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0001757715 Aterian, Inc. false --12-31 Q1 2024 0.0001 0.0001 500,000,000 500,000,000 7,508,246 7,508,246 7,656,044 7,656,044 125 2 0.1 3 10 0 4 3 33.33 66.66 10 1.0 3 4.1 3 6,902,816 0 false false false false The number of options and exercise price per share have been retroactively restated to reflect the one for twelve (1 for 12) reverse stock split, which was effective on March 22, 2024. On March 20, 2023, the Company made certain leadership changes in our essential oil business resulting in a change in strategy and outlook for the business which will result in a reduced portfolio offering. This reduction in the portfolio will be impactful to our essential oil business's future revenues and profitability and as a result the Company made revisions to our internal forecasts. The Company concluded that this change was an interim triggering event for the three months ending March 31, 2023 indicating the carrying value of our essential oil business's long-lived assets including trademarks may not be recoverable. Accordingly, the Company performed an interim impairment test of the trademark and assessed the recoverability of the related intangible assets by using level 3 inputs and comparing the carrying value of an asset group to the net undiscounted cash flow expected to be generated. The recoverability test indicated that certain definite-live trademark intangible assets were impaired. The Company concluded the carrying value of the trademark exceeded its estimated fair value which was determined utilizing the relief-from-royalty method to determine discounted projected future cash flows which resulted in an impairment charge. The Company recorded an intangible impairment charge of $16.7 million in the three months ending March 31, 2023 within impairment loss on intangibles on the condensed consolidated statement of operations. The number of shares and grant date fair value per share have been retroactively restated to reflect the one for twelve (1 for 12) reverse stock split, which was effective on March 22, 2024. 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Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 


 

FORM 10-Q

 


 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2024

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 001-38937


Aterian, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

83-1739858

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer
Identification Number)

   

350 Springfield Avenue, Suite 200

Summit, NJ

 

07901

(Address of principal executive offices)

 

(Zip Code)

 

(347) 676-1681

(Registrants telephone number, including area code)


 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.0001 par value per share

 

ATER

 

The Nasdaq Stock Market LLC

 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

 ☐

Non-accelerated filer

 

Smaller reporting company

 

Emerging growth company

   

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ☒

 

As of May 8, 2024, the registrant had 8,435,679 shares of common stock, $0.0001 par value per share, outstanding.

 



 

 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

3

 

Condensed Consolidated Balance Sheets

3

 

Condensed Consolidated Statements of Operations

4

 

Condensed Consolidated Statements of Comprehensive Loss

5

 

Condensed Consolidated Statements of Stockholder’s Equity

6

 

Condensed Consolidated Statements of Cash Flows

7

 

Notes to Unaudited Condensed Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

Item 4.

Controls and Procedures

26

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

27

Item 1A.

Risk Factors

27

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

27

Item 3.

Defaults Upon Senior Securities

27

Item 4.

Mine Safety Disclosures

27

Item 5.

Other Information

27

Item 6.

Exhibits

28

Signatures

 

29

 

 

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). Many of these statements can be identified by the use of terminology such as believes, expects, intends, anticipates, plans, may, will, could, "would, projects, continues, estimates, potential, opportunity or the negative versions of these terms and other similar expressions. Our actual results or experience could differ significantly from the forward-looking statements. Factors that could cause or contribute to these differences include those discussed in Risk Factors, in Part II, Item 1A of this Quarterly Report on Form 10-Q as well as information provided elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the Securities and Exchange Commission (the SEC) on March 19, 2024. You should carefully consider that information before you make an investment decision.

 

You should not place undue reliance on these types of forward-looking statements, which speak only as of the date that they were made. These forward-looking statements are based on the beliefs and assumptions of the Companys management based on information currently available to management and should be considered in connection with any written or oral forward-looking statements that the Company may issue in the future as well as other cautionary statements the Company has made and may make. Except as required by law, the Company does not undertake any obligation to release publicly any revisions to these forward-looking statements after completion of the filing of this Quarterly Report on Form 10-Q to reflect later events or circumstances or the occurrence of unanticipated events.

 

The discussion of the Companys financial condition and results of operations should be read in conjunction with the Companys Condensed Consolidated Financial Statements and the related Notes thereto included in this Quarterly Report on Form 10-Q.

 

 

 

 

PART IFINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

ATERIAN, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except share and per share data)

 

  

December 31, 2023

  

March 31, 2024

 

ASSETS

        

Current assets:

        

Cash

 $20,023  $17,545 

Accounts receivable, net

  4,225   2,382 

Inventory

  20,390   18,520 

Prepaid and other current assets

  4,998   5,138 

Total current assets

  49,636   43,585 

Property and equipment, net

  775   748 

Other intangibles, net

  11,320   10,955 

Other non-current assets

  138   386 

Total assets

 $61,869  $55,674 

LIABILITIES AND STOCKHOLDERS’ EQUITY

        

Current Liabilities:

        

Credit facility

 $11,098  $9,396 

Accounts payable

  4,190   4,058 

Seller notes

  1,049   903 

Accrued and other current liabilities

  9,110   7,989 

Total current liabilities

  25,447   22,346 

Other liabilities

  391   378 

Total liabilities

  25,838   22,724 

Commitments and contingencies (Note 9)

          

Stockholders' equity:

        

Common stock, $0.0001 par value, 500,000,000 shares authorized and 7,508,246 and 7,656,044 shares outstanding at December 31, 2023 and March 31, 2024, respectively (*)

  9   9 

Additional paid-in capital

  736,675   738,805 

Accumulated deficit

  (699,815)  (704,977)

Accumulated other comprehensive loss

  (838)  (887)

Total stockholders’ equity

  36,031   32,950 

Total liabilities and stockholders' equity

 $61,869  $55,674 

 

(*) The number of shares and per share amounts have been retroactively restated to reflect the one for twelve (1 for 12) reverse stock split, which was effective on March 22, 2024. 

 

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

 

 

 

 

ATERIAN, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

(in thousands, except share and per share data)

 

   

Three Months Ended March 31,

 
   

2023

   

2024

 

Net revenue

  $ 34,879     $ 20,214  

Cost of goods sold

    15,782       7,046  

Gross profit

    19,097       13,168  

Operating expenses:

               

Sales and distribution

    20,226       13,214  

Research and development

    1,247        

General and administrative

    5,959       5,232  

Impairment loss on intangibles

    16,660        

Total operating expenses

    44,092       18,446  

Operating loss

    (24,995 )     (5,278 )

Interest expense, net

    371       323  

Change in fair value of warrant liability

    354       (517 )

Other expense, net

    54       7  

Loss before income taxes

    (25,774 )     (5,091 )

Provision for income taxes

    26       71  

Net loss

  $ (25,800 )   $ (5,162 )

Net loss per share, basic and diluted

  $ (4.03 )   $ (0.76 )

Weighted-average number of shares outstanding, basic and diluted (*)

    6,394,905       6,789,955  

 

(*) The number of shares and per share amounts have been retroactively restated to reflect the one for twelve (1 for 12) reverse stock split, which was effective on March 22, 2024. 

 

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

 

 

 

ATERIAN, INC.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(in thousands)

 

   

Three Months Ended March 31,

 
   

2023

   

2024

 

Net loss

  $ (25,800 )   $ (5,162 )

Other comprehensive loss:

               

Foreign currency translation adjustments

    129       (49 )

Other comprehensive loss

    129       (49 )

Comprehensive loss

  $ (25,671 )   $ (5,211 )

 

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

 

 

 

ATERIAN, INC.

Condensed Consolidated Statements of Stockholders Equity

(Unaudited)

(in thousands, except share and per share data)

 

 

   

Three Months Ended March 31, 2023

 
   

Common Stock(*)

   

Additional Paid-in

   

Accumulated

   

Accumulated Other Comprehensive

   

Total Stockholders’

 
   

Shares

   

Amount

   

Capital

   

Deficit

   

Loss

   

Equity

 

BALANCE—January 1, 2023

    6,729,533     $ 8     $ 728,339     $ (625,251 )   $ (1,144 )   $ 101,952  

Net loss

                      (25,800 )           (25,800 )

Issuance of shares of restricted common stock

    55,678                                

Forfeiture of shares of restricted common stock

    (48,860 )                              

Issuance of common stock

    25,000             290                   290  

Stock-based compensation expense

                2,196                   2,196  

Other comprehensive income

                            129       129  

BALANCE—March 31, 2023

    6,761,351     $ 8     $ 730,825     $ (651,051 )   $ (1,015 )   $ 78,767  

 

(*) The number of shares and per share amounts have been retroactively restated to reflect the one for twelve (1 for 12) reverse stock split, which was effective on March 22, 2024. 

 

   

Three Months Ended March 31, 2024

 
   

Common Stock(*)

   

Additional Paid-in

   

Accumulated

   

Accumulated Other Comprehensive

   

Total Stockholders’

 
   

Shares

   

Amount

   

Capital

   

Deficit

   

Loss

   

Equity

 

BALANCE—January 1, 2024

    7,508,246     $ 9     $ 736,675     $ (699,815 )   $ (838 )   $ 36,031  

Net loss

                      (5,162 )           (5,162 )

Issuance of shares of restricted common stock

    11,668                                

Forfeiture of shares of restricted common stock

    (42,650 )                              

Issuance of common stock

    178,780             670                   670  

Stock-based compensation expense

                1,460                   1,460  

Other comprehensive income

                            (49 )     (49 )

BALANCE—March 31, 2024

    7,656,044     $ 9     $ 738,805     $ (704,977 )   $ (887 )   $ 32,950  

 

(*) The number of shares and per share amounts have been retroactively restated to reflect the one for twelve (1 for 12) reverse stock split, which was effective on March 22, 2024. 

 

 

ATERIAN, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

   

Three Months Ended March 31,

 
   

2023

   

2024

 

OPERATING ACTIVITIES:

               

Net loss

  $ (25,800 )   $ (5,162 )

Adjustments to reconcile net loss to net cash used by operating activities:

               

Depreciation and amortization

    1,762       428  

Provision for sales returns

    (223 )     64  

Amortization of deferred financing cost and debt discounts

    106       83  

Stock-based compensation

    2,317       1,667  

Change in deferred tax balance

          (5 )

Change in inventory provisions

    (1,023 )     (976 )

Loss (gain) in connection with the change in warrant fair value

    354       (517 )

Impairment loss on intangibles

    16,660        

Changes in assets and liabilities:

               

Accounts receivable

    1,028       1,843  

Inventory

    4,312       2,846  

Prepaid and other assets

    751       249  

Accounts payable, accrued and other liabilities

    (7,661 )     (526 )

Cash used in operating activities

    (7,417 )     (6 )

INVESTING ACTIVITIES:

               

Purchase of intangibles and fixed assets

    (33 )     (36 )

Purchase of Step and Go assets

   

(125)

     

 

Purchase of minority equity investment

          (200 )

Cash used in investing activities

    (158 )     (236 )

FINANCING ACTIVITIES:

               

Repayments on note payable to Smash

    (398 )     (153 )

Borrowings from MidCap credit facilities

    20,549       11,453  

Repayments for MidCap credit facilities

    (22,602 )     (13,244 )

Insurance obligation payments

    (534 )     (254 )

Cash provided (used) by financing activities

    (2,985 )     (2,198 )

Foreign currency effect on cash, cash equivalents, and restricted cash

    129       (49 )

Net change in cash and restricted cash for the year

    (10,431 )     (2,489 )

Cash and restricted cash at beginning of year

    46,629       22,195  

Cash and restricted cash at end of year

  $ 36,198     $ 19,706  

RECONCILIATION OF CASH AND RESTRICTED CASH:

               

Cash

    33,911       17,545  

Restricted Cash—Prepaid and other current assets

    2,158       2,032  

Restricted cash—Other non-current assets

    129       129  

TOTAL CASH AND RESTRICTED CASH

  $ 36,198     $ 19,706  
                 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

               

Cash paid for interest

  $ 538     $ 402  

Cash paid for taxes

  $     $ 3  

NON-CASH INVESTING AND FINANCING ACTIVITIES:

               

Non-cash consideration paid to contractors

  $ 321     $ 620  
Non-cash minority equity investment   $     $ 50  

 

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

 

 

Aterian, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2023 and 2024 (Unaudited)

(In thousands, except share and per share data)

 

1.

