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Item 7. Management’s Discussion and Analysis

2025-02-26 compared with 2024-03-08 · 133 added, 187 removed, 332 unchanged (49% of the section changed)

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The Honest Company, Inc.

(“Honest” and, together with its consolidated subsidiaries, the “Company,” “we,” “us” and “our”) is a personal care company dedicated to creating clean- and sustainably-designed products.

(“Honest” and, together with its consolidated subsidiaries, the “Company,” “we,” “us” and “our”) is a personal care company dedicated to creating cleanly-formulated and sustainably-designed products.

Our commitment to our core values, continual innovation and engaging our community has differentiated and elevated our brand and our products.

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We are an omnichannel brand, ensuring our products are available wherever our consumers shop.

Our differentiated platform positions us for continued growth through our trusted brand, award-winning multi-category product offerings, and omnichannel accessibility.

Our integrated multi-category product architecture is intentionally designed to serve our consumers every day, at every age and through every life stage, no matter where they are on their journey.

Our three product categories are Diapers and Wipes, Skin and Personal Care, and Household and Wellness, which represented 63%, 26%, and 11%, respectively, of our revenue for the year ended December 31, 2023, compared to 64%, 28%, and 8%, respectively, of our revenue for the year ended December 31, 2022.

Our integrated multi-category product architecture is designed to drive loyalty, increase our consumer wallet share and generate attractive consumer lifetime value.

We believe that our consumers are modern, aspirational, conscious and style-forward and that they seek out high quality, effective and thoughtfully-designed products.

We believe that they are passionate about living a conscious life and are enthusiastic ambassadors for brands they trust.

Our differentiated platform positions us for continued growth through our trusted brand, award-winning multi-category product offerings, and omnichannel availability.

Our integrated multi-category product portfolio is intentionally designed to serve our consumers every day, at every age and through every life stage.

We believe this drives loyalty, increases our consumer wallet share and generates attractive consumer lifetime value.

We believe that our consumers are modern, aspirational and style-forward and that they seek out high quality, effective and thoughtfully-designed products.

We believe that they are very choiceful about the products that they purchase and use.

And, we believe they are enthusiastic ambassadors for brands they trust.

As purpose-driven consumers, they transcend any one demographic, spanning gender, age, geography, ethnicity and household income.

Honest consumers are often young, mobile-centric and digitally-inclined.

We build relationships with these consumers through a disruptive digital marketing strategy that engages them with “snackable” digital content (short-form, easily digestible content), immerses them in our brand values, and inspires them to join the Honest community.

We build relationships with these consumers through a disruptive digital marketing strategy that engages them with digital content.

Our direct connection with our community enables us to understand what consumers’ needs are and inspires our product innovation pipeline, generating a significant competitive advantage over more traditional consumer packaged goods (“CPG”) peers.

Our omnichannel approach seeks to meet consumers wherever they want to shop, balancing deep consumer connection with broad convenience and accessibility.

Since our launch, we have built a well-integrated omnichannel presence by expanding our product accessibility across both Digital and Retail channels, including the launch of strategic partnerships with Target, Amazon and Walmart in 2014, 2017 and 2022, respectively.

For the year ended December 31, 2023, we generated 49% and 51% of our revenue from our Digital and Retail channels, respectively, compared to 45% and 55%, respectively, for the year ended December 31, 2022.

Our omnichannel presence seeks to meet consumers wherever they want to shop, balancing deep consumer connection with broad convenience and availability.

Since our launch, we have built a well-integrated omnichannel presence by expanding our product availability, including the launch of strategic partnerships with Target, Amazon and Walmart in 2014, 2017 and 2022, respectively.

We maintain direct relationships with our consumers via our flagship digital platform, Honest.com, which allows us to influence brand experience and better understand consumer preferences and behavior.

We increase accessibility of our products to more consumers through both the third-party pureplay ecommerce sites that, with Honest.com, comprise our Digital channel, and our Retail channel, which includes leading retailers and their websites.

As of December 31, 2023, o ur products can be found in approximately 51,000 retail locations across the United States and Canada.

In 2023, as part of the Transformation Initiative we announced that we plan to focus on our North American customers and are actively reducing the portfolio of products we will offer for sale in certain regions, including retail locations in Europe.

We also increase the availability of our products to more consumers through third-party ecommerce sites, our leading retailers and their websites.

Our integrated omnichannel presence provides meaningful benefits to our consumers which we believe are not easily replicated by our competitors.

distinctive business model has allowed us to efficiently scale our business while remaining agnostic as to the channel where consumers purchase our products.

Initial Public Offering

On May 7, 2021, we completed our IPO of 25,807,000 shares of our common stock at a stock price of $16.00 per share, resulting in aggregate net proceeds to us of approximately $91.0 million, after deducting the underwriting discount and commissions of $6.7 million and offering expenses of $5.5 million.

We sold 6,451,613 shares and certain existing stockholders sold an aggregate of 19,355,387 shares.

We 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.

We did not receive any proceeds from the sale of shares of our common stock by the selling stockholders.

Transformation Initiative

In 2023, we executed a broad-based Transformation Initiative designed to build the Honest brand and drive growth in higher-margin areas of the portfolio, strengthen our 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.

The Transformation Initiative resulted in the following:

• Costs associated with the Transformation Initiative, including restructuring costs described below, were $10.8 million for the year ended December 31, 2023.

Refer to discussion under "Results of Operations" below.

• Restructuring costs, which include employee-related costs, asset-related costs and contract terminations related to exiting retail and online stores in unprofitable geographical locations in Asia and Europe, were $2.2 million for the year ended December 31, 2023 and are reflected in Restructuring on the consolidated statements of comprehensive loss.

The restructuring element of the Transformation Initiative was substantially completed by December 31, 2023.

• We expect the Transformation Initiative to result in annualized benefits to adjusted EBITDA (1) in the range of $15.0 million to $20.0 million beginning in 2024, and we started to see benefits in late 2023.

These benefits include reductions in costs of revenue, reductions in operating expenses and increases in revenue.

• The cash impact of costs related to the Transformation Initiative was $3.5 million for the year ended December 31, 2023.

