Aterian(ATER) - 2022 Q4 - Annual Report

PART I Business Aterian is a technology-enabled consumer product company using its AIMEE platform to sell fifteen brands, primarily through online channels like Amazon, which generated 89% of 2022 revenue - Aterian is a technology-enabled consumer product company using its proprietary data science platform, AIMEE, to manage its product lifecycle from development to sales[8][9] - The company owns and operates fifteen brands, including hOmeLabs, Squatty Potty, Mueller, and Healing Solutions, across various consumer product categories[8] - Aterian generates the vast majority of its revenue through online marketplaces, with Amazon accounting for 89% of total revenue in 2022, a decrease from 93% in 2021[10][17] - The business is subject to seasonality, with higher sales for cooling products in the summer and kitchen appliances in the fourth quarter holiday season[18] - Substantially all finished products were purchased from approximately 77 suppliers in China during 2022, with one supplier accounting for over 10% of purchases[20] Risk Factors The company faces significant risks including a history of operating losses, a going concern warning, intense online competition, heavy reliance on Amazon, and supply chain dependence on China - The company has a history of significant operating losses, reporting a net loss of $196.3 million in 2022, and its independent auditor has expressed substantial doubt about its ability to continue as a going concern[29][30][31] - A substantial majority of revenue comes from Amazon's U.S. marketplace, making the company vulnerable to changes in Amazon's terms of service, platform fees, or any suspension of its seller accounts[46][47][48] - The business depends on third-party suppliers, mostly in Asia, creating risks related to supply chain disruptions, geopolitical instability, currency fluctuations, and tariffs[43][44][45] - The company faces intense competition on online marketplaces from numerous third-party brands, including direct competition from some of its own contract manufacturers[32][33][34] - The common stock has traded below Nasdaq's $1.00 minimum bid price requirement, posing a risk of delisting if compliance is not regained[86] - The company's credit facility contains restrictive covenants, and it relies on export credit insurance for its Chinese vendors, the unavailability of which could materially impact operations[50][52] Properties Aterian's corporate headquarters is a leased 5,200 sq ft office in New York, with other offices owned in the UK and leased in China and Poland - The company's principal executive office is a leased space of approximately 5,200 square feet in New York, with the lease expiring in April 2023[87] - Aterian owns its UK office and leases its offices in China and Poland with lease terms expiring in May 2024 and July 2023, respectively[87] Legal Proceedings The company is involved in various legal proceedings but believes none will have a material effect on its business or financial condition - The company believes there are no pending legal proceedings that are expected to have a material effect on its business or financial condition[89] Mine Safety Disclosures This section is not applicable to the company - No mine safety disclosures were reported[89] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Aterian's common stock trades on Nasdaq under "ATER"; the company has never paid cash dividends and does not plan to, due to business needs and credit agreement restrictions - The company's common stock trades on the Nasdaq Capital Market under the symbol "ATER"[91] - Aterian has never paid cash dividends and does not plan to in the foreseeable future, with its credit facility also restricting such payments[92] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, net revenue decreased by 10.7% to $221.2 million, resulting in a $196.3 million net loss, significantly impacted by a $120.4 million goodwill impairment, raising going concern doubts Results of Operations Net revenue decreased by 10.7% to $221.2 million in 2022, leading to a $196.3 million net loss, while operating loss widened to $178.2 million due to significant impairment charges Consolidated Results of Operations (2021 vs. 2022) | Metric | 2021 (in thousands) | 2022 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Net Revenue | $247,767 | $221,170 | (10.7%) | | Gross Profit | $121,863 | $105,518 | (13.4%) | | Operating Loss | $(34,077) | $(178,159) | 422.8% | | Net Loss | $(236,024) | $(196,292) | (16.8%) | - The decrease in net revenue was primarily due to a $21.6 million (9.2%) drop in direct net revenue, attributed to softness in consumer demand[115] - A goodwill impairment charge of $120.4 million and an intangible impairment charge of $3.1 million were recorded in 2022, significantly impacting the operating loss[128][129] Net Revenue by Channel (2021 vs. 2022) | Channel | 2021 (in thousands) | 2022 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Direct | $235,817 | $214,168 | (9.2%) | | Wholesale | $11,950 | $7,002 | (41.4%) | | Total Net Revenue | $247,767 | $221,170 | (10.7%) | Net Revenue by Product Category (2022) | Product Category | Net Revenue (in thousands) | | :--- | :--- | | Heating, cooling and air quality | $67,797 | | Kitchen appliances | $40,551 | | Housewares | $33,041 | | Essential oils and related accessories | $23,604 | | Cookware, kitchen tools and gadgets | $19,526 | | Health and beauty | $17,485 | | Home office | $13,322 | | Other | $5,844 | Liquidity and Capital Resources The company's liquidity raises substantial doubt about its going concern ability, with $43.6 million cash and $625.3 million accumulated deficit as of December 31, 2022, despite improved operating cash flow - The company's history of significant losses and negative cash flows raises substantial doubt about its ability to continue as a going concern[145][149][217] Cash Flow Summary (2021 vs. 2022) | Cash Flow Activity | 2021 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | $(41,969) | $(17,477) | | Net Cash Used in Investing Activities | $(44,905) | $(677) | | Net Cash Provided by Financing Activities | $95,569 | $26,996 | - As of December 31, 2022, the company had $43.6 million in unrestricted cash and cash equivalents and an accumulated deficit of $625.3 million[147] - The company is required to maintain minimum liquidity under its MidCap credit facility: $12.5 million from Feb 1 to May 31, and $15.0 million at all other times[147][153] - In 2022, the company raised approximately $46.8 million net from equity offerings in March and October to fund working capital and corporate purposes[144][155] Non-GAAP Financial Measures Non-GAAP Contribution Margin sharply declined to $3.9 million (1.8% of net revenue) in 2022, and Adjusted EBITDA worsened to a loss of $33.5 million (-15.2% of net revenue) Key Non-GAAP Metrics (2021 vs. 2022) | Metric | 2021 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | Contribution Margin | $25,038 | $3,903 | | Contribution Margin % of Net Revenue | 10.1% | 1.8% | | Adjusted EBITDA | $(7,159) | $(33,514) | | Adjusted EBITDA % of Net Revenue | (2.9%) | (15.2%) | - Contribution Margin is defined as gross profit less certain variable costs like e-commerce commissions, online advertising, and logistics expenses[159] - Adjusted EBITDA is reconciled from net loss by adding back interest, taxes, D&A, stock-based compensation, impairment charges, and other non-recurring or non-cash items[159][173] Critical Accounting Policies and Use of Estimates Key accounting policies involve significant estimates, notably goodwill and intangible asset valuations, which led to $120.4 million and $3.1 million impairment charges respectively in 2022 - Key accounting policies requiring significant estimates include revenue recognition, inventory valuation, goodwill valuation, and accounting for contingent consideration from acquisitions[175][180][182][185] - In 2022, a sustained decline in the company's stock price and market capitalization below book value triggered interim goodwill impairment tests[186][188] - The company recorded total goodwill impairment charges of approximately $120.4 million for the year ended December 31, 2022, eliminating all goodwill from the balance sheet[192] - A significant decrease in sales and contribution margin for certain asset groups was considered a triggering event, resulting in a $3.1 million impairment charge on intangible assets in 2022[193][194] Financial Statements and Supplementary Data This section presents audited consolidated financial statements for 2021 and 2022, including an auditor's going concern warning due to recurring losses and negative cash flows Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued a fair opinion but included a "Going Concern" paragraph due to recurring losses, negative cash flows, and potential covenant non-compliance - The independent auditor's report contains an explanatory paragraph expressing substantial doubt about the company's ability to continue as a going concern[217] - The basis for the going concern uncertainty includes recurring losses from operations, recurring negative operating cash flows, and potential non-compliance with credit facility covenants[217] Consolidated Financial Statements As of December 31, 2022, total assets decreased to $156.4 million, total liabilities to $54.5 million, with a net loss of $196.3 million and $17.5 million net cash used in operations Key Balance Sheet Items (as of Dec 31, 2022) | Account | 2021 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | Cash | $30,317 | $43,574 | | Inventory | $63,045 | $43,666 | | Goodwill | $119,941 | $0 | | Total Assets | $313,570 | $156,439 | | Credit Facility | $32,845 | $21,053 | | Total Liabilities | $89,342 | $54,487 | Key Income Statement Items (Year Ended Dec 31, 2022) | Account | Amount (in thousands) | | :--- | :--- | | Net Revenue | $221,170 | | Gross Profit | $105,518 | | Impairment loss on goodwill | $120,409 | | Operating Loss | $(178,159) | | Net Loss | $(196,292) | | Net loss per share | $(2.95) | Notes to Consolidated Financial Statements Notes detail the going concern issue, MidCap Credit Facility balance of $21.1 million, legal