Honest Company, Inc. 10-K

Item 8. Financial Statements and Supplementary Data. Index to Financial Statements Page Report of Independent Registered Public Accounting Firm (PCAOB ID 238 ) 71 Consolidated Balance Sheets 72 Consolidated Statements of Comprehensive Loss 73 Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) 74 Consolidated Statements of Cash Flows 75 Notes to Consolidated Financial Statements 76 70 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, 2023 and 2022, 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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023 in conformity with accounting principles generally accepted in the United States of America. Change in Accounting Principle As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in fiscal year 2022. 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. 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 8, 2024 We have served as the Company’s auditor since 2012. 71 The Honest Company, Inc. Consolidated Balance Sheets (in thousands, except share and per share amounts) December 31, 2023 December 31, 2022 Assets Current assets Cash and cash equivalents $ 32,827 $ 9,517 Short-term investments — 5,650 Accounts receivable, net 43,084 42,334 Inventories 73,490 115,664 Prepaid expenses and other current assets 8,371 15,982 Total current assets 157,772 189,147 Operating lease right-of-use asset 23,683 29,947 Property and equipment, net 13,486 14,327 Goodwill 2,230 2,230 Intangible assets, net 309 370 Other assets 4,141 4,578 Total assets $ 201,621 $ 240,599 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 22,289 $ 24,755 Accrued expenses 32,209 38,010 Deferred revenue 2,212 815 Total current liabilities 56,710 63,580 Long term liabilities Operating lease liabilities, net of current portion 21,738 29,842 Other long-term liabilities 34 817 Total liabilities 78,482 94,239 Commitments and contingencies (Note 11) Stockholders’ equity Preferred stock, $ 0.0001 par value, 20,000,000 shares authorized at December 31, 2023 and 2022, none issued or outstanding as of December 31, 2023 and 2022 — — Common stock, $ 0.0001 par value, 1,000,000,000 shares authorized at December 31, 2023 and 2022; 95,868,421 and 92,907,351 shares issued and outstanding as of December 31, 2023 and 2022, respectively 9 9 Additional paid-in capital 602,198 586,213 Accumulated deficit ( 479,068 ) ( 439,830 ) Accumulated other comprehensive loss — ( 32 ) Total stockholders’ equity 123,139 146,360 Total liabilities and stockholders’ equity $ 201,621 $ 240,599 The accompanying notes are an integral part of these Consolidated Financial Statements. 72 The Honest Company, Inc. Consolidated Statements of Comprehensive Loss (in thousands, except share and per share amounts) For the year ended December 31, 2023 2022 2021 Revenue $ 344,365 $ 313,651 $ 318,639 Cost of revenue 243,833 221,336 209,467 Gross profit 100,532 92,315 109,172 Operating expenses Selling, general and administrative 94,582 87,317 84,059 Marketing 36,440 47,782 54,260 Restructuring 2,205 — — Research and development 6,214 6,996 7,679 Total operating expenses 139,441 142,095 145,998 Operating loss ( 38,909 ) ( 49,780 ) ( 36,826 ) Interest and other income (expense), net ( 254 ) 871 ( 1,776 ) Loss before provision for income taxes ( 39,163 ) ( 48,909 ) ( 38,602 ) Income tax provision 75 110 77 Net loss $ ( 39,238 ) $ ( 49,019 ) $ ( 38,679 ) Net loss per share attributable to common stockholders: Basic and diluted $ ( 0.42 ) $ ( 0.53 ) $ ( 0.43 ) Weighted-average shares used in computing net loss per share attributable to common stockholders: Basic and diluted 94,516,690 92,201,806 71,126,218 Other comprehensive loss Unrealized gain (loss) on short-term investments, net of taxes 32 9 ( 135 ) Comprehensive loss $ ( 39,206 ) $ ( 49,010 ) $ ( 38,814 ) The accompanying notes are an integral part of these Consolidated Financial Statements. 73 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 — — 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 Common stock withheld for tax obligation and net settlement — — ( 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 Net loss — — — — — ( 49,019 ) — ( 49,019 ) Other comprehensive loss — — — — — — 9 9 Stock options exercised — — 43,556 — 122 — — 122 Stock-based compensation — — — — 15,078 — — 15,078 Vested restricted stock — — 1,263,963 — — — — — Shares issued under employee stock purchase plan — — 95,742 — 256 — — 256 Common stock withheld for tax obligation and net settlement — — ( 8,050 ) — ( 37 ) — — ( 37 ) ASC 842 transition effect — — — — — 845 — 845 Balance at December 31, 2022 — $ — 92,907,351 $ 9 $ 586,213 $ ( 439,830 ) $ ( 32 ) $ 146,360 Net loss — — — — — ( 39,238 ) — ( 39,238 ) Other comprehensive loss — — — — — — 32 32 Stock options exercised — — 2,300 — 4 — — 4 Stock-based compensation — — — — 15,804 — — 15,804 Vested restricted stock — — 2,831,801 — — — — — Shares issued under employee stock purchase plan — — 126,969 — 177 — — 177 Balance at December 31, 2023 — $ — 95,868,421 $ 9 $ 602,198 $ ( 479,068 ) $ — $ 123,139 The accompanying notes are an integral part of these Consolidated Financial Statements. 74 The Honest Company, Inc. Consolidated Statements of Cash Flows (in thousands) For the year ended December 31, 2023 2022 2021 Cash flows from operating activities Net loss $ ( 39,238 ) $ ( 49,019 ) $ ( 38,679 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 2,740 2,753 4,146 Stock-based compensation 15,804 15,078 16,847 Other 6,257 6,345 311 Changes in assets and liabilities: Accounts receivable, net ( 750 ) ( 10,550 ) ( 8,989 ) Inventories 42,174 ( 39,996 ) 1,001 Prepaid expenses and other assets 8,005 ( 4,358 ) ( 6,114 ) Accounts payable, accrued expenses and other long-term liabilities ( 9,347 ) 10,396 ( 6,691 ) Deferred revenue 1,396 83 14 Operating lease liabilities ( 7,688 ) ( 7,007 ) — Net cash provided by (used in) operating activities 19,353 ( 76,275 ) ( 38,154 ) Cash flows from investing activities Purchases of short-term investments — ( 12,782 ) ( 65,267 ) Proceeds from sales of short-term investments — — 27,394 Proceeds from maturities of short-term investments 5,683 49,362 29,470 Purchases of property and equipment ( 1,838 ) ( 1,617 ) ( 220 ) Purchases of intangible assets ( 10 ) — — Net cash provided by (used in) investing activities 3,835 34,963 ( 8,623 ) 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 4 122 5,730 Payment of initial public offering costs — — ( 5,477 ) Taxes paid related to net share settlement of equity awards — ( 37 ) ( 567 ) Proceeds from ESPP 176 256 291 Payments on finance lease liabilities ( 58 ) ( 303 ) ( 1,126 ) Net cash provided by financing activities 122 38 60,368 Net increase (decrease) in cash, cash equivalents and restricted cash 23,310 ( 41,274 ) 13,591 Cash, cash equivalents and restricted cash Beginning of the period 9,517 50,791 37,200 End of the period $ 32,827 $ 9,517 $ 50,791 Reconciliation of cash, cash equivalents and restricted cash to the consolidated balance sheets Cash and cash equivalents $ 32,827 $ 9,517 $ 50,791 Restricted cash, current — — — Restricted cash, non-current — — — Total cash, cash equivalents and restricted cash $ 32,827 $ 9,517 $ 50,791 Supplemental disclosures of cash flow information Cash paid during the period for: Interest $ 1 $ 8 $ 1,797 Income Taxes 116 $ 101 $ 76 Supplemental disclosures of noncash activities Equipment acquired under capital lease obligations $ — $ — $ 123 Capital expenditures included in accounts payable and accrued expenses $ 25 $ 54 $ 33 The accompanying notes are an integral part of these Consolidated Financial Statements. 