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(1) We do not provide guidance for the most directly comparable GAAP measure, net loss, and similarly cannot provide a reconciliation between our adjusted EBITDA outlook and net loss without unreasonable effort due to the unavailability of reliable estimates for certain components of net loss, including interest and other (income) expense, net, and the respective reconciliations.

These items are not within our control and may vary greatly between periods and could significantly impact our financial results calculated in accordance with GAAP.

We may incur other charges or cash expenditures not currently contemplated that may occur as a result of or in connection with the Transformation Initiative.

We believe specific value drivers of the Transformation Initiative pillars include:

The Company expects to continue driving benefits from its three Transformation Initiative Pillars of Brand Maximization, Margin Enhancement, and Operating Discipline:

1) Brand Maximization

• Leveraging the strength of the Honest brand to drive growth through innovation, margin-accretive products, and marketing effectiveness.

• The impact of additional pricing increases across the majority of our product portfolio throughout 2023, following pricing increases in 2022 that resulted in revenue growth driven by both volume and pricing.

• Leveraging the strength of the Honest brand to drive growth through greater availability, expanded household penetration, product innovation, margin-accretive products, and marketing effectiveness.

• Pricing strategy as a driver of revenue is also a component of Brand Maximization.

This includes the ongoing benefit of pricing increases across the majority of our product portfolio in 2022 and 2023.

2) Margin Enhancement

• Focusing our resources on North America, which includes exiting our low-margin business in Europe and Asia.

• Exiting low-margin elements of the cleaning and sanitization business in 2023 (included in Household and Wellness product category).

• Focusing our resources on North America, which included the exit of our low-margin business in Europe and Asia.

• Exiting low-margin elements of the cleaning and sanitization business in 2023.

• Executing an inventory, or stock-keeping unit (“SKU”), rationalization program in 2023.

• Re-directing resources to accelerate cost savings, including optimization of our contract manufacturing strategies, reduced shipping and logistic costs, and product costs.

• Realigning resources to reflect the prioritization of higher-margin opportunities.

• Realigning resources to reflect the prioritization of higher-margin opportunities, including strategic shift away from our lower margin channels, including our direct-to-consumer (“DTC”) business .

3) Operating Discipline

• Focusing on improving our executional excellence in how we operate as an enterprise.

• Building a culture that emphasizes returns across growth drivers, including marketing, trade promotion, and innovation.

• Managing working capital including the reduction of inventory.

Costs associated with the Transformation Initiative for the year ended December 31, 2023 were as follows (in thousands):

For the year ended December 31, 2023

Reduction in Net Revenue (1)

Cost of Revenue 3,842

Restructuring Costs (2)

Other Costs (3)

Total $ 10,797

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(1) Relates to product markdowns and true-up of prior quarter estimates.

(2) Refer to the restructuring table under "Results of Operations" below for further details of operating expenses included in restructuring costs.

(3) Other Costs include donation expenses, consulting and other professional services.

For further details on the Transformation Initiative, refer to Note 17, "Restructuring" included in these consolidated financial statements.

For further details on the restructuring element of the Transformation Initiative, refer to Note 15, "Restructuring" included in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Key Factors Affecting Our Performance

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Risk Factors.”

Operational and Marketing Efficienc y

To grow our business, we intend to continue to improve our operational and marketing efficiency, which includes attracting new consumers, increasing community engagement and improving fulfillment and distribution operations.

Our marketing model is inclusive of a best-in-class modern approach across paid, owned, and earned marketing channels.

We invest significant resources in marketing and content generation, use a variety of brand and performance marketing channels and work continuously to improve brand exposure at our retail customers to acquire new consumers.

It is important to maintain reasonable costs for these marketing efforts relative to the revenue we expect to derive from our consumers.

We leverage proprietary consumer insights and best-in-class analytics to guide our omnichannel strategy and inform our marketing spend optimization.

Our future success depends in part on our ability to effectively attract consumers on a cost-efficient basis and achieve efficiencies in our operations.

In addition, we believe we have been able to achieve some operational and marketing efficiency as part of cost savings in connection with our Brand Maximization Transformation Pillar.

Ability to Execute Increasing Physical Availability

The core of our growth strategy centers around increasing physical availability of our products through expanded stores, doors, aisles, shelves and facings.

While we have made significant progress in our distribution gains, we are still under indexed compared to competition.

Our partnerships with leading third-party retail platforms and national retailers have broadened our consumer reach, raised our brand awareness and enhanced our margins through operating leverage.

With the higher costs of shipping and fulfillment activities related to our direct-to-consumer (“DTC”) business and other related costs, we will continue to shift our focus and investments towards more efficient and scalable distribution models with our current retail and digital customers.

As we move forward beyond 2025, we will gradually transition away from Honest.com as a shipping and fulfillment channel, while ensuring the site remains a resource for educating consumers, showcasing our complete product portfolio, and driving consumers to purchase offsite.

We will continue to pursue partnerships with a wide variety of retailers, including mass retailers, online retailers, club retailers, grocery stores, drugstores and specialty retailers.

Our ability to execute this strategy will depend on a number of factors, such as competitive dynamics and retailers’ satisfaction with the sales and profitability of our products, channel shifts of their customers, and their own supply chain, order timing, and inventory needs, which may fluctuate from period to period.

Our product mix is a driver of our financial performance given our focus on accretive product launches and innovation to increase product margins.

Even though our growth strategy aims to boost sales across products by increasing total distribution, we intend to prioritize growth in products with attractive margin characteristics, including wipes, and leverage our brand equity and consumer insights to extend into new products.

Ability to Grow Our Brand Awareness

Our brand is integral to the growth of our business and is essential to our ability to engage and stay connected with the growing clean products consumer.

In order to increase the share of wallet of existing conscious consumers and to attract new consumers, our brand has to maintain its trustworthiness and authenticity.

Our ability to attract new consumers will depend, among other things, on our ability to successfully produce products that are free of defects and communicate the value of those products as clean, sustainable and effective, the efficacy of our marketing efforts and the offerings of our competitors.

