Aterian, Inc. (filing registrant: Mohawk Group Holdings, Inc.) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020, compared with Q1 2019. The filing is dated May 11, 2020. The filing text identifies the registrant as Mohawk Group Holdings, Inc.; it does not explain the relationship to the Aterian name in the request metadata.
Business context
The company describes itself as a technology-enabled consumer products business using its AIMEE software platform to develop, market, and sell products, primarily through online marketplaces. Substantially all sales are made through Amazon. Product revenue is concentrated in environmental and small home appliances. The company also launched the Holonix Health brand for personal protective equipment and wellness products in response to COVID-19.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2020 |
|---|---|---|
| Net revenue | $17.8 million | $25.6 million |
| Gross profit / gross margin | $6.7 million / 37.4% | $10.3 million / 40.2% |
| Operating loss | $7.1 million | $13.9 million |
| Net loss | $8.4 million | $15.0 million |
| Net loss per share, basic and diluted | $0.73 | $0.99 |
| Cash used in operating activities | $11.9 million | $17.1 million |
| Adjusted EBITDA (non-GAAP) | $(5.6) million | $(6.4) million |
Revenue rose 43.6%, driven mainly by direct sales, up 47.7% to $25.2 million. Environmental-appliance revenue increased to $13.3 million from $6.6 million, principally reflecting products launched over the prior year. Gross margin improved 2.8 percentage points, which management attributed to lower unit costs and manufacturer volume discounts. However, operating expenses increased 75.3% to $24.2 million; the operating-loss margin widened to 54.2% from 40.0%. Net loss increased 79.2%. Stock-based compensation rose to $7.4 million from $1.5 million and was a major factor in higher reported expenses. Adjusted EBITDA loss as a percentage of revenue improved to 25.0% from 31.3%.
At March 31, 2020, cash was $14.1 million (cash and restricted cash totaled $14.5 million), inventory was $44.3 million, and current liabilities were $56.6 million versus current assets of $67.3 million. The balance sheet showed $23.9 million for the credit facility and $13.6 million for term loans, net of specified discounts and issuance costs. The company separately reported $25.0 million of principal outstanding on its revolving facility and $15.0 million on its term loan. Revolver availability was less than $0.1 million. The company reported $37.4 million of total borrowings from lenders, a figure that reflects its reported carrying-value presentation.
Operating cash outflow increased year over year, including cash investment in receivables and inventory. Inventory rose $8.0 million during the quarter. The company stated that it had raised $102.0 million in equity financing since inception, including IPO proceeds.
Outlook, risks, and unusual items
- Going concern: Management’s forecast for the following 12 months assumed revenue growth, margin expansion, certain fixed-cost reductions, improved inventory management, and a reduced operating cash deficit. The filing states that substantial doubt exists about the company’s ability to continue as a going concern. Forecast achievement and continued covenant compliance are not assured; management said additional financing may be needed, potentially on expensive or dilutive terms. A covenant breach could make borrowings due on demand absent a lender waiver.
- COVID-19 and supply chain: The company said the pandemic began adversely affecting it and manufacturing partners in January. Substantially all products are sourced and manufactured in China; one manufacturer expected to produce over 30% of 2020 inventory had reopened and reached over 90% capacity by early March. Revenue had increased from March through the filing date, but future effects on demand, sourcing, logistics, inventory replenishment, and operations remained uncertain. The company also disclosed vendor-payment delays and a temporary loss of Sinosure export-credit-insurance availability in April; the insurance had been reinstated to levels management considered sufficient as of the filing date.
- Regulatory matters: The Department of Energy questioned compliance of a dehumidifier model with energy-conservation standards; potential penalties were not estimable. The EPA had identified certain dehumidifiers in relation to ENERGY STAR requirements; the company was not selling or marketing the identified products. In April, the EPA also placed a hold on imports of certain dehumidifiers while reviewing compliance and advertising issues. The company disputed the concerns; costs or penalties could not be estimated.
- Controls: Disclosure controls were not effective at March 31, 2020 due to previously reported material weaknesses involving IT access and change management, account reconciliations and journal entries, stock-compensation analysis, and review of accounting and disclosure guidance. Remediation steps were underway, but effectiveness was not established.
- Other: Management cited seasonality in environmental appliances and holiday-related kitchen products. The company also discussed tariff exposure on China-sourced goods and said planned price increases might not fully offset tariffs or could reduce customer orders. No formal quantified revenue or earnings guidance was provided.
Most important facts for investors to verify
- How the stated 12-month liquidity and operating forecast compares with actual subsequent results, and whether the company obtained additional financing or lender covenant relief.
- Whether cash burn, inventory levels, and vendor payment timing improved, and whether export-credit insurance remained available.
- Whether pandemic-related supply constraints or demand shifts affected new launches, product availability, and sales concentration in environmental appliances and Amazon.
- The outcomes and financial exposure, if any, from the DOE and EPA matters, including the import hold on certain dehumidifiers.
- Whether internal-control remediation was completed and tested, and the effect of stock-based compensation on reported operating costs and dilution.
- The issuer-name and corporate continuity relationship between the Mohawk Group Holdings, Inc. registrant named in this filing and Aterian, Inc.