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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, 2021

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)

 

37 East 18th Street, 7th Floor

New York, NY

 

10003

(Address of principal executive offices)

 

(Zip Code)

 

(347) 676-1681

(Registrant’s 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 3, 2021, the registrant had 30,624,056 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

25

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

Item 4.

Controls and Procedures

37

PART II.

OTHER INFORMATION

38

Item 1.

Legal Proceedings

38

Item 1A.

Risk Factors

38

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

47

Item 3.

Defaults Upon Senior Securities

47

Item 4.

Mine Safety Disclosures

47

Item 5.

Other Information

47

Item 6.

Exhibits

48

Signatures

51

 

1


 

 

Special 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 of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance.  In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

 

 

the potential impact of the COVID-19 global pandemic on our business, revenue and financial condition, including our supply chain and our operations;

 

our expectation that consumer spending will continue to shift online, and that such shift will continue even after the COVID-19 global pandemic ends;

 

our future financial performance, including our revenue, costs of goods sold and operating expenses;

 

our ability to achieve, sustain and grow profitability;

 

the sufficiency of our cash to meet our liquidity and operational needs and to execute our growth strategies, including potential acquisitions;

 

our ability to maintain the security and availability of our technology platform, including our AIMEE (Artificial Intelligence Marketplace e-Commerce Engine) software platform;

 

our ability to successfully launch new products, including our ability to successfully manage supply chain risks;

 

our ability to identify, complete and integrate merger and acquisition transactions;

 

our ability to successfully execute and grow net revenue and profitability from sales of personal protective equipment (“PPE”);

 

our predictions about industry and market trends;

 

our ability to successfully expand internationally;

 

our ability to effectively manage our growth and future expenses;

 

our estimated total addressable market, including for potential acquisitions;

 

our ability to maintain, protect and enhance our intellectual property, including our AIMEE software platform;

 

our ability to comply with modified or new laws and regulations applying to our business;

 

our ability to attract and retain key personnel;

 

our ability to successfully defend litigation brought against us or to pursue litigation; and

 

the increased expenses and obligations associated with being a public company.

We caution you that the foregoing list may not contain all the forward-looking statements made in this Quarterly Report on Form 10-Q.

We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section of this Quarterly Report on Form 10-Q entitled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a highly competitive and challenging environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events and circumstances reflected, or that the plans, intentions or expectations disclosed, in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those expressed or implied by the forward-looking statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q, new information or the occurrence of unanticipated events, except as required by law. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, other strategic transactions or investments we may make or enter into.

2


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

ATERIAN, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except share and per share data)

 

 

 

December 31, 2020

 

 

March 31, 2021

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash

 

$

26,718

 

 

$

34,995

 

Accounts receivable—net

 

 

5,747

 

 

 

7,192

 

Inventory

 

 

31,582

 

 

 

55,026

 

Prepaid and other current assets

 

 

11,111

 

 

 

24,577

 

Total current assets

 

 

75,158

 

 

 

121,790

 

PROPERTY AND EQUIPMENT—net

 

 

169

 

 

 

166

 

GOODWILL AND OTHER INTANGIBLES—net

 

 

78,778

 

 

 

140,473

 

OTHER NON-CURRENT ASSETS

 

 

3,349

 

 

 

3,552

 

TOTAL ASSETS

 

$

157,454

 

 

$

265,981

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Credit facility

 

$

12,190

 

 

$

14,319

 

Accounts payable

 

 

14,856

 

 

 

26,475

 

Term loan

 

 

21,600

 

 

 

21,600

 

Seller notes

 

 

16,231

 

 

 

10,677

 

Contingent earn-out liability

 

 

1,515

 

 

 

18,783

 

Accrued and other current liabilities

 

 

8,340

 

 

 

14,181

 

Total current liabilities

 

 

74,732

 

 

 

106,035

 

OTHER LIABILITIES

 

 

1,841

 

 

 

1,841

 

CONTINGENT EARN-OUT LIABILITY

 

 

21,016

 

 

 

35,951

 

TERM LOANS

 

 

36,483

 

 

 

83,689

 

Total liabilities

 

 

134,072

 

 

 

227,516

 

COMMITMENTS AND CONTINGENCIES (Note 9)

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

 

 

Common stock, par value $0.0001 per share—500,000,000 shares authorized and

   27,074,791 shares outstanding at December 31, 2020; 500,000,000 shares

   authorized and 30,590,796 shares outstanding at March 31, 2021

 

 

3

 

 

 

3

 

Additional paid-in capital

 

 

216,305

 

 

 

313,911

 

Accumulated deficit

 

 

(192,935

)

 

 

(275,488

)

Accumulated other comprehensive income

 

 

9

 

 

 

39

 

Total stockholders’ equity

 

 

23,382

 

 

 

38,465

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

157,454

 

 

$

265,981

 

 

See notes to condensed consolidated financial statements.

