Aterian(ATER) - 2021 Q3 - Quarterly Report

Special Note Regarding Forward-Looking Statements This section outlines the nature and risks of forward-looking statements, with no obligation to update - Forward-looking statements cover potential impacts of COVID-19, online consumer spending shifts, future financial performance, profitability, liquidity, platform security, new product launches, M&A, PPE sales, international expansion, growth management, market trends, intellectual property, regulatory compliance, key personnel, and public company expenses[3] - The outcome of forward-looking statements is subject to risks, uncertainties, and other factors detailed in the "Risk Factors" section, and new risks may emerge[5] - The company undertakes no obligation to update forward-looking statements to reflect events or circumstances after the report date, except as required by law[6] PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents unaudited condensed consolidated financial statements, including balance sheets, operations, and cash flows Condensed Consolidated Balance Sheets This section details the company's financial position, including assets, liabilities, and stockholders' equity Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | Dec 31, 2020 | Sep 30, 2021 | Change | | :-------------------------- | :----------- | :----------- | :----- | | Total Assets | $157,454 | $321,685 | +$164,231 | | Total Liabilities | $134,072 | $109,030 | -$25,042 | | Total Stockholders' Equity | $23,382 | $212,655 | +$189,273 | | Cash | $26,718 | $37,470 | +$10,752 | | Inventory | $31,582 | $71,273 | +$39,691 | | Goodwill—net | $47,318 | $118,619 | +$71,301 | | Other Intangibles—net | $31,460 | $67,355 | +$35,895 | | Accounts Payable | $14,856 | $24,640 | +$9,784 | | Term Loan (current) | $21,600 | $0 | -$21,600 | | Term Loan (non-current) | $36,483 | $25,454 | -$11,029 | | Contingent Earn-out Liability (current) | $1,515 | $14,886 | +$13,371 | | Contingent Earn-out Liability (non-current) | $21,016 | $16,667 | -$4,349 | Condensed Consolidated Statements of Operations This section presents the company's revenues, expenses, and net loss over specific periods Condensed Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2021 | Change (YoY) | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | Change (YoY) | | :------------------------------------ | :-------------------------- | :-------------------------- | :----------- | :-------------------------- | :-------------------------- | :----------- | | Net Revenue | $58,783 | $68,121 | +15.9% | $144,212 | $184,446 | +27.9% | | Gross Profit | $28,095 | $34,175 | +21.6% | $65,994 | $92,982 | +40.9% | | Operating Income (Loss) | $106 | $(7,527) | -7200.9% | $(15,610) | $(30,812) | -97.4% | | Interest Expense—net | $934 | $2,786 | +198.3% | $3,120 | $11,877 | +280.7% | | Loss on Extinguishment of Debt | $0 | $106,991 | N/A | $0 | $136,763 | N/A | | Net Loss | $(805) | $(110,556) | -13633.7% | $(18,772) | $(229,415) | -1122.1% | | Net Loss per Share (basic & diluted) | $(0.05) | $(3.13) | -6160.0% | $(1.18) | $(7.55) | -539.8% | Condensed Consolidated Statements of Comprehensive Loss This section presents net loss and other comprehensive income/loss, like foreign currency adjustments Condensed Consolidated Statements of Comprehensive Loss Highlights (in thousands) | Metric | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | | :----------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net Loss | $(805) | $(110,556) | $(18,772) | $(229,415) | | Foreign currency translation adjustments | $(19) | $(259) | $(28) | $(305) | | Comprehensive Loss | $(824) | $(110,815) | $(18,800) | $(229,720) | Condensed Consolidated Statements of Stockholder's Equity This section outlines changes in stockholders' equity, including net loss, stock issuances, and warrant reclassifications - Total stockholders' equity increased from $23,382 thousand at January 1, 2021, to $212,655 thousand at September 30, 2021[27] - Key drivers of the increase in stockholders' equity include the issuance of common stock to High Trail ($129,620 thousand), reclassification of warrants to equity ($97,088 thousand), and proceeds from equity offering ($36,735 thousand)[27] - The company recorded a net loss of $(229,415) thousand during the nine months ended September 30, 2021, which reduced accumulated deficit[27] Condensed Consolidated Statements of Cash Flows This section summarizes cash