75 The Honest Company, Inc. Notes to Consolidated Financial Statements As of December 31, 2023 (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 personal care company dedicated to creating clean- and sustainably-designed products. 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 statements of comprehensive loss upon completion of the IPO. 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. Restructuring The Company incurs restructuring costs in connection with the exiting of certain products and geographical locations, workforce reductions, and other actions. Such costs include employee termination benefits (one-time arrangements), termination of contractual obligations, non-cash asset charges, including asset impairments, and other direct incremental costs. The Company records employee termination liabilities once they are both probable and estimable for severance provided under the Company’s existing severance policy. Other costs associated with a restructuring initiative, such as consulting and professional fees, product or geographical exit costs, accelerated amortization associated with a restructuring initiative, are recognized in the period in which the liability is incurred. Accrued restructuring costs are recorded within Accrued Expenses in the consolidated balance sheets. Refer to Note 17, "Restructuring" included in these consolidated financial statements for more information on the Company's restructuring initiatives. 76 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. 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, capitalized software, useful lives associated with long-lived assets, incremental borrowing rates associated with leases, 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. 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. 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, 2023 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 trends within our Household and Wellness product category, consumer demand for sanitizing and disinfecting products decreased over the past few years. As a result, the Company made a decision to exit certain elements of these products during the quarter ended March 31, 2023. Refer to Note 17, "Restructuring" included in these consolidated financial statements for more information on the Company's restructuring initiatives. Cash and Cash Equivalents 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. 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 (expense), net. As of December 31, 2023, the Company did not hold any investments. 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. 77 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, 2023 2022 Customer A 49 % 44 % Customer B 25 % 15 % The Company’s customers that accounted for 10% or more of total revenue were as follows: For the Year Ended December 31, 2023 2022 2021 Customer A 31 % 31 % 28 % Customer B 30 % 19 % 22 % 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 as net of allowance for credit losses. The Company does not accrue interest on its trade receivables. The Company evaluates accounts receivable estimated to be uncollectible by considering the lifetime expected credit losses of our accounts receivable at time of inception, and records an allowance for credit losses, as necessary, with the balance of our accounts receivable presented at the net realizable value. The Company considers factors in its allowance for credit losses such as historical analysis, credit quality of customers, the age of the accounts receivable balances and macroeconomic conditions that may impact on the Company's customers' ability to pay. The allowance for credit losses was $ 0.4 million and $ 0.5 million, respectively, as of December 31, 2023 and 2022. 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. 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: 78 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 Effective January 1, 2022, the Company accounts for leases in accordance with Accounting Standards Codification No. 842, Leases (“ASC 842”). The Company’s lease portfolio includes both real estate and non-real estate type leases which are accounted for as either finance or operating leases. Real estate leases generally include office and warehouse facilities and non-real estate leases generally include office equipment and machinery. The Company determines if a contract is or contains a lease at inception. The Company’s leases have remaining lease terms of less than one to six years . Renewal options that are deemed reasonably certain are included as part of the lease term for purposes of calculating the right-of-use ("ROU") assets and lease liability. The Company elected the practical expedient to not separate lease and non-lease components, as such non-lease components are included in the calculation of the ROU asset and lease liability and included in the lease expense over the term of the lease. As most of the Company's leases do not contain an implicit interest rate, the Company uses judgement to determine an incremental borrowing rate to use at lease commencement. Operating lease ROU assets and lease liabilities are recorded on the date the Company takes possession of the leased assets with expense recognized on a straight-line basis over the lease term. Leases with an estimated total term of 12 months or less are not recorded on the balance sheet and the lease expense is recognized on a straight-line basis over the lease term. Generally, the Company’s lease agreements do not contain material residual value guarantees or material restrictive covenants. 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 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 were $ 1.1 million, net of $ 2.4 million of accumulated amortization as of December 31, 2023 and $ 1.0 million, net of $ 1.8 million of accumulated amortization as of December 31, 2022. 