COMPANY OVERVIEW

 

Aterian, Inc. (the "Company") is a technology-enabled consumer products company that predominantly operates through online retail channels such as Amazon and Walmart. The Company operates its owned brands, which were either incubated or purchased, selling products in multiple categories, including home and kitchen appliances, kitchenware, air quality appliances, health and beauty products and essential oils.

 

Headquartered in New Jersey, Aterian also maintains offices in China, Philippines, and the United Kingdom.

 

Liquidity and Going Concern

 

As an emerging growth company in the early commercialization stage of its lifecycle, we are subject to inherent risks and uncertainties associated with the development of our enterprise. In this regard, substantially all of our efforts to date have been devoted to the development and sale of our products in the marketplace, which includes our investment in organic growth at the expense of short-term profitably, our investment in incremental growth through mergers & acquisitions (“M&A strategy”), our recruitment of management and technical staff, and raising capital to fund the development of our enterprise. As a result of these efforts, we have incurred significant losses and negative cash flows from operations since our inception and expect to continue to incur such losses, at a reduced level, and negative cash flows for the foreseeable future until such time that we reach a scale of profitability to sustain our operations. We have also experienced declining revenues due to macroeconomic factors, including increased interest rates and reduced consumer discretionary spending, and other factors, and we intend to focus our efforts on a more limited number of products. In addition, our recent financial performance has been adversely impacted by inflationary pressures and reduced consumer spending.

 

In order to execute our growth strategy, we have historically relied on outside capital through the issuance of equity, debt, and borrowings under financing arrangements (collectively “outside capital”) to fund our cost structure, and we expect to continue to rely on outside capital for the foreseeable future, specifically for our M&A strategy. While we believe we will eventually reach a level of profitability to sustain our operations, there can be no assurance we will be able to achieve such profitability or do so in a manner that does not require our continued reliance on outside capital. Moreover, while we have historically been successful in raising outside capital, there can be no assurance we will be able to continue to obtain outside capital in the future or do so on terms that are acceptable to us.

 

As of the date the accompanying Consolidated Financial Statements were issued (the “issuance date”), we evaluated the significance of the following adverse financial conditions in accordance with Accounting Standard Codification 205-40, Going Concern:

 

• Since our inception, we have incurred significant losses and used cash flows from operations to fund our enterprise. In this regard, during the three months ended March 31, 2024, we incurred a net loss of $5.2 million and used net cash flows in our operations of $6 thousand. In addition, as of March 31, 2024, we had unrestricted cash and cash equivalents of $17.5 million available to fund our operations and an accumulated deficit of $705.0 million.

 

• We are required to remain in compliance with certain financial covenants required by the MidCap Credit facility (See Note 6, Credit Facility, Term Loans and Warrants). We were in compliance with these financial covenants as of March 31, 2024, and expect to remain in compliance through at least March 31, 2025. During February 2024, the Company amended its terms with Midcap Credit Facility extending the term until December 2026 and amending certain financial covenants with favorable terms. However, with our short history of forecasting our business following the onset of the COVID-19 global pandemic, the current global inflation, related global supply chain disruptions and uncertain consumer demand, we can provide no assurances that we will remain in compliance with our financial covenants. Further, absent of our ability to generate cash inflows from our operations or secure additional outside capital, we will be unable to remain in compliance with these financial covenants. In the event we are unable to remain in compliance with these financial covenants (or other non-financial covenants required by the MidCap Credit Facility), and we are unable to secure a waiver or forbearance, MidCap may, at its discretion, exercise any and all of its existing rights and remedies, which may include, among others, accelerating repayment of the outstanding borrowings and/or asserting its rights in the assets securing the loan.

 

• As of the issuance date, we have no firm commitments to secure additional outside capital from lenders or investors. While we expect to continue to explore raising additional outside capital, specifically to fund our M&A strategy, there can be no assurance we will be able to obtain capital or do so on terms that are acceptable to us. Accordingly, absent our ability to generate cash inflows from our operations and/or secure additional outside capital in the near term, we may be unable to meet our obligations as they become due over the next twelve months beyond the issuance date.

 

• The Company's plan is to continue to closely monitor our operating forecast, to pursue our M&A strategy, to pursue additional sources of outside capital on terms that are acceptable to us, and to secure a waiver or forbearance from MidCap if we are unable to remain in compliance with one or more of the covenants required by the MidCap Credit Facility. Further, the Company has enacted a strategy to reduce the number of SKUs it sells and will no longer be pursuing future sales of SKUs that are either not profitable or not core to the Company’s strategy. If some or all of our plans prove unsuccessful, we may need to implement short-term changes to our operating plan, including but not limited to delaying expenditures, reducing investments in new products, or reducing our sale and distribution infrastructure. We may also need to seek long-term strategic alternatives, such as a significant curtailment of our operations, a sale of certain of our assets, a divestiture of certain product lines, a sale of the entire enterprise to strategic or financial investors, and/or allow our enterprise to become insolvent.

 

The Company has initiated two restructuring programs over the last 12 months to reduce operating costs and right size the workforce to align with the scale of our streamlined operations. In addition, we have reduced the SKU count to solely focus on profitable products that are core to the Company’s strategy. During the three months ending March 31, 2024, we extended the term with Midcap Credit Facility until December 2026 (See Note 6, Credit Facility, Term Loans and Warrants) and amended key terms which will add more flexibility to liquidity and strengthen our balance sheet. In consideration of these factors, the Company will monitor profitability and cash flow over the next several quarters to evaluate our ability to continue as a going concern.

 

Although significant strides have been made in reducing our operating losses and strengthening our balance sheet, uncertainties persist in our business operations and the forecasting of our business. These uncertainties raise substantial doubt about our ability to continue as a going concern. The accompanying Consolidated Financial Statements have been prepared on the basis that we will continue to operate as a going concern, which contemplates that we will be able to realize assets and settle liabilities and commitments in the normal course of business for the foreseeable future. Accordingly, the accompanying Consolidated Financial Statements do not include any adjustments that may result from the outcome of these uncertainties.

 

Nasdaq Listing - On April 24, 2023, we received a letter from the Listing Qualifications Staff of The Nasdaq Stock Market LLC (“Nasdaq”) indicating that, based upon the closing bid price of our common stock for the last 30 consecutive business days, the Company is currently in compliance with the requirement to maintain a minimum bid price of $1.00 per share for continued listing on The Nasdaq Capital Market, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Notice”). The Bid Price Notice provided a compliance period of 180 calendar days from the date of the Bid Price Notice, or until October 23, 2023, to regain compliance with the minimum closing bid requirement, pursuant to Nasdaq Listing Rule 5810(c)(3)(A). Following a request we made on October 13, 2023, on October 24, 2023, we received a letter from Nasdaq granting the Company an additional 180 days, or until April 22, 2024, to regain compliance with the minimum closing bid requirement (the “Extension Notice”).

 

On August 11, 2023, Aterian's shareholders approved discretionary authority to our Board to (A) amend our Amended and Restated Certificate of Incorporation to effect one or more consolidations of the issued and outstanding shares of our common stock, par value $0.0001 per share, pursuant to which the shares of Common Stock would be combined and reclassified at ratios within the range from 1-for-2 up to 1-for-30 and (B) determine whether to arrange for the disposition of fractional interests by stockholders entitled thereto, to pay in cash the fair value of fractions of a share of Common Stock as of the time when those entitled to receive such fractions are determined, or to entitle stockholders to receive from our transfer agent, in lieu of any fractional share, the number of shares of Common Stock rounded up to the next whole number, and to amend our Amended and Restated Certificate of Incorporation in connection therewith.

 

On March 20, 2024, the Company filed a Certificate of Amendment to its Amended and Restated Certificate of Incorporation of the Company with the Secretary of State of Delaware (the “Certificate of Amendment”) to affect a 1 - 12 reverse stock split (the “Reverse Stock Split”) of the shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”). The Certificate of Amendment did not decrease the number of authorized shares of Common Stock. No fractional shares were issued in connection with the Reverse Stock Split. Any fractional shares that would otherwise have resulted from the Reverse Stock Split were rounded up to the nearest whole number. The Reverse Stock Split impacted all holders of the Common Stock proportionally and did not impact any stockholder’s percentage ownership of Common Stock (except to the extent the Reverse Stock Split results in any stockholder owning fractional shares). 

 

The Common Stock began trading on a Reverse Stock Split-adjusted basis on the Nasdaq on March 22, 2024. All share and per share data has been retroactively adjusted to reflect the Reverse Stock Split.

 

Restructuring - On May 9, 2023, the Company announced a plan to reduce expenses by implementing a reduction in its current workforce impacting approximately 50 employees and 15 contractors, primarily in the Philippines. The Company recognized restructuring charges of $1.6 million for the year-ended December 31, 2023, respectively.

 

On February 8, 2024, the Company committed to a fixed cost-cutting plan, including a reduction in workforce which resulted in the termination of approximately 17 employees and 26 contractors globally. The Company recognized restructuring charges of $0.6 million for the three months ended March 31, 2024.

 

8

 
 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation—The Condensed Consolidated Financial Statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

 

Unaudited Interim Financial Information—The accompanying interim Condensed Consolidated Financial Statements are unaudited and have been prepared on the same basis as the audited financial statements and, in the opinion of management, reflect all adjustments necessary for the fair presentation of the Company's financial position as of  March 31, 2024 and the results of its operations and its cash flows for the periods ended March 31, 2024 and 2023. The financial data and other information disclosed in these notes related to the three months ended March 31, 2024 and 2023 are also unaudited. The results for the three months ended March 31, 2024 are not necessarily indicative of results to be expected for the year ending December 31, 2024, any other interim periods or any future year or period.

 

The Condensed Consolidated Balance Sheet as of December 31, 2023, presented herein, has been derived from the Company’s audited Consolidated Financial Statements for the fiscal year then ended. These unaudited Condensed Consolidated Interim Financial Statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2023 (“Annual Report”) and have been prepared on a consistent basis with the accounting policies described in Note 2 of the Notes to Consolidated Financial Statements included in our Annual Report. Our accounting policies did not change during the three months ended March 31, 2024, other than with respect to the new accounting pronouncements adopted as described in Note 2, Recent Accounting Pronouncements.

 

Use of Estimates—Preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period covered by the financial statements and accompanying notes. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from those estimates.

 

Principles of Consolidation—The Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

 

Restricted Cash—As of December 31, 2023, the Company has classified the following as restricted cash: $0.1 million related to its Chinese subsidiary within “Other Non-current Assets” on the Consolidated Balance Sheets, $2.0 million related to a letter of credit within "Prepaid and Other Current Assets" on the Consolidated Balance Sheets.