Our brand is integral to the growth of our business and is essential to our ability to engage and stay connected with the growing clean products consumer market.

In order to increase the share of wallet of our existing consumers and to attract new consumers, our brand has to maintain its trustworthiness and authenticity.

Our ability to attract new consumers will depend on, among other things, the efficacy of our marketing efforts, our ability to successfully produce products that are free of defects and communicate the value of those products as cleanly-formulated and sustainably-designed and effective and the competing offerings of our competitors.

Beyond preserving the integrity of our brand, our performance will depend on our ability to augment our reach and increase the number of consumers aware of Honest and our product portfolio.

As part of the Transformation Initiative, we have been focused on Brand Maximization, including improving the return on marketing by reducing marketing spend on low-return campaigns and emphasizing best-selling items, focusing on the most profitable areas of our business.

We believe our brand strength will enable us to continue to expand across categories and channels, allowing us to deepen relationships with consumers.

We believe our brand strength will enable us to continue to launch new products, allowing us to deepen relationships with consumers.

Our performance depends significantly on factors that may affect the level and pattern of consumer spending in the product categories in which we operate.

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Research, development and innovation are core elements underpinning our growth strategy.

Through our in-house research and development laboratories, we are able to access the latest advancements in clean ingredients and continue to innovate in the clean conscious space.

Based in Los Angeles, California, our research and development team, including chemists, an in-house toxicologist and an eco-toxicologist, develops innovative clean products based on the latest green technology.

At Honest, product innovation never stops.

Through our in-house research and development laboratories, we are able to access the latest advancements in clean ingredients.

Based in Los Angeles, California, our research and development team, including chemists, an in-house toxicologist and an eco-toxicologist, develops innovative cleanly-formulated products based on the latest green technology.

At Honest, product innovation is top of mind.

The improvement of existing products and the introduction of new products have been, and continue to be, integral to our growth.

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Our continued focus on research and development will be central to attracting and retaining consumers in the future.

Our ability to successfully develop, market and sell new products will depend on a variety of factors, including our continued investment in innovation, integrated business planning processes and capabilities.

Continued Product Category Growth

Our product mix is a driver of our financial performance given our focus on accretive product launches and innovation to increase product margins.

Even though our growth strategy aims to boost sales across all product categories, we intend to prioritize growth in Skin and Personal Care given its attractive margin characteristics and leverage our brand equity and consumer insights to extend into new adjacent product categories.

We are also committed to bringing our Honest Standard to new products and new categories where we believe there is a need for a higher standard for clean personal care.

Continued Execution of Omnichannel Strategy

The continued execution of our omnichannel strategy impacts our financial performance.

We intend to continue leveraging our marketing strategy to drive increased consumer awareness and leverage our flagship digital platform, Honest.com, to create direct connections with our consumers, influence brand experience and understand consumer preference and behavior.

Our partnerships with leading third-party retail platforms and national retailers have broadened our consumer reach, raised our brand awareness and enhanced our margins through operating leverage.

We will continue to pursue partnerships with a wide variety of retailers, including mass retailers, online retailers, club retailers, grocery stores, drugstores and specialty retailers.

Operational and Marketing Efficienc y

It is important to maintain reasonable costs for these marketing efforts relative to the revenue we expect to derive from our consumers.

We leverage our proprietary data and systems to generate valuable consumer insights that guide our omnichannel strategy and inform our marketing spend optimization.

Our future success depends in part on our ability to effectively attract consumers on a cost-efficient basis and achieve efficiencies in our operations.

In addition, we have been able to achieve some operational and marketing efficiency as part of cost savings in connection with our Transformation Initiative.

Our paid advertising includes search engine marketing, display, paid social media and product placement and traditional advertising, such as direct mail, television, radio and magazine advertising.

We drive a significant amount of traffic to our website via search engines and, therefore, rely heavily on search engines.

Paid advertising costs significantly increased industry-wide during the past few years, which negatively impacted our ability to cost-effectively drive traffic to Honest.com.

As a result, we have decreased and shifted marketing spend into support for retail and other digital customers that has allowed us to increase marketing efficiency, while maintaining revenue growth.

Additionally, through our improved marketing efficiency the consumer is able to choose where they want to purchase our products online, and we have seen more consumers choosing online retailers as compared to purchasing directly on Honest.com, which for the year ended December 31, 2023 has negatively impacted revenue at Honest.com but has improved revenue in other channels.

Our ability to successfully develop, market and sell new products will depend on a variety of factors, including our continued investment in innovation.

We are also committed to bringing our Honest Standard to new products where we believe there is a need for a higher standard for clean personal care.

Overall Macro Trends

We have strategically positioned ourselves to benefit from several macro trends related to changes in consumer behavior.

We believe consumers’ increasing interest in purpose-designed products has contributed to higher demand for certain products.

At the same time, changes in macro-level consumer spending trends, including as a result of global pandemics or other macroeconomic conditions, such as inflation, have resulted and could in the future result in fluctuations in our operating results.

We believe consumers’ increasing interest in cleanly-designed products and purpose-driven companies has contributed to higher demand for certain products.

At the same time, changes in macro-level trends, including as a result of global pandemics, changing consumer attitudes or behavior or other macroeconomic conditions, such as inflation, tariffs or supply chain disruptions, have resulted and could in the future result in fluctuations in our operating results.

Business Operations

Global economic and political uncertainty have increased due to the impact of continued inflationary pressures, adverse impact on confidence in financial markets and geopolitical events, including the conflict in Ukraine and the Israel-Hamas war.

Global economic and political uncertainty have increased due to the impact of continued inflationary pressures, adverse impact on confidence in financial markets and geopolitical events.

Additionally, the extent of the impact of macroeconomic trends on the Company’s operational and financial performance in the future will depend on future developments.

Prolonged unfavorable economic conditions, including as a result of global pandemics, rising inflation and interest rates and any resulting recession or slowed economic growth, have had and may continue to have an adverse effect on our sales and profitability.

Prolonged unfavorable economic conditions, including as a result of global pandemics, changing consumer attitudes or behavior or other macroeconomic conditions, such as inflation, tariffs or supply chain disruptions, have had and may continue to have an adverse effect on our sales and profitability.

