Business context and reporting period
This Form 10-Q covers the quarter and nine months ended September 30, 2020. The registrant was Mohawk Group Holdings, Inc. (Nasdaq: MWK), now identified in the request as Aterian, Inc. It operated a technology-enabled consumer products business, selling mainly through online marketplaces, particularly Amazon U.S., and using its AIMEE analytics and automation platform.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net revenue | $58.8m | $40.6m | $144.2m | $88.8m |
| Gross profit | $28.1m | $17.5m | $66.0m | $36.0m |
| Gross margin | 47.8% | 43.2% | 45.8% | 40.5% |
| Operating income (loss) | $0.1m | $(14.1)m | $(15.6)m | $(36.8)m |
| Net loss | $(0.8)m | $(15.0)m | $(18.8)m | $(40.2)m |
| Adjusted EBITDA, non-GAAP | $5.1m | $(2.7)m | $2.0m | $(11.9)m |
- Q3 diluted and basic loss per share was $0.05, versus $0.99 in the prior-year quarter; nine-month loss per share was $1.18 versus $3.10.
- Q3 revenue grew 44.8% year over year. Direct revenue rose 21.0% to $48.4m; wholesale revenue rose to $10.0m, primarily reflecting PPE sales. PPE contributed $8.8m in Q3 and $14.6m in the nine-month period.
- Q3 gross margin improved as management cited higher selling prices, lower unit costs, and manufacturer volume discounts. Sales and distribution expense was $18.9m, or 32.2% of revenue, compared with 44.6% a year earlier. The company attributed lower expense ratios partly to fulfillment efficiencies and lower stock-based compensation.
- Nine-month operating cash flow was positive $7.6m, compared with negative $13.1m. The 2020 result included a $17.2m inventory-related cash inflow and a $7.5m accounts-receivable cash outflow; cash generation therefore reflected working-capital movements as well as operations.
- Cash at September 30 was $37.4m, compared with $30.4m at December 31, 2019. Current assets were $72.0m and current liabilities $46.8m. Inventory declined to $18.8m from $36.2m.
- Reported lender borrowings were $28.7m at September 30, down from $35.1m at year-end; this excludes the separately disclosed $2.4m unsecured Truweo seller note. The credit facility had $14.2m drawn and only $0.4m available; the Horizon term loan had $14.0m outstanding. The company reported covenant compliance at quarter-end.
Material changes and significant transactions
- On August 26, 2020, the company raised approximately $23.4m net in a follow-on stock offering, issuing 3,860,710 shares at $7.00 per share. Shares outstanding rose to 21,844,944 at September 30 from 17,736,649 at December 31, 2019.
- Also on August 26, the company acquired the Truweo e-commerce health and wellness assets for $16.4m: $14.0m cash and a $2.4m unsecured note bearing 8% interest. Preliminary purchase accounting included $12.7m goodwill and $3.1m intangible assets.
- Nine-month revenue increased 62.4%, while gross margin expanded to 45.8%. The company reported a substantially smaller operating and net loss than in the prior-year period. Q3 operating results were near break-even, but the company remained loss-making for the first nine months.
- Management reported 32 product launches in the first nine months of 2020, compared with 14 in the prior-year period. It also reduced initial order quantities for launches to limit inventory exposure, while noting this could slow products’ progress to the sustain phase or raise launch marketing costs.
Outlook, risks, contingencies, and controls
- No formal numerical revenue or earnings guidance was provided. Management’s 12-month forecast assumed revenue growth, margin expansion, lower certain fixed costs, better inventory management, reduced operating cash deficits, and continued covenant compliance. Management cautioned that forecast performance and future financing were not assured.
- The filing states that conditions—including the company’s operating-loss history, growth investment strategy, COVID-19 uncertainty, and limited track record of meeting forecasts—raise substantial doubt about its ability to continue as a going concern. The statements nevertheless use the going-concern basis and include no related adjustments. Management said it may seek additional capital; any financing could be expensive or dilutive. A covenant breach could make borrowings due on demand absent lender waiver.
- COVID-19 had so far coincided with increased online demand and few reported material operational impacts, but the company warned of potential disruption to Chinese sourcing, manufacturing, logistics, inventory replenishment, product launches, demand, and access to capital. Substantially all products were sourced or manufactured in China, and one manufacturer was expected to produce over 30% of 2020 inventory.
- Marketplace dependence is significant: substantially all product sales were made through Amazon U.S. The filing notes prior listing suspensions, including dehumidifier listings, and the risk that marketplace policy, fulfillment, or listing changes could impair sales.
- Regulatory matters include a DOE test notice regarding a dehumidifier model, EPA/ENERGY STAR disputes and a hold on sales of certain dehumidifier inventory, and a California Energy Commission matter for which the company was negotiating a penalty. Potential penalties or costs were not clearly quantifiable; the filing warns some could be material.
- The company reported that disclosure controls were not effective at September 30 because previously identified material weaknesses in internal controls remained. Weaknesses included IT access and change controls, account reconciliation and journal-entry review, stock-compensation review, and accounting/disclosure analysis. Remediation work was underway, including third-party assistance.
- Other risks include shipping-cost increases effective from November 2020, concentration among shipping providers, volatile PPE demand and collections, inventory forecasting, tariffs, and reliance on third-party manufacturers and warehouses. Ordinary-course legal matters were disclosed; the company said it was not party to a material legal proceeding.
Most important facts for investors to verify
- Whether operating cash flow remains positive after working-capital effects, particularly inventory drawdown and receivables collection.
- Whether growth and margins persist after the PPE-related wholesale sales and the pandemic-driven shift to online shopping.
- Cash needs, available borrowing capacity, covenant headroom, and progress toward resolving the stated going-concern doubt.
- Truweo’s post-acquisition revenue and profitability, and the assumptions supporting its goodwill and intangible-asset valuations.
- Outcomes and potential costs of DOE, EPA, and California Energy Commission matters, including any continuing restrictions on dehumidifier sales.
- Progress remediating internal-control material weaknesses and the effect of the equity offering and share-based compensation on dilution.