 

As of March 31, 2024, the Company has classified the following as restricted cash: $0.1 million related to its Chinese subsidiary within “Other Non-current Assets” on the Condensed Consolidated Balance Sheets and $2.0 million related to a letter of credit within "Prepaid and Other Current Assets" on the Condensed Consolidated Balance Sheets.

 

Inventory and Cost of Goods Sold—The Company’s inventory consists almost entirely of finished goods. The Company currently records inventory on its balance sheet on a first-in first-out basis, or net realizable value, if it is below the Company’s recorded cost. The Company’s costs include the amounts it pays manufacturers for product, tariffs and duties associated with transporting product across national borders, and freight costs associated with transporting the product from its manufacturers to its warehouses, as applicable. The valuation of our inventory requires us to make judgments, based on available information such as historical data, about the likely method of disposition, such as through sales to individual customers or liquidations, and expected recoverable values of each disposition category. Changes to the relevant assumptions and projections would impact our consolidated financial results in periods subsequent to recording these estimates. If we anticipate a change in assumptions such as future demand or market conditions to be less favorable than our previous estimates, additional inventory write-downs may be required. Conversely, if we are able to sell inventories that had been written down to a level below the ultimate realized selling price in a previous period, sales would be recorded with a lower or no offsetting charge to cost of sales.

 

The “Cost of goods sold” line item in the consolidated statements of operations consists of the book value of inventory sold to customers during the reporting period. When circumstances dictate that the Company use net realizable value as the basis for recording inventory, it bases its estimates on expected future selling prices less expected disposal costs.

 

Accounts Receivable—Accounts receivable are stated at historical cost less allowance for doubtful accounts. On a periodic basis, management evaluates its accounts receivable and determines whether to provide an allowance or if any accounts should be written off based on a past history of write-offs, collections and current credit conditions. A receivable is considered past due if the Company has not received payments based on agreed-upon terms. The Company generally does not require any security or collateral to support its receivables. The Company performs ongoing evaluations of its customers and maintains an allowance for bad and doubtful receivables. As of  December 31, 2023 and March 31, 2024, the Company had an allowance for doubtful accounts of $0.1 million.

 

Revenue Recognition—The Company accounts for revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC Topic 606”). The Company derives its revenue from the sale of consumer products. The Company sells its products directly to consumers through online retail channels and through wholesale channels.

 

For direct-to-consumer sales, the Company considers customer order confirmations to be a contract with the customer. Customer confirmations are executed at the time an order is placed through third-party online channels. For wholesale sales, the Company considers the customer purchase order to be the contract.

 

For all of the Company’s sales and distribution channels, revenue is recognized when control of the product is transferred to the customer (i.e., when the Company’s performance obligation is satisfied), which typically occurs at shipment date. As a result, the Company has a present and unconditional right to payment and record the amount due from the customer in accounts receivable.

 

Revenue from consumer product sales is recorded at the net sales price (transaction price), which includes an estimate of future returns based on historical return rates. There is judgment in utilizing historical trends for estimating future returns. The Company’s refund liability for sales returns was $0.2 million at December 31, 2023 and $0.3 million at March 31, 2024, which is included in accrued liabilities and represents the expected value of the refund that will be due to its customers.

 

The Company evaluated principal versus agent considerations to determine whether it is appropriate to record platform fees paid to Amazon as an expense or as a reduction of revenue. Platform fees are recorded as sales and distribution expenses and are not recorded as a reduction of revenue because it owns and controls all the goods before they are transferred to the customer. The Company can, at any time, direct Amazon,  or similarly direct other third-party logistics providers (“Logistics Providers”), to return the Company’s inventory to any location specified by the Company. It is the Company’s responsibility to make customers whole following any returns made by customers directly to Logistic Providers and the Company retains the back-end inventory risk. Further, the Company is subject to credit risk (i.e., credit card charge backs), establishes prices of its products, can determine who fulfills the goods to the customer (Amazon or the Company) and can limit quantities or stop selling the goods at any time. Based on these considerations, the Company is the principal in this arrangement.

 

Net Revenue by Category. The following table sets forth the Company’s net revenue disaggregated by sales channel and geographic region based on the billing addresses of its customers:

 

  

Three Months Ended March 31, 2023

 
  

(in thousands)

 
  

Direct

  

Wholesale/Other

  

Total

 

North America

 $31,962  $1,516  $33,478 

Other

  1,401      1,401 

Total net revenue

 $33,363  $1,516  $34,879 

 

  

Three Months Ended March 31, 2024

 
  

(in thousands)

 
  

Direct

  

Wholesale/Other

  

Total

 

North America

 $18,720  $145  $18,865 

Other

  1,349      1,349 

Total net revenue

 $20,069  $145  $20,214 

 

Net Revenue by Product Categories. The following table sets forth the Company’s net revenue disaggregated by product categories for the three months ended March 31, 2024 and 2023:

 

  

Three Months Ended March 31,

 
  

2023

  

2024

 
  

(in thousands)

 

Heating, cooling and air quality

 $5,349  $3,204 

Kitchen appliances

  6,371   1,920 

Health and beauty

  4,857   3,313 

Personal protective equipment

  509    

Cookware, kitchen tools and gadgets

  3,620   1,395 

Home office

  2,667   2,031 

Housewares

  6,209   4,885 

Essential oils and related accessories

  4,588   3,208 

Other

  709   258 

Total net revenue

 $34,879  $20,214 

 

9

 

Intangibles—We review long-lived assets for impairment when performance expectations, events, or changes in circumstances indicate that the asset's carrying value may not be recoverable. The evaluation is performed at the lowest level of identifiable cash flows by comparing the carrying value of the asset group to the undiscounted cash flows. If the evaluation indicates that the carrying amount of the assets may not be recoverable, any potential impairment is measured based upon the fair value of the related asset or asset group as determined by an appropriate market appraisal or other valuation technique.

 

On March 20, 2023, the Company made certain leadership changes in our essential oil business resulting in a change in strategy and outlook for the business resulting in a reduced portfolio offering. This reduction in the portfolio will be impactful to our essential oil business's future revenues and profitability and as a result the Company made revisions to our internal forecasts. The Company concluded that this change was an interim triggering event for the three months ending March 31, 2023 indicating the carrying value of our essential oil business's long-lived assets including trademarks may not be recoverable. Accordingly, the Company performed an interim impairment test of the trademark and assessed the recoverability of the related intangible assets by using level 3 inputs and comparing the carrying value of an asset group to the net undiscounted cash flow expected to be generated. The recoverability test indicated that certain definite-live trademark intangible assets were impaired. The Company concluded the carrying value of the trademark exceeded its estimated fair value which was determined utilizing the relief-from-royalty method to determine discounted projected future cash flows which resulted in an impairment charge. The Company recorded an intangible impairment charge of $16.7 million during the three months ending March 31, 2023 within impairment loss on intangibles on the consolidated statement of operations.

 

During the three months ended June 30, 2023, the Company had a substantial decrease in its market capitalization, primarily relating to a decrease in share price. Further, the Company continues to see reduced net revenues across its portfolio due primarily to the current macroeconomic environment reducing demand for consumer discretionary goods. Finally, during the three months ending June 30, 2023, the Company implemented a strategy of rationalizing certain less profitable products and reducing its product offering, specifically related to its kitchen appliance products. As a result of this rationalization, along with the reduced demand for its products, the Company has made certain revisions to its internal forecasts for its Paper business and Kitchen appliance business. The Company concluded that these factors were an interim triggering event for the three months ending June 30, 2023 indicating the carrying value of our Paper and Kitchen appliance business’s long-lived assets, including trademarks, may not be recoverable. Accordingly, the Company performed an interim impairment test of the trademark and assessed the recoverability of the related intangible assets by using level 3 inputs and comparing the carrying value of an asset group to the net undiscounted cash flow expected to be generated. The recoverability test indicated that certain definite-live trademark intangible assets were impaired. The Company concluded the carrying value of the trademark exceeded its estimated fair value which was determined utilizing the relief-from-royalty method to determine discounted projected future cash flows which resulted in an impairment charge. The Company recorded an intangible impairment charge of $22.8 million for the Paper business and Kitchen appliance business during the three months ending June 30, 2023 within impairment loss on intangibles on the consolidated statement of operations.

 

During the three months ended December 31, 2023, the Company continued to see reduced revenue in its paper business resulting in certain revisions to its internal forecasts. Due to these revisions in forecast due to reduced demand, the Company concluded this was an interim triggering event for the three months ending December 31, 2023 indicating the carrying value of our Paper business’s long-lived assets, including trademarks, may not be recoverable. Accordingly, the Company performed an interim impairment test of the trademark and assessed the recoverability of the related intangible assets by using level 3 inputs and comparing the carrying value of an asset group to the net undiscounted cash flow expected to be generated. The recoverability test indicated that certain definite-live trademark intangible assets were impaired. The Company concluded the carrying value of the trademark exceeded its estimated fair value which was determined utilizing the relief-from-royalty method to determine discounted projected future cash flows which resulted in an impairment charge. The Company recorded an intangible impairment charge of $0.3 million for the Paper business during the three months ending December 31, 2023 within impairment loss on intangibles on the consolidated statement of operations.

 

These fair value measurements require significant judgements using Level 3 inputs, such as discounted projected future cash flows, which are not observable from the market, directly or indirectly. There is uncertainty in the projected future cash flows used in the Company’s impairment analysis, which requires the use of estimates and assumptions. If actual performance does not achieve the projections, or if the assumptions used in the analysis change in the future, the Company may be required to recognize additional impairment charges in future periods. Key assumptions in the impairment models included a discount and royalty rate. The Company believes our procedures for determining fair value are reasonable and consistent with current market conditions as of March 31, 2024.

 

For the three months ending March 31, 2023, total impairment loss on intangibles was approximately $16.7 million. There was no triggering events to test intangibles for impairment loss during the three months ended March 31, 2024.

 

We will continue to closely monitor actual results versus expectations as well as whether and to what extent any significant changes in current events or conditions result in corresponding changes to our expectations about future estimated cash flows. If our adjusted expectations of the operating results do not materialize, we may be required to record intangible impairment charges, which may be material.

 

Fair Value of Financial Instruments—The Company’s financial instruments, including net accounts receivable, accounts payable, and accrued and other current liabilities are carried at historical cost. At March 31, 2024, the carrying amounts of these instruments approximated their fair values because of their short-term nature. The Company’s credit facility is carried at amortized cost at December 31, 2023 and March 31, 2024 and the carrying amount approximates fair value as the stated interest rate approximates market rates currently available to the Company. The Company considers the inputs utilized to determine the fair value of the borrowings to be Level 2 inputs.

 

The fair value of the stock purchase warrants issued in connection with the Company’s common stock offering on March 1, 2022 were measured using the Black-Scholes model. Inputs used to determine the estimated fair value of the warrant liabilities include the fair value of the underlying stock at the valuation date, the term of the warrants, and the expected volatility of the underlying stock. The significant unobservable input used in the fair value measurement of the warrant liabilities is the estimated term of the warrants. Upon the issuance of the stock purchase warrants, the Company evaluated the terms of each warrant to determine the appropriate accounting and classification pursuant to FASB ASC Topic 480, Distinguishing Liabilities from Equity (ASC 480), and FASB Accounting Standards Codification Topic 815, Derivatives and Hedging (ASC 815). Based on the Company’s evaluation and due to certain terms in the warrant agreements, it concluded the stock purchase warrants should be classified as liability with subsequent remeasurement as long as such warrants continue to be classified as liabilities.

