The Honest Company Reports Third Quarter 2022 Results

____________

(1) According to independent third-party data. Reflects retail consumption for diapers, wipes, baby personal care, skin care and cosmetics items in total.
(2) We do not provide guidance for the most directly comparable GAAP measure, net loss, and similarly cannot provide a reconciliation between our adjusted EBITDA outlook and net loss without unreasonable effort due to the unavailability of reliable estimates for certain components of net loss, including interest and other (income) expense, net, and the respective reconciliations. These items are not within our control and may vary greatly between periods and could significantly impact our financial results calculated in accordance with GAAP.

“I’m delighted with our Honest team’s execution against our strategic priorities. In an uncertain macro environment, our brand and go-to-market strategies continue to resonate with the consumer. Our strong consumption and market share gains at retail have led to incremental distribution with both new and existing customers. We continue to make our products accessible to more consumers, while building brand awareness, household penetration and brand loyalty,” said Chief Executive Officer Nick Vlahos.

“Despite persistent cost inflation, economic pressure on the consumer and tighter inventory management by retailers, strong consumption of Honest products within our categories speaks to consumers’ desire to purchase clean and natural products, which gives us confidence in our growth plans as we enter 2023.”

Third Quarter Results

This press release includes non-GAAP financial measures. See “Use of Non-GAAP Financial Measures” at the end of this press release for more information.

Revenue increased 2% to $85 million for the third quarter of 2022 compared to the third quarter of 2021. Revenue growth in the quarter was negatively impacted by 8 percentage points due to a prior-year Skin and Personal Care rotational program with a key club retailer that did not repeat this year. Growth was driven by 115% revenue growth in Household and Wellness, 3% revenue growth in Diapers and Wipes, offset by a 13% revenue decrease in Skin and Personal Care.

Third Quarter 2022 Revenue by Product Category For the three months ended September 30, 2022 2021 % change (Unaudited, in thousands, except percentages) Diapers and Wipes$55,222 $53,847 3 %Skin and Personal Care 21,992 25,375 (13) Household and Wellness 7,366 3,429 115 Total Revenue$84,580 $82,651 2 %

Revenue by product category was as follows:

______________________

(1) According to independent third-party data. Reflects retail consumption for diapers and wipes.

Third Quarter 2022 Revenue by Channel For the three months ended September 30, 2022 2021 % change (Unaudited, in thousands, except percentages) Digital$33,782 $39,114 (14)%Retail 50,798 43,537 17 Total Revenue$84,580 $82,651 2 % For the three months ended September 30, 2022 2021 (Unaudited, as a percentage of revenue) Digital40% 47%Retail60% 53%Total Revenue100% 100%

Digital revenue decreased 14% as compared to the third quarter of 2021, driven by a key digital customer’s inventory reduction in the third quarter of 2022 and the timing of shipments related to its national promotion event compared to last year. Consumption at this retailer remained strong, increasing 20% in the quarter as compared to the third quarter of 2021. Additionally, we made a strategic choice to significantly reduce digital media spending in the face of higher advertising costs, which impacted revenue in the digital channel. Those funds were shifted to higher return opportunities, such as shopper marketing, to support our retail expansion this quarter.

Retail revenue increased 17% behind double-digit growth within our five largest customers in the Retail channel. In particular, revenue increased 16% at Target during the third quarter of 2022, supported by our 83rd consecutive week of year-over-year point-of-sales growth, and the launch of diapers, wipes, and personal care into over 2,500 Walmart stores.

Gross margin was 30.3% in the third quarter of 2022, a 30 basis point sequential improvement versus the second quarter of 2022.
Gross margin declined 570 basis points versus the third quarter of 2021, driven by higher product costs, including inbound freight, transportation, fulfillment and warehouse expenses, and increased trade promotion spend, partially offset by the benefit of price increases and cost savings.

Operating expenses increased $3 million in the third quarter of 2022 compared to the third quarter of 2021, including costs attributed to a $1.5 million product donation of sanitizing products and $1.6 million in legal fees related to securities litigation claims. Excluding these costs, operating expenses were about flat versus the third quarter of 2021 and in-line with expectations. Marketing expenses were over 14% of sales, supporting brand growth and Retail channel expansion.

Net loss for the third quarter of 2022 was $12 million compared to a net loss of $5 million in the third quarter of 2021.

Adjusted EBITDA for the third quarter of 2022 was negative $5.6 million, which was not adjusted for the $1.5 million expense related to product donations. See the reconciliation of adjusted EBITDA, a non-GAAP financial measure, to net loss in the table at the end of this press release.

We ended the third quarter of 2022 with $41 million in cash, cash equivalents and short-term investments and no debt on our balance sheet. The majority of our cash investment this quarter reflected an increase in inventory to support our strategic expansion plans, including retail distribution into over 2,500 Walmart stores, as well as our purchase of inventory supporting the Honest Baby Clothing business. We believe the Company’s increased investment in working capital is sufficient to support the future growth of the business.