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 factors indicate that the fair value of the asset is less 79 than its carrying amount, the Company will perform a quantitative test by determining the fair value of the reporting unit. The estimated fair value of the reporting unit is based on a projected discounted cash flow model that includes significant assumptions and estimates, including discount rate, growth rate, and future financial performance. Valuations of similar public companies may also be evaluated when assessing the fair value of the reporting unit. If the carrying value of the reporting unit exceeds the fair value, then an impairment loss is recognized for the difference. The Company tests goodwill for impairment annually at October 31. The Company performed its annual goodwill impairment test as of October 31, 2023 and 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. 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 recorded 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, 2023, 2022 and 2021, realized and unrealized foreign currency losses, net were immaterial, $ 0.2 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 80 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 restricted stock awards that contain service vesting conditions is estimated based on the fair value of the underlying shares on the grant date, 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. For awards that contain service, performance or a combination of both vesting conditions, the grant date fair value of restricted stock award is estimated based on the fair value of the underlying shares on grant date while the Black-Scholes option-pricing model is used to estimate the grant date fair value of stock option awards. For 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, performance condition is not probable of being achieved for accounting purposes until the event occurs. Thereafter, stock-based compensation 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. The Monte Carlo simulation model is used to estimate the fair value of stock options that have market vesting conditions. Determining the fair value of stock option awards requires judgment and the assumptions used in the 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 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. 81 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 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 years ended December 31, 2023, 2022 and 2021, revenue recognized from the use of gift cards was $ 0.6 million, $ 0.8 million and $ 0.9 million, respectively. As of December 31, 2023 and 2022, deferred revenue related to gift card purchases was $ 1.0 million and $ 0.8 million, respectively. 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 82 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. 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) 2023 2022 2021 Beginning balance $ 6,396 $ 6,494 $ 8,207 Charged to revenue 49,724 48,962 47,290 Charged to selling, general and administrative expense 659 550 — Charged to marketing expense 17,056 12,541 16,150 Utilization of accrual for trade promotions ( 64,522 ) ( 61,954 ) ( 65,153 ) Reclassification to prepaid expenses and other current assets/accrued expenses ( 933 ) ( 197 ) — Ending balance $ 8,380 $ 6,396 $ 6,494 As of December 31, 2023 and 2022 , $ 6.8 million and $ 5.8 million, respectively, of the ending allowance balances were recorded as a reduction to accounts receivable. 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. 83 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, 2023 and 2022 , the current portion of deferred advertising costs was $ 0.4 million and $ 1.6 million, respectively, which is included in prepaid expenses and other current assets. As of December 31, 2023 and 2022 , the noncurrent portion of deferred advertising costs was immaterial, respectively, which is included in other assets. Advertising expense was $ 33.8 million, $ 44.8 million and $ 49.2 million for the years ended December 31, 2023, 2022 and 2021, respectively. 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 Adopted Accounting Pronouncements In June 2016, the Financial Accounting Standard Board ("FASB") issued Accounting Standard Update ("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, including interim periods within those fiscal years. Effective January 1, 2023, the Company adopted this standard, which did not have a material impact on the Company’s consolidated financial statements. Recently Issued Accounting Pronouncements – Not Yet Adopted In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures , which expands reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendments in the ASU require that a public entity discloses, on an annual and interim basis, significant segment expenses that are regularly provided to an entity's chief operating decision maker ("CODM"), a description of other segment items by reportable segment, and any additional measures of a segment's profit or loss used by the CODM when deciding how to allocate resources. The amendments in this ASU are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Retrospective application is required for all prior periods presented, and early adoption is permitted. The Company does not expect the adoption of ASU No. 2023-07 to have a material impact on the Company’s consolidated financial statements or disclosures. In December 2023, the FASB issued ASU No. 2023-09, I ncome Taxes: Improvements to Income Tax Disclosures . This guidance requires consistent categories and greater disaggregation of information in the rate reconciliation and disclosures of income taxes paid by jurisdiction. For public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2024. The Company does not expect the adoption of ASU No. 2023-09 to have a material impact on the Company’s consolidated financial statements or disclosures. 