10-Q
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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, 2023

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

(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). YESNO

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, 2023, the registrant had 81,125,003 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

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

Item 4.

Controls and Procedures

37

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

38

Item 1A.

Risk Factors

38

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

41

Item 3.

Defaults Upon Senior Securities

42

Item 4.

Mine Safety Disclosures

42

Item 5.

Other Information

42

Item 6.

Exhibits

43

Signatures

 

45

 

 

 

1


 

 

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, 2022, which was filed with the Securities and Exchange Commission (the SEC) on March 16, 2023. 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 Company’s 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 Company’s financial condition and results of operations should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and the related Notes thereto included in this Quarterly Report on Form 10-Q.

2


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

ATERIAN, INC.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

December 31,
2022

 

 

March 31,
2023

 

ASSETS

 

 

 

 

(unaudited)

 

Current assets:

 

 

 

 

 

 

Cash

 

$

43,574

 

 

$

33,911

 

Accounts receivable, net

 

 

4,515

 

 

 

3,486

 

Inventory

 

 

43,666

 

 

 

40,378

 

Prepaid and other current assets

 

 

8,261

 

 

 

6,870

 

Total current assets

 

 

100,016

 

 

 

84,645

 

Property and equipment, net

 

 

853

 

 

 

830

 

Other intangibles, net

 

 

54,757

 

 

 

36,392

 

Other non-current assets

 

 

813

 

 

 

753

 

Total assets

 

$

156,439

 

 

$

122,620

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

Credit facility

 

$

21,053

 

 

$

19,103

 

Accounts payable

 

 

16,035

 

 

 

8,955

 

Seller notes

 

 

1,693

 

 

 

1,303

 

Accrued and other current liabilities

 

 

14,254

 

 

 

13,045

 

Total current liabilities

 

 

53,035

 

 

 

42,406

 

Other liabilities

 

 

1,452

 

 

 

1,447

 

Total liabilities

 

 

54,487

 

 

 

43,853

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

Common stock, $0.0001 par value, 500,000,000 shares authorized and 80,752,290 and 81,134,161 shares outstanding at December 31, 2022 and March 31, 2023, respectively

 

 

8

 

 

 

8

 

Additional paid-in capital

 

 

728,339

 

 

 

730,825

 

Accumulated deficit

 

 

(625,251

)

 

 

(651,051

)

Accumulated other comprehensive loss

 

 

(1,144

)

 

 

(1,015

)

Total stockholders’ equity

 

 

101,952

 

 

 

78,767

 

Total liabilities and stockholders' equity

 

$

156,439

 

 

$

122,620

 

 

The accompanying notes are an integral part of these unaudited 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,

 

 

 

2022

 

 

2023

 

Net revenue

 

$

41,673

 

 

$

34,879

 

Cost of good sold

 

 

18,066

 

 

 

15,782

 

Gross profit

 

 

23,607

 

 

 

19,097

 

Operating expenses:

 

 

 

 

 

 

Sales and distribution

 

 

22,974

 

 

 

20,226

 

Research and development

 

 

1,144

 

 

 

1,247

 

General and administrative

 

 

9,541

 

 

 

5,959

 

Impairment loss on goodwill

 

 

29,020

 

 

 

 

Impairment loss on intangibles

 

 

 

 

 

16,660

 

Change in fair value of contingent earn-out liabilities

 

 

(2,775

)

 

 

 

Total operating expenses

 

 

59,904

 

 

 

44,092

 

Operating loss

 

 

(36,297

)

 

 

(24,995

)

Interest expense, net

 

 

802

 

 

 

371

 

Gain on extinguishment of seller note

 

 

(2,012

)

 

 

 

Loss on initial issuance of equity

 

 

5,835

 

 

 

 

Change in fair value of warrant liability

 

 

1,879

 

 

 

354

 

Other (income) expense, net

 

 

(25

)

 

 

54

 

Loss before income taxes

 

 

(42,776

)

 

 

(25,774

)

Provision for income taxes

 

 

 

 

 

26

 

Net loss

 

$

(42,776

)

 

$

(25,800

)

Net loss per share, basic and diluted

 

$

(0.78

)

 

$

(0.34

)

Weighted-average number of shares outstanding, basic and diluted

 

 

55,141,448

 

 

 

76,732,539

 

 

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

4


 

ATERIAN, INC.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(in thousands)

 

 

Three Months Ended March 31,

 

 

2022

 

 

2023

 

Net loss

$

(42,776

)

 

$

(25,800

)

Other comprehensive loss:

 

 

 

 

 

Foreign currency translation adjustments

 

(171

)

 

 

129

 

Other comprehensive loss

 

(171

)

 

 

129

 

Comprehensive loss

$

(42,947

)

 

$

(25,671

)

 

The accompanying notes are an integral part of these unaudited 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, 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

80,752,290

 

 

$

8

 

 

$

728,339

 

 

$

(625,251

)

 

$

(1,144

)

 

$

101,952

 

Net loss

 

 

 

 

 

 

 

(25,800

)

 

 

 

 

(25,800

)

Issuance of shares of restricted common stock

 

668,104

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeiture of shares of restricted common stock

 

(586,233

)

 

 

 

 

 

 

 

 

 

 

Issuance of common stock

 

300,000

 

 

 

 

 

 

290

 

 

 

 

 

 

 

 

 

290

 

Stock-based compensation expense

 

 

 

 

 

2,196

 

 

 

 

 

 

 

2,196

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

129

 

 

 

129

 

BALANCE—March 31, 2023

 

81,134,161

 

 

$

8

 

 

$

730,825

 

 

$

(651,051

)

 

$

(1,015

)

 

$

78,767

 

 

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

 

6


 

ATERIAN, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2023

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

Net loss

 

$

(42,776

)

 

$

(25,800

)

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

 

 

 

 

 

 

Depreciation and amortization

 

 

1,846

 

 

 

1,762

 

Provision for (recovery of) sales returns

 

 

109

 

 

 

(223

)

Amortization of deferred financing cost and debt discounts

 

 

106

 

 

 

106

 

Stock-based compensation

 

 

2,865

 

 

 

2,317

 

Gain from decrease of contingent earn-out liability fair value

 

 

(2,775

)

 

 

Change in inventory provisions

 

 

 

 

(1,023

)

Loss in connection with the change in warrant fair value

 

 

1,879

 

 

 

354

 

Gain in connection with settlement of note payable

 

 

(2,012

)

 

 

 

Loss on initial issuance of equity

 

 

5,835

 

 

 

 

Impairment loss on goodwill

 

 

29,020

 

 

 

Impairment loss on intangibles

 

 

 

 

16,660

 

Changes in assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

4,608

 

 

 

1,028

 

Inventory

 

 

(12,380

)

 

 

4,312

 

Prepaid and other current assets

 

 

410

 

 

 

751

 

Accounts payable, accrued and other liabilities

 

 

95

 

 

 

(7,661

)

Cash used in operating activities

 

 

(13,170

)

 

 

(7,417

)

INVESTING ACTIVITIES:

 

 

 

 

 

 

Purchase of fixed assets

 

 

(16

)

 

 

(33

)

Purchase of Step and Go assets

 

 

 

 

 

(125

)

Cash used in investing activities

 

 

(16

)

 

 

(158

)

FINANCING ACTIVITIES:

 

 

 

 

 

 

Proceeds from equity offering, net of issuance costs

 

 

27,007

 

 

 

 

Repayments on note payable to Smash

 

 

(1,084

)

 

 

(398

)

Borrowings from MidCap credit facilities

 

 

30,357

 

 

 

20,549

 

Repayments for MidCap credit facilities

 

 

(33,845

)

 

 

(22,602

)

Insurance obligation payments

 

 

(719

)

 

 

(534

)

Cash provided (used) by financing activities

 

 

21,716

 

 

 

(2,985

)

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

 

 

(171

)

 

 

129

 

Net change in cash and restricted cash for the year

 

 

8,359

 

 

 

(10,431

)

Cash and restricted cash at beginning of year

 

 

38,315

 

 

 

46,629

 

Cash and restricted cash at end of year

 

$

46,674

 

 

$

36,198

 

RECONCILIATION OF CASH AND RESTRICTED CASH:

 

 

 

 

 

 

Cash

 

 

44,281

 

 

 

33,911

 

Restricted Cash—Prepaid and other current assets

 

 

2,264

 

 

 

2,158

 

Restricted cash—Other non-current assets

 

 

129

 

 

 

129

 

TOTAL CASH AND RESTRICTED CASH

 

$

46,674

 

 

$

36,198

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

Cash paid for interest

 

$

357

 

 

$

538

 

NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

Non-cash consideration paid to contractors

 

$

 

 

$

321

 

Fair value of warrants issued in connection with equity offering

 

$

18,982

 

 

$

 

Issuance of common stock for settlement of seller note

 

$

767

 

 

$

 

Equity fundraising cost not paid

 

$

166

 

 

$

 

 

 

 

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

7


 

Aterian, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2022 and 2023 (Unaudited)

(In thousands, except share and per share data)

1.
ORGANIZATION AND DESCRIPTION OF BUSINESS

Aterian, Inc. is a technology-enabled consumer products company that builds, acquires and partners with e-commerce brands. Aterian predominantly operates through online retail channels such as Amazon and Walmart, Inc. The Company operates its owned 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 essential oils.

 

Headquartered in New Jersey, Aterian also maintains offices in China, Philippines, and Poland.

 

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 and negative cash flows for the foreseeable future until such time that we reach a scale of profitability to sustain our operations. In addition, our 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 below for additional details).

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 scale 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 Condensed 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, 2023, we incurred a net loss of $25.8 million and used net cash flows in our operations of $7.4 million. In addition, as of March 31, 2023, we had unrestricted cash and cash equivalents of $33.9 million available to fund our operations and an accumulated deficit of $651.1 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, 2023, and expect to remain in compliance through at least March 31, 2024. However, with our short history of forecasting our business during the ongoing COVID-19 global pandemic, the current record global inflation and related global supply chain disruptions, 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 may 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 are continually exploring additional outside capital, specifically to fund our M&A growth strategy, there can be no assurance we will be able 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.

8


 

 

• The Company's plan to continue to closely monitor our operating forecast, our M&A strategy, pursue additional sources of outside capital on terms that are acceptable to us, and 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. If some or all of our plans prove unsuccessful, we may need to implement short-term changes to our operating plan, such as delaying expenditures, reducing investments in new products, delaying the development of our software, 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.

These uncertainties raise substantial doubt about our ability to continue as a going concern. The accompanying Condensed 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 Condensed Consolidated Financial Statements do not include any adjustments that may result from the outcome of these uncertainties.

 

COVID-19 Pandemic and the Supply Chain

 

During 2022, we were impacted by the COVID-19 pandemic and related global shipping disruption. Together these led to substantial increases in supply chain costs, in particular for shipping containers, which we rely on to import our goods, reduced the reliability and timely delivery of shipping containers and substantially increased our last mile shipping costs on our oversized goods, which are a material part of our business. The reduced reliability and delivery of such shipping containers forced us to spend more on premium shipping to ensure goods were delivered. Further, the global shipping disruption led us to increase our inventory on-hand in early 2022, including advance ordering and taking possession of inventory earlier than expected, impacting our 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 adjusted following the onset of COVID-19 pandemic. There remains significant uncertainty to consumer demand and buying habits 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. and potentially reduced demand for our products.

We continue to consider the impact of the COVID-19 and the related supply chain disruptions on the assumptions and estimates used when preparing our Condensed Consolidated Financial Statements including inventory valuation, and the impairment of long-lived assets. These assumptions and estimates may change. If the economic conditions worsen beyond what is currently estimated by management, such future changes may have an adverse impact on our business, operations, financial results, and liquidity.

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, 2023 and the results of its operations and its cash flows for the periods ended March 31, 2023 and 2022. The financial data and other information disclosed in these notes related to the three-month periods ended March 31, 2023 and 2022 are also unaudited. The results for the three-month periods ended March 31, 2023 are not necessarily indicative of results to be expected for the year ending December 31, 2023, any other interim periods or any future year or period.

 

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.

 

9


 

Restricted Cash—As of December 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 Consolidated Balance Sheets, $2.0 million related to a letter of credit and $0.9 million for cash sweeps account related to the Midcap Credit Facility within "Prepaid and Other Current Assets" on the Consolidated Balance Sheets.

 

As of March 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 Condensed Consolidated Balance Sheets, $2.0 million related to a letter of credit and $0.2 million for cash sweeps account related to the Midcap Credit Facility 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. These assumptions about future disposition of inventory are inherently uncertain and changes in our estimates and assumptions may cause us to realize material write-downs in the future.

The “Cost of goods sold” line item in the Condensed 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, 2022 and March 31, 2023, the Company had an allowance for doubtful accounts of $0.4 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 $0.6 million at December 31, 2022 and $0.4 million at March 31, 2023, 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, similarly, 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.

10


 

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, 2022

 

 

 

(in thousands)

 

 

 

Direct

 

 

Wholesale/Other

 

 

Total

 

North America

 

$

38,633

 

 

$

1,629

 

 

$

40,262

 

Other

 

 

1,411

 

 

 

 

 

 

1,411

 

Total net revenue

 

$

40,044

 

 

$

1,629

 

 

$

41,673

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$