The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and with our audited financial statements and related notes thereto for the year endedDecember 31, 2021 included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 as filed with theSecurities and Exchange Commission (the "SEC") onMarch 16, 2022 . As discussed in the section titled "Special Note Regarding Forward-Looking Statements", the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified in the section titled "Special Note Regarding Forward Looking Statements" and those discussed in the section titled "Risk Factors" under Part II, Item 1A in this Quarterly Report on Form 10-Q. Unless the context otherwise requires, the terms "Aterian ," the "Company," "we," "us" and "our" in this Quarterly Report on Form 10-Q refer toAterian, Inc. and our consolidated subsidiaries, includingAterian Group, Inc.
Overview
We are a technology-enabled consumer products platform that uses "data science" (which includes but is not limited to, machine learning, natural language processing, and data analytics) to design, develop, market and sell products. We were founded on the premise that if a company selling consumer packaged goods was founded today, it would apply data science, the synthesis of massive quantities of data and the use of social proof to validate high caliber product offerings as opposed to over-reliance on brand value and other traditional marketing tactics. Today, we predominantly operate through online retail channels such as Amazon.com ("Amazon") and Walmart, Inc. We have launched and sold hundreds of SKUs on e-commerce platforms. Through the success of a number of those products we have incubated our own brands. We also have purchased brands and products when we believe it is advantageous. Today, we own and operate fourteen brands that sell products in multiple categories, including home and kitchen appliances, kitchenware, heating, cooling and air quality appliances (dehumidifiers, humidifiers and air conditioners), health and beauty products and essential oils. Our fourteen brands include, hOmeLabs; Vremi; Squatty Potty; Xtava; RIF6;Aussie Health ; Holonix; Truweo; Mueller; Pursteam; Pohl and Schmitt; Spiralizer; Healing Solutions; and Photo Paper Direct.
Seasonality of Business and Product Mix
Our individual product categories are typically affected by seasonal sales trends primarily resulting from the timing of the summer season for certain of our environmental appliance products and the fall and holiday season for our small kitchen appliances and accessories. With our current mix of environmental appliances, the sales of those products tend to be significantly higher in the summer season. Further, our small kitchen appliances and accessories tend to have higher sales during the fourth quarter, which includesThanksgiving and the December holiday season. As a result, our operational results, cash flows, cash and inventory positions may fluctuate materially in any quarterly period depending on, among other things, adverse weather conditions, shifts in the timing of certain holidays and changes in our product mix. Each of our products typically goes through the Launch phase and depending on its level of success is moved to one of the other phases as further described below:
i. Launch phase: During this phase, we leverage our technology to target
opportunities identified using AIMEE (
e-Commerce Engine) and other sources. During this period of time, due to
the combination of discounts and investment in marketing, our net margin
for a product could be as low as approximately negative 35%. Net margin is
calculated by taking net revenue less the cost of goods sold, less
fulfillment, online advertising and selling expenses. These costs primarily
reflect the estimated variable costs related to the sale of a product.
ii. Sustain phase: Our goal is for every product we launch to enter the
sustain phase and become profitable, with a target average of positive 15%
net margin, within approximately three months of launch on average. Net
margin primarily reflects a combination of manual and automated
adjustments in price and marketing spend. Over time, our products benefit
from economies of scale stemming from purchasing power both with manufacturers and with fulfillment providers.
iii. Milk phase or Liquidate phase: If a product does not enter the sustain
phase or if the customer satisfaction of the product (i.e., ratings) is
not satisfactory, then it will go to the liquidate phase and we will sell
through the remaining inventory. In order to enter the milk phase, we believe that a product must be well received and become a strong leader
in its category in both customer satisfaction and volume sold as compared
to its competition. Products in the milk phase that have achieved profitability should benefit from pricing power and we expect their profitability to increase accordingly. To date, none of 33
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our products have achieved the milk phase and we can provide no assurance
that any of our products will do so in the future.
To date, our operating results have included a mix of products in the launch and sustain phases, and we expect such results to include a mix of products in all phases at any given period. Product mix can affect our gross profit and the variable portion of our sales and distribution expenses. Ultimately, we believe that the future cash flow generated by our products in the sustain phase will outpace the amount that we will reinvest into launching new products, driving net revenue and profitability at the company level while we continue to invest in growth and technology. Due to the impact of the COVID-19 pandemic on the global supply chain, we have had to increase our inventory on hand to avoid disruption in sales. The unpredictability of container availability, space on vessels and shipping lead times, as well as associated manufacturing lead time, has caused us to secure more inventory upfront. Having more inventory on hand not only impacts our working capital but also requires us to increase our storage capacity, through our warehouse network, which of itself has a capital impact.
The following table shows the number of launches of new products included in our
net revenue that have achieved, or are expected to achieve, more than
approximately
Three Months Ended March 31, 2021 2022 Launches of new products 21 - Our growth in direct revenue can be impacted by the timing and the season in which products are launched and any mergers or acquisitions. There were no new product launches in the quarter endedMarch 31, 2022 , as we paused new product launches due to global supply chain unpredictability. Due to the COVID-19 pandemic's impact on the global supply chain, we have paused the launch of new products. The sharp increase in shipping costs has made our target competitive pricing difficult to achieve and the current unpredictability of shipping container availability makes it more difficult for us to maintain the required inventory levels, which in turn makes the potential and profitable success of product launches even more difficult to achieve in this current environment. Furthermore, we have concerns about the impact ofRussia's invasion ofUkraine on our business including its effects on the global economy, the performance and cost of supply chain and financial markets. We will continue to evaluate the impacts of this, in addition to the impacts of the COVID-19 pandemic, on our business.
