire and develop employee-led initiatives addressing issues that matter most to them. As a health and wellness brand, we ensure our employees have competitive benefits and access to a range of wellness offerings to empower them to live healthy, happy lives.
Diversity and Inclusion
As a Company founded by a woman of color, we have always been passionate about ensuring a diverse and inclusive workforce that reflects our consumers and the communities we serve. Our Chief Executive Officer is one of the only Afro-Latina Chief Executive Officers at a U.S. publicly traded company, bringing a new era of leadership that reflects the diversity of Honest’s consumers. We are proud to say that as of December 31, 2022, people of color represented nearly half of our workforce, and women represented more than 65% and 60% of our workforce and leadership, which includes director level and above, respectively. We currently have four Employee Resource Groups: Women Excelling in Leadership and Living , or W.E.L.L,
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Parents & Friends , Black Leadership, Allies & Community , or B.L.A.C and Honest Asian-American Pacific Islanders , or H.A.A.P.I. W.E.L.L supports the personal and professional development of women at Honest. Parents & Friends provides a valuable network of parenting resources and information. B.L.A.C was created to lift, engage and empower Black voices within The Honest Company and across the community. H.A.A.P.I was launched in 2021 to create a supportive and inclusive community for Asian Americans and Pacific Islanders and allies. We have made a commitment to provide training and a platform for important dialogue about diversity, inclusion and equity.
Hiring, Development and Retention
We look to attract and retain the best talent to help the Company deliver against our strategies. We prioritize career growth and leadership development because growing our talent and building our capabilities supports our retention efforts and helps us establish a strong foundation for long-term success. We believe a firm commitment to our values will continue to drive our success going forward and that employee engagement is an integral component. The ongoing training and development of our employees through our Honest University program provides continued growth for employees in areas of leadership, as well as technical skills.
Employee Safety and Well-Being
As a values-driven organization, the Company takes a holistic approach to caring for its employees, with benefits and programs designed to support physical, mental, emotional and financial well-being.
We prioritize safety for all employees and third-party warehouse partners through a combination of education, training and safety-related policies, while also operating in compliance with applicable regulations, including Occupational Safety and Health Administration guidelines in the U.S. This approach was particularly important as the Company continued to navigate the COVID-19 pandemic and implemented enhanced safety protocols across our facilities, including preventive detection measures, contact tracing, frequent cleaning and sanitizing, required use of personal protective equipment and the adjustment of work schedules to reduce exposure.
The Company continued to support employees emotional well-being during the pandemic by offering additional physical and mental health benefits, including our partnership with Thrive Global which offers employees learning and development through training sessions, resources and virtual guides to support and promote emotional well-being. Additionally, the Company provides an Employee Assistance Program (EAP) at no cost to employees to support emotional health and a fitness reimbursement through Global Fit Rewards to encourage a healthy lifestyle for Honest employees.
To support our people’s financial well-being, the Company provides competitive compensation – including short- and long-term incentives – to attract and retain top talent. Our commitment to pay equity helps ensure our compensation is fair and rewards employees for their contributions. In addition, we offer a competitive employee matching 401(k) plan.
Government Regulation
Substantially all of our products are subject to regulation by the Consumer Product Safety Commission, or the CPSC, the EPA, and the Federal Trade Commission, or the FTC, as well as various other federal, state, local and foreign regulatory authorities. These laws and regulations principally relate to the ingredients or components, proper labeling, advertising, packaging, marketing, manufacture, registration, safety, shipment and disposal of our products.