84 3. Revenue Disaggregation of Revenue Revenue by sales channel: For the year ended December 31, 2023 2022 2021 (In thousands) Digital $ 169,015 $ 141,403 $ 157,546 Retail 175,350 172,248 161,093 Total revenue $ 344,365 $ 313,651 $ 318,639 Revenue by product category: For the year ended December 31, 2023 2022 2021 (In thousands) Diapers and Wipes $ 218,263 $ 200,429 $ 200,923 Skin and Personal Care 88,104 89,316 101,697 Household and Wellness 37,998 23,906 16,019 Total revenue $ 344,365 $ 313,651 $ 318,639 Non-Monetary Transactions The Company has in the past and may in the future enter into trade agreements with a vendor to exchange excess inventory for future marketing and transportation credits. The Company recognizes revenue reflecting the fair value of the marketing and transportation credits upon delivery of goods, with the corresponding short and long-term 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, 2023, the Company did not enter into any new trade agreements. For the years ended December 31, 2023, 2022 and 2021, the Company recognized $ 0.0 million , $ 3.2 million and $ 4.2 million, respectively, of revenue and $ 0.0 million , $ 1.7 million and $ 2.2 million, respectively, of associated cost of revenue based on the timing of delivery of goods, related to these marketing and transportation credits. The Company assesses the recoverability of the marketing and transportation credits periodically. Factors considered in evaluating the recoverability include management’s history of credit usage and future 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 become determinable. For the years ended December 31, 2023, 2022 and 2021, the Company recorded no impairment losses related to these credits and used an aggregate of $ 0.3 million, $ 1.4 million and $ 0.4 million, respectively, of credits. 4. Intangible Assets, Net Intangible assets consisted of the following: As of December 31, 2023 Gross Carrying Amount Accumulated Amortization Intangible Assets, Net (in thousands) Tradenames $ 780 $ ( 541 ) $ 239 Domain names 287 ( 217 ) 70 Total intangible assets, net $ 1,067 $ ( 758 ) $ 309 85 As of December 31, 2022 Gross Carrying Amount Accumulated Amortization Intangible Assets, Net (in thousands) Tradenames $ 770 $ ( 489 ) $ 281 Domain names 287 ( 198 ) 89 Total intangible assets, net $ 1,057 $ ( 687 ) $ 370 As of December 31, 2023 and 2022, the weighted average remaining useful lives for tradenames and domain names was 5.7 years and 3.9 years, respectively, and 6.2 years and 4.8 years, respectively. Amortization expense was $ 0.1 million for each of the years ended December 31, 2023, 2022 and 2021, respectively. Estimated future amortization expense for each of the following five years ending December 31 and thereafter is as follows: (in thousands) 2024 $ 71 2025 71 2026 71 2027 30 2028 23 Thereafter 43 $ 309 5. Property and Equipment, Net Property and equipment consisted of the following: As of December 31, 2023 2022 (in thousands) Machinery and equipment $ 13,850 $ 12,198 Computer and office equipment 1,700 1,794 Capitalized software 5,094 5,989 Furniture and fixtures 4,335 4,334 Leasehold improvements 15,829 15,839 Subtotal 40,808 40,154 Accumulated depreciation and amortization ( 27,322 ) ( 25,827 ) Total property and equipment, net $ 13,486 $ 14,327 For each of the years ended December 31, 2023, 2022 and 2021, depreciation of equipment under capital lease obligations was $ 0.0 million , $ 0.3 million and $ 0.4 million, respectively. 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, 2023 2022 2021 (In thousands) Cost of revenues $ 931 $ 1,013 $ 2,198 Research and development 223 195 186 Selling, general and administrative 1,515 1,474 1,697 Total depreciation and amortization expense $ 2,669 $ 2,682 $ 4,081 86 6. Investments All investments in debt securities, if any, 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, 2023, the Company did not hold any investments in debt securities. As of December 31, 2022, the Company held $ 5.7 million of investments with contractual maturities of less than one year. As of December 31, 2022, the Company did not have any 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, 2022 Cost or Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Total Estimated Fair Value (In thousands) Corporate bonds $ 3,216 $ — $ ( 24 ) $ 3,193 Commercial paper 582 — — 582 Certificates of deposit 1,884 — ( 9 ) 1,875 Total investments $ 5,682 $ — $ ( 33 ) $ 5,650 Realized gains and losses on investments in debt securities for the years ended December 31, 2023, 2022 and 2021 were immaterial . Unrealized losses on investments for the year ended December 31, 2023 was immaterial. 7. Fair Value Measurements Financial assets measured and recorded at fair value on a recurring basis consist of the following as of: December 31, 2023 Level 1 Level 2 Level 3 Total (In thousands) Cash equivalents Money market funds $ 5,589 $ — $ — $ 5,589 Total cash equivalents 5,589 — — 5,589 December 31, 2022 Level 1 Level 2 Level 3 Total (In thousands) Cash equivalents Money market funds $ 9,595 $ — $ — $ 9,595 Total cash equivalents 9,595 — — 9,595 Short-term investments Corporate bonds — 3,193 — 3,193 Commercial paper — 582 — 582 Certificates of deposit — 1,875 — 1,875 Total short-term investments — 5,650 — 5,650 Total $ 9,595 $ 5,650 $ — $ 15,245 The carrying amounts for the Company’s cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value due to their short maturities. 87 8. Credit Facilities 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 provided for a $ 35.0 million revolving credit facility that matures on April 30, 2026. The 2021 Credit Facility included a subfacility that provided for the issuance of letters of credit in an amount of up to $ 10.0 million at any time outstanding, which reduced the amount available under the 2021 Credit Facility. As of December 31, 2022, there were outstanding standby letters of credit of $ 4.8 million related to lease obligations with $ 30.2 million available to be drawn upon. The 2021 Credit Facility was 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 recognized the commitment fee as incurred in interest and other expense, net in the consolidated statements of comprehensive loss. For the year ended December 31, 2022, the commitment fee incurred was immaterial. As of December 31, 2022, there was no outstanding balance under the 2021 Credit Facility. In January 2023, the 2021 Credit Facility was terminated and replaced in its entirety with the 2023 Credit Facility (defined below). 2023 Credit Facility In January 2023, the Company entered into a first lien credit agreement (the “2023 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 2023 Credit Facility includes a sub-facility that provides for the issuance of letters of credit in an amount of up to $ 15.0 million at any time outstanding. Availability of the 2023 Credit Facility is based upon a borrowing base formula and periodic borrowing base certifications valuing certain of the Company’s accounts receivable and inventory as reduced by an availability block and certain reserves, if any. The 2023 Credit Facility includes an uncommitted accordion feature that allows for increases in the revolving commitment to as much as an additional $ 35.0 million, for up to $ 70.0 million in potential revolving commitment. The 2023 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 2023 Credit Facility. The Company recognizes the commitment fee as incurred in interest and other income (expense), net in the consolidated statements of comprehensive loss. For the year ended December 31, 2023, the commitment fee incurred was immaterial. As of December 31, 2023, there were $ 3.7 million outstanding letters of credit and $ 17.7 million available to be drawn upon. As of December 31, 2023, there was no outstanding balance under the 2023 Credit Facility. The interest rate applicable to the 2023 Credit Facility is, at the Company’s option, either (a) the Adjusted Term SOFR rate (subject to a 0.00 % floor), plus a margin ranging from 1.50 % to 2.25 % or (b) the CB floating rate, (i) plus a margin of 0.25 % or (ii) minus a margin ranging from 0.25 % to 0.50 %. The margin is based upon the Company’s fixed charge coverage ratio. The CB floating rate is the higher of (a) the Wall Street Journal prime rate and (b) 2.50 %. The 2023 Credit Facility will terminate and borrowings thereunder, if any, would be due in full on April 30, 2026. Debt under the 2023 Credit Facility is guaranteed by substantially all of the Company’s material domestic subsidiaries and is secured by substantially all of the Company’s and such subsidiaries’ assets. The 2023 Credit Facility contains covenants that restrict, among other things, the Company's ability to sell assets, make investments and acquisitions, grant liens, change the Company’s lines of business, pay dividends and make certain other restricted payments. The Company is subject to certain affirmative and negative covenants including the requirement that it maintains a minimum total fixed charge coverage ratio during the periods set forth in the 2023 Credit Facility. Failure to do so, unless waived by the lenders under the 2023 Credit Facility pursuant to its terms, as amended, would result in an event of default under the 2023 Credit Facility. As of December 31, 2023, the Company is in compliance with all covenants under the 2023 Credit Facility. 88 9. Accrued Expenses Accrued expenses consisted of the following: As of December 31, 2023 2022 (In thousands) Payroll and payroll related expenses (1) $ 8,007 $ 6,790 Accrued inventory purchases 9,368 17,050 Accrued returns 269 318 Accrued rent (2) 8,105 7,688 Accrued restructuring (3) 356 — Other accrued expenses 6,104 6,164 Total accrued expenses $ 32,209 $ 38,010 _______________ (1) Includes $ 1.2 million and $ 4.3 million of Chief Executive Officer and Chief Financial Officer executive transition related expense as of December 31, 2023 and 2022, respectively. (2) Represents short-term operating lease liabilities. Refer to Note 16, "Leases" included in these consolidated financial statements for more information on leases. (3) Refer to Note 17, "Restructuring" included in these consolidated financial statements for more information on the Company's restructuring initiative. 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. 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: 89 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 statements 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. The Nevada Tax Commission heard the appeal on May 2, 2022. The Nevada Tax Commission upheld the Company's appeal and overturned the Department's Deficiency Notice. The Company submitted a refund request for the taxes and interest paid, following the Department's June 9, 2021 decision, that were subject to abatement under the December 2016 Abatement Agreement. The Company recognized $ 0.7 million in other income in interest and other expense, net on the consolidated statements of comprehensive loss during the year ended December 31, 2022 related to the refund of taxes and interest paid. 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 Division. 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, alleging claims and seeking relief under Sections 11 and 15 of the Securities Act of 1933 relating to the Company’s IPO. Defendants’ motion to dismiss the putative consolidated class action complaint was filed on March 14, 2022. On July 18, 2022, the Company's motion to dismiss was granted in part and denied in part. On May 1, 2023, the Lead Plaintiff’s motion for class certification in the consolidated class action was granted in part and denied in part, with the U.S. District Court for the Central District of California limiting the certified class to only those persons and entities that purchased or otherwise acquired the Company’s publicly traded common stock pursuant and traceable to the Company’s IPO offering documents prior to August 19, 2021, as well as all persons and entities that acquired ownership of a trading account, retirement account, or any other similar investment account or portfolio containing the Company’s publicly traded common stock that was purchased or otherwise acquired pursuant and traceable to the IPO offering documents prior to August 19, 2021, and were damaged thereby. On August 14, 2023 the Lead Plaintiff filed an amended consolidated class action complaint naming as additional defendants Catterton Management Company L.L.C., L Catterton VIII, L.P., L. Catterton VIII Offshore, L.P., THC Shared Abacus, LP, Catterton Managing Partner VIII, L.L.C., and C8 Management, L.L.C. On October 16, 2023 those additional defendants filed a motion to 90 dismiss the Second Amended Complaint with respect to the claims against them. On January 31, 2024, that motion to dismiss was granted by the court to the extent those additional defendants challenged the claims as untimely. The court granted Lead Plaintiff leave to amend within fourteen days of that order. 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. A fourth derivative complaint was filed by David Butler in the U.S. District Court for the District of Delaware on October 19, 2022 with similar allegations. Each of these federal and state court derivative cases have been stayed pending the outcome of a motion for summary judgment in the securities class action. These matters are in the preliminary stages of litigation with uncertain outcomes at this time. Therefore, the Company cannot estimate the probability of loss or make an estimate of the loss or range of loss in these matters. On August 10, 2022, Catrice Sida and Kris Yerby filed a putative class action complaint in the U.S. District Court for the Northern District of California alleging violations of California’s Unfair Competition Law, False Advertising Law, Consumers Legal Remedies Act, breach of warranty, and unjust enrichment related to plant-based claims on certain of the Company’s wipes products and seeking declaratory relief, injunctive relief, monetary damages, punitive damages and statutory penalties, and attorneys’ fees and costs. The Company filed its motion to dismiss on October 17, 2022. On December 6, 2022, the Company's motion to dismiss was denied. The Company’s motion to stay pending the Ninth Circuit Court of Appeals’ review of the Central District of California’s decision in Whiteside v. Kimberly-Clark Corp., No. 5:22-cv-1988 JGB (SPx), 2023 WL 4328175 (C.D. Cal. June 1, 2023) was denied on September 5, 2023. On February 20, 2024, the parties filed a Notice of Settlement to notify the court that the parties have agreed to settle the matter on an individual, non-class basis. The plaintiffs will file a Stipulation of Dismissal upon finalization of the settlement agreement. As of December 31, 2023 and 2022, the Company was not subject to any other currently pending legal matters or claims that based on its current evaluation are 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 number 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 number of future payments the Company could be required to make under these indemnification provisions is indeterminable. The Company has never been involved in litigation in connection with these indemnification arrangements. As of December 31, 2023 and 2022, 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. 