3


 

ATERIAN, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

(in thousands, except share and per share data)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2021

 

NET REVENUE

 

$

25,628

 

 

$

48,136

 

COST OF GOODS SOLD

 

 

15,330

 

 

 

22,073

 

GROSS PROFIT

 

 

10,298

 

 

 

26,063

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

Sales and distribution

 

 

13,910

 

 

 

25,069

 

Research and development

 

 

2,281

 

 

 

2,124

 

General and administrative

 

 

8,003

 

 

 

10,976

 

Change in fair value of contingent earn-out liabilities

 

 

 

 

 

15,645

 

TOTAL OPERATING EXPENSES:

 

 

24,194

 

 

 

53,814

 

OPERATING LOSS

 

 

(13,896

)

 

 

(27,751

)

INTEREST EXPENSE—net

 

 

1,109

 

 

 

4,420

 

CHANGE IN FAIR VALUE OF WARRANT LIABILITY

 

 

 

 

 

30,202

 

LOSS ON INITIAL ISSUANCE OF WARRANT

 

 

 

 

 

20,147

 

OTHER EXPENSE

 

 

25

 

 

 

33

 

LOSS BEFORE INCOME TAXES

 

 

(15,030

)

 

 

(82,553

)

PROVISION FOR INCOME TAXES

 

 

 

 

 

 

NET LOSS

 

$

(15,030

)

 

$

(82,553

)

Net loss per share, basic and diluted

 

$

(0.99

)

 

$

(3.15

)

Weighted-average number of shares outstanding, basic and diluted

 

 

15,193,647

 

 

 

26,225,383

 

 

See notes to condensed consolidated financial statements.

4


 

ATERIAN, INC.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2021

 

NET LOSS

 

$

(15,030

)

 

$

(82,553

)

OTHER COMPREHENSIVE INCOME (LOSS):

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(2

)

 

 

30

 

Other comprehensive income (loss)

 

 

(2

)

 

 

30

 

COMPREHENSIVE LOSS

 

$

(15,032

)

 

$

(82,523

)

 

See notes to condensed consolidated financial statements.

 

5


 

 

ATERIAN, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(in thousands, except share and per share data)

 

 

 

Three Months Ended March 31, 2020

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Total

Stockholders’

Equity

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Income/(Loss)

 

 

(Deficit)

 

BALANCE—January 1, 2020

 

 

17,736,649

 

 

$

2

 

 

$

140,477

 

 

$

(129,809

)

 

$

57

 

 

$

10,727

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(15,030

)

 

 

 

 

 

(15,030

)

Issuance of 439,145 shares of restricted

   common stock in March 2020

   (see Note 7)

 

 

439,145

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeiture of 371,320 shares of restricted

   common stock

 

 

(371,320

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

7,439

 

 

 

 

 

 

 

 

 

7,439

 

Shares of restricted common stock

   retired in connection with vesting

 

 

(40,480

)

 

 

 

 

 

 

(139

)

 

 

 

 

 

 

 

 

 

 

(139

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

(2

)

BALANCE—March 31, 2020

 

 

17,763,994

 

 

$

2

 

 

$

147,777

 

 

$

(144,839

)

 

$

55

 

 

$

2,995

 

 

 

 

 

Three Months Ended March 31, 2021

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Income

 

 

Equity

 

BALANCE—January 1, 2021

 

 

27,074,791

 

$

 

3

 

$

 

216,305

 

$

 

(192,935

)

 

$

9

 

 

$

23,382

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(82,553

)

 

 

 

 

 

(82,553

)

Issuance of common stock upon exercise of stock option grants

 

 

978,495

 

 

 

 

 

 

8,749

 

 

 

 

 

 

 

 

 

8,749

 

Issuance of common stock related to exercise of warrants

 

 

1,039,960

 

 

 

 

 

 

40,172

 

 

 

 

 

 

 

 

 

40,172

 

Issuance of common stock in connection with acquisition of Healing Solutions assets

 

 

1,387,759

 

 

 

 

 

 

39,454

 

 

 

 

 

 

 

 

 

39,454

 

Issuance of restricted stock awards

 

 

109,791

 

 

 

 

 

 

3,427

 

 

 

 

 

 

 

 

 

3,427

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

5,804

 

 

 

 

 

 

 

 

 

5,804

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30

 

 

 

30

 

BALANCE—March 31, 2021

 

 

30,590,796

 

 

$

3

 

 

$

313,911

 

 

$

(275,488

)

 

$

39

 

 

$

38,465

 

 

 

See notes to condensed consolidated financial statements.

