Aterian, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with the three months ended March 31, 2021. Aterian operates a technology-enabled portfolio of consumer product brands, selling primarily through online channels, especially Amazon.
Financial and operating results
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net revenue | $41.7 million | $48.1 million |
| Gross profit / gross margin | $23.6 million / 56.6% | $26.1 million / 54.1% |
| Operating loss | $36.3 million | $27.8 million |
| Net loss | $42.8 million | $82.6 million |
| Adjusted EBITDA (non-GAAP) | $(4.5) million; (10.9)% of revenue | $(1.2) million; (2.5)% of revenue |
| Cash used in operating activities | $13.2 million | $8.5 million |
| Cash and cash equivalents at quarter-end | $44.3 million | — |
At March 31, 2022, inventory was $75.4 million, total assets were $297.0 million, and stockholders’ equity was $197.4 million. Cash flow from investing activities was a $0.02 million outflow; financing activities provided $21.7 million. Cash and restricted cash totaled $46.7 million, including $2.4 million of restricted cash.
The MidCap revolving facility had approximately $29.5 million outstanding and $3.6 million of availability. Its stated commitment is up to $40 million, subject to a borrowing base. The facility bears interest at a base or LIBOR rate plus 5.50% and includes minimum-liquidity covenants. Aterian reported compliance as of March 31, 2022. The balance sheet reports $29.5 million of current credit-facility debt.
Material changes and notable items
- Revenue declined 13.4%. Direct revenue fell 13.2%; organic revenue rose 70.8% to $29.8 million, while revenue from acquired businesses fell to $9.6 million from $28.7 million as prior-year acquisition revenue shifted into the organic comparison after one year.
- Management attributed weaker sales in several categories to reduced e-commerce demand as stores reopened, price increases, inventory shortages and delayed deliveries. No new products were launched in Q1 2022; launches were paused because of supply-chain uncertainty.
- Gross margin increased to 56.6%, which management attributed mainly to product mix. However, non-GAAP contribution margin declined to $3.8 million, or 9.2% of revenue, from $6.1 million, or 12.7%, as variable selling, advertising and logistics costs remained significant.
- Operating loss widened despite lower net loss. A $29.0 million non-cash goodwill impairment, prompted primarily by the decline in market capitalization, contributed to the operating loss. Lower interest expense and smaller warrant-related fair-value charges helped reduce net loss year over year.
- The March private placement generated approximately $27.5 million gross proceeds through common shares and warrants. The company recorded a $20.9 million warrant liability at quarter-end and a $5.8 million loss on initial issuance of equity. Shares outstanding increased from 55.1 million at year-end 2021 to 62.3 million at March 31, 2022; 65.4 million were outstanding as of May 9, 2022.
- Inventory rose from $63.0 million at year-end to $75.4 million, including $19.0 million in transit. Management said advance purchasing and higher on-hand inventory were responses to shipping delays and were pressuring working capital.
- Aterian settled a Truweo seller note for 292,887 shares and recorded a $2.0 million gain on extinguishment.
Outlook, risks and contingencies
- Going concern: Management said substantial doubt exists about Aterian’s ability to continue as a going concern. The company reported a $471.7 million accumulated deficit, a $42.8 million quarterly net loss and no firm commitments for additional outside capital. Management plans to monitor forecasts and seek capital, but gave no assurance that funding or sufficient operating cash will be available over the next twelve months. Failure to improve results, obtain capital or maintain covenant compliance could require significant operating reductions and could expose borrowings to acceleration.
- Costs and demand: COVID-related disruption, container and last-mile shipping costs, inflation, tariffs and lockdowns in China may raise costs, delay deliveries and constrain supply. Price increases have sometimes reduced sales velocity; management expects elevated shipping costs to continue in the near term. The company also cited uncertainty related to Russia’s invasion of Ukraine.
- Product and regulatory matters: A supplier reported production issues involving certain dehumidifier batches; Aterian was assessing affected inventory and warned of possible Q3 2022 stockouts. DOE and EPA matters concerning dehumidifier energy standards, ENERGY STAR compliance and advertising remain unresolved; potential penalties or costs were not clearly estimable.
- Legal matters: A proposed securities-class-action settlement requires a $1.3 million payment and remained subject to final court approval. A Mueller product-marketing matter had an agreement in principle for $0.5 million cash plus $0.3 million in coupons, subject to formal documents and court approval. The company is also defending shareholder derivative and Sabby contract actions; loss ranges were not estimable. A supplier settlement receivable and goods obligation remained disputed, with a $4.1 million reserve recorded.
- Cybersecurity: On April 25, 2022, Aterian was alerted to a potential data-security incident involving a UK website and said its investigation was continuing.
- Goodwill: Further deterioration in operating expectations, stock price or market multiples could result in additional impairment charges. Management provided no numerical revenue or earnings guidance in the filing.
Most important facts for investors to verify
- Whether Aterian can fund operations and meet MidCap liquidity covenants without committed additional capital, and the facility’s borrowing-base availability and terms.
- Whether revenue trends, contribution margin and operating cash use improve after paused launches, pricing changes and supply constraints.
- Inventory quality, aging and sell-through, including the dehumidifier production issue and any expected Q3 stockouts.
- The dilution and potential cash or share impact of the March 2022 warrants and other equity-linked obligations.
- Final outcomes and costs of the securities settlement, Mueller matter, other litigation and DOE/EPA proceedings, as well as the UK data-incident investigation.
- Whether further goodwill impairment is required and how management’s valuation assumptions compare with subsequent results.