THE HONEST COMPANY, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes as disclosed in our prospectus, datedMay 4, 2021 , filed with theSecurities and Exchange Commission ("SEC") in accordance with Rule 424(b) of the Securities Act onMay 6, 2021 (the "Prospectus") in connection with our initial public offering ("IPO"). OverviewThe Honest Company, Inc. ("Honest" and, together with its consolidated subsidiaries, the "Company," "we," "us" and "our") is a digitally-native, mission-driven brand focused on leading the clean lifestyle movement, creating a community for conscious consumers and seeking to disrupt multiple consumer product categories. Our commitment to our core values, passionate innovation and engaging our community has differentiated and elevated our brand and our products. Since our launch in 2012, we have been dedicated to developing clean, sustainable, effective and thoughtfully-designed products. By doing so with transparency, we have cultivated deep trust around what matters most to our consumers: their health, their families and their homes. We are an omnichannel brand, ensuring our products are available however our consumers shop. Our differentiated platform positions us for continued growth through our trusted brand, award-winning multi-category product offering, deep digital-first connection with consumers and omnichannel accessibility. Our integrated multi-category product architecture is intentionally designed to serve our consumers every day, at every age and through every life stage, no matter where they are on their journey. Today, our three categories are Diapers and Wipes, Skin and Personal Care and Household and Wellness, which represented 61%, 32%, and 6%, respectively, of our revenue for the three months endedMarch 31, 2021 , compared to 70%, 26%, and 5%, respectively, of our revenue for the three months endedMarch 31, 2020 . At the center of our product ecosystem are our diapers, which are a strategic consumer acquisition tool that acts as an entry point for our portfolio, as new parents often go on to purchase products from our other categories for their everyday family needs. Our integrated multi-category product architecture is designed to drive loyalty, increase our consumer wallet share and generate attractive consumer lifetime value. We believe that our consumers are modern, aspirational, conscious and style-forward and that they seek out high quality, effective and thoughtfully-designed products. We believe that they are passionate about living a conscious life and are enthusiastic ambassadors for brands they trust. As purpose-driven consumers, they transcend any one demographic, spanning gender, age, geography, ethnicity and household income. Honest consumers are often young, mobile-centric and digitally-inclined. We build relationships with these consumers through a disruptive digital marketing strategy that engages them with "snackable" digital content (short-form, easily digestible content), immerses them in our brand values, and inspires them to join the Honest community. Our direct connection with our community enables us to understand what consumers' needs are and inspires our product innovation pipeline, generating a significant competitive advantage over more traditional consumer packaged goods, or CPG, peers. Our omnichannel approach seeks to meet consumers however they want to shop, balancing deep consumer connection with broad convenience and accessibility. Since our launch, we have built a well-integrated omnichannel presence by expanding our retail accessibility across both Digital and Retail channels, including the launch of strategic partnerships with Costco, Target and Amazon in 2013, 2014 and 2017, respectively. For the three months endedMarch 31, 2021 , we generated 52% and 48% of our revenue from our Digital and Retail channels, respectively, compared to 57% and 43% respectively for the three months endedMarch 31, 2020 . We maintain direct relationships with our consumers via our flagship digital platform, Honest.com, which allows us to influence brand experience and better understand consumer preferences and behavior. We increase accessibility of our products to more consumers through both the third-party pureplay ecommerce sites that, with Honest.com, comprise the rest of our Digital channel, and our Retail channel, which includes leading retailers and their websites. Our products can be found in approximately 32,000 retail locations acrossthe United States ,Canada andEurope . This distinctive business model has allowed us to efficiently scale our business while remaining agnostic as to the channel where consumers purchase our products. Our integrated omnichannel presence provides meaningful benefits to our consumers which we believe is not easily replicated by our competitors. 18 --------------------------------------------------------------------------------
Initial Public Offering
OnMay 7, 2021 , we completed our IPO of 25,807,000 shares of our common stock at a stock price of$16.00 per share, resulting in aggregate net proceeds to us of approximately$91.1 million , after deducting the underwriting discount and commissions of$6.7 million and offering expenses of$5.4 million ,$2.3 million of which was unpaid atMarch 31, 2021 . We sold 6,451,613 shares and certain existing stockholders sold an aggregate of 19,355,387 shares. We granted the underwriters an option for a period of 30 days to purchase up to an additional 3,871,050 shares of common stock from the selling stockholders at$16.00 per share less the underwriting discounts and commissions. InMay 2021 , the underwriters' fully exercised the option to purchase these additional shares from the selling stockholders. We did not receive any proceeds from the sale of shares of our common stock by the selling stockholders.