6


 

ATERIAN, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2021

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(15,030

)

 

$

(82,553

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

41

 

 

 

1,204

 

Provision for sales returns

 

 

84

 

 

 

(100

)

Amortization of deferred financing costs and debt discounts

 

 

304

 

 

 

3,963

 

Stock-based compensation

 

 

7,439

 

 

 

6,899

 

Loss from increase of contingent liabilities fair value

 

 

 

 

 

15,645

 

Loss in connection with warrant fair value

 

 

 

 

 

30,202

 

Loss on initial issuance of warrant

 

 

 

 

 

20,147

 

Other

 

 

33

 

 

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(3,140

)

 

 

(1,445

)

Inventory

 

 

(8,044

)

 

 

(15,355

)

Prepaid and other current assets

 

 

540

 

 

 

(4,675

)

Accounts payable, accrued and other liabilities

 

 

682

 

 

 

17,573

 

Cash used in operating activities

 

 

(17,091

)

 

 

(8,495

)

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchase of fixed assets

 

 

(18

)

 

 

(20

)

Purchase of Healing Solutions assets

 

 

 

 

 

(15,280

)

Cash used in investing activities

 

 

(18

)

 

 

(15,300

)

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from warrant exercise

 

 

 

 

 

8,939

 

Proceeds from cancellation of warrant

 

 

 

 

 

16,957

 

Proceeds from exercise of stock options

 

 

(112

)

 

 

8,749

 

Repayments on note payable to Smash

 

 

 

 

 

(4,737

)

Proceeds from initial public offering, net of issuance costs

 

 

17,435

 

 

 

 

Repayments from MidCap credit facility

 

 

(15,414

)

 

 

 

Borrowings from MidCap credit facility

 

 

 

 

 

14,531

 

Repayments from MidCap credit facility

 

 

 

 

 

(12,325

)

Deferred financing costs from MidCap credit facility

 

 

 

 

 

(151

)

Repayments for High Trail Term Loan

 

 

 

 

 

(5,400

)

Borrowings from High Trail term loan note 2

 

 

 

 

 

14,025

 

Debt issuance costs from High Trail Term Loan

 

 

 

 

 

(1,136

)

Deferred offering costs

 

 

(139

)

 

 

 

Insurance obligation payments

 

 

(965

)

 

 

(951

)

Capital lease obligation payments

 

 

(2

)

 

 

 

Cash provided by financing activities

 

 

803

 

 

 

38,501

 

EFFECT OF EXCHANGE RATE ON CASH

 

 

3

 

 

 

(99

)

NET CHANGE IN CASH AND RESTRICTED CASH FOR PERIOD

 

 

(16,303

)

 

 

14,607

 

CASH AND RESTRICTED CASH AT BEGINNING OF PERIOD

 

 

30,789

 

 

 

30,097

 

CASH AND RESTRICTED CASH AT END OF PERIOD

 

$

14,486

 

 

$

44,704

 

RECONCILIATION OF CASH AND RESTRICTED CASH

 

 

 

 

 

 

 

 

CASH

 

$

14,050

 

 

$

34,995

 

RESTRICTED CASH—Prepaid and other assets

 

 

307

 

 

 

9,580

 

RESTRICTED CASH—Other non-current assets

 

 

129

 

 

 

129

 

TOTAL CASH AND RESTRICTED CASH

 

$

14,486

 

 

$

44,704

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

759

 

 

$

252

 

Non-cash consideration paid to contractors

 

$

 

 

$

3,427

 

NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Debt issuance costs not paid

 

$

 

 

$

246

 

Original issue discount

 

$

 

 

$

2,475

 

Fair value of contingent consideration liability

 

$

 

 

$

16,557

 

Discount of debt relating to warrants issuance

 

$

 

 

$

7,740

 

Issuance of common stock in connection with acquisition

 

$

 

 

$

39,454

 

Common stock issued for warrants

 

$

 

 

$

1,125

 

 

See notes to condensed consolidated financial statements.

7


 

Aterian, Inc.

