Aterian, Inc. — Q3 2021 Form 10-Q
Business and period. Aterian operates a technology-enabled portfolio of consumer-product brands, selling primarily through online marketplaces. This unaudited filing covers the quarter and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods. The company completed acquisitions of Healing Solutions, Squatty Potty and Photo Paper Direct during 2021.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $68.1 million | $58.8 million | $184.4 million | $144.2 million |
| Gross profit / margin | $34.2 million / 50.2% | $28.1 million / 47.8% | $93.0 million / 50.4% | $66.0 million / 45.8% |
| Operating income (loss) | $(7.5) million | $0.1 million | $(30.8) million | $(15.6) million |
| Net income (loss) | $(110.6) million | $(0.8) million | $(229.4) million | $(18.8) million |
| Adjusted EBITDA (non-GAAP) | $0.7 million | $5.1 million | $(4.2) million | $2.0 million |
| Contribution margin (non-GAAP) | $8.2 million / 12.1% | $11.2 million / 19.1% | $20.0 million / 10.9% | $20.5 million / 14.2% |
Revenue rose 15.9% in Q3 and 27.9% year to date, but growth was acquisition-led: Q3 organic revenue fell 24.6% to $35.4 million, and nine-month organic revenue fell 30.3% to $87.8 million. Management attributed the organic declines to lower demand as retail reopened, price increases to offset delivery costs, and inventory shortages from delayed shipments. Q3 acquisitions contributed $30.7 million of revenue, compared with $1.4 million in the prior-year quarter.
Gross margin improved largely because acquired products generally had higher margins than Aterian’s oversized organic products. However, higher shipping and fulfillment costs weighed on contribution margin. Q3 sales and distribution expense increased 70.7% to $32.3 million; as a share of revenue it rose to 47.5% from 32.2%. The nine-month 2021 net loss includes $136.8 million of debt-extinguishment losses, along with warrant-related and other noncash accounting items; Q3 debt-extinguishment loss was $107.0 million.
Cash, liquidity and debt
- At September 30, cash was $37.5 million; cash and restricted cash totaled $39.6 million. Current assets were $130.9 million and current liabilities $66.5 million.
- Inventory rose to $71.3 million from $31.6 million at December 31, 2020, reflecting advance purchasing and longer, less reliable shipping lead times.
- Operating activities used $40.4 million of cash in the first nine months, versus providing $7.6 million in the prior-year period. Investing used $44.9 million, primarily for acquisitions; financing provided $95.3 million.
- The MidCap credit facility was repaid and terminated in April 2021. After High Trail defaults, amendments and debt repayment transactions, $25.0 million of term debt remained, due April 2023. The company reported compliance with its renegotiated financial covenants as of the filing date.
- High Trail received substantial common-stock payments in settlement of accelerated debt, including 12.2 million shares issued in connection with the 2021 debt restructuring, in addition to cash repayments. High Trail’s warrants were exercised in full after quarter-end, on October 21, 2021, for 3.5 million additional shares.
Outlook, risks and unusual items
- Going concern: Management stated that supply-chain costs and disruption, weaker demand, reduced forecasts and covenant risks raise substantial doubt about the company’s ability to continue as a going concern. The financial statements include no adjustments for the outcome of this uncertainty.
- Guidance: Aterian reduced its 2021 forecasts and withdrew 2021 net-revenue and Adjusted EBITDA guidance in August. It said it could not predict when guidance might resume. It expected supply-chain impacts to continue for at least six to nine months.
- Management actions: Seek additional shipping vendors, renegotiate last-mile rates, reduce fixed costs, hold more inventory, and postpone or cancel some product launches. The company temporarily paused launches of products manufactured in Asia; there were no new product launches in Q3.
- Key operating risks: Container availability and freight costs, increased last-mile shipping and raw-material costs, tariffs, inflation, demand uncertainty, inventory shortages or obsolescence, dependence on online marketplaces, and ability to meet debt covenants. The company recorded $3.0 million of inventory-obsolescence expense year to date.
- Legal and regulatory matters: A supplier failed to make agreed settlement payments and deliver goods; Aterian reserved $4.1 million and commenced legal action. The filing also describes securities class-action and shareholder derivative cases, a Sabby contract action, and unresolved DOE/EPA matters concerning certain dehumidifiers. Losses for the lawsuits and potential regulatory penalties could not be reasonably estimated.
- Acquisitions and accounting: Acquisition-related earn-out liabilities totaled $31.6 million. Goodwill increased to $118.6 million; management reported no impairment-triggering event at quarter-end but warned that share-price declines or lower long-term forecasts could lead to impairment. Share-based compensation was $21.3 million for the nine-month period.
Investor verification priorities
- Review liquidity forecasts, cash needs and the assumptions supporting management’s going-concern assessment.
- Track covenant compliance, remaining High Trail debt terms, and any further dilution or financing requirements.
- Assess whether organic sales stabilize and whether acquired revenue and margins offset ongoing declines in the legacy business.
- Monitor freight, fulfillment and inventory costs, inventory quality, product-launch delays, and the ability to pass cost increases to customers.
- Follow developments and potential financial exposure in the supplier, securities, derivative and regulatory matters.