Our cosmetic, over-the-counter drugs, food (vitamins/dietary supplements) and cleaning products are subject to regulation by the Food and Drug Administration, or the FDA. Under the Federal Food, Drug and Cosmetic Act, or the FDCA, cosmetics are defined as articles or components of articles that are applied to the human body and intended to cleanse, beautify or alter its appearance, with the exception of soap. The labeling of cosmetic prod ucts is also subject to the requirements of the FDCA, the Fair Packaging and Labeling Act, the Poison Prevention Packaging Act and other FDA regulations. Cosmetics are not subject to pre-market approval by the FDA, however certain ingredients, such as color additives, must be pre-authorized. If safety of the products or ingredients has not been adequately substantiated, a specific warning label is required. Other warnings may also be mandated pursuant to FDA regulations. The FDA monitors compliance of cosmetic products through market surveillance and inspection of cosmetic manufacturers and distributors to ensure that the products neither contain false nor misleading labeling and that they are not manufactured under unsanitary conditions. Inspections also may arise from consumer or competitor complaints filed with the FDA. In the event the FDA identifies false or misleading labeling or unsanitary conditions or otherwise a failure to comply with FDA requirements, we may be required by a regulatory authority or we may independently decide to conduct a recall or market withdrawal of our product or to make changes to our manufacturing processes or product formulations or labels. In addition, the Modernization of Cosmetics Regulation Act, enacted in December 2022, is expected to expand the FDA’s regulatory authority over cosmetic products, including by providing the FDA with new mandatory recall authority over cosmetics and by
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requiring the registration of cosmetic manufacturing facilities, the reporting of certain adverse events, the issuance of cGMP requirements and the establishment of safety substantiation requirements.
If a product is intended for use in the diagnosis, cure, mitigation, treatment or prevention of a disease condition or to affect the structure or function of the human body, the FDA will regulate the product as a drug. Our current products that are intended to treat acne and skin care products with sun protection factor, or SPF, are considered over-the-counter, or OTC, drug products by the FDA. Our OTC products are subject to regulation through the FDA’s “monograph” system which specifies, among other things, permitted active drug ingredients and their concentrations. The FDA’s monograph system also provides the permissible product claims and certain product labeling requirements, based on the intended use of the product. Our OTC drug products must be manufactured consistent with the FDA’s current drug good manufacturing practices requirements, and the failure to maintain compliance with these requirements could require us to conduct recalls, market withdrawal, or make changes to our manufacturing practices.
The FDA may change the regulations as to any product category, requiring a change in labeling, product formulation or analytical testing.
We are subject to regulation by the CPSC under the Consumer Product Safety Act, the Flammable Fabrics Act, the Poison Prevention Packaging Act, the Federal Hazardous Substances Act, and other laws enforced by the CPSC. These statutes and the related regulations establish safety standards and bans for consumer products. The CPSC monitors compliance of consumer products under its jurisdiction through market surveillance and has the authority to conduct product safety related inspections of establishments where consumer products are manufactured, held, or transported. The CPSC has the authority to require the recall of noncompliant products or products containing a defect that creates a substantial risk of injury to the public. The CPSC may seek penalties for regulatory noncompliance under certain circumstances. CPSC regulations also require manufacturers of consumer products to report to the CPSC certain types of information regarding products that fail to comply with applicable regulations, that contain a defect which could create a substantial product hazard, or that create an unreasonable risk of serious injury or death. Certain state laws also address the safety of consumer products and mandate reporting requirements, and noncompliance may result in penalties or other regulatory action.
Certain of our products are also subject to regulation by the EPA, under the Federal Insecticide, Fungicide, and Rodenticide Act, or FIFRA. FIFRA establishes a system of pesticide, including disinfectant product, regulation to protect applicators, consumers and the environments. Under FIFRA, certain of our cleaning products, including the disinfectant products, may require approval from and registration with the EPA prior to sale. Products subject to FIFRA must comply with specified approval, registration, manufacture, labeling, and reporting requirements, among other requirements. EPA is authorized to take enforcement action to prevent the sale or distribution of non-compliant disinfectant products, including to prevent the sale or distribution of unregistered disinfectants and to prevent the sale or distribution of registered pesticides that are not permitted to make claims permitted by the terms of their registration, among other areas of non-compliance. The EPA may seek penalties for regulatory noncompliance under certain circumstances. Manufacturers subject to FIFRA may also be required to report certain types of information regarding disinfectant products to EPA. Certain state laws may also address requirements applicable to cleaning products, and non-compliance may result in penalties or other regulatory action.
