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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year-ended December 31, 20212022
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☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
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Commission File Number 001-38937
Aterian, Inc.
(Exact name of Registrant as specified in its charter)
Delaware | 83-1739858 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
37 East 18th Street, 7th Floor
New York, NY10003
(Address of principal executive offices and zip code)
(347)676-1681
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common stock, par value $0.0001 per share | ATER | The Nasdaq Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes☐No☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes☐No☒
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒No☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes☒No☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☒ | |||
Non-accelerated filer | ☐ | Smaller reporting company |
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Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b) ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes☐No☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on the Nasdaq Capital Market on June 30, 20212022 (the last trading day of the registrant’s second fiscal quarter of 2021)2022), was approximately $504.0$142.1 million.
The number of shares of Registrant’s Common Stock outstanding as of March 4, 202213, 2023 was 62,093,56981,000,989.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for the 2021 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K, to the extent described in Part III. Such definitive proxy statement, or an amendment to this Annual Report on Form 10-K, will be filed with the Securities and Exchange Commission within 120 days after the end of the registrant’s fiscal year-ended December 31, 2021.
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ATERIAN, INC
Table of Contents
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PART I | ||
Item 1. |
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Item 2. |
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Item 3. |
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Item 4. |
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PART II | ||
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Item 6. |
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Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 8. |
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Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | 69 |
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Item 10. | 70 | |
Item 11. |
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Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Item 13. | Certain Relationships and Related Transactions, and Director Independence |
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Item 14. |
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PART IV | ||
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Item 16 |
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this “Annual Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Forward-looking statements contained in this Annual Report include, but are not limited to, statements about:
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We caution you that the foregoing list may not contain all the forward-looking statements made in this Annual Report on Form 10-K.
We have based the forward-looking statements contained in this Annual Report primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, and results of operations and prospects.operations. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section of this Annual Report entitled “Risk Factors” and elsewhere in this Annual Report. Moreover, we operate in a highly competitive, dynamic and challenging environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Annual Report. We cannot assure you that the results, events and circumstances reflected, or that the plans, intentions or expectations disclosed, in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those expressed or implied by the forward-looking statements.
The forward-looking statements made in this Annual Report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Annual Report to reflect events or circumstances after the date of this Annual Report, new information or the occurrence of unanticipated events, except as required by law. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, other strategic transactions or investments we may make or enter into.
Non-GAAP Financial Measures
In Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations1, of this Annual Report (the “MD&A”), we present certain financial measures that are derived from our consolidated financial data but are not presented in our financial statements that are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). These measures are considered “non-GAAP financial measures” under the Securities and Exchange Commission’s rules. The reasons we use these non-GAAP financial measures and the reconciliations to their most directly comparable GAAP financial measures are included in the “Non-GAAP Financial Measures” section of the MD&A.
PART I
Item 1. Business.
Overview
Aterian, Inc. and its subsidiaries (“Aterian”, the “Company”, “we”, “us”, and “our”), is a technology-enabled consumer products platformproduct company 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. Aterian was 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, weWe predominantly operate through online retail channels such as Amazon.com (“Amazon”) and Walmart, Inc. ("Walmart").
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 fourteenfifteen brands which 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 fourteenfifteen brands are hOmeLabs; Vremi, Squatty Potty; Xtava; RIF6; Aussie Health; Holonix; Truweo; Mueller; Pursteam; Pohl and Schmitt; Spiralizer; Healing Solutions; and Photo Paper Direct. By leveragingDirect and Step and Go.
To allow us to scale, we have invested in building our own proprietary data science based software technology platform, known as AIMEE. AIMEE, we are ableour “Artificial Intelligence Marketplace Ecommerce Engine” enables our team to identify new product and market opportunities, andmanage our business more efficiently by injecting technology into processes that would otherwise have to launch, market and sell products in the rapidly growing global e-commerce market.be executed manually. AIMEE combines large quantities of data, data science and other automation algorithms, at scale, to allow rapid opportunity identification and automated online sales and marketing of consumer products.
AIMEE sources data from various e-commerce platforms, the internet and publicly available data, allowing us to estimate and determine trends, performance and consumer sentiment on products and searches within e-commerce platforms. This functionality, allowsand other data sources, allow us to help determine which products to develop, market manufacture through contract manufacturers, import and sell on e-commerce marketplaces. In addition, AIMEE is also connected, through application program interfaces (“APIs”), to multiple e-commerce platforms. This allows us to automate the purchase of marketing, automate various parts of our fulfillment and logistics operations and to automate pricing changes on product listings. We generate revenue primarily through the online sales of our various digital native consumer products and a substantial percentagewith substantially all of our sales arebeing made through the Amazon U.S. marketplace.
See the sections contained within this Annual Report entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” for further information.
Our History and Corporate Information
We were incorporated in Delaware under the name Mohawk Group Holdings, Inc. in March 2018 and we changed our name to Aterian, Inc. in April 2021. We have a single direct operating subsidiary, Aterian Group, Inc., a Delaware corporation, which was incorporated in Delaware in April 2014 as Mohawk Group, Inc. As of December 31, 2021,2022, we have multiple operating subsidiaries located in the U.S., Canada, Ireland, the Philippines and China andwe conduct variousmaterial aspects of our business in a number of other geographic locations including Israel,the U.S., the Philippines, Poland France and Ukraine.China.
Our principal executive offices are located at 37 East 18th Street, 7th Floor, New York, NY 10003, and our telephone number is (347) 676-1681.10003. Our website address is www.aterian.io. We do not incorporate the information on, or accessible through, our website into this Annual Report, and you should not consider any information on, or accessible through, our website as part of this Annual Report. We have included our website address in this Annual Report solely as an inactive textual reference.
Our Platform
AIMEE, our proprietary technology, is a cloud-based modular platform incorporating a multi-tenant architecture. Our platform is highly configurable and designed to provide flexibility in implementing critical business processes. AIMEE connects to multiple e-commerce platforms and other internet based sources through application program interfaces (“APIs”) in order to ingest data.
At its core, AIMEE ingests data used in product research, analysis and performance and provides the automation of numerous sales, marketing and fulfillment tasks and functions. AIMEE helps us automate and manage the life-cycle of our consumer product portfolio and provides us with the ability to scale our business efficiently. AIMEE, along with our people, allows us to perform the following key business functions:
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AIMEE is comprised of three modules that are in various stages of development and that operate today in combination with human judgment and oversight:
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As part of using AIMEE consistently, we oversee and improve the data and automation driven by our AIMEE platform. Here are some examples for each module of how our team validates the accuracy of the information we use in part in making our business decisions:fulfillment processes;
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We continue to develop AIMEE’s capabilities. This includes forecasting, inventory management, online marketing and other aspects, which require human judgment and oversight. At its core, AIMEE is designed to intelligently automate many of our business tasks and provides us with the ability to scale our business.
For the year-ended December 31, 2021 and December 31, 2020, we spent approximately $9.8 million and $8.2 million, respectively, on research and development expenses, of which the majority are related to AIMEE. Included in the year-ended December 31, 2021
and December 31, 2020 research and development expenses were approximately $5.3 million and $3.9 million, respectively, of stock-based compensation expenses, primarily for executives and senior management. We continue to expect to spend more than $4.0 million annually in research and development expenses, exclusive of stock-based compensation charges.
Our Business Model
We believe the digital disruption of retail, namely the consumer shift to e-commerce, will continue for decades to come. As this digital disruption continues, we believe the products consumers purchase, and the places they purchase them, will index more towards function, value, and ease / speed of delivery and less towards the historical dominance of brand recognition. The ubiquity of data on the internet has empowered consumers to make data driven choices when it comes to nearly every consumer choice. In this data rich world, we believe that digital marketplaces offer both brands and consumers the best value when it comes to buying and selling consumer products.
For the consumer, digital marketplaces offer nearly endless product choice, competitive pricing and easy delivery options. For brands and manufacturers, digital marketplaces not only offer the ability to instantly connect with millions of customers across the world, but also provide a real-time data stream of purchase behavior to decide against. The data that digital marketplaces provide, in addition to consumer trends data that exists outside of these marketplaces, creates an opportunity for software to change the way products are ideated, merchandised, marketed, analyzed and fulfilled.
AIMEE, our software platform, infuses technology throughout the consumer product value chain, generally allowing us to create and sell products and brands with a more customer centric value proposition than the legacy incumbents’ products.
We believe our platform makes it possible for us to launch and automates the sales of evergreen products with features that customers have indicated are the most important to them and with profitable unit economics. With scale, we gain purchasing power both at the product level and at the overall fulfillment level, which improves our operating results. We also believe that our platform provides us with substantial leverage such that we can acquire already existing products and utilize AIMEE to optimize “make” versus “buy” decisions. Our technology also gives us the ability to track unit economics on an individual SKU basis, which we believe, combined with the automation of our fixed costs, will allow us to disrupt and scale the consumer product business model.
We believe our platform makes it possible for us to launch and automate the sales of evergreen products with features that customers have indicated are important to them and with profitable unit economics. We also believe that our platform provides us with substantial leverage such that we can acquire already existing products and utilize AIMEE to optimize “make” versus “buy” decisions. Our technology also gives us the ability to track unit economics on an individual SKU basis, which we believe, combined with the automation of our fixed costs, will allow us to disrupt and scale the consumer product business model.
Our product lifecycle can be summarized as follows:
Acquisitions |
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3. 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 marketing opportunities identified using AIMEE (Artificial Intelligence Marketplace 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 of positive 15% net margin for most products, within approximately three months of launch on average. 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, 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 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, sustain and liquidate 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.
Consumer Products - Make versus Buy
We have used AIMEE to internally develop our product portfolio for our owned and operated consumer product brands and have hundreds of SKUs available for sale. AIMEE’s idea generator has been developed to be product agnostic and we believe can generate product opportunities in most product categories. We have also leveraged AIMEE to assist in decision-making and diligence to buy (acquire through acquisition) consumer product brands and related products. During 2021, we acquired the brands Healing Solutions, Squatty Potty and Photo Paper Direct; during 2020, we acquired the brands Truweo, Mueller, Pursteam, Pohl and Schmitt, and Spriralizer and their related products; during 2019, we acquired the brand Aussie Health.
Acquisitions
While we intend to pursue growth from our existing product portfolio and from new product launches, we also intend to pursue growth through strategic acquisitions of digital native brands that we believe will integrate well with our business. When looking at new potential product categories and potential acquisition targets, we typically apply a make-or-buy analysis based in part on the data provided from our AIMEE technology platform and other sources of data combined with our assessment of the risks and costs of successfully launching products in the new product category. We intend to pursue acquisitions when the target meets our financial and other criteria, including revenue and profit sustainability. We expect that these consumer product businesses will typically have built a significant presence on at least one e-commerce marketplace around one or more product categories. We expect that the products of these businesses will have strong unit economics, high product quality and stable supply chains, have developed significant social proof in the form of customer reviews and high search ranking for relevant keywords and are in product categories where frequent product improvement is not required. They also tend to have significant concentration risk due to limited product offerings, have limited ability to scale as they do not have a technology platform enabling automation and have limited working capital to further enable growth.
Our ability to complete any acquisition typically depends on a number of factors such as the successful completion of confirmatory due diligence, negotiation of definitive agreements, the seller providing seller financing, our ability to use debt and equity financing, and permission from our existing lenders.
Platform as a Service (Managed PaaS)
While our core focus is currently on our organic consumer product and acquired business, we believe that as we scale and unlock more resources to invest in it, our Managed PAAS offering could in the long term become a substantial part of our business. We believe that this solution, which includes combined access to our team’s expertise and portions of the AIMEE platform, could provide an advantage over other competitors in this industry. We believe this is because many incumbent companies have historically operated as business-to-businesses and have not invested sufficiently to succeed on online marketplaces. With our Managed PaaS solution, we believe we can bridge this operational gap by offering our technology combined with our substantial know-how in managing business-to-consumer supply chains, marketing, and customer service, among other things.
We currently structure our offering as a standalone service or, in cases where the client’s third-party’s logistics do not allow for fulfillment direct-to-consumer, as a service suite which includes a standard reseller agreement that leverages our integrated direct-to-consumer fulfillment program. Managed PaaS is currently a nominal part of our business and will remain so while we are focusing our resources on scaling our consumer business. We believe that in the short to medium term the consumer business opportunity is larger.
Intellectual Property
We rely primarily on a combination of trade secrets, trademarks, employee and third-party nondisclosure agreements and licensing arrangements (including open source software) to protect our intellectual property in the U.S. and internationally.property. We generally do not pursue patent applications as a means of protecting our intellectual property. We have applied to register or have registered certain of our trademarks in the U.S. and other jurisdictions, and we will pursue additional trademark registrations to the extent we believe they would be beneficial and cost-effective.
Customers
Our customers are mainly individual online consumers who purchase our products primarily on Amazon US, and to a lesser extent on our owned and operated websites and other marketplaces.marketplaces, such as Walmart. In 2021, approximately 93% of our revenue was through the Amazon sales platform and in 2020, 88%2022, 89% of our revenue was through the Amazon sales platform.
Seasonality
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 heating, cooling and air quality products, 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 includes Thanksgiving 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.
Sales and Marketing
Our sales and marketing strategy and approach is driven by our people, who substantially leverage AIMEE. AIMEE is being developed to allow price automatization, media buying and search engine optimization leveraging our proprietary technology software and algorithms we have built into AIMEE. We believe this automation will bring significant competitive advantages for our products and PaaS customers alike.products. For our SKUs, our advertising investment is focused on online channels and e-commerce platforms. Currently our primary focus on advertising spend is online across Amazon, Google and Facebook. Our spend
Third-Party Manufacturing & Logistics
During 2022, we purchased substantially all of our finished products from suppliers in China. We do not maintain long-term purchase contracts with suppliers and approachoperate mainly on advertising is different depending ona purchase order basis. We negotiate purchases from our foreign suppliers in U.S. dollars. We purchased our inventory from approximately 77 suppliers, one of which represented more than 10% of purchases during the life cycleyear ended December 31, 2022. While we believe the loss of productsany one supplier would not have a long-term material adverse effect on our platform. We viewbusiness due to the availability of other suppliers, the loss of a supplier could, in the short term, materially and classify products into categories such as launch, sustain, milk or liquidate. adversely impact our business.
The launch phase is where we classify new products being introduced into the marketplace. The advertising spend during this stage is aggressive and can last for a number of months on averageprincipal raw materials used by our third-party suppliers to ensure the product launch is successful, with a focus on search optimization and the development of social proof thatmanufacture our products are meeting customer needs. Once our products reach the sustain phase, our salesplastic, glass, steel, copper, aluminum and marketing strategy then focuses primarily on managing price and pay-per-click optimization, along with a corresponding reduction in spending on search optimization and social proof.packaging materials. We believe adequate quantities of raw materials are available from various suppliers.
Third-Party Manufacturing & Logistics
As of December 31, 2021, we contract, through purchase orders, with approximately 148 manufacturers, predominately in China, for a substantial percentage of our consumer products. As of December 31, 2021, we have an operations team of approximately 26 people in Shenzhen, China, 10 people in our Philippines office, and 14 people across the U.S. that perform sourcing, product testing, manufacturer qualification, quality assurance and control and purchasing, among other things. In general, we do not use master agreements with vendors and aim to have flexibility in our supply chain to match our forecasting needs.
We use a combination of Amazon warehouses, other third-party warehouse and logistics partners to fulfill direct-to-consumer orders, through agreements or terms of services. In addition to fulfillment by Amazon warehouses, in 2018 we began utilizing threeuse geographically distributed third-party warehouses to allow usin the U.S. to deliver orders within one to two days through ground shipment to approximately 99% of the U.S. market. Warehouse selection for any particular product depends on the size and other aspects of the products to be warehoused, with a focus on optimizing storage and fulfillment costs. We are focused on driving manufacturing and logistics costs down as we grow, scale and improve our purchasing power.most customers.
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We have expanded our third-party warehouse network to provide fulfillment by merchant One Day Prime delivery. This expansion covered approximately 76% of the U.S. market in 2021, based on our sales history. We believe that the increase in warehouse costs associated with this expansion will be more than offset by the decrease in shipping costs to customers as the average last mile shipping zones will decrease due to our increased reach.
Competition
The consumer goods and e-commerce markets are highly competitive includingand dynamic. We compete primarily against numerous third-party brands and sellers on marketplaces for each of our products. Competition is based on price, product features and quality, strong ratings and reviews, effective marketing, visibility and location on the market for potential mergeronline shelf and acquisition opportunities where there are many aggregatorssupply chain excellence, which is mostly the ability to deliver products to customers in one to two days. In certain instances, we compete directly with substantial access to capital focused on acquiring Amazonour third party sellers. Our competitors include traditional and non-traditional consumer good companies, discount stores, traditional retailers, the online platformssuppliers who sell their own brands directly to customers, including with respect to certain of these traditional retail competitors, independent retail stores and e-commerce companies. The market for PaaS services relating to e-commerce, and the U.S. Amazon marketplace in particular, is also very competitive with a variety ofour material products such as dehumidifiers.well-funded entrants in the space. The market landscape is diverse,with competitors selling into brands, agencies, manufacturers andretailers alike. The services offered by these competitors vary, withsome offering point solutions for specific aspects related to sellingon Amazon, including research and business intelligence, Amazonservices and listing management, while others focus on amore holistic approach. Some of these competitors leverageproprietary software to execute their services, while others offerpersonnel with relevant expertise. In addition, Amazon also offers its sellers a variety of tools that are generally free.
We believe that our owned and operated products business gives us an advantage as we are able to quickly develop new algorithms and test them on our own products to ensure their efficacy before delivering them to Managed PaaS clients. By having our owned and operated businesses, we are able to better predict and develop features that we believe will deliver results for Managed PaaS clients.
With regard to our consumer product business, we believe our competitors are Amazon, Helen of Troy, Newell Brands, Frigidaire, Trademark Global and any other consumer product company that sells products similar to ours in the e-commerce space. There has also been an increase in the number of sellers who are based in China that sell products similar to ours. For our acquisition growth strategy, we believe our competitors are Thrasio, HeyDay, SellerX, Perch, Boosted Commerce and Heroes, among numerous other aggregators in the U.S. and Europe. For our Managed PaaS business, we believe our competitors are Feedvisor, CommerceIQ, Channel Advisor, Teikametrics, Jungle Scout, Helium10 and numerous others. We believe that we are able to compete effectively because of our expertise, platform, data science and other automation.
Regulatory Matters/Governmental Regulations
We are subject to a variety of U.S. federal, state and local laws and international laws, including but not limited to those governing the processing of payments, consumer protection, the privacy of consumer information and other laws regarding unfair and deceptive trade practices. We are also subject to various environmental laws, rules and regulations, such as California’s Proposition 65.
The products sold by us are also subject to regulation by U.S. governmental agencies, including the U.S. Consumer Product Safety Commission, the Federal Trade Commission, United States Food and Drug Administration, the U.S. Environmental Protection Agency, the U.S. Department of Energy and similar state and international regulatory authorities, such as the California Energy Commission. We do not estimate any significant capital expenditures for environmental control matters either in the current fiscal year or in the near future.
We are also subject to regulations relating to our supply chain. For example, the California Transparency in Supply Chains Act requires retail sellers that do business in California to disclose their efforts to eradicate slavery and human trafficking in their supply chains. As part of our vendor qualification process, we review suppliers’ operations for compliance with applicable labor and workplace standards and other applicable laws, including laws prohibiting child labor, forced labor and unsafe working conditions.
Substantially mostA significant portion of our products are currently manufactured in China, which may result in additional costs, if laws related to international trade result in additional tariffs on our products.
Although we have not suffered any material restrictions from doing business in the past due to government regulations, significant impediments may arise in the future as we expand product offerings.
From time to time, we dispose of or donate of obsolete inventory which is disposed of or destroyed in compliance with applicable laws and regulations.
People
The human capital objectives we focus on in managing our business include attracting, developing, and retaining key personnel. Our employees are critical to the success of our organization and we are committed to supporting our employees’ professional development. We believe our management team has the experience necessary to effectively implement our growth strategy and continue to drive stockholder value. We provide competitive compensation, which includes a focus on stock-based compensation, and benefits to attract and retain key personnel, while also providing a safe, inclusive and respectful workplace. As of December 31, 2021,2022, we had 159178 full-time employees, of which 156 were full-time, and 6064 independent contractors. Of our employees and contractors, 37 are
engaged in research and development, 156 are engaged in sales, marketing and operations and 26 are in general corporate and administrative positions.
As of December 31, 2021,2022, our employees and contractors are based in seven offices, (including shared workspaces)workspaces and remote work locations. Of our employees and contractors, 26 are in research and development, sales, marketing, operations, general corporate and administration in New York, 25 are in operations and revenue across remote roleslocations in the U.S., 32 are in China, where we perform operations and manufacturer inspections, one is in the U.K. in finance, 79 are in, the Philippines, where we perform customer service, sales and marketing and other logistics functions and 26 are in Poland where we perform research and development.Poland. We also contract with 2133 consultants, predominantly for research and development functions in Ukraine, Poland,Serbia, Israel, France, Costa Rica, and Montreal. Canada.
Our employees are not represented by any collective bargaining agreements or labor unions.4
Item 1A. Risk Factors.
Summary of Risk Factors
Below is a summary of the principal factors that make an investment in shares of our common stock speculative or risky. These factors, along with other general risk factors, are described in further detail under the heading “Risk Factors” below.
Risks Relating to Our Business
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Risks Relating to Intellectual Property
We have historically operated at a loss and Cyber Security
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Risks Relating to Litigationwe may never achieve or sustain profitability or positive cash flows. Further we and Government Regulation
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Risks Relating to the Ownership of our Common Stock
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Risks Relating to Our Business
Our growth strategy is capital dependent and due to the impact of the COVID-19 pandemic and related global supply chain disruption, our management has expressed substantial doubt about our ability to continue as a going concern.
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. As a result, we have incurred significant losses and will 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.
We have been affected by the COVID-19 pandemichistorically operated at a loss and related global supply chain disruption. Together, these have led to substantial increasesexperienced losses after tax of $236.0 million and $196.3 million in the costs of our supply chain, specifically, the costs of shipping containers, which we rely on to import our goods. The COVID-19 pandemic and related supply chain disruption have also reduced the reliability and timely delivery of shipping containers, which has in turn negatively impacted our shipping times and substantially increased our shipping costs. These delays and cost increases have been particularly substantial for oversized goods, which are a material part of our business. The increased costs of our supply chain negatively impacted us in the fiscal yearyears ended December 31, 2021 and 2022, respectively. In addition, our costs may increase in future periods, which could negatively affect our future operating results and ability to achieve and sustain profitability. For example, we believe it willmay need to continue to negatively impact usexpend substantial financial and other resources on the ideation, sourcing and development of products, our technology infrastructure, research and development, including the development of new features for at leastour AIMEE software platform, sales and marketing, international expansion and general administration, including expenses related to being a public company. We have had to rely on a combination of cash flow from operations and new capital in order to sustain our business. Despite the next six to nine months. Therefact that we have raised significant capital, there can be no assurancesassurance that the costs of our supply chainwe will ever return to pre-pandemic levels andachieve profitability. Even if that is the case our long-term operating results and financial condition couldwe do, there can be adversely impacted.
Due to the reduced reliability and delivery of shipping containers we have had to spend more on premium shipping to ensure space on board of the vessels that carry our goods, if at all, and the general lack of reliability and timely delivery of shipping containers has had further down supply chain impacts as it takes longer for containers to be offloaded and returned. Further, this global supply chain disruption is forcing us to take steps to increase our inventory on-hand, including advance ordering and taking possession of inventory earlier than expected, which negatively impacts our working capital.
Third party last mile shipping partners, such as UPS and FedEx, continue to increase the cost of delivering goods to end consumers as their delivery networks continue to be impacted by the COVID-19 pandemic. In addition, we may be adversely impacted by rising costs of the commodity raw materials used to produce our products.
The COVID-19 pandemic also 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 the globe, and in the U.S. in particular. We have serious concerns about the effect of inflation on all aspects of our business, including its impact on the supply chain and our consumers. Increasing inflation, coupled with the reopening of the country, have resulted in changes to consumer buying habits, which may have reduced demand for our products. Further, we have increased the sale prices for our products to offset the increased supply chain costs, which has also led to reduced demand for our goods. Reduced demand for our products and increased prices affecting consumer demand generally have also made forecasting and budgeting more difficult.
We have been taking, and plan to continue to take, various actions to help improve our financial forecasts and allow us to navigate through the continuing global supply chain disruption. These actions include, but are not limited to, obtaining new third party vendors for shipping containers, renegotiating rates with third party last mile providers, postponing or canceling some or all of our product launches, and reducing fixed costs and increasing our inventory on-hand to ensure products are available on time to sell. More specifically, due to our need to increase our inventory on-hand to ensure products are available on time to sell and to secure inventory earlier than normal, we may experience working capital tightness based on our forecasts during the first half of 2022 and the first quarter of 2023.
Given the inherent uncertainties associated with executing our growth strategy, as well as the uncertainty associated with the ongoing COVID-19 global pandemic and related global supply chain disruption, we can provide no assurance that we will be able to obtain sufficient outside capitalmaintain or generate sufficientincrease profitability on a quarterly or annual basis. Failure to achieve or sustain profitability could have a material adverse effect on our business.
Our growth strategy has resulted in operating losses and negative cash flows from operations to fund our obligations for the twelve months following the issuance of the accompanying consolidated financial statements. Further, there can be no assurance that these actions around the supply chain along with our operating forecast for the twelve months following the issuance of the accompanying consolidated financial statements will be attained such that we will be able to maintain compliance with our financial covenants with our lender and
meet our obligations as they become due. These negative financial conditions raiseraised substantial doubt about our ability to continue as a going concern.
Our management plansindependent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the Year-ended December 31, 2022, that raised substantial doubt about our ability to continue to closely monitor our operating forecast and may pursue additional sources of financing and/or capital to fund our operations or to continue our merger and acquisition strategy.as a going concern. If we are unable to improvecontinue as a going concern or maintain our operating results, secure any necessary waivers fromfinancial covenants with our lender, and/or obtain additional sources of financing and capital on acceptable terms (if at all) for our planned operations, including our merger and acquisition strategy,lenders, we may have to make significant changes to our operating plan, such as delay expenditures, reduce investments in new products, delay the further development of and upgrades and updates to, our software, reduce our sale and distribution infrastructure, limit or postponesignificantly reduce our mergerbusiness. Further, if we are unable to continue as a going concern, we may be forced to liquidate our assets and acquisition strategythe values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements.
We face intense competition and if we are unable to compete effectively, our market share and revenue could be diminished which may delay or otherwise significantly reducehinder our efforts to achieve or maintain profitability.
We cannot assure you that our products will continue to compete favorably or that we will be successful in the scopeface of increasing competition from new products and enhancements introduced by existing competitors or new companies entering the markets in which we operate. We sell our products primarily on marketplaces and primarily on Amazon in the U.S. Unlike traditional brick and mortar retailers, the consumer who is shopping on marketplaces has a significant number of competing products to select from as there are limited barriers to entry. In addition, the Internet facilitates competitive entry and comparison shopping, which enhances the ability of new and existing businesses to compete against us. A number of our business.
Wecurrent and potential competitors have greater resources, longer histories, and/or greater brand recognition. As a result, they may be able to secure better terms from vendors and devote more resources to technology, infrastructure, fulfillment, and marketing then we may be able to. In addition, some of our competitors aggressively discount their products in order to gain market share, which has resulted in pricing pressures, reduced profit margins and lost market share. Further, social proof for products sold on marketplaces in the form of product ratings and reviews is highly important to our success. In certain instances we have been unable to maintain such social proof, and we may be unable to maintain such social proof in the future, or competitors may be able to attain better social proof for their products which could have a shortmaterial impact on our operating historyresults.
For certain significant products in our portfolio such as air conditioners and most of our dehumidifiers, we compete directly with our contract manufacturer who sells its own competing private label products on the marketplaces we sell and who has a rapidly evolving industrylower cost structure and increasingly competitive environment.
We havesignificantly better R&D capabilities. As a short operating historyresult of competition, our product offerings, whether in a rapidly evolving and highly competitive industry thatnew or existing markets, may not developbe successful, we may fail to gain or may lose business, and we may be required to increase our marketing spending or lower prices, either of which could materially impact our operating results.
We rely on our technology platform, AIMEE, to compete effectively in a manner favorablethe markets we operate, but the effectiveness of AIMEE and our other technology may require significant investments which we may be unable to make or which may be unsuccessful.
Our financial projections are highly subjective in nature and our future financial results could vary significantly from our projections and also from quarter-to-quarter.
From time to time, we may provide financial projections to our business.shareholders, lenders, investment community, and other stakeholders and these projections are highly subjective. Our relatively shortquarterly revenue and other operating history makes itresults have varied in the past and are likely to continue to vary significantly from quarter-to-quarter in the future. It is difficult for us to assessaccurately predict the demand for many of our products, or the amount and timing of our future revenue and operating results. Our projections are based on management’s best estimate
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of sales using historical sales data and other relevant information available at the time. These projections are highly subjective since product sales can fluctuate substantially. Additionally, changes in consumer demand, transportation, supplier lead times, costs and availability, raw material costs and availability, and other factors could make our inventory management and sales forecasting more difficult. Further, we base our expense levels and investment plans on sales estimates. A significant portion of our expenses and investments are fixed, and we are not able to adjust our spending quickly if our sales are less than expected. Due to these and other factors described elsewhere in this section, our future operating results could vary materially from our projections and from quarter-to-quarter. Further, we believe that quarter-to-quarter comparisons of our operating results are not necessarily meaningful. Moreover, our operating results may not meet the expectations of our equity research analysts or investors. If this occurs, the trading price of our common stock could fall substantially, either suddenly or over time.
Our business is sensitive to the strength of the United States consumer market and any weakness in this market or changes in consumer preferences could adversely affect our business.
The strength of the U.S. economy has a significant impact on our performance. You should considerWe are dependent on discretionary spending, which is affected by, among other things, unemployment rates, economic and political conditions worldwide, consumer confidence, energy and gasoline prices, interest and mortgage rates, the level of consumer debt and taxation, and financial markets, which are all outside of our control. A continuing softening of demand, whether caused by changes in customer preferences or a weakening of the U.S. or global economies, may result in decreased revenue. We believe we have sustained a decline in the sales of our products due to the factors mentioned above, and any continued economic downturn in the U.S could materially and adversely affect our business, operating results and prospectsfinancial condition.
Demand for our products is highly seasonal and dependent on weather conditions which could result in light of the risks and difficulties we may encounter.
Our future success will depend in large part upon our ability to, among other things:
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In addition, there continues to be increased competition in all aspects of our industry. We continue to see money raised by competitorssignificant variations in our space. We are also seeing manufacturers sellinginventory levels and operating results.
Weather and other conditions can materially impact the demand for our products. Demand for our cooling, and air quality products that compete with oursprimarily occurs during the summer months and such manufacturers typically have a pricing advantage over us.
We have significant operational exposure relating todemand for our kitchen appliances and accessories primarily occurs during the COVID-19 pandemicfall and related supply chain issuesholiday season. Natural disasters (such as wildfires, hurricanes and the impact from thisice storms), public health crises (such as pandemics and epidemics), or an unusually mild or short summer season may result in combination with the impact of Russia’s invasion of Ukraineunanticipated material fluctuations in consumer demand. These factors could have a material adverse impacteffect on our business, financial condition, operating results and prospects.
The COVID-19 pandemic has impacted us in numerous ways since the first quarter of 2020 and we believe it will continue to affect our business moving forward.
Amongst other things, it has affected our efficiency and ability to launch new products, replenish inventory for existing products, forecast demand for our products, ship into or receive inventory in our third-party warehouses, and to ship or sell products to customers. In addition, the majority of our personnel are currently working remotely, which creates challenges in the way we operate our business, including with respect to the manner in which we monitor the quality of our products.
If any of our key personnel contracts COVID-19, this could affect our ability to execute our operations. In addition, our operations rely on third-parties to manufacture our products, to provide logistics and warehousing services and to facilitate sales of our products, and accordingly we rely on the business continuity plans of these third parties to continue to operate during the pandemic and have limited to no ability to influence their plans.
Furthermore, global financial markets could be significantly affected as a result of Russia’s invasion of Ukraine. The U.S., U.K., and the EU governments, among others, have developed coordinated sanctions and export control measure packages including comprehensive financial sanctions against major Russian banks (including SWIFT cut off).
Due to the uncertainty as to the severity and duration of the pandemic, and the impact and extent of Russian aggressiveness the impact on our future revenues, profitability, liquidity, financial condition, business and results of operations is uncertain at this time. We continue to take steps to preserve our liquidity and capital resources through various actions which include delaying and negotiating the delay of payments to certain vendors. The effect of such actions could have an adverse impact on our business, including our relationships with these vendors. For example, payment delays to certain of our manufacturing vendors in China during April 2020
had resulted in a temporary loss of availability of export credit insurance from the China Export & Credit Insurance Corporation (“Sinosure”), a Chinese state-owned enterprise, that provides export credit insurance to our manufacturing vendors. As of the date of this Annual Report, Sinosure has reinstated this insurance to levels that we believe are sufficient to fund our operations.
Sales and operating results have become more difficult to forecast due to the pandemic and we may suffer from future inventory shortages. This makes it more difficult for us to appropriately plan our expenses. We base our current and future expense levels primarily on our operating forecasts and estimates of sales. We may be unable to adjust our spending in a timely manner to compensate for any unexpected shortfall in sales, whether due to lack of inventory or otherwise, and if actual results differ from our estimates, our operating results and financial condition could be adversely impacted. condition.
We may not be able to sustain our revenue growth rate.
Our recent revenue growth should not be considered indicative of our future performance. Specifically, our net revenue increased by 33.4% for the year ended December 31, 2021 compared to the year ended December 31, 2020. As we grow our business, our revenue growth rates may slow in future periods due to a number of reasons, which may include our inability to successfully launch new products that reach our sustain phase and to keep those products in the sustain phase, as well as the maturation of our business. In fact, we have paused the launch of new products. Our revenue growth rates may also slow in future periods to the extent we are unable to identify and complete acquisitions, or are unable to maintain or grow revenues from such businesses after closing an acquisition. We can provide no assurance that we will continue to be able to maintain or sustain the same levels of historic revenue growth.
We may decide to delay certain investments in order to more quickly achieve profitability, and while such decisions may accelerate net revenue and profitability on a short-term basis, we can provide no assurance that we will continue to be able to maintain or sustain the same levels of historic revenue growth. In addition, we may focus on product opportunities that have larger addressable markets but require increased levels of marketing investment and we can provide no assurances that such a shift will be successful.
In addition, in the year ended December 31, 2021, we experienced an increase in net revenue in part due to the shift by consumers to online shopping as a result of the COVID-19 pandemic. While we expect this shift to continue, we can provide no assurance that this shift will continue in the near or longer term or continue with respect to the products we offer.
We may be limited by our ability to raise the funding we need to support our growth or to maintain our existing business. Also such funding may be available only by diluting existing stockholders.
The success of our business depends, in part, on our ability to invest significant resources in research, development of our proprietary technology platform, and product development, including through acquisitions. To support our business growth we may require additional funds to maintain, grow and respond to business challenges. Accordingly, we need to engage in equity or debt financings to secure additional funds. If we raise additional funds through issuances of equity or convertible debt securities, we expect our existing stockholders to suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. The debt we may incur in order to obtain these funds may negatively impact our financial conditions or operating results.
Any debt financing secured by us in the future would require the consent of our existing lenders, and also could involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. In addition, we may not be able to continue to acquire the financing needed in order to pursue future acquisitions or similar transactions or we may not be able to raise sufficient equity or equity-like capital without first seeking stockholder approval, which could limit our ability to complete such financing, or to complete any related transaction on a timely basis.
We also may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to maintain, grow and respond to business challenges would be significantly limited, and our business and prospects could fail or be adversely affected.
If we are unable to manage our inventory effectively, our operating results and financial condition could be adversely affected.
To ensure timely delivery of products, we generally issue purchase orders to contract manufacturers. As a result, we are vulnerable to demand and pricing shifts and to suboptimal selection and timing of product purchases.
In the past, we have not always predicted the appropriateaccurately forecasted consumer demand for our products by consumers with accuracy, which has resultedresulting in inventory shortages, excess inventory write offs and lower gross margins. We rely onare exposed to significant inventory risks that may adversely affect our procurement team to order productsoperating results and we rely on our data analytics to decide on the levelsfinancial condition as a result of seasonality, new product launches, rapid changes in product cycles and timing of inventory we purchase, including when to reorder items that are selling wellpricing, defective merchandise, changes in customer demand and when to write off items that are not selling well. We rely on our contract manufacturers who are often responsible for conducting a number of traditional operationsconsumer spending patterns, changes in consumer tastes with respect to their respectiveour products, including maintainingspoilage, adverse actions taken by marketplaces to remove our products, and other factors. Demand for products can change significantly between the time inventory is ordered and the date of sale. In addition, when we begin selling a new product, it may be difficult to establish vendor relationships, determine appropriate product or component selection, and accurately forecast demand. We carry a broad selection of products and also carry significant inventory levels of certain products, such as cooling, and air quality products and kitchen appliances, and at times we are unable to sell our products in sufficient quantities or to meet demand during the relevant selling seasons. Any one of the inventory risk factors set forth above may adversely affect our operating results and financial condition.
Increased costs of raw materials, energy, labor, transportation and inventoryplatform fees charged by marketplaces may adversely affect our business, operating results and financial condition.
Significant increases in the cost and reductions in the availability of raw materials, energy, labor, transportation, and increases in tariffs and platform fees charged by marketplaces have negatively impacted our business, operating results and financial condition. Our contract manufacturers purchase significant amounts of metals and plastics to manufacture our products. In addition, they also purchase significant amounts of electricity to supply the energy required in their production processes. Global political instabilities such as the Russian invasion of Ukraine and tensions between China and Taiwan and other factors may result in higher metal, plastic, electric, transportation and product costs, or could impair our ability to obtain products at marketable rates or at all. We are heavily dependent on inbound sea, rail and truck freight. Disruptions in the global supply chain and freight networks, has, and may continue to limit inbound and outbound shipment capacity and increase our cost of goods sold and certain operating expenses. Further, the marketplaces on which we sell our products charge fees for shipment to us. In these instances,selling, storage, advertising and fulfillment, all of which have historically increased and we
may be unable to ensure that these suppliers expect will continue to perform these services toincrease. The cost of raw materials, energy, labor, transportation, and the platform fees charged by marketplaces in the aggregate, represents a significant portion of our satisfaction in a manner that providescost of goods sold and certain other operating expenses, which are not within our customer with an appropriate brand experience or on commercially reasonable terms. If so, our business, reputationcontrol and brands could suffer. If our sales and procurement teams do not accurately predict demand or if our algorithms do not help us reorder the right products or write off the right products timely, we may not effectively managebe able to pass on to our inventory, which could result in inventory excess or shortages, and ourcustomers. Our business, operating results and financial condition could be adversely affected. affected by future increases in any of these costs. Additionally, the loss or disruption of essential manufacturing and supply elements
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such as raw materials or other finished product components, restricted transportation or increased freight costs, reduced workforce, or other manufacturing and distribution disruption could adversely impact our ability to meet our customers’ needs. Furthermore, it is not practical for us to mitigate our exposure to, nor are we able to accurately project the long lasting effectspossible effect of the COVID-19 pandemic, we expect to continue experiencing inventory shortages andforeign currency exchange rate fluctuations on our operating results and financial condition could be adversely affected.
Risks associated with the suppliers from whom our products are sourced could materially adversely affect our financial performance as well as our reputation and brand.
Our ability to develop and maintain relationships with reputable suppliers and offer high quality productsdue to our customers is criticalconstantly changing exposure to our success. If we are unablevarious foreign currencies and the difficulty in predicting fluctuations in foreign currency exchange rates relative to develop and maintain relationships with suppliers that would allow us to offer a sufficient amount and variety of quality products on acceptable commercial terms, our ability to satisfy our customers’ needs, and therefore our growth prospects and financial performance, would be materially adversely affected.
If our supplies are faced with severe negative economic effects of the COVID-19 pandemic as discussed elsewhere in these Risk Factors they may be forced to reject our purchase orders or only accept a smaller portion of such purchase orders.
In addition, we are unable to predict whether any of the countries in which our suppliers’ products are currently manufactured or may be manufactured in the future will be subject to trade restrictions imposed by the U.S. or foreign governments or the likelihood, type or effect of any such restrictions. Any event causing a disruption or delay of imports fromDollar.
We depend on third-party suppliers with international manufacturing operations, including the imposition of additional import restrictions, restrictions on the transfer of funds or increased tariffs or quotas, could increase the cost or reduce the supply of merchandise available to our customers and materially adversely affect our financial performance as well as our reputation and brand. In addition, we may not be able to shift production for our products to other countries not subject to tariffs or other disruptions or be able to obtain competitive pricing and sufficient quality. Furthermore, some or all of our suppliers’ foreign operations may be adversely affected by political and financial instability, resultingproducts, most of which are located in the disruption of trade from exporting countries, restrictions on the transfer of funds or other trade disruptions.
We rely on our technology, including AIMEE, to operate our business and to maintain our competitiveness,Asia, and any failureinability or reductiondelay in the capability of our technology or reduction in the amount of data provided by third parties, the loss of whichobtaining products from such suppliers could limit the functionality of our technology, could harm our business.
We depend on the use of our proprietary technology platform named AIMEE and other sophisticated information technologies and systems, including technology and systems used for websites and apps, customer service, logistics and fulfillment, supplier connectivity, communications and administration. Artificial intelligence and machine learning technologies are subject to rapid changes and our technology is yet to be fully automated. As our operations grow in size, scope and complexity, we will need to continuously improve and upgrade our systems and infrastructure to offer an increasing number of consumer-enhanced services, features and functionalities, while maintaining and improving the reliability and integrity of our systems and infrastructure.
Our future success also depends on our ability to adapt our technology, our services and infrastructure, including our research, sales and marketing, and logistics and fulfillment platform, which leverages our technology, to meet rapidly evolving e-commerce trends and demands while continuing to improve our software’s performance, features and reliability. The emergence of alternative platforms may require us to continue to invest in new and costly technology. We may not be successful, or we may be less successful than our competitors, in developing technologies that operate effectively across multiple e-commerce platforms, which would negatively impact our business and financial performance. New developments in other areas, such as cloud computing providers, could also make it easier for competitors to enter our markets due to lower up-front technology costs. In addition, we may not be able to maintain our existing systems, replace or upgrade our current systems or introduce new technologies and systems as quickly or cost effectively as we would like. We expect to incur significant costs in the continued development of our technology’s functionality, and any failure to invest in and adapt to technological developments and industry trends may have a material adverse effect on our business, operating results and financial condition.
We are dependent on third-party suppliers such as contract manufacturers and third-party logistics providers and carriers for the manufacturing and distribution of operations,our products and any disruption to our supply chain, even for a relatively short period of time, could cause a loss of revenue, which could adversely affect our business, operating results and financial conditioncondition. Our ability to select reliable suppliers that provide timely deliveries of quality products will impact our success in meeting customer demand. Further, for a number of our significant products, we only have a single-source of supply (such as for certain dehumidifiers) and prospects. in general we do not have enforceable contracts with our contract manufacturers covering costs and production. Any supplier’s inability or unwillingness to timely deliver products that meet desired specifications or any unanticipated changes in suppliers could be disruptive and costly and it is unlikely that we will be able to effect alternative arrangements on a timely basis, or in the case of manufacturing certain of our significant products, at all. Any significant failure by us to obtain quality products, in sufficient quantities, on a timely basis, and at an affordable cost or any significant delays or interruptions of supply would have a material adverse effect on our business, operating results and financial condition.
As most of our product suppliers are based in China, our business is subject to additional risks including, among others: currency fluctuations; labor unrest; potential political, economic and social instability, including the repercussions of the conflict in Ukraine and tensions between China and Taiwan; restrictions on transfers of funds; import duties and quotas; changes in domestic and international customs and tariffs, including embargoes and customs restrictions; uncertainties involving the costs to transport and warehouse products due to the dynamic nature of the global supply chain; unexpected changes in regulatory environments; regulatory issues involved in dealing with foreign suppliers and in exporting and importing products. The foregoing factors could have a material adverse effect on our business, operating results and financial condition.
A significant majority of our revenue isresults from sales of products on Amazon’s U.S. Marketplace and any change, limitation, or restriction on our ability to operate on Amazon’s platform could have a material adverse impact toon our business, operating results of operations,and financial condition and prospects. condition.
A substantial percentage of our revenue is driven byfrom sales of products on Amazon’s U.S. marketplace and we are subject to Amazon’s terms of service (“ToS”) and various other Amazon seller policies and services that apply to third parties sellingwho sell products on Amazon’s marketplace.
Amazon has the right to terminate or suspend our ability to sell on its agreement with usplatform at any time and for any reason. Amazon may also take other actions against us such as suspending or terminating aour seller accountaccounts or product listinglistings and withholding payments owed to us indefinitely. WhileFrom time to time in the past, we endeavor to materially comply with the terms of services of Amazon’s marketplace,have experienced such adverse actions for products we have launched and products we have acquired and, we can provide no assurancesassurance that Amazonwe will be able to comply with Amazon's ToS. Further, in the event any of our seller accounts or product listings are suspended for noncompliance, our reinstatement efforts may take significant time and attention or could fail, which could have the same determination with respect toa material adverse effect on our compliance. business, operating results and financial condition.
In addition, Amazon canhas made, and we expect will continue to make, changes to its platform that could require us to change the manner in which we operate, limit our ability to successfully launch new products or increase our costs to operateoperate. Such changes and such changesthe efforts required to maintain compliance therewith could have an adverse effect on our business, operating results of operations,and financial condition and prospects.condition. Examples of past changes that could impact us relate tofrom Amazon have included platform fee chargesincreases (i.e., storage, advertising, fulfillment and selling commissions), exclusivity, inventory warehouse availability, excluded productslimitations, and limitationsrestrictions on certain sales and marketing.marketing activities. Any change, limitation or restriction on our ability to sell on Amazon’s platform, even if temporary, could have a material impact on our business, operating results of operations,and financial condition and prospects. condition.
While we do significant diligence for all of our acquisitions it is difficult to uncover all actions taken by previous owners, some of which may be against the terms of service of Amazon’s platforms and this could impact our ability to operate on Amazon and affect the benefit of the bargain we receive. For example, we have dealt with an issue from the Smash acquisition whereby the former owner's actions have caused us to lose reviews and access to certain inventory. While we are working with Amazon to resolve this issue, there can be no assurances any such actions will be successful and our financial operation conditions could be materially impacted.
We also rely on services provided by Amazon’s fulfillment platform, including its Prime Certification,badge program, in which provides forAmazon guarantees expedited shipping of products we sell to the consumer, an important aspectfactor in the consumer’s buying decision for consumers. For products that wedecision. Further, Amazon allows us to fulfill ourselves, we are qualifiedfrom our own third-party warehouses directly to offercustomers under the same Prime badge guarantee. Amazon may at any time decide to discontinue allowing us to fulfill sales of our products for sale withdirectly from our warehouse network or limit our ability to advertise on our product listings that such products will receive expedited shipping under its Prime Certification delivery.badge program. Any such inability to market our products for sale with expedited delivery provided under Prime Certificationor limitation, could have a material impact on our business, results of operations, and financial conditioncondition.
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Our Credit Facility contains various restrictions and prospects. Failurecovenants that could limit our operating flexibility and we may be unable to remain compliant withrefinance or repay our Credit Facility. We also rely on credit export insurance for our vendors in China, the best fulfillment practices on Amazon’s platformunavailability of which could have a material adverse impact on our business, operating results and financial condition.
On December 22, 2021, we obtained a revolving credit facility from Midcap Funding IV Trust (the “Credit Facility”). Our Credit Facility contains covenants and other restrictions that, among other things, requires us to satisfy certain liquidity and borrowing availability tests, restricts our ability to execute M&A transactions and to incur additional indebtedness. These restrictions and covenants, and those in other future financing arrangements, may limit our ability to respond to market conditions, to provide for capital investment needs or to take advantage of business opportunities.
There is no guarantee that we will be available to repay or refinance our Credit Facility. Further, at any time, if we violate the terms of the Credit Facility, we may not be able to obtain a waiver from our lender under satisfactory terms, or at all, which would limit our operating flexibility and/or liquidity and which could have a material adverse effect on our business, operating results and financial condition.
We also rely on the availability of export credit insurance from the China Export & Credit Insurance Corporation (“Sinosure”), a Chinese state-owned enterprise, that provides export credit insurance to our contract manufacturers. From time to time, our contract manufacturers have experienced reductions in the availability of such credit from Sinosure as a result of our failure to timely pay them. While we currently believe our contract manufacturers have insurance at levels that we believe are sufficient to fund our operations, there can be no assurance that such insurance will be available at levels we require for our business, or at all, whether or not we make timely payments to our vendors, which would have a material adverse effect on our business, operating results and financial condition and prospects. condition.
In addition, due to the COVID-19 pandemic, AmazonCompany has changedcash deposits at financial institutions in excess of the insured amount of inventory it accepts per product for a period of time. If this were$0.3 million by the Federal Deposit Insurance Corporation.
Our efforts to continue it could cause us to miss sales and/or pay additional shipping costs which would harmgrow our business operationsthrough new products, services, technologies, and geographic expansion may not be successful and may place a significant strain on our management and, operational, financial conditions.and other resources.
Our businesslong-term success depends on our ability to builddevelop and maintain strong product listings on e-commerce platformscommercialize a continuing stream of new products and services, to expand geographically and to receive favorable customer reviews.continue development of our technology platform. We have entered and expect to continue to enter new product, service and geographic markets for which we have limited or no experience. For example, we have recently started to expand into Europe. In part we rely on Amazon’s global reviews program for success in our international expansion. If that program were to be limited, reduced or discontinued, our international expansion would be negatively affected. Our efforts to grow our business place significant strain on our management, personnel, operations, systems, financial resources, and internal financial control and reporting functions, among other things. We face the risk that we will be unable to disrupt incumbents and that our competitors will introduce new and better products and services that compete with us. There are numerous uncertainties inherent in successfully developing and commercializing new products and services on a continuing basis and new product launches or services may not deliver expected growth in sales or operating results. Any new product or service that we develop and market may not be introduced in a timely or cost-effective manner, may contain defects, errors, quality or other issues, or may not achieve the market acceptance necessary to generate sufficient revenue or may never become profitable. If we receive negative reviews, customer complaints, negative publicityare unable to develop and introduce a continuing stream of competitive new products and services, it may have an adverse effect on our business, operating results and financial condition. Our failure to successfully execute on our growth initiatives can negatively impact our financial results and financial condition. To date, we have been unsuccessful in offering our services to third-party brands and while we expect to continue to offer our services there can be no assurance that we will be successful.
We may be unsuccessful in making and integrating acquisitions or otherwise fail to live up to expectations, it could materiallyin maintaining or growing the financial performance of any acquired businesses which may adversely affect our business and operating results of operations and growth prospects.
Customer complaints or negative publicity about our sites, products, delivery times, customer data handling and security practices, customer support or marketing strategies, even if not accurate, especially on Amazon’s marketplace, blogs, and social media websites could diminish consumers’ viewsimpact the price of our product listingscommon stock and result in harmdilution to our brands. Even a small decrease in anyshareholders.
Acquisitions are an important aspect of our product’s ratings on the Amazon marketplace could cause such productgrowth strategy and we expect to suffer substantial harm. Customers may also make safety-related orcontinue to pursue brand and other claims regarding a product sold through our online retail partners, such as Amazon, which may result in any such online retail partner removing the product from its marketplace.strategic acquisitions. We have from time to time experienced such removals and such removals may materially impact our financial results depending on the product that is removed and length of time that it is removed.
Unfortunately, a significant portion of our perceived performance by each customer depends on third parties outside of our control, including suppliers and logistics providers who deliver our products. In addition to issues related to the COVID-19 pandemic as addressed above, we may be subject to manufacturing or shipping delays or disruptions caused byacquired a number of factors,companies, and we may in the future acquire or invest in or enter into joint ventures with additional companies. Such acquisitions have in the past required, and in the future may require, the attention of management in integrating those businesses including inclement weather, earthquakes, blizzards, tornadoes, floods, power outages and other natural or man-made disasters, including those caused by climate change, labor or social justice activism, health epidemics, bioterrorism, actsincreased attention to managing the supply chain of war or other political hostilities. Because we rely on national, regional and local transportation companiescertain acquisitions. The market for the delivery of some of our products, we are also subject to risks of breakage or other damage to our products during delivery by any of these third parties. We also use and rely on other services from third parties, such as our telecommunications services, and those servicesacquisitions has historically been highly competitive. Our growth strategy may be subjectadversely affected if we face increased competition for or fail to outagesidentify suitable acquisition targets. In addition, pursuing or completing any such acquisitions could divert management’s attention, and interruptions that are not withinotherwise disrupt our control. If any of the foregoing occurs, it may impact our perceived performanceoperations and related reviews of our products, which could materially adversely affect our operating results and financial condition. Any acquisition, if not favorably received by consumers, shareholders, analysts, and others in the investment community, could have a material adverse effect on the price of our common stock. In addition, any acquisition involves numerous risks, including: failing to identify problems during due diligence, liabilities or other shortcomings or challenges that could cause a target to under perform post-closing; difficulties in the assimilation of
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the operations, technologies, products, and personnel associated with the acquisition and unanticipated expenses related to such integration; challenges in integrating distribution channels; diversion of management's attention from other business resultsconcerns; difficulties in transitioning and preserving customer, contractor, supplier, and other important third-party relationships; challenges realizing anticipated cost savings, synergies and other benefits; the potential impairment of operationstangible and growth prospects.intangible assets and goodwill; risks of entering markets in which we have no or limited experience; risks associated with subsequent losses including potential unknown liabilities associated with a company we acquire; and problems retaining key personnel. We provide no assurances that we will be able to complete any acquisitions or that any acquired businesses will experience the same or better level of financial performance as prior to the acquisition.
Significant merchandise returns
In order to complete any future acquisitions, we may need to use our cash on hand, and we will likely need to raise additional equity or incur or assume debt, any of which could harm our business.
We allow our customers to return products, subjectbusiness, only be available on unfavorable terms, if at all, and result in additional dilution to our return policy. If merchandise returns are significant, our business, prospects, financial condition and results of operations could be harmed. Further, we may modify our policies relating to returns from time to time, which may result in customer dissatisfaction or an increase in the number of product returns. From time to time our products are damaged in transit, which can increase return rates and harm our brand. Our refund liability for sales returns was $0.5 million, and $0.6 million for the years ended December 31, 2020 and December 31, 2021, respectively, which is included in accrued liabilities and represents the expected value of refunds that may be due to our customers. We have seen increased returns on certain SKUs and the e-
stockholders.commerce economy globally has seen increased returns since the start of the COVID-19 pandemic. If we experience significant product returns, we would incur significant expenses and our results of operations and financial condition would be adversely affected.
We may be unable to attract, retain or motivate key personnel or hire, retain and motivate qualified personnel, in part due towhich could harm our use of stock-based compensation and the volatility of our common stock, and our business could be harmed. business.
Our future success depends on our continuing ability to attract, develop, motivate and retain highlywell qualified and skilled employees. Competition for well-qualified employees in all aspects of our business is intense globally. The loss of one or more of our key personnel or theour inability to promptly identify a suitable successor to a key role, including through a succession plan, could have an adverse effect on our business. Each of our executive officers, key technical personnel and other employees could terminate their employment relationship with us at any time. Moreover, we rely on stock-based compensation as a method to attract, retain and motivate our employees. If our common stock continues to be volatile or depressed, we may be unable to attract, retain and motivate employees, and if this occurs, it could have a material adverse effect on our business, operating results and financial condition. We do not currently maintain key-person life insurance policies on any member of our senior management team and other key employees, except for our Founder and Chief Executive Officer, Yaniv Sarig.
Competition for well-qualified employees in all aspects of our business, including senior executives, software engineers and other technology professionals, is intense globally. We do not have long-term employment or non-competition agreements with any of our personnel. Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate existing employees. In particular, our software engineers and technology professionals are key to designing, maintaining and improving code and algorithms necessary to our business. In addition, we may experience employee turnover as a result of the ongoing “great resignation” occurring throughout the U.S. economy, which has impacted job market dynamics. New hires require training and take time before they achieve full productivity. New employees may not become as productive as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals. Moreover, we use stock-based compensation as a method to attract, retain and motivate our employees, and if our common stock continues to be volatile, we may be unable to attract well-qualified employees or retain and motivate existing employees and key senior management at cost-effective compensation levels, and if this occurs, our business, results of operations, financial condition and prospects may be adversely affected.
The terms of our Credit Facility contain restrictive covenants that may limit our operating flexibility.
On December 22, 2021, we entered into Credit and Security Agreement with Midcap Funding IV Trust, pursuant to which we received access to a $40.0 million revolving credit facility (the “Credit Facility”). The Credit Facility contains affirmative and restrictive covenants that limit our operating ability including to, among other things, transfer or dispose of assets, merge with other companies or consummate certain changes of control, pay dividends, incur additional indebtedness and liens and enter into new businesses. The Credit Facility also contains affirmative and restrictive covenants that limit our ability including to, among other things, acquire other companies and modify organizational documents. We therefore may not be able to engage in any of the foregoing transactions unless we obtain the consent of our lenders. In addition, the Credit Facility is secured by all of our inventory, and the Credit Facility requires us to satisfy certain covenants, including maintaining either a minimum amount of liquidity or a minimum amount of availability under the Credit Facility. There is no guarantee that we will be able to meet our covenants or pay the principal and interest on any such debt. Furthermore, there is no guarantee that future working capital, borrowings or equity financing will be available to repay or refinance any such debt. Any inability to make scheduled payments, meet the financial or other covenants in our Credit Facility would adversely affect our business. Further, at any time, if we violate the terms of the Credit Facility or otherwise fail to meet our covenants, we may not be able to obtain a waiver from the lenders under satisfactory terms, if at all, which would limit our operating flexibility and/or liquidity and which would have an adverse effect on our business and prospects.
We are evaluating acquisition targets in a challenging and evolving environment and, our ability to acquire targets at a low multiple may not be viable or such acquisitions could divert our management’s attention.
Acquisitions are important to the success of our business and overall corporate strategy, and the inherent risks associated with these transactions have increased due to the global disruption of the COVID-19 pandemic which has affected our potential acquisition targets similarly to how it has affected us, as described elsewhere in this “Risk Factors” section.
Acquisitions of early stage brands may have benefits, such as smaller upfront purchase prices, but also have risks such as limited operating history, less experienced management teams and under-developed systems. As we continue to expand our business and invest in businesses of increasing size with higher performance levels and growing product portfolios, we may face increasing competition in our efforts. As a result of increased competition within the industry we operate, our ability to buy companies at a low multiple may not be viable. Through increased competition, the possibility that the cost of acquisitions may be driven up may adversely affect our long-term business strategy, financial condition and results of operations.
As our business continues to face changing technologies, shifting consumer demands, and frequent introduction of rival products, our success depends on our ability to invest in and adapt to new businesses. Our growth strategy may be adversely affected if we fail to identify, or face increased competition for, suitable acquisition targets.
In addition, pursuing or completing any such acquisitions could divert our management’s attention, and otherwise disrupt our operations and adversely affect our operating results and our financial condition.
Our efforts to expand our business into new brands, products, services, technologies, and geographic regions will subject us to additional business, legal, financial and competitive risks and may not be successful.
Our business success depends to some extent on our ability to expand our customer offerings by launching new brands, products and services and by expanding our existing offerings into new geographies. Our strategy is to use our proprietary software to determine which markets to enter and optimize the mix of products that we offer. Launching new brands, products and services requires significant upfront investments, including investments in marketing, information technology and additional personnel. We operate in highly competitive industries with relatively low barriers to entry and must compete successfully in order to grow our business. As our business expands into new industries, we may not be able to generate satisfactory revenue from these efforts to offset these upfront investments. Any lack of market acceptance of our efforts to launch new brands, products and services or to expand our existing offerings could have a material adverse effect on our business, prospects, financial condition and results of operations. Further, as we continue to expand our fulfillment capability or add new brands, products and services with different requirements, our logistics networks will become increasingly complex and operating them will become more challenging. There can be no assurance that we will be able to operate our networks effectively. We have also entered and may continue to enter new markets and provide product offerings in which we have limited or no experience, which may not be successful or appealing to our customers. In addition, as we enter new markets certain employees are developing specific product level expertise. As discussed elsewhere in this “Risk Factors” section, we may have difficulty retaining such employees and if any of these employees with specific product level expertise leave us, we may face difficulties in maintaining or replacing such specific expertise.
Our ability to attract new customers and increase revenue from existing customers depends, in part, on our ability to enhance and improve our existing features, pinpoint new markets and introduce new products. We expend significant resources on research and development of our products in order to meet our customers’ rapidly evolving demands. The success of any enhancements or new features depends on several factors, including timely completion, adequate quality testing, actual performance quality, market-accepted pricing levels and overall market acceptance. We may not be successful in these efforts, which could result in significant expenditures that could impact our revenue or distract management’s attention from current offerings.
Increased emphasis on the sale of new products or on acquisitions could distract us from focusing on sales of our existing products in existing markets, negatively affecting our overall sales. We have invested and expect to continue to invest in new businesses, products, features, services and technologies. Such endeavors may involve significant risks and uncertainties, including insufficient revenue from such investments to offset any new liabilities assumed and expenses associated with these new investments, inadequate return of capital on our investments, distraction of management from current operations and unidentified issues not discovered in our due diligence of such strategies and offerings that could cause us to fail to realize the anticipated benefits of such investments and incur unanticipated liabilities. Because these new strategies and offerings are inherently risky, no assurance can be given that they will be successful. Our new features or enhancements could fail to attain sufficient market acceptance for many reasons, including: delays in introducing products in new or current markets; failure to accurately predict market demand or end consumer preferences; defects, errors or failures in our manufacturing; introduction of competing products; poor financial conditions for our customers or poor general macroeconomic conditions; changes in legal or regulatory requirements, or increased legal or regulatory scrutiny, adversely affecting our products; failure of our brand promotion activities or negative publicity about the performance or effectiveness of our existing features and products; and disruptions or delays in the online retailers and, or in addition to, logistics providers distributing our products.
There is no assurance that we will successfully identify new opportunities or develop and bring new products to market on a timely basis, which could materially and adversely affect our business, financial condition and operating results and compromise our ability to generate revenue.
Expansion of our operations internationally requires management attention and resources, involves additional risks and may be unsuccessful.
We have limited experience with operating internationally or selling our merchandise outside of the U.S., and as we expand internationally, we will need to adapt to different local cultures, standards and policies. The business model and technology we employ and the merchandise we currently offer may not be successful with consumers outside of the U.S. Furthermore, to succeed with consumers and clients in international locations, it may be necessary to locate fulfillment centers in foreign markets and hire local employees in those international centers, and we may have to invest in these facilities and personnel before proving we can
successfully run foreign operations. We may not be successful in expanding into international markets or in generating revenue from foreign operations for a variety of reasons, including: localization of our merchandise offerings and technology, including translation into foreign languages and adaptation for local practices; availability of certain technology features and availability of data, including at reasonable costs; different consumer demand dynamics, which may make our business model, technology and the products we offer less successful compared to in the U.S.; competition from local incumbents that understand the local market and may operate more effectively; regulatory requirements, taxes, trade laws, trade sanctions and economic embargoes, tariffs, import and export quotas, custom duties or other trade restrictions or any unexpected changes thereto; laws and regulations regarding anti-bribery and anti-corruption compliance; differing labor regulations where labor laws may be more advantageous to employees as compared to the U.S. and increased labor costs; more stringent regulations relating to privacy and data security and access to, or use of, commercial and personal information; changes in a specific country’s or region’s political or economic conditions, including changes to or limits on access to internet connectivity; and risks resulting from changes in currency exchange rates.
If we invest substantial time and resources to establish and expand our operations internationally and are unable to do so successfully and in a timely manner, our operating results would suffer.
We may acquire other companies or technologies, which could divert our management’s attention, result in additional dilution to our stockholders, may decline in financial performance post closing and otherwise disrupt our operations and adversely affect our operating results.
We may in the future seek to acquire or invest in businesses, features or technologies that we believe could complement or expand our market, enhance our technical capabilities or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated. In addition, to the extent that we enter into any term sheets or otherwise announce any intention to acquire any additional businesses, features or technologies, any such acquisition would generally be subject to completion of due diligence and required approvals, and would likely require additional financing, and there can be no assurance that any such acquisition will occur or be completed in a timely manner, or at all. There can also be no assurances that any acquired companies or technologies will maintain the same level of financial performance as prior to the acquisition and if that were to occur our business, financial condition and operations could be adversely affected.
Any failure to successfully integrate our acquired businesses or any failure to maintain the same level or better financial performance may adversely affect our business and operations.
Over the past years, we have completed several acquisitions, and plan to continue making acquisitions in the future. We believe that acquisitions may further our growth strategy. In order to obtain the anticipated benefits associated with these acquisitions, we will need to successfully integrate these businesses in an effective and efficient manner. If we acquire additional businesses, we may not be able to integrate the acquired personnel, operations, existing contracts and technologies successfully or effectively manage the combined business following the acquisition. We also may not achieve the anticipated benefits from any acquired business, due to a number of factors, including:
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In addition, a significant portion of the purchase price of any business we acquire may be allocated to acquired goodwill and intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our operating results based on this impairment assessment process, which could adversely affect our results of operations. There can also be no assurances that any acquired companies or technologies will maintain the same level of financial performance as prior to the acquisition and if that were to occur our business, financial condition and operations could be adversely affected.
Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results. If an acquired business fails to meet our expectations, our business, operating results and financial condition may suffer.
We are dependent on third-party manufacturers, most of which are located in China.
A substantial portion of our products are manufactured by unaffiliated companies that are located in China. This concentration of manufacturers in a single country exposes us to risks associated with doing business globally, including: changing international political relations; labor availability and cost; changes in laws, including tax laws, regulations and treaties; changes in labor laws, regulations and policies; changes in customs duties, additional tariffs and other trade barriers; changes in shipping costs; currency exchange fluctuations; local political unrest; an extended and complex transportation cycle; the impact of changing economic conditions; and the availability and cost of raw materials and merchandise. The political, legal and cultural environment in China and other nations is continuously evolving, and any change that impairs our ability to obtain products from manufacturers in that region, or to obtain products at marketable rates, could have a material adverse effect on our business, operating results and financial condition. We rely on one large manufacturer for the manufacture of several of our products, including our dehumidifiers. If we were no longer able to maintain that relationship for any reason, we may not be able to timely find another manufacturer, specifically one that provides the same quality, which would negatively affect our business, sales and results of operations.
Our understanding with most of our suppliers do not provide for the long-term availability of merchandise or the continuation of particular pricing practices, nor do they usually restrict such suppliers from selling products to other buyers or directly to consumers themselves. There can be no assurance that our current suppliers will continue to sell us products on current terms or that we will be able to establish new or otherwise extend current supply relationships to ensure product acquisitions in a timely and efficient manner and on acceptable commercial terms.
Risks Relating to Intellectual Property and Cyber Security
Our use of open source software may pose particular risks to our proprietary software and systems.
We use open source software in our proprietary software AIMEE, and other of our sophisticated information technologies and systems, and we expect to continue to use open source software in the future. We may use open source software that may require that source code that is developed using such open source software be made available to the public and that any modifications or derivative works to such open source software continue to be licensed under open source licenses. From time to time, we may face claims from third parties claiming infringement. These claims could result in litigation and could require us to purchase a costly license, publicly release the affected portions of our source code, limit our use of or cease using the implicated software unless and until we can re-engineer such software to avoid infringement or change the use of the implicated open source software. These claims could also lead to deactivation of portions of our technology.
In addition to risks related to license requirements, use of certain open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties, indemnities or other contractual protections with
respect to the software (for example, non-infringement or functionality). Our use of open source software may also present additional security risks because the source code for open source software is publicly available, which may make it easier for hackers and other third parties to determine how to breach our sites and systems that rely on open source software. Any of these risks could be difficult to eliminate or manage, and, if not addressed, could have a material adverse effect on our business, financial condition and operating results.
We rely on data provided by third parties, the loss or reduction of which could limit the functionality of our platforms or disrupt our business.
We use our technology to determine market trends and what markets to enter into. Our ability to successfully use our technology depends on our ability to analyze and utilize data, including search engine results, provided by unaffiliated third parties, primarily, Google and Amazon. Some of this data is provided to us pursuant to third-party data sharing policies and terms of use, under data sharing agreements by third-party providers or by customer consent. The majority of this data is sourced for free or for de minimis amounts. Our technology sources significant amounts of data through application program interfaces (“APIs”) or through other standard data upload/download methods. This source of data allows us, leveraging our technology, to determine trends, performance and consumer sentiment on products and searches within e-commerce platforms. This functionality allows us to help determine which products to market, manufacture through contract manufacturers, import and sell on e-commerce marketplaces. The connection to multiple e-commerce platforms through APIs allows us to develop the automation of the purchase of marketing and to automate pricing changes on product listings on those e-commerce platforms.
In the future, any of these third parties could change its data sharing policies, including making them more restrictive, charging fees or altering its algorithms that determine the placement, display and accessibility of search results and social media updates, any of which could result in the loss of, or significant impairment to, our ability to collect useful data. These third parties could also interpret our, or our service providers’, data collection policies or practices as being inconsistent with their policies, which could result in the loss of our ability to collect this data. Privacy concerns may cause end users to resist providing the personal data necessary to allow our proprietary software to determine market trends as well as our ability to effectively retain existing customers. Privacy advocacy groups and the technology and other industries are considering various new, additional or different self-regulatory standards that may place additional burdens on us. Any such changes could impair our ability to use data and could adversely impact select functionality of our proprietary software, impairing the ability to use this data to anticipate customer demand and market trends, as well as adversely affecting our business and our ability to generate revenue.
Any significant disruption in service on our websites or apps or in our computer systems, a number of which are currently hosted or provided by third-party providers, could materially affect our ability to operate, damage our reputation and result in a loss of consumers, which would harm our business and results of operations.
Our ability to sell and market our products relies on the performance and continued development of our technology. Our technology’s functionality, including its continued development, relies upon a number of third-party related services, including those relating to cloud infrastructure, technology services, servers, open source libraries and vendor APIs. Any disruption or loss of any of these third-party services could have a negative effect on our business, results of operations, financial condition and prospects. We may experience interruptions in our systems, including server failures that temporarily slow down or interfere with the performance of our platforms and the ability to sell on e-commerce marketplaces. Interruptions in these systems, whether due to system failures, human input errors, computer viruses, physical or electronic break-ins, or denial-of-service attacks on us, third-party vendors or communications infrastructure, could affect the availability of our services on our platform and prevent or inhibit our ability to sell our products. The volume of traffic and activity on e-commerce marketplaces spikes on certain days, such as on Amazon Prime Day, Black Friday and Cyber Monday, and any such interruption would be particularly problematic if it were to occur on such a high-volume day. Problems with the reliability of our systems or third-party marketplaces could prevent us from earning revenue and could harm our reputation. Damage to our reputation, any resulting loss of customers and e-commerce confidence and the cost of remedying these problems could negatively affect our business, results of operations, financial condition and prospects.
Our ability to maintain communications, network and computer hardware in the countries in which they are used may be subject to regulatory review and licensing in the future, and the failure to obtain any required licenses could negatively affect our business. Our systems and infrastructure are predominately reliant on third parties. Problems faced by our third-party service providers with the telecommunications network providers with whom they contract or with the systems by which they allocate capacity among their users, including us, could adversely affect the experience of our consumers. Our third-party service providers could decide to close their facilities without adequate notice. Any financial difficulties, such as bankruptcy or reorganization, faced by our third-party service providers or any of the service providers with whom they contract may have negative effects on our business, the nature and extent of which are difficult to predict. If our third-party service providers are unable to keep up with our needs for capacity, this could
have an adverse effect on our business. Any errors, defects, disruptions or other performance problems with our services could harm our reputation and may have a material adverse effect on our business, results of operations, financial condition and prospects.
Our failure or the failure of third parties to protect our sites, networks and systems against security breaches, or otherwise to protect our confidential information, could damage our reputation and brand and substantially harm our business and operating results.
We collect, maintain, transmit and store data about our consumers, brands and others, including credit card information and personally identifiable information, as well as other confidential information. We also engage third parties that store, process and transmit these types of information on our behalf. We rely on encryption and authentication technology licensed from third parties in an effort to securely transmit confidential and sensitive information, including credit card numbers. Advances in computer capabilities, new technological discoveries or other developments may result in the whole or partial failure of this technology and may allow transaction data or other confidential and sensitive information to be breached or compromised. In addition, our brand’s e-commerce websites are often attacked through compromised credentials, including those obtained through phishing and credential stuffing. Our security measures, and those of our third-party service providers, may not detect or prevent all attempts to breach our systems, denial-of-service attacks, viruses, malicious software, break-ins, phishing attacks, social engineering, security breaches or other attacks or disruptions that may jeopardize the security of information stored in or transmitted by our websites, networks and systems that we or such third party service providers otherwise maintain, including payment card systems, which may subject us to fines or higher transaction fees or limit or terminate our access to certain payment methods. We and such third party service providers may not anticipate or prevent all types of attacks until after they have already been launched. Further, techniques used to obtain unauthorized access to or sabotage systems change frequently and may not be known until launched against us or our third-party service providers. In addition, security breaches can occur as a result of non-technical issues, including intentional or unintentional breaches by our employees or by third parties. These risks may increase over time as the complexity and number of technical systems and applications we use also increases.
Breaches of our security measures or those of our third-party service providers or other cyber security incidents could result in unauthorized access to our sites, networks, systems and accounts; unauthorized access to, and misappropriation of, consumer information, including consumers’ personally identifiable information, or other confidential or proprietary information of ourselves or third parties; viruses, worms, spyware or other malware being served from our sites, networks or systems; deletion or modification of content or the display of unauthorized content on our sites; interruption, disruption or malfunction of operations; costs relating to breach remediation, deployment of additional personnel and protection technologies, response to governmental investigations and media inquiries and coverage; engagement of third-party experts and consultants; or litigation, regulatory action and other potential liabilities. In the past, we have been the target of social engineering, phishing, malware and similar attacks and threats of denial-of-service attacks. While we have yet to experience any material adverse effects from these attempted attacks, such attacks in the future could have a material adverse effect on our operations. If any of these breaches of security should occur, our reputation and brand could be damaged, our business may suffer, we could be required to expend significant capital and other resources to alleviate problems caused by such breaches, and we could be exposed to a risk of loss, litigation or regulatory action and possible liability. We cannot guarantee that recovery protocols and backup systems will be sufficient to prevent data loss. Actual or anticipated attacks may cause us to incur increased costs, including costs to deploy additional personnel and protection technologies, train employees and engage third-party experts and consultants.
We may experience periodic system interruptions from time to time. In addition, continued growth in our transaction volume, and surges in online traffic and orders associated with promotional activities or seasonal trends in our business, place additional demands on our marketplace platforms and could cause or exacerbate slowdowns or interruptions. If there is a substantial increase in the volume of traffic on our sites or the number of orders placed by customers, we will be required to further expand and upgrade our technology, transaction processing systems and network infrastructure. There can be no assurances that we will be able to accurately project the rate or timing of such increases, if any, in the use of our sites and expand and upgrade our systems and infrastructure to accommodate such increases on a timely basis. In order to remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our sites, which is particularly challenging given the rapid rate at which new technologies, customer preferences and expectations and industry standards and practices are evolving in the e-commerce industry. Accordingly, we redesign and enhance various functions on our sites on a regular basis, and we may experience instability and performance issues as a result of these changes. Our disaster recovery plan may be inadequate, and our business interruption insurance may not be sufficient to compensate us for the losses that could occur.
Any compromise or breach of our security measures, or those of our third-party service providers, could violate applicable privacy, data protection, data security, network and information systems security and other laws and cause significant legal and financial exposure, adverse publicity and a loss of confidence in our security measures, which could have a material adverse effect on our business, results of operations, financial condition and prospects. We continue to devote significant resources to protect against
security breaches, and we may need to devote significant resources in the future to address problems caused by breaches, including notifying affected subscribers and responding to any resulting litigation, which in turn, may divert resources from the growth and expansion of our business. To date, we are not aware of any material compromises or breaches of our networks or systems.
Assertions by third parties of infringement or misappropriation by us of their intellectual property rights or confidential know-how could result in significant costs and substantially harm our business and results of operations.
Third parties have asserted, and may in the future assert, that we have infringed or misappropriated their trademarks, copyrights, confidential know-how, trade secrets, patents or other intellectual property rights. We cannot predict whether any such assertions or claims arising from such assertions will substantially harm our business and results of operations, whether or not they are successful. If we are forced to defend against any infringement or other claims relating to the trademarks, copyright, confidential know how, trade secrets, patents or other intellectual property rights of third parties, whether they are with or without merit or are determined in our favor, we may face costly litigation or diversion of technical and management personnel. Furthermore, the outcome of a dispute may be that we would need to cease selling a product or use of some portion of our technology, develop non-infringing technology, pay damages, costs or monetary settlements or enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may be unavailable on terms acceptable to us, or at all, and we may be unable to successfully develop non-infringing technology. In addition, Amazon and other marketplaces may remove a product listing if they determine, whether or not accurate, that we are infringing on the intellectual property of others. Any assertions or litigation could materially adversely affect our business, results of operations, financial condition and prospects.
The e-commerce industry is characterized by vigorous protection and pursuit of intellectual property rights, which has resulted in protracted and expensive litigation for many companies. Some companies, including some of our competitors, own large numbers of patents, copyrights and trademarks, which they may use to assert claims against us. In addition, because patent applications can take years to issue and are often afforded confidentiality for some period of time, there may currently be pending applications, unknown to us, that later result in issued patents that could cover one or more of our technologies. For example, the Company has received informal notice from a third-party alleging patent infringement with respect to certain paper transfer products sold by the Company. The Company is in discussions with representatives of the third party to resolve the matter, does not believe it is infringing any active patents of the third party and intends to defend itself vigorously.
Certain third parties have substantially greater resources than we have and may be able to sustain the costs of intellectual property litigation for longer periods of time than we can. Even if we were to prevail in such a dispute, any litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management and key personnel from our business operations.
We could incur substantial costs in protecting or defending our intellectual property rights, and any failure to protect our intellectual property could adversely affect our business, results of operations and financial condition.
Our success depends, in part, on our ability to protect our proprietary methods, trademarks, domain names, copyrights, patents, trade dress, trade secrets, proprietary technology and similar intellectual property, and we rely on trademark, copyright and patent law, trade secret protection, agreements and other methods with our employees and others to protect our proprietary rights. There can be no assurance that the particular forms of intellectual property protection that we seek and implement, including business decisions about when to file trademark applications and patent applications, will be adequate to protect our business. We intend to continue to file and prosecute patent applications when appropriate to attempt to protect our rights in our proprietary technologies. However, there can be no assurance that our patent applications will be approved, that any patents issued will adequately protect our intellectual property, that the scope of the claims in our issued patents will be sufficient or have the coverage originally sought, that our issued patents will provide us with any competitive advantages, or that such patents will not be challenged by third parties or found by a judicial authority to be invalid or unenforceable.
We could be required to spend significant resources to monitor and protect our intellectual property rights. Litigation may be necessary in the future to enforce our intellectual property rights, determine the validity and scope of our proprietary rights or those of others, or defend against claims of infringement or invalidity. Such litigation may fail, and even if successful, could be costly, time-consuming and distracting to management and could result in a diversion of significant resources. Our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights or alleging that we infringe the counterclaimant’s own intellectual property. An adverse determination of any litigation or defense proceedings could put our intellectual property at risk of being invalidated or interpreted narrowly and could put our related pending patent applications at risk of not being issued. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential or sensitive information could be compromised by disclosure in the event of litigation. During the course of litigation, there could be public announcements of the
results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock.
Any of our intellectual property rights could be challenged by others or invalidated through administrative processes or litigation. Furthermore, there can be no guarantee that others will not independently develop similar products, duplicate any of our products or design around our patents. Despite our efforts, we may be unable to prevent third parties from infringing upon, misappropriating or otherwise violating our intellectual property rights and other proprietary rights.
Risks Relating to Litigation and Government Regulation
We may be subject to general litigation, regulatory disputes and government inquiries. Any failure to comply with current laws, rules and regulations or changes to such laws, rules and regulations and other legal uncertainties may adversely affect our business, financial performance, results of operations or business growth.
As a growing company with expanding operations, we have in the past and may in the future increasingly face the risk of claims, lawsuits, government investigations and other proceedings involving competition and antitrust, intellectual property, privacy, consumer protection, accessibility claims, securities, tax, labor and employment, commercial disputes, services and other matters. The number and significance of these disputes and inquiries have increased as the political and regulatory landscape changes, and as we have grown larger and expanded in scope and geographic reach, and our services have increased in complexity.
For example, we are a party to various actions and claims arising in the normal course of business, certain of which are indicated below:
In September 2019, we received a Test Notice from the U.S. Department of Energy (“DOE”) indicating that a certain dehumidifier model may not comply with applicable energy-conservation standards. The DOE requested that we provide it with several model units for DOE testing. If it is determined that we have violated certain energy-conservation standards, we could be fined pursuant to DOE guidelines, and this civil penalty may be material to our consolidated financial statements. We intend to vigorously defend ourselves. We have submitted to the DOE testing process, made a good-faith effort to provide necessary notice as practicable, and included in a formal response copy of the energy-efficiency report and certification that were issued for the dehumidifier model at the time of production. We believe this product is compliant, and we, in conjunction with our manufacturing partner, have disputed the Test Notice received from the DOE.
In September 2019, we received notice from the U.S. Environmental Protection Agency (“EPA”) that certain of our products were identified by the Association of Home Appliance Manufacturers (“AHAM”) as failing to comply with EPA ENERGY STAR requirements. For an appliance to be ENERGY STAR certified, it must meet standards promulgated by the EPA and enforced through EPA-accredited certification bodies and laboratories. We believe that our products are compliant, and we, in conjunction with our manufacturing partner, have disputed the AHAM testing determination pursuant to EPA guidelines. While a resolution remains pending, we are not selling or marketing the products identified by the EPA. We cannot be certain that these products will eventually be certified by AHAM and the EPA, and we may incur costs that cannot presently be calculated in the event that we need to make changes to the manner in which these products are manufactured and sold.
In April 2020, we received notice from the EPA with respect to regulatory compliance and advertising associated with certain of our dehumidifier products. We believe that our products and the associated advertising are compliant, and we are currently in discussions with the EPA to resolve the matter. The EPA had placed a hold on the sale of certain of our dehumidifier inventory while it reviewed the matter with us. As of October 2020, we are able to resume selling the products identified by the EPA, and discussions are continuing with the EPA. No penalty has been assessed by the EPA or communicated to us. If we receive a similar notice from the EPA in the future with regards to regulatory compliance of any of our other products, the EPA may place a hold on the sale of our products while it reviews an open matter with us.
On May 13, 2021, a securities class action complaint was filed in the U.S. District Court for the Southern District of New York by Andrew Tate naming our company, Yaniv Sarig and Fabrice Hamaide as defendants. On June 10, 2021, a substantially similar securities class action complaint was filed in the same court by Jeff Coon against the same defendants. Thereafter, other stockholders asserted similar claims. On August 10, 2021, the court appointed Joseph Nolff as the lead plaintiff of the putative class action, and on October 12, 2021, he filed an amended complaint, (i) adding Arturo Rodriguez as a defendant, (ii) asserting violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated thereunder and (iii) claiming that the defendants made false and materially misleading statements and failed to disclose material adverse facts regarding our business, operations, and prospects and that this was revealed on May 4, 2021, when Culper Research published a report allegedly exposing these alleged misrepresentations and omissions. The lead plaintiff has since filed two further amended complaints repeating substantively the same allegations. The Company recently reached an agreement in principle to resolve this action on March
10, 2022 for $1.3 million, subject to negotiation of a formal memorandum of understanding, the execution of final settlement documents, and court approval. If that process does not succeed, the Company is prepared to continue the full defense of this action.
On October 21, October 25 and November 10, 2021, three shareholder derivative actions were filed on behalf of our company by Shaoxuan Zhang, Michael Sheller and Tyler Magnus in the U.S. District Court for the Southern District of New York. These actions, collectively, name Yaniv Sarig, Fabrice Hamaide,Arturo Rodriguez, Greg B. Petersen, Bari A. Harlam,Amy von Walter, William Kurtz, Roi Zion Zahut, Joseph A. Risico, Tomer Pascal and Mihal Chaouat-Fix as individual defendants, and our company as a nominal defendant. These actions are predicated on substantively the same factual allegations contained in the above-described securities class action and assert that the individual defendants (i) breached their fiduciary duties, (ii) misused their authority, (iii) were unjustly enriched and (iv) wasted corporate assets. The action filed by Michael Sheller also alleges that individual defendants Sarig and Hamaide are liable for contribution pursuant to Sections 10(b) and 21D of the Exchange Act in the event we are held liable in the shareholder derivative action. The action filed by Shaoxuan Zhang alleges analogous liability on the part of Sarig, Hamaide and Rodriguez. Finally, the action filed by Shaoxuan Zhang also alleges that individual defendants Sarig, Harlam, Kurtz, Petersen and von Walter are liable for violations of Section 14(a) of the Exchange Act. We believe the allegations are without merit and intend to vigorously defend against these actions. The parties to these actions have agreed to stay this action pending resolution of the Securities Class Action and given the tentative resolution of the Securities Class Action the Company intends to engage with the parties for a resolution of these matters following finalization of that settlement. However, the outcome of these legal proceedings are currently uncertain.
On September 20, 2021, Sabby Volatility Warrant Master Fund Ltd. (“Sabby”) sued our company in the Supreme Court of the State of New York, New York County, alleging that we breached the Securities Purchase Agreement, dated June 10, 2021 (the “Purchase Agreement”), pursuant to which Sabby purchased 400,000 shares of our common stock, for an aggregate price of approximately $6 million. Sabby contends that certain of the representations and warranties made by us in the Purchase Agreement concerning our financial condition and the accuracy of our prior disclosures were untrue and that we breached the Purchase Agreement’s anti-dilution and use-of-proceeds covenants on both August 9, 2021 and September 23, 2021, when we resolved certain defaults with High Trail. We intend to vigorously defend against this action, and, on December 15, 2021, we filed a motion to dismiss, which was fully briefed as of February 11, 2022.
In October 2021, the Company received a class action notification and pre-lawsuit demand letter demanding corrective action with respect to the marketing, advertising and labeling ofcertain products under the Mueller Austria brand. The letter claims that Aterian marketed, advertised, and labeled the products with representations that create the false impression they are made in Austria. The Company intends to vigorously defend against this potential action, which has not reached the stage of litigation yet. The parties are proceeding to mediation in an attempt to reach a reasonable resolution, however the outcome is uncertain at this point. Based on information available to the Company at present, the Company cannot reasonably estimate a range of loss for this potential action We cannot predict the outcome of this dispute with certainty. Regardless of the outcome, these can have an adverse impact on us because of legal costs, diversion of management resources and other factors.
On February 24, 2022, the Company received a notice disputing the Company’s calculation of the earn-out payment to be paid to Josef Eitan and Ran Nir pursuant to the Stock Purchase Agreement (the “PPD Stock Purchase Agreement”), dated as of May 5, 2021, by and among the Company, Truweo, LLC, Photo Paper Direct Ltd, Josef Eitan and Ran Nir. The Company is in discussions with representatives of Josef Eitan and Ran Nir to resolve the matter as required pursuant to the terms of the PPD Stock Purchase Agreement, however the Company believes its calculations are accurate and intends to vigorously defend itself.
The Company has received informal notice from a third-party alleging patent infringement with respect to certain paper transfer products sold by the Company. The Company is in discussions with representatives of the third party to resolve the matter, does not believe it is infringing any active patents of the third party and intends to defend itself vigorously.
Determining reserves for any litigation is a complex, fact-intensive process that is subject to judgment calls. It is possible that a resolution of one or more such proceedings could require us to make substantial payments to satisfy judgments, fines or penalties or to settle claims or proceedings, any of which could harm our business. These proceedings could also result in reputational harm, criminal sanctions, consent decrees or orders preventing us from offering certain products or services or requiring a change in our business practices in costly ways or requiring development of non-infringing or otherwise altered products or technologies. Litigation and other claims and regulatory proceedings against us could result in unexpected expenses and liabilities, which could have a material adverse effect on our business, results of operations, financial condition and prospects.
Our business and financial performance could be adversely affected by unfavorable changes in or interpretations of existing laws, rules and regulations or the promulgation of new laws, rules and regulations applicable to us and our businesses, including those relating to the internet and e-commerce, internet advertising and price display, consumer protection, anti-corruption, antitrust and competition, economic and trade sanctions, energy usage and emissions, tax, banking, data security, network and information systems
security, data protection and privacy. As a result, regulatory authorities could prevent or temporarily suspend us from carrying on some or all of our activities or otherwise penalize us if our practices were found not to comply with applicable regulatory or licensing requirements or any binding interpretation of such requirements. Unfavorable changes or interpretations could decrease demand for our products or services, limit marketing methods and capabilities, affect our margins, increase costs or subject us to additional liabilities.
If our products experience any recalls, product liability claims, or government, customer or consumer concerns about product safety or other consumer protection issues, our reputation, financial condition and operating results could be harmed.
Our products are subject to regulation by the U.S. Consumer Product Safety Commission, the Federal Trade Commission (“FTC”) and similar state and international regulatory authorities, and such products sold on our platform could be subject to involuntary recalls and other actions by these authorities. Concerns about product safety including concerns about the safety of products manufactured in developing countries, could lead us to recall selected products. Recalls and government, customer or consumer concerns about product safety could harm our reputation and reduce sales, either of which could have a material adverse effect on our business, results of operations, financial condition and prospects.
We may be subject to product liability claims if people or property are harmed by the products we sell. Some of the products we sell may expose us to product liability claims or other consumer protection issues and litigation (including class actions) or regulatory action relating to safety, personal injury, and death or environmental or property damage. Although we maintain liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all. In general, our agreements with members of our supply chain do not indemnify us from product liability for a particular product, and some members of our supply chain may not have sufficient resources or insurance to satisfy their indemnity and defense obligations.
If further tariffs or other restrictions are placed on imports from China or any negative trade measures are taken by China, our business, financial condition and results of operations could be materially and adversely affected.
We purchase a substantial portion of our products from unaffiliated manufacturers that are located in China. This concentration exposes us to risks associated with doing business globally, including changes in tariffs. The Office of the United States Trade Representative previously identified certain Chinese imported goods for additional tariffs to address China’s trade policies and practices. These tariffs could have a material adverse effect on our business and results of operations. Additionally, the Biden administration has canceled tariff exclusions that provided tariff relief to certain products and has yet to signal whether it will reinstate such exclusions or further alter existing trade agreements and terms between China and the U.S., including limiting trade with China, adjusting the current tariffs on imports from China and potentially imposing other restrictions on exports from China to the U.S. Consequently, it is possible that tariffs may be imposed on products imported from foreign countries, including China, or that our business will be affected by retaliatory trade measures taken by China or other countries in response to existing or future tariffs. This may cause us to raise prices or make changes to our operations, any of which could have a material adverse effect on our business and results of operations.
We are subject to U.S. governmental regulation and other legal obligations related to privacy, data protection and information security. If we are unable to comply with these, we may be subject to governmental enforcement actions, litigation, fines and penalties or adverse publicity.
We collect personally identifiable information and other data from our consumers and prospective consumers. We collect this info automatically through the automated sales processes with e-commerce marketplaces. We, at times, may use this information to provide, support, expand and improve our business, customer service and tailor our marketing and advertising efforts.
Our handling of data is subject to a variety of laws and regulations, including regulation by various government agencies, such as the FTC, and various state, local and foreign agencies. Our data handling also is subject to contractual obligations and industry standards.
The U.S. federal and various state and foreign governments have adopted or proposed limitations on the collection, distribution, use and storage of data relating to individuals, including the use of contact information and other data for marketing, advertising and other communications with individuals and businesses. In the U.S., various laws and regulations apply to the collection, processing, disclosure and security of certain types of data. Additionally, the FTC and many state attorneys general are interpreting federal and state consumer protection laws as imposing standards for the online collection, use, dissemination and security of data. The laws and regulations relating to privacy and data security are evolving, can be subject to significant change and may result in ever-increasing regulatory and public scrutiny and escalating levels of enforcement and sanctions.
In the U.S., federal and various state governments have adopted or are considering laws, guidelines or rules for the collection, distribution, use and storage of information collected from or about consumers or their devices. For example, California recently passed the California Consumer Privacy Act (the “CCPA”), effective as of January 1, 2020, which introduced substantial changes to privacy law for businesses that collect personal information from California residents. The CCPA has been amended several times, and will be significantly updated from the California Privacy Rights Act (the “CPRA”), a ballot initiative that passed in November 2020. Effective in most material aspects starting on January 1, 2023, the CPRA’s amendments to the CCPA will expand California residents’ rights with respect to certain sensitive personal information and give California residents’ a right to opt out of the sharing of certain personal information for targeted online advertising. The CPRA also created a new state agency vested with authority to implement and enforce the CCPA and the CPRA. Virginia also recently enacted a CCPA/CPRA-like law, the Virginia Consumer Data Privacy Act, to provide its residents with similar rights. Additionally, the FTC and many state attorneys general are applying federal and state consumer protection laws, to impose standards for the online collection, use and dissemination of data. Furthermore, these obligations may be interpreted and applied inconsistently from one jurisdiction to another and may conflict with other requirements or our practices.
Many data protection regimes apply based on where a consumer is located, and as we expand and new laws are enacted or existing laws change, we may be subject to new laws, regulations or standards or new interpretations of existing laws, regulations or standards, which could require us to incur additional costs and restrict our business operations. Any failure or perceived failure by us to comply with rapidly evolving privacy or security laws, such as the Personal Information Security Specification in China (the “China Specification”), policies (including our own stated privacy policies), legal obligations or industry standards or any security incident that results in the unauthorized release or transfer of personally identifiable information or other consumer data may result in governmental enforcement actions, litigation (including consumer class actions), fines and penalties or adverse publicity and could cause our consumers to lose trust in us, which could have a material adverse effect on our business, results of operations, financial condition and prospects.
We handle credit card and other personal information, and, as such, are subject to governmental regulation and other legal obligations related to the protection of personal data, privacy and information security in certain countries where we do business and there has been and will continue to be a significant increase globally in such laws that restrict or control the use of personal data.
Due to the sensitive nature of such information, we have implemented policies and procedures to preserve and protect our data and our customers’ data against loss, misuse, corruption, misappropriation caused by systems failures, unauthorized access or misuse. Notwithstanding these policies, we could be subject to liability claims by individuals and customers whose data resides in our databases for the misuse of that information. If we fail to meet appropriate compliance levels, this could negatively impact our ability to utilize credit cards as a method of payment, and/or collect and store credit card information, which could disrupt our business.
In Europe, the data privacy and information security regime continues to evolve and is subject to increasing regulatory scrutiny.
The General Data Protection Regulation (“GDPR”) implements stringent operational requirements for our use of personal data. These stringent requirements include expansive disclosures to our consumers about how we may use their personal data, increased controls on profiling customers and increased rights for customers to access, control and delete their personal data. In addition, there are mandatory data breach notification requirements and significantly increased penalties of the greater of €20 million or 4% of our global turnover for the preceding financial year. The U.K.’s Network and Information Systems Regulations 2018 apply to us as an online marketplace and place additional network and information systems security obligations on us, as well as mandatory security incident notification in certain circumstances with penalties of up to £17 million.
In recent years, U.S. and European lawmakers and regulators have expressed concern over the use of third-party cookies and similar technologies for online behavioral advertising. To address these concerns, the GDPR set forth enumerated requirements as to how websites are meant to properly handle the collection and use of personal data gathered through cookies. Such regulations may have a negative effect on businesses, including ours, that collect and use online usage information for consumer acquisition and marketing, may increase the cost of operating a business that collects or uses such information and undertakes online marketing, may also increase regulatory scrutiny and may increase potential civil liability under data protection or consumer protection laws.
We may incur substantial costs to comply with these regulations. The changes could require significant systems changes, limit the effectiveness of our marketing activities, adversely affect our margins, increase costs and subject us to additional liabilities.
We are subject to stringent privacy regulations in China that are broader than those of our other operations.
Although the China Specification is not a mandatory regulation, it nonetheless has a key role in relation to China’s Cyber Security Law in respect of protecting personal information in China. Furthermore, it is likely that the China Specification will be relied on by Chinese government agencies as a standard to determine whether businesses have abided by China’s data protection rules. The China Specification introduced many concepts and protection rules for personal information in China, such as “Data Controller” from GDPR. From a consent perspective the China Specification and GDPR are similar, but the China Specification has broadened the scope of personal sensitive information as compared to GDPR (including but not limited to phone number, transaction record and purchase history, bank account, browser history and e-ID info such as system account, email address and corresponding password) and thus, the application of explicit consent under the China Specification is more far reaching. Furthermore, under the China Specification, the Data Controller must provide the purpose of collecting and using personal information, as well as business functions of such purpose, and the China Specification requires the Data Controller to distinguish its core function from additional functions to ensure the Data Controller will only collect personal information as needed. Our failure to comply with the China Specification could result in governmental enforcement actions, litigation, fines and penalties, which could have a material adverse effect on our business, results of operations, financial condition and prospects.
We are subject to risks related to climate change, including potentially increased legislative and regulatory burdens and changing customer preferences, and we may be subject to related lawsuits, all of which could have a material adverse effect on our business, prospects, financial condition and results of operations.
Climate change may increasingly drive change to existing or new legislation and regulations that may negatively impact our business and shape our customers’ preferences for the products we sell. Further, climate change may adversely impact the economy and changing economic conditions and consumer activity could reduce demand for our products. Fluctuations in weather can also affect demand for our products. For example, milder than normal weather can reduce demand for dehumidifiers and air conditioners. Severe weather or acts of nature, including hurricanes, winter storms, earthquakes, floods and other natural disasters can stress systems, disrupt our operations and cause service outages, production delays and property damage that require incurring additional expenses. All of these factors could have an adverse impact on our business, prospects, financial condition and results of operations.
We may also be subject to climate change-related lawsuits and any defense associated with such litigation could be costly, time-consuming and distracting to management and could have a material adverse effect on our business, prospects, financial condition and results of operations
Risks Relating to the Ownership of our Common Stock
We are an emerging growth company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.
We are an emerging growth company and, for as long as we continue to be an emerging growth company, we intend to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including:
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We intend to take advantage of these and other exemptions until we are no longer an “emerging growth company”. Under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), we will remain an emerging growth company until the earliest of:
● the last day of the fiscal year during which we have total annual gross revenues of $1.07 billion or more;
● the last day of the fiscal year following the fifth anniversary of the completion of our initial public offering, or December 31, 2024;
● the date on which we have issued, during the previous three-year period, more than $1.0 billion in non-convertible debt securities; and
● the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), (i.e., the first day of the fiscal year after we have (1) more than $700.0 million in outstanding common equity held by our non-affiliates, measured each year on the last day of our second fiscal quarter, (2) been public for at least 12 months, and (3) are not eligible to be deemed a “smaller reporting company” because we do not meet the revenue test of the definition of “smaller reporting company”, which includes an initial determination that our annual revenues are more than $100.0 million for the most recently completed fiscal year).
We cannot predict if investors will find our common stock less attractive by our reliance on any of the exemptions afforded emerging growth companies. If some investors find our common stock less attractive because we rely on these exemptions, there may be a less active trading market for our common stock and the market price of our common stock may be more volatile.
In addition, under the JOBS Act, “emerging growth companies” can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption and, as a result, our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies. Section 107 of the JOBS Act provides that we can elect to opt out of the extended transition period at any time, which election is irrevocable.
Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company”, which would allow us to take advantage of many of the same exemptions from disclosure requirements (excluding the exemption from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act) and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
Our share price has been very volatile. Market volatility may affect the value of an investment in our common stock and could subject us to litigation.
Technology stocks have historically experienced high levels of volatility. There has been and could continue to be significant volatility in the market price and trading volume of equity securities. For example, our closing stock price ranged from approximately $2.15 to $47.66 per share from January 1, 2021 to March 15, 2022. The market price of our common stock could be subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including:
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Furthermore, in recent years, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies, and technology companies in particular. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of our common stock. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could also harm our business.
The concentration of our stock ownership will likely limit your ability to influence corporate matters, including the ability to influence the outcome of director elections and other matters requiring stockholder approval.
As of March 8, 2022, our executive officers, directors and the holders of more than 5% of our outstanding common stock in the aggregate beneficially own approximately 11.6% of our common stock. This concentrated control limits your ability to influence corporate matters for the foreseeable future. As a result, these stockholders, acting together, will have significant influence over all matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. Corporate actions might be taken even if other stockholders oppose them. Additionally, these stockholders may cause us to make strategic decisions or pursue acquisitions that could involve risks to you or may not be aligned with your interests. This concentration of ownership might also have the effect of delaying or preventing a change of control of our company that other stockholders may view as beneficial. This control may materially adversely affect the market price of our common stock. In addition, as further described below, we have entered into voting agreements with a number of parties in connection with our initial public offering and in connection with acquisition transactions. We may elect to release one or more parties from voting agreements which could also limit your ability to influence corporate matters for the foreseeable future.
MV II, LLC, Dr. Larisa Storozhenko and Mr. Maximus Yaney (collectively, the “Designating Parties”) have entered into a voting agreement with us (the “Restated Voting Agreement”), pursuant to which each of the Designating Parties agreed to relinquish the right to vote their shares of capital stock of, and any other equity interest in, us (collectively, the “Voting Interests”) by granting our board of directors the sole right to vote all of the Voting Interests as the Designating Parties’ proxyholder. The Voting Interests include all shares of our common stock currently held by the Designating Parties, as well as any of our securities or other equity interests acquired by the Designating Parties in the future. Pursuant to the proxy granted by the Designating Parties, our board of directors is required to vote all of the Voting Interests in direct proportion to the voting of the shares and equity interests voted by all holders other than the Designating Parties. The proxy granted by the Designating Parties under the Restated Voting Agreement is irrevocable. In addition, the Restated Voting Agreement proxyholder may not be changed unless we receive the prior approval of The Nasdaq Stock Market LLC.
The Restated Voting Agreement became effective on June 12, 2019, and it will continue until the earlier to occur of (a) a Deemed Liquidation Event unless, immediately upon such Deemed Liquidation Event, our common stock is and remains listed on The Nasdaq Stock Market LLC, or (b) Mr. Yaney’s death. For purposes of the Restated Voting Agreement, a “Deemed Liquidation Event” means (i) the acquisition of us by another entity by means of any transaction or series of related transactions to which we are party other thana transaction or series of transactions in which the holders of our voting securities outstanding immediately prior to such transaction or series of transactions retain, immediately after such transaction or series of transactions, as a result of our shares held by such holders prior to such transaction or series of transactions, a majority of the total voting power represented by our outstanding voting securities or such other surviving or resulting entity; (ii) a sale, lease or other disposition of all or substantially all of our and our subsidiaries’ assets taken as a whole by means of any transaction or series of related transactions, except where such sale, lease or other disposition is to a wholly-owned subsidiary of us; or (iii) any liquidation, dissolution or winding up of us, whether voluntary or involuntary;
however, a Deemed Liquidation Event shall not include any transaction effected primarily to raise capital for us or a spin-off or similar divestiture of our product or platform as a service business as part of a reorganization of us approved by our board of directors. In addition, the rights and obligations under the Restated Voting Agreement will terminate with respect to shares of capital stock sold by a Designating Party in connection with any arm’s length transaction to a third-party that is not a Designating Party, an affiliate of a Designating Party or any other individual or party that has a direct or indirect familial relationship with any Designating Party.
On December 1, 2020, 9830 Macarthur LLC (“9830”), one of the sellers of the assets of the e-commerce business under the brands Mueller, Pursteam, Pohl and Schmitt and Spiralizer (the “Smash Assets”), entered into a lock-up, voting and standstill agreement with us, pursuant to which 9830 agreed that until December 1, 2025, 9830 will, among other things, vote at each annual or special meeting of our stockholders all shares of common stock held by 9830 in accordance with the recommendations of our board of directors on each matter presented to our stockholders at such meeting.
As a result of our failure to timely file certain financial statements relating to the Smash Assets, we are currently ineligible to file new short form registration statements on Form S-3 or to have resale registration statements declared effective in a timely manner, which may impair our ability to raise capital on terms favorable to us, in a timely manner or at all, or in the case of resale registration statements, could result in an event of default under our credit facilities or a breach of existing obligations to stockholders with registration rights.
Form S-3 permits eligible issuers to conduct registered offerings using a short form registration statement that allows the issuer to incorporate by reference its past and future filings and reports made under the Exchange Act. In addition, Form S-3 enables eligible issuers to conduct primary offerings “off the shelf” under Rule 415 of the Securities Act. The shelf registration process, combined with the ability to forward incorporate information, allows issuers to avoid delays and interruptions in the offering process and to access the capital markets in a more expeditious and efficient manner than raising capital in a standard registered offering pursuant to a Registration Statement on Form S-1. The ability to register securities for resale may also be limited as a result of the loss of Form S-3 eligibility.
The Securities and Exchange Commission rules required us to file certain financial statements relating to the Smash Assets (the “Smash Financial Statements”) no later than February 16, 2021, and we filed such financial statements on May 14, 2021. As a result of our failure to timely file the Smash Financial Statements, we are not currently permitted to use our existing registration statement on Form S-3. As a consequence, absent a waiver of the Form S-3 eligibility requirements, we are not permitted to sell all of the amount of our common stock or other securities we could otherwise sell until at least June 1, 2022, which could adversely affect our ability to run our operations and progress our product development programs. We also will not be permitted to conduct an “at the market offering” absent an effective primary registration statement on Form S-3.
A “short squeeze” due to a sudden increase in demand for shares of our common stock that largely exceeds supply has led to, and may continue to lead to, extreme price volatility in shares of our common stock.
Investors may purchase shares of our common stock to hedge existing exposure or to speculate on the price of our common stock. Speculation on the price of our common stock may involve long and short exposures. To the extent aggregate short exposure exceeds the number of shares of our common stock available for purchase on the open market, investors with short exposure may have to pay a premium to repurchase shares of our common stock for delivery to lenders of our common stock. Those repurchases may in turn, dramatically increase the price of shares of our common stock until additional shares of our common stock are available for trading or borrowing. This is often referred to as a “short squeeze.”
A large proportion of our common stock has been and may continue to be traded by short sellers which may increase the likelihood that our common stock will be the target of a short squeeze. A short squeeze has previously led and could in the future lead to volatile price movements in shares of our common stock that are unrelated or disproportionate to our operating performance or prospects. Stockholders that purchase shares of our common stock during a short squeeze may lose a significant portion of their investment.
The estimates of market opportunity, market size and forecasts of market growth included in our publicly-filed documents may prove to be inaccurate, and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all.
Market opportunity, size estimates and growth forecasts included in our publicly-filed documents are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. For example, several of the reports and data on which our estimates and forecasts are based rely on projections of consumer adoption and incorporate data from secondary sources such as company websites as well as industry, trade and government publications.
Net revenue and operating results are difficult to forecast because they generally depend on the volume, timing and type of orders we receive, all of which are uncertain. We base our expense levels and investment plans on our estimates of total net revenue and gross margins using human judgment combined with our machine learning, natural language processing and data analytics. We cannot be sure the same growth rates, trends and other key performance metrics are meaningful predictors of future growth. If our assumptions and calculations prove to be wrong, we may spend more than we anticipate acquiring and retaining customers or may generate less net revenue than anticipated, any of which could have a negative impact on our business and results of operations. In addition, as we enter a new consumer product market, we may initially provide discounts to customers to gain market traction, and the amount and effect of these discounts may vary greatly. Finally, we are evaluating our total addressable market with respect to new product offerings and new markets. These estimates of total addressable market and growth forecasts are subject to significant uncertainty, are based on assumptions and estimates that may not prove to be accurate and are based on data published by third parties that we have not independently verified. Even if the market in which we compete meets the size estimates and growth forecasted in our publicly-filed documents, our business could fail to grow at similar rates, if at all.
Our business is also affected by general economic and business conditions in the U.S., and we anticipate that it will be increasingly affected by conditions in international markets. In addition, we experience seasonal trends in our business, and our mix of product offerings is highly variable from day-to-day and quarter-to-quarter. Specifically, we have realized a disproportionate amount of our net revenue and earnings for prior fiscal years during warmer weather and summer seasons. If we experience lower than expected net revenue during these periods, it may have a disproportionately large impact on our operating results and financial condition for that year. In anticipation of increased sales activity during the third and fourth quarter, we may incur significant additional expenses, including additional marketing and additional staffing in our customer support operations. In addition, we may experience an increase in our net shipping costs due to complimentary upgrades, split-shipments and additional long-zone shipments necessary to ensure timely delivery for the holiday season. This variability makes it difficult to predict sales and could result in significant fluctuations in our net revenue from period-to-period. A significant portion of our expenses is fixed, and as a result, we may be unable to adjust our spending in a timely manner to compensate for any unexpected shortfall in net revenue. Any failure to accurately predict net revenue or gross margins could cause our operating results to be lower than expected, which could materially adversely affect our financial condition and stock price.
Future sales and issuances of our capital stock, or the perception that such sales may occur, could cause our stock price to decline.
We may issue additional securities following the date of this Annual Report on Form 10-K. Our amended and restated certificate of incorporation authorizes us to issue up to 500,000,000 shares of common stock and 10,000,000 shares of undesignated preferred stock. Future sales and issuances of our capital stock or rights to purchase our capital stock could result in substantial dilution to our existing stockholders. We may sell common stock, convertible securities and other equity securities in one or more transactions at prices and in a manner as we may determine from time to time. If we sell any such securities in subsequent transactions, the ownership of existing stockholders will be diluted, possibly materially. New investors in subsequent transactions could also gain rights, preferences and privileges senior to those of existing holders of our common stock.
Future sales of substantial amounts of our common stock in the public market could reduce the prevailing market prices for our common stock. Substantially all of our outstanding common stock is eligible for sale as are shares of common stock issuable under vested and exercisable stock options. If our existing stockholders sell a large number of shares of our common stock, or the public market perceives that those existing stockholders might sell shares of common stock, the market price of our common stock could decline significantly. Existing stockholder sales might also make it more difficult for us to sell additional equity securities at a time and price that we deem appropriate, or at all.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty, any action asserting a claim against us arising pursuant to the DGCL, our amended and restated certificate of incorporation or our amended and restated bylaws, or any action asserting a claim against us that is governed by the internal affairs doctrine; provided, that, this provision would not apply to suits brought to enforce a duty or liability created by the Securities Act, the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. These choices of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. In addition, stockholders who do bring a claim in the Court of Chancery of the State of Delaware could face additional litigation costs in pursuing any such claim, particularly if they do not reside in or near Delaware. Furthermore, the enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that a court could find these types of provisions to be
inapplicable or unenforceable. If a court were to find the choice of forum provisions in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition.
Anti-takeover provisions in our charter documents and under the General Corporation Law of the State of Delaware (the “DGCL”) could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our management.
Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws may delay or prevent an acquisition of us or a change in our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the DGCL, which prohibits stockholders owning in excess of 15% of the outstanding combined organization voting stock from merging or combining with the combined organization. Although we believe these provisions collectively will provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove then-current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of management.
Anti-takeover provisions in our charter documents could discourage, delay or prevent a change in control of us and may affect the trading price of our common stock.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could significantly reduce the value of shares of our capital stock to a potential acquirer or delay or prevent changes in control or changes in our management without the consent of our board of directors. Our charter documents include the following provisions:
●a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a majority of our board of directors;
●no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
●the exclusive right of our board of directors, unless the board of directors grants such right to the stockholders, to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;
●the required approval of at least two-thirds of the shares entitled to vote to remove a director for cause, and the prohibition on removal of directors without cause;
●the ability of our board of directors to authorize the issuance of shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of stockholders or a hostile acquirer;
●the ability of our board of directors to alter our amended and restated bylaws without obtaining stockholder approval;
●the required approval of at least two-thirds of the shares entitled to vote to adopt, amend or repeal our amended and restated bylaws or repeal the provisions of our amended and restated certificate of incorporation regarding the election and removal of directors;
●a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;
●an exclusive forum provision providing that the Court of Chancery of the State of Delaware will be the exclusive forum for certain actions and proceedings;
●the requirement that a special meeting of stockholders may be called only by the board of directors, the chairperson of the board of directors, the chief executive officer or the president (in the absence of a chief executive officer) which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and
●advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.
These provisions could discourage, delay or prevent a transaction involving a change in control of us. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and cause us to take other corporate actions our stockholders desire.
Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations.
We have $152.0$216.4 million net operating loss carryforwards as of December 31, 2021,2022, which have a full valuation allowance against them. In general, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), a corporation that undergoes an ownership change, which is generally defined as a greater than 50-percentage-point cumulative change by value in the equity ownership of certain stockholders over a rolling three-year period, is subject to limitations on its ability to utilize its pre-change net operating losses (“NOLs”) to offset post-change taxable income. Our existing NOLs may be subject to limitations arising from previous ownership changes, and if we undergo an ownership change, our ability to utilize NOLs could be further limited by Section 382 of the Code and similar state provisions. Future changes in our stock ownership, some of which may be outside of our control, could result in an ownership change under Section 382 of the Code. Furthermore, our ability to utilize NOLs of companies that we may acquire in the future may be subject to limitations. There is also a risk that due to regulatory changes, such as limitations on the use of NOLs, our existing NOLs could expire, decrease in value or otherwise be unavailable to offset future income tax liabilities. For example, the Tax Cuts and Jobs Act resulted in a reduction in the economic benefit of the NOLs and other deferred tax assets available to us. For these reasons, we may not be able to realize a tax benefit from the use of our NOLs, even asif we attain profitability. We have not performed a detailed analysis to determine whether an ownership change under Section 382 of the Code has occurred. The effect of a Section 382 ownership change would be the imposition of an annual limitation on the use of net operating loss carryforwards attributable to periods before the change. Any limitation may result in expiration of all, or a portion of the NOLs or other tax attributes, such as research and development credit carryforwards, before utilization.
Risks Relating to Information and Cyber Security
Accounting adjustments due to changes in circumstances or estimates may require us to write down intangible assets, such as goodwill and may have a material impact on our financial reporting and results of operations.
We operate under one business component which is the same as our reporting unit based on the guidance in ASC Topic 350-20.
We engaged a third-party valuation specialist to assist in performing our goodwill test in December 2021. 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, a form of the market approach.
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, terminal growth rates and the cost of capital. 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. Cost of capital is another significant assumption as the discount rate is used to calculate the current fair value of those projected cash flows. Under the guideline public company method, significant assumptions relate to the selection of appropriate guideline companies and the valuation multiples used in the market analysis.
We believe that the assumptions and estimates made are reasonable and appropriate, and changes in our assumptions and estimates could have a material impact on our reported financial results. In addition, sustained declines in our stock price and related market capitalization could impact key assumptions in the overall estimated fair values of our reporting unit and could result in non-cash impairment charges that could be material to our consolidated balance sheet or results of operations. We began to experience improvement in our operating margins and additional improvement in our products performance before the inclusion of fixed costs. These improvements, coupled with our acquisitions, supported our conclusion that we would generate significant improvements in the operating results. However, even with a sensitivity analysis on projected operating results, we still had significant excess fair-value over our carrying value.
Since December 31, 2020, we had an additional increase in the amount of goodwill through acquisitions made in 2021. Although we have experienced volatility in our share price and short-term forecasts, impacting our going concern analysis due lender covenant risks, we believe we have had no triggering events as our overall long-term forecasts remain materially the same as of December 31, 2021. However, if we continue to experience downward share price volatility or there are material reductions in long-term forecasts the excess fair-value over our carrying value could be reduced significantly and could lead to a triggering event and ultimately to a goodwill impairment charge. We performed a full step one impairment test at 12/31/2021 and concluded no impairment and that our estimated fair-values exceeded our carrying values by 21% as of the year-ended December 31, 2021.
We will continue to closely monitor actual results versus expectations as well as whetherrely on data provided by third parties and to what extent any significant changesloss, reduction in current eventsaccess or conditions, including changes to the impactsincreased costs related thereto of COVID-19 on our business, result in corresponding changes to our expectations about future estimated cash flows, discount rates and market multiples. If our adjusted expectations of the operating results do not materialize, if the discount rate increases (based on increases in interest rates, market rates of return or market volatility) or if market multiples decline, we may be required to record goodwill impairment charges, which may be material.
While we believe our conclusions regarding the estimates of fair value of our reporting units are 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 units serve, the realization of future sales price and volume increases, fluctuations in exchange rates, 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.
On an ongoing basis, we evaluate whether facts and circumstances indicate any impairment of the value of intangible assets. As circumstances change, we cannot assure you that the value of these intangible assets will be realized. If we determine that a significant impairment has occurred, we will be required to write-off the impaired portion of goodwill, which could have a material adverse effect on our business.
We use our technology in various aspects of our business including for new product launches, forecasting, fulfillment and the automation of sales and marketing of our products, among other things. Our ability to successfully use our technology depends to a large extent on our ability to analyze and utilize data, including search engine results, provided by unaffiliated third parties, primarily, Google and Amazon. In the future, these third parties could change their data sharing policies, including making them more restrictive or expensive, or could alter their algorithms, any of which could result in the loss of, or significant impairment to, our ability to collect and analyze useful data. These third parties could also interpret our, or our service providers’, data collection policies or practices as being inconsistent with their policies, which could result in the loss of our ability to collect and use this data.
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Our business, operating results and financial condition could be adversely impacted if our information technology systems or those of third-parties become subject to a data security breach, are disrupted or cease to operate effectively.
We rely heavily on information technology systems to operate our business and we collect, maintain, transmit and store sensitive data including data about our consumers. We also engage and rely upon third parties who engage in the same activities on our behalf. Accordingly, it is vital to maintain constant operation of these systems and to maintain cybersecurity. Our systems and those of third parties that we use in our operations are vulnerable to security risks, including from viruses and worms, phishing attacks, social engineering, hacking, distributed denial-of-service attacks, ransomware, and similar disruptions from the unauthorized tampering with our servers and computer systems or those of third parties that we use in our operations, which could lead to interruptions, delays, loss of critical and sensitive data, and loss of consumer confidence. In addition, insider actors-malicious or otherwise-could cause technical disruptions and/or confidential data leakage. In addition, if a ransomware attack or other cybersecurity incident occurs, either internally or at our third-party technology service providers, we could be prevented from accessing our data or systems, which may cause interruptions or delays in our business operations, cause us to incur material remediation costs, and could subject us to demands to pay a ransom or damage our reputation. Our failure to prevent or mitigate data loss, theft, misuse, or other security breaches or vulnerabilities affecting our or our vendors’ technology and systems, could: expose us or our customers to a risk of loss, disclosure, or misuse of such information; result in litigation, fines, liability, or regulatory action (including under laws related to privacy, data use, data protection, data security, network security, and consumer protection); deter customers from using our stores to buy our products; and harm our business, operating results, financial condition and reputation. We use third party technology and systems for a variety of reasons, including, without limitation, encryption and authentication technology, employee email, content delivery to customers, back-office support, hosting, payment processing and other functions. Despite our security efforts, some of our systems have experienced past security breaches, and, although they did not have a material adverse effect on our operations or financial results, there can be no assurance that future incidents, which we expect to have, will not have material adverse effects on our business, operating results or financial condition. For example on April 25, 2022, we were alerted by a payment processor of a potential data security incident regarding one of our UK websites. This has not resulted in nor do we believe this will result in a material impact on our business. In addition, because the techniques, tools and tactics used in cyber-attacks frequently change and may be difficult to detect for periods of time, we may face difficulties in anticipating and implementing adequate preventative measures or fully mitigating harms after such an attack. It is possible for security vulnerabilities to remain undetected for an extended time period, up to and including several years as was the case in the prior non-material security breach identified in April 2022. The Company’s adoption of remote working, initially driven by the pandemic, may also introduce additional threats or disruptions to our information technology networks and infrastructure. Although we have developed systems and processes that are designed to protect customer data and prevent such incidents, including systems and processes designed to reduce the impact of a security breach at a third-party vendor or customer, such measures cannot provide absolute security and may fail to operate as intended or be circumvented. In addition, our insurance may not provide sufficient coverage to compensate for related losses.
Additionally, we use open source software in our proprietary software AIMEE, and our other sophisticated information technologies and systems, and we expect to continue to use open source software in the future. In addition to risks related to license requirements, use of certain open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties, indemnities or other contractual protections with respect to the software (for example, non-infringement or functionality). Our use of open source software may also present additional security risks because the source code for open source software is publicly available, which may make it easier for hackers and other third parties to determine how to breach our sites and systems that rely on open source software.
Our information technology systems and those of our third parties may be vulnerable from time to time to damage, interruptions and other technical malfunctions including but not limited to breaches, human error, power outages, telecommunication or utility failures, systems failures, natural disasters or other catastrophic events. In addition, growth in our transaction volume or surges in online traffic place additional demands on our systems and could cause or exacerbate slowdowns or interruptions. If any such systems are damaged, or fail to function properly, we may have to make monetary investments to repair or replace the systems and could endure delays in operations. From time to time, we have experienced disruptions to our systems and we expect to continue to experience disruptions. Any material disruption or slowdown of such systems, including the failure to successfully upgrade systems, could have a material impact on many aspects of our operations including our ability to operate on e-commerce marketplaces. Such a loss or delay could have a material adverse impact on our business, operating results and financial condition. Our systems are not fully redundant and our disaster recovery planning may not be sufficient.
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Risks Relating to the Litigation and Government Regulation
Claims, litigation, government investigations, product liability and recalls, and other proceedings may adversely affect our business, operating results and financial condition.
We are, from time to time, involved in various claims, litigation matters and regulatory proceedings that could have a material adverse effect on us. These matters may include personal injury and other tort claims, deceptive trade practice disputes, intellectual property disputes, product recalls, contract disputes, employment and tax matters and other proceedings and litigation, including class actions lawsuits. It is not possible to predict the outcome of pending or future litigation and any such claims, with or without merit, could be time consuming and expensive, and may require the Company to incur substantial costs and divert the resources of management.
We face exposure to product liability and other claims in the event that one of our products is alleged to have resulted in property damage, bodily injury or other adverse effects. In addition, if we are required to, or voluntarily, repair, replace or refund one or more of our products, it could have a material impact on our business, operating results, financial condition and reputation.
In the summer of 2021, the Company received informal notice from a third-party alleging patent infringement with respect to certain transfer paper products sold by the Company. While the Company does not believe it is infringing any active patents of the third party and intends to defend itself vigorously, there can be no assurances that the Company will obtain a satisfactory outcome.
In February 2022, the Company received a notice disputing the Company’s calculation of the earn-out payment to be paid to the prior owners of a transfer paper business acquired by the Company. While the Company believes its calculations are accurate and intends to vigorously defend itself, there can be no assurances that the Company will obtain a satisfactory outcome without unnecessary expense of money, resources or attention of management.
Determining legal reserves or possible losses from claims against us involves judgment and may not reflect the full range of uncertainties and unpredictable outcomes. Until the final resolution of such matters, we may be exposed to losses in excess of the amount recorded, and such excess amounts could have a material effect on our business, results of operations and financial condition. In addition, it is possible that a resolution of any claim, including as a result of a settlement, could require us to make substantial future payments, prevent us from offering certain products or services, or require us to change our business practices each of which could have a material adverse effect on our business, operating results and financial condition.
We must successfully manage compliance with current and expanding laws and regulations, as well as manage new and pending legal and regulatory matters in the periodU.S. and abroad.
We are subject in the ordinary course of our business, in the U.S. and elsewhere, to many statutes, ordinances, rules and regulations that, if violated by us or the third parties we work with, could have a material adverse effect on our business, operating results and financial condition. These laws and regulations include but are not limited to accounting and financial reporting, advertising, anti-bribery and anti corruption, consumer protection, data security and privacy, electronic commerce, employment, intellectual property, product liability, and trade (including tariffs). In addition, increasing governmental and societal attention to environmental, social and governance (ESG) matters, including expanding mandatory and voluntary reporting, diligence and disclosure on topics such as climate change, waste production, water usage, human capital, labor and risk oversight, could expand the nature, scope and complexity of matters that we are required to control, assess and report, each of which can be challenging given our reliance on third party suppliers. These and other rapidly changing laws, regulations, policies and related interpretations as well as increased enforcement actions by various governmental and regulatory agencies, create challenges for us, including our compliance and ethics programs, may alter the environment in which we do business and may increase the write-off occurs.ongoing costs of compliance, which could adversely impact our business, operating results and financial condition. If we are unable to continue to meet these challenges and to comply with all laws, regulations, policies and related interpretations, it could negatively impact our reputation and our business, operating results and financial condition. Additionally, we may in the future be subject to inquiries, investigations, claims, proceedings and requests for information from governmental agencies or private parties, the adverse outcomes of which could harm our business. Failure to successfully manage these new or pending regulatory and legal matters and to resolve such matters without significant liability or damage to our reputation may materially adversely impact our operating results and financial condition. Furthermore, if new legal or regulatory matters result in fines or costs in excess of the amounts accrued to date, that may also materially impact our operating results and financial position.
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U.S. government trade actions could have a material adverse effect on our business, financial position, and results of operation.
Over the past several years, the U.S. government has taken a number of trade actions that impact or could impact our operations, including imposing tariffs on certain goods imported into the United States. As the majority of our products are imported into the United States from China, many of our products are subject to the tariffs imposed under Section 301 of U.S. trade law that have been applied to separate lists of Chinese goods imported into the United States, beginning during the Trump Administration and continuing in the Biden Administration. A number of lawsuits and other legal challenges with respect to the Section 301 tariff actions have been filed and remain pending, which could result in changes to the tariffs. To date, the Biden Administration has effectively maintained and has continued to defend and to enforce these particular trade actions. We are continually evaluating the impact of the current and any possible new tariffs on our supply chain, costs and sales and are considering strategies to mitigate such impact, including reviewing sourcing options, filing requests for exclusion from the tariffs for certain product lines and working with our suppliers. We can provide no assurance that any strategies we implement to mitigate the impact of such tariffs or other trade actions will be successful. Given the uncertainty regarding the scope and duration of these trade actions by the U.S. government or other countries, as well as the potential for additional trade actions, the impact on our operations and results remains uncertain.
Risks Relating to the Ownership of our Common Stock
We are an “emerging growth company” and the reduced disclosure requirements applicable to emerging growth companies may make it more difficult to compare our performance with other public companies and make our common stock less attractive to investors.
We are an “emerging growth company”, as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”), and we take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, we also take advantage of an extended transition period for complying with new or revised accounting standards. This may make comparison of our financial statements with those of another public company that has complied with such new or revised accounting standards difficult or impossible because of the potential differences in accounting standards used. We will lose our status as an emerging growth company no later than December 31, 2024.
The market price and trading volume of our common stock may fluctuate significantly.
The market price and trading volume of our common stock has at times experienced substantial price volatility. There has been, and we expect will continue to be, significant volatility in the market price and trading volume of our common stock. In certain instances these fluctuations have been unrelated or disproportionate to our operating performance and financial condition. In addition, the market price of our common stock may be, and we believe recently has been, significantly impacted by investors covering large short positions in our common stock. In addition, there are many other factors that have caused and may continue to cause the market price of our common stock to fluctuate, including: actual or anticipated variations in our quarterly operating results, or the operating results and financial condition of companies perceived to be similar to us; deterioration and decline in general economic, industry and/or market conditions; changes in estimates of our financial results or recommendations by equity research analysts, including any decision by equity research analysts to initiate or discontinue coverage; announcements by us or our competitors of significant acquisitions, strategic alliances or joint ventures; and changes in our capital structure, such as future issuances of securities or the incurrence of additional debt.
We may be limited by our ability to raise the funding we need to support our growth or to maintain our existing business. Also such funding may be available only by diluting existing stockholders.
The success of our business depends, in part, on our ability to invest significant resources in R&D including for the development of our proprietary technology platform and for the development of new products and services. Our success also depends on our ability to grow through acquisitions. To support our business growth we will likely require additional funds to maintain, grow and respond to business challenges. Accordingly, from time to time we need to engage in equity or debt financings to secure additional funds. If we raise additional funds through issuances of equity or convertible debt securities, that would result in significant dilution to our existing stockholders, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt we may incur may negatively impact our business, financial condition and operating results. We have in the past and may in the future incur debt that allows us to repay such debt using our common stock which could result in significant dilution. Further, we may not be able to obtain additional financing on terms favorable to us, or at all, whether due to issues related to the Company or unrelated to the Company including but not limited to bank failures. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to grow or to respond to business challenges would be significantly limited, and our business could fail or our operating results and financial condition could be adversely affected.
12
Any debt financing secured by us in the future could involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. In addition, we may not be able to continue to acquire the financing needed in order to pursue future acquisitions or similar transactions or we may not be able to raise sufficient equity or equity-like capital without first seeking stockholder approval, which could limit our ability to complete such financing, or to complete any related transaction on a timely basis.
Future sales of our common stock by our insiders, or the perception that these sales may occur, may cause the market price of our common stock to decline.
Our employees, directors and officers, and their affiliates, hold substantial amounts of shares of our common stock. Sales of a substantial number of such shares by these stockholders, or the perception that such sales will occur, may cause the market price of our common stock to decline. Other than our stock ownership guidelines and our restrictions on trading that arise under securities laws (or pursuant to our securities trading policy that is intended to facilitate compliance with securities laws), including the prohibition on trading in securities by or on behalf of a person who is aware of nonpublic material information, we have no restrictions on the right of our employees, directors and officers, and their affiliates, to sell their unrestricted shares of common stock. Our officers and directors periodically sell shares of common stock to cover tax liabilities from prior restricted stock awards.
Future sales and issuances of our capital stock, or the perception that such sales may occur, could cause our stock price to decline.
Future sales and issuances of our capital stock or rights to purchase our capital stock could result in substantial dilution to our existing stockholders. We may sell common stock, convertible securities and other debt or equity securities in one or more transactions at prices and in a manner as we may determine from time to time. If we sell any such securities in subsequent transactions, the ownership of existing stockholders will be diluted, possibly materially. New investors in subsequent transactions could also gain rights, preferences and privileges senior to those of existing holders of our common stock. In addition, we issue to our employees equity awards under our equity incentive plans which could be material in amount.
If our existing stockholders sell a large number of shares of our common stock, or the public market perceives that those existing stockholders might sell shares of common stock, the market price of our common stock could decline significantly. Existing stockholder sales might also make it more difficult for us to sell additional equity securities at a time and price that we deem appropriate, or at all.
There is no guarantee of a continuing public market for you to resell our common stock.
As of the date of this Annual Report, our stock has a minimum closing bid price below $1.00 per share. In general, Nasdaq’s continued listing requirements require, among other things, a minimum closing bid price requirement of $1.00 per share. If a company fails to meet the $1.00 minimum closing bid price requirement for 30 consecutive business days, Nasdaq will send a deficiency notice to the company, advising that it has been afforded a “compliance period” of 180 calendar days to regain compliance with the applicable requirements. In the future, if our common stock remains below the continued listing standard of $1.00 per share or otherwise fails to satisfy any of the Nasdaq continued listing requirements, and if we are unable to cure such deficiency during any subsequent cure period, our common stock could be delisted from the Nasdaq. If our common stock ultimately were to be delisted for any reason, we could face a number of significant material adverse consequences, including limited availability of market quotations for our common stock; limited news and analyst coverage; decreased ability to obtain additional financing; limited liquidity for our stockholders due to thin trading; and the potential loss of confidence by investors, employees and other third parties who we do business with.
Further, we may decide to effect a reverse split of our common stock which could impact the market price for our stock, limit our ability to raise capital while pursuing a reverse split or otherwise limit our ability to execute acquisition transactions and there is no assurance that the market price or trading volume for our common stock will not further decline after announcing or effecting such split.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
As of December 31, 2021, we had offices, including shared workspaces, in seven locations.
Our2022, our principal place of business and corporate headquarters was our New York office with approximately 5,200 square feet of space is our corporate headquarters andwhich is leased for a term of two years expiring April 2023.2023 and has approximately 5,200 square feet of space. Our UK office is a building we own, our China office is leased for a term of three years expiring in May 2024 and our Poland office with approximately 5,000 square feet of space is leased through July 2023.
Our other offices are either shared workspaces or leases with a short-term commitment (month to month).
13
Item 3. Legal Proceedings.
From time to time, we may be involved in various claims and legal proceedings relating to claims arising out of our operations, primarily with respect to the sale of our consumer products. We believe that there are no pending lawsuits or claims that, individually or in the aggregate, may have a material effect on our business, financial condition or operating results.
Item 4. Mine Safety Disclosures.
None.
14
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock is traded on the Nasdaq Capital Market under the symbol “ATER”.
Holders of Record
As of December 31, 2021,2022, there were approximately 152167 holders of record of our common stock.
Stock Performance GraphDividends
The following performance graph and related information shall not be deemed “soliciting material” nor to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent we specifically incorporate it by reference into such filing.
The following graph shows a comparison of our cumulative total returns with those of the Russell 2000 Index and the Standard & Poor’s (“S&P”) 500 Index. At this time, we cannot reasonably identify a comparable peer group due to the fact that the companies we consider to be our competitors encompass a vast range of companies, including traditional and non-traditional consumer good companies, discount stores, traditional retailers, the online platforms of these traditional retail competitors, independent retail stores and e-commerce companies, and most of our competitors are not publicly traded or of a similar market capitalization to ours. During 2021, we joined the Russell 2000 Index and thus, we consider the Russell 2000 Index to be our most comparable peer group index as it is comprised of companies with market capitalizations similar to our own. The graph assumes that the value of an investment in our common stock and in each such index was $100 on June 12, 2019, the date of our initial public offering, and that all dividends have been reinvested. The comparison in the graph below is based on historical data and is not intended to forecast the possible future performance of our common stock.
Dividends
We have never declared or paid any cash dividends on our capital stock.stock. We intend to retain any future earnings, if any, to finance the operation and expansion of our business, and do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay dividends will be made at the discretion of our board of directors or any authorized committee thereof after considering our financial condition, results of operations, capital requirements, business prospects and other factors our board of directors or such committee deems relevant, and subject to the restrictions contained in our current or future financing instruments. Pursuant to the Credit Agreement, dated as of December 22, 2021, with Midcap Funding IV Trust as Agent (“MidCap”) and the
lenders party thereto, we are restricted from declaring any dividends or other distributions, subject to exceptions for certain of our subsidiaries.
Securities Authorized for Issuance Under Equity Compensation Plans
See Item 12 of Part III of this Annual Report regarding information about securities authorized for issuance under our equity compensation plans.
Unregistered Sales of Equity Securities
On October 29, 2021, we entered into a consulting agreement with an advisory firm, pursuant to which the advisory firm agreed to provide us with certain management consulting, business and advisory services. As partial consideration for $0.2 million of the services, we issued the advisory firm 500,000 shares of our restricted common stock.
On November 18, 2021, we issued an aggregate of 1,408,242 restricted shares of our common stock to Healing Solutions, LLC and related individuals to settle our earn-out obligations in connection with our acquisition of the Healing Solutions Assets.
On December 30, 2021, we issued 15,000 restricted shares of our common stock to a consultant, Sam Appelbaum, as consideration for less than $0.1 million of services rendered.
The issuance of the foregoing securities was not registered under the Securities Act in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated by the SEC, and in reliance on similar exemptions under applicable state laws.
None
Item 6. Reserved
15
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations contains forward-looking statements that involve a number of risks, uncertainties and assumptions. Actual events or results may differ materially from our expectations. Important factors that could cause actual results to differ materially from those stated or implied by our forward-looking statements include, but are not limited to, those set forth in Part I, “Item 1A. Risk Factors” in this Annual Report. All forward-looking statements included in this Annual Report are based on information available to us as of the time we file this Annual Report and, except as required by law, we undertake no obligation to update publicly or revise any forward-looking statements.
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 fourteenfifteen brands include, hOmeLabs; Vremi; Squatty Potty; Xtava; RIF6; Aussie Health; Holonix; Truweo; Mueller; Pursteam; Pohl and Schmitt; Spiralizer; Healing Solutions; and Photo Paper Direct.Direct and Step and Go.
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 includes Thanksgiving 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:
|
|
|
|
|
|
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 theThe impact of the COVID-19 pandemic on the global supply chain, we have been
forced to increase our inventory on hand to avoid disruption in sales. Thethe unpredictability of container availability, space on vessels and shipping lead times, as well as associated manufacturing lead time, has forcedled us to secure more inventory upfront.upfront which affected our business and operating results in 2022. Having more inventory on hand not only impacts our working capital but also requires us to increase our storage capacity, (warehouse network)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 $0.5 million in net revenue per year on average.
| Year-Ended December 31, |
| |||||||||
| 2019 |
|
| 2020 |
|
| 2021 |
| |||
Launches of new products |
| 32 |
|
|
| 37 |
|
|
| 40 |
|
Our growth in direct revenue can be impacted by the timing and the season in which products are launched as well as the impact of mergers and acquisitions.acquisitions.
Further 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 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 of Russia’s invasion of Ukraine on our business including its effects on the global economy, 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—Revenue—We derive our revenue from the sale of consumer products, primarily in the U.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.
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 from China. We contract manufacturers, predominantly in China, 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, 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.
Expenses
Expenses:
Research and Development Expenses—Research and development expenses include compensation and employee benefits for technology development employees, travel-related costs and fees paid to outside consultants related to the development of our intellectual property.
16
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 (“FBA”) or fulfilled by Walmart (“WFS”). 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, productsProducts 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 Two Day Prime certified, allowing us to deliver our sales through Amazon to approximately 76% of the U.S.,most customers within one day and to over 99% of the U.S. withinor two days, based on our sales history.days. 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”) with MidCap Funding IV Trust (“MidCap”) and our term loans in 2021 with High Trail Investments SA LLC (“High Trail SA”) and High Trail Investments ON LLC (“High Trail ON” and, together with High Trail SA, “High Trail”).
17
Results of Operations
Comparison of Years-Ended December 31, 20202021 and 20212022
The following table summarizes our results of operations for the years-ended December 31, 20202021 and 2021, 2022, together with the changes in those items in dollars and percentage:
|
| Year-Ended December 31, |
|
| Change |
|
| Year-Ended |
|
| Change |
|
| ||||||||||||||||||||
|
| 2020 |
|
| 2021 |
|
| Amount |
|
| % |
|
| 2021 |
|
| 2022 |
|
| Amount |
|
| % |
|
| ||||||||
|
| (in thousands, except percentages) |
|
| (in thousands, except percentages) |
|
| ||||||||||||||||||||||||||
NET REVENUE |
| $ | 185,704 |
|
| $ | 247,767 |
|
| $ | 62,063 |
|
|
| 33.4 | % |
| $ | 247,767 |
|
| $ | 221,170 |
|
| $ | (26,597 | ) |
|
| (10.7 | ) | % |
COST OF GOODS SOLD |
|
| 100,958 |
|
|
| 125,904 |
|
|
| 24,946 |
|
|
| 24.7 |
|
|
| 125,904 |
|
|
| 115,652 |
|
|
| (10,252 | ) |
|
| (8.1 | ) | % |
GROSS PROFIT |
|
| 84,746 |
|
|
| 121,863 |
|
|
| 37,117 |
|
|
| 43.8 |
|
|
| 121,863 |
|
|
| 105,518 |
|
|
| (16,345 | ) |
|
| (13.4 | ) | % |
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Sales and distribution expenses (1) |
|
| 68,005 |
|
|
| 127,369 |
|
|
| 59,364 |
|
|
| 87.3 |
| |||||||||||||||||
Research and development expenses (1) |
|
| 8,130 |
|
|
| 9,837 |
|
|
| 1,707 |
|
|
| 21.0 |
| |||||||||||||||||
General and administrative expenses (1) |
|
| 30,631 |
|
|
| 45,099 |
|
|
| 14,468 |
|
|
| 47.2 |
| |||||||||||||||||
Settlement of a contingent earnout liability |
|
| — |
|
|
| 4,164 |
|
|
| 4,164 |
|
|
| 100.0 |
| |||||||||||||||||
Sales and distribution (1) |
|
| 127,369 |
|
|
| 121,139 |
|
|
| (6,230 | ) |
|
| (4.9 | ) | % | ||||||||||||||||
Research and development (1) |
|
| 9,837 |
|
|
| 6,012 |
|
|
| (3,825 | ) |
|
| (38.9 | ) | % | ||||||||||||||||
General and administrative (1) |
|
| 45,099 |
|
|
| 38,239 |
|
|
| (6,860 | ) |
|
| (15.2 | ) | % | ||||||||||||||||
Impairment loss on goodwill |
|
| — |
|
|
| 120,409 |
|
|
| 120,409 |
|
|
| 100.0 |
| % | ||||||||||||||||
Impairment loss on intangibles |
|
| — |
|
|
| 3,118 |
|
|
| 3,118 |
|
|
| 100.0 |
| % | ||||||||||||||||
Settlement of a contingent earn-out liability |
|
| 4,164 |
|
|
| — |
|
|
| (4,164 | ) |
|
| (100.0 | ) | % | ||||||||||||||||
Change in fair value of contingent earn-out liabilities |
|
| 12,731 |
|
|
| (30,529 | ) |
|
| (43,260 | ) |
|
| -339.8 |
|
|
| (30,529 | ) |
|
| (5,240 | ) |
|
| 25,289 |
|
|
| 82.8 |
| % |
TOTAL OPERATING EXPENSES: |
|
| 119,497 |
|
|
| 155,940 |
|
|
| 36,443 |
|
|
| 30.5 |
|
|
| 155,940 |
|
|
| 283,677 |
|
|
| 127,737 |
|
|
| 81.9 |
| % |
OPERATING LOSS |
|
| (34,751 | ) |
|
| (34,077 | ) |
|
| 674 |
|
|
| -1.9 |
|
|
| (34,077 | ) |
|
| (178,159 | ) |
|
| (144,082 | ) |
|
| 422.8 |
| % |
INTEREST EXPENSE—net |
|
| 4,979 |
|
|
| 12,655 |
|
|
| 7,676 |
|
|
| 154.2 |
|
|
| 12,655 |
|
|
| 2,603 |
|
|
| (10,052 | ) |
|
| (79.4 | ) | % |
GAIN ON EXTINGUISHMENT OF SELLER NOTE |
|
| — |
|
|
| (2,012 | ) |
|
| (2,012 | ) |
|
| (100.0 | ) | % | ||||||||||||||||
LOSS ON INITIAL ISSUANCE OF EQUITY |
|
| — |
|
|
| 18,669 |
|
|
| 18,669 |
|
|
| 100.0 |
| % | ||||||||||||||||
CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITY |
|
| — |
|
|
| 3,254 |
|
|
| 3,254 |
|
|
| 100.0 |
|
|
| 3,254 |
|
|
| — |
|
|
| (3,254 | ) |
|
| (100.0 | ) | % |
LOSS ON EXTINGUISHMENT OF DEBT |
|
| 2,037 |
|
|
| 138,859 |
|
|
| 136,822 |
|
|
| 6,716.8 |
|
|
| 138,859 |
|
|
| — |
|
|
| (138,859 | ) |
|
| (100.0 | ) | % |
CHANGE IN FAIR VALUE OF WARRANT LIABILITY |
|
| 21,338 |
|
|
| 26,455 |
|
|
| 5,117 |
|
|
| 24.0 |
|
|
| 26,455 |
|
|
| (470 | ) |
|
| (26,925 | ) |
|
| (101.8 | ) | % |
LOSS ON INITIAL ISSUANCE OF WARRANTS |
|
| — |
|
|
| 20,147 |
|
|
| 20,147 |
|
|
| 100.0 |
|
|
| 20,147 |
|
|
| — |
|
|
| (20,147 | ) |
|
| (100.0 | ) | % |
OTHER EXPENSE (INCOME)—net |
|
| (27 | ) |
|
| 45 |
|
|
| 72 |
|
|
| -266.7 |
|
|
| 45 |
|
|
| (281 | ) |
|
| (326 | ) |
|
| (728.9 | ) | % |
LOSS BEFORE INCOME TAXES |
|
| (63,078 | ) |
|
| (235,492 | ) |
|
| (172,414 | ) |
|
| 273.3 |
|
|
| (235,492 | ) |
|
| (196,668 | ) |
|
| 38,824 |
|
|
| (16.5 | ) | % |
PROVISION FOR INCOME TAXES |
|
| 48 |
|
|
| 532 |
|
|
| 484 |
|
|
| 1008.3 |
| |||||||||||||||||
PROVISION (BENEFIT) FOR INCOME TAXES |
|
| 532 |
|
|
| (376 | ) |
|
| (908 | ) |
|
| (170.7 | ) | % | ||||||||||||||||
NET LOSS |
| $ | (63,126 | ) |
| $ | (236,024 | ) |
| $ | (172,898 | ) |
|
| 273.9 | % |
| $ | (236,024 | ) |
| $ | (196,292 | ) |
| $ | 39,732 |
|
|
| (16.8 | ) | % |
(1)Amounts include stock-based compensation expense as follows:follows:
|
| Years-Ended December 31, |
|
| Change |
|
| Years-Ended December 31, |
|
| Change |
|
| ||||||||||||||||||||
|
| 2020 |
|
| 2021 |
|
| Amount |
|
| % |
|
| 2021 |
|
| 2022 |
|
| Amount |
|
| % |
|
| ||||||||
|
| (in thousands, except percentages) |
|
| (in thousands, except percentages) |
|
| ||||||||||||||||||||||||||
Sales and distribution expenses |
| $ | 2,533 |
|
| $ | 6,809 |
|
| $ | 4,276 |
|
|
| 168.8 | % |
| $ | 6,809 |
|
| $ | 5,014 |
|
| $ | (1,795 | ) |
|
| (26.4 | ) | % |
Research and development expenses |
|
| 3,965 |
|
|
| 5,339 |
|
|
| 1,374 |
|
|
| 34.7 | % |
|
| 5,339 |
|
|
| 1,871 |
|
|
| (3,468 | ) |
|
| (65.0 | ) | % |
General and administrative expenses |
|
| 16,218 |
|
|
| 16,839 |
|
|
| 621 |
|
|
| 3.8 | % |
|
| 16,839 |
|
|
| 7,709 |
|
|
| (9,130 | ) |
|
| (54.2 | ) | % |
Total stock-based compensation expense |
| $ | 22,716 |
|
| $ | 28,987 |
|
| $ | 6,271 |
|
|
| 27.6 | % |
| $ | 28,987 |
|
| $ | 14,594 |
|
| $ | (14,393 | ) |
|
| (49.7 | ) | % |
18
The following table sets forth the components of our results of operations as a percentage of net revenue:
|
| Year-Ended |
|
| |||||||||||||
|
| Year-Ended December 31, |
|
| 2021 |
|
| 2022 |
|
| |||||||
|
| 2020 |
|
| 2021 |
|
| (in thousands, except percentages) |
|
| |||||||
NET REVENUE |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 |
| % |
| 100.0 |
| % |
COST OF GOODS SOLD |
|
| 54.4 |
|
|
| 50.8 |
|
|
| 50.8 |
|
|
| 52.3 |
|
|
GROSS PROFIT |
|
| 45.6 |
|
|
| 49.2 |
|
|
| 49.2 |
|
|
| 47.7 |
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Sales and distribution expenses |
|
| 36.6 |
|
|
| 51.4 |
| |||||||||
Research and development expenses |
|
| 4.4 |
|
|
| 4.0 |
| |||||||||
General and administrative expenses |
|
| 16.5 |
|
|
| 18.2 |
| |||||||||
Settlement of a contingent earnout liability |
|
| — |
|
|
| 1.7 |
| |||||||||
Sales and distribution |
|
| 51.4 |
|
|
| 54.8 |
|
| ||||||||
Research and development |
|
| 4.0 |
|
|
| 2.7 |
|
| ||||||||
General and administrative |
|
| 18.2 |
|
|
| 17.3 |
|
| ||||||||
Impairment loss on goodwill |
|
| — |
|
|
| 54.4 |
|
| ||||||||
Impairment loss on intangibles |
|
| — |
|
|
| 1.4 |
|
| ||||||||
Settlement of a contingent earn-out liability |
|
| 1.7 |
|
|
| — |
|
| ||||||||
Change in fair value of contingent earn-out liabilities |
|
| 6.9 |
|
|
| (12.3 | ) |
|
| (12.3 | ) |
|
| (2.4 | ) |
|
TOTAL OPERATING EXPENSES: |
|
| 64.4 |
|
|
| 63.0 |
|
|
| 63.0 |
|
|
| 128.2 |
|
|
OPERATING LOSS |
|
| (18.8 | ) |
|
| (13.8 | ) |
|
| (13.8 | ) |
|
| (80.5 | ) |
|
INTEREST EXPENSE—net |
|
| 2.7 |
|
|
| 5.1 |
|
|
| 5.1 |
|
|
| 1.2 |
|
|
GAIN ON EXTINGUISHMENT OF SELLER NOTE |
|
| — |
|
|
| (0.9 | ) |
| ||||||||
LOSS ON INITIAL ISSUANCE OF EQUITY |
|
| — |
|
|
| 8.4 |
|
| ||||||||
CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITY |
|
| — |
|
|
| 1.3 |
|
|
| 1.3 |
|
|
| — |
|
|
LOSS ON EXTINGUISHMENT OF DEBT |
|
| 1.1 |
|
|
| 56.0 |
|
|
| 56.0 |
|
|
| — |
|
|
CHANGE IN FAIR VALUE OF WARRANT LIABILITY |
|
| 11.5 |
|
|
| 10.7 |
|
|
| 10.7 |
|
|
| (0.2 | ) |
|
LOSS ON INITIAL ISSUANCE OF WARRANTS |
|
| — |
|
|
| 8.1 |
|
|
| 8.1 |
|
|
| — |
|
|
OTHER EXPENSE (INCOME)—net |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (0.1 | ) |
|
LOSS BEFORE INCOME TAXES |
|
| (34.1 | ) |
|
| (95.0 | ) |
|
| (95.0 | ) |
|
| (88.9 | ) |
|
PROVISION FOR INCOME TAXES |
|
| — |
|
|
| 0.3 |
| |||||||||
PROVISION (BENEFIT) FOR INCOME TAXES |
|
| 0.3 |
|
|
| (0.2 | ) |
| ||||||||
NET LOSS |
|
| (34.1 | )% |
|
| (95.3 | )% |
|
| (95.3 | ) | % |
| (88.7 | ) | % |
Net Revenue
Revenue by Product Categories:
The following table sets forth our net revenue disaggregated by product categories:
|
| Year-Ended December 31, |
|
| Change |
|
| Year-Ended |
|
| Change |
|
| ||||||||||||||||||||
|
| 2020 |
|
| 2021 |
|
| Amount |
|
| % |
|
| 2021 |
|
| 2022 |
|
| Amount |
|
| % |
|
| ||||||||
|
| (in thousands, except percentages) |
|
|
|
|
|
| (in thousands, except percentages) |
|
| ||||||||||||||||||||||
Direct |
| $ | 164,218 |
|
| $ | 235,817 |
|
| $ | 71,599 |
|
|
| 43.6 | % |
| $ | 235,817 |
|
| $ | 214,168 |
|
| $ | (21,649 | ) |
|
| (9.2 | ) | % |
Wholesale |
|
| 20,150 |
|
|
| 11,528 |
|
|
| (8,622 | ) |
|
| (42.8 | )% |
|
| 11,950 |
|
|
| 7,002 |
|
|
| (4,948 | ) |
|
| (41.4 | ) | % |
Managed PaaS |
|
| 1,336 |
|
|
| 422 |
|
|
| (914 | ) |
|
| (68.4 | )% | |||||||||||||||||
Net revenue |
| $ | 185,704 |
|
| $ | 247,767 |
|
| $ | 62,063 |
|
|
| 33.4 | % |
| $ | 247,767 |
|
| $ | 221,170 |
|
| $ | (26,597 | ) |
|
| (10.7 | ) | % |
19
Net revenue increased $62.1decreased $26.6 million, or 33.4%10.7%, during the year-ended December 31, 20212022 to $247.8$221.2 million, compared to $185.7$247.8 million for the year-ended December 31, 2020. 2021. The increasedecrease in net revenue was primarily attributable to an increasea decrease in direct net revenue of $71.6$21.6 million, or a 43.6% increase.9.2% decrease. This was primarily due to softness in consumer demand partially offset by liquidation of higher priced excess inventory. Direct net revenue consists of both organic net revenue and net revenue from our mergers and acquisitions (“M&A”). For the year-ended December 31, 2022, organic revenue was $201.9 million and revenue from our M&A businesses was $11.5 million. For the year-ended December 31, 2021, organic revenue was $118.4 million and revenue from our M&A businesses was $120.9 million. For the year-ended December 31, 2020, organic revenue was $147.9 million and revenue from our M&A businesses was $16.3 million. Our organic revenue decreasedincreased by $29.5$83.5 million, or 19.9%70.5%, during the year-ended December 31, 2021,2022, as compared to the year-ended December 31, 2020. This decrease was primarily driven by reduced sales volume, which we attribute to both reduced 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. Included in our2021 as M&A net revenue has moved into organic net revenue for the year-ended December 31, 2021 is approximately $15.7 million of revenue for products launched in 2021. Included in our organic net revenue for the year-ended December 31, 2020 is approximately $23.6 million of revenue for products launched in 2020.after one year from purchase.
We also saw a decrease in wholesale revenue of $8.6$5.0 million versus the prior year, primarily from a decrease in the sale of personal protective equipment (“PPE”) in the year-ended December 31, 20212022.. Finally, we saw a decrease in Managed PaaS revenue of $0.9 million in the year-ended December 31, 2021.
|
| Year-Ended December 31, |
|
| Year-Ended December 31, |
| ||||||||||
|
| 2020 |
|
| 2021 |
|
| 2021 |
|
| 2022 |
| ||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||
Heating, cooling and air quality |
| $ | 78,424 |
|
| $ | 73,685 |
|
| $ | 73,685 |
|
| $ | 67,797 |
|
Kitchen appliances |
|
| 29,711 |
|
|
| 43,180 |
|
|
| 43,180 |
|
|
| 40,551 |
|
Health and beauty |
|
| 26,070 |
|
|
| 15,579 |
|
|
| 15,579 |
|
|
| 17,485 |
|
Personal protective equipment |
|
| 15,488 |
|
|
| 6,073 |
|
|
| 6,073 |
|
|
| 1,564 |
|
Cookware, kitchen tools and gadgets |
|
| 14,868 |
|
|
| 22,933 |
|
|
| 22,933 |
|
|
| 19,526 |
|
Home office |
|
| 7,669 |
|
|
| 12,352 |
|
|
| 12,352 |
|
|
| 13,322 |
|
Housewares |
|
| 3,277 |
|
|
| 33,951 |
|
|
| 33,951 |
|
|
| 33,041 |
|
Essential oils and related accessories |
|
| — |
|
|
| 27,444 |
|
|
| 27,444 |
|
|
| 23,604 |
|
Other |
|
| 8,861 |
|
|
| 12,148 |
|
|
| 12,570 |
|
|
| 4,280 |
|
Total net product revenue |
|
| 184,368 |
|
|
| 247,345 |
| ||||||||
Managed PaaS |
|
| 1,336 |
|
|
| 422 |
| ||||||||
Total net revenue |
| $ | 185,704 |
|
| $ | 247,767 |
|
| $ | 247,767 |
|
| $ | 221,170 |
|
Heating, cooling and air quality accounted for $73.7$67.8 million in net revenue for the year-ended December 31, 20212022 compared to $78.4$73.7 million for the year-ended December 31, 2020.2021. This decrease was primarily driven by reduced sales volume, which we attribute to both reduced e-commerceconsumer demand due to the reopening of brick & mortar retail,from inflationary pressure on consumer spending and increased salesales prices due to global supply chain disruptions and inventory shorts due to delayed receiptoffset by liquidation of goods.higher priced inventory.
Kitchen appliances accounted for $43.2$40.6 million in net revenue for the year-ended December 31, 20212022 compared to $29.7 $43.2 million in net revenue for the corresponding period in 2020, an increase2021, a decrease of $13.5$2.6 million. This decrease was primarily driven by reduced sales volume, which we attribute to reduced consumer demand from inflationary pressure on consumer spending, increased sales prices due to global supply chain disruption which has reduced our sales velocity offset by liquidation of higher priced inventory.
million from new products launched
Health and growth in our existing products during the year-ended December 31, 2021, including M&A businesses. Cookware, kitchen tools and gadgetsbeauty accounted for approximately $22.9$17.5 million in net revenue for the year-ended December 31, 20212022 compared to $14.9$15.6 million in net revenue for the corresponding period in 2020,2021, an increase of $8.1million from new products launched and growth in our existing products during the year-ended December 31, 2021, including M&A businesses. Net revenue from housewares increased approximately $30.7million from growth in our existing products and$1.9 million. The increase is primarily attributable to new products obtained through M&A businesses. We started selling essentialpartially offset by reduced consumer demand.
Cookware, kitchen tools and gadgets accounted for $19.5 million in net revenue for the year-ended December 31, 2022 compared to $22.9 million in net revenue for the year-ended December 31, 2021. The decrease of $3.4 million is driven by reduced sales volume, which we attribute to reduced consumer demand from inflationary pressures on consumer spending, increased sales prices due to global supply chain disruption which has reduced our sales velocity offset by liquidation of higher priced inventory.
Housewares accounted for $33.0 million in net revenue for the year-ended December 31, 2022 compared to $34.0 in net revenue for the year-ended December 31, 2021. The decrease in revenue of $1.0 million is primarily attributable to reduced consumer demand partially offset by new products obtained through acquisitions.
Essential oils and related accessories accounted for $23.6 million in 2021 via M&A, which generatednet revenue for year-ended December 31, 2022 compared to $27.4 million in net revenue for the year-ended December 31, 2021. The decrease in net revenue of $3.8 million is primarily driven by reduced sales volume, which we attribute to reduced consumer demand for inflationary pressure on consumer spending, increased sales prices due to global supply disruptions and inventory shorts due to manufacturing delays.
20
Cost of Goods Sold and Gross Margin
|
| Year-Ended December 31, |
|
| Change |
|
| Year-Ended December 31, |
|
| Change |
|
| ||||||||||||||||||||
|
| 2020 |
|
| 2021 |
|
| Amount |
|
| % |
|
| 2021 |
|
| 2022 |
|
| Amount |
|
| % |
|
| ||||||||
|
| (in thousands, except percentages) |
|
| (in thousands, except percentages) |
|
| ||||||||||||||||||||||||||
Cost of goods sold |
| $ | 100,958 |
|
| $ | 125,904 |
|
| $ | 24,946 |
|
|
| 24.7 | % |
| $ | 125,904 |
|
| $ | 115,652 |
|
| $ | (10,252 | ) |
|
| (8.1 | ) | % |
Gross profit |
| $ | 84,746 |
|
| $ | 121,863 |
|
| $ | 37,117 |
|
|
| 43.8 | % |
| $ | 121,863 |
|
| $ | 105,518 |
|
| $ | (16,345 | ) |
|
| (13.4 | ) | % |
Cost of goods sold increaseddecreased by $24.9$10.3 million from $100.9$125.9 million for the year-ended December 20, 20202021 to $125.9$115.7 million for the year-ended December 21, 2021.2022 primarily from reduced sales volume. The increasedecrease in cost of goods sold wasis primarily attributable to an increase the decrease of $42.9$45.5 million from our M&A businesses, offset by a $10.5 million decrease in cost of goods sold from our acquired businesses, as acquisitions move into organic business and $7.5 after one year of purchase, partially offset by an increase in cost of goods sold of $29.5 million from PPE.our organic businesses.
Gross profit improveddecreased from 45.6% for the year-ended December 31, 2020 to 49.2% for the year-ended December 31, 2021.2021 to 47.7% for the year-ended December 31, 2022. The improvementdecrease in gross margin was dueprofit is primarily attributable to a changethe impact of increased costs of supply chain and liquidation of high priced excess inventory. This is partially offset by product mix as our net revenue increased from our M&A businesses, which have a higher gross margin of 59.2% than our organic business of 40.9%.gross margin. The majority of our M&A businesses’businesses' net revenue tends to be from smaller products that have higher gross margins versus our organic business,business' net revenue, which tend to be oversized goods that havewith lower gross margins.margin. We expect to see future impacts in our gross margin on bothfor the first half of 2023 due to our M&A and organic businesses as the internationalexpectation of continued liquidation of high priced excess inventory partially offset by improving shipping container crisis continues to drive shipping container costs higher and cause reductions in delivery reliability and other, which also increases related shipping container delivery costs, and other inflationary pressures.rates.
Sales and Distribution Expenses
|
| Year-Ended December 31, |
|
| Change |
| ||||||||||
|
| 2020 |
|
| 2021 |
|
| Amount |
|
| % |
| ||||
|
| (in thousands, except percentages) |
| |||||||||||||
Sales and distribution expenses |
| $ | 68,005 |
|
| $ | 127,369 |
|
| $ | 59,364 |
|
|
| 87.3 | % |
|
| Year-Ended December 31, |
|
| Change |
|
| ||||||||||
|
| 2021 |
|
| 2022 |
|
| Amount |
|
| % |
|
| ||||
|
| (in thousands, except percentages) |
|
| |||||||||||||
Sales and distribution expenses |
| $ | 127,369 |
|
| $ | 121,139 |
|
| $ | (6,230 | ) |
|
| (4.9 | ) | % |
Sales and distribution expenses which included e-commerce platform commissions, online advertising and logistics expenses (i.e., variable sales and distribution expense), increaseddecreased to $121.1 million for the year-ended December 31, 2022 from $127.4 million for the year-ended December 31, 2021 from $68.0 million for the year-ended December 31, 2020. This increase is primarily attributable to the increase in the volume of products sold in the year- ended December 31, 2021, of $43.1 million as2021. Although net revenue decreased year over year, our e-commerce platform commissions, online advertising, selling and logistics expenses increased towere flat at $103.3 million infor the year- endedyear-ended December 31, 2021 as compared2022 and December 31, 2021. This is attributable to $60.2 millionhigher storage costs and fulfillment costs due to fuel surcharges, an increase in the prior period. Amazon fees, and marketing investments in certain businesses.
Our sales and distribution fixed costs (e.g., salary and office expenses) increaseddecreased to $17.3 million for the year- ended December 31, 2021 from $5.2$17.9 million for the year-ended December 31, 20202022 from $24.1 million for the year-ended December 31, 2021 primarily due to approximately $4.1 million of bad debt reserve from our dispute with a certain PPE supplier approximately $2.0 million of professional fees from transition services charges from certain of our M&A businesses,which was recorded during the year-ended December 2021 and headcount expenses of $5.2 million.did not recur in 2022. Sales and distribution expenses for the year- endedyear-ended December 31, 20212022 included an increasea decrease in stock-based compensation expense of $4.3 million as the prior period included reversals of expense of certain restricted stock awards granted pursuant to the 2019 Equity Plan, which restricted stock awards were canceled upon termination of certain employees.$1.8 million.
As a percentage of net revenue, sales and distribution expenses increased to 54.8% for the year-ended December 31, 2022 from 51.4% for the year-ended December 31, 2021 from 36.6% for the year-ended December 31, 2020 primarily from an increase in last mile shipping costs, bad debt reserve (1.7% as a percentage of net revenue), professional fees from transition services (0.8% as a percentage of net revenue) and stock-based compensation expense (1.7% as a percentage of net revenue).2021. E-commerce platform commissions, online advertising, selling and logisticslogistic expenses included within sales and distribution expenses, as a percentage of net revenue, were 41.7%46.7% for the year-ended December 31, 2021 as2022 compared to 32.4%41.7% for the year-ended December 31, 2020.2021. This rate increase is predominantly dueprimarily attributable to product mix, an increase in storage costs, an increase in e-commerce platform service provider fulfillment fees, and to thean increase in last mile shipping costs, specifically aroundfor oversized goods, due to the demand on those third-party providers’third party providers' delivery networks. We expect to see these cost increases continue in the near-term.network.
Research and Development Expenses
|
| Year-Ended December 31, |
|
| Change |
| ||||||||||
|
| 2020 |
|
| 2021 |
|
| Amount |
|
| % |
| ||||
|
| (in thousands, except percentages) |
|
|
| |||||||||||
Research and development expenses |
| $ | 8,130 |
|
| $ | 9,837 |
|
| $ | 1,707 |
|
|
| 21.0 | % |
|
| Year-Ended December 31, |
|
| Change |
|
| ||||||||||
|
| 2021 |
|
| 2022 |
|
| Amount |
|
| % |
|
| ||||
|
| (in thousands, except percentages) |
|
|
| ||||||||||||
Research and development expenses |
| $ | 9,837 |
|
| $ | 6,012 |
|
| $ | (3,825 | ) |
|
| (38.9 | ) | % |
The increasedecrease in research and development expenses was primarily attributable to an increase ofa decrease in stock-based compensation expense of approximately $1.4 million from expenses of certain restricted stock awards granted.$3.5 million.
21
General and Administrative Expenses
|
| Year-Ended December 31, |
|
| Change |
| ||||||||||
|
| 2020 |
|
| 2021 |
|
| Amount |
|
| % |
| ||||
|
| (in thousands, except percentages) |
|
|
| |||||||||||
General and administrative expenses |
| $ | 30,631 |
|
| $ | 45,099 |
|
| $ | 14,468 |
|
|
| 47.2 | % |
|
| Year-Ended December 31, |
|
| Change |
|
| ||||||||||
|
| 2021 |
|
| 2022 |
|
| Amount |
|
| % |
|
| ||||
|
| (in thousands, except percentages) |
|
|
| ||||||||||||
General and administrative expenses |
| $ | 45,099 |
|
| $ | 38,239 |
|
| $ | (6,860 | ) |
|
| (15.2 | ) | % |
The increasedecrease in general and administrative expenses was primarily due to a decrease in stock-based compensation expense of $9.2 million partially offset by an increase of professional fees of approximately $4.1$2.6 million related to M&Alegal settlement fees (See note 12 of Consolidated Financial Statements in this annual report on form 10-K) and $1.7 million in inventory donations.
Impairment loss on Goodwill
|
| Year-Ended December 31, |
|
| Change |
|
| ||||||||||
|
| 2021 |
|
| 2022 |
|
| Amount |
|
| % |
|
| ||||
|
| (in thousands, except percentages) |
|
| |||||||||||||
Goodwill |
| $ | — |
|
| $ | (120,409 | ) |
| $ | (120,409 | ) |
|
| (100.0 | ) | % |
We evaluated current economic conditions during 2022, including the impact of the Federal Reserve further increasing the risk-free interest rate, as well as the inflationary pressure on product and labor costs including legal, audit and internal control related fees,operational impacts attributable to continued global supply chain disruptions. We believe that these conditions were factors in our market capitalization falling below the book value of net assets during 2022. Accordingly, we concluded a triggering event had occurred and performed interim goodwill impairment analyses during the three months ended March 31, 2022 and September 30, 2022 which resulted in impairment charges of $29.0 million and $90.9 million, respectively. There was no remaining goodwill on the balance sheet as of September 30, 2022.
On October 4, 2022, the Company acquired Step and Go, a brand in the health and wellness category, for $0.7 million. As part of the purchase price allocation of the acquisition, $0.5 million was attributed to goodwill. As our market capitalization was further reduced below net assets as of December 31, 2022, an increaseimpairment loss on goodwill of $0.5 million was recorded for the three months ended December 31, 2022, which is included in intangibles amortizationimpairment loss on goodwill in the Consolidated Statement of Operations for the year-ended December 31, 2022.
As a result of these analyses, we recorded a total goodwill impairment charge of approximately $6.0$120.4 million for the year-ended December 31, 2022.
Impairment loss on Intangibles
|
| Year-Ended December 31, |
|
| Change |
|
| ||||||||||
|
| 2021 |
|
| 2022 |
|
| Amount |
|
| % |
|
| ||||
|
| (in thousands, except percentages) |
|
|
| ||||||||||||
Impairment loss on Intangibles |
| $ | — |
|
| $ | (3,118 | ) |
| $ | (3,118 | ) |
|
| (100.0 | ) | % |
Certain asset groups experienced a significant decrease in sales and $1.3 million reserve relatedcontribution margin during 2022. This was considered an interim triggering event for the three months ended September 30, 2022. Based on the analysis of comparing the undiscounted cash flow to the litigation settlement.carrying value of
the asset group, one group tested indicated that the assets may not be recoverable. For this asset group, we compared the fair value to the carrying amount
of the asset group and recorded an intangible impairment charge of $3.1 million for the year-ended December 31, 2022.
Change in fair value of contingent earn-out liabilities
|
| Year-Ended December 31, |
|
| Change |
|
| Year-Ended December 31, |
|
| Change |
|
| ||||||||||||||||||||
|
| 2020 |
|
| 2021 |
|
| Amount |
|
| % |
|
| 2021 |
|
| 2022 |
|
| Amount |
|
| % |
|
| ||||||||
|
| (in thousands, except percentages) |
|
|
|
| (in thousands, except percentages) |
|
| ||||||||||||||||||||||||
Settlement of a contingent earn-out liability |
| $ | — |
|
| $ | 4,164 |
|
| $ | 4,164 |
|
|
| 100.0 | % |
| $ | 4,164 |
|
| $ | — |
|
| $ | (4,164 | ) |
|
| (100.0 | ) | % |
Change in fair value of contingent earn-out liabilities |
| $ | 12,731 |
|
| $ | (30,529 | ) |
| $ | (43,260 | ) |
|
| -339.8 | % |
| $ | (30,529 | ) |
| $ | (5,240 | ) |
| $ | 25,289 |
|
|
| 82.8 |
| % |
The settlement of a contingent earn-out liability for the year-ended December 31, 2021 was due to the difference of fair value of the shares issued on the settlement date versus the fair value of the earn-out on the date of the settlement.
22
The increase in 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 ofin our share price since the date of each acquisition and contribution margin projections.
Interest expense, net
|
| Year-Ended December 31, |
|
| Change |
| ||||||||||
|
| 2020 |
|
| 2021 |
|
| Amount |
|
| % |
| ||||
|
| (in thousands, except percentages) |
|
|
| |||||||||||
Interest expense |
| $ | 4,979 |
|
| $ | 12,655 |
|
| $ | 7,676 |
|
|
| 154.2 | % |
|
| Year-Ended December 31, |
|
| Change |
|
| ||||||||||
|
| 2021 |
|
| 2022 |
|
| Amount |
|
| % |
|
| ||||
|
| (in thousands, except percentages) |
|
|
| ||||||||||||
Interest expense |
| $ | 12,655 |
|
| $ | 2,603 |
|
| $ | (10,052 | ) |
|
| (79.4 | ) | % |
The increasedecrease in interest expense was primarily related to the increasepayment in the High Trail loan interest and related amortization of deferred financing fees and warrant discounts compared toin the prior period’s credit facility and term loan,period which had lowerhigher borrowings and less amortization of deferred financing fees and warrant discountsinterest rate compared to this current period. period which only includes our Midcap credit facility.
Gain on extinguishment of seller note
|
| Year-Ended December 31, |
|
| Change |
|
| ||||||||||
|
| 2021 |
|
| 2022 |
|
| Amount |
|
| % |
|
| ||||
|
| (in thousands, except percentages) |
|
|
| ||||||||||||
Gain on extinguishment of seller note |
| $ | — |
|
| $ | 2,012 |
|
| $ | 2,012 |
|
|
| 100.0 |
| % |
The gain on extinguishment of seller note during the year-ended December 31, 2022 was attributable to the settlement of the Truweo seller note, which resulted in a $2.0 million gain on extinguishment of seller note upon the extinguishment of debt.
Loss on initial issuance of equity
|
| Year-Ended December 31, |
|
| Change |
|
| ||||||||||
|
| 2021 |
|
| 2022 |
|
| Amount |
|
| % |
|
| ||||
|
| (in thousands, except percentages) |
|
|
| ||||||||||||
Loss on initial issuance of equity |
| $ | — |
|
| $ | 18,669 |
|
| $ | 18,669 |
|
|
| 100.0 |
| % |
The loss on initial issuance of equity is attributable to the issuance of common shares and initial valuation of the prefunded warrants and common stock warrants from our March 2022 equity raise of $5.8 million in March 2022. Further, in September 2022, we recorded a charge related to the September 29, 2022 securities purchase agreement for common stock and associated warrants for the three months ended September 30, 2022 as we deemed the agreement non cancellable. The $12.8 million expense is derived from the anticipated fair-value of the issuances of equity attributable to the expected issuance of common shares and common stock warrants versus the anticipated proceeds to be received by us. We closed and issued the common stock and associated warrants on October 4, 2022.
Change in fair value of derivative liability
|
| Year-Ended December 31, |
|
| Change |
| ||||||||||
|
| 2021 |
|
| 2022 |
|
| Amount |
|
| % |
| ||||
|
| (in thousands, except percentages) |
|
| ||||||||||||
Change in fair market value of derivative liability |
| $ | 3,254 |
|
| $ | — |
|
| $ | (3,254 | ) |
|
| 100.0 | % |
The change in fair market value of derivative liability during the year-ended December 31, 2021 is attributable to the term loan from High Trail as we fair-valued certain embedded derivatives within the term loan, primarily around default interest rates.
23
Loss on extinguishment of debt
|
| Year-Ended December 31, |
|
| Change |
| ||||||||||
|
| 2020 |
|
| 2021 |
|
| Amount |
|
| % |
| ||||
|
| (in thousands, except percentages) |
|
|
| |||||||||||
Loss on extinguishment of debt |
| $ | 2,037 |
|
| $ | 138,859 |
|
| $ | 136,822 |
|
|
| 6716.8 | % |
|
| Year-Ended December 31, |
|
| Change |
|
| ||||||||||
|
| 2021 |
|
| 2022 |
|
| Amount |
|
| % |
|
| ||||
|
| (in thousands, except percentages) |
|
|
| ||||||||||||
Loss on extinguishment of debt |
| $ | 138,859 |
|
| $ | — |
|
| $ | (138,859 | ) |
|
| (100.0 | ) | % |
The increaseloss on extinguishment of debt for the year-ended December 31, 2021 is attributable to the payment and termination of the December 20202021 Note (as(as defined in Note 6 to our consolidated financial statementsConsolidated Financial Statements included in this Annual Report)Report), the February 20212022 Note (as defined in Note 6 to our consolidated financial statementsConsolidated Financial Statements included in this Annual Report) Report) and our prior credit facility, which resulted in $29.8 million in loss on extinguishment of debt consisting of unamortized deferred finance costs, the extinguishment of the majority of the April 20212022 Note loan, which resulted in $107.0$107.0 million in loss on extinguishment of debt and the extinguishment of the High Trail Note loan, which resulted in $2.1$2.1 million in loss on extinguishment of debt.
Change in fair market value of warrant liability
|
| Year-Ended December 31, |
|
| Change |
|
| ||||||||||
|
| 2021 |
|
| 2022 |
|
| Amount |
|
| % |
|
| ||||
|
| (in thousands, except percentages) |
|
|
| ||||||||||||
Change in fair market value of warrant liability |
| $ | 26,455 |
|
| $ | (470 | ) |
| $ | (26,925 | ) |
|
| (101.8 | ) | % |
Loss on initial issuance of warrants |
| $ | 20,147 |
|
| $ | — |
|
| $ | (20,147 | ) |
|
| (100.0 | ) | % |
|
| Year-Ended December 31, |
|
| Change |
| ||||||||||
|
| 2020 |
|
| 2021 |
|
| Amount |
|
| % |
| ||||
|
| (in thousands, except percentages) |
|
|
| |||||||||||
Change in fair market value of warrant liability |
| $ | 21,338 |
|
| $ | 26,455 |
|
| $ | 5,117 |
|
|
| 24.0 | % |
Loss on initial issuance of warrants |
| $ | — |
|
| $ | 20,147 |
|
| $ | 20,147 |
|
|
| 100.0 | % |
The increase ischange in fair market value of the warrant liability during the year-ended December 31, 2021 was attributable to the change inissuance of the fair value of warrant liability from warrants in connection with the December 2020 Note and the February 2021 Note and related change in the fair value of warrant liability. The change in fair market value of warrant liability during the year-ended December 31, 2022 was related to the change in fair market value of the warrant liabilities from the increase ofprefunded warrants and common stock warrants from our share price since the issuances of the warrants. March 2022 equity raise.
The loss on initial issuance of warrants for the year-ended December 31, 2021 was primarily driven by the increase of our share price since the original issuance of the warrants.
Change in fair value of derivative liability
|
| Year-Ended December 31, |
|
| Change |
| ||||||||||
|
| 2020 |
|
| 2021 |
|
| Amount |
|
| % |
| ||||
|
| (in thousands, except percentages) |
|
|
| |||||||||||
Change in fair market value of derivative liability |
| $ | — |
|
| $ | 3,254 |
|
| $ | 3,254 |
|
|
| 100.0 | % |
The increase is attributable to the term loan from High Trail as we fair-valued certain embedded derivatives within the term loan, primarily around default interest rates.
Comparison of the Years Ended December 31, 2020 and 2019
For a discussion regarding our financial condition and results of operations for the year ended December 31, 2020 as compared to the year ended December 31, 2019, please refer to the discussion under the heading “Results of Operations—Comparison of the Years Ended December 31, 2020 and 2019” in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on March 16, 2021, as amended by Amendment No. 1 filed with the SEC on April 29, 2021 and Amendment No. 2 filed with the SEC on September 24, 2021.
Liquidity and Capital Resources
Cash Flows for Years-Ended December 31, 20202021 and 20212022
The following table provides information regarding our cash flows for the years-ended December 31, 20202021 and 2021:2022:
|
| Year- Ended December 31, |
| |||||||||||||
|
| 2020 |
|
| 2021 |
|
| Year-Ended December 31, |
| |||||||
|
| (in thousands) |
|
| 2021 |
|
| 2022 |
| |||||||
Cash provided (used) by operating activities |
| $ | 6,091 |
|
| $ | (41,969 | ) | ||||||||
|
| (in thousands) |
| |||||||||||||
Cash used by operating activities |
| $ | (41,969 | ) |
| $ | (17,477 | ) | ||||||||
Cash used in investing activities |
|
| (39,054 | ) |
|
| (44,905 | ) |
|
| (44,905 | ) |
|
| (677 | ) |
Cash provided by financing activities |
|
| 32,319 |
|
|
| 95,569 |
|
|
| 95,569 |
|
|
| 26,996 |
|
Effect of exchange rate on cash |
|
| (48 | ) |
|
| (477 | ) |
|
| (477 | ) |
|
| (528 | ) |
Net change in cash and restricted cash for period |
| $ | (692 | ) |
| $ | 8,218 |
| ||||||||
Net change in and restricted cash for the period |
| $ | 8,218 |
|
| $ | 8,314 |
|
Net Cash Used in Operating Activities
Net cash provided by operating activities was $6.1 million for the year-ended December 31, 2020, resulting from our net cash losses from operations of $2.4 million, offset by cash from working capital of $8.5 million from changes in accounts receivable, purchase of inventory and insurance and payments of accounts payable.
Net cash used by operating activities was $42.0 million for the year-ended December 31, 2021, resulting from our net cash losses from operations of $24.4 million and cash usage from working capital of $17.6 million from changes in accounts receivable, purchase of inventory and insurance and payments of accounts payable.
Net cash used by operating activities was $17.5 million for the year-ended December 31, 2022, resulting from our net cash losses from operations of $37.2 million, offset by cash from working capital of $19.7 million from changes in accounts receivable, purchase of inventory and insurance and payments of accounts payable and accrued expenses. The reduction of inventory and accounts payable in 2022 relate to the decrease in inventory purchases in 2022 compared to 2021 and our efforts to normalize inventory levels by liquidating higher cost inventory. The decrease in accounts receivable year over year relates to a reduction in sales volume during the last month of the quarter, December 2021 versus December 2022, and timing from a significant wholesale receivable from 2021 collected in 2022.
24
Net Cash Used in Investing Activities
Net cash used in investing activities for the year-ended December 31, 2020 was primarily from the acquisition of Truweo Assets for $14.0 million and Smash Assets for $25.0 million.
Net cash used in investing activities of $44.9 million for the year-ended December 31, 2021 was primarily for the acquisition of the assets from Healing Solutions, LLC (“Healing Solutions”) for $15.3 $15.3 million, the assets from Squatty Potty, LLC for $19.0 $19.0 million and the acquisition of Photo Paper Direct Ltd. of $10.6 million.
Net cash used in investing activities for the year-ended December 31, 2022 was primarily from the acquisition of Step and Go for $0.6 million.
Net Cash Provided by Financing Activities
For the year-ended December 31, 2020, cash provided by financing activities of $32.3 million was primarily from the net proceeds of our August 2020 underwritten public offering of $23.4 million and borrowings from the High Trail term loan, net of $35.8 million, which was offset by net repayments on the Credit Facility of $10.1 million and repayments of the Horizon Term Loan of $16.0 million.
For the year-ended December 31, 2021, cash provided by financing activities of $95.6 million was primarily from proceeds from borrowings from the High Trail April 20212022 Notes of $110.0 million, proceeds from cancellation of a warrant of $16.9 million and proceeds from an equity offering of $36.7 million, net, proceeds from exercise of stock options of $9.0 million, borrowings of $20.0 million of Midcap credit facility offset by repayments of the High Trail December 20202021 Note and February 20212022 Note of $59.5 million, repayments of the High Trail April 20212022 Note of $10.1 million, repayments of the High Trail December 20212022 Note of $27.5 million and $10.5 million of repayments of notes issued to certain sellers in connection with our M&A activity.
Cash Flows for Years-EndedFor the year-ended December 31, 20192022, cash provided by financing activities of $27.0 million was primarily from the net proceeds from the March and 2020
For a discussion regarding our financial conditionOctober 2022 equity raise of $46.8 million partially offset by the net repayment of borrowings from the Midcap credit facility of $12.2 million, the payment of earn-out to Squatty Potty of $4.0, and resultsthe repayment of operations for the year ended December 31, 2020 as comparednote to the year ended December 31, 2019, please refer to the discussion under the heading “Liquidity and Capital Resources—ComparisonSmash of the Years Ended December 31, 2020 and 2019” in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on March 16, 2021, as amended by Amendment No. 1 filed with the SEC on April 29, 2021 and Amendment No. 2 filed with the SEC on September 24, 2021.$3.4 million.
Sources of
Liquidity and Going Concern
As an emerging growth company in the early commercialization stage of its lifecycle, we are subject to inherent risks and uncertainties associated with the development of our enterprise. In this regard, substantially all of our efforts to date have been dependent on outside capital throughdevoted to the issuancedevelopment and sale of equity to investors and borrowings from lenders (collectively “outside capital”) since our inception to executeproducts in the marketplace, which includes our growth strategy of investinginvestment in organic growth at the expense of short-term profitably, and investingour investment in incremental growth through mergers and& acquisitions (“M&A strategy”)., our recruitment of management and technical staff, and raising capital to fund the development of our enterprise. As a result of these efforts, we have incurred significant losses and negative cash flows from operations since our inception and expect to continue to incur such losses and negative cash flows for the foreseeable future until such time that we reach a scale of profitability to sustain our operations. 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 disclosure below)below for additional details). As a result,
In order to execute our growth strategy, we have incurred significant losseshistorically relied on outside capital through the issuance of equity, debt, and will remain dependentborrowings under financing arrangements (collectively “outside capital”) to fund our cost structure and we expect to continue to rely on outside capital for the foreseeable future, untilspecifically for M&A. While we believe we will eventually reach a scale of profitability to sustain our operations, there can be no assurance we will be able to achieve such timeprofitability or do so in a manner that we can realizedoes not require our strategy of growth by generating profits through our organic growth and M&A strategy, and reduce ourcontinued reliance on outside capital. Moreover, while we have historically been successful in raising outside capital, there can be no assurance we will be able to continue to obtain outside capital in the future or do so on terms that are acceptable to us.
Given
As of the inherent uncertainties associateddate the accompanying Consolidated Financial Statements were issued (the “issuance date”), we evaluated the significance of the following adverse financial conditions in accordance with executingAccounting Standard Codification 205-40, Going Concern:
25
sufficientus. Accordingly, absent our ability to generate cash inflows from our operations and/or secure additional outside capital or generate sufficient cash from operationsin the near term, we may be unable to fundmeet our obligations as they become due over the next twelve months frombeyond the date these consolidated financial statements were issued. issuance date.
Since
These uncertainties raise substantial doubt about our ability to continue as a going concern.
In order to alleviate substantial doubt, The accompanying Consolidated Financial Statements have been prepared on the basis that we plan towill continue to closely monitor our operating forecast, pursue additional sourcesoperate as a going concern, which contemplates that we will be able to realize assets and settle liabilities and commitments in the normal course 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 termsbusiness for the foreseeable future. Accordingly, the accompanying Consolidated Financial Statements do not include any adjustments that are acceptable to us to fund our operations and M&A strategy, and/or (c) secure a waiver or forbearancemay result 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 delay expenditures, reduce investments in new products, delay the developmentoutcome of our software, reduce our sale and distribution infrastructure, or otherwise significantly reduce the scope of our business. Moreover, if we breach the financial covenants required by the credit facility agreement and fails 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. these uncertainties.
COVID-19 Pandemic and Supply Chain—Chain
The full impact of the COVID-19 pandemic and Supply Chain, including the impact associated with preventive and precautionary measures thatDuring 2022, we other businesses and governments are taking, continues to evolve.
During 2021, we have beenwere impacted by the COVID-19 pandemic and related global shipping disruption.disruptions. Together these have led to substantial increases in supply chain costs, in particular shipping containers, which we rely on to import our goods, has reduced the reliability and timely delivery of such shipping containers and has substantially increased our last mile shipping costs on its oversized goods. These cost increases have been particularly substantial toour oversized goods which isare a material part of our business. The reduced reliability and delivery of such shipping containers is forcingforced us to spend more on premium shipping to ensure goods arewere delivered, if at all, and the lack of reliability and timely delivery has further down chain impacts such as it takestaking longer for containers to be offloaded and returned. Further, thisthe global shipping disruption is forcingled us to increase our inventory on-hand, including advance ordering and taking possession of inventory earlier than expected, impacting itsour working capital.
Third party last mile shipping partners, such as UPS and FedEx, continue to increase the cost of delivering goods to the end consumers as their delivery networks continue to be impacted byadjusted following the onset of the COVID-19 pandemic. The COVID-19 pandemic continues to bringThere remains significant uncertainty to consumer demand and buying habits 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 the U.S. Coupled with the recent reopening of the majority of the country, we have noticed changes to consumer buying habits, which may have reduced demand for its products.
COVID-19 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 the U.S. Coupled with continued changes in governmental restrictions and requirements, which continued to vary across the majority of the country, the Company has noticed changes to consumer buying habits, which may have reduced demand for its products. Further, we have increased the sale prices for our products to offset the increased supply chain costs, which has also led topotentially reduced demand for our goods. Reduced demand for our products and increased prices affecting consumer demand generally have also made forecasting more difficult.products.
We continue to consider the impact of COVID-19 and Supply Chainthe related supply chain disruptions on the assumptions and estimates used when preparing our consolidated financial statementsConsolidated 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.change. If the economic conditions caused by COVID-19 and Supply Chain worsen beyond what is currently estimated by management, such future changes may have an adverse impact on our results of business, operations, financial position,results, and liquidity.
Debt Repayment
On August 9, 2021, our lender, High Trail Investments SA LLC (“High Trail SA”) and High Trail Investments ON LLC (“High Trail ON” and, together with High Trail SA, “High Trail”) notified us that High Trail declared an event of default under the April 2021
Notes (as defined in Note 6 to our consolidated financial statements included in this Annual Report) as a result of our failure to maintain Adjusted EBITDA ( primarily due to the impacts of supply chain), as required under the terms of our then-existing debt arrangements with High Trail. On September 22, 2021, we reached an agreement with High Trail to pay down and amend our outstanding secured term debt.
We paid off the remaining $25.0 million High Trail Term Loan as of December 31, 2021 (see the discussion under the heading MidCap Credit Facility December 2021 below). Pursuant to ASC 470, Debt, we concluded the High Trail Term Loan transaction resulted in the extinguishment of the High Trail Term Loan in the amount of $2.5 million of extinguishment of which has been classified within loss on extinguishment of debt on the consolidated statements of operations.
MidCap Credit Facility – December 2021
2021—On December 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 to MidCap Funding XXVII Trust a warrant to purchase up to an aggregate of 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 us to maintain a minimum unrestricted cash balance of (a) $12.5 million during the period from February 1st through and including May 31st of each calendar year, and (b) $15.0 million at all other times thereafter.times. At its 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
26
over the next twelve months and are in compliance with the minimum liquidity covenant as of the date these consolidated financial statementsConsolidated Financial Statements were issued.
OnThe outstanding balance on the MidCap credit facility as of December 22,30, 2021 we used $27.6and 2022 was $32.9 million and $21.1 million, respectively. The Company had $0.3 million of availability on the Midcap credit facility as of December 31, 2022.
On September 29, 2022, we entered into securities purchase agreements (the “September Purchase Agreements”) with certain accredited investors, pursuant to which, among other things, we agreed to sell and issue, in a registered direct offering (the “Registered Direct Offering”), an aggregate of 10,643,034 shares of Common Stock and accompanying warrants to purchase an aggregate of 10,643,034 shares of Common Stock. 10,526,368 of the shares and the accompanying warrants to purchase 10,526,368 shares of Common Stock were sold to certain accredited purchasers that are not affiliated with us at a combined offering price of $1.90 per share and accompanying warrant to purchase one share of Common Stock. The remaining 116,666 shares of Common Stock and the accompanying warrants to purchase 116,666 shares of Common Stock were sold to certain of our insiders, comprised of our President and Chief Executive Officer, Chief Financial Officer, Chief Legal Officer and Global Head of M&A and Chief Technology Officer, at a combined offering price of $2.10 per share and accompanying warrant to purchase one share of Common Stock.
The Registered Direct Offering closed on October 4, 2022 and the Company issued and sold an aggregate of 10,643,034 shares of common stock to the Purchasers. The gross proceeds to us from the Registered Direct Offering were approximately $20.2 million, before deducting fees payable to the placement agent and other estimated offering expenses payable by us. We currently intend to use 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 FacilityRegistered Direct Offering for
working capital purposes, the conduct of our business and other general corporate purposes.purposes, which may include acquisitions, investments in or licenses of complementary products, technologies or businesses.
Pursuant to the ASC 815-40, the September Purchase Agreements represent a legally binding contract that meets the definition of a firm commitment and as such we recorded a derivative expense related to the offering of common stock (“forward contract”). Additionally, we recorded $12.8 million derivative expense derived from the excess of the fair-value
of the issuances of equity of common shares and common stock warrants over the anticipated proceeds to be received by us. This expense was recorded in loss on initial issuance of equity on the consolidated statement of operations for the year-ended December 31, 2022.
Contingent earn-out liability considerations
—As of December 1, 2020, the acquisition date of the assets of the e-commerce business under the brands Mueller, Pursteam, Pohl and Schmitt and Spiralizer (the “Smash Assets”), the initial fair value amount of the earn-out payment was appropriately $9.8 million. As of December 31, 2020,2021, the fair value amount of the earn-out payment with respect to the Smash Assets was approximately $22.5 million representing a change of fair value impact of approximately $12.7 million. As of December 31, 2021, the fair value amount of2022, there was no remaining earn-out liability relating to Smash Assets as the earn-out payment with respect to the Smash Assetsthreshold was approximately $5.2, representing a year-ended December 31, 2021.not achieved.
As part of the acquisition of the certain assets of Healing Solutions (the “Healing Solutions Assets”), Healing Solutions was entitled to earn-out payments based on the achievement of certain contribution margin thresholds on certain products of the acquired business. If the earn-out consideration event occurs: (i) prior to the date that is nine months following the Closing Date, we were to issue 528,670 shares of our common stock to Healing Solutions; (ii) on or after the date that is nine months following the Closing Date but before the date that is 12 months following the Closing Date, we were to issue 396,502 shares of common stock to Healing Solutions; or (iii) on or after the date that is 12 months following the Closing Date but before the date that is 15 months following the Closing Date (the date that is 15 months following the Closing Date, the “Earn-Out Termination Date”), we were to issue 264,335 shares of common stock to Healing Solutions; or after 15 months, we would not have any obligation to issue any shares of our common stock to Healing Solutions.
As of February 2, 2021, the acquisition date of the Healing Solutions Assets, the initial fair value amount of the earn-out payment with respect to the Healing Solutions Assets was appropriately $16.5 million. In November 2021, we issued 1.4 million shares of common stock in full settlement of the earn-out. As of December 31, 20212022 there was no earn-out liability related to Healing Solutions.
As part of the acquisition of the assets of Squatty Potty, LLC (the “Squatty Potty Assets”), Squatty Potty is entitled to earn-out payments based on the achievement of certain contribution margin thresholds on certain products of the acquired business. If the earn-out consideration event occurred in the 12 months ending December 31, 2021,2022, the earn-out payment amount was to be $3.9 million and if the parties terminate the transition service agreement prior to the date that is nine months following the Closing Date, we are to pay an additional $3.9 million.
As of May 5, 2021, the acquisition date of the Squatty Potty Assets, the initial fair value amount of the earn-out payment with respect to the Squatty Potty Assets was appropriately $3.5 million. As of December 31, 2021, the fair value amount of the earn-out payment with respect to the Squatty Potty Assets was approximately $4.0 million, representing a net change of fair value impact of approximately $0.5 million for year-ended December 31, 2021. As of December 31, 2022, there was no remaining fair value for the Squatty Potty earn-out payment as amount was fully paid during 2022.
As of May 5, 2021, the acquisition date of Photo Paper Direct Ltd. (“Photo Paper Direct”), the initial fair value amount of the earn-out payment with respect to Photo Paper Direct was appropriately $0.9 million. As of December 31, 2021 and 2022, the fair value amount
27
of the earn-out payment with respect to the Photo Paper Direct acquisition was approximately $0.0 million as we believe the earnout was not achieved, representing a net change of fair value impact of approximately $0.9 million forachieved. Photo Paper Direct disagrees with our determination and we remain in dispute with the year-ended December 31, 2021.prior owners with respect to this matter.
Open Inventory Purchase Orders
—As of December 31, 20202021 and 2021,2022, the Company had open inventory purchase orders of $55.0$32.3 million and $32.3$13.5 million, respectively, placed with vendors waiting to be fulfilled.
Non-GAAP Financial Measures
We believe that our financial statements and the other financial data included in this Annual Report have been prepared in a manner that complies, in all material respects, with generally accepted accounting principles in the U.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), reserve on barter credits 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, settlement of earn-outs, amortization of inventory step-up from acquisitions (included in cost of goods sold), reserve for barter credits, profit and loss impacts from the issuance of common stock and/or warrants, changes in fair-market value of warrant liability, professional fees and transition costs related to acquisitions, litigation settlements, impairment on goodwill and intangibles, loss from extinguishment of debt 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 aaNon-GAAP Financial Measure 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.
In the reconciliation to calculate contribution margin, we add e-commerce platform commissions, online advertising, selling and logistics expenses (“sales and distribution variable expense”), and the reserve for barter credits to gross marginprofit 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.
28
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). |
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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:
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| • changes in fair value of contingent earn-out liabilities, warrant liabilities, and |
|
| Year-Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2020 |
|
| 2021 |
| |||
|
| (in thousands, except percentages) |
| |||||||||
Gross profit |
| $ | 45,040 |
|
| $ | 84,746 |
|
| $ | 121,863 |
|
Contribution margin |
| $ | 2,489 |
|
| $ | 25,123 |
|
| $ | 25,038 |
|
Gross profit as a percentage of net revenue |
|
| 39.4 | % |
|
| 45.6 | % |
|
| 49.2 | % |
Contribution margin as a percentage of net revenue |
|
| 2.2 | % |
|
| 13.5 | % |
|
| 10.1 | % |
Net Loss |
| $ | (58,789 | ) |
| $ | (63,126 | ) |
| $ | (236,024 | ) |
EBITDA |
| $ | (54,191 | ) |
| $ | (57,547 | ) |
| $ | (215,511 | ) |
Adjusted EBITDA |
| $ | (19,469 | ) |
| $ | 2,494 |
|
| $ | (7,159 | ) |
Net loss as a percentage of net revenue |
|
| (51.4 | )% |
|
| (34.0 | )% |
|
| (95.3 | )% |
Adjusted EBITDA as a percentage of net revenue |
|
| (17.0 | )% |
|
| 1.3 | % |
|
| (2.9 | )% |
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 related to acquisitions, loss from extinguishment of debt and other expenses, net. As used herein, Adjusted EBITDA as a percentage of net revenue represents Adjusted EBITDA divided by net revenue. .
|
| Year-Ended December 31, |
|
| |||||
|
| 2021 |
|
| 2022 |
|
| ||
|
| (in thousands, except percentages) |
|
| |||||
Gross profit |
| $ | 121,863 |
|
| $ | 105,518 |
|
|
Contribution margin |
| $ | 25,038 |
|
| $ | 3,903 |
|
|
Gross profit as a percentage of net revenue |
|
| 49.2 | % |
|
| 47.7 |
| % |
Contribution margin as a percentage of net revenue |
|
| 10.1 | % |
|
| 1.8 |
| % |
Net Loss |
| $ | (236,024 | ) |
| $ | (196,292 | ) |
|
EBITDA |
| $ | (215,511 | ) |
| $ | (186,544 | ) |
|
Adjusted EBITDA |
| $ | (7,159 | ) |
| $ | (33,514 | ) |
|
Net loss as a percentage of net revenue |
|
| (95.3 | )% |
|
| (88.8 | ) | % |
Adjusted EBITDA as a percentage of net revenue |
|
| (2.9 | )% |
|
| (15.2 | ) | % |
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:29
|
| Year-Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2020 |
|
| 2021 |
| |||
|
| (in thousands, except percentages) |
| |||||||||
Net loss |
| $ | (58,789 | ) |
| $ | (63,126 | ) |
| $ | (236,024 | ) |
Add: |
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|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
| 29 |
|
| 48 |
|
| 532 |
| |||
Interest expense, net |
|
| 4,386 |
|
|
| 4,979 |
|
|
| 12,655 |
|
Depreciation and amortization |
|
| 183 |
|
|
| 552 |
|
|
| 7,326 |
|
EBITDA |
|
| (54,191 | ) |
|
| (57,547 | ) |
|
| (215,511 | ) |
Other expense (income), net |
|
| 41 |
|
|
| (27 | ) |
|
| 45 |
|
Change in fair value of contingent earn-out liabilities |
|
| — |
|
|
| 12,731 |
|
|
| (30,529 | ) |
Settlement of a contingent earnout liability |
|
| — |
|
|
| — |
|
|
| 4,164 |
|
Amortization of inventory step-up from acquisitions (included in cost of goods sold) |
|
|
|
|
|
| 583 |
|
|
| 5,458 |
|
Change in fair market value of warrant liability |
|
| — |
|
|
| 21,338 |
|
|
| 26,455 |
|
Derivative liability discount related to term loan |
|
| — |
|
|
| — |
|
|
| 3,254 |
|
Loss on extinguishment of debt |
|
| — |
|
|
| 2,037 |
|
|
| 138,859 |
|
Loss on initial issuance of warrants |
|
| — |
|
|
| — |
|
|
| 20,147 |
|
Professional fees related to acquisitions |
|
|
|
|
|
| 663 |
|
|
| 1,450 |
|
Transition costs from acquisitions |
|
| — |
|
|
| — |
|
|
| 2,076 |
|
Professional and legal fees related to Photo Paper Direct acquisition |
|
| — |
|
|
| — |
|
|
| 1,586 |
|
Reserve on dispute with PPE supplier |
|
| — |
|
|
| — |
|
|
| 4,100 |
|
Litigation reserve |
|
| — |
|
|
| — |
|
|
| 1,300 |
|
Reserve on barter credits |
|
| — |
|
|
| — |
|
|
| 1,000 |
|
Stock-based compensation expense |
|
| 34,681 |
|
|
| 22,716 |
|
|
| 28,987 |
|
Adjusted EBITDA |
| $ | (19,469 | ) |
| $ | 2,494 |
|
| $ | (7,159 | ) |
Net loss as a percentage of net revenue |
|
| (51.4 | )% |
|
| (34.0 | )% |
|
| (95.3 | )% |
Adjusted EBITDA as a percentage of net revenue |
|
| (17.0 | )% |
|
| 1.3 | % |
|
| (2.9 | )% |
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 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.GAAP:
| Year-Ended December 31, |
| Year-Ended December 31, |
| ||||||||||||||
| 2019 |
|
| 2020 |
|
| 2021 |
| 2021 |
|
| 2022 |
| |||||
| (in thousands, except percentages) |
| (in thousands, except percentages) |
| ||||||||||||||
Gross Profit | $ | 45,040 |
|
| $ | 84,746 |
|
| $ | 121,863 |
| $ | 121,863 |
|
| $ | 105,518 |
|
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Amortization of inventory step-up from acquisitions (included in cost of goods sold) |
| — |
|
|
| 583 |
|
|
| 5,458 |
|
| 5,458 |
|
|
| — |
|
Reserve on barter credits |
| — |
|
|
| — |
|
|
| 1,000 |
|
| 1,000 |
|
|
| 1,643 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
E-commerce platform commissions, online advertising, selling and logistics expenses |
| (42,551 | ) |
|
| (60,206 | ) |
|
| (103,283 | ) |
| (103,283 | ) |
|
| (103,258 | ) |
Contribution margin | $ | 2,489 |
|
| $ | 25,123 |
|
| $ | 25,038 |
| $ | 25,038 |
|
| $ | 3,903 |
|
Gross Profit as a percentage of net revenue |
| 39.4 | % |
|
| 45.6 | % |
|
| 49.2 | % |
| 49.2 | % |
|
| 47.7 | % |
Contribution margin as a percentage of net revenue |
| 2.2 | % |
|
| 13.5 | % |
|
| 10.1 | % |
| 10.1 | % |
|
| 1.8 | % |
30
Adjusted EBITDA
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:
| Year-Ended December 31, |
| |||||
| 2021 |
|
| 2022 |
| ||
| (in thousands, except percentages) |
| |||||
Net loss | $ | (236,024 | ) |
| $ | (196,292 | ) |
Add: |
|
|
|
|
| ||
Provision for income taxes | 532 |
|
|
| (376 | ) | |
Interest expense, net |
| 12,655 |
|
|
| 2,603 |
|
Depreciation and amortization |
| 7,326 |
|
|
| 7,521 |
|
EBITDA |
| (215,511 | ) |
|
| (186,544 | ) |
Other expense (income), net |
| 45 |
|
|
| (281 | ) |
Change in fair value of contingent earn-out liabilities |
| (30,529 | ) |
|
| (5,240 | ) |
Settlement of a contingent earn-out liability |
| 4,164 |
|
|
| — |
|
Impairment loss on goodwill |
| — |
|
|
| 120,409 |
|
Impairment loss on intangibles |
| — |
|
|
| 3,118 |
|
Gain on extinguishment of seller note |
| — |
|
|
| (2,012 | ) |
Amortization of inventory step-up from acquisitions (included in cost of goods sold) |
| 5,458 |
|
|
| — |
|
Change in fair market value of warrant liability |
| 26,455 |
|
|
| (470 | ) |
Derivative liability discount related to term loan |
| 3,254 |
|
|
| — |
|
Loss on original issuance of equity |
| — |
|
|
| 18,669 |
|
Loss on extinguishment of debt |
| 138,859 |
|
|
| — |
|
Loss on initial issuance of warrants |
| 20,147 |
|
|
| — |
|
Professional fees related to acquisitions |
| 1,450 |
|
|
| — |
|
Transition costs from acquisitions |
| 2,076 |
|
|
| — |
|
Professional and legal fees related to Photo Paper Direct acquisition |
| 1,586 |
|
|
| — |
|
Litigation reserve |
| 1,300 |
|
|
| 2,600 |
|
Reserve on dispute with PPE supplier |
| 4,100 |
|
|
| — |
|
Reserve on barter credits |
| 1,000 |
|
|
| 1,643 |
|
Stock-based compensation expense |
| 28,987 |
|
|
| 14,594 |
|
Adjusted EBITDA | $ | (7,159 | ) |
| $ | (33,514 | ) |
Net loss as a percentage of net revenue |
| (95.3 | )% |
|
| (88.8 | )% |
Adjusted EBITDA as a percentage of net revenue |
| (2.9 | )% |
|
| (15.2 | )% |
Critical Accounting Policies and Use of Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statementsConsolidated 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.
While our significant accounting policies are described in more detail in the notes to our financial statements appearing elsewhere in this Annual Report, we believe the following accounting policies used in the preparation of our financial statements require the most significant judgments and estimates.
31
Revenue Recognition—We account for revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with CustomersCustomers..
We derive our revenue from the sale of consumer products. We sell our products directly to consumers through online retail channels and through wholesale channels. For direct-to-consumer sales, we consider customer order confirmations to be a contract with the customer. Customer confirmations are executed at the time an order is placed through third-party online channels. For wholesale sales, we consider the customer purchase order to be the contract. 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 shipment date. As a result, we have a present and unconditional right to payment and record the amount due from the customer in accounts receivable.
Revenue from consumer product sales is recorded at the net sales price (transaction price), which includes an estimate of future returns based on historical return rates.
There is judgment in utilizing historical trends for estimating future returns and estimates around newly launched products which do not have historical data.
Our refund liability for sales returns was $0.5 million and $0.6 million at December 31, 20202021 and 2021, respectively,2022, which is included in accrued liabilities and represents the expected value of the refund that will be due to our customers.
Inventory valuation—Inventories, consisting of products available for sale, are primarily accounted for using the first-in first-out method, and are valued at the lower of cost and net realizable value. This valuation requires us to make judgments, based on available information such as historical data, about the likely method of disposition, such as through sales to individual customers or liquidations, and expected recoverable values of each disposition category. These assumptions about future disposition of inventory are inherently uncertain and changes in our estimates and assumptions may cause us to realize material write-downs in the future.
Warrant Liability—The fair values of the outstanding warrants were measured using the Monte Carlo SimulationBlack Scholes model. Due to the complexity of the warrants issued, we use an outside expert to assist in providing the mark to market fair valuation of the liabilities over the reporting periods in which the original agreement was in effect.
Inputs used to determine estimated fair value of the warrant liabilities include the fair value of the underlying stock at the valuation date, the term of the warrants, and the expected volatility of the underlying stock. The significant unobservable input used in the fair value measurement of the warrant liabilities is the estimated term of the warrants. Generally, increases (decreases) in the fair value of the underlying stock and estimated term result in a directionally similar impact to the periodic fair value measurement of the outstanding warrant liability, and are recorded within the Change in fair market value of warrant line item on the statement of operations.
The fair value of warrant liability was $31.8$0.0 million and $0.0$3.5 million at December 31, 20202021 and 2021,2022, respectively.
Accounting for contingent consideration—Our acquisitions may include contingent consideration as part of the purchase price. The fair value of the contingent consideration is estimated as of the acquisition date based on the present value of the contingent payments to be made using a weighted probability of possible payments.
The unobservable inputs used in the determination of the fair value of the contingent consideration include management’s assumptions about the likelihood of payment based on the established benchmarks and discount rates based on internal rate of return analysis. The fair value measurement includes inputs that are Level 3 measurement as discussed in Note 6 to our consolidated financial statementsConsolidated Financial Statements included in this Annual Report. Should actual results increase or decrease as compared to the assumption used in our analysis, the fair value of the contingent consideration obligations will increase or decrease, up to the contracted limit, as applicable. Changes in the fair value of the contingent earn-out consideration could cause a material impact and volatility in our operating results.
Contingent earn-out liabilities were $22.5$9.2 million and $9.2$0.0 million at December 31, 20202021 and 2021,2022, respectively.
Accounting for Business Combinations—We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed, based upon their estimated fair values at the acquisition date. These fair values are typically estimated with assistance from independent valuation specialists.
The purchase price allocation process requires us to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets, contractual support obligations assumed, contingent consideration arrangements, and pre-acquisition contingencies.
32
Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain.
Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to:
• future expected cash flows from product sales or other customer contracts; • expected costs of fulfillment including marketing, warehousing and product sales; • the acquired company’s brand and competitive position, as well as assumptions about the period of time the acquired brand will continue to be used in the combined company’s product portfolio; • cost of capital and discount rates; and • estimating the useful lives of acquired assets as well as the pattern or manner in which the assets will amortize. |
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Refer to Note16 - Acquisitions to our consolidated financial statementsConsolidated Financial Statements included in this Annual Report-for more informationinformation.
Subsequent Measurement of Goodwill Valuation —The Company operatesWe operate under one business component which is the same as itsour reporting unit based on the guidance in ASC Topic 350-20.
We assess goodwill for impairment at least annually during the fourth quarter and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. During 2022, we had events and conditions in the first and third quarter that required an interim assessment of goodwill.
We evaluated current economic conditions, including the impact of the Federal Reserve further increasing the risk-free interest rate, as well as the inflationary pressure on product and labor costs and operational impacts attributable to continued global supply chain disruptions. We believe that these conditions were factors in our market capitalization falling below the book value of net assets. Accordingly, we concluded a triggering event had occurred and performed interim goodwill impairment analyses and determined that our goodwill impaired during the three months ended March 31, 2022 and three months ended September 30, 2022.
We engaged a third-party valuation specialist to assist management in performing ouran interim goodwill test in December 2021.impairment test. 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, and guideline transaction method (bothwhile also taking into consideration our market approaches).
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 and the cost of capital.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. Cost of capital is another significant assumption as the discount rate is used to calculate the current fair value of those projected cash flows. Under the guideline public company method, and guideline transaction method, significant assumptions relate to the selection of appropriate guideline companies, and transactions and the valuation multiples used in the market analysis.analysis and our market capitalization.
Due to the sustained decline in our stock price leading up to and subsequent to March 31, 2022 and September 30, 2022, we used the market capitalization to determine the fair value of the reporting unit. As a result, we recorded impairment charges of $29.0 and $90.0 million during the three months ending March 31, 2022 and September 30, 2022, respectively. There was no remaining goodwill on the balance sheet as of September 30, 2022.
While we believe our conclusions regarding the estimates of fair value of our reporting unit are 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 our 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 our business, there can be no assurance that our 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.
On October 4, 2022, the Company acquired Step and Go, a brand in the health and Wellness category, for $0.7 million. As part of the purchase price allocation of the acquisition, $0.5 million was attributed to goodwill. As our market capitalization was further reduced below net assets as of December 31, 2022, an impairment loss on goodwill of $0.5 million was recorded for the three months ended December 31, 2022.
33
As a result of these analyses, we recorded a total goodwill impairment charge of approximately $120.4 million for the year-ended December 31, 2022.
Goodwill was $47.3$119.9 million and $120.0$0.0 million at December 31, 20202021 and 2021,December 31, 2022, respectively.
We believe that the assumptions and estimates made are reasonable and appropriate, and changes in ourthe assumptions and estimates could have a material impact on our reported financial results. In addition, sustained declines
Intangible asset valuation —We review long-lived assets for impairment when performance expectations, events, or changes in our stock pricecircumstances indicate that the asset's carrying value may not be recoverable. The evaluation is performed at the lowest level of identifiable cash flows by comparing the carrying value of the asset group to the undiscounted cash flows. If the evaluation indicates that the carrying amount of the assets may not be recoverable, any potential impairment is measured based upon the fair value of the related asset or asset group as determined by an appropriate market appraisal or other valuation technique. Certain asset groups experienced a significant decrease in sales and contribution margin through September 30, 2022. This was considered an interim triggering event for the three months ended September 30, 2022. We assessed the recoverability of the related market capitalization could impact key assumptionsintangible assets by using level 3 inputs and comparing carrying value of an asset group to the net undiscounted cash flows expected to be generated to determine if carrying value is not recoverable.
The recoverability test indicated that certain definite-lived trademark intangible assets were impaired which resulted in an impairment charge. We recorded
an intangible impairment charge of $3.1 million in the overall estimated fair values of our reporting unit and could result in non-cash impairment charges that could be material to our consolidated balance sheet or results of operations. We began to experience improvement in our operating margins and additional improvement in our products performance before the inclusion of fixed costs. These improvements, coupled with our acquisitions, supported our conclusion that we would generate significant improvements in the operating results.
Since December 31, 2020, we had an additional increase in the amount of goodwill through acquisitions made in 2021. Although wethree months ended September 30, 2022. The Company did not have experienced volatility in our share price and short-term forecasts, impacting our going concern analysis due lender covenant risks, we believe we have had no triggering events as our overall long-term forecasts remain materially the same as of December 31, 2021. However, if we continue to experience downward share price volatility or there are material reductions in long-term forecasts the excess fair-value over our carrying value could be reduced significantly and could lead to a triggering event and ultimately to a goodwillduring the three months ended December 31, 2022. Total impairment charge. We performed a full step one impairment test at 12/31/2021 and concluded no impairment and that our estimated fair-values exceeded our carrying values by 21% as ofloss on intangibles for the year-ended December 31, 2021. 2022 was $3.1 million.
We will continue to closely monitor actual results versus expectations as well as whether and to what extent any significant changes in current events or conditions, including changes to the impacts of COVID-19 on our business, result in corresponding changes to our expectations about future estimated cash flows, discount rates and market multiples.flows. If our adjusted expectations of the operating results do not materialize, if the discount rate increases (based on increases in interest rates, market rates of return or market volatility) or if market multiples decline, we may be required to record goodwillintangible impairment charges, which may be material.
While we believe our conclusions regarding the estimates of fair valuerecoverability of our reporting unitsasset groupings are 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 unitsasset groups serve, the realization of future sales price and volume increases, fluctuations in exchange rates, fluctuations in price and availability of key raw materials and future operating efficiencies and, as it pertains to discount rates, the volatility in interest rates and costs of equity.
Subsequent Measurement of Intangible assetsefficiencies.—Intangible assets with finite lives are amortized over their estimated useful life on a straight-line basis.
We monitor conditions related to these assets to determine whether events and circumstances warrant a revision to the remaining amortization. We test these assets for potential impairment whenever our management concludes events or changes in circumstances indicate that the carrying amount may not be recoverable. The original estimate of an asset’s useful life and the impact of an event or circumstance on either an asset’s useful life or carrying value involve significant judgment regarding estimates of the future cash flows associated with each asset.
Intangibles were $31.5 million and $65.0 million at December 31, 2020 and 2021, respectively.
JOBS Act
In April 2012, the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” (“EGC”) can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. We have elected to avail ourselves of this exemption and, as a result, our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies. Section 107 of the JOBS Act provides that we can elect to opt out of the extended transition period at any time, which election is irrevocable.
In addition, as an EGC, we have taken advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
We will remain an EGC until the earlier of (i) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more; (ii) the last day of the fiscal year following the fifth anniversary of the completion of our initial public offering, or December 31, 2024; (iii) the date on which we have issued more than $1.0 billion in non-convertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the Securities and Exchange Commission (the “SEC”) (i.e., the first day of the fiscal year after we have (1) more than $700.0 million in outstanding common equity held by our non-affiliates, measured each year on the last day of our second fiscal quarter, (2) been public for at least 12 months, and (3) are not eligible to be deemed a “smaller reporting company” because we do not meet the revenue test of the definition of “smaller reporting company”, which includes an initial determination that our annual revenues are more than $100.0 million for the most recently completed fiscal year).
Recent Accounting Pronouncements
The JOBS Act permits an emerging growth company to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to use this extended transition period until we are no longer an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period. As a result, our financial
statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
34
Adopted Accounting Standards
In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU 2016-02”ASC 842”). This ASU requires lessees, which was amended by subsequent ASUs, to record mostenhance the comparability and usefulness of financial reporting around leasing activity. The new standard supersedes the existing authoritative literature for lease accounting under ASC 840, with a focus on applying a “right-of-use model.” The guidance for leases on their balance sheets but recognize the expenses on their income statementsunder ASC 842 results in a manner similar to current practice. ASU 2016-02 states that a lessee would recognize aright-of-use asset (“ROU asset”) and lease liability being reported on the balance sheet for leases with an original lease term greater than twelve months. ASC 842 is effective for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. In July 2019, the FASB delayed the effective date for this ASU for private companies (including emerging growth companies) and it will be effectiveCompany for annual reporting periods beginning after December 15, 2021, with early adoption permitted.including interim periods within that fiscal year. The new guidance was adoptedCompany elected the standard on January 1, 2022 using the alternative modified retrospective transition approach in accordance with no material impact on our consolidated financial statements. We adopted this standard by electingASU 2018-11, Leases (Topic 842): Targeted Improvements. The cumulative effect of the package of practical expedients without hindsight, which permits us to not reassess (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases, and (3) any initial direct costs for any existing leasestransition adjustments was recognized as of the adoption date. We have several corporate office leases which are classified as operating leases,date of adoption.
Under the alternative modified retrospective transition approach, the reported results for which we are required to record a right-of-use asset2022 reflect the application of ASC 842 guidance, whereas comparative periods and a lease liability equalthe respective disclosures prior to the present valueadoption of ASC 842 are presented using the remaining minimum lease payments and will continue to recognize expenses on a straight-line basis for these leases. On January 1, 2022, welegacy guidance of ASC 840. The Company recorded an aggregate of approximately $0.7 million of right-of-use assets and a corresponding $0.7 million of lease liabilities upon adoption of this standard. Current Right-of-use assets of $0.2 million and corresponding lease liabilities are included in the prepaid and other current assets and accrued and other current liabilities line item respectively on the condensed consolidated balance sheets. Non-current Right-of-Use Assets of $0.1 million and corresponding lease liabilities are included in the prepaid and other non-current assets and accrued and other non-current liabilities line item respectively on the condensed consolidated balance sheets. The adoption of the standard did not have a material impact on the condensed consolidated statements of operations, or condensed consolidated statements of cash flows. The Company has elected to apply the package of practical expedients requiring no reassessment of whether any expired or existing contracts are or contain leases, the lease classification of any expired or existing leases, or the capitalization of initial direct costs for any existing leases. Additionally, the Company elected the practical expedient that permit the exclusions of leases considered to be short-term.
In August 2018, the FASB issued ASU No. 2018-15, “Customer’s Accounting for Implementation Cost Incurred in a Cloud Computing Arrangement That Is a Service Contract”(“ASU 2018-15”). Under the new guidance, customers apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software license. This will result in certain implementation costs being capitalized; the associated amortization charge will, however, be recorded as an operating expense. Under the previous guidance, costs incurred when implementing a cloud computing arrangement deemed to be a service contract were recorded as an operating expense when incurred.ASU 2018-15 will beThe new guidance is effective for public business entities in fiscal years beginning after December 15, 2021, including2019, and interim periods within those fiscal years. Early adoption is permitted. For all other entities, the amendments in this update are effective for annual reporting periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021. The new guidance was adopted on January 1, 2022December 15, 2021 with no material impact on our consolidated financial statements.the Company’s Consolidated Financial Statements.
In August 2020, the FASB issued ASU No. 2020-06, “Debt—Debt with Conversion and Other Options (Topic 470) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Topic 814): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“(“ASU 2020-06”). ASU 2020-06 eliminates the number of accounting models used to account for convertible debt instruments and convertible preferred stock. The update also amends the disclosure requirements for convertible instruments and EPS in an effort to increase financial reporting transparency. ASU 2020-06 will be effective for fiscal years beginning after December 15, 2021,2023, including interim periods within those fiscal years. Early adoption is permitted. The new guidance was early adopted on January 1, 2022 with no material impact on our consolidated financial statements.the Company’s Consolidated Financial Statements.
Recent Accounting Pronouncements
The JOBS Act permits an emerging growth company to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to use this extended transition period until we are no longer an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issuedASU 2016-13: Financial Instruments – Credit Losses (Topic 326). This ASU requires the use of an expected loss model for certain types of financial instruments and requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates. For trade receivables, loans and held-to-maturity debt securities, an estimate of lifetime expected credit losses is required. For available-for-sale debt securities, an allowance for credit losses will be required rather than a reduction to the carrying value of the asset. In July 2019, the FASB delayed the effective date for this ASU for private companies (including emerging growth companies) and will be effective for annual reporting periods beginning after December 15, 2022, with early adoption permitted. While we have not completed our evaluation of the impact of adoption of this standard, we doThe Company does not expect it to have a material impact on our condensed consolidated financial statements.its Consolidated Financial Statements.
35
In December 2019, the FASB issued ASU 2019-12, Income Taxes.Taxes. This ASU provides for certain updates to reduce complexity in accounting for income taxes, including the utilization of the incremental approach for intra-period tax allocation, among others. This standard is effective for fiscal years beginning after December 15, 2021, and for interim periods beginning after December 15, 2022 with early adoption permitted. While we havethe Company has not completed ourits evaluation of the impact of adoption of this standard, we dothe Company does not expect it to have a material impact on our condensed consolidated financial statements.its Consolidated Financial Statements.
In October 2020, the FASB issued ASU 2020-10, Codification Improvements. The amendments in this Update represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments are effective for annual periods beginning after December 15, 2020, for public business entities. For all other entities, the amendments are effective for annual periods beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022. While the Company has not completed its evaluation of the impact of adoption of this standard, the Company does not expect it to have a material impact on its Consolidated Financial Statements and will adopt it as of January 2023.
In September 2022, the FASB issued ASU 2022-04, Disclosures for Supplier Finance Arrangements. The amendments in this Update enhances the transparency of supplier finance programs. This standard is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022 except for amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. While the Company has not completed its evaluation of the impact of adoption of this standard, the Company does not expect it to have a material impact on its Consolidated Financial Statements and will adopt it as of January 2023.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risk related to changes in interest rates. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments, including cash equivalents, are in the form, or may be in the form of, money market funds or marketable securities and are or may be invested in U.S. Treasury and U.S. government agency obligations. Due to the short-term maturities and low risk profiles of our investment, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our investments. We do not currently use or plan to use financial derivatives in our investment portfolio or engage in hedging transactions to manage our exposure to interest rate risk.
In addition, we have outstanding debt under the Credit Facility with MidCap that bears interest. As of December 31, 2021,2022, our outstanding indebtedness under the Credit Facility was $32.8$21.1 million, which bears interest at a rate of LIBORTerm Secured Overnight Financing Rate ("Term SOFR"), which is defined as SOFR plus 0.10%, plus 5.50%. We do not believe that an immediate 10% increase in interest rates would have a material effect on interest expense for the Credit Facility, and therefore we do not expect our operating results or cash flows to be materially affected to any degree by a sudden change in market interest.
We are currently exposed to market risk related to changes in foreign currency exchange rates. We do not currently engage in hedging transactions to manage our exposure to foreign currency exchange rate risk as we do not currently believe our exposure is material. Sales outside of the U.S. represented approximately 1% and 2% of our net revenue for the years-ended December 31, 20202021 and 2021.2022, respectively. Currently, our revenue-producing transactions are primarily denominated in U.S. dollars; however, as we continue to expand internationally, our results of operations and cash flows may increasingly become subject to fluctuations due to changes in foreign currency exchange rates. In periods when the U.S. dollar declines in value as compared to foreign currencies in which we incur expenses, our foreign-currency based expenses will increase when translated into U.S. dollars. In addition, future fluctuations in the value of the U.S. dollar may affect the price at which we sell our products outside the U.S. To date, our foreign currency risk has been minimal, and we have not historically hedged our foreign currency risk; however, we may consider doing so in the future.
Inflation would generally affect us by increasing our cost of labor and overhead costs. We do not believe that inflation had a material effect on our business, financial condition or results of operations for the years-ended December 31, 20202021 and 2021.December 31,2022.
36
Item 8. Financial Statements and Supplementary Data.
ATERIAN, INC.
Index to Consolidated Financial Statements
Financial Statement Schedule:37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Aterian, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Aterian, Inc. and subsidiaries (the “Company”"Company") as of December 31, 20202021 and 2021,2022, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows, for each of the threetwo years in the period ended December 31, 2021,2022, and the related notes and the financial statement schedule listed in the accompanying index (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20202021 and 2021,2022, and the results of its operations and its cash flows for each of the threetwo years in the period ended December 31, 2021,2022, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying consolidated financial statements have been prepared assuming the Company will be able to continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has sufferedincurred recurring losses from operations and recurring negative operating cash flows since inception and may be unable to remain in compliance with certain financial covenants required by its term loanthe agreement governing the Company’s credit facility which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on the Company’sCompany's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
New York, New York
March 16, 2022 2023
We have served as the Company’s auditor since 2017.
* * * * * *F-1
ATERIAN, INC.
Consolidated Balance Sheets
(in thousands, except share and per share data)
|
| December 31, 2020 |
|
| December 31, 2021 |
|
| December 31, |
|
| December 31, |
| ||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Cash |
| $ | 26,718 |
|
| $ | 30,317 |
|
| $ | 30,317 |
|
| $ | 43,574 |
|
Accounts receivable—net |
|
| 5,747 |
|
|
| 10,478 |
|
|
| 10,478 |
|
|
| 4,515 |
|
Inventory |
|
| 31,582 |
|
|
| 63,045 |
|
|
| 63,045 |
|
|
| 43,666 |
|
Prepaid and other current assets |
|
| 11,111 |
|
|
| 21,034 |
|
|
| 21,034 |
|
|
| 8,261 |
|
Total current assets |
|
| 75,158 |
|
|
| 124,874 |
|
|
| 124,874 |
|
|
| 100,016 |
|
PROPERTY AND EQUIPMENT—net |
|
| 169 |
|
|
| 1,254 |
|
|
| 1,254 |
|
|
| 853 |
|
GOODWILL—net |
|
| 47,318 |
|
|
| 119,941 |
|
|
| 119,941 |
|
|
| — |
|
OTHER INTANGIBLES—net |
|
| 31,460 |
|
|
| 64,955 |
|
|
| 64,955 |
|
|
| 54,757 |
|
OTHER NON-CURRENT ASSETS |
|
| 3,349 |
|
|
| 2,546 |
|
|
| 2,546 |
|
|
| 813 |
|
TOTAL ASSETS |
| $ | 157,454 |
|
| $ | 313,570 |
|
| $ | 313,570 |
|
| $ | 156,439 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Credit facility |
| $ | 12,190 |
|
| $ | 32,845 |
|
| $ | 32,845 |
|
| $ | 21,053 |
|
Accounts payable |
|
| 14,856 |
|
|
| 21,716 |
|
|
| 21,716 |
|
|
| 16,035 |
|
Term loan |
|
| 21,600 |
|
|
| — |
| ||||||||
Seller notes |
|
| 16,231 |
|
|
| 7,577 |
|
|
| 7,577 |
|
|
| 1,693 |
|
Contingent earn-out liability |
|
| 1,515 |
|
|
| 3,983 |
|
|
| 3,983 |
|
|
| — |
|
Accrued and other current liabilities |
|
| 8,340 |
|
|
| 17,621 |
|
|
| 17,621 |
|
|
| 14,254 |
|
Total current liabilities |
|
| 74,732 |
|
|
| 83,742 |
|
|
| 83,742 |
|
|
| 53,035 |
|
OTHER LIABILITIES |
|
| 1,841 |
|
|
| 360 |
|
|
| 360 |
|
|
| 1,452 |
|
CONTINGENT EARN-OUT LIABILITY |
|
| 21,016 |
|
|
| 5,240 |
|
|
| 5,240 |
|
|
| — |
|
TERM LOANS |
|
| 36,483 |
|
|
| — |
| ||||||||
Total liabilities |
|
| 134,072 |
|
|
| 89,342 |
|
|
| 89,342 |
|
|
| 54,487 |
|
COMMITMENTS AND CONTINGENCIES (Note 12) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
STOCKHOLDERS’ EQUITY: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Common stock, par value $0.0001 per share—500,000,000 shares authorized and 27,074,791 shares outstanding at December 31, 2020; 500,000,000 shares authorized and 55,090,237 shares outstanding at December 31, 2021 |
|
| 3 |
|
|
| 5 |
| ||||||||
Common stock, $0.0001 par value, 500,000,000 shares authorized and 55,090,237 and 80,752,290 shares outstanding at December 31, 2021 and December 31, 2022, respectively |
|
| 5 |
|
|
| 8 |
| ||||||||
Additional paid-in capital |
|
| 216,305 |
|
|
| 653,650 |
|
|
| 653,650 |
|
|
| 728,339 |
|
Accumulated deficit |
|
| (192,935 | ) |
|
| (428,959 | ) |
|
| (428,959 | ) |
|
| (625,251 | ) |
Accumulated other comprehensive income |
|
| 9 |
|
|
| (468 | ) |
|
| (468 | ) |
|
| (1,144 | ) |
Total stockholders’ equity |
|
| 23,382 |
|
|
| 224,228 |
|
|
| 224,228 |
|
|
| 101,952 |
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
| $ | 157,454 |
|
| $ | 313,570 |
|
| $ | 313,570 |
|
| $ | 156,439 |
|
See notes to consolidated financial statements.Consolidated Financial Statements.
F-2
ATERIAN, INC.
Consolidated Statements of Operations
(in thousands, except share and per share data)
|
| Year-Ended December 31, |
|
| Year-Ended December 31, |
| ||||||||||||||
|
| 2019 |
|
| 2020 |
|
| 2021 |
|
| 2021 |
|
| 2022 |
| |||||
NET REVENUE |
| $ | 114,451 |
|
| $ | 185,704 |
|
| $ | 247,767 |
|
| $ | 247,767 |
|
| $ | 221,170 |
|
COST OF GOODS SOLD |
|
| 69,411 |
|
|
| 100,958 |
|
|
| 125,904 |
|
|
| 125,904 |
|
|
| 115,652 |
|
GROSS PROFIT |
|
| 45,040 |
|
|
| 84,746 |
|
|
| 121,863 |
|
|
| 121,863 |
|
|
| 105,518 |
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Sales and distribution |
|
| 55,206 |
|
|
| 68,005 |
|
|
| 127,369 |
|
|
| 127,369 |
|
|
| 121,139 |
|
Research and development |
|
| 10,661 |
|
|
| 8,130 |
|
|
| 9,837 |
|
|
| 9,837 |
|
|
| 6,012 |
|
General and administrative |
|
| 33,506 |
|
|
| 30,631 |
|
|
| 45,099 |
|
|
| 45,099 |
|
|
| 38,239 |
|
Impairment loss on goodwill |
|
| — |
|
|
| 120,409 |
| ||||||||||||
Impairment loss on intangibles |
|
| — |
|
|
| 3,118 |
| ||||||||||||
Settlement of a contingent earn-out liability |
|
| — |
|
|
| — |
|
|
| 4,164 |
|
|
| 4,164 |
|
|
| — |
|
Change in fair value of contingent earn-out liabilities |
|
| — |
|
|
| 12,731 |
|
|
| (30,529 | ) |
|
| (30,529 | ) |
|
| (5,240 | ) |
TOTAL OPERATING EXPENSES: |
|
| 99,373 |
|
|
| 119,497 |
|
|
| 155,940 |
|
|
| 155,940 |
|
|
| 283,677 |
|
OPERATING LOSS |
|
| (54,333 | ) |
|
| (34,751 | ) |
|
| (34,077 | ) |
|
| (34,077 | ) |
|
| (178,159 | ) |
INTEREST EXPENSE—net |
|
| 4,386 |
|
|
| 4,979 |
|
|
| 12,655 |
|
|
| 12,655 |
|
|
| 2,603 |
|
GAIN ON EXTINGUISHMENT OF SELLER NOTE |
|
| — |
|
|
| (2,012 | ) | ||||||||||||
LOSS ON INITIAL ISSUANCE OF EQUITY |
|
| — |
|
|
| 18,669 |
| ||||||||||||
CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITY |
|
| — |
|
|
| — |
|
|
| 3,254 |
|
|
| 3,254 |
|
|
| — |
|
LOSS ON EXTINGUISHMENT OF DEBT |
|
| — |
|
|
| 2,037 |
|
|
| 138,859 |
|
|
| 138,859 |
|
|
| — |
|
CHANGE IN FAIR VALUE OF WARRANT LIABILITY |
|
| — |
|
|
| 21,338 |
|
|
| 26,455 |
|
|
| 26,455 |
|
|
| (470 | ) |
LOSS ON INITIAL ISSUANCE OF WARRANTS |
|
| — |
|
|
| — |
|
|
| 20,147 |
|
|
| 20,147 |
|
|
| — |
|
OTHER EXPENSE (INCOME)—net |
|
| 41 |
|
|
| (27 | ) |
|
| 45 |
|
|
| 45 |
|
|
| (281 | ) |
LOSS BEFORE INCOME TAXES |
|
| (58,760 | ) |
|
| (63,078 | ) |
|
| (235,492 | ) |
|
| (235,492 | ) |
|
| (196,668 | ) |
PROVISION FOR INCOME TAXES |
|
| 29 |
|
|
| 48 |
|
|
| 532 |
| ||||||||
PROVISION (BENEFIT) FOR INCOME TAXES |
|
| 532 |
|
|
| (376 | ) | ||||||||||||
NET LOSS |
| $ | (58,789 | ) |
| $ | (63,126 | ) |
| $ | (236,024 | ) |
| $ | (236,024 | ) |
| $ | (196,292 | ) |
Net loss per share, basic and diluted |
| $ | (4.35 | ) |
| $ | (3.68 | ) |
| $ | (6.67 | ) |
| $ | (6.67 | ) |
| $ | (2.95 | ) |
Weighted-average number of shares outstanding, basic and diluted |
|
| 13,516,844 |
|
|
| 17,167,999 |
|
|
| 35,379,005 |
|
|
| 35,379,005 |
|
|
| 66,529,565 |
|
See notes to consolidated financial statements.Consolidated Financial Statements.
F-3
ATERIAN, INC.
Consolidated Statements of Comprehensive Loss
(in thousands)
|
| Year-Ended December 31, |
| |||||||||||||||||
|
| 2019 |
|
| 2020 |
|
| 2021 |
|
| 2021 |
|
| 2022 |
| |||||
NET LOSS |
| $ | (58,789 | ) |
| $ | (63,126 | ) |
| $ | (236,024 | ) |
| $ | (236,024 | ) |
| $ | (196,292 | ) |
OTHER COMPREHENSIVE INCOME: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Foreign currency translation adjustments |
|
| 17 |
|
|
| (48 | ) |
|
| (477 | ) |
|
| (477 | ) |
|
| (676 | ) |
Other comprehensive income (loss) |
|
| 17 |
|
|
| (48 | ) |
|
| (477 | ) | ||||||||
Other comprehensive loss |
|
| (477 | ) |
|
| (676 | ) | ||||||||||||
COMPREHENSIVE LOSS |
| $ | (58,772 | ) |
| $ | (63,174 | ) |
| $ | (236,501 | ) |
| $ | (236,501 | ) |
| $ | (196,968 | ) |
See notes to consolidated financial statements.Consolidated Financial Statements.
F-4
ATERIAN, INC.
Consolidated Statements of Stockholders’ Equity
(in thousands, except share and per share data)
|
| Common Stock |
|
| Additional Paid-in |
|
| Accumulated |
|
| Accumulated Other Comprehensive |
|
| Total Stockholders’ |
| |||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Income |
|
| Equity |
| ||||||
BALANCE—January 1, 2019 |
|
| 11,534,190 |
|
| $ | 1 |
|
| $ | 76,348 |
|
| $ | (71,020 | ) |
| $ | 40 |
|
| $ | 5,369 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (58,789 | ) |
|
| — |
|
|
| (58,789 | ) |
Issuance of 2,406,618 shares of restricted common stock on March 20, 2019 |
|
| 2,406,618 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Issuance of 88,548 shares of restricted common stock on May 17, 2019 and forfeiture of 69,141 shares of restricted common stock |
|
| 19,407 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Issuance of 64,982 shares of restricted common stock on June 12, 2019 |
|
| 64,982 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Issuance of 3,600,000 shares of common stock on June 14, 2019, net of professional fees and offering costs |
|
| 3,600,000 |
|
|
| 1 |
|
|
| 29,446 |
|
|
| — |
|
|
| — |
|
|
| 29,447 |
|
Issuance of 84,975 shares of restricted common stock in August 2019 |
|
| 84,975 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Issuance of 74,510 shares of restricted common stock in November 2019 and forfeiture of 48,520 shares of restricted common stock |
|
| 25,990 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 34,681 |
|
|
| — |
|
|
| — |
|
|
| 34,681 |
|
Exercise of stock options |
|
| 487 |
|
|
| — |
|
|
| 2 |
|
|
| — |
|
|
| — |
|
|
| 2 |
|
Other comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 17 |
|
|
| 17 |
|
BALANCE—January 1, 2020 |
|
| 17,736,649 |
|
| $ | 2 |
|
| $ | 140,477 |
|
| $ | (129,809 | ) |
| $ | 57 |
|
| $ | 10,727 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (63,126 | ) |
|
| — |
|
|
| (63,126 | ) |
Issuance of 439,145 shares of restricted common stock on March 12, 2020 |
|
| 439,145 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Forfeiture of 371,329 shares of restricted common stock |
|
| (371,329 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Forfeiture of 134,366 shares of restricted common stock |
|
| (134,366 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Issuance of 134,364 shares of restricted common stock |
|
| 134,364 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Issuance of 3,860,710 shares of common stock in connection with follow-on public offering, including underwriter's over-allotment, net of offering costs and underwriter's discount |
|
| 3,860,710 |
|
|
| — |
|
|
| 23,416 |
|
|
| — |
|
|
| — |
|
|
| 23,416 |
|
Issuance of 10,000 shares of restricted common stock on July 13, 2020 |
|
| 10,000 |
|
|
| — |
|
|
| 49 |
|
|
| — |
|
|
| — |
|
|
| 49 |
|
Issuance of 95,500 shares of restricted common stock on July 20, 2020 |
|
| 95,500 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Issuance of 22,700 shares of restricted common stock on September 30, 2020 |
|
| 22,700 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Issuance of 25,000 warrants on August 18, 2020 |
|
| — |
|
|
| — |
|
|
| 204 |
|
|
| — |
|
|
| — |
|
|
| 204 |
|
Issuance of 90,000 shares of restricted common stock on August 10, 2020 |
|
| 90,000 |
|
|
| — |
|
|
| 760 |
|
|
| — |
|
|
| — |
|
|
| 760 |
|
Issuance of 90,000 shares of restricted common stock on November 16, 2020 |
|
| 90,000 |
|
|
| — |
|
|
| 659 |
|
|
| — |
|
|
| — |
|
|
| 659 |
|
Issuance of 4,220,000 shares of common stock in connection with asset purchase agreement |
|
| 4,220,000 |
|
|
| 1 |
|
|
| 29,076 |
|
|
| — |
|
|
| — |
|
|
| 29,077 |
|
Issuance of 890,000 shares of restricted common stock on December 14, 2020 |
|
| 890,000 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Issuance of 23,500 shares of restricted common stock on December 17, 2020 |
|
| 23,500 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Shares of common stock retired in connection with vesting |
|
| (42,779 | ) |
|
| — |
|
|
| (150 | ) |
|
| — |
|
|
| — |
|
|
| (150 | ) |
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 21,770 |
|
|
| — |
|
|
| — |
|
|
| 21,770 |
|
Exercise of stock options |
|
| 10,697 |
|
|
| — |
|
|
| 44 |
|
|
| — |
|
|
| — |
|
|
| 44 |
|
Other comprehensive loss |
|
| ��� |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (48 | ) |
|
| (48 | ) |
BALANCE—December 31, 2020 |
|
| 27,074,791 |
|
| $ | 3 |
|
| $ | 216,305 |
|
| $ | (192,935 | ) |
| $ | 9 |
|
| $ | 23,382 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (236,024 | ) |
|
| — |
|
|
| (236,024 | ) |
Issuance of common stock upon exercise of stock option grants |
|
| 1,011,422 |
|
|
| — |
|
|
| 9,033 |
|
|
| — |
|
|
| — |
|
|
| 9,033 |
|
Issuance of common stock related to exercise of warrants |
|
| 6,405,605 |
|
|
| — |
|
|
| 40,318 |
|
|
| — |
|
|
| — |
|
|
| 40,318 |
|
| Common Stock |
| Additional |
| Accumulated |
| Accumulated |
| Total |
| |||||||||||||||||||||||||||||||||||||
| Shares |
| Amount |
| Capital |
| Deficit |
| Income |
| Equity |
| |||||||||||||||||||||||||||||||||||
BALANCE—December 31, 2020 |
| 27,074,791 |
|
| $ | 3 |
|
| $ | 216,305 |
|
| $ | (192,935 | ) |
| $ | 9 |
|
| $ | 23,382 |
| ||||||||||||||||||||||||
Net loss | — |
|
| — |
|
| — |
|
|
| (236,024 | ) |
| — |
|
|
| (236,024 | ) | ||||||||||||||||||||||||||||
Issuance of common stock upon exercise of stock option grants |
| 1,011,422 |
|
| — |
|
|
| 9,033 |
|
| — |
|
| — |
|
|
| 9,033 |
| |||||||||||||||||||||||||||
Issuance of common stock related to exercise of warrants |
| 6,405,605 |
|
| — |
|
|
| 40,318 |
|
| — |
|
| — |
|
|
| 40,318 |
| |||||||||||||||||||||||||||
Issuance of common stock in connection with acquisition of Healing Solutions assets |
|
| 2,796,001 |
|
|
| — |
|
|
| 47,369 |
|
|
| — |
|
|
| — |
|
|
| 47,369 |
|
| 2,796,001 |
|
| — |
|
|
| 47,369 |
|
| — |
|
| — |
|
|
| 47,369 |
| |||
Issuance of restricted stock awards |
|
| 769,104 |
|
|
| — |
|
|
| 7,669 |
|
|
| — |
|
|
| — |
|
|
| 7,669 |
|
| 769,104 |
|
| — |
|
|
| 7,669 |
|
| — |
|
| — |
|
|
| 7,669 |
| |||
Issuance of warrants to High Trail |
|
| — |
|
|
| — |
|
|
| 39,016 |
|
|
| — |
|
|
| — |
|
|
| 39,016 |
| — |
|
| — |
|
|
| 39,016 |
|
| — |
|
| — |
|
|
| 39,016 |
| ||||
Issuance of warrants to Midcap |
|
| — |
|
|
| — |
|
|
| 589 |
|
|
| — |
|
|
| — |
|
|
| 589 |
| — |
|
| — |
|
|
| 589 |
|
| — |
|
| — |
|
|
| 589 |
| ||||
Issuance of common stock to High Trail |
|
| 12,284,161 |
|
|
| 2 |
|
|
| 129,618 |
|
|
| — |
|
|
| — |
|
|
| 129,620 |
|
| 12,284,161 |
|
|
| 2 |
|
|
| 129,618 |
|
| — |
|
| — |
|
|
| 129,620 |
| ||
Reclassification of warrants to equity |
|
| — |
|
|
| — |
|
|
| 97,088 |
|
|
| — |
|
|
| — |
|
|
| 97,088 |
| — |
|
| — |
|
|
| 97,088 |
|
| — |
|
| — |
|
|
| 97,088 |
| ||||
Reclassification of warrants to liability |
|
| — |
|
|
| — |
|
|
| (21,260 | ) |
|
| — |
|
|
| — |
|
|
| (21,260 | ) | — |
|
| — |
|
|
| (21,260 | ) |
| — |
| — |
|
|
| (21,260 | ) | |||||
Warrant modification on extinguishment |
|
| — |
|
|
| — |
|
|
| 17,399 |
|
|
| — |
|
|
| — |
|
|
| 17,399 |
| — |
|
| — |
|
|
| 17,399 |
|
| — |
|
| — |
|
|
| 17,399 |
| ||||
Issuance of shares of common stock net of professional fees and offering costs |
|
| 2,666,667 |
|
|
| — |
|
|
| 36,735 |
|
|
| — |
|
|
| — |
|
|
| 36,735 |
|
| 2,666,667 |
|
| — |
|
|
| 36,735 |
|
| — |
|
| — |
|
|
| 36,735 |
| |||
Issuance of shares of common stock in connection with asset purchase agreement |
|
| 704,548 |
|
|
| — |
|
|
| 11,075 |
|
|
| — |
|
|
| — |
|
|
| 11,075 |
|
| 704,548 |
|
| — |
|
|
| 11,075 |
|
| — |
|
| — |
|
|
| 11,075 |
| |||
Issuance of shares of restricted common stock |
|
| 2,025,597 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| 2,025,597 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| |||||
Forfeiture of shares of restricted common stock |
|
| (647,659 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| (647,659 | ) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| |||||
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| 22,696 |
|
|
| — |
|
|
| — |
|
|
| 22,696 |
| — |
|
| — |
|
|
| 22,696 |
|
| — |
|
| — |
|
|
| 22,696 |
| ||||
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (477 | ) |
|
| (477 | ) | — |
|
| — |
|
| — |
|
| — |
|
|
| (477 | ) |
|
| (477 | ) | ||||
BALANCE—December 31, 2021 |
|
| 55,090,237 |
|
| $ | 5 |
|
| $ | 653,650 |
|
| $ | (428,959 | ) |
| $ | (468 | ) |
| $ | 224,228 |
|
| 55,090,237 |
|
| $ | 5 |
|
| $ | 653,650 |
|
| $ | (428,959 | ) |
| $ | (468 | ) |
| $ | 224,228 |
|
Net loss | — |
|
| — |
|
| — |
|
|
| (196,292 | ) |
| — |
|
|
| (196,292 | ) | ||||||||||||||||||||||||||||
Issuance of shares of restricted common stock |
| 4,428,662 |
|
|
| 1 |
|
| — |
|
| — |
|
| — |
|
|
| 1 |
| |||||||||||||||||||||||||||
Forfeiture of shares of restricted common stock |
| (423,482 | ) |
| — |
| — |
| — |
| — |
| — |
| |||||||||||||||||||||||||||||||||
Exercise of pre-funded warrants |
| 3,013,850 |
|
| — |
|
|
| 15,039 |
|
| — |
|
| — |
|
|
| 15,039 |
| |||||||||||||||||||||||||||
Issuance of common stock for settlement of seller note |
| 292,887 |
|
| — |
|
| 767 |
|
| — |
| — |
|
| 767 |
| ||||||||||||||||||||||||||||||
Issuance of common stock, net of issuance costs |
| 18,277,948 |
|
|
| 2 |
|
|
| 46,832 |
|
| — |
|
| — |
|
|
| 46,834 |
| ||||||||||||||||||||||||||
Issuance of warrants in connection with offering | — |
|
| — |
|
|
| (18,982 | ) |
| — |
|
| — |
|
|
| (18,982 | ) | ||||||||||||||||||||||||||||
Issuance of common stock |
| 72,188 |
|
|
|
|
|
| 43 |
|
| — |
|
| — |
|
|
| 43 |
| |||||||||||||||||||||||||||
Initial issuance of equity | — |
|
| — |
|
|
| 18,669 |
|
| — |
|
| — |
|
|
| 18,669 |
| ||||||||||||||||||||||||||||
Issuance of warrant to contractors | — |
|
| — |
|
|
| 1,137 |
|
| — |
| — |
|
|
| 1,137 |
| |||||||||||||||||||||||||||||
Stock-based compensation expense | — |
|
| — |
|
|
| 11,184 |
|
| — |
|
| — |
|
|
| 11,184 |
| ||||||||||||||||||||||||||||
Other comprehensive loss | — |
|
| — |
|
| — |
|
| — |
|
|
| (676 | ) |
|
| (676 | ) | ||||||||||||||||||||||||||||
BALANCE—December 31, 2022 |
| 80,752,290 |
|
| $ | 8 |
|
| $ | 728,339 |
|
| $ | (625,251 | ) |
| $ | (1,144 | ) |
| $ | 101,952 |
|
See notes to consolidated financial statements.Consolidated Financial Statements.
F-5
ATERIAN, INC.
Consolidated Statements of Cash Flows
(in thousands)
|
| Year-Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2020 |
|
| 2021 |
| |||
OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (58,789 | ) |
| $ | (63,126 | ) |
| $ | (236,024 | ) |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 183 |
|
|
| 552 |
|
|
| 7,326 |
|
Provision for sales returns |
|
| 134 |
|
|
| 92 |
|
|
| 43 |
|
Amortization of deferred financing cost and debt discounts |
|
| 1,218 |
|
|
| 2,245 |
|
|
| 7,742 |
|
Stock-based compensation |
|
| 34,681 |
|
|
| 22,716 |
|
|
| 28,987 |
|
Loss (Gain) from increase of contingent earn-out liability fair value |
|
| — |
|
|
| 12,731 |
|
|
| (30,529 | ) |
Loss in connection with settlement of earn-out |
|
| — |
|
|
| — |
|
|
| 4,164 |
|
Loss in connection with the change in warrant fair value |
|
| — |
|
|
| 21,338 |
|
|
| 26,455 |
|
Loss on initial issuance of warrants |
|
| — |
|
|
| — |
|
|
| 20,147 |
|
Loss from extinguishment of High Trail December 2020 and February 2021 Term Loan |
|
| — |
|
|
| — |
|
|
| 28,240 |
|
Loss from extinguishment of High Trail April 2021 Term Loan |
|
| — |
|
|
| — |
|
|
| 106,991 |
|
Loss from extinguishment of High Trail Term Loan |
|
| — |
|
|
| — |
|
|
| 2,096 |
|
Loss from extinguishment of Credit Facility |
|
| — |
|
|
| — |
|
|
| 1,532 |
|
Loss from extinguishment of Horizon term loan |
|
| — |
|
|
| 1,065 |
|
|
| — |
|
Provision for barter credits |
|
| — |
|
|
| — |
|
|
| 1,000 |
|
Loss from derivative liability discount related to term loan |
|
| — |
|
|
| — |
|
|
| 3,254 |
|
Allowance for doubtful accounts and other |
|
| 94 |
|
|
| — |
|
|
| 4,200 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| 309 |
|
|
| (4,703 | ) |
|
| (4,554 | ) |
Inventory |
|
| (5,360 | ) |
|
| 18,659 |
|
|
| (19,303 | ) |
Prepaid and other current assets |
|
| (1,004 | ) |
|
| 1,513 |
|
|
| (7,856 | ) |
Accounts payable, accrued and other liabilities |
|
| 3,334 |
|
|
| (6,991 | ) |
|
| 14,120 |
|
Cash provided (used) by operating activities |
|
| (25,200 | ) |
|
| 6,091 |
|
|
| (41,969 | ) |
INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of fixed assets |
|
| (114 | ) |
|
| (89 | ) |
|
| (32 | ) |
Purchase of Truweo assets |
|
| (1,176 | ) |
|
| — |
|
|
| — |
|
Purchase of Truweo assets |
|
| — |
|
|
| (13,965 | ) |
|
| — |
|
Purchase of Smash assets |
|
| — |
|
|
| (25,000 | ) |
|
| — |
|
Purchase of Healing Solutions assets |
|
| — |
|
|
| — |
|
|
| (15,250 | ) |
Purchase of Photo Paper Direct, net of cash acquired |
|
| — |
|
|
| — |
|
|
| (10,583 | ) |
Purchase of Squatty Potty assets |
|
| — |
|
|
| — |
|
|
| (19,040 | ) |
Proceeds on sale of fixed assets |
|
| 6 |
|
|
| — |
|
|
| — |
|
Cash used in investing activities |
|
| (1,284 | ) |
|
| (39,054 | ) |
|
| (44,905 | ) |
FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from initial public offering, net of issuance costs |
|
| 36,000 |
|
|
| — |
|
|
| — |
|
Issuance costs from initial public offering |
|
| (5,446 | ) |
|
| — |
|
|
| — |
|
Proceeds from warrant exercise |
|
| — |
|
|
| — |
|
|
| 9,085 |
|
Proceeds from cancellation of warrant |
|
| — |
|
|
| — |
|
|
| 16,957 |
|
Proceeds from issuance of common stock from follow-on public offering, net of issuance costs |
|
| — |
|
|
| 23,416 |
|
|
| 36,735 |
|
Proceeds from exercise of stock options |
|
| — |
|
|
| — |
|
|
| 9,033 |
|
Repayments on note payable to Aussie Health Co. |
|
| — |
|
|
| (207 | ) |
|
| — |
|
Repayments on note payable to Smash |
|
| — |
|
|
| — |
|
|
| (10,495 | ) |
Payment of earnout to Squatty Potty |
|
| — |
|
|
| — |
|
|
| (7,971 | ) |
Proceeds from exercise of stock options |
|
| — |
|
|
| 44 |
|
|
| — |
|
Tax paid in connection with RSAs |
|
| — |
|
|
| (150 | ) |
|
| — |
|
Borrowings from MidCap credit facilities |
|
| 98,663 |
|
|
| 123,633 |
|
|
| 48,750 |
|
Repayments from MidCap credit facilities |
|
| (92,165 | ) |
|
| (133,782 | ) |
|
| (28,274 | ) |
Debt issuance costs from MidCap credit facility |
|
| (581 | ) |
|
| — |
|
|
| (849 | ) |
Debt issuance costs from Horizon term loan |
|
| (900 | ) |
|
| — |
|
|
| — |
|
Repayments for Horizon term loan |
|
| — |
|
|
| (15,990 | ) |
|
| — |
|
Borrowings from High Trail term loan |
|
| — |
|
|
| 38,000 |
|
|
| — |
|
Debt issuance costs High Trail term loan |
|
| — |
|
|
| (2,207 | ) |
|
| — |
|
Repayments for High Trail December 2020 Note and February 2021 Note |
|
| — |
|
|
| — |
|
|
| (59,500 | ) |
Repayments for High Trail April 2021 Note |
|
| — |
|
|
| — |
|
|
| (10,139 | ) |
Repayments for High Trail December 2021 Note |
|
| — |
|
|
| — |
|
|
| (27,500 | ) |
Borrowings from High Trail February 2021 Note |
|
| — |
|
|
| — |
|
|
| 14,025 |
|
Borrowings from High Trail April 2021 Note |
|
| — |
|
|
| — |
|
|
| 110,000 |
|
Debt issuance costs from High Trail February 2021 Note |
|
| — |
|
|
| — |
|
|
| (1,462 | ) |
Debt issuance costs from High Trail April 2021 Note |
|
| — |
|
|
| — |
|
|
| (2,202 | ) |
Insurance financing proceeds |
|
| 3,833 |
|
|
| 2,660 |
|
|
| 2,424 |
|
Insurance obligation payments |
|
| (2,783 | ) |
|
| (3,066 | ) |
|
| (3,048 | ) |
Capital lease obligation payments |
|
| (55 | ) |
|
| (32 | ) |
|
| — |
|
Cash provided by financing activities |
|
| 36,566 |
|
|
| 32,319 |
|
|
| 95,569 |
|
EFFECT OF EXCHANGE RATE ON CASH |
|
| (1 | ) |
|
| (48 | ) |
|
| (477 | ) |
NET CHANGE IN CASH AND RESTRICTED CASH FOR THE YEAR |
|
| 10,081 |
|
|
| (692 | ) |
|
| 8,218 |
|
|
| Year-Ended December 31, |
| |||||||||||||||||
|
| 2021 |
| 2022 |
| |||||||||||||||
OPERATING ACTIVITIES: |
|
|
|
|
| |||||||||||||||
Net loss |
| $ | (236,024 | ) |
| $ | (196,292 | ) | ||||||||||||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
|
|
|
|
|
| ||||||||||||||
Depreciation and amortization |
|
| 7,326 |
|
|
| 7,521 |
| ||||||||||||
Provision for sales returns |
|
| 43 |
|
|
| 56 |
| ||||||||||||
Amortization of deferred financing cost and debt discounts |
|
| 7,742 |
|
|
| 429 |
| ||||||||||||
Stock-based compensation |
|
| 28,987 |
|
|
| 14,594 |
| ||||||||||||
Gain from decrease of contingent earn-out liability fair value |
|
| (30,529 | ) |
|
| (5,240 | ) | ||||||||||||
Loss in connection with settlement of earn-out |
|
| 4,164 |
|
| — |
| |||||||||||||
Loss (gain) in connection with the change in warrant fair value |
|
| 26,455 |
|
|
| (470 | ) | ||||||||||||
Gain in connection with settlement of note payable |
| — |
|
|
| (2,012 | ) | |||||||||||||
Loss on initial issuance of warrants |
|
| 20,147 |
|
| — |
| |||||||||||||
Issuance of common stock |
| — |
|
|
| 43 |
| |||||||||||||
Loss on initial issuance of equity |
|
| — |
|
|
| 18,669 |
| ||||||||||||
Loss from extinguishment of High Trail December 2020 and February 2021 Term Loan |
|
| 28,240 |
|
| — |
| |||||||||||||
Loss from extinguishment of High Trail April 2021 Term Loan |
|
| 106,991 |
|
| — |
| |||||||||||||
Loss from extinguishment of High Trail Term Loan |
|
| 2,096 |
|
| — |
| |||||||||||||
Loss from extinguishment of Credit Facility |
|
| 1,532 |
|
| — |
| |||||||||||||
Provision for barter credits |
|
| 1,000 |
|
|
| 1,643 |
| ||||||||||||
Loss from derivative liability discount related to term loan |
|
| 3,254 |
|
| — |
| |||||||||||||
Impairment loss on goodwill |
| — |
|
|
| 120,409 |
| |||||||||||||
Impairment loss on intangibles |
| — |
|
|
| 3,118 |
| |||||||||||||
Allowance for doubtful accounts and other |
|
| 4,200 |
|
|
| 367 |
| ||||||||||||
Changes in assets and liabilities: |
|
|
|
|
|
| ||||||||||||||
Accounts receivable |
|
| (4,554 | ) |
|
| 5,596 |
| ||||||||||||
Inventory |
|
| (19,303 | ) |
|
| 19,438 |
| ||||||||||||
Prepaid and other current assets |
|
| (7,856 | ) |
|
| 5,564 |
| ||||||||||||
Accounts payable, accrued and other liabilities |
|
| 14,120 |
|
|
| (10,910 | ) | ||||||||||||
Cash used in operating activities |
|
| (41,969 | ) |
|
| (17,477 | ) | ||||||||||||
INVESTING ACTIVITIES: |
|
|
|
|
|
| ||||||||||||||
Purchase of fixed assets |
|
| (32 | ) |
|
| (82 | ) | ||||||||||||
Purchase of Healing Solutions assets |
|
| (15,250 | ) |
| — |
| |||||||||||||
Purchase of Photo Paper Direct, net of cash acquired |
|
| (10,583 | ) |
| — |
| |||||||||||||
Purchase of Squatty Potty assets |
|
| (19,040 | ) |
| — |
| |||||||||||||
Purchase of Step and Go assets |
| — |
|
|
| (595 | ) | |||||||||||||
Cash used in investing activities |
|
| (44,905 | ) |
|
| (677 | ) | ||||||||||||
FINANCING ACTIVITIES: |
|
|
|
|
|
| ||||||||||||||
Proceeds from warrant exercise |
|
| 9,085 |
|
| — |
| |||||||||||||
Proceeds from cancellation of warrant |
|
| 16,957 |
|
| — |
| |||||||||||||
Proceeds from issuance of common stock from follow-on public offering, net of issuance costs |
|
| 36,735 |
|
| — |
| |||||||||||||
Proceeds from equity offering, net of issuance costs |
| — |
|
|
| 46,834 |
| |||||||||||||
Proceeds from exercise of stock options |
|
| 9,033 |
|
| — |
| |||||||||||||
Repayments on note payable to Smash |
|
| (10,495 | ) |
|
| (3,423 | ) | ||||||||||||
Payment of earn-out to Squatty Potty |
|
| (7,971 | ) |
|
| (3,983 | ) | ||||||||||||
Borrowings from MidCap credit facilities |
|
| 48,750 |
|
|
| 136,687 |
| ||||||||||||
Repayments for MidCap credit facilities |
|
| (28,274 | ) |
|
| (148,907 | ) | ||||||||||||
Debt issuance costs from MidCap credit facility |
|
| (849 | ) |
| — |
| |||||||||||||
Repayments for High Trail April 2021 Note |
|
| (10,139 | ) |
| — |
| |||||||||||||
Repayments for High Trail December 2021 Note |
|
| (27,500 | ) |
| — |
| |||||||||||||
Repayments for High Trail December 2020 Note and February 2021 Note |
|
| (59,500 | ) |
| — |
| |||||||||||||
Borrowings from High Trail February 2021 Note |
|
| 14,025 |
|
| — |
| |||||||||||||
Borrowings from High Trail April 2021 Note |
|
| 110,000 |
|
| — |
| |||||||||||||
Debt issuance costs from High Trail February 2021 Note |
|
| (1,462 | ) |
| — |
| |||||||||||||
Debt issuance costs from High Trail April 2021 Note |
|
| (2,202 | ) |
| — |
| |||||||||||||
Insurance financing proceeds |
|
| 2,424 |
|
|
| 2,099 |
| ||||||||||||
Insurance obligation payments |
|
| (3,048 | ) |
|
| (2,311 | ) | ||||||||||||
Cash provided by financing activities |
|
| 95,569 |
|
|
| 26,996 |
| ||||||||||||
EFFECT OF EXCHANGE RATE ON CASH |
|
| (477 | ) |
|
| (528 | ) | ||||||||||||
NET CHANGE IN CASH AND RESTRICTED CASH FOR THE YEAR |
|
| 8,218 |
|
|
| 8,314 |
| ||||||||||||
CASH AND RESTRICTED CASH AT BEGINNING OF YEAR |
|
| 20,708 |
|
|
| 30,789 |
|
|
| 30,097 |
|
|
| 30,097 |
|
|
| 38,315 |
|
CASH AND RESTRICTED CASH AT END OF YEAR |
| $ | 30,789 |
|
| $ | 30,097 |
|
| $ | 38,315 |
|
|
| 38,315 |
|
|
| 46,629 |
|
RECONCILIATION OF CASH AND RESTRICTED CASH |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
CASH |
| $ | 30,353 |
|
| $ | 26,718 |
|
| $ | 30,317 |
|
|
| 30,317 |
|
|
| 43,574 |
|
RESTRICTED CASH—Prepaid and other current assets |
|
| 307 |
|
|
| 3,250 |
|
|
| 7,849 |
|
|
| 7,849 |
|
|
| 2,926 |
|
RESTRICTED CASH—Other non-current assets |
|
| 129 |
|
|
| 129 |
|
|
| 149 |
|
|
| 149 |
|
|
| 129 |
|
TOTAL CASH AND RESTRICTED CASH |
| $ | 30,789 |
|
| $ | 30,097 |
|
| $ | 38,315 |
|
| $ | 38,315 |
|
| $ | 46,629 |
|
|
|
|
|
|
|
| ||||||||||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
|
|
|
|
|
| ||||||||||||||
Cash paid for interest |
| $ | 5,611 |
|
| $ | 1,875 |
| ||||||||||||
Cash paid for taxes |
| $ | 41 |
|
| $ | 100 |
| ||||||||||||
Non-cash consideration paid to contractors |
| $ | - |
|
| $ | 1,137 |
| ||||||||||||
Modification of warrants between equity and liability |
| $ | 75,828 |
|
| $ | — |
| ||||||||||||
Non-cash consideration paid to contractors |
| $ | 7,289 |
|
| $ | — |
| ||||||||||||
NON-CASH INVESTING AND FINANCING ACTIVITIES: |
|
|
|
|
|
| ||||||||||||||
Original issue discount |
| $ | 2,475 |
|
| $ | — |
| ||||||||||||
Fair value of contingent consideration |
| $ | 20,971 |
|
| $ | — |
| ||||||||||||
Discount of debt relating to warrants issuance |
| $ | 51,284 |
|
| $ | — |
| ||||||||||||
Notes payable of acquisition |
| $ | 16,550 |
|
| $ | — |
| ||||||||||||
Issuance of common stock in connection with Healing Solutions and Photo Paper Direct acquisitions |
| $ | 50,529 |
|
| $ | — |
|
F-6
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
| $ | 3,201 |
|
| $ | 2,787 |
|
| $ | 5,611 |
|
Cash paid for taxes |
| $ | 21 |
|
| $ | 46 |
|
| $ | 41 |
|
Non-cash barter exchange of inventory for advertising/logistics credits |
| $ | — |
|
| $ | 3,352 |
|
| $ | — |
|
Modification of warrants between equity and liability |
| $ | — |
|
| $ | — |
|
| $ | 75,828 |
|
Non-cash consideration paid to contractors |
| $ | — |
|
| $ | 1,672 |
|
| $ | 7,289 |
|
NON-CASH INVESTING AND FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity fundraising costs not paid |
| $ | 160 |
|
| $ | — |
|
| $ | — |
|
Debt issuance costs not paid |
| $ | — |
|
| $ | 142 |
|
| $ | — |
|
Original issue discount |
| $ | — |
|
| $ | 5,000 |
|
| $ | 2,475 |
|
Discount of debt relating to warrants issuance |
| $ | — |
|
| $ | 10,483 |
|
| $ | — |
|
Notes payable related to acquisitions |
| $ | 195 |
|
| $ | 18,073 |
|
| $ | — |
|
Issuance of common stock in connection with acquisition |
| $ | — |
|
| $ | 29,075 |
|
| $ | — |
|
Fair value of contingent consideration |
| $ | — |
|
| $ | 9,800 |
|
| $ | 20,971 |
|
Discount of debt relating to warrants issuance |
| $ | — |
|
| $ | — |
|
| $ | 51,284 |
|
Notes Payable of acquisition |
| $ | — |
|
| $ | — |
|
| $ | 16,550 |
|
Issuance of common stock in connection with Healing Solutions and Photo Paper Direct acquisitions |
| $ | — |
|
| $ | — |
|
| $ | 50,529 |
|
Issuance of common stock - debt repayment |
| $ | — |
|
| $ | — |
|
| $ | 125,562 |
|
Issuance of common stock - Healing Solutions earnout settlement |
| $ | — |
|
| $ | — |
|
| $ | 7,914 |
|
Issuance of common stock - debt repayment |
| $ | 125,562 |
|
| $ | — |
|
Issuance of common stock - Healing Solutions earn-out settlement |
| $ | 7,914 |
|
| $ | — |
|
Issuance of common stock related to exercise of warrants |
| $ | — |
|
| $ | 767 |
|
Initial issuance of equity |
| $ | — |
|
| $ | 18,669 |
|
Fair value of warrants issued in connection with equity offering |
| $ | — |
|
| $ | 18,982 |
|
Issuance of common stock |
| $ | — |
|
| $ | 43 |
|
Exercise of prefunded warrants |
| $ | — |
|
| $ | 15,039 |
|
See notes to consolidated financial statements.Consolidated Financial Statements.
F-7
Aterian, Inc.
Notes to consolidated financial statementsConsolidated Financial Statements
FOR THE YEARS-ENDED DECEMBER 31, 2019, 20202021 and 20212022
(In thousands, except share and per share data)
1.ORGANIZATION AND DESCRIPTION OF BUSINESS
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Aterian, Inc., formerly known as Mohawk Group Holdings, Inc., and its subsidiaries, (“Aterian” or the “Company”), is a technology-enabled consumer products platformcompany that builds, acquires and partners with e-commerce brands. The Company’s proprietary software and agile supply chain helps create a growing base of consumer products. Aterian predominantly operates through online retail channels such as Amazon and Walmart, Inc. The Company owns and operates fourteenfifteen brands, which were either incubated or purchased, selling 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 essentialsessential oils.
Headquartered in New York, Aterian’s offices can also be found in China, Philippines, Israel and Poland.
Liquidity and Going Concern—As of December 31, 2021, the Company had total cash and cash equivalents of $30.3 million and an accumulated deficit of $429.0 million. In addition, the Company’s net loss and net cash used in operating activities amounted to $236.0 million and $42.0 million, respectively, for the year ended December 31, 2021.Concern
As an emerging growth company in the Company hasearly commercialization stage of its lifecycle, we are subject to inherent risks and uncertainties associated with the development of our enterprise. In this regard, substantially all of our efforts to date have been dependent on outside capital throughdevoted to the issuancedevelopment and sale of equity to investors and borrowings from lenders (collectively “outside capital”) since its inception to execute its growth strategy of investingour products in the marketplace, which includes our investment in organic growth at the expense of short-term profitably, and investingour investment in incremental growth through mergers and& acquisitions (“M&A strategy”)., our recruitment of management and technical staff, and raising capital to fund the development of our enterprise. As a result of these efforts, we have incurred significant losses and negative cash flows from operations since our inception and expect to continue to incur such losses and negative cash flows for the foreseeable future until such time that we reach a scale of profitability to sustain our operations. In addition, the Company’sour 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 disclosure below)below for additional details). As a result,
In order to execute our growth strategy, we have historically relied on outside capital through the Company has incurred significant lossesissuance of equity, debt, and will remain dependentborrowings under financing arrangements (collectively “outside capital”) to fund our cost structure and we expect to continue to rely on outside capital for the foreseeable future, untilspecifically for M&A. While we believe we will eventually reach a scale of profitability to sustain our operations, there can be no assurance we will be able to achieve such timeprofitability or do so in a manner that the Company can realize its strategy of growth by generating profits through its organic growth and M&A strategy, and reduce itsdoes not require our continued reliance on outside capital. Moreover, while we have historically been successful in raising outside capital, there can be no assurance we will be able to continue to obtain outside capital in the future or do so on terms that are acceptable to us.
Given
As of the inherent uncertainties associateddate the accompanying Consolidated Financial Statements were issued (the “issuance date”), we evaluated the significance of the following adverse financial conditions in accordance with executingAccounting Standard Codification 205-40, Going Concern:
F-8
In addition, as disclosed in Note 9, the Company entered into a $50.0 million asset backed credit agreement in December 2021. The credit facility contains a financial covenant that requires the Company to maintain a minimum unrestricted cash balance of (a) $12.5 million during the period from February 1st through and including May 31st of each calendar year, and (b) $15.0 million at all other times thereafter. At its election, the Company may elect to comply with an alternative financial covenant that would require the Company to maintain a minimum borrowing availability under the credit facility of $10.0 million at all times. The Company does not anticipate electing the alternative financial covenant over the next twelve months and was in compliance with the minimum liquidity covenant as of the date these consolidated financial statements were issued.
Since its inception, the Company has been able to successfully raise a substantial amount of outside capital to fund the Company’s growth strategy. However, as of December 31, 2021, the Company had no firm commitments of additional outside capital from current or prospective investors or lenders. While management believes the Company will be able to secure additional outside capital, no assurance can be provided that such capital will be obtained or on terms that are acceptable to the Company. Furthermore, given the inherent uncertainties associated with the Company’s growth strategy, the Company 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 the Company’s ability to continue as a going concern.
In order to alleviate substantial doubt, management plansissuance date.
delaying expenditures, reducereducing investments in new products, delaydelaying the development of itsour software, reduce itsor reducing our sale and distribution infrastructure, or otherwise significantly reduce the scopeinfrastructure. We may also need to seek long-term strategic alternatives, such as a significant curtailment of its business. Moreover, if the Company breaches the financial covenants required by the credit facility agreement and fails to secureour operations, a waiver or forbearance from the lender, such breach or failure could accelerate the repaymentsale of certain of our assets, a divestiture of certain product lines, a sale of the outstanding borrowings under the credit facility agreemententire enterprise to strategic or the exercise of other rights financial investors, and/or remedies the lender may have under applicable law. Management 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 acceptableallow our enterprise to the Company.become insolvent.
These uncertainties raise substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statementsConsolidated Financial Statements have been prepared on the basis that the Companywe will continue to operate as a going concern, which contemplates that the Companywe will be able to realize assets and settle liabilities and commitments in the normal course of business for the foreseeable future. Accordingly, the accompanying consolidated financial statementsConsolidated Financial Statements do not include any adjustments that may result from the outcome of these uncertainties.
COVID-19 Pandemic and Supply Chain—The full impact of the COVID-19 pandemic and Supply Chain including the impact associated with preventive and precautionary measures that the Company, other businesses and governments are taking, continues to evolve as of the date of this report.
During 2021, the Company has been2022 we were 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 the Company relieswe rely on to import itsour goods, has reduced the reliability and timely delivery of such shipping containers and has substantially increased the Company’sour last mile shipping costs on its oversized goods. These cost increases have been particularly substantial toour oversized goods, which isare a material part of the Company’sour business. The reduced reliability and delivery of such shipping containers is forcing the Companyforced us to spend more on premium shipping to ensure goods arewere delivered if at all, and. Further, 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 the Companyled us to increase itsour inventory on-hand, including advance ordering and taking possession of inventory earlier than expected, impacting itsour working capital.
Third party last mile shipping partners, such as UPS and FedEx, continue to increase the cost of delivering goods to the end consumers as their delivery networks continue to be impacted byadjusted following the onset of COVID-19 pandemic. The COVID-19 pandemic continues to bringThere remains significant uncertainty to consumer demand and buying habits 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 the U.S. Coupled with the recent reopening of the majority of the country, the Company has noticed changes to consumer buying habits, which may haveand potentially reduced demand for itsour products.
COVID-19 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 the U.S. Coupled with continued changes in governmental restrictions and requirements, which continued to vary across the majority of the country, the Company has noticed changes to consumer buying habits, which may have reduced demand for its products.
The Company continuesWe continue to consider the impact of the COVID-19 and Supply Chainthe related supply chain disruptions on the assumptions and estimates used when preparing theseour 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.change. If the economic conditions caused by COVID-19 and Supply Chain worsen beyond what is currently estimated by management, such future changes may have an adverse impact on the Company’s results ofour business, operations, financial position,results, and liquidity.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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Basis of Presentation—The consolidated financial statementsConsolidated Financial Statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Use of Estimates—Preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period covered by the financial statements and accompanying notes. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from those estimates.
Principles of Consolidation—The consolidated financial statementsConsolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Restricted Cash—As of December 31, 2020, the Company has classified the following as restricted cash: $0.1 million related to its Chinese subsidiary within “other non-current assets” on the consolidated balance sheets and $3.3 million related to a returned deposit for inventory that a manufacturer required the Company to pay into an escrow account within “prepaid and other current assets” on the consolidated balance sheets.
Restricted Cash— As of December 31, 2021, the Company has classified the following as restricted cash: $0.1$0.1 million related to its Chinese subsidiary within “other non-current assets” on the consolidated balance sheets, $2.0$2.0 million related to a letter of credit and $5.9$5.9 million for cash sweep accounts related to the Midcap Credit facility within “prepaid and other current assets” on the consolidated balance sheets.
F-9
As of December 31, 2022, the Company has classified the following as restricted cash: $0.1 million related to its Chinese subsidiary within “other non-current assets” on the consolidated balance sheets, $2.0 million related to a letter of credit and $0.9 million for cash sweeps account related to the Midcap Credit Facility within "prepaid and other current assets" on the consolidated balance sheets.
Accounts Receivable—Accounts receivable are stated at historical cost less allowance for doubtful accounts. On a periodic basis, management evaluates its accounts receivable and determines whether to provide an allowance or if any accounts should be written off based on a past history of write-offs, collections and current credit conditions. A receivable is considered past due if the Company has not received payments based on agreed-upon terms. The Company generally does not require any security or collateral to support its receivables. The Company performs on-going evaluations of its customers and maintains an allowance for bad and doubtful receivables. On December 31, 20202021 and 2021,2022, the Company had 0an allowance for doubtful accounts.accounts of $0.0 and $0.4 million, respectively.
Concentration of Credit Risk—Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable. The Company maintains cash and restricted cash with various domestic and foreign financial institutions of high credit quality. The Company performs periodic evaluations of the relative credit standing of all of the aforementioned institutions.The Company does have cash deposits at financial institutions in excess of the insured amount of $0.3 million by the Federal Deposit Insurance Corporation.
The Company’s accounts receivables are derived from sales contracts with a large number of customers. The Company maintains reserves for potential credit losses on customer accounts when deemed necessary. Significant customers are those which represent more than 10% of the Company’s total net revenue or gross accounts receivable balance at the balance sheet date. During the years-ended December 31, 20202021 and 2021,2022, the Company had 0no one customer that accounted for 10% or more of total net revenue. In addition, as of December 31, 20202021 and 2021,2022, the Company has 0 one customerhad three customers that accounted for 10% or more of gross accounts receivable. As of December 31, 20202021 and 2021,2022, approximately 68%42% and 42%43%, respectively, of its accounts receivable is held by the Company’s sales platform vendor, Amazon, which collects money on the Company’s behalf from its customers.
The Company’s business is reliant on one key vendor which currently provides the Company with its sales platform, logistics and fulfillment operations, including certain warehousing for the Company’s net goods, and invoicing and collection of its revenue from the Company’s end customers. In 2020,2021, approximately 88%93% of the Company’s revenue was through or with the Amazon sales platform and in 2021, 93%2022, 89% of its net revenue was through or with the Amazon sales platform.
Property and Equipment—Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is provided for using the straight-line method over the estimated useful lives of the assets. Capital leases and leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset. Costs of maintenance and repairs that do not improve or extend the lives of the respective assets are expensed as incurred.
The estimated useful lives for significant property and equipment categories are as follows:
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Income Taxes—The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to operating loss carry-forwards and temporary differences between financial statement bases of existing assets and liabilities and their respective income tax bases. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in the income tax rates on deferred tax asset and liability balances is recognized in income in the period that includes the enactment date of such rate change. A valuation allowance is recorded for loss carry-forwards and other deferred tax assets when it is determined that it is more likely than not that such loss carry-forwards and deferred tax assets will not be realized. The Company recognizes the tax benefits on any uncertain tax positions taken or expected to be taken in the consolidated financial statementsConsolidated Financial Statements when it is more likely than not the position will be realized upon ultimate settlement with the tax
authority assuming full knowledge of the position and relevant facts. The tax benefits recognized in the consolidated financial statementsConsolidated Financial Statements from such a position are measured based on the largest benefit that has a greater than 50%50% likelihood of being realized upon ultimate settlement. The Company recognizes estimated interest and penalties related to uncertain tax positions as a part of the provision for income taxes.
Revenue Recognition—The Company accounts for revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC Topic 606”). The Company adopted ASC Topic 606 as of January 1, 2017 using the full retrospective method. The standard did not affect the Company’s consolidated net loss, financial position, or cash flows. There were no changes to the timing of revenue recognition as a result of the adoption.
The Company derives its revenue from the sale of consumer products. The Company sells its products directly to consumers through online retail channels and through wholesale channels.
For direct-to-consumer sales, the Company considers customer order confirmations to be a contract with the customer. Customer confirmations are executed at the time an order is placed through third-party online channels. For wholesale sales, the Company considers the customer purchase order to be the contract.
For all of the Company’s sales and distribution channels, revenue is recognized when control of the product is transferred to the customer (i.e., when the Company’s performance obligation is satisfied), which typically occurs at shipment date. As a result, the Company has a present and unconditional right to payment and record the amount due from the customer in accounts receivable.
F-10
Revenue from consumer product sales is recorded at the net sales price (transaction price), which includes an estimate of future returns based on historical return rates. There is judgment in utilizing historical trends for estimating future returns. The Company’s refund liability for sales returns was $0.5 million and $0.6$0.6 million at December 31, 20202021 and 2021, respectively,2022, which is included in accrued liabilities and represents the expected value of the refund that will be due to its customers.
The Company evaluated principal versus agent considerations to determine whether it is appropriate to record platform fees paid to Amazon as an expense or as a reduction of revenue. Platform fees are recorded as sales and distribution expenses and are not recorded as a reduction of revenue because it owns and controls all the goods before they are transferred to the customer. The Company can, at any time, direct Amazon, similarly, other third-party logistics providers (“Logistics Providers”), to return the Company’s inventory to any location specified by the Company. It is the Company’s responsibility to make customers whole following any returns made by customers directly to Logistic Providers and the Company retains the back-end inventory risk. Further, the Company is subject to credit risk (i.e., credit card chargebacks), establishes prices of its products, can determine who fulfills the goods to the customer (Amazon or the Company) and can limit quantities or stop selling the goods at any time. Based on these considerations, the Company is the principal in this arrangement.
Performance Obligations. A performance obligation is a promise in a contract to transfer a distinct good to the customer and is the unit of account in ASC Topic 606. A contract’s transaction price is recognized as revenue when the performance obligation is satisfied. Each of the Company’s contracts have a single distinct performance obligation, which is the promise to transfer individual goods.
For consumer product sales, the Company has elected to treat shipping and handling as fulfillment activities, and not a separate performance obligation. Accordingly, the Company recognizes revenue for its single performance obligation related to product sales at the time control of the merchandise passes to the customer, which is generally at the time of shipment. The Company bills customers for charges for shipping and handling on certain sales and such charges are recorded as part of net revenue. Shipping and handling revenue for each of the years-ended December 31, 20202021 and 20212022 were de minimis.
For each contract, the Company considers the promise to transfer products to be the only identified performance obligation. In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which the Company expects to be entitled.
All of the Company’s direct and wholesale revenue for the years-ended December 31, 2020 and 2021 are recognized at a point in time.
Sales taxes—Consistent with prior periods, sales taxes collected from customers are presented on a net basis and as such are excluded from net revenue.
Net Revenue by Category: The following table sets forth the Company’s net revenue disaggregated by sales channel and geographic region based on the billing addresses of its customers:
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| Year-Ended December 31, 2019 |
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| Year-Ended December 31, 2021 |
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| (in thousands) |
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| Direct |
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| Wholesale |
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| Managed Platform as a Service (“PaaS”) |
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| Total |
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| Direct |
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| Wholesale/Other |
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| Total |
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North America |
| $ | 111,168 |
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| $ | 1,408 |
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| $ | 1,685 |
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| $ | 114,261 |
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| $ | 232,067 |
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| $ | 11,950 |
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| $ | 244,017 |
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Other |
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| 190 |
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|
| — |
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|
| — |
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|
| 190 |
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| 3,750 |
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|
| — |
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|
| 3,750 |
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Total net revenue |
| $ | 111,358 |
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| $ | 1,408 |
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| $ | 1,685 |
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| $ | 114,451 |
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| $ | 235,817 |
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| $ | 11,950 |
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| $ | 247,767 |
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| Year-Ended December 31, 2022 |
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| (in thousands) |
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| Direct |
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| Wholesale/Other |
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| Total |
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North America |
| $ | 209,336 |
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| $ | 7,002 |
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| $ | 216,338 |
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Other |
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| 4,832 |
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| — |
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| 4,832 |
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Total net revenue |
| $ | 214,168 |
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| $ | 7,002 |
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| $ | 221,170 |
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| Year-Ended December 31, 2020 |
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| Direct |
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| Wholesale |
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| Managed PaaS |
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| Total |
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North America |
| $ | 164,162 |
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| $ | 20,150 |
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| $ | 1,336 |
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| $ | 185,648 |
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Other |
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| 56 |
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| — |
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| — |
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| 56 |
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Total net revenue |
| $ | 164,218 |
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| $ | 20,150 |
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| $ | 1,336 |
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| $ | 185,704 |
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| Year-Ended December 31, 2021 |
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| (in thousands) |
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| Direct |
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| Wholesale |
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| Managed PaaS |
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| Total |
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North America |
| $ | 232,067 |
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| $ | 11,528 |
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| $ | 422 |
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| $ | 244,017 |
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Other |
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| 3,750 |
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| — |
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| — |
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| $ | 3,750 |
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Total net revenue |
| $ | 235,817 |
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| $ | 11,528 |
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| $ | 422 |
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| $ | 247,767 |
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F-11
Net Revenue by Product Categories: The following table sets forth the Company’s net revenue disaggregated by product categories:
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| Year-Ended December 31, |
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| 2021 |
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| 2022 |
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| (in thousands) |
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Heating, cooling and air quality |
| $ | 73,685 |
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| $ | 67,797 |
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Kitchen appliances |
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| 43,180 |
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| 40,551 |
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Health and beauty |
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| 15,579 |
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| 17,485 |
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Personal protective equipment |
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| 6,073 |
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| 1,564 |
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Cookware, kitchen tools and gadgets |
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| 22,933 |
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| 19,526 |
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Home office |
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| 12,352 |
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| 13,322 |
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Housewares |
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| 33,951 |
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| 33,041 |
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Essential oils and related accessories |
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| 27,444 |
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| 23,604 |
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Other |
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| 12,570 |
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| 4,280 |
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Total net revenue |
| $ | 247,767 |
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| $ | 221,170 |
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| Year-Ended December 31, |
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| 2019 |
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| 2020 |
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| 2021 |
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| (in thousands) |
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Heating, cooling and air quality |
| $ | 58,025 |
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| $ | 78,424 |
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| $ | 73,685 |
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Kitchen appliances |
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| 26,917 |
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| 29,711 |
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| 43,180 |
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Health and beauty |
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| 14,948 |
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| 26,070 |
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| 15,579 |
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Personal protective equipment |
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| — |
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| 15,488 |
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| 6,073 |
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Cookware, kitchen tools and gadgets |
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| 6,898 |
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| 14,868 |
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| 22,933 |
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Home office |
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| 172 |
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| 7,669 |
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| 12,352 |
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Housewares |
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| 3,206 |
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| 3,277 |
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| 33,951 |
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Essential oils and related accessories |
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| — |
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|
| — |
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| 27,444 |
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Other |
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| 2,600 |
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| 8,861 |
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| 12,148 |
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Total net product revenue |
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| 112,766 |
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| 184,368 |
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| 247,345 |
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Managed PaaS |
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| 1,685 |
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| 1,336 |
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|
| 422 |
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Total net revenue |
| $ | 114,451 |
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| $ | 185,704 |
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| $ | 247,767 |
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Fair Value of Financial Instruments—The Company’s financial instruments, including net accounts receivable, accounts payable, and accrued and other current liabilities are carried at historical cost. At December 31, 2021,2022, the carrying amounts of these instruments approximated their fair values because of their short-term nature. The Company’s credit facility is carried at amortized cost at December 31, 20202021 and December 31, 20212022 and the carrying amount approximates fair value as the stated interest rate approximates market rates currently available to the Company. The Company considers the inputs utilized to determine the fair value of the borrowings to be Level 2 inputs.
The fair value of the outstanding warrants were measured using the Monte Carlo Simulation model. Due to the complexity of the warrants issued, the Company uses an outside expert to assist in providing the mark to market fair valuation of the liabilities over the reporting periods in which the original agreement was in effect. Inputs used to determine estimated fair value of the warrant liabilities include the fair value of the underlying stock at the valuation date, the term of the warrants, and the expected volatility of the
underlying stock. The significant unobservable input used in the fair value measurement of the warrant liabilities is the estimated term of the warrants. Generally, increases (decreases) in the fair value of the underlying stock and estimated term result in a directionally similar impact to the periodic fair value measurement of the outstanding warrant liability, and are recorded within the Change in fair market value of warrant line item on the statement of operations.
The fair value of the contingent consideration related to business combinations is estimated using a probability-adjusted discounted cash flow model. These fair value measurements are based on significant inputs not observable in the market. The key internally developed assumptions used in these models are discount rates and the probabilities assigned to the milestones to be achieved. The company remeasures the fair value of the contingent consideration at each reporting period, and any changes in fair value resulting from either the passage of time or events occurring after the acquisition date, such as changes in discount rates, or in the expectations of achieving the performance targets, are recorded within the change in fair value of contingent earn-out liabilities line item on the statement of operations.
Assets and liabilities recorded at fair value on a recurring basis in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:
Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and
Level 3—Unobservable inputs that are supported by little or no market data for the related assets or liabilities.
Goodwill— The Company operates under one business component which is the same as its reporting unit based on the guidance in ASC Topic 350-20.
The Company engaged a third-party valuation specialist to assist management in performing its annual goodwill impairment test in December 2021. 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), the guideline public company method, and guideline transaction method (both market approaches).
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, terminal growth rates and the cost of capital. 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. Cost of capital is another significant assumption as the discount rate is used to calculate the current fair value of those projected cash flows. Under the guideline public company method and guideline transaction method, significant assumptions relate to the selection of appropriate guideline companies and transactions and the valuation multiples used in the market analysis.
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. In addition, sustained declines in the Company’s stock price and related market capitalization could impact key assumptions in the overall estimated fair values of its reporting unit and could result in non-cash impairment charges that could be material to the Company's consolidated balance sheet or results of operations. The company began to experience improvement in its operating margins and additional improvement in its products performance before the inclusion of fixed costs. These improvements, coupled with the Company’s acquisitions, supported the Company’s conclusion that it would generate significant improvements in its operating results.
Since December 31, 2020, the Company has had an additional increase in the amount of goodwill through acquisitions made in 2021. Although the Company has experienced volatility in its share price and short-term forecasts, impacting its going concern analysis due to lender covenant risks, the Company believes it has had no triggering events as its overall long-term forecasts remain materially the same as of December 31, 2021. However, if the Company continues to experience downward share price volatility or there are material reductions in long-term forecasts the excess fair-value over its carrying value could be reduced significantly and could lead to a triggering event and ultimately to a goodwill impairment charge. The Company performed a full step one impairment test at December 31, 2021 and concluded 0 impairment and that its estimated fair-values exceeded its carrying values by 21% as of the year-ended December 31, 2021.
The Company will continue to closely monitor actual results versus expectations as well as whether and to what extent any significant changes in current events or conditions, including changes to the impacts of COVID-19 on its business, result in corresponding changes to its expectations about future estimated cash flows, discount rates and market multiples. If the Company’s adjusted expectations of the operating results do not materialize, if the discount rate increases (based on increases in interest rates, market rates of return or market volatility) or if market multiples decline, we may be required to record goodwill impairment charges, which may be material.
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 units serve, the realization of future sales price and volume increases, fluctuations in exchange rates, 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.
Intangible assets—Intangible assets with finite lives are amortized over their estimated useful life on a straight-line basis. The Company monitors conditions related to these assets to determine whether events and circumstances warrant a revision to the remaining amortization. The Company tests these assets for potential impairment whenever its management concludes events or changes in circumstances indicate that the carrying amount may not be recoverable. The original estimate of an asset’s useful life and the impact of an event or circumstance on either an asset’s useful life or carrying value involve significant judgment regarding estimates of the future cash flows associated with each asset.
Business Combinations—In accordance with FASB ASC Topic 805 “Business Combinations", acquired assets and liabilities assumed as part of a business acquisition are generally recorded at their fair value at the date of acquisition. The excess of purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Determining fair value of identifiable assets, particularly intangibles, and liabilities acquired also requires management to make estimates, which are based on all available information and in some cases assumptions with respect to the timing and amount of future revenues and expenses associated with an asset.
Accounting and Contingent Consideration—The Company’s acquisitions include contingent consideration as part of the purchase price. The fair value of the contingent consideration is estimated as of the acquisition date based on the present value of the contingent payments to be made using a weighted probability of possible payments. The unobservable inputs used in the determination of the fair value of the contingent consideration include management’s assumptions about the likelihood of payment based on the established benchmarks and discount rates based on internal rate of return analysis. The fair value measurement includes inputs that are Level 3 measurements.If actual results increase or decrease as compared to the assumption used in the Company’s analysis, the fair value of the contingent consideration obligations will increase or decrease, up to the contracted limit, as applicable. Changes in the fair value of the contingent earn-out consideration could cause a material impact and volatility in the Company’s operating results.
Inventory and Cost of Goods Sold—The Company’s inventory consists almost entirely of finished goods. The Company currently records inventory on its balance sheet on a first-in first-out basis, or net realizable value, if it is below the Company’s recorded cost. The Company’s costs include the amounts it pays manufacturers for product, tariffs and duties associated with transporting product across national borders, and freight costs associated with transporting the product from its manufacturers to its warehouses, as applicable.
The “Cost of goods sold” line item in the consolidated statements of operations consists of the book value of inventory sold to customers during the reporting period and amortization of inventory step-up from acquisitions. When circumstances dictate that the Company use net realizable value as the basis for recording inventory, it bases its estimates on expected future selling prices less expected disposal costs.
Sales and Distribution—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). Further, sales and distribution expenses also include employee compensation and benefits and other related fixed costs. Costs associated with the Company’s advertising and sales promotion are expensed as incurred and are included in sales and
distribution expenses. For the years-ended December 31, 2019, 2020 and 2021, the Company recognized $4.8 million, $6.3 million and $9.0 million, respectively, for advertising costs, which consists primarily of online advertising expense. Shipping and handling expense is included in the Company’s consolidated statements of operations within sales and distribution expenses. This includes pick and pack costs and outbound transportation costs to ship goods to customers performed by e-commerce platforms or incurred directly by the Company’s own fulfillment operations. The Company’s expense for shipping and handling was $17.2 million, $20.4 million and $43.4 million during fiscal years 2019, 2020 and 2021, respectively.
Research and Development— Research and development expenses include compensation and employee benefits for technology development employees, travel related costs, and fees paid to outside consultants related to development of the Company’s owned intellectual property and technology.
General and Administrative—General and administrative expenses include compensation and employee benefits for executive management, finance administration, legal, and human resources, facility costs, travel, professional service fees and other general overhead costs.
Stock-Based Compensation—Stock-based compensation expense to employees is measured based on the grant-date fair value of the awards and recognized in the consolidated statements of operations over the period during which the employee is required to perform services in exchange for the award (the vesting period of the award). The Company estimates the fair value of stock options granted using the Black-Scholes option valuation model.
The Black-Scholes option-pricing model requires the input of highly subjective assumptions, including the fair value of the Company’s underlying common stock, the expected term of stock options, the expected volatility of the price of its common stock, risk-free interest rates and the expected dividend yield of its common stock. The assumptions used in the Company’s option-pricing model represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, the Company’s stock-based compensation expense could be materially different in the future.
These assumptions are estimated as follows:
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If any of the assumptions used in the Black-Scholes option-pricing model changes significantly, stock-based compensation for future awards may differ materially compared with the awards granted previously. The Company recognizes forfeitures as they occur, which results in a reduction in compensation expense at the time of forfeiture.
Foreign Currency—The functional currency of the Company’s foreign subsidiaries is the local currency. All assets and liabilities of foreign subsidiaries are translated at the current exchange rate as of the end of the period, and revenues and expenses are translated at the average exchange rates in effect during the period. The gain or loss resulting from the process of translating foreign currency financial statements into U.S. dollars is reflected as a foreign currency cumulative translation adjustment and reported as a component of accumulated other comprehensive income loss. Foreign currency transaction gains and losses resulting from or expected to result from transactions denominated in a currency other than the functional currency are recognized in other expense, net in the consolidated statements of operations. The Company recorded net loss from foreign currency transactions of less than $0.1 million for each of the years-ended December 31, 2019, 2020 and 2021.
Net Loss Per Share—The Company computes basic earnings per share using the weighted-average number of shares of common stock outstanding during the period. For periods in which the Company reports net losses, diluted net loss per share attributable to
stockholders is the same as basic net loss per share attributable to stockholders, because potentially dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.
Segment Information—The Company reports segment information in accordance with ASC Topic No. 280 “Segment Reporting.” The Company has 1 reportable segment.
Recent Accounting Pronouncements
The Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) permits an emerging growth company to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. The Company has elected to use this extended transition period until it is no longer an emerging growth company or until it affirmatively and irrevocably opts out of the extended transition period. As a result, the Company’s financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
Adopted Accounting Standards
In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). This ASU requires lessees to record most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. ASU 2016-02 states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. In July 2019, the FASB delayed the effective date for this ASU for private companies (including emerging growth companies) and it will be effective for annual reporting periods beginning after December 15, 2021, with early adoption permitted. The new guidance was adopted on January 1, 2022 with no material impact on the Company’s consolidated financial statements. The Company adopted this standard by electing the package of practical expedients without hindsight, which permits the Company to not reassess (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases, and (3) any initial direct costs for any existing leases as of the adoption date. The Company has several corporate office leases which are classified as operating leases, for which the Company is required to record a right-of-use asset and a lease liability equal to the present value of the remaining minimum lease payments and will continue to recognize expenses on a straight-line basis for these leases. On January 1, 2022, the Company recorded an aggregate of approximately $0.7 million of right-of-use assets and corresponding $0.7 million of lease liabilities upon adoption of this standard. Right-of-use assets and corresponding lease liabilities are included in the prepaid and other assets and accrued and other liabilities line item respectively on the consolidated balance sheets.
In August 2018, the FASB issued ASU No. 2018-15, “Customer’s Accounting for Implementation Cost Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”). Under the new guidance, customers apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software license. This will result in certain implementation costs being capitalized; the associated amortization charge will, however, be recorded as an operating expense. Under the previous guidance, costs incurred when implementing a cloud computing arrangement deemed to be a service contract were recorded as an operating expense when incurred.ASU 2018-15 will be effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted. The new guidance was adopted on January 1, 2022 with no material impact on the Company’s consolidated financial statements.
In August 2020, the FASB issued ASU No. 2020-06, “Debt—Debt with Conversion and Other Options (Topic 470) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Topic 814): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”). ASU 2020-06 eliminates the number of accounting models used to account for convertible debt instruments and convertible preferred stock. The update also amends the disclosure requirements for convertible instruments and EPS in an effort to increase financial reporting transparency. ASU 2020-06 will be effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted. The new guidance was adopted on January 1, 2022 with no material impact on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issuedASU 2016-13: Financial Instruments – Credit Losses (Topic 326). This ASU requires the use of an expected loss model for certain types of financial instruments and requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates. For trade receivables, loans and held-to-maturity debt securities, an estimate of lifetime expected credit losses is required. For available-for-sale debt securities, an allowance for credit losses will be required rather than a reduction to the carrying value of the asset. In July 2019, the FASB delayed the effective date for this ASU for private companies (including emerging growth companies) and will be effective for annual reporting periods beginning after December 15, 2022, with early adoption permitted. While the Company has not completed its evaluation of the impact of adoption of this standard, the Company does not expect it to have a material impact on its condensed consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes. This ASU provides for certain updates to reduce complexity in accounting for income taxes, including the utilization of the incremental approach for intra-period tax allocation, among others. This standard is effective for fiscal years beginning after December 15, 2021, and for interim periods beginning after December 15, 2022 with early adoption permitted. While the Company has not completed its evaluation of the impact of adoption of this standard, the Company does not expect it to have a material impact on its condensed consolidated financial statements.
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Inventory consisted of the following as of December 31, 2020 and 2021 (in thousands):
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| December 31, 2020 |
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| December 31, 2021 |
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Inventory on-hand |
| $ | 22,753 |
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| $ | 48,079 |
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Inventory in-transit |
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| 8,829 |
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| 14,966 |
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Inventory |
| $ | 31,582 |
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| $ | 63,045 |
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The Company’s Inventory on-hand is held either with Amazon, Walmart or the Company’s other third-party warehouses. The Company does not have any contractual right of returns with its contract manufacturers. The Company’s Inventory on-hand held by Amazon was approximately $5.3 million and $8.4 millionas of December 31, 2020 and December 31, 2021, respectively.
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Accounts receivable consisted of the following as of December 31, 2020 and 2021 (in thousands):
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| December 31, 2020 |
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| December 31, 2021 |
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Trade accounts receivable |
| $ | 5,747 |
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| $ | 10,478 |
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Allowance for doubtful accounts |
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| — |
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| — |
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Accounts receivable—net |
| $ | 5,747 |
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| $ | 10,478 |
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Property and equipment consisted of the following as of December 31, 2020 and 2021 (in thousands):
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| December 31, 2020 |
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| December 31, 2021 |
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Computer equipment and software |
| $ | 613 |
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| $ | 943 |
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Furniture, fixtures and equipment |
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| 91 |
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| 91 |
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Leasehold improvements |
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| 56 |
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| 56 |
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Building |
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| — |
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| 723 |
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Subtotal |
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| 760 |
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| 1,813 |
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Less: accumulated depreciation and amortization |
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| (591 | ) |
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| (559 | ) |
Property and equipment—net |
| $ | 169 |
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| $ | 1,254 |
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Depreciation expense for property and equipment totaled $0.2 million, $0.3 million and $0.2 million during the years-ended December 31, 2019, 2020 and 2021, respectively.
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The Company’s financial instruments consist of Level 1 assets at December 31, 2020 and 2021. The Company’s cash and restricted cash was $30.1 million and $38.3 million at December 31, 2020 and 2021, respectively, and included savings deposits and overnight investments.
The Company’s credit facility and term loans are carried at amortized cost at December 31, 2020 and December 31, 2021 and the carrying amount approximates fair value as the stated interest rate approximates market rates currently available to the Company.
The Company considers the inputs utilized to determine the fair value of the borrowings to be Level 3 inputs. The Company categorizes its warrants potentially settleable in cash as Level 3 fair value measurements. The warrants potentially settleable in cash are measured at fair value on a recurring basis and are being marked to fair value at each reporting date until they are completely settled or meet the requirements to be accounted for as a component of stockholders’ equity.
The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following table summarizes the fair value of the Company’s financial assets that are measured at fair value for the years-ended December 31, 2020 and 2021 (in thousands):
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| December 31, 2020 |
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| Level 1 |
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| Level 2 |
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| Level 3 |
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Assets: |
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Cash and cash equivalents |
| $ | 26,718 |
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| $ | — |
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| $ | — |
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Restricted Cash |
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| 3,379 |
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| — |
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| — |
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Liabilities: |
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Estimated fair value of contingent earn-out considerations |
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| — |
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| — |
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| 22,531 |
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Fair market value of warrant liability |
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| — |
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| — |
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| 31,821 |
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| December 31, 2021 |
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| Fair Value Measurement Category |
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| Level 1 |
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| Level 2 |
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| Level 3 |
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Assets: |
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Cash and cash equivalents |
| $ | 30,317 |
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| $ | — |
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| $ | — |
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Restricted cash |
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| 7,998 |
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| — |
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| — |
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Liabilities: |
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Estimated fair value of contingent earn-out considerations |
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| — |
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| — |
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| 9,223 |
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Fair market value of warrant liability |
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| — |
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| — |
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| — |
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A summary of the activity of the Level 3 liabilities carried at fair value on a recurring basis for the years-ended December 31, 2020 and 2021 are as follows (in thousands):
Balance at December 31, 2020 |
| $ | 31,821 |
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Modification of warrant liability to equity classification |
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| (58,276 | ) |
Change in fair value of warrant liability |
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| 26,455 |
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Balance at December 31, 2021 |
| $ | — |
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Balance at December 31, 2020 |
| $ | 22,531 |
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Fair value at issuance of contingent earn-out liability |
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| 20,971 |
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Change in fair value of contingent earn-out liability |
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| (30,529 | ) |
Payment of contingent earn-out liability |
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| (3,750 | ) |
Balance at December 31, 2021 |
| $ | 9,223 |
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The fair value of the outstanding warrants were measured using the Monte Carlo SimulationBlack Scholes model. Due to the complexity of the warrants issued, the Company uses an outside expert to assist in providing the mark to market fair valuation of the liabilities over the reporting periods in which the original agreement was in effect. Inputs used to determine estimated fair value of the warrant liabilities include the fair value of the underlying stock at the valuation date, the term of the warrants, and the expected volatility of the underlying stock. The significant unobservable input used in the fair value measurement of the warrant liabilities is the estimated term of the warrants. Generally, increases (decreases) in the fair value of the underlying stock and estimated term result in a directionally similar impact to the periodic fair value measurement of the outstanding warrant liability, and are recorded within the Change in fair market value of warrant line item on the statement of operations.
The fair value of the contingent consideration related to business combinations is estimated using a probability-adjusted discounted cash flow model. These fair value measurements are based on significant inputs not observable in the market. The key internally developed assumptions used in these models are discount rates and the probabilities assigned to the milestones to be achieved. The company remeasures the fair value of the contingent consideration at each reporting period, and any changes in fair value resulting from either the passage of time or events occurring after the acquisition date, such as changes in discount rates, or in the expectations of achieving the performance targets, are recorded within the change in fair value of contingent earn-out liabilities line item on the statement of operations.
Assets and liabilities recorded at fair value on a recurring basis in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:
Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and
Level 3—Unobservable inputs that are supported by little or no market data for the related assets or liabilities.
Goodwill—The Company operates under one business component which is the same as its reporting unit based on the guidance in ASC Topic 350-20.
F-12
We assess goodwill for impairment at least annually during the fourth quarter and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. During 2022, we had events and conditions in the first quarter and third quarter that required an interim assessment of goodwill.
We evaluated current economic conditions, including the impact of the Federal Reserve further increasing the risk-free interest rate, as well as the inflationary pressure on product and labor costs and operational impacts attributable to continued global supply chain disruptions. We believe that these conditions were factors in our market capitalization falling below the book value of net assets as of March 31, 2022 and September 30, 2022. Accordingly, we concluded a triggering event had occurred and performed interim goodwill impairment analyses.
The Company engaged a third-party valuation specialist to assist management in performing interim goodwill impairment tests. 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, while also taking into consideration our 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.
Due to the sustained decline in the Company’s stock price leading up to and subsequent to the fiscal quarters ending March 31, 2022 and September 30, 2022, the Company used the market capitalization as of quarter-end in each case to determine the fair value of the reporting unit. As a result, the Company recorded goodwill impairment charges of $29.0 million and $90.9 million during the three months ended March 31, 2022 and September 30, 2022, respectively. There was no remaining goodwill on the balance sheet as of September 30, 2022.
On October 4, 2022, the Company acquired Step and Go, a brand in the health and wellness category, for $0.7 million. As part of the purchase price allocation of the acquisition, $0.5 million was attributed to goodwill. As our market capitalization was below net assets as of December 31, 2022, an impairment loss on goodwill of $0.5 million was recorded for the three months ended December 31, 2022, which is included in impairment loss on goodwill in the Consolidated Statement of Operations for the year-ended December 31, 2022.
Total loss on goodwill impairment for the year-ended December 31, 2022 was $120.4 million.
Intangibles—The Company reviews long-lived intangible assets for impairment when performance expectations, events, or changes in circumstances indicate that the asset's carrying value may not be recoverable. The evaluation is performed at the lowest level of identifiable cash flows by comparing the carrying value of the asset group to the undiscounted cash flows. If the evaluation indicates that the carrying amount of the assets may not be recoverable, any potential impairment is measured based upon the fair value of the related asset or asset group as determined by an appropriate market appraisal or other valuation technique.
Certain asset groups experienced a significant decrease in sales and contribution margin through September 30, 2022. This was considered an interim triggering event for the three months ended September 30, 2022. The Company assessed the recoverability of the related intangible assets by using level 3 inputs and comparing carrying value of an asset group to the net undiscounted cash flows expected to be generated to determine if carrying value is not recoverable. The recoverability test indicated that certain definite-lived trademark intangible assets were impaired which resulted in an impairment charge of $3.1 million. The Company did not have a triggering event during the three month ended December 31, 2022. The impairment of intangibles of $3.1 million is included in loss on impairment of intangibles in the consolidated statement of operations for the year-ended December 31, 2022.
Business Combinations—In accordance with FASB ASC Topic 805 “Business Combinations", acquired assets and liabilities assumed as part of a business acquisition are generally recorded at their fair value at the date of acquisition. The excess of purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Determining fair value of identifiable assets, particularly intangibles, and liabilities acquired also requires management to make estimates, which are based on all available information and in some cases assumptions with respect to the timing and amount of future revenues and expenses associated with an asset.
F-13
Accounting and Contingent Consideration—The Company’s acquisitions include contingent consideration as part of the purchase price. The fair value of the contingent consideration is estimated as of the acquisition date based on the present value of the contingent payments to be made using a weighted probability of possible payments. The unobservable inputs used in the determination of the fair value of the contingent consideration include management’s assumptions about the likelihood of payment based on the established benchmarks and discount rates based on internal rate of return analysis. The fair value measurement includes inputs that are Level 3 measurements.If actual results increase or decrease as compared to the assumption used in the Company’s analysis, the fair value of the contingent consideration obligations will increase or decrease, up to the contracted limit, as applicable. Changes in the fair value of the contingent earn-out consideration could cause a material impact and volatility in the Company’s operating results.
Inventory and Cost of Goods Sold—The Company’s inventory consists almost entirely of finished goods. The Company currently records inventory on its balance sheet on a first-in first-out basis, or net realizable value, if it is below the Company’s recorded cost. The Company’s costs include the amounts it pays manufacturers for product, tariffs and duties associated with transporting product across national borders, and freight costs associated with transporting the product from its manufacturers to its warehouses, as applicable. The valuation of our inventory requires us to make judgments, based on available information such as historical data, about the likely method of disposition, such as through sales to individual customers or liquidations, and expected recoverable values of each disposition category. These assumptions about future disposition of inventory are inherently uncertain and changes in our estimates and assumptions may cause us to realize material write-downs in the future.
The “Cost of goods sold” line item in the consolidated statements of operations consists of the book value of inventory sold to customers during the reporting period and amortization of inventory step-up from acquisitions. When circumstances dictate that the Company use net realizable value as the basis for recording inventory, it bases its estimates on expected future selling prices less expected disposal costs.
Sales and Distribution—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). Further, sales and distribution expenses also include employee compensation and benefits and other related fixed costs. Costs associated with the Company’s advertising and sales promotion are expensed as incurred and are included in sales and distribution expenses. For the years-ended December 31, 2021 and 2022, the Company recognized $9.0 million and $11.6 million, respectively, for advertising costs, which consists primarily of online advertising expense. Shipping and handling expenses are included in the Company’s consolidated statements of operations within sales and distribution expenses. This includes pick and pack costs and outbound transportation costs to ship goods to customers performed by e-commerce platforms or incurred directly by the Company’s own fulfillment operations. The Company’s expense for shipping and handling was $43.4 million and $47.4 million during fiscal years 2021 and 2022, respectively.
Research and Development— Research and development expenses include compensation and employee benefits for technology development employees, travel related costs, and fees paid to outside consultants related to development of the Company’s owned intellectual property and technology.
General and Administrative—General and administrative expenses include compensation and employee benefits for executive management, finance administration, legal, and human resources, facility costs, travel, professional service fees and other general overhead costs.
Stock-Based Compensation—Stock-based compensation expense to employees is measured based on the grant-date fair value of the awards and recognized in the consolidated statements of operations over the period during which the employee is required to perform services in exchange for the award (the vesting period of the award). The fair value of restricted stock awards is based on the stock price on the date of the grant. The Company estimates the fair value of stock options granted using the Black-Scholes option valuation model.
The Black-Scholes option-pricing model requires the input of highly subjective assumptions, including the fair value of the Company’s underlying common stock, the expected term of stock options, the expected volatility of the price of its common stock, risk-free interest rates and the expected dividend yield of its common stock. The assumptions used in the Company’s option-pricing model represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, the Company’s stock-based compensation expense could be materially different in the future.
These assumptions are estimated as follows:
F-14
If any of the assumptions used in the Black-Scholes option-pricing model changes significantly, stock-based compensation for future awards may differ materially compared with the awards granted previously. The Company recognizes forfeitures as they occur, which results in a reduction in compensation expense at the time of forfeiture.
Foreign Currency—The functional currency of the Company’s foreign subsidiaries is the local currency. All assets and liabilities of foreign subsidiaries are translated at the current exchange rate as of the end of the period, and revenues and expenses are translated at the average exchange rates in effect during the period. The gain or loss resulting from the process of translating foreign currency financial statements into U.S. dollars is reflected as a foreign currency cumulative translation, an adopted accounting standard adjustment and reported as a component of accumulated other comprehensive income loss. Foreign currency transaction gains and losses resulting from or expected to result from transactions denominated in a currency other than the functional currency are recognized in other expense, net in the consolidated statements of operations. The Company recorded net loss from foreign currency transactions of less than $0.1 million and $0.2 million for the years ended December 31, 2021 and 2022, respectively.
Net Loss Per Share—The Company computes basic earnings per share using the weighted-average number of shares of common stock outstanding during the period. For periods in which the Company reports net losses, diluted net loss per share attributable to stockholders is the same as basic net loss per share attributable to stockholders, because potentially dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.
Segment Information—The Company reports segment information in accordance with ASC Topic No. 280 “Segment Reporting.” The Company has one reportable segment.
Adopted Accounting Standards
In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASC 842”), which was amended by subsequent ASUs, to enhance the comparability and usefulness of financial reporting around leasing activity. The new standard supersedes the existing authoritative literature for lease accounting under ASC 840, with a focus on applying a “right-of-use model.” The guidance for leases under ASC 842 results in a right-of-use asset (“ROU asset”) and lease liability being reported on the balance sheet for leases with an original lease term greater than twelve months. ASC 842 is effective for the Company for annual reporting periods beginning after December 15, 2021, including interim periods within that fiscal year. The Company elected the standard on January 1, 2022 using the alternative modified retrospective transition approach in accordance with ASU 2018-11, Leases (Topic 842): Targeted Improvements. The cumulative effect of the transition adjustments was recognized as of the date of adoption.
Under the alternative modified retrospective transition approach, the reported results for 2022 reflect the application of ASC 842 guidance, whereas comparative periods and the respective disclosures prior to the adoption of ASC 842 are presented using the legacy guidance of ASC 840. The Company recorded an aggregate of approximately $0.7 million of right-of-use assets and a corresponding $0.7 million of lease liabilities upon adoption of this standard. Current Right-of-use assets of $0.2 million and corresponding lease liabilities are included in the prepaid and other current assets and accrued and other current liabilities line item respectively on the condensed consolidated balance sheets. Non-current Right-of-Use Assets of $0.1 million and corresponding lease liabilities are included in the prepaid and other non-current assets and accrued and other non-current liabilities line item respectively on the condensed consolidated balance sheets. The adoption of the standard did not have a material impact on the condensed consolidated statements of operations, or condensed consolidated statements of cash flows. The Company has elected to apply the package of practical expedients requiring no reassessment of whether any expired or existing contracts are or contain leases, the lease classification of any expired or existing leases, or the capitalization of initial direct costs for any existing leases. Additionally, the Company elected the practical expedient that permit the exclusions of leases considered to be short-term.
F-15
In August 2018, the FASB issued ASU No. 2018-15, “Customer’s Accounting for Implementation Cost Incurred in a Cloud Computing Arrangement That Is a Service Contract”. Under the new guidance, customers apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software license. This will result in certain implementation costs being capitalized; the associated amortization charge will, however, be recorded as an operating expense. Under the previous guidance, costs incurred when implementing a cloud computing arrangement deemed to be a service contract were recorded as an operating expense when incurred. The new guidance is effective for public business entities in fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other entities, the amendments in this update are effective for annual reporting periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021. The new guidance was adopted on December 15, 2021 with no material impact on the Company’s Consolidated Financial Statements.
In August 2020, the FASB issued ASU No. 2020-06, “Debt—Debt with Conversion and Other Options (Topic 470) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Topic 814): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”). ASU 2020-06 eliminates the number of accounting models used to account for convertible debt instruments and convertible preferred stock. The update also amends the disclosure requirements for convertible instruments and EPS in an effort to increase financial reporting transparency. ASU 2020-06 will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The new guidance was early adopted on January 1, 2022 with no material impact on the Company’s Consolidated Financial Statements.
Recent Accounting Pronouncements
The JOBS Act permits an emerging growth company to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to use this extended transition period until we are no longer an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13: Financial Instruments – Credit Losses (Topic 326). This ASU requires the use of an expected loss model for certain types of financial instruments and requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates. For trade receivables, loans and held-to-maturity debt securities, an estimate of lifetime expected credit losses is required. For available-for-sale debt securities, an allowance for credit losses will be required rather than a reduction to the carrying value of the asset. In July 2019, the FASB delayed the effective date for this ASU for private companies (including emerging growth companies) and will be effective for annual reporting periods beginning after December 15, 2022, with early adoption permitted. The Company does not expect it to have a material impact on its Consolidated Financial Statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes. This ASU provides for certain updates to reduce complexity in accounting for income taxes, including the utilization of the incremental approach for intra-period tax allocation, among others. This standard is effective for fiscal years beginning after December 15, 2021, and for interim periods beginning after December 15, 2022 with early adoption permitted. While the Company has not completed its evaluation of the impact of adoption of this standard, the Company does not expect it to have a material impact on its Consolidated Financial Statements.
In October 2020, the FASB issued ASU 2020-10, Codification Improvements. The amendments in this Update represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments are effective for annual periods beginning after December 15, 2020, for public business entities. For all other entities, the amendments are effective for annual periods beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022. While the Company has not completed its evaluation of the impact of adoption of this standard, the Company does not expect it to have a material impact on its Consolidated Financial Statements and will adopt it as of January 2023.
In September 2022, the FASB issued ASU 2022-04, Disclosures for Supplier Finance Arrangements. The amendments in this Update enhances the transparency of supplier finance programs. This standard is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022 except for amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. While the Company has not completed its evaluation of the impact of adoption of this standard, the Company does not expect it to have a material impact on its Consolidated Financial Statements and will adopt it as of January 2023.
F-16
3.INVENTORY
Inventory consisted of the following as of December 31, 2021 and 2022 (in thousands):
|
| Year-Ended December 31, |
| |||||
|
| 2021 |
|
| 2022 |
| ||
Inventory on-hand |
| $ | 48,079 |
|
| $ | 34,374 |
|
Inventory in-transit |
|
| 14,966 |
|
|
| 9,292 |
|
Inventory |
| $ | 63,045 |
|
| $ | 43,666 |
|
The Company’s Inventory on-hand is held either with Amazon, Walmart or the Company’s other third-party warehouses. The Company does not have any contractual right of returns with its contract manufacturers. The Company’s Inventory on-hand held by Amazon was approximately $8.4 million and $8.6 millionas of December 31, 2021 and December 31, 2022, respectively.
4.ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following as of December 31, 2021 and 2022 (in thousands):
|
| Year-Ended December 31, |
| |||||
|
| 2021 |
|
| 2022 |
| ||
Trade accounts receivable |
| $ | 10,478 |
|
| $ | 4,882 |
|
Allowance for doubtful accounts |
|
| — |
|
|
| (367 | ) |
Accounts receivable--net |
| $ | 10,478 |
|
| $ | 4,515 |
|
5.PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of December 31, 2021 and 2022 (in thousands):
|
| Year-Ended December 31, |
| |||||
|
| 2021 |
|
| 2022 |
| ||
Computer equipment and software |
| $ | 943 |
|
| $ | 1,109 |
|
Furniture, fixtures and equipment |
|
| 91 |
|
|
| 91 |
|
Leasehold improvements |
|
| 56 |
|
|
| 56 |
|
Building |
|
| 723 |
|
|
| 638 |
|
Subtotal |
|
| 1,813 |
|
|
| 1,894 |
|
Less: accumulated depreciation and amortization |
|
| (559 | ) |
|
| (1,041 | ) |
Property and equipment–net |
| $ | 1,254 |
|
| $ | 853 |
|
Depreciation expense for property and equipment totaled $0.2 million and $0.4 million during the years-ended December 31, 2021 and 2022, respectively.
6.FAIR VALUE MEASUREMENTS
The Company’s financial instruments consist of Level 1 assets at December 31, 2021 and 2022. The Company’s cash and restricted cash was $38.3 million and $46.6 million at December 31, 2021 and 2022, respectively, and included savings deposits and overnight investments.
The Company’s credit facility and term loans are carried at amortized cost at December 31, 2021 and December 31, 2022 and the carrying amount approximates fair value as the stated interest rate approximates market rates currently available to the Company.
The Company considers the inputs utilized to determine the fair value of the borrowings to be Level 3 inputs. The Company categorizes its warrants potentially settleable in cash as Level 3 fair value measurements. The warrants potentially settleable in cash are measured at fair value on a recurring basis and are being marked to fair value at each reporting date until they are completely settled or meet the requirements to be accounted for as a component of stockholders’ equity.
F-17
The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following table summarizes the fair value of the Company’s financial assets that are measured at fair value for the years-ended December 31, 2021 and 2022 (in thousands):
|
| Year-Ended December 31, 2021 |
| |||||||||
|
| Fair Value Measurement Category |
| |||||||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| |||
Assets: |
|
|
|
|
|
|
|
|
| |||
Cash and cash equivalents |
| $ | 30,317 |
|
| $ | — |
|
| $ | — |
|
Restricted Cash |
|
| 7,998 |
|
|
| — |
|
|
| — |
|
Liabilities: |
|
|
|
|
|
|
|
|
| |||
Estimated fair value of contingent earn-out considerations |
|
| — |
|
|
| — |
|
|
| 9,223 |
|
|
|
|
|
|
|
|
|
|
| |||
|
| Year-Ended December 31, 2022 |
| |||||||||
|
| Fair Value Measurement Category |
| |||||||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| |||
Assets: |
|
|
|
|
|
|
|
|
| |||
Cash and cash equivalents |
| $ | 43,574 |
|
| $ | — |
|
| $ | — |
|
Restricted cash |
|
| 3,055 |
|
|
| — |
|
|
| — |
|
Liabilities: |
|
|
|
|
|
|
|
|
| |||
Warrant liability |
|
|
|
|
|
|
|
| 3,473 |
|
The following table summarizes the Company's warrant activity during the year-ended December 31, 2022 (in thousands):
|
|
| Year-Ended December 31, 2022 |
| |
Warrants liability as of January 1, 2022 |
|
| $ | — |
|
Change in fair value of warrants |
|
|
| 3,473 |
|
Warrants liability as of December 31, 2022. |
|
| $ | 3,473 |
|
The fair value of the outstanding warrants were measured using the Black Scholes model. Due to the complexity of the warrants issued, the Company uses an outside expert to assist in providing the mark to market fair valuation of the liabilities over the reporting periods in which the original agreement was in effect. Inputs used to determine estimated fair value of the warrant liabilities include the fair value of the underlying stock at the valuation date, the term of the warrants, and the expected volatility of the underlying stock. The significant unobservable input used in the fair value measurement of the warrant liabilities is the estimated term of the warrants. Generally, increases (decreases) in the fair value of the underlying stock and estimated term result in a directionally similar impact to the periodic fair value measurement of the outstanding warrant liability, and are recorded within the Change in fair market value of warrant line item on the statement of operations.
The fair value of the contingent consideration related to business combinations is estimated using a probability-adjusted discounted cash flow model. These fair value measurements are based on significant inputs not observable in the market. The key internally developed assumptions used in these models are discount rates and the probabilities assigned to the milestones to be achieved. The Company remeasures the fair value of the contingent consideration at each reporting period, and any changes in fair value resulting from either the passage of time or events occurring after the acquisition date, such as changes in discount rates, or in the expectations of achieving the performance targets, are recorded within the change in fair value of contingent earn-out liabilities line item on the statement of operations.
7.PREPAID AND OTHER CURRENT ASSETS
|
|
Prepaid and other current assets consisted of the following as of December 31, 20202021 and 20212022 (in thousands):
|
|
|
| December 31, |
|
| December 31, |
| ||
Prepaid inventory |
|
|
| $ | 4,137 |
|
| $ | 1,342 |
|
Restricted cash |
|
|
|
| 7,998 |
|
|
| 2,926 |
|
Prepaid insurance |
|
|
|
| 2,440 |
|
|
| 1,991 |
|
Consulting fees |
|
|
|
| 2,263 |
|
|
| — |
|
Amazon global logistics |
|
|
|
| 2,865 |
|
|
| 576 |
|
Other |
|
|
|
| 1,331 |
|
|
| 1,426 |
|
|
|
|
| $ | 21,034 |
|
|
| 8,261 |
|
F-18
|
| December 31, 2020 |
|
| December 31, 2021 |
| ||
Prepaid inventory |
| $ | 4,361 |
|
| $ | 4,137 |
|
Restricted cash |
|
| 3,250 |
|
|
| 7,998 |
|
Prepaid insurance |
|
| 1,504 |
|
|
| 2,440 |
|
Consulting fees |
|
| 738 |
|
|
| 2,263 |
|
Amazon global logistics |
|
| — |
|
|
| 2,865 |
|
Other |
|
| 1,258 |
|
|
| 1,331 |
|
Prepaid and other current assets |
| $ | 11,111 |
|
| $ | 21,034 |
|
8.ACCRUED AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following as of December 31, 20202021 and 20212022 (in thousands):
|
| December 31, 2020 |
|
| December 31, 2021 |
|
| December 31, |
|
| December 31, |
| ||||
Accrued compensation costs |
| $ | 293 |
|
| $ | 162 |
|
| $ | 162 |
|
| $ | 53 |
|
Accrued professional fees and consultants |
|
| 483 |
|
|
| 331 |
|
|
| 331 |
|
|
| 461 |
|
Accrued logistics costs |
|
| 1,068 |
|
|
| 578 |
|
|
| 578 |
|
|
| 609 |
|
Product related accruals |
|
| 3,221 |
|
|
| 2,984 |
|
|
| 2,984 |
|
|
| 1,248 |
|
Sales tax payable |
|
| 457 |
|
|
| 678 |
|
|
| 678 |
|
|
| 711 |
|
Sales return reserve |
|
| 547 |
|
|
| 590 |
|
|
| 590 |
|
|
| 646 |
|
Accrued fulfillment expense |
|
| 381 |
|
|
| 744 |
|
|
| 744 |
|
|
| 755 |
|
Accrued insurance |
|
| 952 |
|
|
| 967 |
|
|
| 967 |
|
|
| 356 |
|
Federal payroll taxes payable |
|
| 330 |
|
|
| 4,449 |
|
|
| 4,449 |
|
|
| 1,467 |
|
Accrued interest payable |
|
| 137 |
|
|
| 338 |
|
|
| 338 |
|
|
| 190 |
|
Warrant liability |
|
| - |
|
|
| 3,473 |
| ||||||||
All other accruals |
|
| 471 |
|
|
| 5,800 |
|
|
| 5,800 |
|
|
| 4,285 |
|
Accrued and other current liabilities |
| $ | 8,340 |
|
| $ | 17,621 |
| ||||||||
Accrued and current liabilities |
| $ | 17,621 |
|
| $ | 14,254 |
|
The Company sponsors, through its professional employer organization provider, a 401(k) defined contribution plan covering all eligible U.S. employees. Contributions to the 401(k) plan are discretionary. Currently, the Company does not match or make any contributions to the 401(k) plan.
F-19
9.CREDIT FACILITY AND TERM LOANS
|
|
MidCap Credit Facility and Term Loan – November 2018 Note
On November 23, 2018, the Company entered into the three-year $three-year25.0 $25.0 million revolving credit facility (the “Credit Facility”) with MidCap Funding IV Trust (“MidCap”) as agent and lenders party thereto.thereto. The Credit Facility could be increased, subject to certain conditions, to $50.0$50.0 million. Loans under the Credit Facility were determined based on percentages of the Company’s eligible accounts receivable and eligible inventory. The Credit Facility bore interest at a rate of the London Interbank Offered Rate (“LIBOR”) plus 5.75%5.75% for outstanding borrowings. The Company was required to pay a facility availability fee of 0.5%0.5% on the average unused portion of the Credit Facility. On December 1, 2020, the Company, certain of the Company’s subsidiaries and MidCap entered into an amendment to the Credit Facility, (i) providing for a $$30.0 million revolving credit facility, which could be increased, subject to certain conditions, to $50.0$50.0 million, (ii) permitting the incurrence of certain debt under certain conditions and restrictions, including the senior secured note with an aggregate principal amount of $43.0$43.0 million issued on December 1, 2020 (as amended, the “December 2020 Note”), (iii) permitting certain payments to High Trail SA as required under the December 2020 Note, and (iv) permitting the acquisition of the assets of an e-commerce business under the brands Mueller, Pursteam, Pohl and Schmitt, and Spiralizer (the “Smash Assets”). Further, the Credit Facility was extended to November 23, 2022.2022. The Credit Facility contained a minimum liquidity financial covenant that required the Company to maintain a minimum of $6.5$6.5 million in cash on hand or availability in the Credit Facility. The Company was in compliance with the financial covenants contained within the Credit Facility as of December 31, 2020. As of December 31, 2020, there was $12.9$12.9 million outstanding on the Credit Facility and an available balance of approximately $1.4$1.4 million and as of December 31, 2021, there was 0no outstanding balance on the Credit Facility. On April 8, 2021, the Company paid off all obligations owing under, and terminated, the Credit Facility. The Company recorded $1.5$1.5 million of extinguishment of debt for the year-ended December 31, 2021, which has been classified within loss on extinguishment of debt on the condensed consolidated statements of operations.operations. Pursuant to the Credit Facility, upon the payment of the amounts outstanding under the Credit Facility, the Company paid a prepayment fee and a payoff letter preparation fee in an aggregate amount equal to 4.3%4.3% of the then outstanding principal balance of the Credit Facility. The Company recorded interest expense from the Credit Facility of approximately $1.9 million and $0.4million for the years-endedyear-ended December 31, 2020 and 2021, respectively, which included $0.7 million and $0.1 million respectively, relating to debt issuance costs.
Horizon Term Loan – December 2018 Note
On December 31, 2018, the Company entered into a term loan agreement (the “Horizon Loan Agreement”) with Horizon Technology Finance Corporation (“Horizon”). As part of the Horizon Loan Agreement, the Company obtained a four-year $$15.0 million term loan (the “Horizon Term Loan”). The Horizon Term Loan bore interest at 9.90%9.90% plus the amount by which one-month LIBOR exceeded 2.50% for outstanding borrowings, and payments on principal were made on a monthly basis. The maturity date of the Horizon Term Loan was January 2023. 2023.
On December 1, 2020, the Company paid off all remaining obligations under the Horizon Term Loan for $15.0$15.0 million and terminated the Horizon Term Loan. The Company recorded interest expense from the Horizon Term Loan of $1.4$1.4 million and $0.0$0.0 million for the years-ended December 31, 2020 and 2021, respectively, which included $0.6$0.6 million and $0.0 million, respectively, relating to debt issuance costscosts..
High Trail Loan - December 2020 Note
On December 1, 2020, the Company refinanced the Horizon Term Loan through the issuance of the December 2020 Note to High Trail SA. The Company received gross proceeds of $38.0$38.0 million in exchange for the December 2020 Note with an aggregate principal amount of $43.0$43.0 million. The December 2020 Note was to be repaid over 24 equal monthly cash payments of $1.8$1.8 million.
The December 2020 Note consisted of the following as of December 31, 2020:
|
| December 31, 2020 |
|
| December 31, |
| ||
|
| (in thousands) |
|
| (in thousands) |
| ||
December 2020 Note |
| $ | 43,000 |
|
| $ | 43,000 |
|
Less: deferred debt issuance costs |
|
| (2,207 | ) |
|
| (2,207 | ) |
Less: discount associated with issuance of warrants |
|
| (9,839 | ) |
|
| (9,839 | ) |
Less: discount associated with original issuance of loan |
|
| (4,692 | ) |
|
| (4,692 | ) |
High Trail warrant |
|
| 31,821 |
|
|
| 31,821 |
|
Total December 2020 Note |
|
| 58,083 |
|
|
| 58,083 |
|
Less-current portion |
|
| (21,600 | ) |
|
| (21,600 | ) |
Term loan-non current portion |
| $ | 36,483 |
| ||||
Term loan non-current portion |
| $ | 36,483 |
|
F-20
The December 2020 Note contained a minimum liquidity financial covenant that required the Company to maintain a minimum of $10.0$10.0 million in unrestricted cash on hand. Additionally, as of the last day of each applicable fiscal quarter, the Company was required to maintain Adjusted EBITDA amounts for the 12-month period ending on such day, as defined in the December 2020 Note. The Company was in compliance with the December 2020 Note’s financial covenants as of December 31, 2020.
The December 2020 Note was extinguished on April 8, 2021 in exchange for an April 2021 Note (see the discussion under the heading High Trail April 2021 Note of this Note 9 below).
High Trail - February 2021 Note
On February 2, 2021, the Company entered into a second, separate transaction with High Trail, where it issued to High Trail ON a 0%0% coupon senior secured promissory note in an aggregate principal amount of $16.5$16.5 million (as amended, the “February 20212022 Note”) that was to mature on February 1, 2023.2023.
High Trail - April 2021 Note
On April 8, 2021, the Company refinanced all its existing debt with High Trail and Midcap. As such, the Company entered into a new securities purchase and exchange agreement (the “Securities Purchase Agreement”) with High Trail SA and High Trail ON, pursuant to which, among other things, the Company issued and sold to High Trail, in a private placement transaction (the “Private Placement”), (i) senior secured promissory notes in an aggregate principal amount of $110.0$110.0 million (the “April 2021 Notes”) that accrued interest at a rate of 8%8% per annum and were to mature on April 8, 2024, and (ii) warrants (the “Warrants” and each, a “Warrant”) to purchase up to an aggregate of 2,259,166 shares of the Company’s common stock in exchange for: (a) a cash payment by High Trail to the Company of $57.7$57.7 million, (b) the cancellation of the December 2020 Note, and (c) the cancellation of the February 2021 Note.
The Company used $14.8$14.8 million of the net proceeds from the Private Placement to repay all amounts owed under the Credit Facility on April 8, 2021.
Pursuant to ASC 470, Debt, the Company concluded the High Trail April 2021 Note transaction resulted in the extinguishment of the two prior High Trail December 2020 and February 2021 term loans in the amount of $28.2$28.2 million of extinguishment of which has been classified within loss on extinguishment of debt on the condensed consolidated statements of operations.
The Company breached its Adjusted EBITDA covenant with its lender, High Trail, and in August 2021, the Company secured a waiver from its lender with the partial repayment of the loan. See the High Trail Letter Agreements and Omnibus Amendment section for additional information.
The April Letter Agreement
On April 8, 2021, the Company entered into a Letter Agreement (the “April Letter Agreement”) with High Trail SA and High Trail ON, pursuant to which, among other things, (i) the Company and High Trail SA agreed to amend the terms of the Letter Agreement to provide that the Company would prepare and file by June 30, 2021 a registration statement (the “Resale Registration Statement”) with the Securities and Exchange Commission for the purposes of registering for resale the December Warrant Shares, the Penny Warrant Shares and the Restricted Shares (as defined below), (ii) the Company issued 130,000 shares of its common stock to High Trail SA
(the (the “Restricted Shares”), and (iii) High Trail SA and High Trail ON agreed to waive any Default or Event of Default (as such terms are defined in the December 2020 Note or the February 2021 Note) caused by the Company’s failure to file the Resale Registration Statement by March 26, 2021.
On April 8, 2021, the Company entered into (i) an amendment (the “SPA Amendment”) to that certain Securities Purchase Agreement, dated as of November 30, 2020, by and between the Company and High Trail SA (the “December 2020 SPA”), and to that certain Securities Purchase Agreement, dated as of February 2, 2021, by and between the Company and High Trail ON (the “February 2021 SPA”), (ii) an amendment to the February Warrant (the “February Warrant Amendment”), (iii) an amendment to the Penny Warrant (the “Penny Warrant Amendment”), and (iv) an amendment to the Additional Warrant (the “Additional Warrant Amendment” and, together with the February Warrant Amendment and the Penny Warrant Amendment, the “Warrant Amendments”). The SPA Amendment amended the December 2020 SPA and the February 2021 SPA to, among other things, allow for the issuance of the April 2021 Notes and to waive certain rights of High Trail under the December 2020 SPA and the February 2021 SPA. The Warrant Amendments amended the February Warrant, the Penny Warrant and the Additional Warrant to amend the definition of “Black Scholes Value” in each warrant to provide that the expected volatility used in the Black Scholes Value shall equal 100% instead of the greater of 100% and the 100-day volatility obtained from the HVT function on Bloomberg (determined utilizing a 365-day annualization factor) as of the trading day immediately following the public announcement of a Change of Control (as defined in each of the warrants), or, if the Change of Control is not publicly announced, the date the Change of Control is consummated.
F-21
The Warrant Amendments to the February Warrant, the Penny Warrant and the Additional Warrant resulted in an $80.0$80.0 million reclassification from a liability to a component of equity and resulted in a $21.3$21.3 million reclassification from a component of equity to a liability as of December 31, 2021.
The Restricted Shares were expensed as part of extinguishment loss, valued based on the fair market value on April 8, 2021 for $4.1$4.1 million, with the offset impacting stockholders’ equity.
High Trail Letter Agreements and Omnibus Amendment
On August 9, 2021, pursuant to those certain Letter Agreements entered into between the Company and High Trail with respect to each of the April 2021 Notes (collectively, the “August Letter Agreements”), High Trail notified the Company that High Trail declared an event of default under the April 2021 Notes as a result of the Company’s Adjusted EBITDA (as defined in the April 2021 Notes) not being equal to at least $12$12 million for the 12 month period ended June 30, 2021 and further notified the Company that High Trail immediately accelerated a total of $18.7$18.7 million of the principal amount of the April 2021 Notes, requiring the Company to immediately pay $21.5$21.5 million (such amount equal to 115%115% of the principal amount that was accelerated, as required under the terms of the April 2021 Notes, plus $0.3$0.3 million of accrued but unpaid interest on the principal amount that was accelerated) (the “Current Event of Default Acceleration Amount”).
Pursuant to the August Letter Agreements, the Company agreed, among other things, to pay the Current Event of Default Acceleration Amount in cash by August 9, 2021 and that any portion not paid in cash would be paid in shares of the Company’s common stock under the terms of the April 2021 Notes, with the number of shares issuable equal to the unpaid Current Event of Default Acceleration Amount divided by 80%80% of the lesser of (i) the Daily VWAP (as defined in the April 2021 Notes) on August 9, 2021 and (ii) the average of the lowest two (2) Daily VWAPs during the ten (10) day VWAP trading period ending on August 9, 2021.
Pursuant to the August Letter Agreements, High Trail waived the events of default relating to the Company’s failure to satisfy the Adjusted EBITDA covenant under the April 2021 Notes, effective upon the payment in cash of $10.1$10.1 million of the Current Event of Default Acceleration Amount and the issuance of the shares of the Company’s common stock for the remaining $11.7$11.7 million of the Current Event of Default Acceleration Amount. The Company paid High Trail an aggregate of $10.1$10.1 million in cash on August 9, 2021 and in accordance with the April 2021 Notes and the August Letter Agreements, paid the remaining $11.7$11.7 million of the Current Event of Default Acceleration Amount by issuing to High Trail an aggregate of 2,841,251 shares of common stock (with the shares issued at a price of $4.1007$4.1007 per share, which was, in accordance with the April 2021 Notes, equal to 80%80% of the Daily VWAP on August 9, 20212021..
In connection with the August Letter Agreements, on August 9, 2021, the Company also entered into an Omnibus Amendment to Senior Secured Notes Due 2024 and Warrants to Purchase Common Stock with High Trail (the “Omnibus Amendment”), whereby: (i) the Company agreed to increase the minimum cash threshold covenant in the April 2021 Notes from $15.0$15.0 million to $30.0$30.0 million through October 31, 2021; (ii) the Company agreed to add a liquidity covenant to the April 2021 Notes whereby it must have liquidity, on each day through October 31, 2021, calculated as (A) inventory, net, plus (B) accounts receivable, net (each determined in accordance with GAAP) in an aggregate minimum amount equal to $65.0$65.0 million less (C) any amount of cash and cash equivalents in excess of $30$30 million; (iii) the definition of “Permitted Investment” in the April 2021 Notes was modified such that the consent of High Trail is now required for certain merger and acquisition activity; (iv) the Company agreed that the exercise prices of the following warrants to purchase shares of the Company’s common stock previously issued to High Trail will be modified to be equal to
the lesser of: (X) the closing price of the Company’s common stock on August 9, 2021 or (Y) the VWAP of the Company’s common stock on August 9, 2021: (1) the February Warrant; (2) the Additional Warrant; and (3) the Warrants (collectively, the “High Trail Warrants”); (v) High Trail agreed that it would not exercise the High Trail Warrants prior to October 17, 2021 (the day that was 60 days after the registration statement registering for resale the 2,666,667 shares of common stock the Company issued on June 15, 2021 was declared effective); and (vi) if, at any time on or after January 7, 2022, High Trail is unable to exercise the High Trail Warrants due to the agreement described in clause (v), the Company agreed to pay High Trail, as liquidated damages, a cash payment that will be equal to (a) the weighted average price of the Company’s common stock on the date High Trail seeks to exercise any of the High Trail Warrants, minus the then-current exercise price of the High Trail Warrants, multiplied by (b) the number of shares subject to the High Trail Warrants that it then desires to exercise.
High Trail Debt Repayment
On September 22, 2021, the Company entered into letter agreements (the “September Letter Agreements”) with High Trail with respect to the April 2021 Notes. Pursuant to the September Letter Agreements, (i) High Trail notified the Company that High Trail declared events of default under the April 2021 Notes and further notified the Company that High Trail accelerated an aggregate of $66.3$66.3 million of the principal amount of the April 2021 Notes, requiring the Company to pay $76.9$76.9 million (such amount equal to 115%115% of the principal amount that was accelerated, as required under the terms of the April 2021Notes,2021 Notes, plus $0.3$0.3 million of accrued but unpaid interest on the principal amount that was accelerated) (collectively, the “Acceleration Amount”), (ii) High Trail agreed, contingent and effective upon the repayment of the Acceleration Amount in shares of the Company’s common stock in accordance with the April 2021 Notes and the September Letter Agreements and the satisfaction of all of the Company’s other obligations under the September Letter
F-22
Agreements and the Second Omnibus Amendment (as defined below), to waive the events of default, (iii) the Company agreed that until November 1, 2021, the Company will not, subject to certain exceptions, issue, offer, sell or otherwise dispose of any equity security, equity-linked security or related security, and (iv) the Company agreed that, as a result of the occurrence of the events of default, it no longer has the right to require High Trail to exercise the High Trail Warrants if the price of the Company’s common stock exceeds 200%200% of the exercise price of the High Trail Warrants for 20 consecutive trading days and certain other conditions were satisfied.
