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 ) 67 Consolidated Balance Sheets 68 Consolidated Statements of Comprehensive Loss 69 Consolidated Statements of Stockholders’ Equity (Deficit) 70 Consolidated Statements of Cash Flows 71 Notes to Consolidated Financial Statements 72 66 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, 2024 and 2023, and the related consolidated statements of comprehensive loss, of stockholders' equity (deficit) and of cash flows for each of the three years in the period ended December 31, 2024, 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, 2024 and 2023, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2024 in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. 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 February 26, 2025 We have served as the Company’s auditor since 2012. 67 The Honest Company, Inc. Consolidated Balance Sheets (in thousands, except share and per share amounts) December 31, 2024 December 31, 2023 Assets Current assets Cash and cash equivalents $ 75,435 $ 32,827 Accounts receivable, net 43,476 43,084 Inventories 85,266 73,490 Prepaid expenses and other current assets 9,741 8,371 Total current assets 213,918 157,772 Operating lease right-of-use asset 17,239 23,683 Property and equipment, net 11,394 13,486 Goodwill 2,230 2,230 Intangible assets, net 235 309 Other assets 2,377 4,141 Total assets $ 247,393 $ 201,621 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 22,807 $ 22,289 Accrued expenses 35,869 32,209 Deferred revenue 1,213 2,212 Total current liabilities 59,889 56,710 Long term liabilities Operating lease liabilities, net of current portion 13,197 21,738 Other long-term liabilities — 34 Total liabilities 73,086 78,482 Commitments and contingencies (Note 10 ) Stockholders’ equity Preferred stock, $ 0.0001 par value, 20,000,000 shares authorized at December 31, 2024 and 2023, none issued or outstanding as of December 31, 2024 and 2023 — — Common stock, $ 0.0001 par value, 1,000,000,000 shares authorized at December 31, 2024 and 2023; 109,159,697 and 95,868,421 shares issued and outstanding as of December 31, 2024 and 2023, respectively 11 9 Additional paid-in capital 659,488 602,198 Accumulated deficit ( 485,192 ) ( 479,068 ) Total stockholders’ equity 174,307 123,139 Total liabilities and stockholders’ equity $ 247,393 $ 201,621 The accompanying notes are an integral part of these Consolidated Financial Statements. 68 The Honest Company, Inc. Consolidated Statements of Comprehensive Loss (in thousands, except share and per share amounts) For the year ended December 31, 2024 2023 2022 Revenue $ 378,340 $ 344,365 $ 313,651 Cost of revenue 233,683 243,833 221,336 Gross profit 144,657 100,532 92,315 Operating expenses Selling, general and administrative 99,044 94,582 87,317 Marketing 45,093 36,440 47,782 Restructuring — 2,205 — Research and development 6,851 6,214 6,996 Total operating expenses 150,988 139,441 142,095 Operating loss ( 6,331 ) ( 38,909 ) ( 49,780 ) Interest and other income (expense), net 282 ( 254 ) 871 Loss before provision for income taxes ( 6,049 ) ( 39,163 ) ( 48,909 ) Income tax provision 75 75 110 Net loss $ ( 6,124 ) $ ( 39,238 ) $ ( 49,019 ) Net loss per share attributable to common stockholders: Basic and diluted $ ( 0.06 ) $ ( 0.42 ) $ ( 0.53 ) Weighted-average shares used in computing net loss per share attributable to common stockholders: Basic and diluted 100,245,394 94,516,690 92,201,806 Other comprehensive loss Unrealized gain on short-term investments, net of taxes — 32 9 Comprehensive loss $ ( 6,124 ) $ ( 39,206 ) $ ( 49,010 ) The accompanying notes are an integral part of these Consolidated Financial Statements. 69 The Honest Company, Inc. Consolidated Statements of Stockholders’ Equity (Deficit) (in thousands, except share amounts) Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity (Deficit) Shares Amount 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 2021 ESPP 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 2021 ESPP 126,969 — 177 — — 177 Balance at December 31, 2023 95,868,421 $ 9 $ 602,198 $ ( 479,068 ) $ — $ 123,139 Net loss — — — ( 6,124 ) — ( 6,124 ) Stock options exercised 8,007,999 1 41,453 — — 41,454 Stock-based compensation — — 15,675 — — 15,675 Vested restricted stock 5,187,447 1 ( 1 ) — — — Shares issued under 2021 ESPP 95,830 — 163 — — 163 Balance at December 31, 2024 109,159,697 $ 11 $ 659,488 $ ( 485,192 ) $ — $ 174,307 The accompanying notes are an integral part of these Consolidated Financial Statements. 