The USDA enforces federal standards for organic production and use of the term “organic” on product labeling. These laws prohibit a company from selling or labeling products as organic unless they are produced and handled in accordance with the applicable federal law.
The FTC, FDA, USDA, EPA, and other government authorities also regulate advertising and product claims regarding the characteristics, quality, safety, performance and benefits of our products. These regulatory authorities typically require a safety assessment of the product and reasonable basis to support any factual marketing claims. What constitutes a reasonable basis for substantiation can vary widely from market to market, and there is no assurance that our efforts to support our claims will be considered sufficient. The most significant area of risk for such activities relates to improper or unsubstantiated claims about the composition, use, efficacy and safety of our products and their environmental impacts. If we cannot adequately support safety or substantiate our product claims, or if our promotional materials make claims that exceed the scope of allowed claims for the classification of the specific product, the FDA, FTC or other regulatory authority could take enforcement action, impose penalties, require us to pay monetary consumer redress, require us to revise our marketing materials or stop selling certain products and require us to accept burdensome injunctions, all of which could harm our business, reputation, financial condition and results of operations.
In addition, the FTC regulates the use of endorsements and testimonials in advertising as well as relationships between advertisers and social media influencers pursuant to principles described in the FTC’s Guides Concerning the Use of Endorsements and Testimonials in Advertising, or the Endorsement Guides. The Endorsement Guides provide that an endorsement must reflect the honest opinion of the endorser and cannot be used to make a claim about a product that the product’s marketer couldn’t itself legally make. They also say that if there is a connection between an endorser and the marketer that
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consumers would not expect and it would affect how consumers evaluate the endorsement, that connection should be disclosed. Another principle in the Endorsement Guides applies to ads that feature endorsements from people who achieved exceptional, or even above average, results from using a product. If the advertiser doesn’t have proof that the endorser’s experience represents what people will generally achieve using the product as described in the ad, then an ad featuring that endorser must make clear to the audience what results they can generally expect to achieve and the advertiser must have a reasonable basis for its representations regarding those generally expected results. Although the Endorsement Guides are advisory in nature and do not operate directly with the force of law, they provide guidance about what the FTC staff generally believes the Federal Trade Commission Act, or FTC Act, requires in the context using of endorsements and testimonials in advertising and any practices inconsistent with the Endorsement Guides can result in violations of the FTC Act’s proscription against unfair and deceptive practices.
To the extent we may rely on endorsements or testimonials, we will review any relevant relationships for compliance with the Endorsement Guides and we will otherwise endeavor to follow the FTC Act and other legal standards applicable to our advertising. However, if our advertising claims or claims made by our social media influencers or by other endorsers with whom we have a material connection do not comply with the Endorsement Guides or any requirement of the FTC Act or similar state requirements, the FTC and state consumer protection authorities could subject us to investigations and enforcement actions, impose penalties, require us to pay monetary consumer redress, require us to revise our marketing materials and require us to accept burdensome injunctions, all of which could harm our business, reputation, financial condition and results of operations.