Key Factors Affecting Our Performance
We believe that the growth of our business and our future success are dependent on many factors. While each of these factors presents significant opportunities for us, they also pose important challenges that we must successfully address to enable us to sustain the growth of our business and improve our operations while staying true to our mission, including those discussed below and in the section of this Quarterly Report on Form 10-Q titled "Risk Factors."
Ability to Grow Our Brand Awareness
Our brand is integral to the growth of our business and is essential to our ability to engage and stay connected with the growing clean lifestyle consumer. Honest is still unknown to many consumers, with unaided brand awareness of 25% among diaper buyers according to our consumer research as ofJanuary 2021 . In order to increase the wallet share of existing conscious consumers and attract new ones, our brand has to maintain its trustworthiness and authenticity. Our ability to attract new consumers will depend, among other things, on our ability to successfully communicate the value of our products as clean, sustainable and effective, the efficacy of our marketing efforts and the offerings of our competitors. Beyond preserving the integrity of our brand, our performance will depend on our ability to augment our reach and increase the number of consumers aware of Honest and our product portfolio. We believe our brand strength will enable us to continue to expand across categories and channels, allowing us to deepen relationships with consumers and expand our access to global markets. Our performance depends significantly on factors that may affect the level and pattern of consumer spending in the product categories in which we operate.
Continued Innovation
Research, development and innovation are core elements underpinning our growth strategy. Through our in-house research and development laboratories, we are able to access the latest advancements in clean ingredients and continue to innovate in the clean conscious lifestyle space. Based inLos Angeles, California , our research and development team, including chemists and an in-house toxicologist, develops innovative clean products based on the latest green technology. At Honest, product innovation never stops. The improvement of existing products and the introduction of new products have been, and continue to be, integral to our growth. We have made significant investments in our product development capabilities and plan to do so in the future. We believe our rigorous approach to product innovation has helped redefine and grow the clean and natural segments of the categories in which we operate. Our continued focus on research and development will be central to attracting and retaining consumers in the future. Our ability to successfully develop, market and sell new products will depend on a variety of factors, including our continued investment in innovation, integrated business planning processes and capabilities.
Continued Product Category Growth
Our product mix is a driver of our financial performance given our focus on accretive product launches and renovation to increase product margins. Even though our growth strategy aims to boost sales across all categories, we intend to prioritize growth in Skin and Personal Care given its attractive margin characteristics and leverage our brand equity and consumer insights to extend into new adjacent product categories. Since we launched our Innovation Strategy, we have enhanced our product portfolio by strategically discontinuing certain products and making calculated extensions within our three product categories. These product changes have contributed to our revenue and margin growth. We intend to continue to prioritize our innovation in higher-margin products, particularly in Skin and Personal Care.
Continued Execution of Omnichannel Strategy
The continued execution of our omnichannel strategy impacts our financial
performance. We intend to continue leveraging our marketing strategy to drive
increased consumer traffic to our flagship digital platform, Honest.com, as it
is a valuable tool for creating direct connections with our consumers,
influencing brand experience and understanding consumer preference and behavior.
Our partnerships with leading third-party retail platforms and national
retailers have broadened our consumer reach, raised our brand awareness and
enhanced our margins through operating leverage. We will continue to pursue
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partnerships with a wide variety of retailers, including online retailers,
big-box retailers, grocery stores, drugstores and specialty retailers. Our
ability to execute this strategy will depend on a number of factors, such as
retailers' satisfaction with the sales and profitability of our products,
channel shifts of their customers, and their own supply chain, order timing, and
inventory needs, which may fluctuate from period to period. For example, in the
second quarter of fiscal 2021, we are experiencing volatility in orders from a
key customer, which could have a potentially material effect on revenue for the
quarter. While we expect shipment volatility to this customer to stabilize,
shipment volatility to this customer - as with other customers - may or may not
stabilize over time.
Operational and Marketing Efficiency
To grow our business, we intend to continue to improve our operational efficiency, which includes attracting new consumers, increasing community engagement and improving fulfillment and distribution operations. We invest significant resources in marketing and content generation, use a variety of brand and performance marketing channels and work continuously to improve brand exposure at our retail partners to acquire new consumers. It is important to maintain reasonable costs for these marketing efforts relative to the revenue we expect to derive from our consumers. We leverage our proprietary Honest Omni-Analytics to generate valuable consumer insights that guide our omnichannel strategy and inform our marketing spend optimization. Our future success depends in part on our ability to effectively attract consumers on a cost-efficient basis and extract efficiencies in our operations.
