Aterian, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Aterian operates a technology-enabled portfolio of consumer-product brands, selling primarily through online marketplaces such as Amazon and Walmart.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net revenue | $66.3 million | $68.1 million | $166.3 million | $184.4 million |
| Gross profit | $30.2 million | $34.2 million | $85.2 million | $93.0 million |
| Gross margin | 45.5% | 50.2% | 51.2% | 50.4% |
| Operating loss | $108.9 million | $7.5 million | $155.4 million | $30.8 million |
| Net loss | $116.9 million | $110.6 million | $176.0 million | $229.4 million |
| Operating cash used | Not separately stated | Not separately stated | $19.5 million | $40.4 million |
- Q3 revenue declined 2.6% year over year; nine-month revenue declined 9.9%. Management cited softer consumer demand, price increases tied to supply-chain costs, and inventory shortages. Growth in organic revenue partly reflects acquired businesses moving into the organic comparison after one year.
- Q3 gross margin fell 4.7 percentage points, with higher shipping costs and liquidation of higher-cost excess inventory cited as factors. Nine-month gross margin rose 0.8 points, primarily due to product mix, partly offset by supply-chain costs and inventory liquidation.
- Q3 non-GAAP contribution margin was $0.7 million, or 1.1% of revenue, versus $8.2 million, or 12.1%, a year earlier. Nine-month contribution margin was $10.2 million, or 6.1%, versus $20.0 million, or 10.9%. Adjusted EBITDA was a loss of $9.1 million for Q3 and $17.3 million for the nine-month period; these are company-defined non-GAAP measures.
- Nine-month net loss improved year over year, largely because 2021 included substantial debt-extinguishment and warrant-related charges. Q3 2022 results included $90.9 million of goodwill impairment, $3.1 million of intangible impairment, and $12.8 million of expense associated with the September equity offering.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $26.0 million; total current assets were $101.8 million and current liabilities $60.6 million. Inventory was $60.5 million. Total assets were $161.5 million, down from $313.6 million at year-end 2021, primarily reflecting impairment charges; stockholders’ equity was $99.3 million.
- Credit-facility debt was $23.9 million net of financing costs and warrant discount (approximately $24.9 million before those deductions). The $50 million MidCap revolver had approximately $4.0 million of availability. The company reported compliance with its liquidity covenant and stated minimum required liquidity is generally $15 million, with a lower seasonal threshold from February through May.
- Cash and restricted cash totaled $29.0 million at September 30, including $3.0 million of restricted cash. Nine-month investing cash use was less than $0.1 million; financing activities provided $11.2 million in the cash-flow statement.
- A $20.2 million gross registered direct offering closed October 4, 2022, after the reporting date. It issued 10.6 million shares and warrants to purchase an additional 10.6 million shares; proceeds were intended for working capital and general corporate purposes.
Changes, outlook and risks
- Goodwill was fully impaired: the company recorded $90.9 million in Q3 and $119.9 million for the first nine months of 2022. Management linked the impairment assessment to falling market capitalization, higher interest rates, inflation and supply-chain disruption. It also recorded a $3.1 million impairment of certain definite-lived trademark assets.
- Management stated that substantial doubt exists about Aterian’s ability to continue as a going concern, citing recurring losses, operating cash use, reliance on outside capital and uncertainty about future covenant compliance and financing. It plans to monitor forecasts, pursue financing and continue its acquisition strategy; it cautioned that operating-plan reductions may be needed if funding or covenant relief is unavailable.
- No formal financial guidance is provided. Management expected to continue liquidating excess inventory at reduced margins through the remainder of 2022 and anticipated shipping-container availability and costs could improve further in 2023, while emphasizing there was no assurance. The company paused most full-scale new-product launches; it reported one launch in the first nine months of 2022.
- Key operating risks include consumer-demand weakness, inflation, shipping and last-mile delivery costs, inventory imbalances, dependence on manufacturers—mostly in China—and geopolitical and COVID-related disruption. The company also disclosed a dehumidifier production issue that could constrain inventory for certain versions.
- Legal and contingency matters include a finalized securities-class-action settlement funded with a $1.3 million payment; a $1.6 million settlement of an investor contract action; a proposed derivative-action settlement of up to $0.3 million subject to final documents and court approval; an agreement in principle for the Mueller product-labeling matter; and ongoing Sentia Wellness and Photo Paper Direct earn-out disputes. A supplier settlement receivable and goods claim remained fully reserved.
- Management reported disclosure controls were effective as of September 30, 2022, with no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether cash generation, financing access and MidCap availability are sufficient to meet obligations and maintain covenant compliance; assess the going-concern warning in light of the October offering and subsequent cash use.
- The dilution and potential warrant exercise impact of the October offering, alongside the March 2022 financing and outstanding equity awards.
- Whether revenue, contribution margin and inventory levels stabilize as excess stock is liquidated, and whether shipping and fulfillment costs actually improve.
- The assumptions behind the full goodwill impairment and whether further intangible or other asset impairments may be required.
- Developments, expected costs and potential exposure from pending litigation, the earn-out dispute and the supplier claim.