Notes to condensed consolidated financial statements

For the Three Months Ended March 31, 2020 and 2021 (Unaudited)

(In thousands, except share and per share data)

1.

ORGANIZATION AND DESCRIPTION OF BUSINESS

Aterian, Inc. and its subsidiaries, formerly known as Mohawk Group Holdings, Inc, (“Aterian” or the “Company”), is a technology-enabled consumer products platform that builds, acquires and partners with e-commerce brands. The Company’s proprietary software and highly agile supply chain helps creating for a growing base of data empowered e-commerce consumers. Aterian predominantly operates through online retail channels such as Amazon and Walmart, Inc.  The Company owns and operates twelve brands, which were either incubated or purchased, selling products in multiple categories, including home and kitchen appliances, kitchenware, heating, cooling and air quality appliances (dehumidifiers, humidifiers and air conditioners), health and beauty products and essentials oils.

Headquartered in New York, Aterian’s offices can be found in China, Philippines, Israel and Poland.

Healing Solutions AcquisitionOn February 2, 2021, the Company acquired certain of Healing Solutions, LLC (“Healing Solutions”) related to its retail and ecommerce business under the Healing Solutions’ brands, Tarvol, Sun Essential Oils and Artizen (among others), which primarily sells essential oils primarily through Amazon and other marketplaces (see Note 10).

 

COVID-19 PandemicOn January 30, 2020, the World Health Organization (the “WHO”) announced a global health emergency because of a new strain of coronavirus (“COVID-19”) originating in Wuhan, China and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified COVID-19 as a pandemic, based on the rapid increase in exposure globally. The full impact of the COVID-19 pandemic, including the impact associated with preventative and precautionary measures that the Company, other businesses and governments are taking, continues to evolve as of the date of this report. As such, the future impact on the Company’s personnel, business and global operations, and on the Company’s suppliers, logistics providers, marketplaces and other business partners is uncertain and cannot be reasonably estimated at this time. Given the nature of the COVID-19 pandemic, it is possible that any and every aspect of the Company’s value chain could be disrupted, and such impact could have a material adverse impact on the Company’s business, financial condition, operating results and prospects. For example, with respect to certain products, the Company has been unable to replenish inventory or, ship into or receive inventory in its third-party warehouses, in each case on a timely basis. Further, in certain instances of the Company has had to delay the launch of new products due to sourcing and other supply chain constraints. The Company may also be unable to forecast demand for its products during the pendency of this pandemic and the Company may experience a substantial decrease in the demand for its products, most of which are considered not essential. In addition, the majority of the Company’s personnel are currently working remotely, which creates challenges in the way the Company operates its business, including, but not limited to, the manner in which the Company tests products and its ability to meet its reporting obligations. The Company’s ability to execute its operations could be further impacted if any of the Company’s key personnel contracts COVID-19. While the potential economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, the continued widespread pandemic could result in significant disruption of global financial markets, reducing the Company’s ability to access capital, which could in the future negatively affect its liquidity.  Due to the uncertainty as to the severity and duration of the pandemic, the impact on the Company’s future revenues, profitability, liquidity, financial condition, business and results of operations is uncertain at this time.

The COVID-19 pandemic began to have an unfavorable impact on the Company, including its key manufacturing partners, in January 2020. Substantially all of the Company’s products are sourced and manufactured in China, including new products that the Company expects to launch during 2021. In addition, the Company relies on its team in Shenzhen for a number of functions relating to product sourcing and development, among other things. The Company’s key manufacturing partner in China re-opened its facilities as of February 10, 2020 and reached and maintained over 90% capacity since early March 2020.

During the second quarter of 2020, the Company preserved its liquidity and capital resources through various actions, which included delaying and negotiating the delay of payments to certain vendors, and the effect of such actions did not have an adverse impact on the Company’s business, including its relationships with these vendors. The Company’s operations rely on third-parties to manufacture its products, to provide logistics and warehousing services and to facilitate sales of its products, and accordingly the Company relies on the business continuity plans of these third parties to operate during the pandemic and has limited ability to influence their plans.

To date the Company has had few material overall negative impacts to its business and operations from the COVID-19 pandemic. The Company has seen 87.8% growth in its net revenue for the quarter ended March 31, 2021 versus the corresponding period of the prior year. The shift of consumer spending from traditional retail to online spending has increased dramatically due to the COVID-19 pandemic. This has benefited the Company as historically over 90% of its net revenue comes from the sale of products online in the

8


 

U.S. and it believes this shift to increased online consumer spending will continue even after the COVID-19 pandemic ends. The Company’s investments in its infrastructure and software and the expansion of its third-party warehousing network have also allowed the Company to continue to deliver its products, even when Amazon itself limited its delivery services. The Company has had no material impacts to its vendor or other business relationships to date and in certain circumstances it has been able to negotiate improved credit and other terms. Further, to date, none of the Company’s key operations vendors has had any material negative impacts related to COVID-19 or changes that have negatively affected the Company’s business, borrowing capabilities or financial covenants. During the first quarter of 2021, we have experienced some impacts to our margins as it relates to increased international freight demands, lack of ship containers and general international freight congestion due to the continued increase demand of goods being sold on ecommerce marketplaces. Further, we expect to see increases in last mile shipping costs as shipping providers continue to see increased demand due to the increase of goods sold on ecommerce marketplaces which stresses their delivery networks. We believe these short-term increases in cost to be primarily related to COVID-19 pandemic. Though the COVID-19 pandemic is fluid, the Company believes at this time that its business may continue to minimize the impact from this current pandemic given the Company’s ability to work remotely, continued consumer demand for products on e-commerce channels and the business continuity plans of its key manufacturing partners and other vendors. The Company believes this combination of factors may help to mitigate risk from the COVID-19 pandemic.

 

The Company continues to consider the impact of COVID-19 on the assumptions and estimates used when preparing these consolidated financial statements including inventory valuation, and the impairment of long-lived assets. These assumptions and estimates may change as the current situation evolves or new events occur and additional information is obtained. If the economic conditions caused by COVID-19 worsen beyond what is currently estimated by management, such future changes may have an adverse impact on the Company's results of operations, financial position, and liquidity.

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation—The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial reporting and as required by Rule 10-01 of Regulation S-X. Certain information and note disclosures normally included in the annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.  The condensed consolidated balance sheet as of December 31, 2020 included herein was derived from the Company’s audited consolidated financial statements as of that date.   As such, the information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and the related notes thereto as of and for the year ended December 31, 2020, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission, on March 16, 2021 (the “Annual Report”).

In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of items of a normal and recurring nature) necessary to present fairly the financial position as of March 31, 2021, the results of operations for the three months ended March 31, 2020 and 2021, the statements of stockholders’ equity for the three months ended March 31, 2020 and 2021, and cash flows for the three months ended March 31, 2020 and 2021. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the full year.

Use of Estimates Preparation of financial statements in conformity with 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 inter-company balances and transactions have been eliminated in consolidation.

Restricted Cash The Company has restricted cash with its primary banks for use as required minimum restricted capital for its Chinese subsidiary. As of December 31, 2020, the Company has classified the following as restricted cash: $0.1 million related to its Chinese subsidiary within “current assets” on the condensed consolidated balance sheets and $3.3 million related to a returned deposit for inventory that a manufacturer required the Company to pay into an escrow account within “prepaid and other current assets” on the condensed consolidated balance sheet.

As of March 31, 2021, the Company has classified the following as restricted cash: $0.1 million related to its Chinese subsidiary and $0.3 million related to a letter of credit within “other non-current assets” on the condensed consolidated balance sheets, and $9.3 million related to a returned deposit for inventory that a manufacturer required the Company to pay into an escrow account within “prepaid and other current assets” on the condensed consolidated balance sheets.

9


 

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.

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.

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, 2020

 

 

 

(in thousands)

 

 

 

Direct

 

 

Wholesale

 

 

Managed PaaS

 

 

Total

 

North America

 

$

25,173

 

 

$

59

 

 

$

361

 

 

$

25,593

 

Other

 

 

35

 

 

 

 

 

 

 

 

 

35

 

Total net revenue

 

$

25,208

 

 

$

59

 

 

$

361

 

 

$

25,628

 

 

 

 

Three Months Ended March 31, 2021

 

 

 

(in thousands)

 

 

 

Direct

 

 

Wholesale

 

 

Managed PaaS

 

 

Total

 

North America

 

$

46,142

 

 

$

1,802

 

 

$

182

 

 

$

48,126

 

Other

 

 

10

 

 

 

 

 

 

 

 

 

10

 

Total net revenue

 

$

46,152

 

 

$

1,802

 

 

$

182

 

 

$

48,136

 

 

 

Net Revenue by Product Categories. The following table sets forth the Company’s net revenue disaggregated by product categories:

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2021

 

 

 

(in thousands)

 

Heating, cooling and air quality

 

$

9,877

 

 

$

6,138

 

Kitchen appliances

 

 

7,025