All of these factors are difficult to predict considering the rapidly evolving landscape as the Company continues to expect a variable operating environment going forward.

Supply Chain Disruptions

There has been and continues to be an adverse impact on global economic conditions, specifically inflationary pressures, which has adversely affected our supply chain in regards to cost of goods sold.

We have experienced and anticipate continued increases in product costs and transportation costs, which has and could continue to hamper our ability to drive margin expansion.

We have taken measures to bolster key aspects of our supply chain, such as ensuring sufficient inventory to support our continued growth, minimizing lead times for raw materials, and implementing a robust cost-savings program, as part of our Transformation Initiative.

In addition, as a result of the supply chain impacts, other macroeconomic trends and high inventory levels in 2022, we experienced increased fulfillment costs in 2022 but saw comparatively lower fulfillment costs in the year ended December 31, 2023, as we reduced inventory levels.

One of our fulfillment partners passed on increased service and inflation related costs to us, including warehouse labor cost, which negatively impacted our cost of revenue for the year ended December 31, 2023.

If we are not successful in negotiating future renewals such that these renewals are at increased costs to us, our business, financial condition, results of operations and prospects could be adversely affected.

In 2022, we negotiated and agreed to higher purchase

prices with two of our third-party manufacturers which negatively impacted our cost of revenue in the Diapers and Wipes product category in the years ended December 31, 2022 and 2023.

In January 2024, we negotiated better price terms with one of these third-party manufacturers, Ontex.

We could face further escalation of purchase costs and cost of revenue in the future.

We implemented price increases that took effect in 2022 and 2023 and in the future as needed to offset current and future input cost inflation and to pursue productivity initiatives to offset inflation.

There has been and continues to be an adverse impact on global economic conditions, specifically inflationary pressures, which has adversely affected our supply chain in regards to cost of sales.

We have experienced and anticipate continued increases in product costs and labor costs due to inflationary pressures and higher transportation costs from ocean container delivery, which has in the past and could continue to hamper our ability to drive margin expansion.

We expect to continue to receive fulfillment costs savings due to warehouse and labor operational efficiencies gained with our Las Vegas, Nevada fulfillment center partner.

If we are not successful in negotiating future renewals with our other fulfillment partner such that these renewals are at increased costs to us, our business, financial condition, results of operations and prospects could be adversely affected.

In January 2024, we negotiated better purchase price terms with one of our third-party manufacturers, Ontex.

However, we have experienced purchase price increases from our third-party manufacturers in the past and could face escalation of purchase costs and cost of revenue in the future.

We implemented price increases that took effect in 2022 and 2023 and we may implement additional price increases in the future as needed to offset current and future input cost inflation and to pursue productivity initiatives to offset inflation.

However, we may not be able to increase our prices or productivity sufficiently enough to offset these costs.

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Consumer Preferences

Our revenue is relatively balanced between our Digital and Retail channels which demonstrates the power of our omni-channel distribution model.

We believe in the power of our omnichannel distribution model.

We believe consumers value the flexibility in terms of where and when they choose to purchase Honest products.

We also believe that consumers recognize the quality of Honest products, knowing that there are over 3,500 chemicals and materials that we choose not to formulate with.

We also believe that consumers research their personal care ingredients and recognize the quality of Honest products, knowing that there are over 3,500 chemicals and materials that we choose not to formulate with.

Inventory is reflected at net realizable value which includes a reserve for excess inventory.

We estimate reserve requirements based on current and forecasted demand, including the ability to liquidate excess inventory and estimated liquidation value.

Depending on future consumer behavior in relation to the macroeconomic environment or otherwise and related aging of inventory, among other factors, we may incur inventory write-downs, customer returns or incur donation expense or disposal costs as we reduce excess inventory.

The decline in demand for our sanitization and disinfecting products included in the Household and Wellness product category has led to the implementation of our plan to exit low-margin household products as part of the Transformation Initiative.

Additionally, we implemented an inventory, or SKU rationalization program, as part of the Transformation Initiative.

For the year ended December 31, 2023, we recorded an inventory write-down, inclusive of overhead costs and tariffs, of $3.4 million mainly related to international product exits and SKU rationalization, which is included in cost of revenue on the consolidated statements of comprehensive loss.

Additionally, we earmarked donations of $3.1 million, mainly related to the liquidation of low-margin household products during the year ended December 31, 2023, which is included in selling, general and administrative expense on the consolidated statements of comprehensive loss.

Due to increased supply chain lead times, new retail distribution, and expectation of supplier price increases that took effect in early 2023, we increased our inventory levels in 2022 to ensure in-stock position to service customers and consumers.

In addition, inflation in input costs, including higher product costs, inbound shipping and warehouse labor, has resulted in a higher dollar value of inventory as of December 31, 2023.

We have reduced our inventory levels during the year ended December 31, 2023 compared to December 31, 2022, as part of our disciplined inventory management.

Inflation Reduction Act of 2022

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.

We do not currently expect any material changes on our consolidated financial position, results of operations and cash flows.

Components of Results of Operations

We generate revenue through the sale of our products through Digital and Retail channels in the following product categories:

Diapers and Wipes, Skin and Personal Care, and Household and Wellness.

The Digital channel includes direct sales to the consumer through our website and sales to third-party ecommerce customers, who resell our products through their own online platforms.

The Retail channel includes sales to traditional brick and mortar retailers and their respective websites, who may also resell our products through their own online platforms.

Our revenue is recognized net of allowances for returns, discounts, credits and any taxes collected from consumers.

Depending on future consumer behavior in relation to the macroeconomic environment or otherwise and related aging of inventory, among other factors, we have in the past and expect to incur in the future additional inventory write-downs, customer returns or incur donation expense or disposal costs as we reduce excess inventory.

In connection with the termination of the Likeness Agreement with Jessica Warren, as part of Ms.

Warren's departure from her Chief Creative Officer position, after April 4, 2025 we are prohibited from selling existing inventory that uses certain specified licensed intellectual property on its packaging, which resulted in inventory write-offs and we anticipate will result in future inventory write-offs.

