Aterian, Inc. — Q2 2021 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2021. Amounts are in U.S. dollars; financial figures below are in millions unless stated otherwise. The filing was signed August 9, 2021.
Business context
Aterian operates a technology-enabled consumer-products platform, selling primarily through online marketplaces including Amazon and Walmart. It reported 14 brands across home, kitchen, health and beauty, and other categories. In 2021 it acquired Healing Solutions, Squatty Potty and Photo Paper Direct; those acquisitions materially affected reported growth and product mix.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net revenue | $68.2 | $59.8 | $116.3 | $85.4 |
| Gross profit / margin | $32.7 / 48.0% | $27.6 / 46.2% | $58.8 / 50.6% | $37.9 / 44.4% |
| Operating income (loss) | $4.5 | $(1.8) | $(23.3) | $(15.7) |
| Net loss | $(36.3) | $(2.9) | $(118.9) | $(18.0) |
| Adjusted EBITDA, non-GAAP | $(3.7) | $3.4 | $(5.0) | $(3.0) |
| Cash used in operating activities | Not separately stated for Q2 | $(32.8) | $(8.9) |
- Q2 revenue grew 14%, but management said organic direct revenue declined $19.2 million, excluding acquired businesses. For the first half, revenue rose 36%, while organic direct revenue declined $27.0 million excluding acquisitions.
- Acquired businesses contributed approximately $33.6 million of Q2 direct revenue and $63.0 million for the first half, as presented in management’s discussion. Revenue growth therefore does not indicate comparable organic growth.
- Q2 operating income included a $23.3 million favorable change in the fair value of contingent earn-out liabilities. Despite that gain, the company recorded a $36.3 million net loss, including debt-extinguishment and warrant-related charges.
- Sales and distribution expense was $39.3 million in Q2, up 111% year over year and 57.6% of revenue, reflecting shipping and fulfillment costs, a $4.1 million reserve related to a PPE supplier dispute, and acquisition-related costs. Q2 cost of goods sold also included a $2.5 million slow-moving inventory reserve.
- At June 30, cash was $61.9 million, restricted cash was $2.1 million, inventory was $75.5 million and current assets were $166.4 million. Current liabilities were $161.7 million; the reported current ratio was approximately 1.03.
- The April 2021 High Trail notes had $110 million face value, carried 8% interest and mature in 2024. The balance sheet reported $72.8 million as current term-loan liability and no noncurrent term loans. The MidCap credit facility had been repaid and terminated.
- Shares outstanding increased from 27.1 million at year-end 2020 to 35.7 million at June 30, 2021. The company also raised $36.7 million net in a June private placement.
Material changes, outlook and risks
- Supply chain and demand: Management cited higher container, international freight and last-mile shipping costs, shipping delays, inventory shortages and increased inventory needs. It expected these pressures to continue for at least six to nine months. Reopening-related changes in buying behavior and price increases may also have reduced demand.
- Going concern and debt covenant: The company breached its Adjusted EBITDA covenant with High Trail for the quarter and stated that substantial doubt existed about its ability to continue as a going concern. It said it had secured a waiver, subject to specified cash payment and share issuance conditions. Management reduced its next-12-month forecast and identified cost reductions, shipping-provider negotiations and postponement or cancellation of some product launches as possible actions.
- Subsequent lender action: On August 9, High Trail declared a default for failure to meet a $12 million trailing-12-month Adjusted EBITDA threshold and accelerated principal. The filing describes the amount due inconsistently: Note 12 states $21.5 million, while Item 5 states $21.8 million; both describe $10.1 million cash payment and $11.7 million payable in shares. The waiver was conditional on those payments. Amendments also raised the minimum cash covenant to $30 million through October 31, 2021, added a liquidity covenant and changed warrant terms.
- Guidance and strategy: The company withdrew its 2021 revenue and Adjusted EBITDA guidance and said it could not say when guidance would resume. It planned to temporarily pause launches of products manufactured in Asia and reduce acquisition activity while supply-chain conditions remained difficult. No replacement financial guidance is provided.
- Unusual financing and accounting items: First-half net loss included $29.8 million of debt-extinguishment loss, $34.6 million of warrant fair-value losses, $20.1 million loss on initial warrant issuance, and $1.9 million derivative fair-value loss. These items, along with the earn-out fair-value gain, materially affect reported results.
- Contingencies: Two securities class actions allege misleading statements about acquisitions, organic growth, AIMEE software and marketing practices; the company said it could not estimate a loss and recorded no liability. DOE and EPA matters relating to dehumidifier compliance remain unresolved, with potential penalties or costs not estimable. A supplier failed to meet a settlement payment and product-delivery obligation; the company reserved $4.1 million of prepaid assets.
- Controls: Management concluded disclosure controls were effective as of June 30, 2021 and reported no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether High Trail’s waiver conditions were completed, the exact amount and share count used to satisfy the accelerated obligation, and compliance with the revised cash and liquidity covenants.
- Cash availability after the $10.1 million lender payment, the share issuance, restricted cash, working-capital needs and continued operating cash burn.
- Organic sales trends and the revenue, margins and cash contribution of acquired businesses, separately from acquisition-driven reported growth.
- Whether freight, fulfillment and inventory costs improve, and the company’s exposure to inventory obsolescence, stockouts and consumer-demand changes.
- The status and potential financial impact of the securities litigation, DOE/EPA matters and supplier dispute, plus any further lender or financing developments.