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, 2024 $ 3,369 2025 1,145 2026 474 2027 174 2028 — Thereafter — Future minimum payments $ 5,162 91 12. Stock-Based Compensation 2011 Stock Incentive Plan The Company’s 2011 Stock Incentive Plan (the “2011 Plan”), which is stockholder-approved, permits the grant of incentive and non-qualified 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, 2021 16,440,539 $ 5.26 5.4 $ 46,589 Granted — $ — Exercised ( 43,556 ) $ 2.81 Forfeited/Cancelled ( 1,508,976 ) $ 5.50 Outstanding at December 31, 2022 14,888,007 $ 5.24 4.0 $ 3,024 Granted — $ — Exercised ( 2,300 ) $ 1.70 Forfeited/Cancelled ( 1,569,911 ) $ 5.17 Outstanding at December 31, 2023 13,315,796 $ 5.25 3.0 $ — Exercisable at December 31, 2022 14,503,073 $ 5.23 3.9 $ 3,024 Exercisable at December 31, 2023 13,266,609 $ 5.25 3.0 $ — 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, 2023, 2022 and 2021 were immaterial , $ 0.1 million and $ 6.0 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, 2023, 2022 and 2021 were $ 0.7 million , $ 2.0 million and $ 7.9 million, respectively. As of December 31, 2023 and 2022, there was $ 0.1 million and $ 1.0 million, respectively, of unrecognized stock-based compensation expense related to unvested stock options, which is expected to be recognized over a weighted-average period of 0.5 years and 1.3 years, respectively. During the year ended December 31, 2023, the Company extended the post-termination exercise period for each outstanding stock option held by certain former executives such that the post-termination exercise period will end on the earlier of (i) the original expiration date of the stock option, or (ii) the date that is the 3-year anniversary of certain former executives no longer providing services to the Company. There were no changes to the exercise price or other terms of these stock options, and these stock options were already fully vested prior to the modification. As a result of this modification, we recognized incremental stock-based compensation expense of $ 0.5 million for the year ended December 31, 2023. 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 are 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 92 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. On January 1, 2023, 3,713,026 additional shares were reserved for issuance pursuant to this provision . 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. 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, 2021 103,561 2,867,306 $ 16.00 $ 13.58 Granted 485,806 3,113,741 $ 3.51 $ 5.07 Vested (1) ( 131,775 ) ( 1,121,573 ) $ 13.38 $ 12.20 Forfeited ( 4,641 ) ( 694,071 ) $ 8.09 $ 10.54 Unvested RSUs at December 31, 2022 452,951 4,165,403 $ 3.44 $ 8.09 Transfer from Employee to Non-Employee Director (2) 1,147,566 ( 1,147,566 ) $ 9.02 $ 9.02 Granted 1,376,563 7,505,557 $ 2.01 $ 1.71 Vested (1) ( 1,382,224 ) ( 1,449,577 ) $ 5.84 $ 6.31 Forfeited ( 637,657 ) ( 1,774,563 ) $ 7.07 $ 5.44 Unvested RSUs at December 31, 2023 957,199 7,299,254 $ 2.19 $ 2.38 _______________ (1) The Company extended the post-termination stock option exercise period for certain former executives, resulting in stock-based compensation expense of $ 0.5 million during the year ended December 31, 2023. Additionally, the Company modified certain former executives' RSUs to accelerate vesting, resulting in stock-based compensation expense of $ 3.1 million during the year ended December 31, 2023. (2) Relates to former Chief Executive Officer ("CEO") RSUs that were reclassified to non-employee director shares for disclosure purposes. The former CEO was not re-nominated for election by the Board in connection with the annual stockholder meeting in May 2023. As of December 31, 2023 and 2022, there was $ 16.6 million and $ 31.2 million, respectively, of unrecognized stock-based compensation expense related to unvested RSUs, which is expected to be recognized over a weighted-average period of 3.0 years and 2.5 years, respectively. 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). On January 1, 2023, 928,256 additional shares were reserved for issuance pursuant to this provision. 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, 2023 and 2022, employees who elected to participate in the ESPP purchased 126,969 and 95,742 shares of common stock, respectively, under the 2021 ESPP, resulting in cash proceeds to the Company of $ 0.2 million and $ 0.3 million, respectively. The weighted 93 average price at purchase was $ 1.39 and $ 2.68 per share, respectively. As of December 31, 2023 and 2022, the Company had 2,756,394 and 1,955,107 , respectively, 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, 2023 2022 Expected life of options (in years) 0.50 0.50 Expected stock price volatility 69.20 % — 86.19 % 73.27 % — 79.56 % Risk free interest rate 5.36 % — 5.43 % 1.52 % — 4.65 % Expected dividend yield — % — % Weighted average grant-date fair value per share $ 0.56 — $ 0.67 $ 1.09 — $ 1.12 2023 Inducement Plan In March 2023, the Company's Compensation Committee adopted the 2023 Inducement Plan (the “Inducement Plan”). The Inducement Plan reserved 4,000,000 shares of the Company’s common stock for issuance under the Inducement Plan to individuals who satisfy the standards for inducement grants under the relevant Nasdaq Stock Market rules. On March 21, 2023, the Company granted 1,845,238 RSUs to the Chief Executive Officer under the Inducement Plan. On May 18, 2023, the Company granted 843,565 RSUs to the Chief Growth Officer under the Inducement Plan. On November 1, 2023, the Company granted 827,357 RSUs to the Chief Financial Officer under the Inducement Plan. Stock-Based Compensation Expense Stock-based compensation expense related to RSU awards, 2021 ESPP purchases and stock options, as applicable, are as follows: For the year ended December 31, 2023 2022 2021 (In thousands) Selling, general and administrative (1) $ 15,465 $ 14,593 $ 15,820 Research and development 339 485 1,027 Total stock-based compensation expense $ 15,804 $ 15,078 $ 16,847 __________________ (1) The Company extended the post-termination stock option exercise period for certain former executives, resulting in stock-based compensation expense of $ 0.5 million during the year ended December 31, 2023. Additionally, the Company modified certain former executives' RSUs to accelerate vesting, resulting in stock-based compensation expense of $ 3.1 million during the year ended December 31, 2023. 