For the year ended December 31, 2024, we recorded an inventory write-down of $0.8 million, inclusive of overhead costs and tariffs, related to the termination of the Likeness Agreement, which is included in cost of revenue on the consolidated statements of comprehensive loss.

Additionally, we earmarked donations of $0.4 million, inclusive of overhead costs and tariffs, related to the termination of the Likeness Agreement during the year ended December 31, 2024, which is included in selling, general and administrative expense on the consolidated statements of comprehensive loss.

Supplier Services Agreement

In 2019, we entered into a license agreement with Butterblu, LLC, or Butterblu, pursuant to which we licensed certain of our trademarks to Butterblu for the manufacture and distribution of certain baby apparel products in exchange for royalties.

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As part of the supplier services agreement, we have agreed to purchase and own inventory for the term of the supplier service agreement, which is until December 31, 2026, unless terminated sooner.

Butterblu continues to operate and maintain our baby apparel offerings independently through the honestbabyclothing.com website under our supplier services agreement.

Honest Baby Clothing sales are reflected as revenue in our consolidated statements of operations.

We are currently in discussions with Butterblu regarding our respective obligations under the supplier services agreement.

Butterblu continues to operate and maintain our baby apparel offerings independently through the honestbabyclothing.com website under our supplier services agreement and its sales are reflected as revenue in our consolidated statements of comprehensive loss.

These discussions could result in termination of the supplier services agreement prior to its termination date, potential disputes over the terms of termination, and costs to us related to the inventory we agreed to purchase and own for the term of the agreement.

In addition, any loss of the relationship with Butterblu may negatively impact sales of our baby apparel, which will adversely affect our results of operations.

Components of Results of Operations

We generate revenue through the sale of our products through our leading retailers and their websites, third-party ecommerce sites and Honest.com.

Our revenue is recognized net of allowances for returns, discounts, credits and any taxes collected from consumers.

Disaggregation of Revenue

We had previously presented our revenue by sales channel of Digital and Retail and by product category of Diapers and Wipes, Skin and Personal Care and Household and Wellness.

In determining the appropriate categories to use to disaggregate revenue in accordance with the requirements of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, we had considered the information regularly reviewed by our chief operating decision maker (“CODM”) for evaluating our financial performance and making resource allocation decisions and the guidance to disaggregate revenue from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.

In 2023, we executed a broad-based Transformation Initiative with Brand Maximization as one of the Pillars designed to leverage the strength of the Honest brand.

As part of our strategy to build the Honest brand, our CODM evaluates our financial performance and makes resource allocation decisions across our products as one brand of a portfolio of multiple products.

As a result, in the first quarter of 2024, we removed the disaggregation of revenue by product category to align with changes made to our long-term strategy and we began disaggregating revenue by (i) direct-to-consumer ("DTC") and (ii) retail and third-party ecommerce customers.

The change had no effect on our results of operations or timing of revenue recognition.

Cost of Revenue

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professional fees, including audit and legal expenses;

donation expenses including tariffs;

donation expenses including overhead and tariffs;

facility costs, including insurance, utilities and rent relating to our headquarters;

third-party service fees related to Honest Baby Clothing;

third-party service fees related to our supplier services agreement for Honest baby clothing, our baby apparel business;

and, depreciation and amortization expenses.

We expect our general and administrative expenses to decrease as a percentage of revenue as we continue to grow our business and organizational capabilities and efficiencies.

Since our IPO, we have also incurred additional costs for employees and third-party professional fees related to operating as a public company and costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations, and increased expenses for insurance, investor relations and professional services.

We expect in the future to incur additional third-party professional fees related to compliance obligations as a public company.

Marketing expenses include costs related to our branding initiatives, retail customer marketing activities, point of purchase displays, targeted online advertising through sponsored search, display advertising, email and influencer marketing campaigns, market research, content production and other public relations and promotional initiatives.

Given higher costs in digital marketing and increased retail distribution, we have shifted the focus of our marketing spend towards supporting retail marketing programs and top of funnel marketing activities.

We will continue to invest in marketing initiatives in our product categories and best selling products with key retailers, as well as expand brand awareness, introduce new product innovation across multiple product categories and implement new marketing strategies.

We will continue to invest in marketing initiatives in our best-selling products with key retailers, as well as expand brand awareness, introduce new product innovation across multiple product categories and implement new marketing strategies.

As we launch new products, we expect to make marketing investments to build brand awareness, drive trial and set the foundation for future revenue growth.

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Interest expense includes fees incurred under our 2023 Credit Facility, including commitment fees and debt issuance costs.

Prior to the adoption of Financial Accounting Standards Board Accounting Standard Update No 2016-02, Leases (ASC 842) on January 1, 2022, interest expense consisted primarily of the portion of rent payments recognized as imputed interest expense under build-to-suit accounting associated with our leasing arrangements.

Other income (expense), net consists of our foreign currency exchange gains, losses relating to transactions denominated in currencies other than the U.S.

dollar and contingent gains.

We expect our foreign currency gains and losses to be immaterial in future periods but continue to fluctuate due to changes in both the volume of foreign currency transactions and foreign currency exchange rates.

We expect our foreign currency gains and losses to be immaterial in

future periods but continue to fluctuate due to changes in both the volume of foreign currency transactions and foreign currency exchange rates.

Income Tax Provision

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Results of Operations

The following table sets forth our consolidated statements of operations data for each of the periods indicated:

The following table sets forth our consolidated statements of comprehensive loss data for each of the periods indicated:

For the year ended December 31,

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Total $ 15,675 $ 15,804

The following table sets forth our consolidated statements of operations data expressed as a percentage of revenue*:

The following table sets forth our consolidated statements of comprehensive loss data expressed as a percentage of revenue*:

For the year ended December 31,

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(In thousands, except percentages)

By Product Category

Diapers and Wipes $ 218,263 $ 200,429 $ 17,834 8.9 %

Skin and Personal Care 88,104 89,316 (1,212) (1.4)

Household and Wellness 37,998 23,906 14,092 58.9

Total Revenue $ 344,365 $ 313,651 $ 30,714 9.8 %

For the year ended December 31,

$ change % change

(In thousands, except percentages)

Digital $ 169,015 $ 141,403 $ 27,612 19.5 %

Retail 175,350 172,248 3,102 1.8

Total Revenue $ 344,365 $ 313,651 $ 30,714 9.8 %

Revenue $ 378,340 $ 344,365 $ 33,975 9.9 %

Revenue was $378.3 million for the year ended December 31, 2024, as compared to $344.4 million for the year ended December 31, 2023.