settlements totaling $1.6 million, and 2022 goodwill and intangible asset impairments of $120.4 million and $3.1 million respectively - Note 1 (Organization and Description of Business) elaborates on the substantial doubt about the company's ability to continue as a going concern, citing recurring losses and reliance on outside capital[238][240] - Note 9 (Credit Facility and Term Loans) shows an outstanding balance of $21.1 million on the MidCap credit facility as of Dec 31, 2022[339] - Note 12 (Commitment and Contingencies) discloses the settlement of a securities class action lawsuit for $1.3 million and a shareholder derivative action for $0.3 million in 2022[365][366][367] - Note 17 (Goodwill and Intangibles) confirms the total goodwill impairment charge for 2022 was approximately $120.4 million, and the total impairment charge for intangibles was $3.1 million[420][421][423] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022, with no material changes reported in Q4 2022 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[429] - Based on the COSO framework, management concluded that internal control over financial reporting was effective as of December 31, 2022[431] - No material changes were made to the company's internal control over financial reporting during the fourth quarter of 2022[432] PART III Directors, Executive Officers and Corporate Governance This section lists executive officers and directors, including CEO Yaniv Sarig, and details the Audit Committee's composition, with Susan Lattmann as the financial expert - The report lists key executive officers including Yaniv Sarig (President and CEO), Arturo Rodriguez (CFO), and Joseph A. Risico (Chief Legal Officer)[435] - The Board has a standing Audit Committee comprised of four independent directors: William Kurtz, Susan Lattmann (Chairperson), Sarah Liebel, and Cynthia Williams[450] - The Board has determined that Susan Lattmann qualifies as an "audit committee financial expert" under SEC rules[450] Executive Compensation In 2022, CEO Yaniv Sarig's total compensation was $1.42 million, a decrease from 2021, with no bonuses paid to NEOs, and director compensation includes cash and restricted stock 2022 Summary Compensation for Named Executive Officers | Name | Position | Salary ($) | Stock Awards ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | | Yaniv Sarig | President and CEO | 349,999 | 1,051,900 | 1,421,126 | | Joseph A. Risico | CLO & Head of M&A | 310,000 | 977,768 | 1,296,077 | | Roi Zahut | CTO | 310,000 | 977,768 | 1,294,723 | - No bonuses were paid to the Named Executive Officers for the year ended December 31, 2022[462] - Effective January 2023, CEO Yaniv Sarig's salary was amended to be paid mostly in company stock, with $60,000 in cash and $290,000 in common stock (331,104 shares) vesting in one year[459] - Non-employee directors receive an annual retainer of $150,000 plus committee fees, paid one-third in cash and two-thirds in restricted stock[469] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of December 31, 2022, 2,856,815 securities were available under equity plans, with Armistice Capital owning 14.9% and all executive officers and directors owning 4.1% of common stock - As of December 31, 2022, a total of 2,856,815 securities were available for future issuance under the company's equity compensation plans[479] - Armistice Capital Master Fund Ltd. is the only stockholder known to beneficially own more than 5% of the company's common stock, with 14.9% ownership[485][487] - All current executive officers and directors as a group beneficially own 4.1% of the company's common stock[485][491] Certain Relationships and Related Transactions, and Director Independence No related party transactions exceeding $120,000 were reported since January 1, 2022, and five of six directors are deemed independent under Nasdaq rules - No related party transactions requiring disclosure occurred since January 1, 2022[493] - The Board has determined that five of its six members (Mses. Harlam, Lattmann, Liebel, Williams, and Mr. Kurtz) are independent directors under Nasdaq rules[495] Principal Accounting Fees and Services Total fees billed by Deloitte & Touche LLP increased from $1.33 million in 2021 to $1.62 million in 2022, primarily due to higher audit fees, all pre-approved by the Audit Committee Fees Billed by Deloitte & Touche LLP | Fee Category | 2021 ($) | 2022 ($) | | :--- | :--- | :--- | | Audit Fees | 1,204,010 | 1,524,207 | | Tax Fees | 125,000 | 89,638 | | All Other Fees | 3,800 | 4,126 | | Total Fees | 1,332,810 | 1,617,971 | - All audit and non-audit services provided by Deloitte & Touche LLP were pre-approved by the Audit Committee in accordance with its policy[499] PART IV Exhibits, Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including asset purchase agreements, corporate governance documents, material contracts, and certifications - This section provides a list of all exhibits filed with the Form 10-K, including material contracts and certifications[502] Form 10-K Summary This section is not applicable - No Form 10-K summary was provided[514]