Overall Macro Trends
We have strategically positioned ourselves to benefit from several macro trends related to changes in consumer behavior. We believe consumers' increasing care for a conscious lifestyle has contributed to significant demand for our products. Further, the rise in digital shopping has complemented our flagship digital platform, Honest.com, our presence with third-party ecommerce players and our Retail partners' websites. Changes in macro-level consumer spending trends, including as a result of the COVID-19 pandemic, could result in fluctuations in our operating results.
Impact of COVID-19
The COVID-19 pandemic has caused general business disruption worldwide beginning inJanuary 2020 . The full extent to which the COVID-19 pandemic will directly or indirectly impact our cash flow, business, financial condition, results of operations and prospects will depend on future developments that are uncertain. As a result of the COVID-19 pandemic, our headquarters is temporarily closed as we support our employees and contractors to work remotely. We have also implemented travel restrictions. These actions represent a significant change in how we operate our business, but we believe that we successfully navigated this transition. In an effort to provide a safe work environment for our employees, we have implemented various social distancing measures, including replacing many in-person meetings with virtual interactions. We will continue to take actions as may be required or recommended by government or health authorities or as we determine are in the best interests of our employees and other business partners in light of the pandemic. We have experienced relatively minor impacts on our inventory availability and delivery capacity since the outbreak, none of which has materially impacted our ability to service our consumers and retail and third-party ecommerce customers. We have taken measures to bolster key aspects of our supply chain, such as securing secondary suppliers and ensuring sufficient inventory to support our continued growth in the face of the pandemic. We continue to work with our existing manufacturing, logistics and other supply chain partners to ensure our ability to service our consumers and retail and third-party ecommerce customers. We believe COVID-19 has been one of the drivers of demand in our Digital channel as consumers shifted to online shopping amid the pandemic. Additionally, our Household and Wellness product category has benefited from increasing demand for sanitization products. We accelerated our development timeline for certain product launches, launching our disinfecting spray and alcohol wipes in 2020. We have seen increased consumer willingness to return to in-store shopping as the economy opens and more of the population is vaccinated. This has driven a channel shift and demand acceleration driving revenue growth within our Retail channel in 2021. The operations of our retail partners, manufacturers and suppliers have also been impacted by the COVID-19 pandemic. While the duration and extent of the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, it has already had an adverse effect on the global economy and the ultimate societal and economic impact of the COVID-19 pandemic remains unknown. In particular, the conditions caused by this pandemic may negatively impact collections of accounts receivable and reduce expected spending from new consumers, all of which could adversely affect our business, financial condition, results of operations and prospects during fiscal 2021 and potentially future periods. 20 -------------------------------------------------------------------------------- Components of Results of Operations Revenue We generate revenue through the sale of our products through Digital and Retail channels in the following product categories: Diapers and Wipes, Skin and Personal Care and Household and Wellness. The Digital channel includes direct sales to the consumer through our website and sales to third-party ecommerce customers, who resell our products through their own online platforms. The Retail channel includes sales to traditional brick and mortar retailers, who may also resell our products through their own online platforms. Our revenue is recognized net of allowances for returns, discounts, credits and any taxes collected from consumers. In 2019 we entered into a license agreement withButterblu, LLC , or Butterblu, pursuant to which we license certain of our trademarks to Butterblu for the manufacture and distribution of certain baby apparel products in exchange for royalties. Butterblu operates and maintains our baby apparel offerings independently through the honestbabyclothing.com website. Our baby apparel offerings and our agreement with Butterblu are not currently material to our business and not expected to be material in the future. For the three months endedMarch 31, 2021 , we collected$0.2 million in royalty revenue. For the three months endedMarch 31, 2020 , we did not collect any royalty revenue under this agreement due in part because we granted Butterblu temporary payment relief. Cost of Revenue Cost of revenue