0001757715 Aterian, Inc. false --12-31 Q3 2023 0.0001 0.0001 500,000,000 500,000,000 80,752,290 80,752,290 89,132,183 89,132,183 3.1 3 10 1 1 4 3 10 6,902,816 On March 20, 2023, the Company made certain leadership changes in our essential oil business resulting in a change in strategy and outlook for the business which will result in a reduced portfolio offering. This reduction in the portfolio will be impactful to our essential oil business's future revenues and profitability and as a result the Company made revisions to our internal forecasts. The Company concluded that this change was an interim triggering event for the three months ending March 31, 2023 indicating the carrying value of our essential oil business's long-lived assets including trademarks may not be recoverable. Accordingly, the Company performed an interim impairment test of the trademark and assessed the recoverability of the related intangible assets by using level 3 inputs and comparing the carrying value of an asset group to the net undiscounted cash flow expected to be generated. The recoverability test indicated that certain definite-live trademark intangible assets were impaired. The Company concluded the carrying value of the trademark exceeded its estimated fair value which was determined utilizing the relief-from-royalty method to determine discounted projected future cash flows which resulted in an impairment charge. The Company recorded an intangible impairment charge of $16.7 million in the three months ending March 31, 2023 within impairment loss on intangibles on the condensed consolidated statement of operations. The Company evaluated current economic conditions during 2022, including the impact of the Federal Reserve further increasing the risk-free interest rate, as well as the inflationary pressure on product and labor costs and operational impacts attributable to continued global supply chain disruptions. The Company believed that these conditions were factors in our market capitalization falling below the book value of net assets during the fiscal quarters ending March 31, 2022 and September 30, 2022. Accordingly, the Company concluded a triggering event had occurred in each of these periods and performed interim goodwill impairment analyses. As a result, the Company recorded a goodwill impairment charge of approximately $29.0 million and $90.9 during the three months ended March 31, 2022 and September 30, 2022, respectively. On October 4, 2022, the Company acquired Step and Go, a brand in the health and Wellness category, for $0.7 million. As part of the purchase price allocation of the acquisition, $0.5 million was attributed to goodwill. As our market capitalization was further reduced below net assets as of December 31, 2022, we concluded a triggering event has occurred to test goodwill, an impairment loss on goodwill of $0.5 million was recorded for the three months ended December 31, 2022, which is included in impairment loss on goodwill in the Consolidated Statement of Operations for the year-ended December 31, 2022. Certain asset groups experienced a significant decrease in sales and contribution margin through September 30, 2022. This was considered an interim triggering event for the three months ended September 30, 2022. Based on the analysis of comparing the undiscounted cash flow to the carrying value of the asset group, one group tested indicated that the assets may not be recoverable. 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Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 


 

FORM 10-Q

 


 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2023

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 001-38937


Aterian, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

83-1739858

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer
Identification Number)

   

350 Springfield Avenue, Suite 200

Summit, NJ

 

07901

(Address of principal executive offices)

 

(Zip Code)

 

(347) 676-1681

(Registrants telephone number, including area code)


 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.0001 par value per share

 

ATER

 

The Nasdaq Stock Market LLC

 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

 ☒

Non-accelerated filer

 

Smaller reporting company

 

Emerging growth company

   

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ☒

 

As of November 1, 2023, the registrant had 90,213,264 shares of common stock, $0.0001 par value per share, outstanding.



 

 

 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

3

 

Condensed Consolidated Balance Sheets

3

 

Condensed Consolidated Statements of Operations

4

 

Condensed Consolidated Statements of Comprehensive Loss

5

 

Condensed Consolidated Statements of Stockholder’s Equity

6

 

Condensed Consolidated Statements of Cash Flows

8

 

Notes to Unaudited Condensed Consolidated Financial Statements

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

44

Item 4.

Controls and Procedures

44

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

45

Item 1A.

Risk Factors

45

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

48

Item 3.

Defaults Upon Senior Securities

48

Item 4.

Mine Safety Disclosures

48

Item 5.

Other Information

48

Item 6.

Exhibits

49

Signatures

 

50

 

 

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). Many of these statements can be identified by the use of terminology such as believes, expects, intends, anticipates, plans, may, will, could, "would, projects, continues, estimates, potential, opportunity or the negative versions of these terms and other similar expressions. Our actual results or experience could differ significantly from the forward-looking statements. Factors that could cause or contribute to these differences include those discussed in Risk Factors, in Part II, Item 1A of this Quarterly Report on Form 10-Q as well as information provided elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the Securities and Exchange Commission (the SEC) on March 16, 2023. You should carefully consider that information before you make an investment decision.

 

You should not place undue reliance on these types of forward-looking statements, which speak only as of the date that they were made. These forward-looking statements are based on the beliefs and assumptions of the Companys management based on information currently available to management and should be considered in connection with any written or oral forward-looking statements that the Company may issue in the future as well as other cautionary statements the Company has made and may make. Except as required by law, the Company does not undertake any obligation to release publicly any revisions to these forward-looking statements after completion of the filing of this Quarterly Report on Form 10-Q to reflect later events or circumstances or the occurrence of unanticipated events.

 

The discussion of the Companys financial condition and results of operations should be read in conjunction with the Companys Condensed Consolidated Financial Statements and the related Notes thereto included in this Quarterly Report on Form 10-Q.

 

 

 

PART IFINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

ATERIAN, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except share and per share data)

 

  

December 31, 2022

  

September 30, 2023

 

ASSETS

        

Current assets:

        

Cash

 $43,574  $27,955 

Accounts receivable, net

  4,515   3,271 

Inventory

  43,666   31,493 

Prepaid and other current assets

  8,261   5,963 

Total current assets

  100,016   68,682 

Property and equipment, net

  853   792 

Other intangibles, net

  54,757   12,016 

Other non-current assets

  813   541 

Total assets

 $156,439  $82,031 

LIABILITIES AND STOCKHOLDERS’ EQUITY

        

Current Liabilities:

        

Credit facility

 $21,053  $14,182 

Accounts payable

  16,035   12,464 

Seller notes

  1,693   1,196 

Accrued and other current liabilities

  14,254   10,740 

Total current liabilities

  53,035   38,582 

Other liabilities

  1,452   1,540 

Total liabilities

  54,487   40,122 

Commitments and contingencies (Note 9)

          

Stockholders' equity:

        

Common stock, $0.0001 par value, 500,000,000 shares authorized and 80,752,290 and 89,132,183 shares outstanding at December 31, 2022 and September 30, 2023, respectively

  8   9 

Additional paid-in capital

  728,339   735,110 

Accumulated deficit

  (625,251)  (692,108)

Accumulated other comprehensive loss

  (1,144)  (1,102)

Total stockholders’ equity

  101,952   41,909 

Total liabilities and stockholders' equity

 $156,439  $82,031 

 

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

 

 

 

ATERIAN, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

(in thousands, except share and per share data)

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2022

  

2023

  

2022

  

2023

 

Net revenue

 $66,326  $39,668  $166,268  $109,811 

Cost of good sold

  36,135   20,085   81,118   56,236 

Gross profit

  30,191   19,583   85,150   53,575 

Operating expenses:

                

Sales and distribution

  33,792   20,921   88,632   61,704 

Research and development

  1,706   852   4,582   3,808 

General and administrative

  10,369   4,326   29,481   16,566 

Impairment loss on goodwill

  90,921      119,941    

Impairment loss on intangibles

  3,118      3,118   39,445 

Change in fair value of contingent earn-out liabilities

  (774)     (5,240)   

Total operating expenses

  139,132   26,099   240,514   121,523 

Operating loss

  (108,941)  (6,516)  (155,364)  (67,948)

Interest expense, net

  904   359   2,043   1,076 

Gain on extinguishment of seller note

        (2,012)   

Loss on initial issuance of equity

  12,834      18,669    

Change in fair value of warrant liability

  (5,528)  (567)  2,365   (2,410)

Other (income) expense, net

  (174)  (128)  (199)  101 

Loss before income taxes

  (116,977)  (6,180)  (176,230)  (66,715)

Provision (benefit) for income taxes

  (75)  90   (243)  142 

Net loss

 $(116,902) $(6,270) $(175,987) $(66,857)

Net loss per share, basic and diluted

 $(1.81) $(0.08) $(2.78) $(0.86)

Weighted-average number of shares outstanding, basic and diluted

  64,648,650   79,022,467   63,397,196   77,801,774 

 

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

 

 

 

ATERIAN, INC.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(in thousands)

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2022

  

2023

  

2022

  

2023

 

Net loss

 $(116,902) $(6,270) $(175,987) $(66,857)

Other comprehensive loss:

                

Foreign currency translation adjustments

  (485)  (213)  (1,087)  42 

Other comprehensive loss

  (485)  (213)  (1,087)  42 

Comprehensive loss

 $(117,387) $(6,483) $(177,074) $(66,815)

 

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

 

 

 

ATERIAN, INC.