 

Assets and liabilities recorded at fair value on a recurring basis in the Condensed Consolidated Balance Sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:

 

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

 

Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

 

Level 3—Unobservable inputs that are supported by little or no market data for the related assets or liabilities.

 

10

 

The following table summarizes the fair value of the Company’s financial assets that are measured at fair value as of December 31, 2023 and March 31, 2024 (in thousands):

 

  

December 31, 2023

 
  

Fair Value Measurement Category

 
  

Level 1

  

Level 2

  

Level 3

 

Assets:

            

Cash and cash equivalents

 $20,023  $  $ 

Restricted Cash

  2,172       

Liabilities:

            

Fair value of warrant liability

        1,033 

 

  

March 31, 2024

 
  

Fair Value Measurement Category

 
  

Level 1

  

Level 2

  

Level 3

 

Assets:

            

Cash and cash equivalents

 $17,545  $  $ 

Restricted cash

  2,161       

Liabilities:

            

Fair value of warrant liability

        516 

 

A summary of the activity of the Level 3 liabilities carried at fair value on a recurring basis for the year-ended  December 31, 2023 and the three months ended March 31, 2024 is as follows (in thousands):

 

  

December 31, 2023

 

Warrants liability as of January 1, 2023

 $3,473 

Change in fair value of warrants

  (2,440)

Warrants liability as of December 31, 2023

 $1,033 

 

  

March 31, 2024

 

Warrants liability as of January 1, 2024

 $1,033 

Change in fair value of warrants

  (517)

Warrants liability as of March 31, 2024

 $516 

 

Adopted Accounting Standards

 

In June 2016, the FASB issued ASU 2016-13: Financial Instruments – Credit Losses (Topic 326). This ASU requires the use of an expected loss model for certain types of financial instruments and requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates. For trade receivables, loans and held-to-maturity debt securities, an estimate of lifetime expected credit losses is required. For available-for-sale debt securities, an allowance for credit losses will be required rather than a reduction to the carrying value of the asset. In July 2019, the FASB delayed the effective date for this ASU for private companies (including emerging growth companies) and will be effective for annual reporting periods beginning after December 15, 2022, with early adoption permitted. The Company adopted this standard on January 1, 2023, but it does not have a material impact on the Consolidated Financial Statements.

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes. This ASU provides for certain updates to reduce complexity in accounting for income taxes, including the utilization of the incremental approach for intraperiod tax allocation, among others. This standard is effective for fiscal years beginning after December 15, 2021, and for interim periods beginning after December 15, 2022, with early adoption permitted. The Company adopted this standard on January 1, 2023, but it does not have a material impact on the Consolidated Financial Statements.

 

In September 2022, the FASB issued ASU 2022-04, Disclosures for Supplier Finance Arrangements. This amendment enhances the transparency of supplier finance programs. This standard is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022, except for amendment on roll forward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The new guidance was early adopted on January 1, 2023, with no impact on the Company’s Consolidated Financial Statements.

 

Recent Accounting Pronouncements

 

The JOBS Act permits an emerging growth company to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to use this extended transition period until we are no longer an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

 

In August 2023, the FASB finalized ASU 2023-09, Income Taxes (Topic 740). This ASU provides for certain updates to enhance the transparency about companies’ exposure to changes in tax legislation and the global tax risk they may face. Under the guidance, companies will be required to provide a breakout of amounts paid for taxes between federal, state, and foreign taxing jurisdictions, rather than a lump sum amount. Further, the rate reconciliation will require disaggregation into eight specific categories, with these categories further disaggregated by jurisdiction and for amounts exceeding 5 percent of their domestic tax rate. The rate reconciliation will need to also disclose both dollar amounts and percentages. This standard is effective for fiscal years beginning after December 15, 2024.

 

In November 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosures (“ASU 2023-07”), which requires a company to disclose additional, more detailed information about a reportable segment’s significant expenses, even if there is one reportable segment, and is intended to improve the disclosures about a public entity’s reportable segments. The ASU is effective for fiscal years beginning after December 15, 2023, and for interim periods beginning after December 15, 2024, with early adoption permitted. We are currently evaluating the impact of the adoption of ASU 2023-07 on our consolidated financial statements.

11

 

 

3.

INVENTORY

 

Inventory consisted of the following as of  December 31, 2023 and March 31, 2024 (in thousands):

 

  December 31, 2023  March 31, 2024 

Inventory on-hand

 $18,980  $17,609 

Inventory in-transit

  1,410   911 

Inventory

 $20,390  $18,520 

 

The Company’s inventory on-hand is held either with Amazon or the Company’s other third-party warehouses. The Company does not have any contractual right of returns with its contract manufacturers. The Company’s inventory on-hand held by Amazon was approximately $5.0 million and $3.6 million as of December 31, 2023 and March 31, 2024, respectively.

 

 

 

4.

PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid and other current assets consisted of the following as of December 31, 2023 and March 31, 2024 (in thousands):

 

  

December 31, 2023

  

March 31, 2024

 

Prepaid inventory

 $619  $820 

Restricted cash

  2,043   2,032 

Prepaid insurance

  1,355   866 

Prepaid freight forwarder

  100   158 

Other

  881   1,262 
Prepaid and Other Current Assets $4,998  $5,138 

 

 

5.

ACCRUED AND OTHER CURRENT LIABILITIES

 

Accrued expenses and other current liabilities consisted of the following as of December 31, 2023 and March 31, 2024 (in thousands):

 

  

December 31, 2023

  

March 31, 2024

 

Accrued compensation costs

 $140  $169 

Accrued professional fees and consultants

  310   220 

Accrued logistics costs

  149   177 

Product related accruals

  644   579 

Sales tax payable

  1,019   1,011 

Sales return reserve

  233   297 

Accrued fulfillment expense

  821   705 

Accrued insurance

  187   38 

Federal payroll taxes payable

  1,243   1,243 

Accrued interest payable

  146   78 

Warrant liability

  1,033   516 

All other accruals

  3,185   2,956 

Accrued and current liabilities

 $9,110  $7,989 

 

The Company sponsors, through its professional employer organization provider, a 401(k) defined contribution plan covering all eligible US employees. Contributions to the 401(k) plan are discretionary. Currently, the Company does not match or make any contributions to the 401(k) plan.

 

12

 
 

6.

CREDIT FACILITY, TERM LOANS AND WARRANTS

 

MidCap Credit Facility

 

On December 22, 2021, the Company entered into a Credit and Security Agreement (the “Credit Agreement”) together with certain of its subsidiaries party thereto as borrowers, the entities party thereto as lenders, and Midcap Funding IV Trust, as administrative agent, pursuant to which, among other things, (i) the Lenders agreed to provide a three year revolving credit facility in a principal amount of up to $40.0 million subject to a borrowing base consisting of, among other things, inventory and sales receivables (subject to certain reserves), and (ii) the Company agreed to issue to MidCap Funding XXVII Trust a warrant (the “Midcap Warrant”) to purchase up to an aggregate of 16,667 shares of common stock of the Company, par value $0.0001 per share, in exchange for the Lenders extending loans and other extensions of credit to the Company under the Credit Agreement.

 

The obligations under the Credit Agreement are a senior secured obligation of the Company and rank senior to all indebtedness of the Company. Borrowings under the Credit Agreement bear interest at a rate of Term Secured Overnight Financing Rate ("Term SOFR"), which is defined as SOFR plus 0.10%, plus 5.50%. The Company will also be required to pay a commitment fee of 0.50% in respect of the undrawn portion of the commitments, which is generally based on average daily usage of the facility during the immediately preceding fiscal quarter. The Credit Agreement does not require any amortization payments.

 

The Credit Agreement minimum liquidity covenant, which includes the Company’s unrestricted U.S. cash plus the revolving loan availability, requires that Midcap shall not permit the credit party liquidity at any time to be less than (a) during the period commencing on February 1st through and including May 31st of each calendar year, $12.5 million and (b) at all other times, $15.0 million. The Credit Agreement includes events of default that are customary for these types of credit facilities, including the occurrence of a change of control. 

 

The Midcap Warrant has an exercise price of $56.40 per share, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, is immediately exercisable, has a term of ten years from the date of issuance and is exercisable on a cash or cashless basis.

 

On February 23, 2024, the Company amended its asset backed credit facility with MidCap Financial Trust. The Credit Facility term has been extended to December 2026 and gives Aterian access to $17 million in current commitments which can be increased, subject to certain conditions, to $30.0 million. The Credit Facility extension reduces the minimum liquidity financial covenant from a peak of $15.0 million to $6.8 million of U.S. cash on hand and/or availability in the Credit Facility. The extension fee was less than $0.1 million.

 

The Company is in compliance with the financial covenants contained within the Credit Agreement as of December 31, 2023 and  March 31, 2024. 

 

The Company’s credit facility consisted of the following as of December 31, 2023 and March 31, 2024 (in thousands):

 

  

December 31, 2023

  

March 31, 2024

 

MidCap Credit Facility

 $11,515  $9,815 

Less: deferred debt issuance costs

  (226)  (265)

Less: discount associated with issuance of warrants

  (191)  (154)

Total MidCap Credit Facility

 $11,098  $9,396 

 

Interest Expense, Net

 

Interest expense, net consisted of the following for the three months ended March 31, 2023 and 2024 (in thousands):

 

  

Three Months Ended March 31,

 
  

2023

  

2024

 

Interest expense

 $596  $393 

Interest income

  (225)  (70)

Total interest expense, net

 $371  $323 

 

Securities Purchase Agreement and Warrants

 

On March 1, 2022, the Company entered into Securities Purchase Agreements (the “Purchase Agreements”) with certain accredited investors identified on the signature pages to the Purchase Agreements (collectively, the “Purchasers”) pursuant to which, among other things, the Company issued and sold to the Purchasers, in a private placement transaction (the “2022 Private Placement”), (i) 536,361 shares of the Company’s common stock (the “Shares”), and accompanying warrants to purchase an aggregate of 402,271 shares of common stock, and (ii) prefunded warrants to purchase up to an aggregate of 251,155 shares of common stock (the “Prefunded Warrants”) and accompanying warrants to purchase an aggregate of 188,366 shares of common stock. The accompanying warrants to purchase common stock are referred to herein collectively as the “Common Stock Warrants”, and the Common Stock Warrants and the Prefunded Warrants are referred to herein collectively as the “Warrants”. Under the Purchase Agreements, each Share and accompanying Common Stock Warrant were sold together at a combined price of $34.92, and each Prefunded Warrant and accompanying Common Stock Warrant were sold together at a combined price of $34.92, for gross proceeds of approximately $27.5 million. In connection with the 2022 Private Placement, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with the Purchasers, pursuant to which the Company agreed to register for resale the Shares, as well as the shares of common stock issuable upon exercise of the Warrants (the “Warrant Shares”). Under the Registration Rights Agreement, the Company agreed to file a registration statement covering the resale by the Purchasers of the Shares and Warrant Shares within 30 days following the agreement date. The Company filed such resale registration statement on March 28, 2022, and it was declared effective by the SEC on April 8, 2022.