includes the purchase price of merchandise sold to customers, inbound and outbound shipping and handling costs, freight and duties, shipping and packaging supplies, credit card processing fees and warehouse fulfillment costs incurred in operating and staffing warehouses, including rent. Cost of revenue also includes depreciation and amortization, allocated overhead and direct and indirect labor for warehouse personnel. Gross Profit and Gross Margin Gross profit represents revenue less cost of revenue. Gross margin is gross profit expressed as a percentage of revenue. Our gross margin may in the future fluctuate from period to period based on a number of factors, including the mix of products we sell, the channel through which we sell our products, the innovation initiatives we undertake in each product category, the promotional environment in the marketplace, manufacturing costs, commodity prices and transportation rates, among other factors. Operating Expenses Our operating expenses consist of selling, general and administrative, marketing and research and development expenses. Selling, General and Administrative Selling, general and administrative expenses consist primarily of personnel costs, principally for our selling and administrative functions. These include personnel-related expenses, including salaries, bonuses, benefits and stock-based compensation expense. Selling, general and administrative expenses also include technology expenses, professional fees, facility costs, including insurance, utilities and rent relating to our headquarters, depreciation and amortization and overhead costs. We expect our general and administrative expenses to increase in absolute dollars as we continue to grow our business and organizational capabilities. We also anticipate that we will incur additional costs for employees and third-party professional fees related to operating as a public company and costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations, and increased expenses for insurance, investor relations and professional services. Marketing Marketing expenses include costs related to our branding initiatives, retail customer marketing activities, point of purchase displays, targeted online advertising through sponsored search, display advertising, email marketing campaigns, market research, content production and other public relations and promotional initiatives. We expect marketing expenses to continue to increase in absolute dollars as we continue to expand brand awareness, introduce new product innovation across multiple product categories and implement new marketing strategies. Research and Development Research and development expenses consist primarily of personnel-related expenses for our research and development team. Research and development expenses also include 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 also include allocated depreciation and amortization and overhead costs. We expect 21 -------------------------------------------------------------------------------- research and development expenses to increase in absolute dollars as we invest in the enhancement of our product offerings through innovation and the introduction of new adjacent product categories. IPO-Related Expenses In 2020, we paid bonuses totaling$9.5 million to certain employees, including members of management, relating to preparation of our IPO, and after the closing of the IPO, we paid an additional$9.5 million in bonuses to certain employees, including members of management, which we collectively refer to as the IPO Bonuses, excluding in each case payroll taxes and expenses. In addition, upon the effective date of the registration statement for our IPO inMay 2021 , we recognized stock-based compensation expense in selling, general and administrative and research and development expenses of$3.1 million related to certain performance and market-based stock options and$0.2 million related to certain restricted stock units. Interest and Other Income (Expense), Net Interest income consists primarily of interest income earned on our short-term investments and our cash and cash equivalents balances. Interest expense consists primarily of interest expense associated with our leasing arrangements. Other income (expense), net consists primarily of our foreign currency exchange gains and losses relating to transactions denominated in currencies other than theU.S. dollar. We expect our foreign currency gains and losses to continue to fluctuate in the future due to changes in both the volume of foreign currency transactions and foreign currency exchange rates. Income Tax Provision We are subject to federal and state income taxes inthe United States . Our annual estimated tax rate differed from theU.S. federal statutory rate of 21% primarily as a result of a valuation allowance against deferred tax assets, stock-based compensation, state taxes, and other permanent differences. We maintain a full valuation allowance for our federal and state deferred tax assets, including net operating loss carryforwards, as we have concluded that it is not more likely than not that the deferred tax assets will be realized.