94 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 considered 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) 2023 2022 2021 Numerator: Net loss $ ( 39,238 ) $ ( 49,019 ) $ ( 38,679 ) 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 $ ( 39,238 ) $ ( 49,019 ) $ ( 30,322 ) Denominator: Weighted average shares of common stock outstanding - basic 94,516,690 92,201,806 71,126,218 Weighted average shares of common stock outstanding - diluted 94,516,690 92,201,806 71,126,218 Net loss per share, attributable to common shareholders: Basic and diluted $ ( 0.42 ) $ ( 0.53 ) $ ( 0.43 ) _____________ (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, 2023 2022 2021 Stock options to purchase common stock 13,315,796 14,888,007 16,440,539 Unvested restricted stock units 8,256,453 4,618,354 2,970,867 Employee stock purchase plan 71,142 62,438 39,157 Total 21,643,391 19,568,799 19,450,563 95 14. Income Taxes The components of income tax provision consisted of the following: For the year ended December 31, 2023 2022 2021 (In thousands) Current Federal $ — $ — $ — State 75 110 77 Foreign — — — 75 110 77 Deferred Federal — — — State — — — Foreign — — — — — — Income tax provision $ 75 $ 110 $ 77 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, 2023 2022 2021 (In thousands) Income tax benefit at the federal statutory rate $ ( 8,203 ) $ ( 10,271 ) $ ( 8,106 ) State income taxes, net of federal benefit ( 90 ) ( 625 ) ( 143 ) Permanent differences for equity compensation 2,587 2,604 5,156 Nondeductible items 142 53 84 Nondeductible compensation 1,218 302 1,349 Change in valuation allowance 4,654 8,047 1,737 Other adjustments ( 233 ) — — Income tax provision $ 75 $ 110 $ 77 96 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) 2023 2022 Deferred tax assets Intangible assets $ 75 $ 95 Property and equipment 867 815 Accrued expenses 1,488 653 Deferred revenue 113 51 Allowances, reserves and other 2,013 2,796 Stock-based compensation 7,728 8,335 Section 174 capitalized expenses 4,346 1,456 Net operating loss and other carryforwards 87,327 85,176 Total deferred tax assets 103,957 99,377 Valuation allowance ( 98,771 ) ( 94,103 ) Net deferred tax assets 5,186 5,274 Deferred tax liabilities Prepaid expenses ( 376 ) ( 364 ) State taxes ( 4,810 ) ( 4,910 ) Total deferred tax liabilities ( 5,186 ) ( 5,274 ) Net deferred taxes $ — $ — Effective January 1, 2022, the Tax Cuts and Jobs Act ("TCJA") of 2017 eliminated the option to deduct research and development expenses in the current year and now requires taxpayers to capitalize and amortize research and development expenses to Internal Revenue Code of 1986, as amended, (“IRC”) Section 174. Although Congress is considering legislation that would reinstate and extend Section 174 expensing for certain research and development expenses, the possibility that this will happen is uncertain. The capitalized expenses are amortized over a 5-year period for domestic expenses and a 15-year period for foreign expenses. As of December 31, 2023 and 2022 , the Company's deferred tax assets related to capitalized research and development expenses were $ 4.3 million and $ 1.5 million, respectively. As of December 31, 2023 , the Company had federal and state net operating loss carryforwards tax effect of $ 311.0 million and $ 274.0 million, respectively. As of December 31, 2022, The Company had federal and state net operating loss carryforwards tax effect of $ 301.0 million and $ 272.0 million, respectively. Federal and state net operating loss carryforwards begin to expire in 2032. As of December 31, 2023 and 2022 , the Company did no t have any state tax credits. Federal net operating losses 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 IRC 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, 2023 and 2022 , 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, 2023 . 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, 2023 , 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: 97 For the year ended December 31, 2023 2022 2021 (In thousands) Beginning balance $ 94,103 $ 86,659 $ 84,934 Increase to valuation allowance 4,654 8,047 1,737 Decrease due to adoption of ASC 842 — ( 613 ) — Other increases (decreases) 14 10 ( 12 ) Ending balance $ 98,771 $ 94,103 $ 86,659 The Company is subject to taxation in the U.S. federal and various state jurisdictions. During the years ended December 31, 2023 and 2022, the Company has no t recorded any uncertain tax positions and has no t recognized interest or penalties in the consolidated statements of comprehensive loss. The Company is subject to examination from federal tax authorities for years 2020, 2021 and 2022. 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. On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (the “Act”), which contains provisions that became effective on January 1, 2023, including a 15% corporate minimum tax and a 1% excise tax on stock buybacks. The Company does not currently expect any material changes on its consolidated financial position, results of operations and cash flows. 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 $ 0.04 million, $ 0.2 million and $ 0.6 million of advertising costs for this related party during the years ended December 31, 2023, 2022 and 2021, respectively, which is reported as marketing expense in the Company’s consolidated statements of comprehensive loss. In May 2022, the Company engaged, Vault Co., a third-party consultant, to develop and deliver an ongoing brand tracker for the Company. Vault Co. is owned by a major shareholder of the Company. Based on services provided, the Company incurred $ 0.03 million and $ 0.1 million, respectively, of advertising costs for this related party during the year ended December 31, 2023 and 2022, which is reported as marketing expense in the Company’s consolidated statements of comprehensive loss. 16. Leases The Company’s lease portfolio includes both real estate and non-real estate type leases which are accounted for as either finance or operating leases. Real estate leases generally include office and warehouse facilities and non-real estate leases generally include office equipment and machinery. The Company determines if a contract is or contains a lease at inception. The Company’s leases have remaining lease terms of less than one to six years . In connection with two 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 $ 3.7 million and $ 4.8 million as of December 31, 2023 and 2022, 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. The components of lease expense were as follows (in thousands): For the year ended December 31, 2023 2022 Finance lease expense: Amortization $ 50 $ 263 Interest on lease liabilities — 7 Operating lease expense: Operating lease expense (1) 7,168 7,153 Sublease income ( 2,006 ) ( 2,006 ) Total lease expense, net $ 5,212 $ 5,417 ______________________ (1) Represents the straight-line lease expense of operating leases, inclusive of amortization of ROU assets and the interest component of operating lease liabilities. 