Aterian, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Aterian operates a technology-enabled consumer products platform with 14 brands, selling primarily through online channels, especially Amazon. Financial amounts below are in millions of dollars unless otherwise stated.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $58.3 | $68.2 | $99.9 | $116.3 |
| Gross profit | $31.4 | $32.7 | $55.0 | $58.8 |
| Gross margin | 53.8% | 48.0% | 55.0% | 50.6% |
| Operating income (loss) | $(10.1) | $4.5 | $(46.4) | $(23.3) |
| Net loss | $(16.3) | $(36.3) | $(59.1) | $(118.9) |
| Adjusted EBITDA (non-GAAP) | $(3.7) | $(3.7) | $(8.3) | $(5.0) |
| Contribution margin (non-GAAP) | $5.6 | $5.7 | $9.5 | $11.8 |
| Operating cash flow | Not provided for quarter | $(22.1) | $(32.8) |
Q2 revenue fell 14.5% year over year; first-half revenue declined 14.1%. Management said organic revenue grew 92.3% in Q2 and 84.3% in the first half as revenue from acquired businesses shifted into the organic category after one year. Total sales nevertheless declined, reflecting lower acquired-business revenue and weaker sales in several categories. Gross margin improved, partly due to a product mix weighted toward smaller, higher-margin acquired-brand products; management cautioned that supply-chain and shipping costs remained a headwind. Adjusted EBITDA remained negative and worsened year over year for the first half.
Financial position and liquidity
- At June 30, 2022, cash and cash equivalents were $34.8; total current assets were $128.8 and current liabilities were $83.4. Inventory was $76.1, up from $63.0 at year-end 2021.
- Total assets were $284.6, including goodwill of $90.9 after a $29.0 non-cash impairment charge in Q1. Stockholders’ equity was $200.8; accumulated deficit was $488.0.
- Credit-facility borrowings were approximately $34.0, with $1.9 of availability reported. The facility requires minimum liquidity of $12.5 during February–May and $15.0 at other times; the company reported compliance as of the filing date. The filing describes the facility as $50.0 million in the notes but $40.0 million in MD&A; verify the applicable commitment and borrowing-base terms.
- Cash and restricted cash totaled $37.1 at June 30. First-half financing cash flow was $21.5, including $27.0 net proceeds from an equity offering; operating activities used $22.1 of cash.
- Shares outstanding increased from 55.1 million at December 31, 2021 to 69.2 million at June 30, 2022; 69.5 million were outstanding on August 5, 2022. The March private placement generated approximately $27.5 million gross and included shares and warrants.
Material changes, outlook and risks
- Going concern: Management states that substantial doubt exists about the company’s ability to continue as a going concern, citing recurring losses, operating cash use, dependence on outside capital, and uncertainty about obtaining further financing or maintaining covenant compliance over the next 12 months. There were no firm commitments for additional capital. Management plans to monitor forecasts and seek capital; if needed, it may defer spending, reduce product investment or software development, and scale back operations.
- Operations and demand: COVID-related disruptions, Chinese lockdowns, container shortages, higher premium freight and last-mile delivery costs, inflation, and weaker consumer demand affected sales and working capital. The company increased inventory and paused full-scale new product launches; it reported no qualifying new product launches in the first half of 2022. It expected elevated shipping costs to continue in the near term and anticipated selling off excess inventory during the remainder of 2022.
- Product and impairment risks: A supplier reported a production issue affecting certain dehumidifier batches; the company said it largely addressed the issue but warned of possible Q3 inventory constraints. Further goodwill impairment could follow if results, market capitalization, discount rates, or valuation multiples deteriorate.
- Unusual items: The first-half results include the $29.0 goodwill impairment, $5.8 loss on initial issuance of equity, $7.9 warrant-liability fair-value loss, and a $2.0 gain on extinguishment of a seller note. Q2 warrant-liability remeasurement generated a $6.0 loss. These items affect comparability and include non-cash fair-value charges.
- Legal and other contingencies: The company paid $1.3 into escrow for a securities class-action settlement, subject to final court approval. Other disclosed matters include shareholder derivative suits, a contract action, a product-marketing matter with a proposed $0.5 cash and $0.3 coupon resolution, a disputed acquisition earn-out, and a newly filed Sentia Wellness action; loss ranges for several matters were not estimable. A potential data-security incident involving a UK website was reported in April 2022, with outcome uncertain.
- Guidance: The filing provides no quantified revenue, earnings, or cash-flow guidance. Management’s commentary points to continued supply-chain, inflation, demand, inventory, and financing uncertainty. Management reported effective disclosure controls as of June 30, 2022.
Key facts for investors to verify
- How much liquidity is accessible after restricted cash, borrowing-base limits, covenant requirements, and expected operating cash use?
- Why does the filing describe the MidCap facility as both $50.0 million and $40.0 million, and what is actual borrowing availability?
- Can the company reduce operating cash burn and improve Adjusted EBITDA without undermining revenue or product availability?
- What is the outlook for inventory levels, excess-stock clearance, freight costs, and the reported dehumidifier supply issue?
- What are the potential dilution and accounting impacts of outstanding warrants, equity awards, and future capital needs?
- What are the final outcomes and potential financial exposure from the pending legal matters and the UK website security incident?