70 The Honest Company, Inc. Consolidated Statements of Cash Flows (in thousands) For the year ended December 31, 2024 2023 2022 Cash flows from operating activities Net loss $ ( 6,124 ) $ ( 39,238 ) $ ( 49,019 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 2,843 2,740 2,753 Stock-based compensation 15,675 15,804 15,078 Amortization of operating ROU assets 6,444 6,257 6,180 Other 746 ( 1,369 ) ( 558 ) Changes in assets and liabilities: Accounts receivable, net ( 378 ) ( 682 ) ( 10,836 ) Inventories ( 10,934 ) 43,475 ( 38,987 ) Prepaid expenses and other assets ( 1,437 ) 8,005 ( 4,358 ) Accounts payable, accrued expenses and other long-term liabilities 3,809 ( 9,347 ) 10,396 Deferred revenue ( 998 ) 1,396 83 Operating lease liabilities ( 8,105 ) ( 7,688 ) ( 7,007 ) Net cash provided by (used in) operating activities 1,541 19,353 ( 76,275 ) Cash flows from investing activities Purchases of short-term investments — — ( 12,782 ) Proceeds from maturities of short-term investments — 5,683 49,362 Purchases of property and equipment ( 530 ) ( 1,838 ) ( 1,617 ) Purchases of intangible assets — ( 10 ) — Net cash provided by (used in) investing activities ( 530 ) 3,835 34,963 Cash flows from financing activities Proceeds from exercise of stock options 41,453 4 122 Taxes paid related to net share settlement of equity awards — — ( 37 ) Proceeds from 2021 ESPP 163 176 256 Payments on finance lease liabilities ( 19 ) ( 58 ) ( 303 ) Net cash provided by financing activities 41,597 122 38 Net increase (decrease) in cash and cash equivalents 42,608 23,310 ( 41,274 ) Cash and cash equivalents Beginning of the period 32,827 9,517 50,791 End of the period $ 75,435 $ 32,827 $ 9,517 Supplemental disclosures of cash flow information Cash paid during the period for: Interest $ — $ 1 $ 8 Income Taxes $ 89 $ 116 $ 101 Supplemental disclosures of noncash activities Capital expenditures included in accounts payable and accrued expenses $ 44 $ 25 $ 54 The accompanying notes are an integral part of these Consolidated Financial Statements. 71 The Honest Company, Inc. Notes to Consolidated Financial Statements As of December 31, 2024 (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 personal care company dedicated to creating cleanly-formulated and sustainably-designed products. 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. Certain reclassifications to the Company's previously reported financial information have been made to conform to the current period presentation. The Company made reclassifications to the consolidated statement of cash flows, including a reclassification of $ 6.3 million and $ 6.2 million, respectively, was made from "Other" to "Amortization of operating right-of-use ("ROU") assets" in the "adjustments to reconcile net loss to net cash provided by (used in) operating activities" section of the consolidated statements of cash flow for the years ended December 31, 2023 and 2022 to conform to the current year presentation, among other immaterial reclassifications. Additionally, the Company made immaterial reclassifications to separately present the lease liability within the deferred tax assets and the right-of-use asset within the deferred tax liabilities related to the implementation of Accounting Standards Codification No. 842 (" ASC 842") in Note 13, "Income Taxes", for the year ended December 31, 2023 to conform to the current year presentation. Restructuring In 2023, the Company incurred 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 recorded employee termination liabilities once they were 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 as of December 31, 2023 are recorded within Accrued Expenses in the consolidated balance sheets. Refer to Note 15, "Restructuring" included in these consolidated financial statements for more information on the Company's restructuring initiatives. Segment Reporting and Geographic Information The Company’s principal business primarily focuses on creating cleanly formulated- and sustainably-designed products. The Company’s Chief Executive Officer ("CEO"), as the chief operating decision maker ("CODM"), organizes the Company, manages resource allocations, and measures performance on the basis of one operating segment. The Company evaluates performance based on consolidated net income (loss). The CODM additionally considers forecasted information on a quarterly basis for net income (loss) when making decisions regarding capital and personnel needs. The CODM reviews information at the consolidated entity level, and does not distinguish the principal business, or group the operations, by geographic locations or industry types for purposes of measuring performance or allocating resources. While the Company creates products that are sold across retail channels and direct-to-consumer ("DTC"), all products are managed as one brand of products under one operating and reportable segment. Furthermore, the Company notes that monitoring financial results as one reportable segment helps the CODM manage expenses on a consolidated basis, consistent with the Company’s operations. The Company does not regularly provide the CODM with more detailed segment expense information beyond what is included in the consolidated statements of comprehensive loss. The significant expense categories which are used to manage operations are those reflected in our consolidated statements of comprehensive loss. Refer to the consolidated statements of comprehensive loss included in the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. 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. 72 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 materially 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 credit losses, valuation of short-term investments, capitalized software, useful lives associated with long-lived assets, goodwill impairment, incremental borrowing rates associated with leases, valuation allowances with respect to deferred tax assets, accruals and contingencies, recoverability of non-cash marketing credits, 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, 2024 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. 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 consists 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, 2024, the Company did not hold any investments. For debt securities with an amortized cost basis in excess of estimated fair value, the Company determines what amount of that deficit, if any, is caused by expected credit losses. The portion of the deficit attributable to expected credit losses is recorded as an allowance for credit losses with an offsetting entry to interest and other income (expense), net in the Company's consolidated statements of comprehensive loss. The portion of the loss related to non-credit factors (if any) is generally recorded as a component of comprehensive loss. 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, 2024 2023 Customer A 41 % 49 % Customer B 16 % 25 % The Company’s customers that accounted for 10% or more of total revenue were as follows: 73 For the Year Ended December 31, 2024 2023 2022 Customer A 30 % 31 % 31 % Customer B 34 % 30 % 19 % 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 may extend 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. The Company will consider, among other factors, write-offs of uncollectible accounts receivable that have a contractual maturity of one year or less if the invoice is six months or older. Accounts receivable are 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 the Company's accounts receivable at time of inception, and records an allowance for credit losses, as necessary, with the balance of the Company's accounts receivable presented at the amortized cost. 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 $ 0.4 million, respectively, as of December 31, 2024 and 2023. 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: 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 Leases Effective January 1, 2022, the Company accounts for leases in accordance with 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 less than three years . Renewal options that are deemed reasonably certain are included as part of the lease term for purposes of calculating the 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 74 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 at the lease commencement date 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, are 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 $ 0.8 million, net of $ 3.2 million of accumulated amortization as of December 31, 2024 and $ 1.1 million, net of $ 2.4 million of accumulated amortization as of December 31, 2023. 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 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 qualitative and quantitative test as of October 31, 2024 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 75 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 interest and other income (expense), 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, 2024, 2023 and 2022, realized and unrealized foreign currency losses, net were $ 0.2 million, $ 0.03 million and $ 0.2 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 the stock award over the applicable service period. For awards that vest based on continued service, stock-based compensation cost is recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the awards. Stock Options For stock option awards that contain service, performance or a combination of both vesting conditions, the grant date fair value 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 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. For stock option awards that contain service, performance and market vesting conditions, or a change in control event, the 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 Company has not granted stock options since the IPO, and for the stock options that were granted pre-IPO the below assumptions were used. 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: 76 • Fair value - 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. New shares are issued from authorized shares of common stock upon the exercise of stock options. Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses the following hierarchy in measuring the fair value of the Company’s assets and liabilities, focusing on the most observable inputs when available: Level 1 - Quoted prices in active markets for identical assets or liabilities. Level 2 - Observable inputs other than Level 1 quoted prices, such as quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active for identical or similar assets and liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 - Valuations are based on inputs that are unobservable and significant to the overall fair value measurement of the assets or liabilities. Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. Fair value is based on quoted market prices, if available. If listed prices or quotes are not available, fair value is based on internally developed models that primarily use market-based or independently sourced market parameters as inputs. Cash equivalents, consisting primarily of money market funds, represent highly liquid investments with maturities of three months or less at purchase. Market prices, which are Level 1 in the fair value hierarchy, are used to determine the fair value of the money market funds. Investments in debt securities are measured using broker provided indicative prices developed using observable market data, which are considered Level 2 in the fair value hierarchy. Certain assets, including long-lived assets, goodwill and intangible assets are also subject to measurement at fair value on a non-recurring basis if they are deemed to be impaired as a result of an impairment review. The fair value of such assets is measured using Level 3 inputs in the fair value hierarchy. Revenue Recognition The Company sells its 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. 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. 77 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. 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, 2024, 2023 and 2022, revenue recognized from the use of gift cards was $ 0.6 million, $ 0.6 million and $ 0.8 million, respectively. As of December 31, 2024 and 2023, deferred revenue related to gift card purchases was $ 1.1 million and $ 1.0 million, respectively. Sales Returns and Allowances For direct-to-consumer, retail, and third-party ecommerce sales, the Company records estimated sales returns in the same period that the related revenue is recorded. The Company uses the expected value method to estimate returns, taking into consideration assumptions of demand based on historical data and historical returns rates. When estimating returns, the Company also considers future business initiatives and relevant anticipated future events. Estimated sales returns and ultimate losses may vary from actual results, which could be material to the consolidated financial statements. The estimated sales returns allowance is recorded as a reduction of revenue. For direct-to-consumer, retail and third-party ecommerce sales, the Company offers credits in the form of discounts, which are recorded as reductions in revenue and are allocated to products on a relative basis based on their respective standalone selling price. 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 contractual allowances 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 the expected value method considering all reasonably available information in determining the accruals for these activities, including historical analysis and contractual rates. 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) 2024 2023 2022 Beginning balance $ 8,380 $ 6,396 $ 6,494 78 Charged to revenue 69,716 49,724 48,962 Charged to selling, general and administrative expense 10 659 550 Charged to marketing expense 19,612 17,056 12,541 Utilization of accrual for trade promotions ( 84,487 ) ( 64,522 ) ( 61,954 ) Reclassification to prepaid expenses and other current assets/accrued expenses 283 ( 933 ) ( 197 ) Ending balance $ 13,514 $ 8,380 $ 6,396 As of December 31, 2024 and 2023 , $ 12.6 million and $ 6.8 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 for warehouse fulfillment facilities and equipment, allocated overhead and direct and indirect labor for warehouse personnel, inventory reserves and destruction costs. Selling, General and Administrative Selling, general and administrative expenses consist primarily of personnel costs, principally for the Company's selling and administrative functions. These include personnel-related expenses, including salaries, bonuses, benefits and stock-based compensation expenses. Selling, general and administrative expenses also include technology expenses; professional fees, including audit and legal expenses; donation expenses including overhead and tariffs; facility costs, including insurance, utilities and rent relating to our headquarters; third-party service fees related to our supplier services agreement for Honest baby clothing, the Company's baby apparel business; and, depreciation and amortization expenses. 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 and influencer marketing campaigns, market research, content production and other public relations and promotional initiatives. Advertising costs are expensed as incurred. Media production costs are expensed the first time the advertisement is aired. Deferred advertising costs consist mainly of point of purchase displays that are specifically branded for the Company’s products and provided to retailers in order to facilitate the marketing of the Company’s products within retail stores. The point of purchase display costs are capitalized as deferred advertising costs and charged to marketing expense over the expected period of benefit, which generally ranges from less than one to two years . As of December 31, 2024 and 2023 , the current portion of deferred advertising costs was $ 0.6 million and $ 0.4 million, respectively, which is included in prepaid expenses and other current assets. As of December 31, 2024 and 2023 , there was an immaterial amount of deferred advertising costs that was considered noncurrent. Advertising expense was $ 41.7 million, $ 33.8 million and $ 44.8 million for the years ended December 31, 2024, 2023 and 2022, 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. 