The increase of $30.7 million, or 9.8%, was primarily due to a $17.8 million increase in revenue from Diapers and Wipes and a $14.1 million increase in revenue from Household and Wellness products, partially offset by a $1.2 million decrease in revenue from Skin and Personal Care products.

The revenue increase in Diapers and Wipes was primarily driven by $20.9 million in revenue growth with a key digital partner in both diapers and wipes driven by improved marketing efficiency with this partner and $9.9 million in revenue growth in the Retail channel in both diapers and wipes due to strong sales velocity in wipes, partially offset by a decline in both diaper and wipes revenue of $12.6 million on Honest.com.

The revenue increase in Household and Wellness was primarily driven by $17.4 million in revenue from Honest Baby Clothing's strong consumption with our key digital customer and due to a Retail channel launch, partially offset by a decrease in sales of disinfecting and sanitization products .

The revenue decrease from Skin and Personal Care was primarily driven by a decrease of $7.1 million in our Retail channel, primarily due to exiting distribution in low-margin channels, a customer bankruptcy and a decrease of $3.2 million in revenue on Honest.com, partially offset by an increase in revenue of $9.3 million in our Digital channel due to strong consumption with our key digital customer.

We estimate that pricing increases taken in 2022 and 2023 contributed $11.4 million to revenue for the year ended December 31, 2023.

The increase in revenue in our Retail channel for the year ended December 31, 2023, compared to the year ended December 31, 2022, was primarily driven by an increase in revenue at our key retailers of $19.1 million primarily due to new distribution and price increases, partially offset by a decline of $9.5 million in revenue due to exiting distribution in low-margin channels and loss of revenue of $5.4 million due to customer bankruptcies.

The increase in revenue in our Digital channel for the year ended December 31, 2023, compared to the year ended December 31, 2022, was primarily driven by an increase in revenue of $41.8 million by our key digital customer driven by strong consumption across all three product categories, partially offset by a decrease in revenue at Honest.com of $13.0 million due to lower digital marketing spend which resulted in lower traffic to Honest.com.

The increase of $34.0 million, or 9.9%, was primarily due to an increase in retail customer revenue of $45.0 million, partially offset by a decrease in DTC revenue of $11.0 million.

The increase in retail customer revenue is primarily due to an increase in wipes revenue of $22.6 million, an increase in baby apparel revenue of $18.8 million and an increase in baby personal care revenue of $6.2 million, partially offset by a decline in adult facial care, including skin and color cosmetics, revenue of $4.5 million.

The decrease in DTC revenue is primarily related to a decline in diaper revenue of $6.6 million and a decline in adult facial care revenue of $1.7 million.

We estimate that pricing increases taken in 2023 contributed $3.3 million, excluding price pack architecture, to revenue for the year ended December 31, 2024.

Cost of Revenue and Gross Profit

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Cost of revenue was $233.7 million for the year ended December 31, 2024, as compared to $243.8 million for the year ended December 31, 2023.

The increase of $22.5 million, or 10.2%, was primarily driven by a 9.8% increase in revenue, $15.7 million increase in product costs, including transportation costs, and $3.8 million of costs related to the Transformation Initiative, partially offset by cost savings.

Cost of revenue as a percentage of revenue increased by 24 basis points.

The decrease of $10.2 million, or 4.2%, was primarily driven by lower product costs, overhead costs, transportation and fulfillment costs as we focus on operating discipline, partially offset by an increase in baby apparel costs.

Cost of revenue as a percentage of revenue decreased by 9.0% primarily due to cost savings across most of the cost structure, including supply chain and product costs, price increases and lower trade promotion levels as compared to the year ended December 31, 2023.

Gross profit was $144.7 million for the year ended December 31, 2024, as compared to $100.5 million for the year ended December 31, 2023.

The increase was mainly related to price increases of $9.7 million and reduced trade spending

of $4.4 million, partially offset by higher product costs and costs related to the Transformation Initiative, including inventory reserves related to product exits and SKU rationalization.

The increase of $44.1 million, or 43.9%, was primarily related to cost savings, including reduced transportation, fulfillment and product costs, sales volume growth, price increases and efficient trade spend.

Operating Expenses

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Selling, general and administrative expenses were $99.0 million for the year ended December 31, 2024, as compared to $94.6 million for the year ended December 31, 2023.

The increase of $7.3 million, or 8.3%, was primarily due to a $4.2 million increase in service fees related to Honest Baby Clothing, a $2.8 million increase in donation expense primarily related to the Transformation Initiative, a $2.1 million increase in employee-related expenses, mainly related to the annual performance bonus accrual, and a $1.4 million increase in legal expenses primarily related to securities litigation, partially offset by a $1.1 million decrease in consulting fees, a $0.9 million decrease in vendor violations and a $0.7 million decrease to insurance costs.

The increase of $4.5 million, or 4.7%, was primarily due to an $7.9 million increase in legal expenses and a $3.7 million increase in service fees related to baby apparel, partially offset by a $3.1 million decrease in donations expense primarily related to our SKU rationalization program under the Transformation Initiative in 2023, a $1.2 million decrease in executive transition related expenses, a $1.1 million decrease in employee related expenses, a $1.0 million decrease in insurance premiums and a $0.8 million decrease in violations and compliance charges related to vendor violations.

Selling, general and administrative expenses as a percentage of revenue decreased 1.3% as compared to the year ended December 31, 2023.

Marketing Expenses

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Marketing expenses were $45.1 million for the year ended December 31, 2024, as compared to $36.4 million for the year ended December 31, 2023.