Condensed Consolidated Statements of Stockholders Equity

(Unaudited)

(in thousands, except share and per share data)

 

 

   

Three Months Ended September 30, 2022

 
   

Common Stock

   

Additional Paid-in

   

Accumulated

   

Accumulated Other Comprehensive

   

Total Stockholders’

 
   

Shares

   

Amount

   

Capital

   

Deficit

   

Loss

   

Equity

 

BALANCE—July 1, 2022

    69,219,384     $ 7     $ 689,955     $ (488,044 )   $ (1,070 )   $ 200,848  

Net loss

                      (116,902 )           (116,902 )

Issuance of shares of restricted common stock

    329,968       -                          

Forfeiture of shares of restricted common stock

    (31,965 )                              

Issuance of common stock

    23,362             43                   43  

Loss on initial issuance of equity

                12,834                   12,834  

Stock-based compensation expense

                2,943                   2,943  

Other comprehensive loss

                            (485 )     (485 )

BALANCE—September 30, 2022

    69,540,749     $ 7     $ 705,775     $ (604,946 )   $ (1,555 )   $ 99,281  

 

   

Three Months Ended September 30, 2023

 
   

Common Stock

   

Additional Paid-in

   

Accumulated

   

Accumulated Other Comprehensive

   

Total Stockholders’

 
   

Shares

   

Amount

   

Capital

   

Deficit

   

Loss

   

Equity

 

BALANCE—July 1, 2023

    88,014,844     $ 9     $ 733,878     $ (685,838 )   $ (889 )   $ 47,160  

Net loss

                      (6,270 )           (6,270 )

Issuance of shares of restricted common stock

    3,959,679                                

Forfeiture of shares of restricted common stock

    (2,842,340 )                              

Stock-based compensation expense

                1,232                   1,232  

Other comprehensive income

                            (213 )     (213 )

BALANCE—September 30, 2023

    89,132,183     $ 9     $ 735,110     $ (692,108 )   $ (1,102 )   $ 41,909  

 

 

ATERIAN, INC.

Condensed Consolidated Statements of Stockholders Equity

(Unaudited)

(in thousands, except share and per share data)

 

 

   

Nine Months Ended September 30, 2022

 
   

Common Stock

   

Additional Paid-in

   

Accumulated

   

Accumulated Other Comprehensive

   

Total Stockholders’

 
   

Shares

   

Amount

   

Capital

   

Deficit

   

Loss

   

Equity

 

BALANCE—January 1, 2022

    55,090,237     $ 5     $ 653,650     $ (428,959 )   $ (468 )   $ 224,228  

Net loss

                      (175,987 )           (175,987 )

Issuance of shares of restricted common stock

    4,350,642       1                         1  

Forfeiture of shares of restricted common stock

    (233,561 )                              

Exercise of prefunded warrants

    3,013,850             15,039                   15,039  

Issuance of common stock settlement of seller note

    292,887             767                   767  

Issuance of common stock, net of issuance costs

    7,003,332       1       27,006                   27,007  

Issuance of warrants in connection with offering

                (18,982 )                 (18,982 )

Issuance of common stock

    23,362             43                   43  

Loss on initial issuance of equity

                18,669                   18,669  

Issuance of warrants to contractors

                  1,137                   1,137  

Stock-based compensation expense

                8,446                   8,446  

Other comprehensive loss

                            (1,087 )     (1,087 )

BALANCE—September 30, 2022

    69,540,749     $ 7     $ 705,775     $ (604,946 )   $ (1,555 )   $ 99,281  

 

   

Nine Months Ended September 30, 2023

 
   

Common Stock

   

Additional Paid-in

   

Accumulated

   

Accumulated Other Comprehensive

   

Total Stockholders’

 
   

Shares

   

Amount

   

Capital

   

Deficit

   

Loss

   

Equity

 

BALANCE—January 1, 2023

    80,752,290     $ 8     $ 728,339     $ (625,251 )   $ (1,144 )   $ 101,952  

Net loss

                      (66,857 )           (66,857 )

Issuance of shares of restricted common stock

    12,050,644       1                         1  

Forfeiture of shares of restricted common stock

    (3,970,751 )                              

Issuance of common stock

    300,000             290                   290  

Stock-based compensation expense

                6,481                   6,481  

Other comprehensive income

                            42       42  

BALANCE—September 30, 2023

    89,132,183     $ 9     $ 735,110     $ (692,108 )   $ (1,102 )   $ 41,909  

 

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

 

 

 

ATERIAN, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

  

Nine Months Ended September 30,

 
  

2022

  

2023

 

OPERATING ACTIVITIES:

        

Net loss

 $(175,987) $(66,857)

Adjustments to reconcile net loss to net cash used by operating activities:

        

Depreciation and amortization

  5,763   3,416 

Provision for sales returns

  134   (215)

Amortization of deferred financing cost and debt discounts

  321   321 

Issuance of common stock

  43    

Stock-based compensation

  11,854   6,771 

Gain from decrease of contingent earn-out liability fair value

  (5,240)   

Change in inventory provisions

     213 

Loss (gain) in connection with the change in warrant fair value

  2,365   (2,410)

Gain in connection with settlement of note payable

  (2,012)   

Loss on initial issuance of equity

  18,669    

Impairment loss on goodwill

  119,941    

Impairment loss on intangibles

  3,118   39,445 

Allowance for doubtful accounts and other

  219   59 

Changes in assets and liabilities:

        

Accounts receivable

  5,326   1,186 

Inventory

  2,588   11,960 

Prepaid and other current assets

  3,351   1,942 

Accounts payable, accrued and other liabilities

  (9,994)  (4,289)

Cash used in operating activities

  (19,541)  (8,458)

INVESTING ACTIVITIES:

        

Purchase of fixed assets

  (29)  (80)

Purchase of Step and Go assets

     (125)

Cash used in investing activities

  (29)  (205)

FINANCING ACTIVITIES:

        

Proceeds from equity offering, net of issuance costs

  27,007    

Repayments on note payable to Smash

  (2,868)  (518)

Payment of Squatty Potty earn-out

  (3,983)   

Borrowings from MidCap credit facilities

  107,678   63,978 

Repayments for MidCap credit facilities

  (116,924)  (71,165)

Insurance obligation payments

  (1,778)  (788)

Insurance financing proceeds

  2,099   986 

Cash provided (used) by financing activities

  11,231   (7,507)

Foreign currency effect on cash, cash equivalents, and restricted cash

  (936)  42 

Net change in cash and restricted cash for the year

  (9,275)  (16,128)

Cash and restricted cash at beginning of year

  38,315   46,629 

Cash and restricted cash at end of year

 $29,040  $30,501 

RECONCILIATION OF CASH AND RESTRICTED CASH:

        

Cash

  25,997   27,955 

Restricted Cash—Prepaid and other current assets

  2,914   2,417 

Restricted cash—Other non-current assets

  129   129 

TOTAL CASH AND RESTRICTED CASH

 $29,040  $30,501 
         

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

        

Cash paid for interest

 $1,409  $1,457 

Cash paid for taxes

 $58  $90 

NON-CASH INVESTING AND FINANCING ACTIVITIES:

        

Non-cash consideration paid to contractors

 $1,137  $321 

Fair value of warrants issued in connection with equity offering

 $18,982  $ 

Issuance of common stock related to exercise of warrants

 $767  $ 

Issuance of common stock

 $43  $ 

Exercise of prefunded warrants

 $15,039  $ 

 

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

 

 

Aterian, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2022 and 2023 (Unaudited)

(In thousands, except share and per share data)

 

 

1.

ORGANIZATION AND DESCRIPTION OF BUSINESS

 

Aterian, Inc. is a technology-enabled consumer products company that predominantly operates through online retail channels such as Amazon and Walmart. The Company operates its owned brands, which were either incubated or purchased, selling products in multiple categories, including home and kitchen appliances, kitchenware, cooling and air quality appliances (dehumidifiers, humidifiers and air conditioners), health and beauty products and essential oils.

 

Headquartered in New Jersey, Aterian also maintains offices in China, Philippines, and Poland.

 

Liquidity and Going Concern

 

As an emerging growth company in the early commercialization stage of its lifecycle, we are subject to inherent risks and uncertainties associated with the development of our enterprise. In this regard, substantially all of our efforts to date have been devoted to the development and sale of our products in the marketplace, which includes our investment in organic growth at the expense of short-term profitably, our investment in incremental growth through mergers & acquisitions (“M&A strategy”), our recruitment of management and technical staff, and raising capital to fund the development of our enterprise. As a result of these efforts, we have incurred significant losses and negative cash flows from operations since our inception and expect to continue to incur such losses and negative cash flows for the foreseeable future until such time that we reach a scale of profitability to sustain our operations. We have also experienced declining revenues due to macroeconomic factors, including increased interest rates and reduced consumer discretionary spending, and other factors, and we intend to focus our efforts on a more limited number of products. In addition, our recent financial performance has been adversely impacted by inflationary pressures and reduced consumer spending.

 

In order to execute our growth strategy, we have historically relied on outside capital through the issuance of equity, debt, and borrowings under financing arrangements (collectively “outside capital”) to fund our cost structure, and we expect to continue to rely on outside capital for the foreseeable future, specifically for our M&A strategy. While we believe we will eventually reach a level of profitability to sustain our operations, there can be no assurance we will be able to achieve such profitability or do so in a manner that does not require our continued reliance on outside capital. Moreover, while we have historically been successful in raising outside capital, there can be no assurance we will be able to continue to obtain outside capital in the future or do so on terms that are acceptable to us.

 

As of the date the accompanying Condensed Consolidated Financial Statements were issued (the “issuance date”), we evaluated the significance of the following adverse financial conditions in accordance with Accounting Standard Codification 205-40, Going Concern:

 

• Since our inception, we have incurred significant losses and used cash flows from operations to fund our enterprise. In this regard, during the nine months ended September 30, 2023, we incurred a net loss of $66.9 million and used net cash flows in our operations of $8.5 million. In addition, as of September 30, 2023, we had unrestricted cash and cash equivalents of $28.0 million available to fund our operations and an accumulated deficit of $692.1 million. Our revenue of $109.8 million for the nine months ended September 30, 2023 declined from $166.3 million for the nine months ended September 30, 2022.

 

• We are required to remain in compliance with certain financial covenants required by the MidCap Credit facility (See Note 6, Credit Facility, Term Loans and Warrants). We were in compliance with these financial covenants as of September 30, 2023, and expect to remain in compliance through at least September 30, 2024. However, with our short history of forecasting our business following the onset of the COVID-19 global pandemic, the current global inflation and related global supply chain disruptions, we can provide no assurances that we will remain in compliance with our financial covenants. Further, absent of our ability to generate cash inflows from our operations or secure additional outside capital, we may be unable to remain in compliance with these financial covenants. In the event we are unable to remain in compliance with these financial covenants (or other non-financial covenants required by the MidCap Credit Facility), and we are unable to secure a waiver or forbearance, MidCap may, at its discretion, exercise any and all of its existing rights and remedies, which may include, among others, accelerating repayment of the outstanding borrowings and/or asserting its rights in the assets securing the loan.

 

• As of the issuance date, we have no firm commitments to secure additional outside capital from lenders or investors. While we expect to continue to explore raising additional outside capital, specifically to fund our M&A strategy, there can be no assurance we will be able obtain capital or do so on terms that are acceptable to us. Accordingly, absent our ability to generate cash inflows from our operations and/or secure additional outside capital in the near term, we may be unable to meet our obligations as they become due over the next twelve months beyond the issuance date.

 

9

 

• The Company's plan is to continue to closely monitor our operating forecast, to pursue our M&A strategy, to pursue additional sources of outside capital on terms that are acceptable to us, and to secure a waiver or forbearance from MidCap if we are unable to remain in compliance with one or more of the covenants required by the MidCap Credit Facility. Further, the Company is enacting a strategy to reduce the number of SKUs it sells and will no longer be pursuing future sales of SKUs that are either not profitable or not core to the Company’s strategy. If some or all of our plans prove unsuccessful, we may need to implement short-term changes to our operating plan, including but not limited to delaying expenditures, reducing investments in new products, delaying the development of our software, or reducing our sale and distribution infrastructure. We may also need to seek long-term strategic alternatives, such as a significant curtailment of our operations, a sale of certain of our assets, a divestiture of certain product lines, a sale of the entire enterprise to strategic or financial investors, and/or allow our enterprise to become insolvent.

 

Nasdaq Listing - On April 24, 2023,  we received a letter from the Listing Qualifications Staff of The Nasdaq Stock Market LLC (“Nasdaq”) indicating that, based upon the closing bid price of our common stock for the last 30 consecutive business days, the Company is not currently in compliance with the requirement to maintain a minimum bid price of $1.00 per share for continued listing on The Nasdaq Capital Market, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Notice”). The Bid Price Notice provided a compliance period of 180 calendar days from the date of the Bid Price Notice, or until October 23, 2023, to regain compliance with the minimum closing bid requirement, pursuant to Nasdaq Listing Rule 5810(c)(3)(A). Following a request we made on October 13, 2023, on October 24, 2023, we received a letter from Nasdaq granting the Company an additional 180 days, or until April 22, 2024, to regain compliance with the minimum closing bid requirement (the “Extension Notice”).

 

The Bid Price Notice has no immediate effect on the continued listing status of our common stock on The Nasdaq Capital Market, and, therefore, our listing remains fully effective. 

 

If at any time before April 22, 2024, the closing bid price of our common stock closes at or above $1.00 per share for a minimum of 10 consecutive business days, subject to Nasdaq’s discretion to extend this period pursuant to Nasdaq Listing Rule 5810(c)(3)(H) to 20 consecutive business days, Nasdaq will provide written notification that the Company has achieved compliance with the minimum bid price requirement, and the matter would be resolved.

 

The Company will continue to monitor the closing bid price of its Common Stock and seek to regain compliance with all applicable Nasdaq requirements within the allotted compliance period. If the Company does not regain compliance within the allotted compliance period, Nasdaq will provide notice that the Common Stock will be subject to delisting. The Company would then be entitled to appeal that determination to a Nasdaq hearings panel. There can be no assurance that the Company will regain compliance with the minimum bid price requirement during the compliance period, or maintain compliance with the other Nasdaq listing requirements.

 

In the future, if our common stock remains below the continued listing standard of $1.00 per share or otherwise fails to satisfy any of the Nasdaq continued listing requirements, and if we are unable to cure such deficiency during any subsequent cure period, our common stock could be delisted from the Nasdaq. If our common stock ultimately were to be delisted for any reason, we could face a number of significant material adverse consequences, including limited availability of market quotations for our common stock; limited news and analyst coverage; decreased ability to obtain additional financing or failure to comply with the covenants with our current lenders; limited liquidity for our stockholders due to thin trading; and the potential loss of confidence by investors, employees and other third parties who we do business with.

 

Further, we may decide to effect a reverse split of our common stock which could impact the market price for our stock, limit our ability to raise capital or otherwise limit our ability to execute acquisition transactions and there is no assurance that the market price or trading volume for our common stock will not further decline after announcing or effecting such split.

 

Restructuring - On May 9, 2023, the Company announced a plan to reduce expenses by implementing a reduction in its current workforce impacting approximately 50 employees and 15 contractors, primarily in the Philippines. The Company recognized restructuring charges of $0.4 million and $1.6 million for the three and nine months ended September 30, 2023, respectively.

 

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation—The Condensed Consolidated Financial Statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

 

Unaudited Interim Financial Information—The accompanying interim Condensed Consolidated Financial Statements are unaudited and have been prepared on the same basis as the audited financial statements and, in the opinion of management, reflect all adjustments necessary for the fair presentation of the Company's financial position as of  September 30, 2023 and the results of its operations and its cash flows for the periods ended September 30, 2022 and 2023. The financial data and other information disclosed in these notes related to the three and nine months ended September 30, 2022 and 2023 are also unaudited. The results for the three and nine months ended September 30, 2023 are not necessarily indicative of results to be expected for the year ending December 31, 2023, any other interim periods or any future year or period.

 

Use of Estimates—Preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period covered by the financial statements and accompanying notes. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from those estimates.

 

Principles of Consolidation—The Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

 

Restricted Cash—As of December 31, 2022, the Company has classified the following as restricted cash: $0.1 million related to its Chinese subsidiary within “Other Non-current Assets” on the Consolidated Balance Sheets, $2.0 million related to a letter of credit and $0.9 million for cash sweeps account related to the Midcap Credit Facility within "Prepaid and Other Current Assets" on the Consolidated Balance Sheets.

 

As of September 30, 2023, the Company has classified the following as restricted cash: $0.1 million related to its Chinese subsidiary within “Other Non-current Assets” on the Condensed Consolidated Balance Sheets, $2.0 million related to a letter of credit and $0.4 million for cash sweeps account related to the Midcap Credit Facility within "Prepaid and Other Current Assets" on the Condensed Consolidated Balance Sheets.

 

10

 

Inventory and Cost of Goods Sold—The Company’s inventory consists almost entirely of finished goods. The Company currently records inventory on its balance sheet on a first-in first-out basis, or net realizable value, if it is below the Company’s recorded cost. The Company’s costs include the amounts it pays manufacturers for product, tariffs and duties associated with transporting product across national borders, and freight costs associated with transporting the product from its manufacturers to its warehouses, as applicable. The valuation of our inventory requires us to make judgments, based on available information such as historical data, about the likely method of disposition, such as through sales to individual customers or liquidations, and expected recoverable values of each disposition category. These assumptions about future disposition of inventory are inherently uncertain and changes in our estimates and assumptions may cause us to realize material write-downs in the future.

 

The “Cost of goods sold” line item in the Condensed Consolidated Statements of Operations consists of the book value of inventory sold to customers during the reporting period. When circumstances dictate that the Company use net realizable value as the basis for recording inventory, it bases its estimates on expected future selling prices less expected disposal costs.

 

Accounts Receivable—Accounts receivable are stated at historical cost less allowance for doubtful accounts. On a periodic basis, management evaluates its accounts receivable and determines whether to provide an allowance or if any accounts should be written off based on a past history of write-offs, collections and current credit conditions. A receivable is considered past due if the Company has not received payments based on agreed-upon terms. The Company generally does not require any security or collateral to support its receivables. The Company performs ongoing evaluations of its customers and maintains an allowance for bad and doubtful receivables. As of  December 31, 2022 and September 30, 2023, the Company had an allowance for doubtful accounts of $0.4 million and $0.3 million.

 

Revenue Recognition—The Company accounts for revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC Topic 606”). The Company derives its revenue from the sale of consumer products. The Company sells its products directly to consumers through online retail channels and through wholesale channels.

 

For direct-to-consumer sales, the Company considers customer order confirmations to be a contract with the customer. Customer confirmations are executed at the time an order is placed through third-party online channels. For wholesale sales, the Company considers the customer purchase order to be the contract.

 

For all of the Company’s sales and distribution channels, revenue is recognized when control of the product is transferred to the customer (i.e., when the Company’s performance obligation is satisfied), which typically occurs at shipment date. As a result, the Company has a present and unconditional right to payment and record the amount due from the customer in accounts receivable.

 

Revenue from consumer product sales is recorded at the net sales price (transaction price), which includes an estimate of future returns based on historical return rates. There is judgment in utilizing historical trends for estimating future returns. The Company’s refund liability for sales returns was $0.6 million at December 31, 2022 and $0.4 million at September 30, 2023, which is included in accrued liabilities and represents the expected value of the refund that will be due to its customers.

 

The Company evaluated principal versus agent considerations to determine whether it is appropriate to record platform fees paid to Amazon as an expense or as a reduction of revenue. Platform fees are recorded as sales and distribution expenses and are not recorded as a reduction of revenue because it owns and controls all the goods before they are transferred to the customer. The Company can, at any time, direct Amazon,  or similarly direct other third-party logistics providers (“Logistics Providers”), to return the Company’s inventory to any location specified by the Company. It is the Company’s responsibility to make customers whole following any returns made by customers directly to Logistic Providers and the Company retains the back-end inventory risk. Further, the Company is subject to credit risk (i.e., credit card charge backs), establishes prices of its products, can determine who fulfills the goods to the customer (Amazon or the Company) and can limit quantities or stop selling the goods at any time. Based on these considerations, the Company is the principal in this arrangement.

 

11

 

Net Revenue by Category. The following table sets forth the Company’s net revenue disaggregated by sales channel and geographic region based on the billing addresses of its customers:

 

  

Three Months Ended September 30, 2022

 
  

(in thousands)

 
  

Direct

  

Wholesale/Other

  

Total

 

North America

 $62,818  $2,530  $65,348 

Other

  978      978 

Total net revenue

 $63,796  $2,530  $66,326 

 

  

Three Months Ended September 30, 2023

 
  

(in thousands)

 
  

Direct

  

Wholesale/Other

  

Total

 

North America

 $38,314  $142  $38,456 

Other

  1,212      1,212 

Total net revenue

 $39,526  $142  $39,668 

 

  

Nine Months Ended September 30, 2022

 
  

(in thousands)

 
  

Direct

  

Wholesale/Other

  

Total

 

North America

 $158,399  $4,415  $162,814 

Other

  3,454      3,454 

Total net revenue

 $161,853  $4,415  $166,268 

 

  

Nine Months Ended September 30, 2023

 
  

(in thousands)

 
  

Direct

  

Wholesale/Other

  

Total

 

North America

 $103,451  $2,454  $105,905 

Other

  3,906      3,906 

Total net revenue

 $107,357  $2,454  $109,811 

 

Net Revenue by Product Categories. The following table sets forth the Company’s net revenue disaggregated by product categories for the three and nine months ended September 30, 2022 and 2023:

 

  

Three Months Ended September 30,

 
  

2022

  

2023

 
  

(in thousands)

 

Heating, cooling and air quality

 $27,179  $15,770 

Kitchen appliances

  10,504   5,586 

Health and beauty

  3,661   3,034 

Personal protective equipment

  516    

Cookware, kitchen tools and gadgets

  5,128   2,408 

Home office

  3,045   2,116 

Housewares

  8,787   6,418 

Essential oils and related accessories

  6,262   3,935 

Other

  1,244   401 

Total net revenue

 $66,326  $39,668 

 

  

Nine Months Ended September 30,

 
  

2022

  

2023

 
  

(in thousands)

 

Heating, cooling and air quality

 $56,835  $29,512 

Kitchen appliances

  27,438   18,234 

Health and beauty

  12,452   11,725 

Personal protective equipment

  1,565   549 

Cookware, kitchen tools and gadgets

  14,229   8,315 

Home office

  10,077   7,410 

Housewares

  23,478   19,558 

Essential oils and related accessories

  17,102   12,787 

Other

  3,092   1,721 

Total net revenue

 $166,268  $109,811 

 

12

 

Intangibles—We review long-lived assets for impairment when performance expectations, events, or changes in circumstances indicate that the asset's carrying value may not be recoverable. The evaluation is performed at the lowest level of identifiable cash flows by comparing the carrying value of the asset group to the undiscounted cash flows. If the evaluation indicates that the carrying amount of the assets may not be recoverable, any potential impairment is measured based upon the fair value of the related asset or asset group as determined by an appropriate market appraisal or other valuation technique. 

 

On March 20, 2023, the Company made certain leadership changes in our essential oil business resulting in a change in strategy and outlook for the business resulting in a reduced portfolio offering. This reduction in the portfolio will be impactful to our essential oil business's future revenues and profitability and as a result the Company made revisions to our internal forecasts. The Company concluded that this change was an interim triggering event for the three months ending March 31, 2023 indicating the carrying value of our essential oil business's long-lived assets including trademarks may not be recoverable. Accordingly, the Company performed an interim impairment test of the trademark and assessed the recoverability of the related intangible assets by using level 3 inputs and comparing the carrying value of an asset group to the net undiscounted cash flow expected to be generated. The recoverability test indicated that certain definite-live trademark intangible assets were impaired. The Company concluded the carrying value of the trademark exceeded its estimated fair value which was determined utilizing the relief-from-royalty method to determine discounted projected future cash flows which resulted in an impairment charge. The Company recorded an intangible impairment charge of $16.7 million during the three months ending March 31, 2023 within impairment loss on intangibles on the condensed consolidated statement of operations.

 

During the three months ended June 30, 2023, the Company had a substantial decrease in its market capitalization, primarily relating to a decrease in share price. Further, the Company continues to see reduced net revenues across its portfolio due primarily to the current macroeconomic environment reducing demand for consumer discretionary goods. Finally, during the three months ending June 30, 2023, the Company implemented a strategy of rationalizing certain less profitable products and reducing its product offering, specifically related to its kitchen appliance products. As a result of this rationalization, along with the reduced demand for its products, the Company has made certain revisions to its internal forecasts for its Paper business and Kitchen appliance business. The Company concluded that these factors were an interim triggering event for the three months ending June 30, 2023 indicating the carrying value of our Paper and Kitchen appliance business’s long-lived assets, including trademarks, may not be recoverable. Accordingly, the Company performed an interim impairment test of the trademark and assessed the recoverability of the related intangible assets by using level 3 inputs and comparing the carrying value of an asset group to the net undiscounted cash flow expected to be generated. The recoverability test indicated that certain definite-live trademark intangible assets were impaired. The Company concluded the carrying value of the trademark exceeded its estimated fair value which was determined utilizing the relief-from-royalty method to determine discounted projected future cash flows which resulted in an impairment charge. The Company recorded an intangible impairment charge of $22.8 million for the Paper business and Kitchen appliance business during the three months ending  June 30, 2023 within impairment loss on intangibles on the condensed consolidated statement of operations. There were no triggering events during the three months ended September 30, 2023.

 

For the nine months ended September 30, 2022 and 2023, total impairment loss on intangibles were approximately$3.1 million and $39.4 million, respectively.

 

Fair Value of Financial Instruments—The Company’s financial instruments, including net accounts receivable, accounts payable, and accrued and other current liabilities are carried at historical cost. At September 30, 2023, the carrying amounts of these instruments approximated their fair values because of their short-term nature. The Company’s credit facility is carried at amortized cost at December 31, 2022 and September 30, 2023 and the carrying amount approximates fair value as the stated interest rate approximates market rates currently available to the Company. The Company considers the inputs utilized to determine the fair value of the borrowings to be Level 2 inputs.

 

13

 

The fair value of the Prefunded Warrants (as defined in the “Securities Purchase Agreement and Warrants” section of this Quarterly Report) and stock purchase warrants issued in connection with the Company’s common stock offering on March 1, 2022 were measured using the Black-Scholes model. Due to the complexity of the warrants issued, the Company uses an outside expert to assist in providing the mark-to-market fair valuation of the liabilities over the reporting periods in which the original agreement was in effect. Inputs used to determine the estimated fair value of the warrant liabilities include the fair value of the underlying stock at the valuation date, the term of the warrants, and the expected volatility of the underlying stock. The significant unobservable input used in the fair value measurement of the warrant liabilities is the estimated term of the warrants. Upon the issuance of the Prefunded Warrants and stock purchase warrants, the Company evaluated the terms of each warrant to determine the appropriate accounting and classification pursuant to FASB ASC Topic 480, Distinguishing Liabilities from Equity (ASC 480), and FASB Accounting Standards Codification Topic 815, Derivatives and Hedging (ASC 815). Based on the Company’s evaluation and due to certain terms in the warrant agreements, it concluded the Prefunded Warrants, and the stock purchase warrants should be classified as liability with subsequent remeasurement as long as such warrants continue to be classified as liabilities.

 

The fair value of the contingent consideration related to business combinations is estimated using a probability-adjusted discounted cash flow model. These fair value measurements are based on significant inputs not observable in the market. The key internally developed assumptions used in these models are discount rates and the probabilities assigned to the milestones to be achieved. The company remeasures the fair value of the contingent consideration at each reporting period, and any changes in fair value resulting from either the passage of time or events occurring after the acquisition date, such as changes in discount rates, or in the expectations of achieving the performance targets, are recorded within “change in fair value of contingent earn-out liabilities” on the statement of operations.

 

Assets and liabilities recorded at fair value on a recurring basis in the Condensed Consolidated Balance Sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:

 

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

 

Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

 

Level 3—Unobservable inputs that are supported by little or no market data for the related assets or liabilities.

 

14

 

The following table summarizes the fair value of the Company’s financial assets that are measured at fair value as of December 31, 2022 and September 30, 2023 (in thousands):

 

  

December 31, 2022

 
  

Fair Value Measurement Category

 
  

Level 1

  

Level 2

  

Level 3

 

Assets:

            

Cash and cash equivalents

 $43,574  $  $ 

Restricted Cash

  3,055       

Liabilities:

            

Fair value of warrant liability

        3,473 

 

  

September 30, 2023

 
  

Fair Value Measurement Category

 
  

Level 1

  

Level 2

  

Level 3

 

Assets:

            

Cash and cash equivalents

 $27,955  $  $ 

Restricted cash

  2,546       

Liabilities:

            

Fair value of warrant liability

        1,063 

 

A summary of the activity of the Level 3 liabilities carried at fair value on a recurring basis for the Year-ended  December 31, 2022 and the nine months ended September 30, 2023 is as follows (in thousands):

 

  

December 31, 2022

 

Warrants liability as of January 1, 2022

 $ 

Change in fair value of warrants

  3,473 

Warrants liability as of December 31, 2022

 $3,473 

 

  

September 30, 2023

 

Warrants liability as of January 1, 2023

 $3,473 

Change in fair value of warrants

  (2,410)

Warrants liability as of September 30, 2023

 $1,063 

 

Adopted Accounting Standards

 

In August 2020, the FASB issued ASU No. 2020-06, “Debt—Debt with Conversion and Other Options (Topic 470) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Topic 814): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”). ASU 2020-06 eliminates the number of accounting models used to account for convertible debt instruments and convertible preferred stock. The update also amends the disclosure requirements for convertible instruments and EPS in an effort to increase financial reporting transparency. ASU 2020-06 will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The new guidance was early adopted on January 1, 2022 with no material impact on the Company’s Consolidated Financial Statements.

 

In September 2022, the FASB issued ASU 2022-04, Disclosures for Supplier Finance Arrangements. This amendment enhances the transparency of supplier finance programs. This standard is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022, except for amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The new guidance was early adopted on January 1, 2023, with no impact on the Company’s Consolidated Financial Statements.

 

15

 

In June 2016, the FASB issued ASU 2016-13: Financial Instruments – Credit Losses (Topic 326). This ASU requires the use of an expected loss model for certain types of financial instruments and requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates. For trade receivables, loans and held-to-maturity debt securities, an estimate of lifetime expected credit losses is required. For available-for-sale debt securities, an allowance for credit losses will be required rather than a reduction to the carrying value of the asset. In July 2019, the FASB delayed the effective date for this ASU for private companies (including emerging growth companies) and will be effective for annual reporting periods beginning after December 15, 2022, with early adoption permitted. The Company adopted this standard on January 1, 2023, but it does not have a material impact on the Consolidated Financial Statements.

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes. This ASU provides for certain updates to reduce complexity in accounting for income taxes, including the utilization of the incremental approach for intraperiod tax allocation, among others. This standard is effective for fiscal years beginning after December 15, 2021, and for interim periods beginning after December 15, 2022, with early adoption permitted. The Company adopted this standard on January 1, 2023, but it does not have a material impact on the Consolidated Financial Statements.

 

Recent Accounting Pronouncements

 

The JOBS Act permits an emerging growth company to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to use this extended transition period until we are no longer an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

 

In August 2023, the FASB finalized ASU 2023-ED100, Income Taxes (Topic 740). This ASU provides for certain updates to enhance the transparency about companies’ exposure to changes in tax legislation and the global tax risk they may face. Under the guidance, companies will be required to provide a breakout of amounts paid for taxes between federal, state, and foreign taxing jurisdictions, rather than a lump sum amount. Further, the rate reconciliation will require disaggregation into eight specific categories, with these categories further disaggregated by jurisdiction and for amounts exceeding 5 percent of their domestic tax rate. The rate reconciliation will need to also disclose both dollar amounts and percentages. This standard is effective for fiscal years beginning after December 15, 2024.

 

 

3.

INVENTORY

 

Inventory consisted of the following as of  December 31, 2022 and September 30, 2023 (in thousands):

 

       
  December 31, 2022  September 30, 2023 

Inventory on-hand

 $34,374  $27,124 

Inventory in-transit

  9,292   4,369 

Inventory

 $43,666  $31,493 

 

The Company’s inventory on-hand is held either with Amazon or the Company’s other third-party warehouses. The Company does not have any contractual right of returns with its contract manufacturers. The Company’s inventory on-hand held by Amazon was approximately $8.6 million and $6.8 million as of December 31, 2022 and September 30, 2023, respectively.

 

16

 
 

4.

PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid and other current assets consisted of the following as of December 31, 2022 and September 30, 2023 (in thousands):

 

  

December 31, 2022

  

September 30, 2023

 

Prepaid inventory

 $1,342  $573 

Restricted cash

  2,926   2,417 

Prepaid insurance

  1,991   1,516 

Prepaid freight forwarder

  576   217 

Other

  1,426   1,240 
Prepaid expenses and current assets $8,261  $5,963 

 

 

5.

ACCRUED AND OTHER CURRENT LIABILITIES

 

Accrued expenses and other current liabilities consisted of the following as of December 31, 2022 and September 30, 2023 (in thousands):

 

   

December 31, 2022

   

September 30, 2023

 

Accrued compensation costs

  $ 53     $ 33  

Accrued professional fees and consultants

    461       317  

Accrued logistics costs

    609       1,426  

Product related accruals

    1,248       907  

Sales tax payable

    711       899  

Sales return reserve

    646       431  

Accrued fulfillment expense

    755       534  

Accrued insurance

    356       439  

Federal payroll taxes payable

    1,467       1,243  

Accrued interest payable

    190       99  

Warrant liability

    3,473       1,063  

All other accruals

    4,285       3,349  

Accrued and current liabilities

  $ 14,254     $ 10,740  

 

The Company sponsors, through its professional employer organization provider, a 401(k) defined contribution plan covering all eligible US employees. Contributions to the 401(k) plan are discretionary. Currently, the Company does not match or make any contributions to the 401(k) plan.

 

 

6.

CREDIT FACILITY, TERM LOANS AND WARRANTS

 

MidCap Credit Facility

 

On December 22, 2021, the Company entered into a Credit and Security Agreement (the “Credit Agreement”) together with certain of its subsidiaries party thereto as borrowers, the entities party thereto as lenders, and Midcap Funding IV Trust, as administrative agent, pursuant to which, among other things, (i) the Lenders agreed to provide a three year revolving credit facility in a principal amount of up to $40.0 million subject to a borrowing base consisting of, among other things, inventory and sales receivables (subject to certain reserves), and (ii) the Company agreed to issue to MidCap Funding XXVII Trust a warrant (the “Midcap Warrant”) to purchase up to an aggregate of 200,000 shares of common stock of the Company, par value $0.0001 per share, in exchange for the Lenders extending loans and other extensions of credit to the Company under the Credit Agreement.

 

On December 22, 2021, the Company used $27.6 million of the net proceeds from the initial loan under the Credit Agreement to repay all remaining amounts owed under those certain senior secured promissory notes issued by the Company to High Trail Investments SA LLC and High Trail Investments ON LLC in an initial principal amount of $110.0 million, as amended (the “Terminated Notes”).

 

The obligations under the Credit Agreement are a senior secured obligation of the Company and rank senior to all indebtedness of the Company. Borrowings under the Credit Agreement bear interest at a rate of Term Secured Overnight Financing Rate ("Term SOFR"), which is defined as SOFR plus 0.10%, plus 5.50%. The Company will also be required to pay a commitment fee of 0.50% in respect of the undrawn portion of the commitments, which is generally based on average daily usage of the facility during the immediately preceding fiscal quarter. The Credit Agreement does not require any amortization payments.

 

The Credit Agreement imposes certain customary affirmative and negative covenants upon the Company including restrictions related to dividends and other foreign subsidiaries limitations. The Credit Agreement minimum liquidity covenant requires that Midcap shall not permit the credit party liquidity at any time to be less than (a) during the period commencing on February 1st through and including May 31st of each calendar year, $12.5 million and (b) at all other times, $15.0 million. The Credit Agreement includes events of default that are customary for these types of credit facilities, including the occurrence of a change of control. The Company is in compliance with the financial covenants contained within the Credit Agreement as of September 30, 2023. The MidCap credit facility matures in December 2024.

 

17

 

The Midcap Warrant has an exercise price of $4.70 per share, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, is immediately exercisable, has a term of ten years from the date of issuance and is exercisable on a cash or cashless basis.

 

The Company’s credit facility consisted of the following as of December 31, 2022 and September 30, 2023 (in thousands):

 

  

December 31, 2022

  

September 30, 2023

 

MidCap Credit Facility

 $21,899  $14,707 

Less: deferred debt issuance costs

  (459)  (285)

Less: discount associated with issuance of warrants

  (387)  (240)

Total MidCap Credit Facility

 $21,053  $14,182 

 

Interest Expense, Net

 

Interest expense, net consisted of the following for the three and nine months ended September 30, 2022 and 2023 (in thousands):

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2022

  

2023

  

2022

  

2023

 

Interest expense

 $904  $487  $2,043  $1,623 

Interest income

     (128)     (547)

Total interest expense, net

 $904  $359  $2,043  $1,076 

 

Securities Purchase Agreement and Warrants

 

On March 1, 2022, the Company entered into Securities Purchase Agreements (the “Purchase Agreements”) with certain accredited investors identified on the signature pages to the Purchase Agreements (collectively, the “Purchasers”) pursuant to which, among other things, the Company issued and sold to the Purchasers, in a private placement transaction (the “2022 Private Placement”), (i) 6,436,322 shares of the Company’s common stock (the “Shares”), and accompanying warrants to purchase an aggregate of 4,827,242 shares of common stock, and (ii) prefunded warrants to purchase up to an aggregate of 3,013,850 shares of common stock (the “Prefunded Warrants”) and accompanying warrants to purchase an aggregate of 2,260,388 shares of common stock. The accompanying warrants to purchase common stock are referred to herein collectively as the “Common Stock Warrants”, and the Common Stock Warrants and the Prefunded Warrants are referred to herein collectively as the “Warrants”. Under the Purchase Agreements, each Share and accompanying Common Stock Warrant were sold together at a combined price of $2.91, and each Prefunded Warrant and accompanying Common Stock Warrant were sold together at a combined price of $2.9099, for gross proceeds of approximately $27.5 million. In connection with the 2022 Private Placement, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with the Purchasers, pursuant to which the Company agreed to register for resale the Shares, as well as the shares of common stock issuable upon exercise of the Warrants (the “Warrant Shares”). Under the Registration Rights Agreement, the Company agreed to file a registration statement covering the resale by the Purchasers of the Shares and Warrant Shares within 30 days following the agreement date. The Company filed such resale registration statement on March 28, 2022, and it was declared effective by the SEC on April 8, 2022.

 

Upon the issuance of the Prefunded Warrants and stock purchase warrants, the Company evaluated the terms of each Warrant to determine the appropriate accounting and classification pursuant to ASC 480 and ASC 815. Based on the Company’s evaluation and due to certain terms in the warrant agreements, it concluded the Prefunded Warrant and the stock purchase warrants should be classified as liabilities with subsequent remeasurement at each quarter so long as such warrants remain to be classified as liabilities. The Company recorded an initial liability on issuance of $19.0 million from this conclusion. As of September 30, 2023, the Company has $1.1 million as the liability related to the Warrants.

 

On September 29, 2022, the Company entered into securities purchase agreements (the “September Purchase Agreements”) with certain accredited investors, pursuant to which, among other things, the Company agreed to sell and issue, in a registered direct offering (the “Registered Direct Offering”), an aggregate of 10,643,034 shares of its common stock and accompanying warrants to purchase an aggregate of 10,643,034 shares of its common stock. 10,526,368 of the shares and the accompanying warrants to purchase 10,526,368 shares of common stock were sold to certain accredited Purchasers that are not affiliated with the Company at a combined offering price of $1.90 per share and accompanying warrant to purchase one share of common stock. The remaining 116,666 of the shares and the accompanying warrants to purchase 116,666 shares of common stock were sold to certain insiders of the Company, at a combined offering price of $2.10 per share and accompanying warrant to purchase one share of common stock.

 

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The Registered Direct Offering closed on October 4, 2022 and the Company issued and sold an aggregate of 10,643,034 shares of common stock to the Purchasers. The gross proceeds to the Company from the Registered Direct Offering were approximately $20.2 million, before deducting fees payable to the placement agent and other estimated offering expenses payable by the Company. The Company currently intends to use the net proceeds from the Registered Direct Offering for working capital purposes, the conduct of its business and other general corporate purposes, which may include acquisitions, investments in or licenses of complementary products, technologies or businesses.

 

Pursuant to the ASC 815-40, the September Purchase Agreements represent legally binding contracts that meets the definition of a firm commitment and as such the Company recorded a derivative related to the offering of common stock (“forward contract”) and associated warrants for the three months ended September 30, 2022. The Company also concluded both the forward contract and the warrants should be classified within stockholders’ equity within the Condensed Consolidated Balance Sheet as of September 30, 2022. Additionally, the Company recorded $12.8 million derivative expense derived from the excess of the fair-value of the issuances of equity of common shares and common stock warrants over the anticipated proceeds to be received by the Company. This expense was recorded in Loss on Initial Issuance of Equity on the Consolidated Statement of Operations for the year-ended December 31, 2022.

 

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7.

STOCK-BASED COMPENSATION

 

The Company has four equity plans:

 

2014 Amended and Restated Equity Incentive Plan

 

The board of directors of Aterian Group, Inc., a subsidiary of the Company (“AGI”), adopted, and AGI’s stockholders approved, the Aterian Group, Inc. 2014 Equity Incentive Plan on June 11, 2014. On March 1, 2017, AGI’s board of directors adopted, and AGI’s stockholders approved, an amendment and restatement of the 2014 Equity Incentive Plan (as amended, the “Aterian 2014 Plan”). As of September 30, 2023, 99,310 shares were reserved for awards available for future issuance under the Aterian 2014 Plan.

 

2018 Equity Incentive Plan

 

The Company’s board of directors (the “Board”) adopted the Aterian, Inc. 2018 Equity Incentive Plan (the “2018 Plan”) on October 11, 2018. The 2018 Plan was approved by its stockholders on May 24, 2019. As of September 30, 2023, 2,300,443 shares were reserved for awards available for future issuance under the 2018 Plan.

 

Options granted to date under the Aterian 2014 Plan and the 2018 Plan generally vest either: (i) over a four-year period with 25% of the shares underlying the options vesting on the first anniversary of the vesting commencement date with the remaining 75% of the shares vesting on a pro-rata basis over the succeeding thirty-six months, subject to continued service with the Company through each vesting date, or (ii) over a three-year period with 33 1/3% of the shares underlying the options vesting on the first anniversary of the vesting commencement date with the remaining 66 2/3% of the shares vesting on a pro-rata basis over the succeeding twenty-four months, subject to continued service with the Company through each vesting date. Options granted are generally exercisable for up to 10 years subject to continued service with the Company.

 

2019 Equity Plan

 

The Board adopted the Aterian, Inc. 2019 Equity Plan (the “2019 Equity Plan”) on March 20, 2019. The 2019 Equity Plan was approved by its stockholders on May 24, 2019. As of September 30, 2023, there were no shares were reserved for future issuance and there were no longer any awards outstanding under the 2019 Equity Plan. Shares of restricted common stock granted under the 2019 Equity Plan initially vested in substantially equal installments on the 6th, 12th, 18th and 24th monthly anniversary of the closing of the Company’s initial public offering (“IPO”). The Company and the 2019 Equity Plan participants subsequently agreed to extend the vesting date of the shares granted under the 2019 Equity Plan a number of times and the last remaining shares granted under the 2019 Equity Plan vested on March 14, 2022. Awards granted under the 2019 Equity Plan and not previously forfeited upon termination of service carried dividend and voting rights applicable to the Company’s common stock, irrespective of any vesting requirement. Under ASC Topic 718, the Company treats each award in substance as multiple awards as a result of the graded vesting and the fact that there is more than one requisite service period. Upon the prerequisite service period becoming probable, the day of the IPO, the Company recorded a cumulative catch-up expense and the remaining expense was recorded under graded vesting. In the event the service of a participant in the 2019 Equity Plan (each, a “Participant”) was terminated due to an “involuntary termination”, then all of such Participant’s unvested shares of restricted common stock were to vest on the date of such involuntary termination unless, within three business days of such termination (1) the Company’s board of directors unanimously determines that such vesting should not occur and (2) the remaining Participants holding restricted share awards covering at least 70% of the shares of restricted common stock issued and outstanding under the 2019 Equity Plan determine that such vesting should not occur. In the event of a forfeiture, voluntary or involuntary, of shares of restricted common stock granted under the 2019 Equity Plan, such shares were automatically reallocated to the remaining Participants in proportion to the number of shares of restricted common stock covered by outstanding awards that each such Participant holds.

 

Inducement Equity Incentive Plan

 

On May 27, 2022, the Compensation Committee of the Board (the “Compensation Committee”) adopted the Aterian, Inc. 2022 Inducement Equity Incentive Plan (the “Inducement Plan”). The Inducement Plan will serve to advance the interests of the Company by providing a material inducement for the best available individuals to join the Company as employees by affording such individuals an opportunity to acquire a proprietary interest in the Company.

 

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The Inducement Plan provides for the grant of equity-based awards in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance units and performance shares solely to prospective employees of the Company or an affiliate of the Company provided that certain criteria are met. Awards under the Inducement Plan may only be granted to an individual, as a material inducement to such individual to enter into employment with the Company or an affiliate of the Company, who (i) has not previously been an employee or director of the Company or (ii) is rehired following a bona fide period of non-employment with the Company. The maximum number of shares available for grant under the Inducement Plan is 2,700,000 shares of the Company’s common stock (subject to adjustment for recapitalizations, stock splits, reorganizations and similar transactions). The Inducement Plan is administered by the Compensation Committee and expires ten years from the date of effectiveness. As of September 30, 2023, 2,180,000 shares were reserved for future issuance under the Inducement Plan.

 

The Inducement Plan has not been and will not be approved by the Company’s stockholders. Awards under the Inducement Plan will be made pursuant to the exemption from Nasdaq stockholder approval requirements for equity compensation provided by Nasdaq Listing Rule 5635(c)(4), which permits Nasdaq listed companies to make inducement equity awards to new employees without first obtaining stockholder approval of the award.

 

The following is a summary of stock option activity during the nine months ended September 30, 2023:

 

  

Options Outstanding

 
  

Number of Options

  

Weighted- Average Exercise Price

  

Weighted- Average Remaining Contractual Life (years)

  

Aggregate Intrinsic Value

 

Balance—January 1, 2023

  368,596  $9.26   5.89  $ 

Options granted

    $     $ 

Options exercised

    $     $ 

Options canceled

  (172,292) $9.32     $ 

Balance—September 30, 2023

  196,304  $9.21   5.25  $ 

Exercisable as of September 30, 2023

  196,304  $9.21   5.25  $ 

Vested and expected to vest as of September 30, 2023

  196,304  $9.21   5.25  $ 

 

As of September 30, 2023, all options have been fully expensed.

 

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A summary of restricted stock award activity within the Company’s equity plans and changes for the nine months ended September 30, 2023 is as follows:

 

Restricted Stock Awards

 

Shares

  

Weighted Average Grant- Date Fair Value

 

Nonvested at January 1, 2023

  4,223,023  $4.85 

Granted

  12,050,644  $0.52 

Vested

  (2,666,468) $3.21 

Forfeited

  (3,970,751) $2.23 

Nonvested at September 30, 2023

  9,636,448  $0.96 

 

As of September 30, 2023, the total unrecognized compensation expense related to unvested shares of restricted common stock was $8.7 million, which the Company expects to recognize over an estimated weighted-average period of 2.4 years.

 

Stock-based compensation expense is allocated based on the cost center to which the award holder belongs. The following table summarizes the total stock-based compensation expense by function, including expense related to consultants, for the three and nine months ended September 30, 2022 and 2023 (in thousands):

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2022

  

2023

  

2022

  

2023

 
  

(in thousands)

  

(in thousands)

 

Sales and distribution expenses

 $999  $330  $4,228  $2,091 

Research and development expenses

  511   278   1,418   1,134 

General and administrative expenses

  1,433   624   6,208   3,546 

Total stock-based compensation expense

 $2,943  $1,232  $11,854  $6,771 

 

 

8.

NET LOSS PER SHARE

 

Basic net loss per share is determined by dividing net loss by the weighted-average shares of common stock outstanding during the period. Diluted net loss per share is determined by dividing net loss by diluted weighted-average shares outstanding. Diluted weighted-average shares reflect the dilutive effect, if any, of potentially dilutive shares of common stock, such as options to purchase common stock calculated using the treasury stock method and convertible notes using the “if-converted” method. In periods with reported net operating losses, all options to purchase common stock are deemed anti-dilutive such that basic net loss per share and diluted net loss per share are equal.

 

The Company’s shares of restricted common stock are entitled to receive dividends and hold voting rights applicable to the Company’s common stock, irrespective of any vesting requirement. Accordingly, although the vesting commences upon the elimination of the contingency, the shares of restricted common stock are considered a participating security and the Company is required to apply the two-class method to consider the impact of the shares of restricted common stock on the calculation of basic and diluted earnings per share. The Company is currently in a net loss position and is therefore not required to present the two-class method; however, in the event the Company is in a net income position, the two-class method must be applied by allocating all earnings during the period to shares of common stock and shares of restricted common stock.

