Aterian, Inc. (filed as Mohawk Group Holdings, Inc.) — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. The filing identifies the registrant as Mohawk Group Holdings, Inc.; it describes a technology-enabled consumer products business using its AIMEE analytics platform and selling primarily through online marketplaces. (The company name in the request differs from the name on this filing.) Dollar amounts below are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net revenue | $59.8 | $30.4 | $85.4 | $48.2 |
| Gross profit / gross margin | $27.6 / 46.2% | $11.8 / 38.7% | $37.9 / 44.4% | $18.4 / 38.2% |
| Operating loss | $(1.8) | $(15.6) | $(15.7) | $(22.7) |
| Net loss | $(2.9) | $(16.9) | $(18.0) | $(25.3) |
| Adjusted EBITDA (non-GAAP) | $3.4 | $(3.7) | $(3.0) | $(9.3) |
Q2 revenue increased 96.9% year over year; first-half revenue increased 77.2%. Management attributed growth to higher direct sales, product launches, pricing and existing products, as well as $5.7 million of Q2 PPE sales. Environmental appliances generated $34.6 million of Q2 revenue; PPE contributed $5.7 million. Managed SaaS revenue declined to $0.3 million from $0.4 million in Q2 2019.
Gross margin improved year over year, which management linked to higher selling prices, lower unit product costs and manufacturer volume discounts. Sales and distribution expense was $18.6 million in Q2, but fell to 31.1% of revenue from 45.1%. Cost leverage and lower shipping costs helped; the company also reported a $0.6 million stock-compensation credit in this expense category due to forfeitures.
For the six months, operating cash used was $8.9 million, compared with $16.3 million in 2019. Investing cash used was $0.02 million; financing cash used was $4.2 million. Cash and restricted cash totaled $17.6 million at June 30, 2020, including $17.2 million of unrestricted cash. Cash declined by $13.2 million during the half-year.
At June 30, cash was $17.2 million, current assets $59.9 million and current liabilities $48.2 million. Inventory was $27.3 million, down from $36.2 million at year-end 2019; accounts receivable rose to $8.6 million from $1.1 million. Gross debt was $34.1 million: $19.1 million under the MidCap revolving facility and $15.0 million under the Horizon term loan. The balance sheet reports debt carrying values of approximately $25.9 million after discounts and issuance costs. No borrowing capacity was available under the revolving facility.
Changes, outlook and principal risks
- Management said it expected PPE net revenue to grow in the second half of 2020; no quantified company-wide revenue or earnings guidance was provided. It described its internal 12-month forecast as assuming revenue growth, margin expansion, lower fixed costs, improved inventory management and reduced operating cash deficits.
- The company launched 24 products in the first half, versus 11 in the comparable 2019 period. It reduced initial order quantities for new products to limit working-capital exposure, while noting this could lengthen the path to product profitability or increase launch marketing costs.
- Management said it had met or exceeded forecasts in the prior two quarters, but disclosed substantial doubt about the company’s ability to continue as a going concern. It warned that liquidity and covenant compliance may require additional financing; any financing could be expensive or dilutive. A covenant breach could make borrowings due on demand. The company reported covenant compliance at June 30.
- COVID-19 had increased online demand and disrupted parts of the supply chain. Substantially all products were sourced and manufactured in China, and one manufacturer was expected to supply over 30% of 2020 inventory. Vendor payment delays temporarily affected export credit insurance in April; the filing says coverage had been reinstated by the report date.
- Amazon is the company’s principal sales channel. Amazon suspended certain dehumidifier listings in Q2, and Amazon’s fulfillment restrictions, marketplace policies or loss of Prime eligibility could materially affect sales.
- Regulatory matters remain unresolved. The EPA placed a hold on sales of certain dehumidifier inventory and is reviewing compliance and advertising; the company also disputed DOE testing and ENERGY STAR determinations. Potential costs or penalties were not estimable and could be material. The company was negotiating a penalty with the California Energy Commission regarding appliance listings.
- Disclosure controls were determined ineffective as of June 30 due to previously identified material weaknesses involving IT access and change controls, journal-entry and reconciliation review, stock-compensation analysis, and accounting/disclosure review. Remediation and additional testing were ongoing.
Most important facts for investors to verify
- Cash runway, operating cash burn, access to new financing and ongoing compliance with minimum-liquidity and other debt covenants.
- Whether PPE sales continue beyond the reported $5.7 million Q2 contribution, including customer demand, delivery, product quality and collections.
- Revenue concentration in Amazon and the outcome and commercial impact of suspended dehumidifier listings and EPA, DOE and California regulatory matters.
- Whether gross-margin gains, shipping-cost savings and product launches persist, given seasonality, tariffs, supply-chain concentration and the company’s history of product launches not consistently reaching its sustain phase.
- Progress in remediating internal-control material weaknesses and the timing and results of effectiveness testing.