flows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | Change | | :------------------------------------------ | :-------------------------- | :-------------------------- | :----- | | Net Cash Provided by (Used in) Operating Activities | $7,600 | $(40,449) | -$48,049 | | Net Cash Used in Investing Activities | $(14,065) | $(44,887) | -$30,822 | | Net Cash Provided by Financing Activities | $13,499 | $95,272 | +$81,773 | | Net Change in Cash and Restricted Cash | $7,037 | $9,502 | +$2,465 | | Cash and Restricted Cash at End of Period | $37,826 | $39,599 | +$1,773 | - Investing activities for 9M 2021 included significant purchases for Healing Solutions assets ($15,250), Squatty Potty assets ($19,040), and Photo Paper Direct ($10,583)[29][244] - Financing activities for 9M 2021 were boosted by borrowings from High Trail April 2021 Note ($110,000), proceeds from warrant cancellation ($16,957), and equity offering ($36,735)[29][247] Notes to Unaudited Condensed Consolidated Financial Statements This section covers notes to unaudited condensed consolidated financial statements 1. ORGANIZATION AND DESCRIPTION OF BUSINESS This section describes Aterian's e-commerce platform business model and recent acquisitions - Aterian is a technology-enabled consumer products platform that builds, acquires, and partners with e-commerce brands, operating predominantly through Amazon and Walmart[34] - In 2021, the company acquired Healing Solutions assets (essential oils), Squatty Potty assets (health and wellness), and Photo Paper Direct (printing supplies)[35] - The company's ability to continue as a going concern is in substantial doubt due to the COVID-19 pandemic's impact on supply chain costs, reduced demand, and a breach of debt covenants, leading to a loan equitization by High Trail[38][40][41] 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This section details accounting principles for financial statements, including revenue recognition and goodwill impairment - Financial statements are prepared in accordance with GAAP for interim reporting, with certain information condensed or omitted per SEC rules[44] - Revenue is derived from direct-to-consumer and wholesale sales of consumer products, primarily in North America, with a significant portion from direct online channels like Amazon[47][48][49][50] Net Revenue by Sales Channel and Geographic Region (in thousands) | Channel/Region | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | | :------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Direct (North America) | $48,415 | $64,920 | $127,316 | $178,218 | | Wholesale (North America) | $10,022 | $1,979 | $15,808 | $3,781 | | Managed PaaS (North America) | $340 | $67 | $1,046 | $357 | | Other (Direct) | $6 | $1,155 | $42 | $2,090 | | Total Net Revenue | $58,783 | $68,121 | $144,212 | $184,446 | Net Revenue by Product Categories (in thousands) | Product Category | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | | :--------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Heating, cooling and air quality | $31,986 | $29,988 | $71,403 | $62,968 | | Kitchen appliances | $9,620 | $8,084 | $27,805 | $29,208 | | Health and beauty | $4,883 | $1,273 | $14,483 | $6,736 | | Personal protective equipment | $8,701 | $1,298 | $15,356 | $2,957 | | Cookware, kitchen tools and gadgets | $1,021 | $5,221 | $3,999 | $16,867 | | Home office | $920 | $4,190 | $2,619 | $7,710 | | Housewares | $562 | $10,418 | $3,085 | $26,709 | | Essential oils and related accessories | $0 | $5,722 | $0 | $23,017 | | Other | $750 | $1,860 | $4,416 | $7,917 | | Managed PaaS | $340 | $67 | $1,046 | $357 | | Total Net Revenue | $58,783 | $68,121 | $144,212 | $184,446 | - Goodwill impairment testing uses discounted cash flow and guideline public company methods, with significant assumptions including projected net revenue, contribution margin, terminal growth rates, and cost of capital[52][53] 3. INVENTORY This section provides a breakdown of inventory values, distinguishing on-hand and in-transit stock Inventory (in thousands) | Metric | Dec 31, 2020 | Sep 30, 2021 | | :----------------- | :----------- | :----------- | | Inventory on-hand | $22,753 | $61,502 | | Inventory in-transit | $8,829 | $9,771 | | Total Inventory | $31,582 | $71,273 | - Inventory on-hand held by Amazon increased from $5.3 million at December 31, 2020, to $11.1 million at September 30, 2021[73] 4. PREPAID EXPENSES AND OTHER CURRENT