Results of Operations The following table sets forth our condensed consolidated statements of operations data for each of the periods indicated:
For the three months ended March 31,
2021 2020
(In thousands)
Revenue $ 81,032 $ 72,372
Cost of revenue 52,651 46,567
Gross profit 28,381 25,805
Operating expenses
Selling, general and administrative(1) 16,697 14,706
Marketing 14,173 9,193
Research and development(1) 1,646 1,166
Total operating expenses 32,516 25,065
Operating income (loss) (4,135) 740
Interest and other income (expense), net (327) (159)
Income (loss) before provision for income taxes (4,462) 581
Income tax provision 22 22
Net income (loss) $ (4,484) $ 559 (1) Includes stock-based compensation expense as follows:
For the three months ended March 31,
2021 2020
(In thousands)
Selling, general and administrative $ 1,748 $ 1,845
Research and development 90 78
Total $ 1,838 $ 1,923
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The following table sets forth our condensed consolidated statements of operations data expressed as a percentage of revenue:
For
the three months ended
2021 2020
(as a percentage of revenue)
Revenue 100.0 % 100.0 %
Cost of revenue 65.0 64.3
Gross profit 35.0 35.7
Operating expenses
Selling, general and administrative 20.6 20.3
Marketing 17.5 12.7
Research and development 2.0 1.6
Total operating expenses 40.1 34.6
Operating income (loss) (5.1) 1.1
Interest and other income (expense), net (0.4) (0.2)
Income (loss) before provision for income taxes (5.5) 0.9
Income tax provision - -
Net income (loss) (5.5) % 0.9 %
Comparison of the Three Months Ended March 31, 2021 and 2020
Revenue
For the three months ended March 31, $ %
2021 2020 change change
(In thousands, except
percentages)
By Product Category
Diapers and Wipes $ 49,574 $ 50,483 $ (909) (1.8) %
Skin and Personal Care 26,245 18,482 7,763 42.0
Household and Wellness 5,213 3,407 1,806 53.0
Total Revenue $ 81,032 $ 72,372 $ 8,660 12.0 %
For the three months ended March 31, $ %
2021 2020 change change
(In thousands, except
percentages)
By Channel
Digital $ 42,461 $ 41,496 $ 965 2.3 %
Retail 38,571 30,876 7,695 24.9
Total Revenue $ 81,032 $ 72,372 $ 8,660 12.0 %
Revenue was $81.0 million for the three months ended March 31, 2021 as compared
to $72.4 million for the three months ended March 31, 2020 . The increase of $8.7
million , or 12.0%, was primarily due to a $7.8 million increase in revenue from
Skin and Personal Care products and a $1.8 million increase in revenue from
Household and Wellness products, offset by a $0.9 million decrease in revenue
from Diapers and Wipes. The revenue increase from Skin and Personal Care was
primarily driven by increased sales volume on our products across both our
Digital and Retail channels, including $3.4 million through the non-monetary
sale of our legacy beauty inventory in exchange for future marketing and
transportation credits. Our revenue from Skin and Personal Care products grew in
our Digital channel driven by our continued investment in our digital marketing
strategy and grew in our Retail channel as a result of volume growth and
expanded distribution with our retail partners. The revenue growth from
Household and Wellness was primarily driven by our sanitization and disinfecting
products that we introduced in the second half of 2020. Diapers and Wipes
revenue was down slightly as we released and transitioned into our new Clean
Conscious Diaper, as well as lower wipes consumption during the three months
ended March 31, 2021 , as compared to higher wipes consumption during the initial
stages of the COVID-19 pandemic during the three months ended March 31, 2020 .
Revenue growth was higher in our Retail channel than our Digital channel as
sales across products saw higher volumes with our retailer partners as compared
to the higher digital penetration we saw during the initial stages of the
COVID-19 pandemic during the three months ended
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--------------------------------------------------------------------------------Cost of Revenue and Gross Profit
For the three months ended March 31, $ %
2021 2020 change change
(In thousands, except
percentages)
Cost of revenue $ 52,651 $ 46,567 $ 6,084 13.1 %
Gross profit $ 28,381 $ 25,805 $ 2,576 10.0 %
Cost of revenue was $52.7 million for the three months ended March 31, 2021 as
compared to $46.6 million for the three months ended March 31, 2020 . The
increase of $6.1 million , or 13.1%, was primarily due to increased product,
shipping and fulfillment expenses associated with the increased sales of our
products. Cost of revenue as a percentage of revenue increased by 63 basis
points primarily due to higher input costs and a more normalized level of
promotional activity as compared to the three months ended March 31, 2020 .
Gross profit was
Operating Expenses
Selling, General and Administrative Expenses
For the three months ended March 31, $ %
2021 2020 change change
(In thousands, except
percentages)
Selling, general and
administrative $ 16,697 $ 14,706 $ 1,991 13.5 %
Selling, general and administrative expenses were $16.7 million for the three
months ended March 31, 2021 as compared to $14.7 million for the three months
ended March 31, 2020 . The increase of $2.0 million , or 13.5%, was primarily due
to an increase of $1.3 million in audit fees driven by IPO-related transaction
costs.
Marketing Expenses
For the three months ended March 31, $ %
2021 2020 change change
(In thousands, except
percentages)
Marketing $ 14,173 $ 9,193 $ 4,980 54.2 %
Marketing expenses were $14.2 million for the three months ended March 31, 2021 ,
as compared to $9.2 million for the three months ended March 31, 2020 . The
increase of $5.0 million , or 54.2%, was primarily due to an increase of $2.4
million in retail marketing expenses and an increase of $1.3 million in
advertising expenses. The increase in advertising expense was driven in part by
the launch of our Clean Conscious Diaper in January 2021 .