79 Recently Adopted Accounting Pronouncements 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 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 adoption of ASU No. 2023-07 did not have a material impact on the Company’s consolidated financial statements or disclosures. Recently Issued Accounting Pronouncements – Not Yet Adopted 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 is currently evaluating the impact that ASU No. 2023-09 will have on its consolidated financial statements or related disclosures. In November 2024, the FASB issued ASU No. 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses . This update is to improve the disclosures of components of certain income statement expense items. For public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2026, and interim periods beginning after December 15, 2027, with early adoption permitted. The Company is currently evaluating the impact that ASU No. 2024-03 will have on its consolidated financial statements or related disclosures. 3. Revenue The Company previously presented its 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, the Company considered the information regularly reviewed by its CODM for evaluating its 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. In 2023, the Company 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 its strategy to build the Honest brand, the Company’s CODM is evaluating the Company’s financial performance and making resource allocation decisions across the Company’s products as one brand of a portfolio of multiple products. As a result, in the first quarter of 2024, the Company removed the disaggregation of revenue by product category to align with changes made to the Company’s long-term strategy and began disaggregating revenue by (i) direct-to-consumer and (ii) retail and third-party ecommerce customers. The change had no effect on the Company's results of operations or timing of revenue recognition. Presentation of disaggregated revenue by direct-to-consumer and retail and third-party ecommerce customers in prior periods have been modified to conform to the current period presentation. 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. Direct-to-Consumer For direct sales to the consumer through the Company's website, Honest.com, 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 and payments are typically processed within two to three business days. 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. Revenue generated from Honest.com was 13 % and 17 %, respectively, of the Company's total revenue during the years ended December 31, 2024 and 2023. 80 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, 2024, the Company did no t enter into any new trade agreements. For the years ended December 31, 2024 and 2023, the Company did no t recognize any revenue or associated cost of revenue related to these marketing and transportation credits. For the year ended December 31, 2022, the Company recognized $ 3.2 million of revenue and $ 1.7 million of associated cost of revenue 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 marketing expense in the consolidated statements of comprehensive loss as they become determinable. For the years ended December 31, 2024, 2023 and 2022, the Company recorded no impairment losses related to these credits and used an aggregate of $ 1.6 million, $ 0.3 million and $ 1.4 million of credits, respectively. 4. Intangible Assets, Net Intangible assets consisted of the following: As of December 31, 2024 Gross Carrying Amount Accumulated Amortization Intangible Assets, Net (in thousands) Tradenames $ 780 $ ( 596 ) $ 184 Domain names 287 ( 236 ) 51 Total intangible assets, net $ 1,067 $ ( 832 ) $ 235 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 As of December 31, 2024 and 2023, the weighted average remaining useful lives for tradenames and domain names was 4.8 years and 3.0 years, respectively, and 5.7 years and 3.9 years, respectively. Amortization expense was $ 0.1 million for each of the years ended December 31, 2024, 2023 and 2022, respectively. Estimated future amortization expense for each of the following five years ending December 31 and thereafter is as follows: (in thousands) 2025 $ 71 2026 71 2027 30 2028 23 2029 19 Thereafter 21 Total future amortization expense $ 235 81 5. Property and Equipment, Net Property and equipment consisted of the following: As of December 31, 2024 2023 (in thousands) Machinery and equipment $ 12,885 $ 13,850 Computer and office equipment 1,189 1,700 Capitalized software 5,238 5,094 Furniture and fixtures 4,259 4,335 Leasehold improvements 15,761 15,829 Subtotal 39,332 40,808 Accumulated depreciation and amortization ( 27,938 ) ( 27,322 ) Total property and equipment, net $ 11,394 $ 13,486 Total depreciation and amortization expense for property and equipment consisted of the following: For the year ended December 31, 2024 2023 2022 (In thousands) Cost of revenues $ 1,048 $ 931 $ 1,013 Research and development 225 223 195 Selling, general and administrative 1,495 1,515 1,474 Total depreciation and amortization expense $ 2,768 $ 2,669 $ 2,682 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, 2024 and 2023 , the Company did not hold any investments in debt securities. 