98 For the year ended December 31, 2021, rent expense under ASC 840 was $ 5.0 million. For the year ended December 31, 2021, sublease rent income was $ 2.5 million . Based on the nature of the ROU assets, amortization of finance leases and amortization of operating ROU assets, operating lease expense and other lease expense are recorded within either cost of revenue or selling, general and administrative expenses and interest on finance lease liabilities is recorded within interest and other expense, net in the consolidated statements of comprehensive loss. The following tables set forth the amount of lease assets and lease liabilities included in the Company’s consolidated balance sheets (in thousands): As of December 31, Assets Financial Statement Line Item 2023 2022 Finance lease assets Property and equipment, net $ 17 $ 70 Operating lease assets Operating lease right-of-use asset 23,683 29,947 Total lease assets $ 23,700 $ 30,017 Liabilities Current Finance lease liabilities Accrued expenses 23 52 Operating lease liabilities Accrued expenses 8,105 7,688 Non-current Finance lease liabilities Other long-term liabilities — 22 Operating lease liabilities Operating lease liabilities, net of current portion 21,738 29,842 Total lease liabilities $ 29,866 $ 37,604 Supplemental information related to the Company’s leases for the year ended December 31, 2023 was as follows: For the year ended December 31, 2023 2022 Weighted-average remaining lease term (in years) Finance leases 0.6 1.4 Operating leases 4.1 4.5 Weighted-average discount rate Finance leases 2.77 % 3.00 % Operating leases 2.29 % 2.29 % Cash paid for amounts included in the measurement of lease liabilities (in thousands) Operating cash flows used in finance leases $ 1 $ 8 Operating cash flows used in operating leases $ 7,688 $ 7,007 Finance cash flows used in finance leases $ 58 $ 303 The Company did no t have any non-cash ROU assets obtained in exchange for lease liabilities during the year ended December 31, 2023 for either finance or operating leases. 99 Future minimum lease payments required under operating and finance leases as of December 31, 2023, were as follows (in thousands): Operating Leases Finance Leases 2024 $ 8,704 22 2025 8,950 1 2026 9,201 — 2027 4,246 — 2028 — — Thereafter — — Future minimum lease payments $ 31,101 $ 23 Less: Amount representing interest ( 1,258 ) — Present value of future lease payments $ 29,843 $ 23 17. Restructuring Transformation Initiative In 2023, the Company executed a broad-based Transformation Initiative designed to build the Honest brand and drive growth in higher-margin areas of the portfolio, strengthen the Company’s cost structure, drive focus on the most productive areas of our business, deliver greater impact from brand-building investments, and improve executional excellence across the enterprise. Restructuring costs are one of the elements of the Transformation Initiative and are included in restructuring on the consolidated statements of comprehensive loss: • Employee-Related Costs – Employee-related costs are primarily comprised of severance and other post-employment benefit costs, calculated based on salary levels, prior service and other statutory minimum benefits, if applicable. • Asset-Related Costs – Asset-related costs consist of accelerated amortization related to visual merchandise in an international retail store taken out of service prior to its existing useful life as a direct result of the restructuring initiatives, as well as asset impairments related to technology taken out of service. • Contract Terminations – Costs related to contract terminations include continuing payments to a third-party after the Company has ceased benefiting from the rights conveyed in the contract, or a payment made to terminate a contract prior to its expiration. Other costs associated with the Transformation Initiative are comprised of the following: • Sales Returns and Cost of Revenue – Product returns, chargebacks and markdowns are recorded as a reduction to revenue and inventory write-offs, write-downs or destruction costs as a direct result of the restructuring initiatives to exit certain products or geographic locations are recorded as a component of cost of revenue on the consolidated statements of comprehensive loss when estimable and reasonably assured. • Other Costs – The Company incurred other costs related to the restructuring initiatives, which are included in selling, general and administrative expense on the consolidated statements of comprehensive loss and primarily include the following: ▪ Donation expenses related to inventory reserves, including tariffs, and ▪ Consulting and other professional services. Restructuring Costs Employee-Related Costs Asset-Related Costs Contract Terminations Total Charges for the year ended December 31, 2023 $ 1,142 $ 193 $ 870 $ 2,205 Changes in accrued expenses as of December 31, 2023 relating to the Transformation Initiative were: 100 Restructuring Costs Employee-Related Costs (1) Contract Terminations Inventory Reserves Total Balance at December 31, 2022 $ — $ — $ — $ — Charges (adjustments) 1,142 479 5,166 6,787 Cash payments ( 786 ) ( 479 ) ( 500 ) ( 1,765 ) Non-cash asset write-offs — — ( 2,085 ) ( 2,085 ) Balance at December 31, 2023 $ 356 $ — $ 2,581 $ 2,937 ___________ (1) Included in accrued expenses as of December 31, 2023. Refer to Note 9, "Accrued Expenses" included elsewhere in these consolidated financial statements. The Company records costs associated with the restructuring initiatives once the relevant accounting criteria have been met. Accrued restructuring costs of $ 0.4 million related to severance costs as of December 31, 2023 are expected to result in cash expenditures funded from cash provided by operations in future periods and is included in accrued expenses on the consolidated balance sheets. 101 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures None.