The decrease of $11.3 million, or 23.7%, was primarily due to a $3.9 million reduction in retail marketing, a $3.6 million reduction in digital advertising, a decrease of $2.8 million in public relations activities and a $0.5 million decrease in product sample distribution.

The increase of $8.7 million, or 23.7%, was primarily due to a $5.9 million increase in retail marketing, a $1.5 million increase in marketing agency fees and $0.5 million increase in photo and video production fees.

Marketing expenses as a percentage of revenue increased 1.3% as compared to the year ended December 31, 2023.

Restructuring Expenses

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Restructuring expenses were $2.2 million for the year ended December 31, 2023.

Restructuring costs are one of the elements of the Transformation Initiative.

For the year ended December 31, 2023, restructuring costs included employee-related costs of $1.1 million, contract termination costs of $0.9 million, and asset-related costs of $0.2 million.

Restructuring expenses are one of the elements of the Transformation Initiative.

For the year ended December 31, 2023, restructuring expenses included employee-related costs of $1.1 million, contract termination costs of $0.9 million, and asset-related costs of $0.2 million.

For further details on the Transformation Initiative, refer to Note 15, "Restructuring" in the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

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Research and development expenses were $6.9 million for the year ended December 31, 2024, as compared to $6.2 million for the year ended December 31, 2023.

The decrease of $0.8 million, or 11.2%, was primarily due to activities related to the Transformation Initiative, as we realign resources to reflect the prioritization of higher-margin opportunities.

The increase of $0.6 million, or 10.3% is consistent with our focus on continued innovation.

Research and development expenses as a percentage of revenue increased 0.01% as compared to the year ended December 31, 2023.

Interest and Other Income (Expense), Net

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Interest and other income (expense), net $ 282 $ (254) $ 536 (211.0) %

Interest and other income (expense), net was net expense of $0.3 million for the year ended December 31, 2023, as compared to net income of $0.9 million for the year ended December 31, 2022.

The decrease of $1.1 million, or 129.2%, was

primarily due to $0.7 million of other income related to the recognition of taxes and interest refunded from the Nevada

Department of Taxation legal settlement during the year ended December 31, 2022, partially offset by the write-off of unamortized debt issuance costs as we entered into the new 2023 Credit Facility.

Interest and other income (expense), net was income of $0.3 million for the year ended December 31, 2024, as compared to expense of $0.3 million for the year ended December 31, 2023.

Liquidity and Capital Resources

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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 our accounts receivable and inventory as reduced by an availability block and certain reserves.

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.

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We recognize 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.

For the year ended December 31, 2024, the commitment fee incurred was immaterial.

As of December 31, 2024, there were $2.5 million outstanding letters of credit and $30.4 million available to be drawn upon.

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As of December 31, 2024, we are in compliance with all covenants under the 2023 Credit Facility.

Refer to Note 8, "Credit Facilities," in the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information on the 2023 Credit Facility.

Refer to Note 8, "Credit Facilities," included in the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information on the 2023 Credit Facility.

The following table summarizes our cash flows for the periods presented:

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(In thousands) 2024 2023

Net cash provided by (used in) operating activities $ 19,353 $ (76,275)

Net cash provided by investing activities $ 3,835 $ 34,963

Net cash provided by operating activities $ 1,541 $ 19,353

Net cash provided by (used in) investing activities $ (530) $ 3,835

Net cash provided by financing activities $ 41,597 $ 122

Operating Activities

Our largest source of operating cash is from the sales of our products through Digital and Retail channels to our consumers and customers.

Our primary uses of cash from operating activities are for cost of revenue expenses, selling, general and administrative expenses, marketing expenses and research and development expenses.

Our largest source of operating cash is from the sales of our products to our consumers and customers.

Our primary uses of cash from operating activities are for cost of revenue, selling, general and administrative expenses, marketing expenses and research and development expenses.

We have in the past generated negative cash flows from operating activities and have supplemented working capital requirements through net proceeds from the sale and maturity of short-term investments.

Net cash provided by operating activities of $19.4 million for the year ended December 31, 2023 was primarily due to a net increase in cash related to changes in operating assets and liabilities of $33.8 million, and non-cash adjustments of $24.8 million, offset by a net loss of $39.2 million.

Net cash provided by operating activities of $1.5 million for the year ended December 31, 2024 was primarily due to non-cash adjustments of $25.7 million, offset by a net decrease in cash related to changes in operating assets and liabilities of $18.0 million and a net loss of $6.1 million.

Non-cash adjustments primarily consisted of stock-based compensation of $15.7 million, amortization of operating Right-Of-Use ("ROU") assets of $6.4 million and depreciation and amortization of $2.8 million.

Changes in cash flows related to operating assets and liabilities primarily consisted of a $42.2 million decrease in inventory, an $8.0 million decrease in prepaid expenses and other assets due to timing of payments, and a $1.4 million increase in deferred revenue, offset by $9.3 million in lower accounts payable and accrued expenses driven by lower inventory purchases due to our disciplined inventory management, a $7.7 million use of cash due to operating lease obligations and a $0.8 million increase in accounts receivable.

Net cash used in operating activities of $76.3 million for the year ended December 31, 2022 was primarily due to net loss of $49.0 million, non-cash adjustments of $24.2 million and a net decrease in cash related to changes in operating assets and liabilities of $51.4 million.

Changes in cash flows related to operating assets and liabilities primarily consisted of a $10.9 million increase in inventory, a $8.1 million use of cash due to operating lease obligations, a $1.4 million increase in prepaid expenses and other assets due to timing of payments and a $1.0 million increase in deferred revenue, offset by a $3.8 million increase in accounts payable and accrued expenses due to timing of payments and a $0.4 million increase in accounts receivable.

Net cash provided by operating activities of $19.4 million for the year ended December 31, 2023 was primarily due to a net increase in cash related to changes in operating assets and liabilities of $35.2 million, and non-cash adjustments of $23.4 million, offset by a net loss of $39.2 million.

Non-cash adjustments primarily consisted of stock-based compensation of $15.8 million, amortization of operating ROU assets of $6.3 million and depreciation and amortization of $2.7 million.