 

Upon the issuance of the Prefunded Warrants and stock purchase warrants, the Company evaluated the terms of each Warrant to determine the appropriate accounting and classification pursuant to ASC 480 and ASC 815. Based on the Company’s evaluation and due to certain terms in the warrant agreements, it concluded the Prefunded Warrant and the stock purchase warrants should be classified as liabilities with subsequent remeasurement at each quarter so long as such warrants remain to be classified as liabilities. The Company recorded an initial liability on issuance of $19.0 million from this conclusion. As of March 31, 2024, the Company has $0.5 million as the liability related to the Warrants.

 

13

 
 

7.

STOCK-BASED COMPENSATION

 

The Company has four equity plans:

 

2014 Amended and Restated Equity Incentive Plan

 

The board of directors of Aterian Group, Inc., a subsidiary of the Company (“AGI”), adopted, and AGI’s stockholders approved, the Aterian Group, Inc. 2014 Equity Incentive Plan on June 11, 2014. On March 1, 2017, AGI’s board of directors adopted, and AGI’s stockholders approved, an amendment and restatement of the 2014 Equity Incentive Plan (as amended, the “Aterian 2014 Plan”). As of March 31, 2024, there were no shares reserved for future issuance under the Aterian 2014 Plan.

 

2018 Equity Incentive Plan

 

The Company’s board of directors (the “Board”) adopted the Aterian, Inc. 2018 Equity Incentive Plan (the “2018 Plan”) on October 11, 2018. The 2018 Plan was approved by its stockholders on May 24, 2019. As of March 31, 2024, 1,549,096 shares were reserved for awards available for future issuance under the 2018 Plan.

 

Options granted to date under the Aterian 2014 Plan and the 2018 Plan generally vest either: (i) over a four-year period with 25% of the shares underlying the options vesting on the first anniversary of the vesting commencement date with the remaining 75% of the shares vesting on a pro-rata basis over the succeeding thirty-six months, subject to continued service with the Company through each vesting date, or (ii) over a three-year period with 33 1/3% of the shares underlying the options vesting on the first anniversary of the vesting commencement date with the remaining 66 2/3% of the shares vesting on a pro-rata basis over the succeeding twenty-four months, subject to continued service with the Company through each vesting date. Options granted are generally exercisable for up to 10 years subject to continued service with the Company.

 

Inducement Equity Incentive Plan

 

On May 27, 2022, the Compensation Committee of the Board (the “Compensation Committee”) adopted the Aterian, Inc. 2022 Inducement Equity Incentive Plan (the “Inducement Plan”). The Inducement Plan will serve to advance the interests of the Company by providing a material inducement for the best available individuals to join the Company as employees by affording such individuals an opportunity to acquire a proprietary interest in the Company.

 

The Inducement Plan provides for the grant of equity-based awards in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance units and performance shares solely to prospective employees of the Company or an affiliate of the Company provided that certain criteria are met. Awards under the Inducement Plan may only be granted to an individual, as a material inducement to such individual to enter into employment with the Company or an affiliate of the Company, who (i) has not previously been an employee or director of the Company or (ii) is rehired following a bona fide period of non-employment with the Company. The maximum number of shares available for grant under the Inducement Plan is 225,000 shares of the Company’s common stock (subject to adjustment for recapitalizations, stock splits, reorganizations and similar transactions). The Inducement Plan is administered by the Compensation Committee and expires ten years from the date of effectiveness. As of March 31, 2024, 189,586 shares were reserved for future issuance under the Inducement Plan.

 

The Inducement Plan has not been and will not be approved by the Company’s stockholders. Awards under the Inducement Plan will be made pursuant to the exemption from Nasdaq stockholder approval requirements for equity compensation provided by Nasdaq Listing Rule 5635(c)(4), which permits Nasdaq listed companies to make inducement equity awards to new employees without first obtaining stockholder approval of the award.

 

Reverse Stock Split

 

On March 20, 2024, the Company filed a Certificate of Amendment to its Amended and Restated Certificate of Incorporation of the Company with the Secretary of State of Delaware (the “Certificate of Amendment”) to affect a 1 - 12 reverse stock split (the “Reverse Stock Split”) of the shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”). The Certificate of Amendment did not decrease the number of authorized shares of Common Stock. No fractional shares were issued in connection with the Reverse Stock Split. Any fractional shares that would otherwise have resulted from the Reverse Stock Split were rounded up to the nearest whole number. The Reverse Stock Split impacted all holders of the Common Stock proportionally and did not impact any stockholder’s percentage ownership of Common Stock (except to the extent the Reverse Stock Split results in any stockholder owning fractional shares). 

 

The reverse stock split is deemed an equity restructuring pursuant to ASC 718, Compensation - Stock Compensation. The Company's equity plans incorporate anti-dilutive provisions for existing equity awards, including restricted stock and stock options, to maintain the value of all awards post-reverse stock split. Consequently, there was no change in the fair value of the awards attributable to the reverse stock split, and no impact on stock-based compensation for the three months ending March 31, 2024.

 

The Common Stock began trading on a Reverse Stock Split-adjusted basis on the Nasdaq on March 22, 2024. All share and per share data has been retroactively adjusted to reflect the Reverse Stock Split.

 

14

 

The following is a summary of stock option activity during the three months ended March 31, 2024:

 

  

Options Outstanding

 
  

Number of Options (*)

  

Weighted- Average

Exercise Price (*)

  

Weighted- Average Remaining Contractual Life (years)

  

Aggregate Intrinsic Value

 

Balance—January 1, 2024

  16,365  $110.51   5.00  $ 

Options granted

    $     $ 

Options exercised

    $     $ 

Options canceled

  (426) $93.71     $ 

Balance—March 31, 2024

  15,939  $110.96   4.57  $ 

Exercisable as of March 31, 2024

  15,939  $110.96   4.57  $ 

Vested and expected to vest as of March 31, 2024

  15,939  $110.96   4.57  $ 

 

(*) The number of options and exercise price per share have been retroactively restated to reflect the one for twelve (1 for 12) reverse stock split, which was effective on March 22, 2024. 

 

As of March 31, 2024, all options have been fully expensed.

 

A summary of restricted stock award activity within the Company’s equity plans and changes for the three months ended March 31, 2024 is as follows:

 

Restricted Stock Awards

 

Shares (*)

  

Weighted Average

Grant-Date Fair Value (*)

 

Nonvested at January 1, 2024

  840,815  $9.73 

Granted

  11,668  $3.97 

Vested

  (51,168) $25.58 

Forfeited

  (42,650) $11.24 

Nonvested at March 31, 2024

  758,665  $8.49 

 

(*) The number of shares and grant date fair value per share have been retroactively restated to reflect the one for twelve (1 for 12) reverse stock split, which was effective on March 22, 2024. 

 

As of March 31, 2024, the total unrecognized compensation expense related to unvested shares of restricted common stock was $5.4 million, which the Company expects to recognize over an estimated weighted-average period of 2.1 years.

 

Stock-based compensation expense is allocated based on the cost center to which the award holder belongs. The following table summarizes the total stock-based compensation expense by function, including expense related to consultants, for the three months ended March 31, 2023 and 2024 (in thousands):

 

  

Three Months Ended March 31,

 
  

2023

  

2024

 
  

(in thousands)

 

Sales and distribution expenses

 $671  $299 

Research and development expenses

  434    

General and administrative expenses

  1,212   1,368 

Total stock-based compensation expense

 $2,317  $1,667 

 

15

 
 

8.

NET LOSS PER SHARE

 

Basic net loss per share is determined by dividing net loss by the weighted-average shares of common stock outstanding during the period. Diluted net loss per share is determined by dividing net loss by diluted weighted-average shares outstanding. Diluted weighted-average shares reflect the dilutive effect, if any, of potentially dilutive shares of common stock, such as options to purchase common stock calculated using the treasury stock method and convertible notes using the “if-converted” method. In periods with reported net operating losses, all options to purchase common stock are deemed anti-dilutive such that basic net loss per share and diluted net loss per share are equal.

 

The Company’s shares of restricted common stock are entitled to receive dividends and hold voting rights applicable to the Company’s common stock, irrespective of any vesting requirement. Accordingly, although the vesting commences upon the elimination of the contingency, the shares of restricted common stock are considered a participating security and the Company is required to apply the two-class method to consider the impact of the shares of restricted common stock on the calculation of basic and diluted earnings per share. The Company is currently in a net loss position and is therefore not required to present the two-class method; however, in the event the Company is in a net income position, the two-class method must be applied by allocating all earnings during the period to shares of common stock and shares of restricted common stock.

 

The following table sets forth the computation of basic and diluted net loss per share (in thousands, except share and per share data):

 

  

Three Months Ended March 31,

 
  

2023

  

2024

 

Net loss

 $(25,800) $(5,162)

Weighted-average number of shares used in computing net loss per share, basic and diluted

  6,394,905   6,789,955 

Net loss per share, basic and diluted

 $(4.03) $(0.76)
         

Anti-dilutive shares excluded from computation of net loss per share (in shares)

  1,979,594   2,074,627 

 

(*) The number of shares and per share amounts have been retroactively restated to reflect the one for twelve (1 for 12) reverse stock split, which was effective on March 22, 2024. 

 

 

9.

COMMITMENTS AND CONTINGENCIES

 

Sales or Other Similar Taxes—Based on the location of the Company’s current operations, the majority of sales tax is collected and remitted either by the Company or on its behalf by e-commerce marketplaces in most states within the U.S. To date, the Company has had no actual or threatened sales and use tax claims from any state where it does not already claim nexus or any state where it sold products prior to claiming nexus. However, the Company believes that the likelihood of incurring a liability as a result of sales tax nexus being asserted by certain states where it sold products prior to claiming nexus is probable. As of  December 31, 2023 and March 31, 2024, the Company estimates that the potential liability, including current sales tax payable is approximately $1.0 million, which has been recorded as an accrued liability. The Company believes this is the best estimate of an amount due to taxing agencies, given that such a potential loss is an unasserted liability that would be contested and subject to negotiation between the Company and the state, or decided by a court.

 

Legal Proceedings—The Company is party to various actions and claims arising in the normal course of business. The Company does not believe that the final outcome of these matters will have a material adverse effect on the Company’s financial position or results of operations. In addition, the Company maintains what it believes is adequate insurance coverage to further mitigate risk. However, no assurance can be given that the final outcome of such proceedings will not materially impact the Company’s financial condition or results of operations. Further, no assurance can be given that the amount or scope of existing insurance coverage will be sufficient to cover losses arising from such matters.

 

Settlement Agreement—On May 2, 2021, the Company entered into a settlement agreement with one of the Company’s suppliers who agreed to pay the amount of $3.0 million to the Company in three installments of $1.0 million each, with the first payment to be paid on or before May 31, 2021, the second payment to be paid on or before September 30, 2021, and the third payment to be paid on or before November 30, 2021. Further, the supplier agreed to deliver certain goods as part of this settlement by September 30, 2021. Through the date of the accompanying Consolidated Financial Statements, the supplier has not paid in full its required first payment of $1.0 million nor has it delivered the required quantity of goods. The Company fully reserved $4.1 million within prepaid and other current assets on its Consolidated Financial Statements during the year-ended December 31, 2022 and December 31, 2023. The Company has commenced legal action against the supplier and certain other parties to the matter. One of the parties to the matter has filed for bankruptcy and such legal action is being stayed until the resolution of such bankruptcy. The Company continues to reserve its legal options and rights on this matter as of March 31, 2024.