ASSETS This section details prepaid expenses and other current assets, including restricted cash and insurance Prepaid and Other Current Assets (in thousands) | Metric | Dec 31, 2020 | Sep 30, 2021 | | :-------------------------- | :----------- | :----------- | | Prepaid inventory | $4,361 | $4,901 | | Restricted cash | $3,250 | $2,000 | | Prepaid insurance | $1,504 | $3,259 | | Other | $1,996 | $2,671 | | Total Prepaid and other current assets | $11,111 | $12,831 | 5. ACCRUED AND OTHER CURRENT LIABILITIES This section outlines accrued expenses and other current liabilities, such as compensation and logistics costs Accrued and Other Current Liabilities (in thousands) | Metric | Dec 31, 2020 | Sep 30, 2021 | | :-------------------------------- | :----------- | :----------- | | Accrued compensation costs | $293 | $98 | | Accrued professional fees and consultants | $483 | $845 | | Accrued logistics costs | $1,068 | $1,228 | | Product related accruals | $3,221 | $3,021 | | Sales tax payable | $457 | $669 | | Sales return reserve | $547 | $945 | | Accrued fulfillment expense | $381 | $819 | | Accrued insurance | $952 | $2,286 | | Federal payroll taxes payable | $330 | $1,723 | | Accrued interest payable | $137 | $360 | | Transition services payable to seller | $0 | $4,331 | | All other accruals | $471 | $1,852 | | Total Accrued and other current liabilities | $8,340 | $18,177 | 6. CREDIT FACILITY AND TERM LOANS This section details debt arrangements, including credit facilities, term loans, defaults, and refinancing events - The MidCap Credit Facility was terminated on April 8, 2021, with all obligations paid off, resulting in a $1.5 million extinguishment loss[83] - On April 8, 2021, the company refinanced all existing debt with High Trail and Midcap, issuing $110.0 million in April 2021 Notes and warrants[90] - The company breached its Adjusted EBITDA covenant with High Trail in August 2021, leading to an acceleration of $18.7 million principal, which was partially paid in cash ($10.1 million) and partially equitized through common stock issuance (2,841,251 shares for $11.7 million)[95][97] - On September 22, 2021, High Trail declared further defaults, accelerating $66.3 million of principal, which was repaid by issuing 9,312,910 shares of common stock. The April 2021 Notes were extinguished and replaced with a $25.0 million term loan due April 2023[100][101] - Total debt extinguishment losses for the nine months ended September 30, 2021, amounted to $136.8 million, including $107.0 million from the April 2021 Note extinguishment[101] Interest Expense, Net (in thousands) | Metric | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | | :------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Interest expense | $960 | $2,919 | $3,177 | $12,470 | | Interest income | $(26) | $(133) | $(57) | $(593) | | Total Interest expense, net | $934 | $2,786 | $3,120 | $11,877 | 7. STOCK-BASED COMPENSATION This section describes equity incentive plans and associated stock-based compensation expenses - The company has three equity plans: Aterian 2014 Plan, 2018 Plan, and 2019 Equity Plan, under which stock options and restricted stock awards are granted[114][115][118] - Total stock-based compensation expense for the nine months ended September 30, 2021, was $21.3 million, an increase from $17.5 million in the prior year[125] - As of September 30, 2021, unrecognized compensation expense for unvested options was $0.7 million (expected over 0.17 years) and for unvested restricted common stock was $26.5 million (expected over 1.69 years)[120][123] 8. NET LOSS PER SHARE This section presents basic and diluted net loss per share calculations, considering anti-dilutive instruments Net Loss Per Share (in thousands, except share and per share data) | Metric | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | | :------------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net loss | $(805) | $(110,556) | $(18,772) | $(229,415) | | Weighted-average shares outstanding (basic & diluted) | 17,090,050 | 35,359,999 | 15,903,517 | 30,383,375 | | Net loss per share (basic & diluted) | $(0.05) | $(3.13) | $(1.18) | $(7.55) | - In periods with net operating losses, all options to purchase common stock are considered anti-dilutive, making basic and diluted net loss per share equal[126] 9. COMMITMENTS AND CONTINGENCIES This section outlines potential liabilities from sales tax, regulatory investigations, and ongoing legal disputes - The company estimates potential sales tax liability of approximately $0.7 million as of September 30, 2021, for states where it sold products prior to claiming nexus[130] - The company is under investigation by the DOE for potential non-compliance with energy-conservation standards for a dehumidifier model and by the EPA for failing to comply with ENERGY STAR requirements for certain dehumidifier products[131][132][133] - The company is a defendant in a securities class action lawsuit and two shareholder derivative actions, alleging false statements, breach of fiduciary duties, and misuse of authority[136][137][138] - A contract dispute with a supplier resulted in a fully reserved $4.1 million prepaid asset due to the supplier's default on a settlement agreement[134] 10. ACQUISITION This section details recent acquisitions, including purchase prices, earn-out liabilities, and financial contributions - In February 2021, Aterian acquired Healing Solutions assets for $15.3 million cash and 1,387,759 shares of common stock, plus estimated earn-out liabilities[140][144] - In May 2021, Aterian acquired Squatty Potty assets for $19.0 million cash, with additional earn-out and transition service payments[149][150] - In May 2021, Aterian acquired Photo Paper Direct for $8.3 million cash and 704,500 shares of common stock, plus an estimated earn-out[155][156] - The fair value of contingent earn-out liabilities is reassessed quarterly, with changes reported in operating income. As of September 30, 2021, total contingent earn-out liabilities were $31.6 million[161][169] Acquisition Contributions to Net Revenue and Operating Income (in thousands) | Acquisition | Period | Net Revenue Contribution | Operating Income Contribution | | :------------------ | :-------------------------- | :----------------------- | :---------------------------- | | Healing Solutions | 3 Months Ended Sep 30, 2021 | $6,800 | $1,100 | | | 9 Months Ended Sep 30, 2021 | $27,100 | $6,300 | | Squatty Potty | 3 Months Ended Sep 30, 2021 | $3,200 | $2,000 | | | 9 Months Ended Sep 30, 2021 | $5,400 | $2,800 | | Photo Paper Direct | 3 Months Ended Sep 30, 2021 | $4,200 | $1,500 | | | 9 Months Ended Sep 30, 2021 | $7,200 | $2,100 | 11. GOODWILL AND INTANGIBLES This section provides a breakdown of goodwill and other intangible assets, including trademarks and customer relations Goodwill (in thousands) | Metric | Dec 31, 2020 | Sep 30, 2021 | Change | | :------- | :----------- | :----------- | :----- | | Goodwill | $47,318 | $118,619 | +$71,301 | Other Intangible Assets (Net Book Value, in thousands) | Metric | Dec 31, 2020 | Sep 30, 2021 | Change | | :-------------------------- | :----------- | :----------- | :----- | | Trademarks | $31,368 | $61,800 | +$30,432 | | Non-competition agreement | $92 | $92 | $0 | | Transition services agreement | $0 | $0 | $0 | | Customer relations | $0 | $5,463 | +$5,463 | | Total Intangibles | $31,460 | $67,355 | +$35,895 | - Goodwill additions of $71.3 million during the nine months ended September 30, 2021, are primarily attributable to expected synergies from integrating acquired products into existing sales channels[145][151][157][171] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section discusses financial condition and results, highlighting COVID-19 and supply chain impacts on performance Overview This overview describes Aterian's AI-enabled consumer products platform, its brands, and product categories - Aterian is a technology-enabled consumer products platform that uses AI and machine learning to build, acquire, and partner with e-commerce brands[178] - The company operates fourteen brands, including hOmeLabs, Vremi, Xtava, RIF6, Aussie Health, Holonix, Truweo, Mueller, Pursteam, Pohl and Schmitt, Spiralizer, Healing Solutions, Squatty Potty, and Photo Paper Direct[179] - Products are sold in multiple categories such as home and kitchen appliances, kitchenware, heating/cooling/air quality, health and beauty, and essential oils[179] Seasonality of Business and Product Mix This section discusses sales seasonality, product lifecycle phases, and supply chain impacts on inventory and launches - Sales are seasonal, with environmental appliances higher in summer and small kitchen appliances/accessories higher in Q4 (Thanksgiving/December holidays)[181] - Products move through Launch (negative 35% net margin), Sustain (target positive 15% net margin within 3 months), and potentially Milk or Liquidate phases[182] - Due to global supply chain unpredictability, the company has increased inventory on-hand, impacting working capital and requiring more storage capacity[183][185] - The company temporarily paused new product launches manufactured in Asia due to sharp increases in shipping costs and inventory unpredictability[185][186] New Product Launches (>$0.5M annual net revenue) | Period | 2020 | 2021 | | :-------------------------- | :--- | :--- | | Three Months Ended Sep 30 | 8 | 0 | | Nine Months Ended Sep 30 | 32 | 40 | Financial Operations Overview This section outlines revenue recognition, cost of goods sold, sales and distribution, and general and administrative expenses - Revenue is primarily from direct-to-consumer sales through online retail channels (Amazon.com, Walmart.com) and wholesale channels, recognized at shipment[187] - Cost of goods sold includes inventory book value, with exposure to tariffs on products imported from China, which the company aims to offset with pricing actions[188] - Sales and distribution expenses are variable, dependent on sales volume, product mix (launch vs. sustain phase), and fulfillment method (FBM vs. FBA), and include e-commerce platform commissions, online advertising, and logistics[190] - General and administrative expenses cover executive, finance, legal, HR compensation, facility costs, insurance, travel, professional fees, and public company costs[191] Results of Operations This section compares financial performance for the three and nine months ended September 30, 2020 and 2021 Comparison of the Three Months Ended September 30, 2020 and 2021 This section compares key financial performance for the three months ended September 30, 2020 and 2021 Key Financial Performance (3 Months Ended Sep 30, in thousands, except percentages) | Metric | 2020 | 2021 | Change Amount | % Change | | :------------------------------------ | :----- | :----- | :------------ | :--------- | | Net Revenue | $58,783 | $68,121 | $9,338 | 15.9% | | Cost of Goods Sold | $30,688 | $33,946 | $3,258 | 10.6% | | Gross Profit | $28,095 | $34,175 | $6,080 | 21.6% | | Sales and Distribution Expenses | $18,944 | $32,337 | $13,393 | 70.7% | | Research and Development Expenses | $1,846 | $2,767 | $921 | 49.9% | | General and Administrative Expenses | $7,199 | $10,843 | $3,644 | 50.6% | | Change in fair value of contingent earn-out liabilities | $0 | $(4,245) | $(4,245) | 100.0% | | Operating Income (Loss) | $106 | $(7,527) | $(7,633) | (7,200.9)% | | Interest Expense, net | $934 | $2,786 | $1,852 | 198.3% | | Loss on extinguishment of debt | $0 | $106,991 | $106,991 | (100.0)% | | Change in fair market value of warrant liability | $0 | $(8,134) | $(8,134) | 100.0% | | Net Loss | $(805) | $(110,556) | $(109,751) | (13,633.7)% | - Direct net revenue increased by 36.5% ($17.7 million), driven by M&A ($30.7 million), while organic revenue decreased by 24.6% ($11.6 million) due to reduced demand and inventory shorts[201] - Gross margin improved from 47.8% to 50.2% due to a product mix shift towards M&A products with higher gross margins (57.8%) compared to organic business (45.9%)[206] - Sales and distribution expenses increased by 70.7% to $32.3 million, primarily due to increased volume, higher last-mile shipping costs, and a $2.4 million increase in stock-based compensation[207][208] Comparison of the Nine months Ended September 30, 2020 and 2021 This section compares key financial performance for the nine months ended September 30, 2020 and 2021 Key Financial Performance (9 Months Ended Sep 30, in thousands, except percentages) | Metric | 2020 | 2021 | Change Amount | % Change | | :------------------------------------ | :----- | :----- | :------------ | :--------- | | Net Revenue | $144,212 | $184,446 | $40,234 | 27.9% | | Cost of Goods Sold | $78,218 | $91,464 | $13,246 | 16.9% | | Gross Profit | $65,994 | $92,982 | $26,988 | 40.9% | | Sales and Distribution Expenses | $51,472 | $96,716 | $45,244 | 87.9% | | Research and Development Expenses | $6,578 | $7,220 | $642 | 9.8% | | General and Administrative Expenses | $23,554 | $31,807 | $8,253 | 35.0% | | Change in fair value of contingent earn-out liabilities | $0 | $(11,949) | $(11,949) | 100.0% | | Operating Loss | $(15,610) | $(30,812) | $(15,202) | (97.4)% | | Interest Expense, net | $3,120 | $11,877 | $8,757 | 280.7% | | Loss on extinguishment of debt | $0 | $136,763 | $136,763 | 100.0% | | Change in fair market value of warrant liability | $0 | $26,455 | $26,455 | 100.0% | | Loss on initial issuance of warrant | $0 | $20,147 | $20,147 | 100.0% | | Net Loss | $(18,772) | $(229,415) | $(210,643) | (1122.1)% | - Direct net revenue increased by 41.6% ($52.9 million), primarily from M&A ($92.7 million), while organic revenue decreased by 30.3% ($38.1 million) due to reduced sales volume, increased prices, and inventory shorts[225] - Gross margin improved from 45.8% to 50.4%, driven by a product mix shift towards M&A products with higher gross margins (58.4%) compared to organic business (43.2%)[230] - Sales and distribution expenses increased by 87.9% to $96.7 million, primarily due to increased volume, higher last-mile shipping costs, a $4.1 million bad debt reserve, and $1.5 million in professional fees from transition services[231][232] Liquidity and Capital Resources This section analyzes cash flows and discusses the company's ability to continue as a going concern - Net cash used in operating activities was $(40.5) million for the nine months ended September 30, 2021, a significant decrease from $7.6 million provided in the prior year, primarily due to net cash losses and working capital changes[243] - Net cash used in investing activities increased to $(44.9) million for the nine months ended September 30, 2021, mainly due to acquisitions of Healing Solutions, Squatty Potty, and Photo Paper Direct[244] - Net cash provided by financing activities significantly increased to $95.2 million for the nine months ended September 30, 2021, driven by High Trail April 2021 Notes borrowings ($110.0 million), warrant cancellation proceeds ($16.9 million), and equity offering proceeds ($36.7 million)[247] - Management expresses substantial doubt about the company's ability to continue as a going concern due to increased supply chain costs, reduced demand, and breaches of debt covenants with High Trail[251][252] Non-GAAP Financial Measures This section defines and reconciles non-GAAP financial measures like Contribution margin and Adjusted EBITDA - Non-GAAP measures presented include Contribution margin, Contribution margin as a percentage of net revenue, Adjusted EBITDA, and Adjusted EBITDA as a percentage of net revenue[255] - Contribution margin is gross profit less amortization of inventory step-up and e-commerce platform commissions, online advertising, selling, and logistics expenses[256] - Adjusted EBITDA is net loss adjusted for depreciation, amortization, interest, taxes, stock-based compensation, changes in fair value of earn-outs and warrants, debt extinguishment, and acquisition-related fees[256] Non-GAAP Financial Measures Summary (in thousands, except percentages) | Metric | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | | :--------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Gross profit | $28,095 | $34,175 | $65,994 | $92,982 | | Contribution margin | $11,210 | $8,232 | $20,492 | $20,028 | | Gross profit as % of net revenue | 47.8% | 50.2% | 45.8% | 50.4% | | Contribution margin as % of net revenue | 19.1% | 12.1% | 14.2% | 10.9% | | Net Loss | $(805) | $(110,556) | $(18,772) | $(229,415) | | EBITDA | $229 | $(105,877) | $(15,427) | $(212,717) | | Adjusted EBITDA | $5,067 | $728 | $2,041 | $(4,198) | | Net loss as % of net revenue | (1.4)% | (162.3)% | (13.0)% | (124.4)% | | Adjusted EBITDA as % of net revenue | 8.6% | 1.1% | 1.4% | (2.3)% | Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details market risks, primarily interest rate sensitivity and foreign currency exchange rates - Primary market risk exposure is interest rate sensitivity, but an immediate 100 basis point change would not materially affect investment fair value due to short-term maturities[272] - The High Trail Notes are at a fixed rate, limiting interest rate exposure for those loans[273] - Foreign currency exchange rate risk is currently not material, with sales outside the U.S. representing less than 5% of net revenue, but may increase with international expansion[274] Item 4. Controls and Procedures This section confirms effective disclosure controls and procedures, with no material changes in internal control - Disclosure controls and procedures were evaluated and deemed effective as of September 30, 2021[276] - No material changes in internal control over financial reporting occurred during the three months ended September 30, 2021[277] - Controls