Research and Development Expenses
For the three months ended March 31, $ %
2021 2020 change change
(In thousands, except
percentages)
Research and development $ 1,646 $ 1,166 $ 480 41.2 %
Research and development expenses were $1.6 million for the three months ended
March 31, 2021 , as compared to $1.2 million for the three months ended March 31,
2020 . The increase of $0.5 million , or 41.2%, was primarily due to an increase
in product development expenses, as well as clinical and claims testing and
pilot trial expenses.
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Interest and Other Income (Expense), Net
For the three months ended March 31, $ %
2021 2020 change change
(In thousands, except
percentages)
Interest and other income
(expense), net $ (327) $ (159) $ (168) 105.7 %
Interest and other income (expense), net was expense of $0.3 million for the
three months ended March 31, 2021 , as compared to expense of $0.2 million for
the three months ended March 31, 2020 . The increase of $0.2 million , or 105.7%,
was primarily due to a decrease in interest income on our short-term investments
due to a lower average investment balance and lower average interest rates.
Liquidity and Capital Resources
We have incurred net losses and net cash outflows from operating activities
since our inception. To date, our available liquidity and operations have been
financed primarily through the sale of redeemable convertible preferred stock,
equity securities and to a lesser extent, debt financing. As of March 31, 2021 ,
we had $39.0 million of cash and cash equivalents and short-term investments of
$12.4 million . Although we are dependent on our ability to raise capital or
generate sufficient cash flow from operations to achieve our business
objectives, we believe our existing cash, cash equivalents, and short-term
investments will be sufficient to meet our working capital and capital
expenditure needs for at least the next twelve months. Future capital
requirements will depend on many factors, including our rate of revenue growth,
gross margin and the level of expenditures in all areas of the Company. To the
extent that existing capital resources and sales growth are not sufficient to
fund future activities, we will need to raise capital through additional equity
or debt financing. Additional funds may not be available on terms favorable to
us or at all. Failure to raise additional capital, if and when needed, could
have a material adverse effect on our financial position, results of operations,
and cash flows.
2021 Credit Facility
In April 2021 , we entered into a first lien credit agreement (the "2021 Credit
Facility"), with JPMorgan Chase Bank, N.A ., as administrative agent and lender,
and the other lenders party thereto, which provides for a $35.0 million
revolving credit facility maturing five years from the date of the 2021 Credit
Facility. The 2021 Credit Facility includes a subfacility that provides for the
issuance of letters of credit in an amount of up to $10.0 million at any time
outstanding.
The 2021 Credit Facility is subject to customary fees for loan facilities of
this type, including a commitment fee based on the average daily undrawn potion
of the revolving credit facility.
The interest rate applicable to the 2021 Credit Facility is, at our option,
either (a) the LIBOR (or a replacement rate established in accordance with the
terms of the 2021 Credit Facility) (subject to a 0.00% LIBOR floor), plus a
margin of 1.50% or (b) the CB floating rate minus a margin of 0.50%. The CB
floating rate is the highest of (a) the
The 2021 Revolving Facility terminates and borrowings thereunder, if any, will be due in full five years from the date of the 2021 Credit Facility.
Debt under the 2021 Credit Facility is guaranteed by substantially all of our
material domestic subsidiaries and is secured by substantially all of our and
such subsidiaries' assets. The 2021 Credit Facility contains affirmative and
negative covenants, indemnification provisions and events of default.
