Aterian, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited consolidated financial statements. Aterian sells consumer products primarily through online marketplaces, with most sales on Amazon.
Financial performance and liquidity
| Metric | Q3 2023 | Prior-year comparison | Nine months 2023 | Prior-year comparison |
|---|---|---|---|---|
| Revenue | $39.7 million | Down 40.2% | $109.8 million | Down 34.0% |
| Gross profit / margin | $19.6 million / 49.4% | 45.5% margin | $53.6 million / 48.8% | 51.2% margin |
| Operating loss | $6.5 million | $108.9 million loss | $67.9 million | $155.4 million loss |
| Net loss | $6.3 million | $116.9 million loss | $66.9 million | $176.0 million loss |
| Operating cash flow | Not provided for the quarter | — | $(8.5) million | $(19.5) million |
| Adjusted EBITDA (non-GAAP) | $(4.4) million | $(9.1) million | $(16.7) million | $(17.3) million |
Q3 gross margin improved year over year, but nine-month gross margin declined. Management attributed Q3 improvement chiefly to product mix and less liquidation of high-priced excess inventory than in the prior-year quarter. Nine-month margin pressure reflected product mix, competitive pricing, and liquidation sales. Contribution margin, another company-defined non-GAAP measure, was $1.2 million (3.0% of revenue) in Q3 and $2.0 million (1.8%) for the nine months.
Revenue fell across all product categories. Management cited weaker consumer demand, competition and pricing pressure, and loss of prominent Amazon product positioning. Q3 direct revenue declined 38.0%; wholesale revenue fell 94.4%. Sales and distribution costs declined in dollars with sales volume but rose as a share of revenue to 52.7% in Q3 and 56.2% for the nine months.
At September 30, cash was $28.0 million, inventory $31.5 million, and current assets $68.7 million versus current liabilities of $38.6 million. Cash and restricted cash totaled $30.5 million. Total liabilities were $40.1 million. The MidCap facility balance was $14.7 million gross ($14.2 million net of debt issuance costs and warrant discount), down from $21.9 million gross at year-end 2022; it matures in December 2024. Facility availability was only $0.6 million. The company was in covenant compliance at quarter-end; the facility requires minimum liquidity of $15.0 million generally and $12.5 million during February through May.
Material changes and unusual items
- Q3 net loss improved substantially from 2022, when results included $90.9 million of goodwill impairment and other significant charges. The 2023 nine-month results include $39.4 million of intangible-asset impairment, but no goodwill impairment; goodwill had been fully impaired in 2022.
- The 2023 intangible impairment comprised $16.7 million related to the essential-oils business and $22.8 million related to the Paper and kitchen-appliance businesses. No impairment trigger was identified in Q3.
- Operating expenses were lower year over year, including sales and distribution and general and administrative expenses. The company recorded $1.6 million of restructuring costs for the nine months, following a workforce reduction affecting about 50 employees and 15 contractors, primarily in the Philippines.
- Cash used in financing activities was $7.5 million for the nine months, primarily reflecting net repayments on the MidCap facility. Cash declined from $43.6 million at December 31, 2022 to $28.0 million at September 30, 2023.
- Shares outstanding were 89.1 million at September 30, versus 80.8 million at December 31, 2022; 90.2 million were reported outstanding on November 1, 2023.
Outlook, risks, and contingencies
- Going concern: Management states that substantial doubt exists about the company’s ability to continue as a going concern. It reported continuing losses, negative operating cash flow, declining revenue, no firm commitments for additional capital, and possible inability to meet obligations over the twelve months following issuance without operating cash inflows and/or new financing. The financial statements assume continued operations and include no adjustments for the outcome of these uncertainties.
- Management plans to monitor forecasts, seek acceptable outside capital, pursue its M&A strategy, and reduce non-core or unprofitable SKUs. It warns that failure of these plans could require spending cuts, reduced product or software investment, asset or business sales, significant operational curtailment, or insolvency. No numerical revenue or earnings guidance is provided. Management expects further product rationalization to reduce revenue in upcoming quarters.
- Nasdaq granted an extension through April 22, 2024 to regain compliance with the $1.00 minimum bid-price requirement. Failure to regain compliance could lead to delisting; a reverse stock split may be considered.
- Amazon concentration, marketplace competition, pricing pressure, consumer weakness, inflation, supply-chain disruption, and dependence on external capital are key risks. Management also cited turnover in software development and potential changes to its AIMEE platform strategy.
- The company disclosed an earn-out dispute in which former sellers claim approximately $8.8 million; Aterian disputes the claim and the matter is undergoing the contractually specified resolution process. A Mueller product-marketing settlement of $0.8 million received preliminary court approval, with a final approval hearing scheduled for February 2024. Accrued potential sales-tax liability was approximately $0.9 million. The company says ordinary-course legal matters are not expected to have a material adverse effect, while noting outcomes and insurance coverage are uncertain.
- CEO Yaniv Sarig resigned in July 2023; Arturo Rodriguez and Joseph Risico became co-CEOs. Management says disclosure controls were effective at September 30, 2023, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether operations, SKU rationalization, and available liquidity can reduce cash burn enough to sustain the business without committed new capital.
- MidCap covenant compliance, borrowing availability, facility terms and maturity, and the effect of any covenant breach or waiver requirement.
- Revenue and contribution-margin trends by category and channel, including Amazon dependence and the impact of advertising, fulfillment fees, pricing, and product-positioning changes.
- Assumptions behind the $39.4 million intangible impairment and the risk of further impairment or inventory write-downs.
- Share-count changes and potential dilution, Nasdaq bid-price compliance, and developments in the earn-out and Mueller matters.