Changes in cash flows related to operating assets and liabilities primarily consisted of a $40.0 million increase in inventory reflecting cost inflation (inclusive of the purchase of $5.5 million of Honest Baby Clothing inventory from Butterblu), an increase in weeks of supply due to longer lead times, as well as in advance of new distribution and an additional investment in advance of supplier price increases that took effect in early 2023, a $10.6 million increase in accounts receivable due to growth in Retail channel revenue, a $4.4 million increase in prepaid expenses and other assets due to timing of payments, offset by a $10.4 million use of cash due to the timing of payments associated with our accounts payable, accrued expenses and a $7.0 million use of cash due to operating lease obligations.

Changes in cash flows related to operating assets and liabilities primarily consisted of a $43.5 million decrease in inventory, an $8.0 million decrease in prepaid expenses and other assets due to timing of payments, and a $1.4 million increase in deferred revenue, offset by $9.3 million in lower accounts payable and accrued expenses driven by lower inventory purchases due to our disciplined inventory management, a $7.7 million use of cash due to operating lease obligations and a $0.7 million increase in accounts receivable.

Investing Activities

Our primary source of investing cash is the sale and maturity of short-term investments and our primary use of investing cash is the purchase of short-term investments and property and equipment.

Our primary source of investing cash historically has been the sale and maturity of short-term investments.

Our primary use of investing cash historically has been the purchase of short-term investments and currently is property and equipment.

Net cash used in investing activities of $0.5 million for the year ended December 31, 2024 was due to the purchase of property and equipment of $0.5 million.

Net cash provided by investing activities of $3.8 million for the year ended December 31, 2023 was due to the proceeds from the maturities of short-term investments of $5.7 million, offset by the purchase of property and equipment of $1.8 million.

Net cash provided by investing activities of $35.0 million for the year ended December 31, 2022 was due to purchases of short-term investments of $12.8 million, offset by proceeds from the maturities of short-term investments of $49.4 million.

Financing Activities

Our financing activities primarily consisted of proceeds from sales of securities, proceeds from stock option award exercises and principal payments of financing lease obligations.

Net cash provided by financing activities of $122 thousand for the year ended December 31, 2023 primarily consisted of proceeds from the 2021 Employee Stock Purchase Plan ("ESPP"), partially offset by principal payments of financing lease obligations.

Net cash provided by financing activities of $38.4 thousand for the year ended December 31, 2022 primarily consisted of proceeds from stock option exercises and the 2021 ESPP, partially offset by principal payments of financing lease obligations.

Net cash provided by financing activities of $41.6 million for the year ended December 31, 2024 primarily consisted of proceeds from the exercise of stock options and proceeds from the 2021 Employee Stock Purchase Plan ("2021 ESPP"), partially offset by principal payments of financing lease obligations.

Net cash provided by financing activities of $122 thousand for the year ended December 31, 2023 primarily consisted of proceeds from the 2021 ESPP, partially offset by principal payments of financing lease

We do not anticipate declaring or paying any cash dividends in the foreseeable future.

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(5) litigation and settlement fees associated with certain non-ordinary course securities litigation claims;

(6) CEO and CFO transition expenses;

and (7) restructuring expenses in connection with the Transformation Initiative.

(6) Chief Executive Officer ("CEO"), Chief Financial Officer ("CFO") and founder and former Chief Creative Officer ("CCO") transition expenses and (7) restructuring expenses in connection with the Transformation Initiative.

Adjusted EBITDA is a financial measure that is not required by, or presented in accordance with GAAP.

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(5) it does not reflect tax payments that may represent a reduction in cash available to us;

and (6) does not include certain non-ordinary cash expenses that we do not believe are representative of our business on a steady-state basis, such as CEO and CFO transition expenses and restructuring expenses in connection with the Transformation Initiative.

and (6) does not include certain non-ordinary cash expenses that we do not believe are representative of our business on a steady-state basis, such as CEO, CFO and founder/CCO transition expenses and restructuring expenses in connection with the Transformation Initiative.

In addition, our use of adjusted EBITDA may not be comparable to similarly titled measures of other companies because they may not calculate adjusted EBITDA in the same manner, limiting its usefulness as a comparative measure.

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Securities litigation expense 12,440 4,703

CEO and CFO transition expense (2)

CEO, CFO and founder/CCO transition expense (2)

Restructuring costs (3)

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Additionally, includes extension of post-termination stock option exercise periods for certain former executives, resulting in stock-based compensation expense of $0.5 million during the year ended December 31, 2023.

(2) Includes sign-on bonus, relocation, legal, recruiting and separation costs.

(2) Includes sign-on bonus, relocation, legal and recruiting costs related to the appointment of our CEO, as well as separation costs related to the termination of our former founder and CCO and former CFO.

(3) See Note 15 “Restructuring” in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for items included in restructuring expense.

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Revenue Recognition

We generate revenue through the sale of our products through Digital and Retail channels in the following product categories:

Diapers and Wipes, Skin and Personal Care and Household and Wellness.

The Digital channel includes direct to the consumer sales through our website and sales to third-party ecommerce customers, who resell our products through their own online platforms.

The Retail channel includes sales to traditional brick and mortar retailers, who may also resell our products through their own online platforms.

We generate revenue through the sale of our products direct-to-consumer through the Company’s website, retail and third-party ecommerce customers, who resell the Company’s products through traditional brick and mortar retailers, who may also resell the Company’s products through their own online platforms.

Our revenue is recognized net of allowances for returns, discounts, credits and any taxes collected from customers.

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We accrue the cost of shipping and handling and recognize revenue and costs at the point in time that control of the goods transfers to the customer.

Retail and Third-Party Ecommerce

For retail and third-party ecommerce sales, our 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, we have 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.

Direct-to-Consumer

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We recognize revenue when these gift cards are redeemed for products and the revenue recognition criteria as described above have been met.

Retail and Third-Party Ecommerce

For retail and third-party ecommerce sales, our 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, we have 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

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Judgment is required to determine the timing and amount of recognition of sales incentive program accruals which we estimate based on past practice with similar arrangements.

Inventories consists of finished goods and are stated at the lower of cost or estimated net realizable value.

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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis