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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, 2022

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 9, 2022, the registrant had 65,362,520 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 

 

 


 

 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

4

 

Condensed Consolidated Balance Sheets

4

 

Condensed Consolidated Statements of Operations

5

 

Condensed Consolidated Statements of Comprehensive Loss

6

 

Condensed Consolidated Statements of Stockholder’s Equity

7

 

Condensed Consolidated Statements of Cash Flows

8

 

Notes to Unaudited Condensed Consolidated Financial Statements

9

Item 2.

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

33

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

48

Item 4.

Controls and Procedures

48

PART II.

OTHER INFORMATION

49

Item 1.

Legal Proceedings

49

Item 1A.

Risk Factors

49

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

59

Item 3.

Defaults Upon Senior Securities

59

Item 4.

Mine Safety Disclosures

59

Item 5.

Other Information

59

Item 6.

Exhibits

59

Signatures

62

 

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:

 

 

Our ability to continue as a going concern;

 

 

the potential impact of the COVID-19 global pandemic and Russian invasion of Ukraine on our business, revenue and financial condition, our supply chain, our operations and our research and development;

 

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

 

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

 

our ability to achieve, sustain and grow net revenue and 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 predictions about industry and market trends;

 

our ability to successfully expand internationally;

 

our ability to effectively manage our growth and future expenses;

 

our ability to identify, acquire, integrate and maintain the financial performance of potential acquisitions;

 

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

 

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

 

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


 

 

Non-GAAP Financial Measures

In Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this Quarterly Report on Form 10-Q (the “MD&A”), we present certain financial measures that are derived from our consolidated financial data but are not presented in our financial statements that are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). These measures are considered “non-GAAP financial measures” under the Securities and Exchange Commission’s rules. The reasons we use these non-GAAP financial measures and the reconciliations to their most directly comparable GAAP financial measures are included in the “Non-GAAP Financial Measures” section of the MD&A.

 

3


 

 

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, 2021

 

 

March 31, 2022

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash

 

$

30,317

 

 

$

44,281

 

Accounts receivable—net

 

 

10,478

 

 

 

5,870

 

Inventory

 

 

63,045

 

 

 

75,425

 

Prepaid and other current assets

 

 

21,034

 

 

 

13,440

 

Total current assets

 

 

124,874

 

 

 

139,016

 

PROPERTY AND EQUIPMENT—net

 

 

1,254

 

 

 

1,146

 

GOODWILL—net

 

 

119,941

 

 

 

90,921

 

OTHER INTANGIBLES—net

 

 

64,955

 

 

 

63,211

 

OTHER NON-CURRENT ASSETS

 

 

2,546

 

 

 

2,726

 

TOTAL ASSETS

 

$

313,570

 

 

$

297,020

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Credit facility

 

$

32,845

 

 

$

29,463

 

Accounts payable

 

 

21,716

 

 

 

22,894

 

Seller notes

 

 

7,577

 

 

 

4,081

 

Contingent earn-out liability

 

 

3,983

 

 

 

6,448

 

Warrant liability

 

 

 

 

 

20,861

 

Accrued and other current liabilities

 

 

17,621

 

 

 

15,412

 

Total current liabilities

 

 

83,742

 

 

 

99,159

 

OTHER LIABILITIES

 

 

360

 

 

 

509

 

CONTINGENT EARN-OUT LIABILITY

 

 

5,240

 

 

 

 

Total liabilities

 

 

89,342

 

 

 

99,668

 

COMMITMENTS AND CONTINGENCIES (Note 9)

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

 

 

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

   55,090,237 shares outstanding at December 31, 2021; 500,000,000 shares

   authorized and 62,348,318 shares outstanding at March 31, 2022

 

 

5

 

 

 

6

 

Additional paid-in capital

 

 

653,650

 

 

 

669,720

 

Accumulated deficit

 

 

(428,959

)

 

 

(471,735

)

Accumulated other comprehensive loss

 

 

(468

)

 

 

(639

)

Total stockholders’ equity

 

 

224,228

 

 

 

197,352

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

313,570

 

 

$

297,020

 

 

See notes to condensed consolidated financial statements.

4


 

ATERIAN, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

(in thousands, except share and per share data)

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2022

 

NET REVENUE

 

$

48,136

 

 

$

41,673

 

COST OF GOODS SOLD

 

 

22,073

 

 

 

18,066

 

GROSS PROFIT

 

 

26,063

 

 

 

23,607

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

Sales and distribution

 

 

25,069

 

 

 

22,974

 

Research and development

 

 

2,124

 

 

 

1,144

 

General and administrative

 

 

10,976

 

 

 

9,541

 

Impairment loss on goodwill

 

 

 

 

 

29,020

 

Change in fair value of contingent earn-out liabilities

 

 

15,645

 

 

 

(2,775

)

TOTAL OPERATING EXPENSES:

 

 

53,814

 

 

 

59,904

 

OPERATING LOSS

 

 

(27,751

)

 

 

(36,297

)

INTEREST EXPENSE—net

 

 

4,420

 

 

 

802

 

GAIN ON EXTINGUISHMENT OF SELLER NOTE

 

 

 

 

 

(2,012

)

LOSS ON INITIAL ISSUANCE OF EQUITY

 

 

 

 

 

5,835

 

CHANGE IN FAIR VALUE OF WARRANT LIABILITY

 

 

30,202

 

 

 

1,879

 

LOSS ON INITIAL ISSUANCE OF WARRANT

 

 

20,147

 

 

 

 

OTHER EXPENSE

 

 

33

 

 

 

(25

)

LOSS BEFORE INCOME TAXES

 

 

(82,553

)

 

 

(42,776

)

PROVISION FOR INCOME TAXES

 

 

 

 

 

 

NET LOSS

 

$

(82,553

)

 

$

(42,776

)

Net loss per share, basic and diluted

 

$

(3.15

)

 

$

(0.78

)

Weighted-average number of shares outstanding, basic and diluted

 

 

26,225,383

 

 

 

55,141,448

 

 

See notes to condensed consolidated financial statements.

 

5


 

 

ATERIAN, INC.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2022

 

NET LOSS

 

$

(82,553

)

 

$

(42,776

)

OTHER COMPREHENSIVE INCOME (LOSS):

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

30

 

 

 

(171

)

Other comprehensive income (loss)

 

 

30

 

 

 

(171

)

COMPREHENSIVE LOSS

 

$

(82,523

)

 

$

(42,947

)

 

See notes to condensed consolidated financial statements.

 

6


 

 

ATERIAN, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(in thousands, except share and per share data)

 

 

 

 

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 income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30

 

 

 

30

 

BALANCE—March 31, 2021

 

 

30,590,796

 

 

$

3

 

 

$

313,911

 

 

$

(275,488

)

 

$

39

 

 

$

38,465

 

 

 

 

 

For the Three Months Ended March 31, 2022

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Equity

 

BALANCE—January 1, 2022

 

 

55,090,237

 

 

$

5

 

 

$

653,650

 

 

$

(428,959

)

 

$

(468

)

 

$

224,228

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(42,776

)

 

 

 

 

 

(42,776

)

Issuance of shares of restricted common stock

 

 

155,456

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeiture of shares of restricted common stock

 

 

(193,594

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock for settlement of seller note

 

 

292,887

 

 

 

 

 

 

767

 

 

 

 

 

 

 

 

 

767

 

Issuance of common stock, net of issuance costs

 

 

7,003,332

 

 

 

1

 

 

 

27,006

 

 

 

 

 

 

 

 

 

27,007

 

Issuance of warrants in connection with offering

 

 

 

 

 

 

 

 

(18,982

)

 

 

 

 

 

 

 

 

(18,982

)

Loss on initial issuance of equity

 

 

 

 

 

 

 

 

5,835

 

 

 

 

 

 

 

 

 

5,835

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,444

 

 

 

 

 

 

 

 

 

1,444

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(171

)

 

 

(171

)

BALANCE—March 31, 2022

 

 

62,348,318

 

 

$

6

 

 

$

669,720

 

 

$

(471,735

)

 

$

(639

)

 

$

197,352

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

7


 

 

ATERIAN, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2022

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(82,553

)

 

$

(42,776

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,204

 

 

 

1,846

 

Provision for sales returns

 

 

(100

)

 

 

109

 

Amortization of deferred financing costs and debt discounts

 

 

3,963

 

 

 

106

 

Change in fair value of warrants

 

 

 

 

 

1,879

 

Stock-based compensation

 

 

6,899

 

 

 

2,865

 

Loss (Gain) from change in contingent liabilities fair value

 

 

15,645

 

 

 

(2,775

)

Loss in connection with warrant fair value

 

 

30,202

 

 

 

 

Loss on initial issuance of warrant

 

 

20,147

 

 

 

 

Gain in connection with settlement of note payable

 

 

 

 

 

(2,012

)

Loss on initial issuance of equity

 

 

 

 

 

5,835

 

Impairment loss on goodwill

 

 

 

 

 

29,020

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,445

)

 

 

4,608

 

Inventory

 

 

(15,355

)

 

 

(12,380

)

Prepaid and other current assets

 

 

(4,675

)

 

 

410

 

Accounts payable, accrued and other liabilities

 

 

17,573

 

 

 

95

 

Cash used in operating activities

 

 

(8,495

)

 

 

(13,170

)

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchase of fixed assets

 

 

(20

)

 

 

(16

)

Purchase of Healing Solutions assets

 

 

(15,280

)

 

 

 

Cash used in investing activities

 

 

(15,300

)

 

 

(16

)

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from warrant exercise

 

 

8,939

 

 

 

 

Proceeds from cancellation of warrant

 

 

16,957

 

 

 

 

Proceeds from exercise of stock options

 

 

8,749

 

 

 

 

Proceeds from equity offering, net of issuance costs

 

 

 

 

 

27,007

 

Repayments on note payable to Smash

 

 

(4,737

)

 

 

(1,084

)

Borrowings from MidCap credit facility

 

 

14,531

 

 

 

30,357

 

Repayments for MidCap credit facility

 

 

(12,325

)

 

 

(33,845

)

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

)

 

 

 

Insurance obligation payments

 

 

(951

)

 

 

(719

)

Cash provided by financing activities

 

 

38,501

 

 

 

21,716

 

EFFECT OF EXCHANGE RATE ON CASH

 

 

(99

)

 

 

(171

)

NET CHANGE IN CASH AND RESTRICTED CASH FOR PERIOD

 

 

14,607

 

 

 

8,359

 

CASH AND RESTRICTED CASH AT BEGINNING OF PERIOD

 

 

30,097

 

 

 

38,315

 

CASH AND RESTRICTED CASH AT END OF PERIOD

 

$

44,704

 

 

$

46,674

 

RECONCILIATION OF CASH AND RESTRICTED CASH

 

 

 

 

 

 

 

 

CASH

 

$

34,995

 

 

$

44,281

 

RESTRICTED CASH—Prepaid and other assets

 

 

9,580

 

 

 

2,264

 

RESTRICTED CASH—Other non-current assets

 

 

129

 

 

 

129

 

TOTAL CASH AND RESTRICTED CASH

 

$

44,704

 

 

$

46,674

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

252

 

 

$

357

 

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

 

 

$

 

Issuance of common stock for settlement of seller note

 

$

 

 

$

767

 

Fair value of warrants issued in connection with equity offering

 

$

 

 

$

18,982

 

Equity fundraising costs not paid

 

$

 

 

$

166

 

Common stock issued for warrants

 

$

1,125

 

 

$

 

 

See notes to condensed consolidated financial statements.

8


 

Aterian, Inc.

Notes to condensed consolidated financial statements

For the Three Months Ended March 31, 2021 and 2022 (Unaudited)

(In thousands, except share and per share data)

1.

ORGANIZATION AND DESCRIPTION OF BUSINESS

Aterian, Inc., formerly known as Mohawk Group Holdings, Inc., and its subsidiaries (“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 agile supply chain helps create a growing base of consumer products. Aterian predominantly operates through online retail channels such as Amazon and Walmart, Inc.  The Company owns and operates fourteen 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 also be found in China, Philippines, Israel and Poland.

Going Concern—As of March 31, 2022, the Company had total cash and cash equivalents of $44.3 million and an accumulated deficit of $471.7 million.  In addition, the Company’s net loss and net cash used in operating activities amounted to $42.8 million and $13.2 million, respectively, for the three months ended March 31, 2022.

As an emerging growth company, the Company has been dependent on outside capital through the issuance of equity to investors and borrowings from lenders (collectively “outside capital”) since its inception to execute its growth strategy of investing in organic growth at the expense of short-term profitably and investing in incremental growth through mergers and acquisitions (“M&A strategy”).  In addition, the Company’s recent financial performance has been adversely impacted by the COVID-19 global pandemic and related global shipping disruption, in particular with respect to substantial increases in supply chain costs for shipping containers (See COVID-19 Pandemic and the Supply Chain disclosure below).  As a result, the Company has incurred significant losses and will remain dependent on outside capital for the foreseeable future until such time that the Company can realize its strategy of growth by generating profits through its organic growth and M&A strategy, and reduce its reliance on outside capital.

Given the inherent uncertainties associated with executing the Company’s growth strategy, as well as the uncertainty associated with the ongoing COVID-19 global pandemic, recent record increases in inflation and related global supply chain disruption, management can provide no assurances the Company will be able to obtain sufficient outside capital or generate sufficient cash from operations to fund the Company’s obligations as they become due over the next twelve months from the date these consolidated financial statements were issued.

In addition, as disclosed in Note 6, the Company entered into a $50.0 million asset backed credit agreement in December 2021 (the “MidCap Credit Facility”).  The MidCap Credit Facility contains a financial covenant that requires the Company to maintain a minimum unrestricted cash balance or minimum borrowing availability of (a) $12.5 million during the period from February 1st through and including May 31st of each calendar year, and (b) $15.0 million at all other times thereafter.  At its election, the Company may elect to comply with an alternative financial covenant that would require the Company to maintain a minimum borrowing availability under the MidCap Credit Facility of $10.0 million at all times.  The Company does not anticipate electing the alternative financial covenant over the next twelve months and was in compliance with the minimum liquidity covenant as of the date these condensed consolidated financial statements were issued.