 

Shareholder Derivative Actions Related to the Securities Class Action—On October 21, October 25 and November 10, 2021, three shareholder derivative actions were filed on behalf of the Company by Shaoxuan Zhang, Michael Sheller and Tyler Magnus in the U.S. District Court for the Southern District of New York. These actions, collectively, name Yaniv Sarig, Fabrice Hamaide, Arturo Rodriguez, Greg B. Petersen, Bari A. Harlam, Amy von Walter, William Kurtz, Roi Zion Zahut, Joseph A. Risico, Tomer Pascal and Mihal Chaouat-Fix as individual defendants, and the Company as a nominal defendant. These actions are predicated on substantively the same factual allegations contained in the above-described securities class action which was resolved via settlement in September 2022 The Company believes the allegations are without merit and continues to deny each of the claims and allegations of wrongdoing. On December 12, 2022, the parties reached an agreement and entered into a Stipulation and Agreement of Settlement (the “Stipulation”) to resolve this derivative action. Under the Stipulation, the Company agreed to adopt certain corporate governance reforms, the terms of which are outlined in Exhibit A to the Stipulation, and a payment of the Plaintiffs’ attorneys’ fees and expenses of $0.3 million The proposed settlement was preliminarily approved by the Court on December 29, 2022, the Company made the agreed $0.3 million payment, and received final approval to the settlement on March 17, 2023.

 

Mueller Action—In October 2021, the Company received a class action notification and pre-lawsuit demand letter demanding corrective action with respect to the marketing, advertising and labeling of certain products under the Mueller brand (the “Mueller Action”). In April 2022, the parties reached an agreement in principle to resolve this potential action for $0.5 million in cash and $0.3 million worth of coupons, which the Company accrued $0.8 million in the three months ended March 31, 2022, subject to court approval. The court preliminarily approved the settlement on August 3, 2023 and final approval was granted May 8, 2024. 

 

Earn-out Payment Dispute—On February 24, 2022, the Company received a notice disputing the Company’s calculation of the earn-out payment to be paid to Josef Eitan and Ran Nir pursuant to the Stock Purchase Agreement (the “PPD Stock Purchase Agreement”), dated as of May 5, 2021, by and among the Company, Truweo, LLC, Photo Paper Direct Ltd, Josef Eitan and Ran Nir. The Company is in discussions with representatives of Mr. Eitan and Mr. Nir, who believe they are entitled to the full earn-out amount (£6,902,816 or approximately $8.8 million) under the terms of the PPD Stock Purchase Agreement, whereas the Company believes they are not. Mr. Eitan and Mr. Nir filed a motion to compel arbitration in the Southern District of New York on September 14, 2022, which was granted on May 18, 2023. The parties engaged an independent accountant to resolve the dispute, as required by the PPD Stock Purchase Agreement and the Southern District of New York. In February 2024, the independent accountant ruled in favor of the Company and determined that the Company owes no earn-out. Therefore, the Company believes it has no liability to the sellers.

 

Leases—The Company’s minimum lease liabilities have not changed significantly during the three months ended March 31, 2024.

 

16

 
 

10.

INTANGIBLES

 

The following tables summarize the changes in the Company’s intangible assets as of December 31, 2023 and March 31, 2024 (in thousands):

 

  

January 1, 2023

  

Year-Ended December 31, 2023

  

December 31, 2023

  

December 31, 2023

 
  

Gross Carrying Amount

  

Additions

  

Impairments (1)

  

Accumulated Amortization

  

Net Book Value

 

Trademarks

 $62,202  $  $(39,728) $(15,335) $7,140 

Non-competition agreement

  11         (11)   

Transition services agreement

  12         (12)   

Customer relationships

  5,700         (1,520)  4,180 

Other

  700         (700)   

Total intangibles

 $68,625  $  $(39,728) $(17,578) $11,320 

 

  

January 1, 2024

  

Three Months Ended March 31, 2024

  

March 31, 2024

  

March 31, 2024

 
  

Gross Carrying Amount

  

Additions

  

Impairments

  

Accumulated Amortization

  

Net Book Value

 

Trademarks

 $21,285  $  $  $(14,406) $6,879 

Non-competition agreement

  11         (11)   

Transition services agreement

  12         (12)   

Customer relationships

  5,700         (1,662)  4,038 

Software

     38         38 

Other

  700         (700)   

Total intangibles

 $27,708  $38  $  $(16,791) $10,955 

 

(1)

On March 20, 2023, the Company made certain leadership changes in our essential oil business resulting in a change in strategy and outlook for the business which will result in a reduced portfolio offering. This reduction in the portfolio will be impactful to our essential oil business's future revenues and profitability and as a result the Company made revisions to our internal forecasts. The Company concluded that this change was an interim triggering event for the three months ending March 31, 2023 indicating the carrying value of our essential oil business's long-lived assets including trademarks may not be recoverable. Accordingly, the Company performed an interim impairment test of the trademark and assessed the recoverability of the related intangible assets by using level 3 inputs and comparing the carrying value of an asset group to the net undiscounted cash flow expected to be generated. The recoverability test indicated that certain definite-live trademark intangible assets were impaired. The Company concluded the carrying value of the trademark exceeded its estimated fair value which was determined utilizing the relief-from-royalty method to determine discounted projected future cash flows which resulted in an impairment charge. The Company recorded an intangible impairment charge of $16.7 million in the three months ending March 31, 2023 within impairment loss on intangibles on the condensed consolidated statement of operations.

 

 

During the three months ended June 30, 2023, the Company had a substantial decrease in its market capitalization, primarily relating to a decrease in share price. Further, the Company continues to see reduced net revenues across its portfolio primarily due to the current macroeconomic environment reducing demand for consumer goods. Finally, during the three months ending June 30, 2023, the Company implemented a strategy of rationalizing certain less profitable products and reducing its product offering, specifically related to its kitchen appliance products. As a result of this rationalization, along with the reduced demand for its products, the Company has made certain revisions to its internal forecasts for its Paper business and Kitchen appliance business. The Company concluded that these factors were an interim triggering event for the three months ending June 30, 2023 indicating the carrying value of our Paper and Kitchen appliance business’s long-lived assets, including trademarks, may not be recoverable. Accordingly, the Company performed an interim impairment test of the trademark and assessed the recoverability of the related intangible assets by using level 3 inputs and comparing the carrying value of an asset group to the net undiscounted cash flow expected to be generated. The recoverability test indicated that certain definite-live trademark intangible assets were impaired. The Company concluded the carrying value of the trademark exceeded its estimated fair value which was determined utilizing the relief-from-royalty method to determine discounted projected future cash flows which resulted in an impairment charge. The Company recorded an intangible impairment charge of $22.8 million for the Paper business and Kitchen appliance business during the three months ending June 30, 2023 within impairment loss on intangibles on the condensed consolidated statement of operations. 

 

 

During the three months ended December 31, 2023, the Company continued to see reduced revenue in its paper business resulting in certain revisions to its internal forecasts. Due to these revisions in forecast due to reduced demand, the Company concluded this was an interim triggering event for the three months ending December 31, 2023 indicating the carrying value of our Paper business’s long-lived assets, including trademarks, may not be recoverable. Accordingly, the Company performed an interim impairment test of the trademark and assessed the recoverability of the related intangible assets by using level 3 inputs and comparing the carrying value of an asset group to the net undiscounted cash flow expected to be generated. The recoverability test indicated that certain definite-live trademark intangible assets were impaired. The Company concluded the carrying value of the trademark exceeded its estimated fair value which was determined utilizing the relief-from-royalty method to determine discounted projected future cash flows which resulted in an impairment charge. The Company recorded an intangible impairment charge of $0.3 million for the Paper business during the three months ending December 31, 2023 within impairment loss on intangibles on the consolidated statement of operations.

 

 

  The following table sets forth the estimated aggregate amortization of the Company’s intangible assets for the next five years and thereafter (amounts in thousands):

 

Remainder of 2024

 $1,199 

2025

  1,564 

2026

  1,564 

2027

  1,554 

2028

  1,551 

2029

  1,551 

Thereafter

  1,972 

Total

 $10,955 

 

17

 
 

11.

RESTRUCTURING

 

On May 9, 2023, the Company announced a plan to reduce expenses and re-align the organization’s structure by implementing a reduction in its current workforce impacting approximately 50 employees and 15 contractors, primarily in the Philippines. The headcount reduction is part of the Company's cost-saving initiatives to navigate challenges in the industry and to better position itself for future growth opportunities. The Company incurred $1.6 million of restructuring charges during the year-ended December 31, 2023, respectively.

 

On February 8, 2024, the Company committed to a fixed cost-cutting plan, including a reduction in workforce which resulted in the termination of approximately 17 employees and 26 contractors globally. The Company recognized restructuring charges of $0.6 million for the three months ended March 31, 2024.

 

The accounting for the restructuring costs follows the provisions of ASC 420, "Accounting for Costs Associated with Exit or Disposal Activities," which requires the recognition of a liability once the restructuring plan is communicated to affected employees and meets the criteria of being probable and reasonably estimable. The Company recognizes a liability for employee severance, other benefits, and involuntary terminations on the communication date.

 

The following table provides a summary of the restructuring costs incurred:

 

  

Three Months Ended

 
  

March 31, 2024

 
  

(in thousands)

 

Employee severance

 $551 

Other restructuring costs

  7 

Total restructuring costs

 $558 

 

The following table provides a summary of the Company's total restructuring reserve:

 

  

Employee Severance

  

Contract Termination Costs

  

Other

  

Total

 

Balance – December 31, 2023

 $  $193  $  $193 

Charges

  551      7   558 

Usage-cash

  (309)        (309)

Usage-noncash

        (4)  (4)

Balance – March 31, 2024

 $242  $193  $3  $438 

 

As of March 31, 2024, the Company has a liability of $0.4 million for restructuring costs, of which $0.3 million is included in accrued expenses and other current liabilities and $0.1 million is included in other liabilities on the consolidated balance sheet. There were no restructuring costs incurred during the three months ended March 31, 2023.

 

As of December 31, 2023, the Company had a liability of $0.2 million for restructuring costs, of which $0.1 million was included in accrued expenses and other current liabilities and $0.1 million was included in other liabilities on the consolidated balance sheet.

 

The Company will continue to assess the restructuring plan's progress and provide updates as required in future financial statements if there are material changes to the initial estimates or additional significant restructuring activities.

 

 

12.

SUBSEQUENT EVENTS

 

On April 8, 2024, the Company received written notice (the “Compliance Notice”) from The Nasdaq Stock Market LLC (“Nasdaq”) informing the Company that it has regained compliance with Nasdaq Listing Rule 5450(a)(1) which requires that companies listed on Nasdaq maintain a minimum bid price of $1.00 per share. Nasdaq notified the Company in the Compliance Notice that from March 22, 2024 to April 5, 2024 the closing bid price of the Company’s common stock had been $1.00 per share or greater and, accordingly, the Company had regained compliance with Nasdaq Listing Rule 5450(a)(1) and that the matter was now closed.

 

18

 
 

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Condensed Consolidated Financial Statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and with our audited financial statements and related notes thereto for the year ended December 31, 2023 included in our Annual Report on Form 10-K for the year ended December 31, 2023 as filed with the Securities and Exchange Commission (the SEC) on March 19, 2024. As discussed in the section titled Special Note Regarding Forward-Looking Statements, the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified in the section titled Special Note Regarding Forward Looking Statements and those discussed in the section titled Risk Factors under Part II, Item 1A in this Quarterly Report on Form 10-Q.

 

Unless the context otherwise requires, the terms Aterian, the Company, we, us and our in this Quarterly Report on Form 10-Q refer to Aterian, Inc. and our consolidated subsidiaries, including Aterian Group, Inc.

 

Overview

 

We are a technology-enabled consumer products company that predominantly operates through online retail channels such as Amazon and Walmart. The Company operates its owned brands, which were either incubated or purchased, selling products in multiple categories, including home and kitchen appliances, kitchenware, air quality appliances, health and beauty products and essential oils.

 

Our primary brands include Squatty Potty; hOmeLabs; Aussie Health; Mueller; Pursteam; Healing Solutions; and Photo Paper Direct ("PPD"). We generate revenue primarily through the online sales of our various consumer products with substantially all of our sales being made through the Amazon U.S. marketplace.

 

During the year ended December 31, 2023, the Company enacted a strategy to reduce the number of SKUs it sells and is no longer pursuing future sales of SKUs that are either not profitable or not core to the Company’s strategy.

 

Seasonality of Business and Product Mix

 

Our individual product categories are typically affected by seasonal sales trends primarily resulting from the timing of the summer season for certain of our environmental appliance products and the fall and holiday season for our small kitchen appliances and accessories. With our current mix of environmental appliances, the sales of those products tend to be significantly higher in the summer season. Further, our essential oils, small kitchen appliances and accessories tend to have higher sales during the fourth quarter, which includes Thanksgiving and the December holiday season. As a result, our operational results, cash flows, cash and inventory positions may fluctuate materially in any quarterly period depending on, among other things, adverse weather conditions, shifts in the timing of certain holidays and changes in our product mix.

 

Product mix can affect our gross profit and the variable portion of our sales and distribution expenses. We rely heavily on a global supply chain in which the cost, lead times, and delays, as well as global and geopolitical events can ultimately have a direct impact to our margins. Further, impacts on our supply chain may force us to hold more inventory, which not only affects working capital but also requires us to increase our storage capacity, through our warehouse network, which of itself has a capital impact.

 

Financial Operations Overview

 

Net Revenue—We derive our revenue from the sale of consumer products, primarily in the U.S. We sell products directly to consumers through online retail channels and through wholesale channels. Direct-to-consumer sales (i.e., direct net revenue), which is currently the majority of our revenue, is done through various online retail channels. We sell on Amazon.com, Walmart.com, and our own websites, with substantially all of our sales made through Amazon.com. For all of our sales and distribution channels, revenue is recognized when control of the product is transferred to the customer (i.e., when our performance obligation is satisfied), which typically occurs at the shipment date.

 

Cost of Goods Sold—Cost of goods sold consists of the book value of inventory sold to customers during the reporting period and the amortization of inventory step-up from acquisitions. Book value of inventory includes the amounts we pay manufacturers for product, tariffs and duties associated with transporting product across national borders, and freight costs associated with transporting the product from our manufacturers to our warehouses, as applicable. Shrinkage costs are also recognized within the cost of goods sold. When circumstances dictate that we use net realizable value as the basis for recording inventory, we base our estimates on expected future selling prices, less expected disposal costs.

 

Expenses:

 

Research and Development Expenses—Research and development expenses include compensation and employee benefits for technology development employees, travel-related costs and fees paid to outside consultants related to the development of our intellectual property. During the three months ending March 31, 2024, the Company shifted its technology platform away from a fully internally developed model to an integrated third party model.  Therefore, beginning with the three months ending March 31, 2024, technology and employee related costs will be presented in general and administrative costs on the Condensed Consolidated Statement of Operations.

 

Sales and Distribution Expenses—Sales and distribution expenses consist of online advertising costs, marketing and promotional costs, sales and ecommerce platform commissions, fulfillment, including shipping and handling, and warehouse costs (i.e., sales and distribution variable expenses). Sales and distribution expenses also include employee compensation and benefits and other related fixed costs. Shipping and handling expenses are included in our consolidated statements of operations in sales and distribution expenses. This includes inbound, pick and pack costs and outbound transportation costs to ship goods to customers performed by e-commerce platforms or incurred directly by us, through our own direct fulfillment platform, which leverages our technology platform and third-party logistics partners. Our sales and distribution expenses, specifically our logistics expenses and online advertising, will vary quarter to quarter as they are dependent on our sales volume, our product mix and whether we fulfill products ourselves, i.e., fulfillment by merchant (“FBM”), or through e-commerce platform service providers, i.e., fulfillment by Amazon (“FBA”) or fulfilled by Walmart (“WFS”). Products with less expensive fulfillment costs as a percentage of net revenue may allow for a lower gross margin, while still maintaining their targeted profitability level. Conversely, products with higher fulfillment costs will need to achieve a higher gross margin to maintain their targeted level of profitability. We are FBM One Day and Two Day Prime certified, allowing us to deliver our sales through Amazon to most customers within one or two days. We periodically review the locations and capacity of our third-party warehouses to ensure we have the appropriate geographic reach, which helps to reduce the average last mile shipping zones to the end customer and as such our speed of delivery improves while our shipping costs to customers decrease, prior to the impacts on shipping providers’ rates.

 

General and Administrative Expenses—General and administrative expenses include compensation and employee benefits for executive management, finance administration, legal, and human resources, facility costs, insurance, travel, professional service fees and other general overhead costs, including the costs of being a public company. Beginning with the three months ending March 31, 2024, technology and employee related costs will also be presented in general and administrative costs.

 

Interest Expense, Net—Interest expense, net includes the interest cost from our credit facility and term loans, and includes amortization of deferred finance costs and debt discounts from our credit facility (the “Credit Facility”) with MidCap Funding IV Trust (“MidCap”).

 

 

Results of Operations

 

Comparison of the Three Months Ended March 31, 2023 and 2024

 

The following table sets forth the components of our results of operations as a percentage of net revenue:

 

 

   

Three Months Ended March 31,

   

Change

 
   

2023(1)

   

2024(1)

   

Amount

   

%

 
   

(in thousands, except percentages)

 

Net revenue

  $ 34,879     $ 20,214     $ (14,665 )     (42.0

)%

Cost of good sold

    15,782       7,046       (8,736 )     (55.4

)%

Gross profit

    19,097       13,168       (5,929 )     (31.0

)%

Operating expenses:

                               

Sales and distribution

    20,226       13,214       (7,012 )     (34.7

)%

Research and development

    1,247             (1,247 )     (100.0

)%

General and administrative

    5,959       5,232       (727 )     (12.2

)%

Impairment loss on intangibles

    16,660             (16,660 )     (100.0

)%

Total operating expenses

    44,092       18,446       (25,646 )     (58.2

)%

Operating loss

    (24,995 )     (5,278 )     19,717       78.9

%

Interest expense, net

    371       323       (48 )     (12.9

)%

Change in fair value of warrant liability     354       (517 )     (871 )     246.0 %

Other income, net

    54       7       (47 )     (87.0

)%

Loss before income taxes

    (25,774 )     (5,091 )     20,683       80.2

%

Provision for income taxes

    26       71       45       173.1

%

Net loss

  $ (25,800 )   $ (5,162 )   $ 20,638       80.0

%

 

 

(1)

Amounts include stock-based compensation expense as follows:

 

   

Three Months Ended March 31,

   

Change

 
   

2023

   

2024

   

Amount

   

%

 
   

(in thousands, except percentages)

 

Sales and distribution expenses

  $ 671     $ 299     $ (372 )     (55.4

)%

Research and development expenses

    434             (434 )     (100.0

)%

General and administrative expenses

    1,212       1,368       156       12.9

%

Total stock-based compensation expense

  $ 2,317     $ 1,667     $ (650 )     (28.1

)%

 

The following table sets forth the components of our results of operations as a percentage of net revenue:

 

   

Three Months Ended March 31,

 
   

2023

   

2024

 

Net revenue

    100.0

%

    100.0

%

Cost of good sold

    45.2       34.9  

Gross profit

    54.8       65.1  

Operating expenses:

               

Sales and distribution

    58.0       65.4  

Research and development

    3.6       0.0  

General and administrative

    17.1       25.9  

Impairment loss on intangibles

    47.8        

Total operating expenses

    126.5       91.3  

Operating loss

    (71.6 )     (26.1 )

Interest expense, net

    1.1       1.6  

Change in fair value of warrant liability

    1.0       (2.6 )

Other income, net

    0.2        

Loss before income taxes

    (73.9 )     (25.1 )

Provision for income taxes

    0.1       0.4  

Net loss

    (74.0 )%     (25.5 )%

 

 

Net Revenue

 

Revenue by Product Categories:

 

The following tables sets forth our net revenue disaggregated by product categories:

 

   

Three Months Ended March 31,

   

Change

 
   

2023

   

2024

   

Amount

   

%

 
   

(in thousands, except percentages)

 

Direct

  $ 33,363     $ 20,069     $ (13,294 )     (39.8

)%

Wholesale

    1,516       145       (1,371 )     (90.4

)%

Net revenue

  $ 34,879     $ 20,214     $ (14,665 )     (42.0

)%

 

Net revenue decreased $14.7 million, or 42.0%, during the three months ended March 31, 2024 to $20.2 million, compared to $34.9 million for the three months ended March 31, 2023. The decrease in net revenue was primarily attributable to a decrease in direct net revenue of $13.3 million, or 39.8%, which was primarily relating to a reduction in our product offering due to our SKU rationalization, competitive pricing pressure and other competitive dynamics on marketplaces.

 

   

Three Months Ended March 31,

 
   

2023

   

2024

 
   

(in thousands)

 

Heating, cooling and air quality

  $ 5,349     $ 3,204  

Kitchen appliances

    6,371       1,920  

Health and beauty

    4,857       3,313  

Personal protective equipment

    509        

Cookware, kitchen tools and gadgets

    3,620       1,395  

Home office

    2,667       2,031  

Housewares

    6,209       4,885  

Essential oils and related accessories

    4,588       3,208  

Other

    709       258  

Total net revenue

  $ 34,879     $ 20,214  

 

Every category of business had a reduction in sales compared to the prior year primarily relating to the SKU rationalization that took place during the year-ended December 31, 2023 and softness in consumer demand due the macroeconomic environment. In addition, there were competitive pricing pressures coupled with certain key products losing their prominent positioning on Amazon due to competition, specifically in the air quality and kitchen appliance businesses. These factors resulted in a reduction of units sold and a reduction in retail sales prices generally for each category of business.

 

Cost of Goods Sold and Gross Profit

 

   

Three Months Ended March 31,

   

Change

 
   

2023

   

2024

   

Amount

   

%

 
   

(in thousands, except percentages)

 

Cost of goods sold

  $ 15,782     $ 7,046     $ (8,736 )     (55.4 )%

Gross profit

  $ 19,097     $ 13,168     $ (5,929 )     (31.0 )%

 

Cost of goods sold decreased by $8.7 million, from $15.8 million for the three months ended March 31, 2023 to $7.0 million for the three months ended March 31, 2024 primarily from reduced sales volumes. The decrease in cost of goods sold was primarily attributable to a decrease of $6.3 million in cost of goods sold from our organic businesses and a decrease of $2.4 million in cost of goods sold from our wholesale businesses.

 

Gross profit increased from 54.8% for the three months ended March 31, 2023 to 65.1% for the three months ended March 31, 2024. The increase in gross profit was due primarily to a change of product mix, improved shipping container rates, and a reduction in liquidation of high priced excess inventory at reduced prices compared to the prior year.

 

Sales and Distribution Expenses

 

   

Three Months Ended March 31,

   

Change

 
   

2023

   

2024

   

Amount

   

%

 
   

(in thousands, except percentages)

 

Sales and distribution expenses

  $ 20,226     $ 13,214     $ (7,012 )     (34.7 )%

 

Sales and distribution expenses, which included e-commerce platform commissions, online advertising and logistics expenses (i.e., variable sales and distribution expense), decreased to $13.2 million for the three months ended March 31, 2024, from $20.2 million for the three months ended March 31, 2023. This decrease is primarily attributable to the decrease in the volume of products sold in the three months ended March 31, 2024, as our e-commerce platform commissions, online advertising, selling and logistics expenses decreased to $10.3 million in the three months ended March 31, 2024 as compared to $17.0 million in the prior year period.

 

Our sales and distribution fixed costs (e.g., salary and office expenses) including stock-based compensation decreased to $2.9 million for the three months ended March 31, 2024, from $3.2 million for the three months ended March 31, 2023. This decrease is primarily attributable to lower stock-compensation expense of $0.4 million and lower headcount expense of $0.5 million, partially offset by an increase in restructuring costs of $0.3 million and an increase in miscellaneous vendor costs costs of $0.3 million.

 

As a percentage of net revenue, sales and distribution expenses increased to 65.4% for the three months ended March 31, 2024, from 58.0% for the three months ended March 31, 2023. E-commerce platform commissions, online advertising, selling and logistics expenses included within sales and distribution expenses, as a percentage of net revenue, were 51.1% for the three months ended March 31, 2024 as compared to 48.8% for the three months ended March 31, 2023. This increase in sales and distribution expenses as a percentage of revenue is predominantly due to product mix and an increase in online advertising costs. 

 

 

Research and Development Expenses

 

   

Three Months Ended March 31,

   

Change

 
   

2023

   

2024

   

Amount

   

%

 
   

(in thousands, except percentages)

         

Research and development expenses

  $ 1,247     $     $ (1,247 )     (100.0 )%

 

During the three months ending March 31, 2024, the Company shifted its technology platform away from a fully internally developed model to an integrated third party model.  Therefore, beginning with the three months ending March 31, 2024, technology and employee related costs will be presented in general and administrative costs on the Condensed Consolidated Statements of Operations.

 

 

General and Administrative Expenses

 

   

Three Months Ended March 31,

   

Change

 
   

2023

   

2024

   

Amount

   

%

 
   

(in thousands, except percentages)

         

General and administrative expenses

  $ 5,959     $ 5,232     $ (727 )     (12.2 )%

 

The decrease in general and administrative expenses was primarily the result of a decrease of $1.3 million in depreciation and amortization, partially offset by an increase in restructuring costs of $0.2 million, an increase in stock-compensation expense of $0.2 million, an increase in headcount expense of $0.1 million, and an increase in miscellaneous costs of $0.1 million primarily relating to the inclusion of research and development expenses in general and administrative expenses for the three months ending March 31, 2024.

 

Impairment loss on intangibles

 

 

   

Three Months Ended March 31,

   

Change

 
   

2023

   

2024

   

Amount

   

%

 
   

(in thousands, except percentages)

         

Impairment loss on intangibles

  $ 16,660     $     $ (16,660 )     (100.0

)%

 

Certain asset groups experienced a significant decrease in sales and contribution margin through March 31, 2023. This was considered an interim triggering event for the three months ended March 31, 2023. Based on the analysis of comparing the undiscounted cash flow to the carrying value of the asset group, one group tested indicated that the assets may not be recoverable. For this asset group, we compared the fair value to the carrying amount of the asset group and recorded an intangible impairment charge of $16.7 million in the three months ended March 31, 2023. There was no impairment loss on intangibles during the three months ended March 31, 2024.

 

Interest expense, net

 

   

Three Months Ended March 31,

   

Change

 
   

2023

   

2024

   

Amount

   

%

 
   

(in thousands, except percentages)

         

Interest expense, net

  $ 371     $ 323     $ (48 )     (12.9

)%

 

Interest expense, net was relatively flat for the three months ended March 31, 2023 and March 31, 2024.

 

Change in fair market value of warrant liability

 

   

Three Months Ended March 31,

   

Change

 
   

2023

   

2024

   

Amount

   

%

 
   

(in thousands, except percentages)

         

Change in fair market value of warrant liability

  $ 354     $ (517 )   $ (871 )     (246.0 )%

 

The 2023 and 2024 activity is related to the change in fair market value of the warrant liabilities from the Prefunded Warrants and common stock warrants from our March 2022 equity raise of capital. The change in fair value of warrant liabilities during the three months ending March 31, 2024 primarily relates to the reduced share price compared to the prior period.

 

 

Liquidity and Capital Resources

 

Cash Flows for the Three Months Ended March 31, 2023 and 2024

 

The following table provides information regarding our cash flows for the three months ended March 31, 2023 and 2024:

 

   

Three Months Ended March 31,

 
   

2023

   

2024

 
   

(in thousands)

 

Cash used by operating activities

  $ (7,417 )   $ (6 )

Cash used in investing activities

    (158 )     (236 )

Cash provided (used) by financing activities

    (2,985 )     (2,198 )

Effect of exchange rate on cash

    129       (49 )

Net change in and restricted cash for the period

  $ (10,431 )   $ (2,489 )

 

Net Cash Used in Operating Activities

 

Net cash used in operating activities was $7.4 million for the three months ended March 31, 2023, resulting primarily from our net cash losses from operations of $5.8 million, impacts from working capital of $1.6 million from changes in accounts receivable, purchases of inventory and payments of accounts payable. The reduction in accounts payable of $7.1 million from December 31, 2022 to March 31, 2023 primarily relates to payments for inventory and reduced purchases for the period.

 

Net cash used in operating activities was $6 thousand for the three months ended March 31, 2024, resulting primarily from our net cash losses from operations of $4.4 million, inflow from working capital of $4.4 million from changes in accounts receivable, purchases of inventory and payments of accounts payable. The reduction of gross inventory of $3.0 million from December 31, 2023 to March 31, 2024 primarily relates to the liquidation of high priced excess inventory and a reduction of purchases for the period.

 

Net Cash Used in Investing Activities

 

For the three months ended March 31, 2023, net cash used in investing activities was $0.2 million primarily related to the remaining payment for the purchase of Step and Go assets which was acquired during the three months ending December 31, 2022.

 

For the three months ended March 31, 2024, net cash used in investing activities was $0.2 million primarily related to the purchase of a minority equity investment in 4th and Heart during the three months ending March 31, 2024.

 

Net Cash Provided (Used) by Financing Activities

 

For the three months ended March 31, 2023, cash used by financing activities of $3.0 million primarily from the net repayments for our MidCap credit facility of $2.1 million, repayment of note payable to Smash of $0.4 million and payment of insurance obligations of $0.5 million.

 

For the three months ended March 31, 2024, cash used by financing activities of $2.2 million primarily from the net repayments for our MidCap credit facility of $1.8 million, repayment of note payable to Smash of $0.2 million and payment of insurance obligations of $0.2 million.

 

Liquidity and Going Concern

 

As an emerging growth company in the early commercialization stage of its lifecycle, we are subject to inherent risks and uncertainties associated with the development of our enterprise. In this regard, substantially all of our efforts to date have been devoted to the development and sale of our products in the marketplace, which includes our investment in organic growth at the expense of short-term profitably, our investment in incremental growth through mergers & acquisitions (“M&A strategy”), our recruitment of management and technical staff, and raising capital to fund the development of our enterprise. As a result of these efforts, we have incurred significant losses and negative cash flows from operations since our inception and expect to continue to incur such losses, at a reduced level, and negative cash flows for the foreseeable future until such time that we reach a scale of profitability to sustain our operations. We have also experienced declining revenues due to macroeconomic factors, including increased interest rates and reduced consumer discretionary spending, and other factors, and we intend to focus our efforts on a more limited number of products. In addition, our recent financial performance has been adversely impacted by inflationary pressures and reduced consumer spending.

 

In order to execute our growth strategy, we have historically relied on outside capital through the issuance of equity, debt, and borrowings under financing arrangements (collectively “outside capital”) to fund our cost structure, and we expect to continue to rely on outside capital for the foreseeable future, specifically for our M&A strategy. While we believe we will eventually reach a level of profitability to sustain our operations, there can be no assurance we will be able to achieve such profitability or do so in a manner that does not require our continued reliance on outside capital. Moreover, while we have historically been successful in raising outside capital, there can be no assurance we will be able to continue to obtain outside capital in the future or do so on terms that are acceptable to us.

 

As of the date the accompanying Consolidated Financial Statements were issued (the “issuance date”), we evaluated the significance of the following adverse financial conditions in accordance with Accounting Standard Codification 205-40, Going Concern:

 

• Since our inception, we have incurred significant losses and used cash flows from operations to fund our enterprise. In this regard, during the three months ended March 31, 2024, we incurred a net loss of $5.2 million and used net cash flows in our operations of $6 thousand. In addition, as of March 31, 2024, we had unrestricted cash and cash equivalents of $17.5 million available to fund our operations and an accumulated deficit of $705.0 million.

 

• We are required to remain in compliance with certain financial covenants required by the MidCap Credit facility (See Note 6, Credit Facility, Term Loans and Warrants). We were in compliance with these financial covenants as of March 31, 2024, and expect to remain in compliance through at least March 31, 2025. During February 2024, the Company amended its terms with Midcap Credit Facility extending the term until December 2026 and amending certain financial covenants with favorable terms. However, with our short history of forecasting our business following the onset of the COVID-19 global pandemic, the current global inflation, related global supply chain disruptions and uncertain consumer demand, we can provide no assurances that we will remain in compliance with our financial covenants. Further, absent of our ability to generate cash inflows from our operations or secure additional outside capital, we will be unable to remain in compliance with these financial covenants. In the event we are unable to remain in compliance with these financial covenants (or other non-financial covenants required by the MidCap Credit Facility), and we are unable to secure a waiver or forbearance, MidCap may, at its discretion, exercise any and all of its existing rights and remedies, which may include, among others, accelerating repayment of the outstanding borrowings and/or asserting its rights in the assets securing the loan.

 

• As of the issuance date, we have no firm commitments to secure additional outside capital from lenders or investors. While we expect to continue to explore raising additional outside capital, specifically to fund our M&A strategy, there can be no assurance we will be able to obtain capital or do so on terms that are acceptable to us. Accordingly, absent our ability to generate cash inflows from our operations and/or secure additional outside capital in the near term, we may be unable to meet our obligations as they become due over the next twelve months beyond the issuance date.

 

• The Company's plan is to continue to closely monitor our operating forecast, to pursue our M&A strategy, to pursue additional sources of outside capital on terms that are acceptable to us, and to secure a waiver or forbearance from MidCap if we are unable to remain in compliance with one or more of the covenants required by the MidCap Credit Facility. Further, the Company has enacted a strategy to reduce the number of SKUs it sells and will no longer be pursuing future sales of SKUs that are either not profitable or not core to the Company’s strategy. If some or all of our plans prove unsuccessful, we may need to implement short-term changes to our operating plan, including but not limited to delaying expenditures, reducing investments in new products, or reducing our sale and distribution infrastructure. We may also need to seek long-term strategic alternatives, such as a significant curtailment of our operations, a sale of certain of our assets, a divestiture of certain product lines, a sale of the entire enterprise to strategic or financial investors, and/or allow our enterprise to become insolvent.