Business Highlights:

Full Year 2022 Outlook

Revenue

Adjusted EBITDA(1)

____________________

(1) We do not provide guidance for the most directly comparable GAAP measure, net loss, and similarly cannot provide a reconciliation between our adjusted EBITDA outlook and net loss without unreasonable effort due to the unavailability of reliable estimates for certain components of net loss, including interest and other (income) expense, net, and the respective reconciliations. These items are not within our control and may vary greatly between periods and could significantly impact our financial results calculated in accordance with GAAP.

We continue to expect basic and diluted shares outstanding to be approximately 92 million.

We expect stock-based compensation, depreciation and amortization and legal expense to be approximately $6 million in aggregate in the fourth quarter.

Preliminary 2023 Outlook - First Half Revenue

Our first half of 2023 revenue outlook reflects 7 percent to 10 percent growth over the first half of 2022. This takes into account the retail distribution expansion that occurred in the second half of 2022 and a new round of price increases on select diapers, wipes, and personal care items effective in the middle of December 2022, balanced by uncertainty in US consumer spending and continued tight inventory management by retailers. As 2023 progresses, we anticipate lapping significant distribution gains, including pipeline shipments, as well as revenue from integrating the Honest Baby Clothing business, both of which occurred in the back half of 2022.

We expect to provide a more detailed 2023 outlook, including gross margin and Adjusted EBITDA for the first half of 2023, during our fourth quarter earnings call in March 2023.

Webcast and Conference Call Information

A webcast and conference call to discuss third quarter 2022 results is scheduled for today, November 10, 2022, at 9:00 a.m. Pacific time/12:00 p.m. Eastern time. Those interested in participating in the conference call by phone, please go to this link https://register.vevent.com/register/BI7f92dc6796f048f2bb7dfd9d2bad9f3e, and you will be provided with dial in details. To avoid delays, we encourage participants to dial into the conference call fifteen minutes ahead of the scheduled start time. A live webcast of the conference call will be available online at: https://investors.honest.com. A replay of the webcast will remain available on the Company’s website for one year.

Forward-Looking Statements

This press release and earnings call referencing this press release contain forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this press release, including statements regarding our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will” or “would” or the negative of these words or other similar terms or expressions. These forward-looking statements include, but are not limited to, statements concerning the following:

You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this press release primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition and operating results.

The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” in the Annual Report, on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on March 28, 2022, and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2022 and June 30, 2022, respectively, filed with the Securities and Exchange Commission on May 13, 2022 and August 12, 2022, respectively, and subsequent filings with the Securities and Exchange Commission. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this press release or the earnings call referencing this press release. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

In addition, statements that contain “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this press release. While we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.

The forward-looking statements made in this press release and the earnings call referencing this press release relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this press release to reflect events or circumstances after the date of this press release or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments.

About The Honest Company

The Honest Company (NASDAQ: HNST) is a mission-driven, digitally-native brand focused on leading the clean lifestyle movement, creating a community for conscious consumers and seeking to disrupt multiple consumer product categories. Since its launch in 2012, Honest has been dedicated to creating thoughtfully formulated, safe and effective personal care, beauty, baby and household products, which are available via Honest.com, third-party ecommerce customers and approximately 50,000 retail locations across the United States, Canada and Europe. Based in Los Angeles, CA, the Company’s mission, to inspire everyone to love living consciously, is driven by its values of transparency, trust, sustainability and a deep sense of purpose around what matters most to its consumers: their health, their families and their homes. For more information about the Honest Standard and the Company, please visit www.honest.com.

Investor Contacts:
Steve Austenfeld
saustenfeld@thehonestcompany.com

Elizabeth Bouquard
ebouquard@thehonestcompany.com

Investor Inquiries:
investors@thehonestcompany.com

Media Contact:
Jennifer Kroog Rosenberg
jrosenberg@thehonestcompany.com

The Honest Company, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
(in thousands, except share and per share amounts) For the three months ended
September 30, For the nine months ended
September 30, 2022 2021 2022 2021 Revenue$84,580 $82,651 $231,792 $238,258 Cost of revenue 58,963 52,892 161,984 153,177 Gross profit 25,617 29,759 69,808 85,081 Operating expenses Selling, general and administrative 23,491 18,568 63,068 65,356 Marketing 12,140 13,687 38,121 41,868 Research and development 1,725 2,092 5,643 6,082 Total operating expenses 37,356 34,347 106,832 113,306 Operating loss (11,739) (4,588) (37,024) (28,225)Interest and other income (expense), net (29) (526) 657 (1,362)Loss before provision for income taxes (11,768) (5,114) (36,367) (29,587)Income tax provision 20 22 60 67 Net loss$(11,788) $(5,136) $(36,427) $(29,654)Net loss per share attributable to common stockholders: Basic and diluted$(0.13) $(0.06) $(0.40) $(0.33)Weighted-average shares used in computing net loss per share attributable to common stockholders: Basic and diluted 92,460,987 90,397,409 92,020,423 64,399,183 Other comprehensive income (loss) Unrealized gain (loss) on short-term investments, net of taxes 37 10 (42) (96)Comprehensive loss$(11,751) $(5,126) $(36,469) $(29,750)