Affirmative covenants include administrative, reporting and legal covenants, in
each case subject to certain exceptions. The negative covenants restrict our
ability, subject to customary exceptions, to, among other things: make
restricted payments including dividends and distributions on, redemptions of,
repurchases or retirement of our capital stock; restrict certain of our
subsidiaries' ability to engage in certain intercompany transactions with other
subsidiaries that do not guarantee obligations under the 2021 Credit Facility;
restrict our ability to incur additional indebtedness and issue certain types of
equity; sell assets, including capital stock of subsidiaries; enter into certain
transactions with affiliates; incur liens; enter into fundamental changes
including mergers and consolidations; make investments, acquisitions, loans or
advances; create negative pledges or restrictions on the payment of dividends or
payment of other amounts owed from subsidiaries; make prepayments or modify
documents governing material debt that is subordinated with respect to right of
payment; engage in certain sale leaseback transactions; change our fiscal year;
and change our lines of business. The 2021 Credit Facility also contains a
financial covenant that requires us to maintain a total net leverage ratio of
not more than 3.50:1.00 during the periods set forth in the 2021 Credit
Facility. The total net leverage ratio is calculated as the ratio of (a) the sum
of (i) total indebtedness minus (ii) up
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to $15.0 million of cash and cash equivalents minus (iii) obligations under
build-to-suit capital leases to (b) consolidated EBITDA, which is defined in the
2021 Credit Facility. The 2021 Credit Facility also includes customary events of
default, including failure to pay principal, interest or certain other amounts
when due, material inaccuracy of representations and warranties, violation of
covenants, specified cross-default and cross-acceleration to other material
indebtedness, certain bankruptcy and insolvency events, certain events relating
to the Employee Retirement Income Security Act of 1974, certain undischarged
judgments, material invalidity of guarantees or grant of security interest, and
change of control, in certain cases subject to certain thresholds and grace
periods. If an event of default occurs and is continuing, lenders holding a
majority of the commitments under the 2021 Credit Facility have the right to,
among other things, (i) terminate the commitments under the 2021 Credit
Facility, (ii) accelerate and require us to repay all the outstanding amounts
owed under the 2021 Credit Facility and (iii) require us to cash collateralize
any outstanding letters of credit. As of June 9, 2021 , we were in compliance
with all covenants under the 2021 Credit Facility.
Cash Flows
The following table summarizes our cash flows for the periods presented:
For the three months ended March 31,
(In thousands) 2021 2020
Net cash used in operating activities $ (11,964) $ (1,664)
Net cash provided by investing activities $ 21,786 $ 18,740
Net cash used in financing activities $ (1,382) Operating Activities Our largest source of operating cash is from the sales of our products through Digital and Retail channels to our consumers. Our primary uses of cash from operating activities are for cost of revenue expenses, selling, general and administrative expenses, marketing expenses and research and development expenses. We have generated negative cash flows from operating activities and have supplemented working capital requirements through net proceeds from the sale and maturity of short-term investments. Net cash used in operating activities of$12.0 million for the three months endedMarch 31, 2021 was primarily due to net loss of$4.5 million , non-cash adjustments of$3.0 million and a net decrease in cash related to changes in operating assets and liabilities of$10.5 million . Non-cash adjustments primarily consisted of stock-based compensation of$1.8 million and depreciation and amortization of$1.1 million . Changes in cash flows related to operating assets and liabilities primarily consisted of a$5.6 million use of cash due to the timing of payments associated with our accounts payable and operating leasing obligations and$1.0 million use of cash due to timing of payments on prepaid expenses and other assets, as well as the non-monetary sale of our legacy beauty inventory for future marketing and transportation credits. These uses of cash were partially offset by$4.9 million increase in accounts receivable due to increase in sales from retail customers and a$0.9 million reduction in inventory due to timing of inventory purchases. Net cash used in operating activities of$1.7 million for the three months endedMarch 31, 2020 was primarily due to net income of$0.6 million , non-cash adjustments of$3.2 million and a net decrease in cash related to changes in operating assets and liabilities of$5.4 million . Non-cash adjustments primarily consisted of stock-based compensation of$1.9 million and depreciation and amortization of$1.2 million . Changes in cash flows related to operating assets and liabilities primarily consisted of a$9.6 million reduction in accounts receivable due to timing of cash collection from retail customers and a$1.5 million use of cash due to timing of payments on prepaid expenses and other assets. This use of cash was partially offset by$5.5 million in increase in inventory due to the timing of inventory purchases and$0.4 million increase in accounts payable and operating leasing obligations due to the timing of associated payments. Investing Activities
Our primary source of investing cash is the sale and maturity of short-term investments and our primary use of investing cash is the purchase of short-term investments and property and equipment.
Net cash provided by investing activities of$21.8 million for the three months endedMarch 31, 2021 was due to proceeds from the sales and maturities of short-term investments of$13.6 million and$8.5 million , respectively, net of purchases of short-term investments of$0.3 million and purchases of property and equipment of$0.1 million . 26 -------------------------------------------------------------------------------- Net cash provided by investing activities of$18.7 million for the three months endedMarch 31, 2020 was due to maturities and sales of short-term investments of$17.6 million and$5.6 million , respectively, net of purchases of short-term investments of$4.5 million . Financing Activities Our financing activities primarily consisted of payments of deferred offering cost, stock option awards exercises and principal payments of financing lease obligations.