We are also subject to a number of U.S. federal and state and foreign laws and regulations that affect companies conducting business on the Internet, including consumer protection regulations that regulate retailers and govern the promotion and sale of merchandise. Many of these laws and regulations are still evolving and being tested in courts, and could be interpreted in ways that could harm our business. These may involve user privacy, data protection, content, intellectual property, distribution, electronic contracts and other communications, automatically renewing product subscriptions, competition, protection of minors, consumer protection, telecommunications, product liability, taxation, economic or other trade prohibitions or sanctions and online payment services. Among other laws and regulations, we are subject to federal, state, local and international laws regarding privacy and protection of people’s data. Foreign data protection, privacy and other laws and regulations can be more restrictive than those in the United States. U.S. federal and state and foreign laws and regulations are constantly evolving and can be subject to significant change. In addition, the application, interpretation and enforcement of these laws and regulations are often uncertain, and may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and practices. In the European Union, the General Data Protection Regulation, or GDPR, has stringent operational requirements relating to the processing of personal data, including, for example, expanded disclosures about how personal information is to be used, limitations on retention of information, increased requirements to erase an individual’s information upon request, mandatory data breach notification requirements and higher standards for data controllers to demonstrate that they have obtained valid consent for certain data processing activities. The GDPR also significantly increases penalties for non-compliance. The California Consumer Privacy Act, or CCPA imposes obligations on covered businesses that process information on California residents to provide specific disclosures to consumers about their data collection, use and sharing practices, and to respond to certain requests from California residents related to their personal data (for example, requests to know of the business’s personal data processing activities, to delete the individual’s personal data, and to opt out of certain personal data disclosures). Also, the CCPA provides for civil penalties and provides a private right of action which may include an award of statutory damages for certain data breaches. In addition, the California Privacy Rights Act of 2020, or CPRA, that went into effect on January 1, 2023, expands the CCPA. The CPRA, among other things, gives California residents the ability to limit the use of certain sensitive information, establishes restrictions on personal data retention, expands the types of data breaches that are subject to the CCPA’s private right of action, provides for penalties for CPRA violations concerning California residents under the age of 16, and establishes a new California Privacy Protection Agency to implement and enforce the law. There are also a number of legislative proposals pending before the U.S. Congress, various state legislative bodies and foreign governments concerning privacy and data protection which could affect us. Some observers have noted that the CCPA could mark the beginning of a trend toward more stringent privacy legislation in the United States, which could increase our potential liability and adversely affect our business, results of operations, and financial condition. If our privacy or data security measures fail to comply with applicable current or future laws and regulations, we may be subject to litigation, regulatory investigations, enforcement notices requiring us to change the way we use personal data or our marketing practices, fines or other liabilities, as well as negative publicity and a potential loss of business.
Trademarks and Other Intellectual Property
We protect our intellectual property through a combination of trademarks, domain names, copyrights, trade secrets and patents, as well as contractual provisions and restrictions on access to our proprietary technology. Our principal trademark assets include the trademarks “Honest” and “The Honest Co.,” which are registered in the United States and targeted foreign jurisdictions, our logos and taglines, and multiple product brand names. We have applied to register or registered many of our trademarks in the United States and other jurisdictions, and we will pursue additional trademark registrations to the extent we believe they would be beneficial and cost- effective.
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We have one patent issued and one patent application pending in the United States and one pending international Patent Cooperation Treaty application. Our issued patent will expire in April 2037. We intend to pursue additional patent protection to the extent we believe it would be beneficial and cost-effective.
We are the registered holder of multiple domestic and international domain names that include “honest” and similar variations. We also hold domain registrations for many of our product names and other related trade names and slogans. In addition to the protection provided by our intellectual property rights, we enter into confidentiality and proprietary rights agreements with our employees, consultants, contractors and business partners. Our employees are also subject to invention assignment agreements. We further control the use of our proprietary technology and intellectual property through provisions in both our customer terms of use on our website and the terms and conditions governing our agreements with other third parties.
Available Information
The Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Exchange Act are available on the Company’s website, free of charge, as soon as reasonably practicable after the reports are electronically filed with or furnished to the SEC. These reports are available at investors.honest.com under Financial Information/SEC Filings. Additionally, the Company routinely posts additional important information, including press releases, on its website and recognizes its website as a channel of distribution to reach public investors and as a means of disclosing material non-public information for complying with disclosure obligations under Regulation FD. Accordingly, investors should monitor our website in addition to our SEC filings and public webcasts. These items are available at investors.honest.com under News and Events.
Information relating to corporate governance at Honest, including the Company’s Code of Business Conduct and Ethics, the Honest Company Corporate Governance Guidelines and Committee charters for the Audit Committee, Compensation Committee and the Nominating and Corporate Governance Committee, is available at investors.honest.com under Corporate Governance or https://investors.honest.com/corporate-governance/douments-charters. The Company will provide any of the foregoing information without charge upon written request to Corporate Communications, The Honest Company, 12130 Millennium Drive, #500, Los Angeles, CA 90094. The information contained on the Company’s website is not included as a part of, or incorporated by reference into, this Report.