The Honest Company, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except share and per share amounts) September 30, 2022 December 31, 2021 September 30, 2021 Assets Current assets Cash and cash equivalents$24,087 $50,791 $27,666 Short-term investments 16,744 42,388 62,678 Accounts receivable, net 38,871 31,784 31,654 Inventories 100,278 75,668 77,858 Prepaid expenses and other current assets 14,435 13,165 13,777 Total current assets 194,415 213,796 213,633 Operating lease right-of-use asset 31,486 — — Property and equipment, net 14,891 52,952 53,888 Goodwill 2,230 2,230 2,230 Intangible assets, net 387 440 458 Other assets 4,951 3,179 4,151 Total assets$248,360 $272,597 $274,360 Liabilities and Stockholders’ Equity Current liabilities Accounts payable$30,703 $28,743 $31,178 Accrued expenses 29,968 19,003 17,280 Deferred revenue 781 731 816 Total current liabilities 61,452 48,477 49,274 Long term liabilities Lease financing obligation, net of current portion — 37,527 37,758 Operating lease liabilities, net of current portion 31,790 — — Other long-term liabilities 33 7,487 7,843 Total liabilities 93,275 93,491 94,875 Commitments and contingencies Stockholders’ equity (deficit) Preferred stock, $0.0001 par value, 20,000,000 shares authorized at September 30, 2022 and December 31, 2021, none issued or outstanding as of September 30, 2022 and December 31, 2021 — — — Common stock, $0.0001 par value, 1,000,000,000 and 150,000,000 shares authorized at September 30, 2022 and December 31, 2021, respectively; 92,590,227 and 91,512,140 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively 9 9 9 Additional paid-in capital 582,396 570,794 562,109 Accumulated deficit (427,237) (391,656) (382,631)Accumulated other comprehensive loss (83) (41) (2)Total stockholders’ equity 155,085 179,106 179,485 Total liabilities and stockholders’ equity$248,360 $272,597 $274,360 

The Honest Company, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands) For the nine months ended September 30, 2022 2021 Cash flows from operating activities Net loss$(36,427) $(29,654)Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,025 3,135 Stock-based compensation 11,360 13,240 Other 4,805 204 Changes in assets and liabilities: Accounts receivable, net (7,087) (8,859)Inventories (24,609) (1,188)Prepaid expenses and other assets (3,228) (7,552)Accounts payable, accrued expenses and other long-term liabilities 7,604 (5,783)Deferred revenue 49 98 Operating lease liabilities (5,161) — Net cash used in operating activities (50,669) (36,359)Cash flows from investing activities Purchases of short-term investments (12,782) (65,267)Proceeds from sales of short-term investments — 26,858 Proceeds from maturities of short-term investments 38,219 9,862 Purchases of property and equipment (1,433) (187)Net cash provided by (used in) investing activities 24,004 (28,734)Cash flows from financing activities Proceeds from initial public offering, net of underwriting commissions and discounts — 96,517 Taxes paid related to net share settlement of equity awards (37) (565)Dividends paid — (35,000)Proceeds from exercise of stock options 122 941 Payment of initial public offering costs — (5,477)Proceeds from 2021 Employee Stock Purchase Plan 157 — Payments on finance lease liabilities (281) (857)Net cash provided by (used in) financing activities (39) 55,559 Net decrease in cash and cash equivalents (26,704) (9,534)Cash and cash equivalents Beginning of the period 50,791 37,200 End of the period$24,087 $27,666 Supplemental disclosures of noncash activities Equipment acquired under capital lease obligations$— $105 Capital expenditures included in accounts payable and accrued expenses$92 $27 

The Honest Company, Inc.
Use of Non-GAAP Financial Measures

We prepare and present our condensed consolidated financial statements in accordance with GAAP. However, management believes that adjusted EBITDA, which is a non-GAAP financial measure, provide 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, including payroll tax; (5) the IPO bonuses in the second quarter of 2021, including associated payroll taxes and expenses, and third-party costs associated with our IPO in 2021; and (6) in certain periods, litigation and settlement fees associated with certain non-ordinary course litigation.

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 analytical tools 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), revenue and other results stated in accordance with GAAP.

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
September 30, For the nine months ended
September 30,(In thousands) 2022 2021 2022 2021 Reconciliation of Net Loss to Adjusted EBITDA Net loss$(11,788) $(5,136) $(36,427) $(29,654)Interest and other (income) expense, net 29 526 (657) 1,362 Income tax provision 20 22 60 67 Depreciation and amortization 639 1,019 2,025 3,135 Stock-based compensation 3,900 4,776 11,360 13,240 Securities litigation expense 1,612 — 2,607 — Related IPO and other transaction-related expenses(1) — — — 12,160 Payroll tax expense related to stock-based compensation 14 123 81 135 Adjusted EBITDA$(5,574) $1,330 $(20,951) $445 

___________________

(1) Includes IPO-related costs, including transaction-related third-party expenses, which are generally incremental costs incurred associated with the preparation of the IPO.