Net cash used in financing activities of
Net cash used in financing activities of
Dividends
InApril 2021 , our board of directors declared a cash dividend of$35.0 million to the holders of record of our common stock and our redeemable convertible preferred stock as ofMay 3, 2021 , which is payable no later thanJune 30, 2021 (the "2021 Dividend"). Other than the 2021 Dividend, we have not declared or paid cash dividends on our capital stock, and we do not anticipate declaring or paying any cash dividends other than the 2021 Dividend in the foreseeable future. Any future determination regarding the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions (including any restrictions in our then-existing debt arrangements), capital requirements, business prospects and other factors our board of directors may deem relevant. The 2021 Credit Facility contains restrictions on our ability to pay dividends.
Non-GAAP Financial Measure We prepare and present our condensed consolidated financial statements in accordance with GAAP. However, management believes that adjusted EBITDA, a non-GAAP financial measure, provides investors with additional useful information in evaluating our performance.
We calculate adjusted EBITDA as net income (loss), adjusted to exclude:
(1) interest and other (income) expense, net; (2) income tax provision;
(3) depreciation and amortization; (4) stock-based compensation expense;
(5) professional fees and expenses and executive termination expenses related to
our Innovation Strategy; (6) litigation and settlement fees associated with
certain non-ordinary course litigation; and (7) the IPO Bonuses, including
associated payroll taxes and expenses, and third-party costs associated with our
IPO.
Adjusted EBITDA is a financial measure that is not required by, or presented in
accordance with GAAP. We believe that adjusted EBITDA, when taken together with
our financial results presented in accordance with GAAP, provides meaningful
supplemental information regarding our operating performance and facilitates
internal comparisons of our historical operating performance on a more
consistent basis by excluding certain items that may not be indicative of our
business, results of operations or outlook. In particular, we believe that the
use of adjusted EBITDA is helpful to our investors as it is a measure used by
management in assessing the health of our business, determining incentive
compensation and evaluating our operating performance, as well as for internal
planning and forecasting purposes.
Adjusted EBITDA is presented for supplemental informational purposes only, has
limitations as an analytical tool and should not be considered in isolation or
as a substitute for financial information presented in accordance with GAAP.
Some of the limitations of adjusted EBITDA include that (1) it does not reflect
capital commitments to be paid in the future, (2) although depreciation and
amortization are non-cash charges, the underlying assets may need to be replaced
and adjusted EBITDA does not reflect these capital expenditures, (3) it does not
consider the impact of stock-based compensation expense, (4) it does not reflect
other non-operating expenses, including interest expense, (5) it does not
include the IPO Bonuses, including associated payroll taxes and expenses, or
third-party costs associated with the preparation of the IPO, (6) it does not
reflect tax payments that may represent a reduction in cash available to us, and
(7) does not include certain non-ordinary cash expenses that we do not believe
are representative of our business on a steady-state basis. In addition, our use
of adjusted EBITDA may not be comparable to similarly titled measures of other
companies because they may not calculate adjusted EBITDA in the same manner,
limiting its usefulness as a comparative measure. Because of these limitations,
when evaluating our performance, you should consider adjusted EBITDA alongside
other financial measures, including our net income (loss) and other results
stated in accordance with GAAP.
27
--------------------------------------------------------------------------------The following table presents a reconciliation of net income (loss), the most directly comparable financial measure stated in accordance with GAAP, to adjusted EBITDA, for each of the periods presented:
For the three months ended March 31,
(In thousands) 2021 2020
Reconciliation of Net Income (Loss) to Adjusted EBITDA Net income (loss)
$ (4,484) $ 559 Interest and other (income) expense, net 327 159 Income tax provision 22 22 Depreciation and amortization 1,090 1,229 Stock-based compensation 1,838 1,923 Innovation Strategy expenses(1) - 571 Related IPO costs and other transaction-related expenses(2) 1,075 - Adjusted EBITDA $ (132)$ 4,463
(1) Includes professional fees and expenses and executive severance and termination expenses related to our Innovation Strategy. (2) Includes related IPO costs and other transaction-related third-party expenses, which are generally incremental costs incurred associated with the preparation of the IPO.
Contractual Obligations and Commitments
There have been no material changes to our contractual obligations from those described in the Prospectus.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q are prepared in accordance with GAAP. The preparation of consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from our estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. Our critical accounting policies are described under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" in the Prospectus and the notes to the audited consolidated financial statements appearing elsewhere in the Prospectus. During the three months endedMarch 31, 2021 , there were no material changes to our critical accounting policies from those discussed in our Prospectus.
Recent Accounting Pronouncements
Refer to Note 2 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a discussion of recently issued accounting pronouncements not yet adopted.
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