Since its inception, the Company has been able to successfully raise a substantial amount of outside capital to fund the Company’s growth strategy.  However, as of March 31, 2022, the Company had no firm commitments of additional outside capital from current or prospective investors or lenders.  While management believes the Company will be able to secure additional outside capital, no assurances can be provided that such capital will be obtained or on terms that are acceptable to the Company.  Furthermore, given the inherent uncertainties associated with the Company’s growth strategy, the Company may be unable to remain in compliance with the financial covenants required by the Midcap Credit Facility over the next twelve months.  These uncertainties raise substantial doubt about the Company’s ability to continue as a going concern.

In order to alleviate substantial doubt, management plans to continue to closely monitor its operating forecast, pursue additional sources of outside capital, and pursue its M&A strategy.  If the Company is (a) unable to improve its operating results, (b) obtain additional outside capital on terms that are acceptable to the Company to fund the Company’s operations and M&A strategy, and/or (c) secure a waiver or forbearance from the lender if the Company is unable to remain in compliance with the financial covenants required by the MidCap Credit Facility, the Company will have to make significant changes to its operating plan, such as delay expenditures, reduce investments in new products, delay the development of its software, reduce its sale and distribution infrastructure, or otherwise significantly reduce the scope of its business.  Moreover, if the Company breaches the financial covenants

9


 

required by the MidCap Credit Facility and fail to secure a waiver or forbearance from the lender, such breach or failure could accelerate the repayment of the outstanding borrowings under the MidCap Credit Facility or the exercise of other rights or remedies the lender may have under applicable law.  Management can provide no assurance a waiver or forbearance will be granted or the outstanding borrowings under the MidCap Credit Facility will be successfully refinanced on terms that are acceptable to the Company.

The accompanying consolidated financial statements have been prepared on the basis that the Company will continue to operate as a going concern, which contemplates that the Company 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.

COVID-19 Pandemic and the Supply Chain—The full impact of the COVID-19 pandemic on the Company’s supply chain, including the impact associated with preventive and precautionary measures that the Company, other businesses and governments are taking, continues to evolve as of the date of this report.

During 2022 to date, the Company has continued to be impacted by the COVID-19 pandemic and related global shipping disruption.  Together these have led to substantial increases in supply chain costs, in particular shipping containers, which the Company relies on to import its goods, costs have increased while the reliability and timely delivery of such shipping containers has reduced and has substantially increased the Company’s last mile shipping costs on its oversized goods. These cost increases have been particularly substantial for oversized goods, which is a material part of the Company’s business.  The reduced reliability and delivery of such shipping containers is forcing the Company to spend more on premium shipping to ensure goods are delivered, if at all, and the lack of reliability and timely delivery has further down chain impacts as it takes longer for containers to be offloaded and returned.   Further, this global shipping disruption is forcing the Company to increase its inventory on-hand, including by advance ordering and taking possession of inventory earlier than expected, negatively impacting its working capital.

Third party last mile shipping partners, such as UPS and FedEx, continue to increase the cost of delivering goods to the end consumers as their delivery networks continue to be impacted by the COVID-19 pandemic.  The COVID-19 pandemic continues to bring uncertainty to consumer demand as price increases related to raw materials, the importing of goods, including tariffs, and the cost of delivering goods to consumers has led to inflation across the U.S. As such, the Company has noticed changes to consumer buying habits, which may lead to reduced demand for its products.  Further, recent record inflation has added additional pressure to the cost of the Company’s supply chain.

The Company continues to consider the impact of the COVID-19 pandemic on the Company’s supply chain 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 situation evolves or new events occur, and additional information is obtained. If the economic conditions caused by the COVID-19 pandemic and the negative impact on the Company’s supply chain 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, 2021 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, 2021, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2022 (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, 2022, the results of operations for the three months ended March 31, 2021 and 2022, the statements of stockholders’ equity for the three months ended March 31, 2021 and 2022, and cash flows for the three months ended March 31, 2021 and 2022. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the full fiscal year.

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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 ConsolidationThe 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, 2021, 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, $2.0 million related to a letter of credit and $5.9 million for cash sweep accounts related to the Midcap Credit Facility within “prepaid and other current assets” on the condensed consolidated balance sheets.

As of March 31, 2022, 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, $2.0 million related to a letter of credit and $0.3 million for cash sweep accounts related to the Midcap Credit Facility within “prepaid and other current assets” on the condensed consolidated balance sheets.

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, 2021

 

 

 

(in thousands)

 

 

 

Direct

 

 

Wholesale/Other

 

 

Total

 

North America

 

$

46,142

 

 

$

1,984

 

 

$

48,126

 

Other

 

 

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