Business Context and Reporting Period
Mohawk Group Holdings, Inc. (subsequently known as Aterian, Inc.) filed this Form 8-K on February 3, 2021, reporting transactions completed or entered into on February 2, 2021. The filing concerns a private debt and warrant financing, an acquisition of a retail and ecommerce business, and related amendments to the company’s existing credit arrangements. It is not a periodic financial-results filing and does not provide revenue or earnings for a reporting period.
Key Financial Metrics and Transactions
| Item | Reported terms |
|---|---|
| Private placement proceeds | $14.025 million, less applicable expenses |
| New senior secured note | $16.5 million principal; 0% coupon; maturity February 1, 2023; no amortization payments |
| Warrant | Up to 469,931 common shares at an exercise price of $25.10 per share; exercisable beginning August 2, 2021; five-year term |
| Asset purchase cash consideration | $15.280 million, including $1.993 million withheld as collateral for certain overdue trade payables |
| Asset purchase equity consideration | 1,387,759 closing shares, plus 170,042 potential inventory consideration shares, subject to adjustment up to 280,000 shares |
| Potential additional equity consideration | Up to 528,670 earn-out shares to the seller and up to 208,242 consulting shares; maximum seller share issuance under the purchase agreement is 2,196,429 shares |
| Existing revolving facility | $25.0 million revolving credit facility; amended to permit the new debt and acquisition |
| Transition services | Fees not exceeding $623,729 per month; agreement generally terminates 15 months after closing |
The filing does not provide current or prior-period revenue, net income, operating cash flow, free cash flow, gross margin, operating margin, cash balance, debt balance, or liquidity ratios.
Material Changes Versus the Prior Comparable Period
- The company incurred a new $16.5 million senior secured obligation and issued warrants in a private placement.
- The company acquired certain assets of Healing Solutions, LLC’s retail and ecommerce business, including brands such as Healing Solutions, Tarvol, Sun Essential Oils, and Artizen, and assumed certain liabilities.
- The company issued 1,387,759 shares at a stated cost basis of $24.01 per share and may issue additional inventory, earn-out, and consulting shares.
- The existing MidCap credit agreement was amended to permit the new debt, related payments, and the asset purchase, and to restrict amendments to the new note.
- The company amended the December 2020 note and warrant documents. The forced-exercise threshold for the December warrant was increased from $18.02 to $30.00 per share.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The new note contains restrictive covenants covering additional debt and liens, investments, dividends, earnings, and minimum cash levels.
- Upon certain equity financings, the company must redeem portions of the new note and the December note, generally based on a specified percentage of financing proceeds and subject to a $5.5 million cap per financing.
- Following an event of default, the investor may require cash redemption at 115% of outstanding principal plus default interest at 15% annually. If cash is not paid, repayment may be made partly or entirely in common stock at a discounted VWAP-based price.
- The investor may require redemption upon a fundamental change and has participation rights in certain future debt, preferred stock, equity-linked, and common-stock financings through at least the later of August 2, 2022, or repayment of the note.
- The note and warrant include beneficial-ownership limitations generally capped at 4.99%, subject to an increase up to 9.99% after notice and a waiting period.
- The seller’s shares are subject to a six-month lock-up, voting commitments, and standstill restrictions. The seller also agreed to support supplier-transition efforts.
- Potential earn-out shares depend on obtaining new suppliers and ending transition services within 15 months. Inventory value determination was expected approximately nine to ten months after closing.
- The company committed to file resale registration statements for applicable acquisition-related shares within 120 days after issuance.
- Historical financial statements of the acquired business and pro forma financial information were not included in this filing; the company stated that it intended to file them by amendment within 71 calendar days.
Important Facts for Investors to Verify
- Verify the final historical and pro forma financial information for the acquired business when filed.
- Verify the company’s post-transaction cash balance, total debt, compliance with minimum-cash and earnings covenants, and availability under the $25.0 million revolving facility.
- Assess dilution from the 469,931 warrants and the potential inventory, earn-out, and consulting shares.
- Review the note’s redemption, default, equity-financing sweep, and future-financing participation provisions.
- Evaluate the acquired business’s supplier transition, transition-service costs, inventory valuation, and ability to satisfy earn-out conditions.
- Confirm the final amount released or retained from the $1.993 million trade-payables collateral and any assumed liabilities.