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). There was no realized or unrealized gains and losses on investments in debt securities for the years ended December 31, 2024 . Realized and unrealized losses on investments for the years ended December 31, 2023 and 2022 were immaterial. 7. Fair Value Measurements Financial assets measured and recorded at fair value on a recurring basis consist of the following as of: 82 December 31, 2024 Level 1 Level 2 Level 3 Total (In thousands) Cash equivalents Money market funds $ 55,280 $ — $ — $ 55,280 Total cash equivalents $ 55,280 $ — $ — $ 55,280 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 Short-term investments Corporate bonds — — — — Commercial paper — — — — Certificates of deposit — — — — Total short-term investments — — — — Total $ 5,589 $ — $ — $ 5,589 The carrying amounts for the Company’s cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value due to their short maturities. 8. Credit Facilities 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 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. 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 years ended December 31, 2024 and 2023, 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. 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, 2024 and 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, 2024, the Company is in compliance with all covenants under the 2023 Credit Facility. 83 9. Accrued Expenses Accrued expenses consisted of the following: As of December 31, 2024 2023 (In thousands) Payroll and payroll related expenses (1) $ 8,410 $ 8,007 Accrued inventory purchases 13,095 9,368 Accrued returns 102 269 Accrued rent (2) 8,541 8,105 Accrued restructuring (3) — 356 Other accrued expenses 5,721 6,104 Total accrued expenses $ 35,869 $ 32,209 _______________ (1) Includes $ 0.3 million and $ 1.2 million of executive transition related expenses as of December 31, 2024 and 2023, respectively. (2) Represents short-term operating lease liabilities. Refer to Note 14, "Leases" included in these consolidated financial statements for more information on leases. (3) Refer to Note 15, "Restructuring" included in these consolidated financial statements for more information on the Company's restructuring. 10. 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 . 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, which 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 84 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. On April 30, 2024, the Company filed its motion for summary judgment. On January 23, 2025, the Court granted the Company's motion for summary judgment. 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 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. On February 14, 2024, the Lead Plaintiff filed a further amended Second Amended Complaint against the additional defendants. The additional defendants filed a motion to dismiss the further amended Second Amended Complaint, which was denied by the court on April 22, 2024. On January 21, 2025, the parties filed a joint stipulation stating that they had reached an agreement in principle to fully settle all pending claims in the action and asking the court to stay the case so the parties could have additional time to negotiate the terms of a formal stipulation of settlement and related documentation. The court entered an order staying the case on the same day. Lead Plaintiff must file a motion for preliminary approval of the settlement by March 12, 2025. 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. 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. 10 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 Court granted the plaintiffs' Stipulation of Dismissal on July 2, 2024. As of December 31, 2024 and 2023, 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 85 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, 2024 and 2023, 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, 2025 $ 1,157 2026 1,064 2027 439 2028 56 2029 — Thereafter — Future minimum payments $ 2,716 11. 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). 86 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, 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 $ — Granted — $ — Exercised ( 8,007,999 ) $ 5.18 Forfeited/Cancelled ( 321,911 ) $ 4.55 Outstanding at December 31, 2024 4,985,886 $ 5.41 2.2 $ 7,600 Exercisable at December 31, 2023 13,266,609 $ 5.25 3.0 $ — Exercisable at December 31, 2024 4,985,886 $ 5.41 2.2 $ 7,600 The intrinsic value of options exercised during the years ended December 31, 2024, 2023 and 2022 were $ 12.6 million , immaterial and $ 0.1 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, 2024, 2023 and 2022 were $ 0.1 million , $ 0.7 million and $ 2.0 million, respectively. As of December 31, 2024, there was no unrecognized stock-based compensation expense related to unvested stock options. As of December 31, 2023, there was $ 0.1 million 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. 