and procedures provide only reasonable assurance and require management judgment in balancing benefits and costs[278] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section details ongoing legal actions, including class action lawsuits and contract disputes, with uncertain outcomes - The company is a defendant in a securities class action lawsuit filed in May 2021, alleging false and misleading statements and omissions[136][137] - Two shareholder derivative actions were filed in October 2021, alleging breach of fiduciary duties, misuse of authority, unjust enrichment, and waste of corporate assets by individual defendants[138][281] - Sabby Volatility Warrant Master Fund Ltd. sued the company in September 2021, alleging breach of a Securities Purchase Agreement due to untrue representations and anti-dilution/use-of-proceeds covenant breaches[139][282] - The outcomes of these legal proceedings are uncertain, and the company cannot reasonably estimate a range of loss or income[137][138][139][281][282] Item 1A. Risk Factors This section updates significant risks, focusing on going concern issues, supply chain disruptions, and debt covenant breaches - Management expresses substantial doubt about the company's ability to continue as a going concern due to COVID-19's impact on supply chain costs, reduced reliability, increased inventory, and breaches of debt covenants[285][286][287][288] - The company faces risks related to effectively managing inventory, including predicting demand, reordering, and potential write-offs, exacerbated by global supply chain disruptions[299][300][301] - Operational exposure to sourcing, manufacturing, shipping, importing, and warehousing risks, including price fluctuations, supply disruptions, and natural disasters, could adversely affect operating results[302] - The company may require additional capital to support growth, but financing might not be available or could dilute existing stockholders, especially given current ineligibility for Form S-3 registration statements[307][308] - The terms of outstanding debt contain restrictive covenants, and past defaults (e.g., Adjusted EBITDA covenant breach with High Trail) have led to loan acceleration, equitization, and renegotiated terms, with future defaults posing risks of further dilution or adverse financial impact[309][310][311][313] - The company's share price may be volatile due to various factors, including financial performance fluctuations, market conditions, and potential "short squeezes"[315][327] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on unregistered common stock issuance for services, relying on specific Securities Act exemptions - On August 9, 2021, 11,191 restricted common shares were issued to Andrew Blecher (independent contractor) and 44,217 restricted shares to Nadav Zohar (prospect referral)[334] - On September 8, 2021, 90,000 restricted common shares were issued to an advisory firm for management consulting, business, and advisory services[334] - These issuances were made in reliance on exemptions from registration under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D[335] Item 3. Defaults Upon Senior Securities This section confirms no defaults upon senior securities were reported during the period - No defaults upon senior securities were reported[335] Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - This item is not applicable[335] Item 5. Other Information No other information was reported under this item - No other information was reported[335] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents, debt agreements, and certifications - The exhibits include amendments to the Certificate of Incorporation and Bylaws, forms of common stock certificates and warrants, and various agreements related to debt and warrants[337][338] - Key debt-related exhibits include the Omnibus Amendment to Senior Secured Notes Due 2024 and Warrants to Purchase Common Stock (August 9, 2021) and the Second Omnibus Amendment (September 22, 2021)[338] - Certifications by the Principal Executive Officer and Principal Financial Officer (pursuant to Rule 13a-14(a) and 18 U.S.C. Section 1350) are also filed/furnished[340][341] Signatures This section confirms the official signing of the report by the CEO and CFO - The Quarterly Report on Form 10-Q was signed by Yaniv Sarig, Chief Executive Officer and Director, and Arturo Rodriguez, Chief Financial Officer, on November 9, 2021[345]