Financial Operations Overview
Net Revenue-We derive our revenue from the sale of consumer products, primarily in theU.S. We sell products directly to consumers through online retail channels and through wholesale channels. Direct-to-consumer sales (i.e., direct net revenue), which is currently the majority of our revenue, is done through various online retail channels. We sell on Amazon.com,Walmart.com , and our own websites, with substantially all of our sales made through Amazon.com. For all of our sales and distribution channels, revenue is recognized when control of the product is transferred to the customer (i.e., when our performance obligation is satisfied), which typically occurs at the shipment date. Our Platform as a Service ("Managed PaaS") currently has nominal net revenue activity and for the near future is expected to be nominal, at best. Currently, we have limited resources at this time to invest in the Managed PaaS business given the pressure of the macro environment as our priority and focus is on our core business. Cost of Goods Sold-Cost of goods sold consists of the book value of inventory sold to customers during the reporting period and the amortization of inventory step-up from acquisitions. Book value of inventory includes the amounts we pay manufacturers for product, tariffs and duties associated with transporting product across national borders, and freight costs associated with transporting the product from our manufacturers to our warehouses, as applicable. When circumstances dictate that we use net realizable value as the basis for recording inventory, we base our estimates on expected future selling prices, less expected disposal costs.The Office of the U.S. Trade Representative has imposed additional tariffs on products imported fromChina . We contract manufacturers, predominantly inChina , through purchase orders, for our consumer products. As such, this exposes us to risks associated with doing business globally, including changes in tariffs, which impact a significant number of our products. We can provide no assurances that future tariff increases will not be enacted. These increases may affect the way we order products, as well as the amount of product we order. If tariff increases are enacted in the future, our pricing actions are expected to be intended to offset the full gross margin impact from such tariffs. Further, we have been affected by the COVID-19 pandemic and related global supply chain disruption. Together, these have led to substantial increases in the costs of our supply chain, specifically, increases in the costs of shipping containers, which we rely on to import our goods. We have increased pricing, when possible, to offset the full gross margin impact which at times has led to reduced sales velocity on certain products at certain times of the year. There are no assurances that these pricing actions will not reduce customer orders in the future. 34 --------------------------------------------------------------------------------
Expenses
Research and
Sales and Distribution Expenses- Sales and distribution expenses consist of online advertising costs, marketing and promotional costs, sales and e-commerce platform commissions, fulfillment, including shipping and handling, and warehouse costs (i.e., sales and distribution variable expenses). Sales and distribution expenses also include employee compensation and benefits and other related fixed costs. Shipping and handling expenses are included in our consolidated statements of operations in sales and distribution expenses. This includes inbound, pick and pack costs and outbound transportation costs to ship goods to customers performed by e-commerce platforms or incurred directly by us, through our own direct fulfillment platform, which leverages AIMEE and our third-party logistics partners. Our sales and distribution expenses, specifically our logistics expenses and online advertising, will vary quarter to quarter as they are dependent on our sales volume, our product mix (i.e., products in the launch phase or sustain phase) and whether we fulfill products ourselves, i.e., fulfillment by merchant ("FBM"), or through e-commerce platform service providers, i.e., fulfillment by Amazon or fulfilled by Walmart. After a product launches and reaches the sustain phase, we seek to maintain the product within its targeted level of profitability. This profitability can be impacted as each product has a unique fulfillment cost due to its size and weight. As such, products with less expensive fulfillment costs as a percentage of net revenue may allow for a lower gross margin, while still maintaining their targeted profitability level. Conversely, products with higher fulfillment costs will need to achieve a higher gross margin to maintain their targeted level of profitability. We are FBM One Day and TwoDay Prime certified, allowing us to deliver our sales through Amazon, to approximately 76% of theU.S. , within one day and to over 99% of theU.S. within two days, based on our sales history. We continually review the locations and capacity of our third-party warehouses to ensure we have the appropriate geographic reach, which helps to reduce the average last mile shipping zones to the end customer and as such our speed of delivery improves while our shipping costs to customers decrease, prior to the impacts on shipping providers' rates. General and Administrative Expenses-General and administrative expenses include compensation and employee benefits for executive management, finance administration, legal, and human resources, facility costs, insurance, travel, professional service fees and other general overhead costs, including the costs of being a public company. Interest Expense, Net-Interest expense, net includes the interest cost from our credit facility and term loans, and includes amortization of deferred finance costs and debt discounts from our credit facility (the "Credit Facility") withMidCap Funding IV Trust ("MidCap") during the year endedDecember 31, 2021 and the three months ended forMarch 31, 2022 , and term loan interest withHigh Trail Investments SA LLC ("High Trail SA ") andHigh Trail Investments ON LLC ("High Trail ON" and, together withHigh Trail SA , "High Trail") during the year endedDecember 31, 2021 . 35 --------------------------------------------------------------------------------
Results of Operations
Comparison of the Three Months Ended
The following table summarizes our results of operations for the three months endedMarch 31, 2021 and 2022, together with the changes in those items in dollars and percentages: Three Months Ended March 31, Change 2021 2022 Amount % (in thousands, except percentages) NET REVENUE$ 48,136 $ 41,673 $ (6,463 ) (13.4 )% COST OF GOODS SOLD 22,073 18,066 (4,007 ) (18.2 ) GROSS PROFIT 26,063 23,607 (2,456 ) (9.4 ) OPERATING EXPENSES: Sales and distribution expenses (1) 25,069 22,974 (2,095 ) (8.4 ) Research and development expenses (1) 2,124 1,144 (980 ) (46.1 ) General and administrative expenses (1) 10,976 9,541 (1,435 ) (13.1 ) Impairment loss on goodwill - 29,020 29,020 100.0 Change in fair value of contingent earn-out liabilities 15,645 (2,775 ) (18,420 ) (117.7 ) TOTAL OPERATING EXPENSES: 53,814 59,904 6,090 11.3 OPERATING LOSS (27,751 ) (36,297 ) (8,546 ) (30.8 ) INTEREST EXPENSE-net 4,420 802 (3,618 ) (81.9 ) GAIN ON EXTINGUISHMENT OF SELLER NOTE - (2,012 ) (2,012 ) (100.0 ) LOSS ON INITIAL ISSUANCE OF EQUITY - 5,835 5,835 100.0 CHANGE IN FAIR VALUE OF WARRANT LIABILITY 30,202 1,879 (28,323 ) (93.8 ) LOSS ON INITIAL ISSUANCE OF WARRANT 20,147 - (20,147 ) (100.0 ) OTHER EXPENSE 33 (25 ) (58 ) (175.8 ) LOSS BEFORE INCOME TAXES (82,553 ) (42,776 ) 39,777 48.2 PROVISION FOR INCOME TAXES - - - - NET LOSS$ (82,553 ) $ (42,776 ) $ 39,777 48.2 %
(1) Amounts include stock-based compensation expense as follows:
Three Months EndedMarch 31, 2021 2022 (in thousands)
Sales and distribution expenses $ 955 $ 347 Research and development expenses
883 274 General and administrative expenses 5,061 2,244
Total stock-based compensation expense
36
-------------------------------------------------------------------------------- The following table sets forth the components of our results of operations as a percentage of net revenue: Three Months Ended March 31, 2021 2022 NET REVENUE 100.0 % 100.0 % COST OF GOODS SOLD 45.9 % 43.4 % GROSS PROFIT 54.1 % 56.6 % OPERATING EXPENSES: Sales and distribution expenses 52.1 % 55.1 % Research and development expenses 4.4 % 2.7 % General and administrative expenses 22.8 % 22.9 % Impairment loss on goodwill 0.0 % 69.6 % Change in fair value of contingent earn-out liabilities 32.5 % (6.7 )% TOTAL OPERATING EXPENSES: 111.8 % 143.7 % OPERATING LOSS (57.7 )% (87.1 )% INTEREST EXPENSE-net 9.2 % 1.9 % GAIN ON EXTINGUISHMENT OF SELLER NOTE 0.0 % (4.8 )% LOSS ON INITIAL ISSUANCE OF EQUITY 0.0 % 14.0 % CHANGE IN FAIR VALUE OF WARRANT LIABILITY 62.7 % 4.5 % LOSS ON INITIAL ISSUANCE OF WARRANT 41.9 % 0.0 % OTHER EXPENSE 0.1 % (0.1 )% LOSS BEFORE INCOME TAXES (171.5 )% (102.6 )% PROVISION FOR INCOME TAXES 0.0 % 0.0 % NET LOSS (171.5 )% (102.6 )% Net Revenue
Revenue by Product Categories:
The following table sets forth our net revenue disaggregated by product categories: Three Months Ended March 31, Change 2021 2022 Amount % (in thousands, except percentages) Direct$ 46,152 $ 40,044 $ (6,108 ) (13.2 )% Wholesale/Other 1,984 1,629 (355 ) (17.9 )% Net revenue$ 48,136 $ 41,673 $ (6,463 ) (13.4 )% Net revenue decreased$6.5 million , or 13.4%, during the three months endedMarch 31, 2022 to$41.7 million , compared to$48.2 million for the three months endedMarch 31, 2021 . The decrease in net revenue was primarily attributable to a decrease in direct net revenue of$6.1 million , or a 13.2% decrease. Direct net revenue consists of both organic net revenue and net revenue from our mergers and acquisitions ("M&A"). For the three months endedMarch 31, 2022 , organic revenue was$29.8 million and revenue from our M&A businesses was$9.6 million . For the three months endedMarch 31, 2021 , organic revenue was$17.4 million and revenue from our M&A businesses was$28.7 million . Our organic revenue increased by$12.4 million , or 70.8%, during the three monthsMarch 31, 2022 , as compared to the three months endedMarch 31, 2021 . This increase was primarily driven by prior year M&A revenue moving into organic revenue after one year, offset by increased pricing on our products affected by global supply chain disruption which led to reduced sales velocity, reduced product launches and inventory shorts due to delayed receipt of goods for the three months endedMarch 31, 2022 . 37 -------------------------------------------------------------------------------- Three Months Ended March 31, 2021 2022 (in thousands)
Heating, cooling and air quality
12,150 8,450 Health and beauty 3,642 4,890 Personal protective equipment 1,154 1,040 Cookware, kitchen tools and gadgets 6,098 4,856 Home office 809 3,708 Housewares 7,182 6,547 Essential oils 7,353 5,082 Other 3,610 1,174 Total net revenue$ 48,136 $ 41,673 Heating, cooling and air quality accounted for$5.9 million in net revenue for the three months endedMarch 31, 2022 , which was essentially flat, compared to$6.1 million for the three months endedMarch 31, 2021 . Kitchen appliances accounted for$8.5 million in net revenue for the three months endedMarch 31, 2022 compared to$12.2 million in net revenue for the corresponding period in 2021, a decrease of$3.7 million primarily due to reduced launches in the current period as well as reduced sales volume, which we attribute to both reduced e-commerce demand due to the reopening of brick & mortar retail, and increased sale prices due to global supply chain disruptions and inventory shorts due to delayed receipt of goods. Cookware, kitchen tools and gadgets accounted for approximately$4.9 million in net revenue for the three months endedMarch 31, 2022 compared to$6.1 million in net revenue for the corresponding period in 2021, a decrease of$1.2 million primarily driven by reduced sales volume, which we attribute to both reduced e-commerce demand due to the reopening of brick & mortar retail, and increased sale prices due to global supply chain disruptions and inventory shorts due to delayed receipt of goods.
Home office products accounted for
Essential oils accounted for$5.0 million in net revenue for the three months endedMarch 31, 2022 compared to$7.4 million in net revenue for the corresponding period in 2021, decrease of a$2.3 million primarily driven by reduced sales volume, which we attribute to both reduced e-commerce demand due to the reopening of brick & mortar retail, and increased sale prices due to global supply chain disruptions and inventory shorts due to manufacturing delays.
Cost of Goods Sold and Gross Margin
Three Months Ended March 31, Change 2021 2022 Amount % (in thousands, except percentages) Cost of goods sold$ 22,073 $ 18,066 $ (4,007 ) (18.2 )% Gross profit$ 26,063 $ 23,607 $ (2,456 ) (9.4 )% Cost of goods sold decreased by$4.0 million , from$22.1 million for the three months endedMarch 31, 2021 to$18.1 million for the three months endedMarch 31, 2022 . The decrease in cost of goods sold was primarily attributable to a decrease of$6.0 million in cost of goods sold from our organic business, offset by a$10.1 million increase in cost of goods sold from our M&A businesses. Gross profit improved from 54.1% for the three-months endedMarch 31, 2021 to 56.6% for the three months endedMarch 31, 2022 . The improvement in gross margin was due to a change of product mix as our net revenue from our M&A businesses, which have a higher gross margin of 66.8% than our organic business' gross margin of 54.2%, offset by the impact from increased costs of our supply chain. The majority of our M&A businesses' net revenue tends to be from smaller products that have higher gross margins versus our organic business' net revenue, which tends to be oversized goods that have lower gross margins. We expect to see future impacts in our gross margin on both our M&A and organic businesses as the international shipping container crisis continues to drive 38 -------------------------------------------------------------------------------- shipping container costs higher and cause reductions in delivery reliability and other delays, which also increases related shipping container delivery costs, as well as other inflationary pressures.
Sales and Distribution Expenses
Three Months Ended March 31, Change 2021 2022 Amount % (in thousands, except percentages)
Sales and distribution expenses
Sales and distribution expenses, which included e-commerce platform commissions, online advertising and logistics expenses (i.e., variable sales and distribution expense), decreased to$23.0 million for the three months endedMarch 31, 2022 from$25.1 million for the three months endedMarch 31, 2021 . This decrease of$2.0 million is primarily attributable to the decrease in the volume of products sold in the three months endedMarch 31, 2022 , as our e-commerce platform commissions, online advertising, selling and logistics expenses decreased to$19.8 million in the three months endedMarch 31, 2022 as compared to$21.7 million in the prior period. Our sales and distribution fixed costs (e.g., salary and office expenses) including stock based compensation stayed relatively flat at$3.2 million for the three months endedMarch 31, 2022 from$3.3 million for the three months endedMarch 31, 2021 . As a percentage of net revenue, sales and distribution expenses increased to 55.1% for the three months endedMarch 31, 2022 from 52.1% for the three months endedMarch 31, 2021 primarily from an increase in last mile shipping costs. E-commerce platform commissions, online advertising, selling and logistics expenses included within sales and distribution expenses, as a percentage of net revenue, were 47.5% for the three months endedMarch 31, 2022 as compared to 45.2% for the three months endedMarch 31, 2021 . This increase in sales and distribution expenses is predominantly due to product mix and to the increase in last mile shipping costs, specifically for oversized goods, due to the demand on those third-party providers' delivery networks. We expect to see these cost increases continue in the near-term.
Research and Development Expenses
Three Months Ended March 31, Change 2021 2022 Amount % (in thousands, except percentages)
Research and development expenses
(980 ) (46.1 )%
The decrease in research and development expenses was primarily attributable to a decrease of stock-based compensation expense of approximately$0.6 million and a decrease of headcount expenses of$0.3 million .
General and Administrative Expenses
Three Months Ended March 31, Change 2021 2022 Amount % (in thousands, except percentages)
General and administrative expenses
The decrease in general and administrative expenses was primarily due to a decrease of stock compensation expenses of$2.8 million offset by an increase of$0.4 million related to the fixed costs expenses related to headcount and an increase of$0.8 million related to the legal settlement of the Mueller Action (see Note 9 of our condensed consolidated financial statements in this Quarterly Report on Form 10-Q for additional details). Impairment loss on goodwill Three Months Ended March 31, Change 2021 2022 Amount % (in thousands, except percentages) Impairment loss on goodwill $ - $ 29,020$ 29,020 100.0 % 39
-------------------------------------------------------------------------------- We assessed our goodwill as ofMarch 31, 2022 due to an interim triggering event due related to our reduced market capitalization and determined that our goodwill was impaired. As a result, we recorded a goodwill impairment charge of$29.0 million in the three months endedMarch 31, 2022 , primarily due to the decrease in our market capitalization. Refer to Note 2 and critical accounting policies.
Change in fair value of contingent earn-out liabilities
Three Months Ended March 31, Change 2021 2022 Amount % (in thousands, except percentages)
Change in fair value of
contingent earn-out liabilities
The change in fair value of contingent earn-out liabilities was related to our M&A, which includes a re-assessment of the estimated fair value of contingent consideration as part of the purchase price, primarily driven by the fluctuation in our share price since the date of each acquisition and contribution margin projections. Interest expense, net Three Months Ended March 31, Change 2021 2022 Amount % (in thousands, except percentages) Interest expense, net $ 4,420$ 802 $ (3,618 ) (81.9 )% The decrease in interest expense was primarily related to the payment in the High Trail loan in the prior period which had higher borrowings and interest rates compared to this current period which only includes our MidCap credit facility.
Loss on initial issuance of equity
Three Months Ended March 31, Change 2021 2022 Amount % (in thousands, except percentages)
Loss on initial issuance of equity $ -
100 .0%
The loss on initial issuance of equity is attributable to the issuance of common
shares and initial valuation of the pre-funded warrants and common stock
warrants from our
Change in fair market value of warrant liability
Three Months Ended March 31, Change 2021 2022 Amount % (in thousands, except percentages) Change in fair market value of warrant liability$ 30,202 $ 1,879 $ (28,323 ) (100.0 )% Loss on initial issuance of warrant$ 20,147 $ -$ (20,147 ) (100.0 )% The expense activity in 2021 is attributable to the issuance of the warrants in connection with theDecember 2020 Note and theFebruary 2021 Note and related change in the fair value of warrant liability and loss on initial issuance of warrant for the three months endedMarch 31, 2021 , which was primarily driven by the extinguishment of the warrants. The 2022 activity is related to the change in fair market value of the warrant liabilities from the pre-funded warrants and common stock warrants from ourMarch 2022 equity raise.
Gain on extinguishment of seller note
Three Months Ended March 31, Change 2021 2022 Amount % (in thousands, except percentages)
Gain on extinguishment of seller note $ -
The gain is attributable to the settlement of the Truweo seller note, which
resulted in a
40 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Cash Flows for the Three Months Ended
The following table provides information regarding our cash flows for the three
months ended
Three Months Ended March 31, 2021 2022 (in thousands) Cash used in operating activities $ (8,495 )$ (13,170 ) Cash used in investing activities (15,300 ) (16 ) Cash provided by financing activities 38,501
21,716
Effect of exchange rate on cash (99 ) (171 )
Net change in cash and restricted cash for period $ 14,607 $ 8,359
Net cash used in operating activities was$8.5 million for the three months endedMarch 31, 2021 , resulting from our net cash losses from operations of$4.6 million , offset by cash from working capital of$3.9 million from changes in accounts receivable, purchase of inventory and insurance and payments of accounts payable. Net cash used in operating activities was$13.2 million for the three months endedMarch 31, 2022 , resulting from our net cash losses from operations of$5.9 million , offset by and impacts from working capital of$7.3 million from changes in accounts receivable, purchases of inventory and insurance and payments of accounts payable.
For the three months endedMarch 31, 2021 , net cash used in investing activities of$15.3 million was primarily from the acquisition of the assets of Healing Solutions for$15.3 million .
For the three months ended
Net Cash Provided by Financing Activities
For the three months endedMarch 31, 2021 , cash provided by financing activities of$38.5 million was primarily from proceeds from cancellation of a warrant of$17.0 million , proceeds from warrant exercises of$8.9 million , proceeds from exercise of stock options of$8.7 million , borrowings from our prior credit facility of$14.5 million and borrowings from theFebruary 2021 Note of$14.0 million , offset by repayments of our prior credit facility of$12.3 million and$4.7 million seller note repayments. For the three months endedMarch 31, 2022 , cash provided by financing activities of$21.8 million was primarily from proceeds from an equity offering of$27.0 million and borrowings from the Credit Facility of$30.4 million offset by$1.0 million of repayments of notes issued to certain sellers in connection with our M&A activity and repayments of the Credit Facility of$33.8 million . Sources of Liquidity and Going Concern-As ofMarch 31, 2022 , the Company had total cash and cash equivalents of$44.3 million and an accumulated deficit of$471.7 million . In addition, the Company's net loss and net cash used in operating activities amounted to$42.8 million and$13.2 million , respectively, for the three months endedMarch 31, 2022 . As an emerging growth company, we have been dependent on outside capital through the issuance of equity to investors and borrowings from lenders (collectively "outside capital") since our inception to execute our growth strategy of investing in organic growth at the expense of short-term profitably and investing in incremental growth through mergers and acquisitions ("M&A strategy"). In addition, our recent financial performance has been adversely impacted by the COVID-19 global pandemic and related global shipping disruption, in particular with respect to substantial increases in supply chain costs for shipping containers (See COVID-19 Pandemic and the Supply Chain below for additional details). As a result, we have incurred significant losses and will 41 -------------------------------------------------------------------------------- remain dependent on outside capital for the foreseeable future until such time that we can realize our strategy of growth by generating profits through our organic growth and M&A strategy, and reduce our reliance on outside capital. Given the inherent uncertainties associated with executing our growth strategy, as well as the uncertainty associated with the ongoing COVID-19 global pandemic, recent record increases in inflation and related global supply chain disruption, we can provide no assurances that we will be able to obtain sufficient outside capital or generate sufficient cash from operations to fund our obligations as they become due over the next twelve months from the date these condensed consolidated financial statements were issued. Since our inception, we have been able to successfully raise a substantial amount of outside capital to fund our growth strategy. However, as ofMarch 31, 2022 , we have had no firm commitments of additional outside capital from current or prospective investors or lenders. Furthermore, given the inherent uncertainties associated with our growth strategy, we may be unable to remain in compliance with the financial covenants required by the credit facility agreement over the next twelve months. These uncertainties raise substantial doubt about our ability to continue as a going concern. In order to alleviate substantial doubt, we plan to continue to closely monitor our operating forecast, pursue additional sources of outside capital, and pursue our M&A strategy. If we are (a) unable to improve our operating results, (b) obtain additional outside capital on terms that are acceptable to us to fund our operations and M&A strategy, and/or (c) secure a waiver or forbearance from the lender if we are unable to remain in compliance with the financial covenants required by the credit facility agreement, we may make significant changes to our operating plan, such as delaying expenditures, reducing investments in new products, delaying the development of our software, reducing our sale and distribution infrastructure, or otherwise significantly reducing the scope of our business. Moreover, if we breach the financial covenants required by the credit facility agreement and fail to secure a waiver or forbearance from the lender, such breach or failure could accelerate the repayment of the outstanding borrowings under the credit facility agreement or the exercise of other rights or remedies the lender may have under applicable law. We can provide no assurance a waiver or forbearance will be granted or the outstanding borrowings under the credit facility will be successfully refinanced on terms that are acceptable to the Company. COVID-19 Pandemic and the Supply Chain- The full impact of the COVID-19 pandemic on our supply chain, including the impact associated with preventive and precautionary measures that we, other businesses and governments are taking, continues to evolve. During 2022 to date, we continue to be impacted by the COVID-19 pandemic and related global shipping disruption. Together these have led to substantial increases in supply chain costs, in particular for shipping containers, which we rely on to import our goods, as reduced reliability and timely delivery of shipping containers and have substantially increased our last mile shipping costs on our oversized goods. These cost increases have been particularly substantial for oversized goods, which is a material part of our business. The reduced reliability and delivery of such shipping containers is forcing us to spend more on premium shipping to ensure goods are delivered, if at all, and the lack of reliability and timely delivery has further down chain impacts as it takes longer for containers to be offloaded and returned. Further, this global shipping disruption is forcing us to increase our inventory on-hand, including by advance ordering and taking possession of inventory earlier than expected, negatively impacting our working capital. Third party last mile shipping partners, such asUPS and FedEx, continue to increase the cost of delivering goods to the end consumers as their delivery networks continue to be impacted by the COVID-19 pandemic. The COVID-19 pandemic continues to bring uncertainty to consumer demand as price increases related to raw materials, the importing of goods, including tariffs, and the cost of delivering goods to consumers has led to inflation across theU.S. As such, the Company has noticed changes to consumer buying habits, which may lead to reduced demand for its products. Further, recent record inflation has added additional pressure to the cost of the Company's supply chain. We continue to consider the impact of the COVID-19 pandemic on our supply chain on the assumptions and estimates used when preparing our consolidated financial statements including inventory valuation, and the impairment of long-lived assets. These assumptions and estimates may change as the current situation evolves or new events occur, and additional information is obtained. If the economic conditions caused by the COVID-19 pandemic and the negative impact on our supply chain worsen beyond what is currently estimated by management, such future changes may have an adverse impact on our results of operations, financial position, and liquidity. MidCap Credit Facility - December 2021-OnDecember 22, 2021 , we entered into a Credit Facility with MidCap, pursuant to which, among other things, (i) the lenders party thereto as lenders (the "Lenders") agreed to provide a 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) we agreed to issue toMidCap Funding XXVII Trust a warrant to purchase up to an aggregate of 42 --------------------------------------------------------------------------------
200,000 shares of our common stock, in exchange for the Lenders extending loans and other extensions of credit to us under the Credit Facility.
The credit facility contains a financial covenant that requires that we maintain a minimum unrestricted cash balance or minimum borrowing availability of (a)$12.5 million during the period fromFebruary 1st through and includingMay 31st of each calendar year, and (b)$15.0 million at all other times thereafter.
At
our election, we may elect to comply with an alternative financial covenant that would require us to maintain a minimum borrowing availability under the credit facility of$10.0 million at all times. We currently do not anticipate electing the alternative financial covenant over the next twelve months and are in compliance with the minimum liquidity covenant as of the date these condensed consolidated financial statements were issued. OnDecember 22, 2021 , we used$27.6 million of the net proceeds from the initial borrowing under the Credit Facility to repay all amounts owed under those certain senior secured promissory notes issued by us to High Trail in an initial principal amount of$110.0 million , as amended. We expect to use the remaining proceeds of any loans under the Credit Facility for working capital and general corporate purposes. We are in compliance with the financial covenants contained within the Credit Agreement as ofMarch 31, 2022 . As ofMarch 31, 2022 , we had approximately$29.4 million outstanding on the credit facility and$3.6 million of availability on the credit facility. Securities Purchase Agreement and Warrants-OnMarch 1, 2022 , we 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, we issued and sold to the Purchasers, in a private placement transaction (the "Private Placement"), (i) 6,436,322 shares of our common stock (the "Shares"), par value$0.0001 per share (the "Common Stock"), and accompanying warrants to purchase an aggregate of 4,827,242 shares of common stock, and (ii) pre-funded warrants to purchase up to an aggregate of 3,013,850 shares of common stock (the "Pre-Funded 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 Pre-Funded 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 Pre-Funded Warrant and accompanying Common Stock Warrant were sold together at a combined price of$2.9099 , for gross proceeds of approximately$27.5 million .
Non-GAAP Financial Measures
We believe that our financial statements and the other financial data included in this Quarterly Report on Form 10-Q have been prepared in a manner that complies, in all material respects, with generally accepted accounting principles in theU.S. ("GAAP"). However, for the reasons discussed below, we have presented certain non-GAAP measures herein. We have presented the following non-GAAP measures to assist investors in understanding our core net operating results on an on-going basis: (i) Contribution Margin; (ii) Contribution margin as a percentage of net revenue; (iii) EBITDA (iv) Adjusted EBITDA; and (v) Adjusted EBITDA as a percentage of net revenue. These non-GAAP financial measures may also assist investors in making comparisons of our core operating results with those of other companies. As used herein, Contribution margin represents gross profit less amortization of inventory step-up from acquisitions (included in cost of goods sold) and e-commerce platform commissions, online advertising, selling and logistics expenses (included in sales and distribution expenses). As used herein, Contribution margin as a percentage of net revenue represents Contribution margin divided by net revenue. As used herein, EBITDA represents net loss plus depreciation and amortization, interest expense, net and provision for income taxes. As used herein, Adjusted EBITDA represents EBITDA plus stock-based compensation expense, changes in fair-market value of earn-outs, amortization of inventory step-up from acquisitions (included in cost of goods sold), changes in fair-market value of warrant liability, professional fees and transition costs related to acquisitions, loss from extinguishment of debt, impairment of goodwill, loss on initial issuance of equity, litigation reserve and other expenses, net. As used herein, Adjusted EBITDA as a percentage of net revenue represents Adjusted EBITDA divided by net revenue. Contribution margin, EBITDA and Adjusted EBITDA do not represent and should not be considered as alternatives to loss from operations or net loss, as determined under GAAP. We present Contribution margin and Contribution margin as a percentage of net revenue, as we believe each of these measures provides an additional metric to evaluate our operations and, when considered with both our GAAP results and the reconciliation to gross profit, provides useful supplemental information for investors. Specifically, Contribution margin and Contribution margin as a percentage of net revenue are two of our key metrics in running our business. All product decisions made by us, from the approval of launching a new product and to the liquidation of a product at the end of its life cycle, are measured primarily from Contribution margin and/or Contribution margin as a percentage of net revenue. Further, we believe these measures provide improved transparency to our stockholders to determine the performance of our products prior to fixed costs as opposed to referencing gross profit alone. 43 -------------------------------------------------------------------------------- In the reconciliation to calculate contribution margin, we add e-commerce platform commissions, online advertising, selling and logistics expenses ("sales and distribution variable expense"), to gross margin to inform users of our financial statements of what our product profitability is at each period prior to fixed costs (such as sales and distribution expenses such as salaries as well as research and development expenses and general administrative expenses). By excluding these fixed costs, we believe this allows users of our financial statements to understand our products performance and allows them to measure our products performance over time. We present EBITDA, Adjusted EBITDA and Adjusted EBITDA as a percentage of net revenue because we believe each of these measures provides an additional metric to evaluate our operations and, when considered with both our GAAP results and the reconciliation to net loss, provide useful supplemental information for investors. We use these measures with financial measures prepared in accordance with GAAP, such as sales and gross margins, to assess our historical and prospective operating performance, to provide meaningful comparisons of operating performance across periods, to enhance our understanding of our operating performance and to compare our performance to that of our peers and competitors. We believe EBITDA, Adjusted EBITDA and Adjusted EBITDA as a percentage of net revenue are useful to investors in assessing the operating performance of our business without the effect of non-cash items. Contribution margin, Contribution margin as a percentage of net revenue, EBITDA, Adjusted EBITDA and Adjusted EBITDA as a percentage of net revenue should not be considered in isolation or as alternatives to net loss, loss from operations or any other measure of financial performance calculated and prescribed in accordance with GAAP. Neither EBITDA, Adjusted EBITDA or Adjusted EBITDA as a percentage of net revenue should be considered a measure of discretionary cash available to us to invest in the growth of our business. Our Contribution margin, Contribution margin as a percentage of net revenue, EBITDA, Adjusted EBITDA and Adjusted EBITDA as a percentage of net revenue may not be comparable to similar titled measures in other organizations because other organizations may not calculate Contribution margin, Contribution margin as a percentage of net revenue, EBITDA, Adjusted EBITDA or Adjusted EBITDA as a percentage of net revenue in the same manner as we do. Our presentation of Contribution margin and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by the expenses that are excluded from such terms or by unusual or non-recurring items. We recognize that EBITDA, Adjusted EBITDA and Adjusted EBITDA as a percentage of net revenue, have limitations as analytical financial measures. For example, neither EBITDA nor Adjusted EBITDA reflects:
• our capital expenditures or future requirements for capital expenditures or
mergers and acquisitions;
• the interest expense or the cash requirements necessary to service interest
expense or principal payments, associated with indebtedness;
• depreciation and amortization, which are non-cash charges, although the
assets being depreciated and amortized will likely have to be replaced in
the future, or any cash requirements for the replacement of assets; • changes in cash requirements for our working capital needs; or • changes in fair value of contingent earn-out liabilities, warrant liabilities, and amortization of inventory step-up from acquisitions (included in cost of goods sold).
Additionally, Adjusted EBITDA excludes non-cash expense for stock-based compensation, which is and is expected to remain a key element of our overall long-term incentive compensation package.
We also recognize that Contribution margin and Contribution margin as a percentage of net revenue have limitations as analytical financial measures. For example, Contribution margin does not reflect:
• general and administrative expense necessary to operate our business;
• research and development expenses necessary for the development, operation
and support of our software platform;
• the fixed costs portion of our sales and distribution expenses including
stock-based compensation expense; or • changes in fair value of contingent earn-out liabilities, warrant liabilities, and amortization of inventory step-up from acquisitions (included in cost of goods sold). 44
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Three Months Ended March 31, 2021 2022 (in thousands, except percentages) Gross profit $ 26,063 $ 23,607 Contribution margin $ 6,134 $ 3,830 Gross profit as a percentage of net revenue 54.1 % 56.6 % Contribution margin as a percentage of net revenue 12.7 % 9.2 % Net Loss $ (82,553 )$ (42,776 ) EBITDA $ (76,929 )$ (40,128 ) Adjusted EBITDA $ (1,194 ) $ (4,541 ) Net loss as a percentage of net revenue (171.5 )% (102.6 )% Adjusted EBITDA as a percentage of net revenue (2.5 )% (10.9 )% Adjusted EBITDA EBITDA represents net loss plus depreciation and amortization, interest expense, net and provision for income taxes. Adjusted EBITDA represents EBITDA plus stock-based compensation expense, changes in fair-market value of earn-outs, amortization of inventory step-up from acquisitions (included in cost of goods sold), change in fair-market value of warrant liability, professional fees and transition costs related to acquisitions, loss from extinguishment of debt, impairment of goodwill, loss on initial issuance of equity, litigation reserve and other expenses, net. As used herein, Adjusted EBITDA as a percentage of net revenue represents Adjusted EBITDA divided by net revenue. The following table provides a reconciliation of EBITDA and Adjusted EBITDA to net loss, which is the most directly comparable financial measure presented in accordance with GAAP: Three Months Ended March 31, 2021 2022 (in thousands, except percentages) Net loss$ (82,553 ) $ (42,776 ) Add: Interest expense, net 4,420 802 Depreciation and amortization 1,204 1,846 EBITDA (76,929 ) (40,128 ) Other expense (income), net 33 (25 ) Impairment loss on goodwill - 29,020 Change in fair value of contingent earn-out liabilities 15,645 (2,775 ) Amortization of inventory step-up from acquisitions (included in cost of goods sold) 1,808 - Gain on extinguishment of seller note - (2,012 ) Loss on initial issuance of equity - 5,835 Change in fair market value of warrant liability 30,202 1,879 Loss on initial issuance of warrant 20,147 - Professional fees related to acquisitions 449 - Litigation reserve - 800 Transition cost from acquisitions 552 - Stock-based compensation expense 6,899 2,865 Adjusted EBITDA$ (1,194 ) $ (4,541 ) Net loss as a percentage of net revenue (171.5 )% (102.6 )% Adjusted EBITDA as a percentage of net revenue (2.5 )% (10.9 )% Contribution Margin
Contribution margin represents gross profit less amortization of inventory step-up from acquisitions (included in cost of goods sold) and e-commerce platform commissions, online advertising, selling and logistics expenses (included in sales and distribution
45 --------------------------------------------------------------------------------
expenses). Contribution margin as a percentage of net revenue represents Contribution margin divided by net revenue. The following table provides a reconciliation of Contribution margin to gross profit and Contribution margin as a percentage of net revenue to gross profit as a percentage of net revenue, which are the most directly comparable financial measures presented in accordance with GAAP.
Three Months Ended March 31, 2021 2022 (in thousands, except percentages) Gross Profit $ 26,063$ 23,607 Add: Amortization of inventory step-up from acquisitions (included in cost of goods sold) 1,808 -
Less:
E-commerce platform commissions, online advertising, selling and logistics expenses (21,737 ) (19,777 ) Contribution margin $ 6,134$ 3,830 Gross Profit as a percentage of net revenue 54.1 % 56.6 % Contribution margin as a percentage of net revenue 12.7 % 9.2 %
Critical Accounting Policies and Use of Estimates
Our unaudited condensed consolidated financial statements have been prepared in accordance withU.S. generally accepted accounting principles ("GAAP"). The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no material changes to our critical accounting policies as compared to the critical accounting policies and significant judgments and estimates as disclosed in our Annual Report on Form 10-K for fiscal year endedDecember 31, 2021 , as filed with theSEC onMarch 16, 2022 (our "Annual Report"). For additional information, please refer to Note 2 of our condensed consolidated financial statements in this Quarterly Report on Form 10-Q.
Subsequent Measurement of
The Company engaged a third-party valuation specialist to assist management in performing an interim goodwill impairment test inMarch 2022 . For goodwill, impairment testing is based upon the best information available using a combination of the discounted cash flow method (a form of the income approach) and the guideline public company method. The Company has experienced high volatility on its stock and saw its market capitalization reduce throughMarch 31, 2022 . This was considered an interim triggering event for the three months endedMarch 31, 2022 . The Company assessed its goodwill as ofMarch 31, 2022 and determined that the Company's goodwill was impaired. As a result, the Company recorded a goodwill impairment charge of$29.0 million in the three months endedMarch 31, 2022 primarily due to the decrease in its market capitalization. Under the income approach, or discounted cash flow method, the significant assumptions used are projected net revenue, projected contribution margin (product operating margin before fixed costs), fixed costs, and terminal growth rates. Projected net revenue, projected contribution margin and terminal growth rates were determined to be significant assumptions because they are the three primary drivers of the projected cash flows in the discounted cash flow fair value model. Under the guideline public company method, significant assumptions relate to the selection of appropriate guideline companies, the valuation multiples used in the market analysis and the Company's market capitalization.
The Company believes that the assumptions and estimates made are reasonable and appropriate, and changes in the assumptions and estimates could have a material impact on its reported financial results. 46 -------------------------------------------------------------------------------- While the Company believes our conclusions regarding the estimates of fair value of its reporting unit is appropriate, these estimates are subject to uncertainty and by nature include judgments and estimates regarding various factors. These factors include the rate and extent of growth in the markets that our reporting unit serves, the realization of future sales price and volume increases, fluctuations in price and availability of key raw materials, future operating efficiencies and, as it pertains to discount rates, the volatility in interest rates and costs of equity. Some of the inherent estimates and assumptions used in determining fair value of the Company's reporting unit are outside the control of management, including interest rates, tax rates, credit ratings and industry growth. Given the current COVID-19 global pandemic and the uncertainties regarding the financial potential impact on the Company's business, there can be no assurance that the Company's estimates and assumptions regarding the impact of COVID-19 and the recovery period made for purposes of the goodwill impairment testing performed will prove to be accurate predictions of the future. While the Company believes it has made reasonable estimates and assumptions to calculate the fair values of its reporting unit, it is possible changes could occur. As for the Company's reporting unit, if in future years, the reporting unit's actual results are not consistent with the Company's estimates and assumptions used to calculate fair value, the Company may be required to recognize material impairments to goodwill. The Company will continue to monitor its reporting unit for any triggering events or other signs of impairment. The Company may be required to perform additional impairment testing based on changes in the economic environment, disruptions to the Company's business, significant declines in operating results of the Company's reporting unit, further sustained deterioration of the Company's market capitalization, and other factors, which could result in impairment charges in the future. Although management cannot predict when improvements in macroeconomic conditions will occur, if consumer confidence and consumer spending decline significantly in the future or the market capitalization deteriorates significantly from current levels, it is reasonably likely the Company will be required to record impairment charges in the future that could be material to the Company's consolidated balance sheet or results of operations. 47
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