 

The following table sets forth the computation of basic and diluted net loss per share (in thousands, except share and per share data):

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2022

  

2023

  

2022

  

2023

 

Net loss

 $(116,902) $(6,270) $(175,987) $(66,857)

Weighted-average number of shares used in computing net loss per share, basic and diluted

  64,648,650   79,022,467   63,397,196   77,801,774 

Net loss per share, basic and diluted

 $(1.81) $(0.08) $(2.78) $(0.86)
                 

Anti-dilutive shares excluded from computation of net loss per share (in shares)

  13,054,457   26,360,485   9,238,156   22,784,728 

 

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9.

COMMITMENTS AND CONTINGENCIES

 

Sales or Other Similar Taxes—Based on the location of the Company’s current operations, the majority of sales tax is collected and remitted either by the Company or on its behalf by e-commerce marketplaces in most states within the U.S. To date, the Company has had no actual or threatened sales and use tax claims from any state where it does not already claim nexus or any state where it sold products prior to claiming nexus. However, the Company believes that the likelihood of incurring a liability as a result of sales tax nexus being asserted by certain states where it sold products prior to claiming nexus is probable. As of each of December 31, 2022 and September 30, 2023, the Company estimates that the potential liability, including current sales tax payable is approximately $0.7 million and $0.9 million, respectively, which has been recorded as an accrued liability. The Company believes this is the best estimate of an amount due to taxing agencies, given that such a potential loss is an unasserted liability that would be contested and subject to negotiation between the Company and the state, or decided by a court.

 

Legal Proceedings—The Company is party to various actions and claims arising in the normal course of business. The Company does not believe that the final outcome of these matters will have a material adverse effect on the Company’s financial position or results of operations. In addition, the Company maintains what it believes is adequate insurance coverage to further mitigate risk. However, no assurance can be given that the final outcome of such proceedings will not materially impact the Company’s financial condition or results of operations. Further, no assurance can be given that the amount or scope of existing insurance coverage will be sufficient to cover losses arising from such matters.

 

Mueller Action—In October 2021, the Company received a class action notification and pre-lawsuit demand letter demanding corrective action with respect to the marketing, advertising and labeling of certain products under the Mueller brand (the “Mueller Action”). In April 2022, the parties reached an agreement in principle to resolve this potential action for $0.5 million in cash and $0.3 million worth of coupons, which the Company accrued $0.8 million in the three months ended March 31, 2022, subject to court approval. The court preliminarily approved the settlement on August 3, 2023 and has scheduled a hearing for final approval for February 28, 2024. If that approval is not granted, the Company is prepared to continue the full defense of this action.

 

Earn-out Payment Dispute—On February 24, 2022, the Company received a notice disputing the Company’s calculation of the earn-out payment to be paid to Josef Eitan and Ran Nir pursuant to the Stock Purchase Agreement (the “PPD Stock Purchase Agreement”), dated as of May 5, 2021, by and among the Company, Truweo, LLC, Photo Paper Direct Ltd, Josef Eitan and Ran Nir. The Company is in discussions with representatives of Mr. Eitan and Mr. Nir, who believe they are entitled to the full earn-out amount (£6,902,816 or approximately $8.8 million) under the terms of the PPD Stock Purchase Agreement, whereas the Company believes they are not. Mr. Eitan and Mr. Nir filed a motion to compel arbitration in the Southern District of New York on September 14, 2022, which was granted on May 18, 2023. The parties have engaged an independent accountant to resolve the dispute, as required by the PPD Stock Purchase Agreement and the Southern District of New York. The Company believes its calculations are accurate and intends to vigorously defend itself.

 

Nasdaq Listing - On April 24, 2023,  we received a letter from the Listing Qualifications Staff of The Nasdaq Stock Market LLC indicating that, based upon the closing bid price of our common stock for the last 30 consecutive business days, the Company is not currently in compliance with the requirement to maintain a minimum bid price of $1.00 per share for continued listing on The Nasdaq Capital Market, as set forth in Nasdaq Listing Rule 5550(a)(2). The Bid Price Notice provided a compliance period of 180 calendar days from the date of the Bid Price Notice, or until October 23, 2023, to regain compliance with the minimum closing bid requirement, pursuant to Nasdaq Listing Rule 5810(c)(3)(A). Following a request we made on October 13, 2023, on October 24, 2023, we received a letter from Nasdaq granting the Company an additional 180 days, or until April 22, 2024, to regain compliance with the minimum closing bid requirement.

 

The Bid Price Notice has no immediate effect on the continued listing status of our common stock on The Nasdaq Capital Market, and, therefore, our listing remains fully effective. 

 

The Company has a compliance period of 180 calendar days from the date of the Extension Notice, or until April 22, 2024, to regain compliance with the minimum closing bid requirement, pursuant to Nasdaq Listing Rule 5810(c)(3)(A). If at any time before April 22, 2024, the closing bid price of our common stock closes at or above $1.00 per share for a minimum of 10 consecutive business days, subject to Nasdaq’s discretion to extend this period pursuant to Nasdaq Listing Rule 5810(c)(3)(H) to 20 consecutive business days, Nasdaq will provide written notification that the Company has achieved compliance with the minimum bid price requirement, and the matter would be resolved. 

 

The Company will continue to monitor the closing bid price of its Common Stock and seek to regain compliance with all applicable Nasdaq requirements within the allotted compliance periods. If the Company does not regain compliance within the allotted compliance periods, Nasdaq will provide notice that the Common Stock will be subject to delisting. The Company would then be entitled to appeal that determination to a Nasdaq hearings panel. There can be no assurance that the Company will regain compliance with the minimum bid price requirement during the compliance period or maintain compliance with the other Nasdaq listing requirements.

 

Leases—The Company’s minimum lease liabilities have not changed significantly during the nine months ended September 30, 2023.

 

 

10.

CONTINGENT EARN-OUT LIABILITIES

 

The Company reviews and reassesses the estimated fair value of contingent consideration on a quarterly basis, and the updated fair value could differ materially from the initial estimates. Adjustments to the estimated fair value related to changes in all other unobservable inputs are reported in operating income (loss).

 

On December 1, 2020, the Company acquired the assets of leading e-commerce business brands Mueller, Pursteam, Pohl and Schmitt, and Spiralizer (the “Smash Assets”) for total consideration of (i) $25.0 million, (ii) 4,220,000 shares of common stock, the cost basis of which was $6.89 (closing stock price at closing of the transaction), of which 164,000 of such shares were issued to the sellers brokers and (iii) a seller note in the amount of $15.6 million, representing the value of certain inventory that the sellers had paid for but not yet sold as of the closing date. As part of the acquisition of the Smash Assets, the sellers of the Smash Assets are entitled to earn-out payments based on the achievement of certain contribution margin thresholds on certain products of the acquired business.

 

As of December 31, 2022 and September 30, 2023, there was no remaining earn-out liability related to Smash Assets.

 

As part of the acquisition of the Squatty Potty Assets, Squatty Potty is entitled to earn-out payments based on the achievement of certain contribution margin thresholds on certain products of the acquired business. If the earn-out consideration event occurs in the 12 months ended December 31, 2021, the maximum payment amount is $3.9 million and if the termination of the transition service agreement is prior to the date that is nine months following the Closing Date, an additional $3.9 million.

 

As of May 5, 2021, the acquisition date, the initial fair value amount of the earn-out payment with respect to the Squatty Potty Assets was appropriately $3.5 million. As of December 31, 2022 and September 30, 2023, there was no remaining earn-out liability related to Squatty Potty.

 

The following table summarizes the changes in the carrying value of estimated contingent earn-out liabilities as of December 31, 2022 (in thousands):

 

   

December 31, 2022

 
   

Smash
Assets

   

Squatty
Potty

   

Total

 

Balance— January 1, 2022

  $ 5,240     $ 3,983     $ 9,223  

Change in fair value of contingent earn-out liabilities

    (5,240 )           (5,240 )

Payment of contingent earn-out liability

          (3,983 )     (3,983 )

Balance— December 31, 2022

  $     $     $  

 

There was no activity for contingent earn-out liabilities for the nine months ending September 30, 2023.

 

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11.

GOODWILL AND INTANGIBLES

 

The following tables summarize the changes in the Company’s goodwill as of December 31, 2022 (in thousands):

 

   

January 1, 2022