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 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, 2024, 3,825,379 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: 87 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, 2022 452,951 4,165,403 $ 3.44 $ 8.09 Transfer from Employee to Non-Employee Director (1) 1,147,566 ( 1,147,566 ) $ 9.02 $ 9.02 Granted 1,376,563 7,505,557 $ 2.01 $ 1.71 Vested (2) ( 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 Granted 545,178 4,890,798 $ 2.81 $ 3.63 Vested (2) ( 775,804 ) ( 4,411,643 ) $ 2.15 $ 2.96 Forfeited — ( 821,805 ) $ — $ 3.10 Unvested RSUs at December 31, 2024 726,573 6,956,604 $ 2.70 $ 2.81 _______________ (1) Relates to former Chief Executive Officer ("CEO") RSUs that were reclassified to non-employee director shares. The former CEO was not re-nominated for election by the Board in connection with the annual stockholder meeting in May 2023. (2) The Company modified certain former executives' RSUs to accelerate vesting, resulting in stock-based compensation expense of $ 6.7 million and $ 3.1 million, respectively, during the years ended December 31, 2024 and 2023. As of December 31, 2024 and 2023, there was $ 17.6 million and $ 16.6 million, respectively, of unrecognized stock-based compensation expense related to unvested RSUs, which is expected to be recognized over a weighted-average period of 2.6 years and 3.0 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, 2024, 956,344 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 years ended December 31, 2024 and 2023 , employees who elected to participate in the 2021 ESPP purchased 95,830 and 126,969 shares of common stock, respectively, under the 2021 ESPP, resulting in cash proceeds to the Company of $ 0.2 million and $ 0.2 million, respectively. The weighted average price at purchase was $ 1.70 and $ 1.39 per share, respectively. As of December 31, 2024 and 2023, the Company had 3,616,908 and 2,756,394 , 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: 88 For the Year Ended December 31, 2024 2023 Expected life of options (in years) 0.50 0.50 Expected stock price volatility 69.20 % — 79.27 % 69.20 % — 86.19 % Risk free interest rate 4.44 % — 5.43 % 5.36 % — 5.43 % Expected dividend yield — % — % Weighted average grant-date fair value per share $ 0.56 — $ 2.56 $ 0.56 — $ 0.67 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. As of December 31, 2024, there were 275,083 shares available for future grant under the Inducement Plan. On February 29, 2024, the Company granted 208,757 RSUs to the Chief People Officer under the Inducement Plan. 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, 2024 2023 2022 (In thousands) Selling, general and administrative (1) $ 15,105 $ 15,465 $ 14,593 Research and development 570 339 485 Total stock-based compensation expense $ 15,675 $ 15,804 $ 15,078 __________________ (1) Includes $ 6.7 million and $ 3.1 million, respectively, of stock-based compensation expense during the years ended December 31, 2024 and 2023 related to the acceleration of RSUs held by certain former executives. 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. 12. Net Income (Loss) per Share Attributable to 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, if any. 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) 2024 2023 2022 Numerator: Net loss $ ( 6,124 ) $ ( 39,238 ) $ ( 49,019 ) Net loss attributable to common stockholders - basic and diluted $ ( 6,124 ) $ ( 39,238 ) $ ( 49,019 ) Denominator: Weighted average shares of common stock outstanding - basic and diluted 100,245,394 94,516,690 92,201,806 Net loss per share, attributable to common shareholders: Basic and diluted $ ( 0.06 ) $ ( 0.42 ) $ ( 0.53 ) 89 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, 2024 2023 2022 Stock options to purchase common stock 4,985,886 13,315,796 14,888,007 Unvested restricted stock units 7,683,177 8,256,453 4,618,354 Employee stock purchase plan 20,753 71,142 62,438 Total 12,689,816 21,643,391 19,568,799 13. Income Taxes The components of income tax provision consisted of the following: For the year ended December 31, 2024 2023 2022 (In thousands) Current Federal $ — $ — $ — State 75 75 110 Foreign — — — 75 75 110 Deferred Federal — — — State — — — Foreign — — — — — — Income tax provision $ 75 $ 75 $ 110 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, 2024 2023 2022 (In thousands) Income tax benefit at the federal statutory rate $ ( 1,252 ) $ ( 8,203 ) $ ( 10,271 ) State income taxes, net of federal benefit 686 ( 90 ) ( 625 ) Permanent differences for equity compensation 3,437 2,587 2,604 Nondeductible items 21 142 53 Nondeductible compensation 947 1,218 302 Change in valuation allowance ( 3,918 ) 4,654 8,047 Nondeductible parking 71 — — Other adjustments 83 ( 233 ) — Income tax provision $ 75 $ 75 $ 110 The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities were as follows: 90 As of December 31, (In thousands) 2024 2023 Deferred tax assets Intangible assets $ 55 $ 75 Lease liability 5,402 7,476 Accrued expenses 171 1,488 Deferred revenue 175 113 Allowances, reserves and other 1,810 2,013 Stock-based compensation 3,192 7,728 Section 174 capitalized expenses 5,854 4,346 Net operating loss and other carryforwards 88,066 87,327 Total deferred tax assets 104,725 110,566 Valuation allowance ( 94,859 ) ( 98,771 ) Net deferred tax assets 9,866 11,795 Deferred tax liabilities Property and equipment ( 548 ) ( 676 ) Right-of-use asset ( 4,284 ) ( 5,933 ) Prepaid expenses ( 241 ) ( 376 ) State taxes ( 4,793 ) ( 4,810 ) Total deferred tax liabilities ( 9,866 ) ( 11,795 ) 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, 2024 , the Company had federal and state net operating loss carryforwards tax effect of $ 313.0 million and $ 272.0 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. Federal and state net operating loss carryforwards begin to expire in 2032. As of December 31, 2024 and 2023 , 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, 2024 and 2023 , 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, 2024 . 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, 2024 , 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: 91 For the year ended December 31, 2024 2023 2022 (In thousands) Beginning balance $ 98,771 $ 94,103 $ 86,659 Increase to valuation allowance ( 3,918 ) 4,654 8,047 Decrease due to adoption of ASC 842 — — ( 613 ) Other increases (decreases) 6 14 10 Ending balance $ 94,859 $ 98,771 $ 94,103 The Company is subject to taxation in the U.S. federal and various state jurisdictions. During the years ended December 31, 2024 and 2023, 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. 14. 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 less than three 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 $ 2.5 million and $ 3.7 million as of December 31, 2024 and 2023, 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, 2024 2023 2022 Finance lease expense: Amortization $ 8 $ 50 $ 263 Short-term lease expense — — 7 Operating lease expense: Operating lease expense (1) 7,168 7,168 7,153 Sublease income ( 2,006 ) ( 2,006 ) ( 2,006 ) Total lease expense, net $ 5,170 $ 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. 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): 92 As of December 31, Assets Financial Statement Line Item 2024 2023 Finance lease assets Property and equipment, net $ — $ 17 Operating lease assets Operating lease right-of-use asset 17,239 23,683 Total lease assets $ 17,239 $ 23,700 Liabilities Current Finance lease liabilities Accrued expenses — 23 Operating lease liabilities Accrued expenses 8,541 8,105 Non-current Finance lease liabilities Other long-term liabilities — — Operating lease liabilities Operating lease liabilities, net of current portion 13,197 21,738 Total lease liabilities $ 21,738 $ 29,866 Supplemental information related to the Company’s leases for the year ended December 31, 2024 was as follows: For the year ended December 31, 2024 2023 Weighted-average remaining lease term (in years) Finance leases — 0.6 Operating leases 2.5 4.1 Weighted-average discount rate Finance leases — % 2.77 % 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 Operating cash flows used in operating leases $ 8,105 $ 7,688 Financing cash flows used in finance leases $ 19 $ 58 The Company did no t have any non-cash ROU assets obtained in exchange for lease liabilities during the year ended December 31, 2024 for either finance or operating leases. Future minimum lease payments required under operating and finance leases as of December 31, 2024, were as follows (in thousands): Operating Leases Finance Leases 2025 $ 8,950 — 2026 9,201 — 2027 4,245 — 2028 — — 2029 — — Thereafter — — Future minimum lease payments $ 22,396 $ — Less: Amount representing interest ( 658 ) — Present value of future lease payments $ 21,738 $ — 15. Restructuring Transformation Initiative 93 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 the Company's business, deliver greater impact from brand-building investments, and improve executional excellence across the enterprise. The restructuring element of the Transformation Initiative was substantially completed by December 31, 2023. For the year ended December 31, 2024, the Company did not incur any restructuring costs related to the Transformation Initiative. 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, 2024 relating to the Transformation Initiative were: Restructuring Costs Employee-Related Costs (1) Contract Terminations Inventory Reserves Total Balance at December 31, 2023 $ 356 $ — $ 2,581 $ 2,937 Cash payments ( 356 ) — — ( 356 ) Non-cash asset write-offs — — ( 2,546 ) ( 2,546 ) Balance at December 31, 2024 $ — $ — $ 35 $ 35 ___________ (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. As of December 31, 2024, there were no accrued restructuring costs outstanding. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures None. 94