Under the terms of the April 2021 Notes, High Trail had the right, by delivering a notice to the Company (each, a “Stock Payment Notice”) to require the Company to satisfy its obligation to repay all or any portion of the Acceleration Amount in shares of the Company’s common stock, with the number of shares issuable determined by dividing the portion of the Acceleration Amount that High Trail requests, pursuant to a Stock Payment Notice, to be repaid in shares of the Company’s common stock, by 80%80% of the lesser of (A) the Daily VWAP (as defined in the April 2021 Notes) on the date of delivery of the Stock Payment Notice, and (B) the average of the lowest two Daily VWAPs during the ten (10) day VWAP trading period ending on the date of delivery of the Stock Payment Notice. Pursuant to the September Letter Agreements, High Trail agreed to deliver Stock Payment Notices as soon as it is practicable to do so without High Trail and its affiliates collectively beneficially owning in the aggregate in excess of 9.99%9.99% of the Company’s outstanding common stock.
In connection with the September Letter Agreements, on September 22, 2021, the Company also entered into a Second Omnibus Amendment to Senior Secured Notes Due 2024 and Warrants to Purchase Common Stock with High Trail (the “Second Omnibus Amendment”), whereby: (i) the maturity date of the April 2021 Notes was changed from April 8, 2024 to April 1, 2023;2023; (ii) the definition of “Permitted Investment” in the April 2021 Notes was modified to include an exception for certain acquisitions of all or substantially all of the assets of another person or a majority of the equity interests of another person; (iii) the definition of “Target Adjusted EBITDA” was modified to reflect certain updated projections of the Company; (iv) the liquidity requirements as set forth in the Omnibus Amendment were removed; (v) the minimum cash threshold covenant was changed from $30.0$30.0 million to $15.0$15.0 million; (vi) the definition of “Adjusted EBITDA” in the April 2021 Notes was modified to be equal to not less than the Target Adjusted EBITDA for the three-month period ending on the last day of each applicable fiscal quarter instead of the 12-month period ending on such day; and (vii) the exercise prices of the High Trail Warrants were modified to be equal to $0.01.$0.01. High Trail reserved the right to void the term of the Second Omnibus Amendment in full or in part in the event that the Company breaches any of the terms of the September Letter Agreements or otherwise fails to timely deliver shares of stock of the Company to High Trail as required thereunder.
In accordance with the April 2021 Notes and the September Letter Agreements, effective September 22, 2021, the Company issued to High Trail an aggregate of 3,474,814 shares of its common stock, and effective September 23, 2021, the Company issued to High Trail an aggregate of 5,838,096 shares of its common stock, satisfying its obligation to repay the Acceleration Amount in full.
Pursuant to ASC 470, Debt, the Company concluded that as a result of the High Trail Letter Agreements and Omnibus Amendment and the High Trail Debt Repayment, the April 2021 Notes were extinguished on September 22, 2021 in exchange for the Notes due April 2023 of $25.0$25.0 million.
The Company paid off the remaining $25.0$25.0 million High Trail Term Loan as of December 31, 2021 (see the discussion under the heading MidCap Credit Facility December 2021 of this Note 9 below). Pursuant to ASC 470, Debt, the Company concluded the High
Trail Term Loan transaction resulted in the extinguishment of the High Trail Term Loan in the amount of $2.5$2.5 million of extinguishment of which has been classified within loss on extinguishment of debt on the consolidated statementsConsolidated Statements of operations.Operations.
For the year-ended December 31, 2021, the Company has recorded a total of $138.9$138.9 million of debt extinguishment loss which includes the $107.0$107.0 million from the High Trail Letter Agreements and Omnibus Amendment and the High Trail Debt Repayment, $28.2$28.2 million from the High Trail December 2020 and February 2021 term loans as part of the issuance of the April 2021 Notes, of $2.5$2.5 million of extinguishment from the remaining $25.0$25.0 million of High Trail Term Loan and $1.5$1.5 million from the repayment of the Credit Facility.
MidCap Credit Facility – December 2021
On December 22, 2021, the Company entered into a Credit and Security Agreement (the “Credit Agreement”) together with certain of its subsidiaries party thereto as borrowers, the entities party thereto as lenders, and Midcap Funding IV Trust, as administrative agent, pursuant to which, among other things, (i) the Lenders agreed to provide a three year revolving credit facility in a principal amount of up to $40.0$40.0 million subject to a borrowing base consisting of, among other things, inventory and sales receivables (subject to certain reserves), and (ii) the Company agreed to issue to MidCap Funding XXVII Trust a warrant (the “Midcap Warrant”) to purchase up to an aggregate of 200,000 shares of common stock of the Company, par value $0.0001$0.0001 per share, in exchange for the Lenders extending loans and other extensions of credit to the Company under the Credit Agreement.
On December 22, 2021, the Company used $27.6$27.6 million of the net proceeds from the initial loan under the Credit Agreement to repay all remaining amounts owed under those certain senior secured promissory notes issued by the Company to High Trail Investments SA LLC and High Trail Investments ON LLC in an initial principal amount of $110.0$110.0 million, as amended (the “Terminated Notes”).
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The obligations under the Credit Agreement are a senior secured obligation of the Company and rank senior to all indebtedness of the Company. Borrowings under the Credit Agreement bear interest at a rate per annum equal to 5.50%of Term Secured Overnight Financing Rate ("Term SOFR"), which is defined as SOFR plus 0.10%, plus at the Company’s option, either a base rate or a LIBOR rate.5.50%. The Company will also be required to pay a commitment fee of 0.50%0.50% in respect of the undrawn portion of the commitments, which is generally based on average daily usage of the facility during the immediately preceding fiscal quarter. The Credit Agreement does not require any amortization payments.
The Credit Agreement imposes certain customary affirmative and negative covenants upon the Company including restrictions related to dividends and other foreign subsidiaries limitations. The Credit Agreement minimum liquidity covenant requires that Midcap shall not permit the credit party liquidity at any time to be less than (a) during the period commencing on February 1st through and including May 31st of each calendar year, $12.5$12.5 million and (b) at all other times, $15.0$15.0 million. The Credit Agreement includes events of default that are customary for these types of credit facilities, including the occurrence of a change of control. The Company was in compliance with the financial covenants contained within the Credit Agreement as of December 31, 2021.
The Midcap Warrant has an exercise price of $4.70$4.70 per share, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, is immediately exercisable, has a term of ten years from the date of issuance and is exercisable on a cash or cashless basis.
The Company’s credit facility consisted of the following as of December 31, 2021:2021 and 2022 (in thousands):
|
| December 31, 2021 |
| |||||||||
|
| (in thousands) |
|
| December 31, |
|
| December 31, |
| |||
MidCap Credit Facility – December 2021 |
|
| 34,119 |
|
| $ | 34,119 |
|
| $ | 21,899 |
|
Less: deferred debt issuance costs |
|
| (691 | ) |
|
| (691 | ) |
|
| (459 | ) |
Less: discount associated with issuance of warrants |
|
| (583 | ) |
|
| (583 | ) |
|
| (387 | ) |
Total MidCap Credit Facility – December 2021 |
| $ | 32,845 |
|
| $ | 32,845 |
|
| $ | 21,053 |
|
Interest Expense, Net
Interest expense, net consisted of the following for the years-ended December 31, 20202021 and 20212022 (in thousands):
|
| Years-Ended December 31, |
| |||||
|
| 2021 |
|
| 2022 |
| ||
Interest expense |
| $ | 13,250 |
|
| $ | 2,696 |
|
Interest income |
|
| (595 | ) |
|
| (93 | ) |
Total interest expense, net |
| $ | 12,655 |
|
| $ | 2,603 |
|
|
| Years Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2020 |
|
| 2021 |
| |||
Interest expense |
| $ | 4,532 |
|
| $ | 5,038 |
|
| $ | 13,250 |
|
Interest income |
|
| (146 | ) |
|
| (59 | ) |
|
| (595 | ) |
Total interest expense, net |
| $ | 4,386 |
|
| $ | 4,979 |
|
| $ | 12,655 |
|
10.STOCKHOLDERS’ EQUITY
|
|
Common Shares—The Company has one class of common shares issued and available. Each share of common stock has the right to one vote per share.share.
On June 14, 2019, the Company completed its IPO, selling 3,600,000 shares of common stock at a public offering price of $10.00 per share. Net proceeds to the Company from the offering were approximately $29.4 million, after deducting legal, underwriting and other offering expenses.
On August 26, 2020 the Company completed the Follow-On Offering of 3,860,710 shares of common stock, which includes the exercise by the underwriters of their option to purchase additional shares of common stock solely to cover over-allotments, at a public offering price of $7.00 per share, less underwriting discounts and commissions. The Company received net proceeds of approximately $23.4 million after deducting underwriting discounts and commissions of approximately $2.2 million and other offering expenses payable by the Company of approximately $1.4 million.
On June 10, 2021, the Company entered into a Securities Purchase Agreement with certain accredited investors (collectively, the “Investors”) pursuant to which, among other things, the Company issued and sold to the Investors, in a private placement transaction, an aggregate of 2,666,667 shares of common stock, of the Company (the “Shares”), at an offering price of $15.00$15.00 per Share, with proceeds to the Company, net of offering costs, of $36.7$36.7 million.
On March 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, (i) 6,436,322 shares of our common stock (the “Shares”), par value $0.0001 per share (“Common Stock”), and accompanying warrants to purchase an aggregate of 4,827,242 shares of common stock, and (ii) prefunded warrants to purchase up to an aggregate of 3,013,850 shares of common stock (the “Prefunded Warrants”) and accompanying warrants to purchase an aggregate of 2,260,388 shares of common stock. The accompanying warrants to purchase Common Stock are referred to herein collectively as the “Common Stock Warrants”, and the Common Stock Warrants and the Prefunded Warrants are referred to herein collectively as the “Warrants”. Under the Purchase Agreements, each Share and accompanying Common Stock Warrant were sold together at a combined price of $2.91, and each Prefunded Warrant and accompanying Common Stock Warrant were sold together at a combined price of $2.91, for gross proceeds of approximately $27.5 million.
On September 29, 2022, we entered into securities purchase agreements (the “September Purchase Agreements”) with certain accredited investors, pursuant to which, among other things, we agreed to sell and issue, in a registered direct offering (the “Registered Direct Offering”), an aggregate of 10,643,034 shares of its Shares and accompanying warrants to purchase an aggregate of 10,643,034 shares of its common stock. 10,526,368 of the shares and the accompanying warrants to purchase 10,526,368 shares of common stock were sold to certain accredited purchasers that are not affiliated with us at a combined offering price of $1.90 per share and accompanying
F-24
warrant to purchase one share of common stock. The remaining 116,666 shares of Common Stock and the accompanying warrants to purchase 116,666 shares of Common Stock were sold to certain of our insiders, comprised of our President and Chief Executive Officer, Chief Financial Officer, Chief Legal Officer and Global Head of M&A and Chief Technology Officer, at a combined offering price of $2.10 per share and accompanying warrant to purchase one share of common stock.
The Registered Direct Offering closed on October 4, 2022 and the Company issued and sold an aggregate of 10,643,034 shares of common stock to the Purchasers. The gross proceeds to us from the Registered Direct Offering were approximately $20.2 million, before deducting fees payable to the placement agent and other estimated offering expenses payable by us. We currently intend to use the net proceeds from the Registered Direct Offering for working capital purposes, the conduct of its business and other general corporate purposes, which may include acquisitions, investments in or licenses of complementary products, technologies or businesses.
Pursuant to the ASC 815-40, the September Purchase Agreement represents a legally binding contract that meets the definition of a firm commitment and as such we recorded a derivative related to the offering of common stock (“forward contract”). Additionally, we recorded $12.8 million derivative expense derived from the excess of the fair-value of the issuances of equity of common shares and common stock warrants over the anticipated proceeds to be received by us. This expense was recorded in loss on initial issuance of equity on the consolidated statement of operations for the year-ended December 31, 2022.
11.STOCK-BASED COMPENSATION
|
|
The Company has threefour equity plans:
2014 Amended and Restated Equity Incentive Plan
The board of directors of Aterian Group, Inc., a subsidiary of the Company (“AGI”), adopted, and AGI’s stockholders approved, the Aterian Group, Inc. 2014 Equity Incentive Plan on June 11, 2014. On March 1, 2017, AGI’s board of directors adopted, and AGI’s stockholders approved, an amendment and restatement of the 2014 Equity Incentive Plan (as amended, the “Aterian 2014 Plan”). As of December 31, 2021, 60,5092022, 81,935 shares were reserved for awards available for future issuance under the Aterian 2014 Plan.
2018 Equity Incentive Plan
The Company’s board of directors adopted the Aterian, Inc. 2018 Equity Incentive Plan (the “2018 Plan”) on October 11, 2018. The 2018 Plan was approved by its stockholders on May 24, 2019. 2020. As of December 31, 2021, 347,3132022, 724,880 shares were reserved for awards available for future issuance under the 2018 Plan.
Options granted to date under the Aterian 2014 Plan and the 2018 Plan generally vest either: (i) over a four-year period with 25% of the shares underlying the options vesting on the first anniversary of the vesting commencement date with the remaining 75% of the shares vesting on a pro-rata basis over the succeeding thirty-six months25, subject to continued service with the Company through each vesting date, or (ii) over a three-year period with 33 1/3% of the shares underlying the options vesting on the first anniversary of the vesting commencement date with the remaining 66 2/375% of the shares vesting on a pro-rata basis over the succeeding thirty-six months, subject to continued service with the Company through each vesting date, or (ii) over a three-year period with 33 1/3% of the shares underlying the options vesting on the first anniversary of the vesting commencement date with the remaining 66 2/3% of the shares vesting on a pro-rata basis over the succeeding twenty-four months, subject to continued service with the Company through each vesting date. Options granted are generally exercisable for up to 10years subject to continued service with the Company.
2019 Equity Plan
The Company’s board of directors adopted the Aterian, Inc. 2019 Equity Plan (the “2019“2020 Equity Plan”) on March 20, 2019. The 2019 Equity Plan was approved by its stockholders on May 24, 2019. As of December 31, 2021, 02022, no shares were reserved for future
issuance. Shares of restricted common stock granted under the 2019 Equity Plan initially vested in substantially equal installments on the 6th, 12th, 18th and 24th monthly anniversary of the closing of the Company’s initial public offering (“IPO”). The Company and the 20192021 Equity Plan participants subsequently agreed to extend (i) the vesting date for the first installment of shares of restricted common stock under the 2019 Equity Plan to March 13, 2020, (ii) the vesting date for the second installment of shares of restricted common stock to December 15, 2020, (iii) the vesting date for the third installment of shares of restricted common stock to either January 18, 2021 or March 10, 2021, and (iv) the vesting date for the fourth installment of shares of restricted common stock to July 1, 2021 or December 14, 2021.2021. Awards granted under the 2019 Equity Plan and not previously forfeited upon termination of service carry dividend and voting rights applicable to the Company’s common stock, irrespective of any vesting requirement. Under ASC Topic 718, the Company treats each award in substance as multiple awards as a result of the graded vesting and the fact that there is more than one requisite service period. Upon the prerequisite service period becoming probable, the day of the IPO, the Company recorded a cumulative catch-up expense and the remaining expense will be recorded under graded vesting. In the event the service of a participant in the 2019 Equity Plan (each, a “Participant”) is terminated due to an “involuntary termination”, then all of such Participant’s unvested shares of restricted common stock shall vest on the date of such involuntary termination unless, within three business days of such termination (1) the Company’s board of directors unanimously determines that such vesting shall not occur and (2) the remaining Participants holding
F-25
restricted share awards covering at least 70%70% of the shares of restricted common stock issued and outstanding under the 2019 Equity Plan determine that such vesting shall not occur. In the event of a forfeiture, voluntary or involuntary, of shares of restricted common stock granted under the 2019 Equity Plan, such shares are automatically reallocated to the remaining Participants in proportion to the number of shares of restricted common stock covered by outstanding awards that each such Participant holds.
Inducement Equity Incentive Plan
On May 27, 2022, the Compensation Committee of the Board (the “Compensation Committee”) adopted the Aterian, Inc. 2022 Inducement Equity Incentive Plan (the “Inducement Plan”). The Inducement Plan serves to advance the interests of the Company by providing a material inducement for the best available individuals to join the Company as employees by affording such individuals an opportunity to acquire a proprietary interest in the Company.
The Inducement Plan provides for the grant of equity-based awards in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance units and performance shares solely to prospective employees of the Company or an affiliate of the Company provided that certain criteria are met. Awards under the Inducement Plan may only be granted to an individual, as a material inducement to such individual to enter into employment with the Company or an affiliate of the Company, who (i) has not previously been an employee or director of the Company or (ii) is rehired following a bona fide period of non-employment with the Company. The maximum number of shares available for grant under the Inducement Plan is 2,700,000 shares of the Company’s common stock (subject to adjustment for recapitalizations, stock splits, reorganizations and similar transactions). The Inducement Plan is administered by the Compensation Committee and expires ten years from the date of effectiveness. As of December 31, 2022, 2,050,000 shares were reserved for future issuance under the Inducement Plan.
The Inducement Plan has not been and will not be approved by the Company’s stockholders. Awards under the Inducement Plan will be made pursuant to the exemption from Nasdaq stockholder approval requirements for equity compensation provided by Nasdaq Listing Rule 5635(c)(4), which permits Nasdaq listed companies to make inducement equity awards to new employees without first obtaining stockholder approval of the award.
The following is a summary of stock options activity during the year-ended December 31, 2021:2022:
|
| Options Outstanding |
| |||||||||||||
|
| Number of Options |
|
| Weighted- Average Exercise Price |
|
| Weighted- Average Remaining Contractual Life (years) |
|
| Aggregate Intrinsic Value |
| ||||
Balance—January 1, 2021 |
|
| 1,570,728 |
|
| $ | 9.09 |
|
|
| 7.71 |
|
| $ | 12,756 |
|
Options granted |
|
| — |
|
| $ | — |
|
| — |
|
| $ | — |
| |
Options exercised |
|
| (1,011,422 | ) |
| $ | 9.00 |
|
|
| — |
|
| $ | — |
|
Options cancelled |
|
| (36,401 | ) |
| $ | 9.17 |
|
| — |
|
| $ | — |
| |
Balance—December 31, 2021 |
|
| 522,905 |
|
| $ | 9.25 |
|
|
| 6.77 |
|
| $ | 25,971 |
|
Exercisable as of December 31, 2021 |
|
| 520,256 |
|
| $ | 9.25 |
|
|
| 6.77 |
|
| $ | 25,971 |
|
Vested and expected to vest as of December 31, 2021 |
|
| 522,905 |
|
| $ | 9.25 |
|
|
| 6.77 |
|
| $ | 25,971 |
|
|
| Options Outstanding |
| |||||||||||||
|
| Number of |
|
| Weighted- |
|
| Weighted- |
|
| Aggregate |
| ||||
Balance—January 1, 2022 |
|
| 522,905 |
|
| $ | 9.25 |
|
|
| 6.77 |
|
| $ | 25,971 |
|
Options granted |
|
| — |
|
| $ | — |
|
| — |
|
| $ | — |
| |
Options exercised |
|
| — |
|
| $ | — |
|
| — |
|
| $ | — |
| |
Options canceled |
|
| (154,309 | ) |
| $ | 9.24 |
|
| — |
|
| $ | — |
| |
Balance—December 31, 2022 |
|
| 368,596 |
|
| $ | 9.26 |
|
|
| 5.89 |
|
| $ | — |
|
Exercisable as of December 31, 2022 |
|
| 368,596 |
|
| $ | 9.26 |
|
|
| 5.89 |
|
| $ | — |
|
Vested and expected to vest as of December 31, 2022 |
|
| 368,596 |
|
| $ | 9.26 |
|
|
| 5.89 |
|
| $ | — |
|
As of December 31, 2021, the total unrecognized compensation expense related to unvested options was less than $0.1 million, which the Company expects to recognize over an estimated weighted-average period of 0.17 years.
During the year-ended December 31, 2021, 02022, no options were granted. All Options have vested and have been fully expensed as of December 31, 2022.
A summary of restricted stock activity within the Company’s equity plans and changes for the year-ended December 31, 2021,2022, is as follows:
Restricted Stock Awards |
| Shares |
|
| Weighted Average Grant- Date Fair Value |
|
| Shares |
|
| Weighted |
| ||||
Nonvested at January 1, 2021 |
|
| 3,259,389 |
|
| $ | 13.51 |
| ||||||||
Nonvested at January 1, 2022 |
|
| 2,106,180 |
|
| $ | 14.94 |
| ||||||||
Granted |
|
| 2,028,547 |
|
| $ | 15.56 |
|
|
| 4,428,662 |
|
| $ | 3.14 |
|
Vested |
|
| (2,798,872 | ) |
| $ | 13.56 |
|
|
| (1,888,337 | ) |
| $ | 10.38 |
|
Forfeited |
|
| (382,884 | ) |
| $ | 14.59 |
|
|
| (423,482 | ) |
| $ | 10.27 |
|
Nonvested at December 31, 2021 |
|
| 2,106,180 |
|
| $ | 14.94 |
| ||||||||
Nonvested at December 31, 2022 |
|
| 4,223,023 |
|
| $ | 4.85 |
|
As of December 31, 2021,2022, the total unrecognized compensation expense related to unvested shares of restricted common stock was $20.1$17.7 million, which the Company expects to recognize over an estimated weighted-average period of 1.161.1 years.
F-26
Stock-based compensation expense is allocated based on the cost center to which the award holder belongs. The following table summarizes the total stock-based compensation expense by function, including expense related to consultants for years-ended December 31, 20202021 and 20212022.
|
| Years-Ended December 31, |
|
| |||||
|
| 2021 |
|
| 2022 |
|
| ||
|
| (in thousands, except percentages) | |||||||
Sales and distribution expenses |
| $ | 6,809 |
|
| $ | 5,014 |
|
|
Research and development expenses |
|
| 5,339 |
|
|
| 1,871 |
|
|
General and administrative expenses |
|
| 16,839 |
|
|
| 7,709 |
|
|
Total stock-based compensation expense |
| $ | 28,987 |
|
| $ | 14,594 |
|
|
|
|
|
|
|
| Years-End December 31, |
| |||||
|
| 2019 |
|
| 2020 |
|
| 2021 |
| |||
|
|
|
|
|
| (in thousands) |
| |||||
Sales and distribution expenses |
| $ | 7,358 |
|
| $ | 2,533 |
|
| $ | 6,809 |
|
Research and development expenses |
|
| 5,711 |
|
|
| 3,965 |
|
|
| 5,339 |
|
General and administrative expenses |
|
| 21,612 |
|
|
| 16,218 |
|
|
| 16,839 |
|
Total stock-based compensation expense |
| $ | 34,681 |
|
| $ | 22,716 |
|
| $ | 28,987 |
|
12.COMMITMENT AND CONTINGENCIES
|
|
Inventory Purchases—As of December 31, 20202021 and 2021,2022, the Company had $55.0$32.3 million and $32.3$13.5 million, respectively, of inventory purchase orders placed with vendors waiting to be fulfilled.
Sales or Other Similar Taxes—Based on the location of the Company’s current operations, the majority of sales tax is collected and remitted either by the Company or on its behalf by e-commerce marketplaces in most states within the U.S. To date, the Company has had no actual or threatened sales and use tax claims from any state where it does not already claim nexus or any state where it sold products prior to claiming nexus. However, the Company believes that the likelihood of incurring a liability as a result of sales tax nexus being asserted by certain states where it sold products prior to claiming nexus is probable. As of each of December 31, 20202021 and December 31, 2021,2022, the Company estimates that the potential liability, including current sales tax payable is approximately $0.5$0.7 million and $0.7 million, respectively, which has been recorded as an accrued liability. The Company believes this is the best estimate of an amount due to taxing agencies, given that such a potential loss is an unasserted liability that would be contested and subject to negotiation between the Company and the state, or decided by a court.
U.S. Department of Energy—In September 2019, the Company received a Test Notice from the U.S. Department of Energy (“DOE”) indicating that a certain dehumidifier model may not comply with applicable energy-conservation standards. The DOE requested that the Company provide it with several model units for DOE testing. If the Company is determined to have violated certain energy-conservation standards, it could be fined pursuant to DOE guidelines, and this civil penalty may be material to the Company’s consolidated financial statements. The Company intends to vigorously defend itself. The Company has submitted to the DOE testing process, made a good-faith effort to provide necessary notice as practicable, and included in a formal response to the DOE copies of the energy-efficiency report and certification that were issued for the dehumidifier model at the time of production. The Company believes that its products are compliant, and the Company, in conjunction with its manufacturing partner, has disputed the Test Notice received from the DOE. As of the date of the issuance of the accompanying condensed consolidated financial statements, the Company cannot reasonably estimate what, if any, penalties may be levied.
U.S. Environmental Protection Agency—In September 2019, the Company received notice from the U.S. Environmental Protection Agency (“EPA”) that certain of its dehumidifier products were identified by the Association of Home Appliance Manufacturers (“AHAM”) as failing to comply with EPA ENERGY STAR requirements. For an appliance to be ENERGY STAR certified, it must meet standards promulgated by the EPA and enforced through EPA-accredited certification bodies and laboratories. The Company believes that its products are compliant, and the Company, in conjunction with its manufacturing partner, has disputed the AHAM testing determination pursuant to EPA guidelines. While a resolution remains pending, the Company is not selling or marketing the products identified by the EPA. The Company cannot be certain that these products will eventually be certified by the EPA, and the Company may incur costs that cannot presently be calculated in the event that the Company needs to make changes to the manner in which these products are manufactured and sold.court.
In April 2020, the Company received notice from the EPA with respect to regulatory compliance and the advertising associated with certain of its dehumidifier products. The Company believes that its products are compliant, and the Company is currently in discussions with the EPA to resolve the matter. The EPA placed a hold on the sale of certain of the Company's dehumidifier inventory while it reviews the matter with the Company. As of October 2020, the Company is able to resume selling the products identified by the EPA, and discussions are continuing with the EPA. The Company cannot be certain of the outcome with the EPA, and the Company may incur costs and penalties that cannot presently be calculated in the event that the Company is unable to resolve this matter with the EPA.
Settlement Agreement—On May 2, 2021, the Company entered into a settlement agreement with one of the Company’s suppliers to agreewho agreed to pay the amount of $3.0$3.0 million to the Company in 3three installments of $1.0$1.0 million each, with the first payment to be paid on
or before May 31, 2021, the second payment to be paid on or before September 30, 2021, and the third payment to be paid on or before November 30, 2021. Further, the supplier agreed to deliver certain goods as part of this settlement by September 30, 2021. Through the date of the accompanying condensed consolidated financial statements,Consolidated Financial Statements, the supplier has not paid in full its required first payment of $1.0$1.0 million nor has it delivered the required quantity of goods. As such, theThe Company has fully reserved $4.1$4.1 million within prepaid and other current assets on its consolidated financial statementsConsolidated Financial Statements during the year-ended December 31,, 2021. 2021 and December 31, 2022. The Company has commenced legal action against the supplier and certain other parties to the matter. One of the parties to the matter has filed for bankruptcy and such legal action is being stayed until the resolution of such bankruptcy. The Company continues to reserve its legal options and rights on this matter.matter as of December 31, 2022.
F-27
Legal Proceedings—The Company is party to various actions and claims arising in the normal course of business. The Company does not believe that the final outcome of these matters will have a material adverse effect on the Company’s condensed consolidated financial position or results of operations. In addition, the Company maintains what it believes is adequate insurance coverage to further mitigate risk. However, no assurance can be given that the final outcome of such proceedings will not materially impact the Company’s condensed consolidated financial condition or results of operations. Further, no assurance can be given that the amount or scope of existing insurance coverage will be sufficient to cover losses arising from such matters.
Securities Class Action—On May 13, 2021,Following a securitiesmediation, an initial settlement-in-principle, and further negotiations, on April 22, 2022, the Company, in conjunction with its codefendants Yaniv Sarig, Fabrice Hamaide, and Arturo Rodriguez, entered into a formal settlement agreement to resolve the purported class action complaint waslawsuits filed in the U.S. District Court for the Southern District of New York (the “Court”) by Andrew Tate naming the Company, Yaniv Sarigon May 13, 2021, and Fabrice Hamaide as defendants. Onby Jeff Coon, on June 10, 2021, a substantially similar securities class action complaint was filed inconsolidated under the same court by Jeff Coon againstcaption Tate v. Aterian, Inc., et. al., 21-cv-04323-VM (the “Action”).
In the same defendants. Thereafter, other stockholders asserted similar claims. On August 10, 2021, the court appointed Joseph Nolff as the lead plaintiff of the putative class action, and on October 12, 2021, he filed an amended complaint, (i) adding Arturo Rodriguez as a defendant, (ii) asserting violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated thereunder and (iii) claimingAction, plaintiffs claimed that the defendants made false and materially misleading statements and failed to disclose material adverse facts regarding the Company’s business, operations, and prospects, and that this was revealed on May 4, 2021, when Culper Research publishedin a report allegedly exposingissued by Culper Research. The Company and its codefendants denied, and continue to deny, that these alleged misrepresentationsallegations have any merit. The settlement agreement contains no admission of wrongdoing and omissions. The lead plaintiff has since filed two further amended complaints repeating substantively the same allegations. On March 10, 2022, expressly states that the Company reached anand its codefendants have entered into a settlement solely to avoid the uncertainties, burden, and expense of further litigation.
The settlement class consists of purchasers of the Company’s securities during the period from August 24, 2020, through May 3, 2021, inclusive (the “Class Period”). Under the terms of the proposed settlement, members of the settlement class release the Company and its codefendants from, among other things, all claims and causes of action of every nature and description, whether known or unknown, that were asserted in the Action; could have been asserted in the Action; relate in any way to transactions in the Company’s securities during the Class Period and any facts, transactions, or occurrences referred to in any of the pleadings or other documents filed in the Action. Under the agreement, the Company was to pay $1.3 million, within 10 business days of the Court’s preliminary approval of the settlement, which would, after final court approval, be distributed to claimants in principlethe settlement class pursuant to resolvethe plan of allocation filed with the Court on May 4, 2022. To the extent permitted by the Court, this payment will also fund the legal fees of plaintiffs’ counsel and the costs of administering the settlement.
The proposed settlement was preliminarily approved by the Court on May 6, 2022, and the Company thereafter paid $1.3 million into the designated escrow. On September 12, 2022, the Court entered a final judgment approving the class action for $1.3 million whichsettlement. The claims administrator is in the process of distributing funds to claimants. The Company does not anticipate any further action in this matter. In connection with the settlement, the Company accrued for, subject to negotiationapproximately $1.3 million during the year ended December 31, 2021 and paid approximately $1.3 million in the second quarter of a formal memorandum of understanding, the execution of final settlement documents, and court approval. If that process does not succeed, the Company is prepared to continue the full defense of this action.2022.
Shareholder Derivative Actions Related to the Securities Class Action—Action—On October 21, October25October 25 and November 10, 2021, three shareholder derivative actions were filed on behalf of the Company by Shaoxuan Zhang, Michael Sheller and Tyler Magnus in the U.S. District Court for the Southern District of New York. These actions, collectively, name Yaniv Sarig, Fabrice Hamaide,Arturo Rodriguez, Greg B. Petersen, Bari A. Harlam,Amy von Walter, WilliamKurtz, Roi Zion Zahut, Joseph A. Risico, Tomer Pascal and Mihal Chaouat-Fix as individual defendants, and the Company as a nominal defendant. These actions are predicated on substantively the same factual allegations contained in the above-described securities class action and assert that the individual defendants (i) breached their fiduciary duties, (ii) misused their authority, (iii) were unjustly enriched and (iv) wasted corporate assets. The action filed by Michael Sheller also alleges that individual defendants Sarig and Hamaide are liable for contribution pursuant to Sections 10(b) and 21D of the Exchange Actwhich was resolved via settlement in the event the Company is held liable in the Securities Class Action. The action filed by Shaoxuan Zhang alleges analogous liability on the part of Sarig, Hamaide and Rodriguez. Finally, the action filed by Shaoxuan Zhang also alleges that individual defendants Sarig, Harlam, Kurtz, Petersen and von Walter are liable for violations of Section 14(a) of the Exchange Act.September 2022 The Company believes the allegations are without merit and intendscontinues to vigorously defend against these actions. Thedeny each of the claims and allegations of wrongdoing. On December 12, 2022, the parties reached an agreement and entered into a Stipulation and Agreement of Settlement (the “Stipulation”) to these actions haveresolve this derivative action. Under the Stipulation, the Company agreed to stay this action pending resolutionadopt certain corporate governance reforms, the terms of which are outlined in Exhibit A to the Stipulation, and a payment of the Securities Class Action,Plaintiffs’ attorneys’ fees and givenexpenses of $0.3 million The proposed settlement was preliminarily approved by the tentative resolution of the Securities Class Action,Court on December 29, 2022, the Company intendsmade the agreed $0.3 million payment, and a hearing to engage withdetermine whether the parties for a resolution of these matters upon finalization of that settlement. However, the outcome of these legal proceedings are currently uncertain. Based on information availableCourt should give final approval to the Company at present, the Company cannot reasonably estimate a range of loss or incomesettlement is scheduled for these actions. March 2023.
SabbyInvestor Contract Action—On September 20, 2021, Sabby Volatility Warrant Master Fund Ltd. (“Sabby”(the “Investor”) sued the Company in the Supreme Court of the State of New York, New York County, alleging that the Company breached the Securities Purchase Agreement, dated June 10, 2021 (the “Purchase Agreement”), pursuant to which Sabbythe Investor purchased 400,000 shares of the Company’s common stock, for an aggregate price of approximately $6$6.0 million. Sabby contendsThe Investor contended that certain of the representations and warranties made by the Company in the Purchase Agreement concerning its financial condition and the accuracy of its prior disclosures were untrue and that the Company breached the Purchase Agreement’s anti-dilution and use-of-proceeds covenants on both August 9, 2021 and September 23, 2021, when the Company resolved certain defaults with High Trail. The Company intends to vigorously defend againstparties reached a settlement agreement for $1.6 million. In this action, the Company denied, and it continues to deny, the Investor’s allegations, and the settlement agreement contains no admission of wrongdoing; the Company nevertheless determined that a resolution was warranted to minimize the costs and risks of ongoing litigation. The Company recorded a $1.6 million expense in general and administrative expenses on the Consolidated Statement of Operations for the year-ended December 15,31, 2022.
F-28
Mueller Action—In October 2021, the Company received a class action notification and pre-lawsuit demand letter demanding corrective action with respect to the marketing, advertising and labeling of certain products under the Mueller brand (the “Mueller Action”). In April 2022, the parties reached an agreement in principle to resolve this potential action for $0.5 million in cash and $0.3 million worth of coupons, which the Company accrued $0.8 million in the three months ended March 31, 2022, subject to negotiation and the execution of final settlement documents and court approval. If that process does not succeed, the Company is prepared to continue the full defense of this action.
Sentia Wellness Action—On June 7, 2022, Sentia Wellness Inc. (“Sentia”) filed an action in Multnomah County, Oregon against Boris Jordan; Measure 8 Ventures, LP; Gron Ventures Fund I, LP; Zola Global Investors Ltd.; Anson Advisors Inc.; AC Anson Investments Ltd.; Anson Investments Master Fund LP; Anson Opportunities Master Fund LP; Serendipity SPC -Trimble Fund SP; Lapid Us Investments LLC; Hadron Healthcare and Consumer Special Opportunities Master Fund; Alliance Global Partners LLC; Sunny Puri; Juan Martinez; Peter Clateman; Wilder Ramsey; Gregory Crowe; Igor Gimelshtein; Tarik Ouass; Andrea Oriani; Marco D’attanseo; Afzal Hasan; and the Company. Sentia asserts claims for breach of fiduciary duty, breach of duty of good faith and fair dealing, intentional interference with prospective economic relations, intentional interference with contractual relationship, negligent misrepresentation, and unjust enrichment against various of these defendants, based on the allegation that Sentia’s debt holders conspired to take control of Sentia and direct its resources and acquisition efforts to the debt holders’ individual financial interests. Sentia alleges that Aterian—then known as Mohawk —contemplated a partial acquisition of Sentia that played some role in these events. The Company filed a motion to dismiss which was fully briefedthe action and, in response, on December 8, 2022, counsel for Sentia agreed to dismiss the Company from the action (without prejudice).
Earn-out Payment Dispute—On February 24, 2022, the Company received a notice disputing the Company’s calculation of the earn-out payment to be paid to Josef Eitan and Ran Nir pursuant to the Stock Purchase Agreement (the “PPD Stock Purchase Agreement”), dated as of February 11, 2022. However,May 5, 2021, by and among the outcomeCompany, Truweo, LLC, Photo Paper Direct Ltd, Josef Eitan and Ran Nir. The Company is in discussions with representatives of this legal proceeding is currently uncertain. Based on information availableMr. Eitan and Mr. Nir, who believe they are entitled to the Company at present,full earn-out under the terms of the PPD Stock Purchase Agreement, whereas the Company cannot reasonably estimatebelieves they are not. Mr. Eitan and Mr. Nir filed a rangemotion to compel arbitration in the Southern District of loss for this action.New York on September 14, 2022. The Company filed its motion to oppose such motion on October 28, 2022, believes its calculations are accurate and intends to vigorously defend itself.
13. INCOME TAXES
|
|
Loss before provision for income taxes consisted of the following for the periods indicated (in thousands):
|
| December 31, |
|
| December 31, |
| ||
Domestic |
| $ | (233,846 | ) |
| $ | (196,166 | ) |
International |
|
| (1,646 | ) |
|
| (502 | ) |
Total |
| $ | (235,492 | ) |
| $ | (196,668 | ) |
|
| December 31, 2019 |
|
| December 31, 2020 |
|
| December 31, 2021 |
| |||
Domestic |
| $ | (58,718 | ) |
| $ | (62,985 | ) |
| $ | (233,846 | ) |
International |
|
| (42 | ) |
|
| (93 | ) |
|
| (1,646 | ) |
Total |
| $ | (58,760 | ) |
| $ | (63,078 | ) |
| $ | (235,492 | ) |
The components of the Company’s income tax provision were as follows for the periods indicated (in thousands):
|
| December 31, |
|
| December 31, |
| ||
Current: |
|
|
|
|
|
| ||
Federal |
| $ | — |
|
| $ | — |
|
State |
|
| 72 |
|
|
| 101 |
|
Foreign |
|
| 265 |
|
|
| 69 |
|
Total current income tax expense |
|
| 337 |
|
|
| 170 |
|
|
|
|
|
|
|
| ||
Deferred: |
|
|
|
|
|
| ||
Federal |
|
| 253 |
|
|
| (270 | ) |
State |
|
| 32 |
|
|
| (35 | ) |
Foreign |
|
| (90 | ) |
|
| (241 | ) |
Total deferred income tax expense (benefit) |
|
| 195 |
|
|
| (546 | ) |
Total income tax provision (benefit) |
| $ | 532 |
|
| $ | (376 | ) |
F-29
|
| December 31, 2019 |
|
| December 31, 2020 |
|
| December 31, 2021 |
| |||
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
State |
|
| 21 |
|
|
| 28 |
|
|
| 72 |
|
Foreign |
|
| 8 |
|
|
| 0 |
|
|
| 265 |
|
Total current |
|
| 29 |
|
|
| 28 |
|
|
| 337 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
| 0 |
|
|
| 0 |
|
|
| 253 |
|
State |
|
| 0 |
|
|
| 20 |
|
|
| 32 |
|
Foreign |
|
| 0 |
|
|
| 0 |
|
|
| (90 | ) |
Total deferred |
|
| 0 |
|
|
| 20 |
|
|
| 195 |
|
Income tax provision |
| $ | 29 |
|
| $ | 48 |
|
| $ | 532 |
|
The reconciliation of the Federal statutory income tax provision to the Company’s effective income tax provision is as follows for the periods indicated (in thousands):
|
| December 31, 2019 |
|
| December 31, 2020 |
|
| December 31, 2021 |
|
| December 31, |
|
| December 31, |
|
| |||||
Income tax benefit at statutory rates |
| $ | (12,339 | ) |
| $ | (13,246 | ) |
| $ | (49,454 | ) |
| $ | (49,454 | ) |
| $ | (41,300 | ) |
|
Permanent differences |
|
| 325 |
|
|
| 6,434 |
|
|
| 3 |
|
|
| 3 |
|
|
| — |
|
|
Debt Extinguishment |
|
| — |
|
|
| — |
|
|
| 33,746 |
| |||||||||
Warrant Liabilities |
|
| — |
|
|
| — |
|
|
| 11,066 |
| |||||||||
Stock Compensation |
|
| — |
|
|
| — |
|
|
| 10,602 |
| |||||||||
Debt extinguishment |
|
| 33,746 |
|
|
| (481 | ) |
| ||||||||||||
Warrant liabilities |
|
| 11,066 |
|
|
| 4,455 |
|
| ||||||||||||
Stock compensation |
|
| 10,602 |
|
|
| 4,410 |
|
| ||||||||||||
Change in FV contingent consideration |
|
| — |
|
|
| — |
|
|
| (3,143 | ) |
|
| (3,143 | ) |
|
| — |
|
|
Other permanent differences |
|
| — |
|
|
| 3 |
|
| ||||||||||||
Foreign rate differential |
|
| (4 | ) |
|
| (4 | ) |
|
| (44 | ) |
|
| (44 | ) |
|
| 14 |
|
|
State income taxes, net of federal tax benefit |
|
| (2,034 | ) |
|
| (2,056 | ) |
|
| (6,424 | ) |
|
| (6,424 | ) |
|
| (5,644 | ) |
|
Other |
|
| 45 |
|
|
| 313 |
|
|
| 264 |
|
|
| 264 |
|
|
| (389 | ) |
|
Prior Year True-Up Adjustments |
|
| — |
|
|
| — |
|
|
| (5,577 | ) | |||||||||
Prior year true-up adjustments |
|
| (5,577 | ) |
|
| (352 | ) |
| ||||||||||||
Valuation allowance |
|
| 14,036 |
|
|
| 8,607 |
|
|
| 9,493 |
|
|
| 9,493 |
|
|
| 38,908 |
|
|
Total income tax expense |
| $ | 29 |
|
| $ | 48 |
|
| $ | 532 |
| |||||||||
Total income tax expense (benefit) |
| $ | 532 |
|
| $ | (376 | ) |
|
The Company’s effective tax rate was 0.08%0.08% and 0.23%(0.19)% for the years-ended December 31, 20202021 and December 31, 2021,2022, respectively. The effective tax rate in both 2020 and 2021 was principally due to minimum state taxes accrued against the Company’sCompany's pre-tax operating loss in eachthe fiscal period. The effective tax rate for 2022 was principally due to tax expense incurred on the operation of acquired goodwill that is deductible for tax purposes and which was fully impaired for book purposes during the year.
The Company’s deferred tax assets and liabilities as of the dates indicated were as follows (in thousands):
|
| December 31, 2020 |
|
| December 31, 2021 |
|
| December 31, |
|
| December 31, |
| ||||
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Sales returns reserve |
| $ | 133 |
|
| $ | 130 |
|
| $ | 130 |
|
| $ | — |
|
Net operating loss carryforwards |
|
| 21,070 |
|
|
| 36,250 |
|
|
| 36,250 |
|
|
| 51,889 |
|
Stock options |
|
| 12,336 |
|
|
| 3,592 |
|
|
| 3,592 |
|
|
| 1,712 |
|
Deferred revenue |
|
| 14 |
|
|
| 15 |
|
|
| 15 |
|
|
| — |
|
Interest expense limitation |
|
| 2,392 |
|
|
| 10,151 |
|
|
| 10,151 |
|
|
| 10,959 |
|
Intangibles |
|
| 58 |
|
|
| 0 |
| ||||||||
Intangibles (definite life) |
|
| — |
|
|
| 181 |
| ||||||||
Intangibles (indefinite life) |
|
| — |
|
|
| 21,386 |
| ||||||||
Other |
|
| 1,917 |
|
|
| 2,364 |
|
|
| 2,364 |
|
|
| 1,972 |
|
Less: valuation allowances |
|
| (37,823 | ) |
|
| (47,316 | ) | ||||||||
Total deferred tax assets before valuation allowance |
|
| 52,502 |
|
|
| 88,099 |
| ||||||||
Valuation allowance |
|
| (47,316 | ) |
|
| (86,224 | ) | ||||||||
Net deferred tax assets |
|
| 97 |
|
|
| 5,186 |
|
|
| 5,186 |
|
|
| 1,875 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Fixed assets |
|
| (14 | ) |
|
| (18 | ) |
|
| (18 | ) |
|
| (3 | ) |
Goodwill |
|
| (103 | ) |
|
| (1,528 | ) |
|
| (1,528 | ) |
|
| — |
|
Prepaid Expenses |
|
| — |
|
|
| (3,562 | ) | ||||||||
Prepaid expenses |
|
| (3,562 | ) |
|
| (1,808 | ) | ||||||||
Intangibles |
|
| — |
|
|
| (560 | ) |
|
| (560 | ) |
|
| — |
|
Contingent Consideration |
|
| — |
|
|
| (1,084 | ) | ||||||||
Contingent consideration |
|
| (1,084 | ) |
|
| (1,092 | ) | ||||||||
Other |
|
| — |
|
|
| (130 | ) |
|
| (130 | ) |
|
| (130 | ) |
Less: valuation allowances |
|
| — |
|
|
| — |
| ||||||||
Net deferred tax liabilities |
|
| (117 | ) |
|
| (6,882 | ) |
|
| (6,882 | ) |
|
| (3,033 | ) |
Net deferred tax assets (liabilities) |
| $ | (20 | ) |
| $ | (1,696 | ) | ||||||||
|
|
|
|
|
|
| ||||||||||
Deferred tax liability, net |
| $ | (1,696 | ) |
| $ | (1,158 | ) |
At December 31, 2022, the Company had approximately $216.4 million of gross net operating losses ("NOLs") which expire in fiscal 2034 if not used. The Company also has approximately $121.3 million of apportioned state and local NOLs that expire between 2026 and 2036, depending on the state.
F-30
The Company has temporary differences due to differences in recognition of revenue and expenses for tax and financial reporting purposes, principally related to net operating losses, inventory, depreciation, and other expenses that are not currently deductible or realizable. At December 31, 2020, the Company had approximately $87.0 million of gross federal net operating losses (“NOLs”), which will begin to expire in fiscal year 2034 if unused. The Company also has approximately $45.8 million apportioned state and local NOLs that expire between 2025 and 2035, depending on the state, if not used. At December 31, 2021, the Company had approximately $152.0$152.0 million of gross federal NOLs, which will begin to expire in fiscal year 2034 if unused and approximately $79.5 million apportioned state and local NOLs. At December 31, 2022, the Company had approximately $216.4 million of gross federal NOLs which will begin to expire in fiscal year 2034 if unused. The Company also has approximately $79.5$121.3 million apportioned state and local NOLs that expire between 20252026 and 2035,2036, depending on the state, if not used. The NOL carryforwards for federal and state income tax purposes which, generally, can be used to reduce future taxable income. The Company’s ability to utilize its NOL carryforwards may be limited pursuant to Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), if the Company has had a change in ownership of more than 50% of its capital stock over a three-year period pursuant to Section 382 of the Code. These complex changes of ownership rules generally focus on ownership changes involving stockholders owning directly or indirectly 5% or more of a company’s stock, including certain public “groups” of stockholders as set forth by Section 382 of the Code, including those arising from new stock issuances and other equity transactions.
In response to COVID-19, various governments worldwide have enacted, or are in the process of enacting, measures to provide relief to businesses negatively affected by the pandemic. On March 27, 2020,2021, the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was signed into law in the U.S. The CARES Act provides relief to U.S. corporations through financial assistance programs and modifications to certain payroll and income tax provisions. In connection with the CARES Act and other financial relief measures worldwide, the Company has recognized $1.3utilized $1.3 million of payroll related credits in other current liabilities for the years-endedyear-ended December 31, 2021. The payroll related credits are recorded in other current liabilities within the consolidated balance sheet.
The Company regularly assesses the realizability of its deferred tax assets and establishes a valuation allowance if it is more-likely-than-not that some portion of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Due to the Company’s history of net operating losses, the Company believes it is more likely than not its federal, state and foreign deferred tax assets will not be realized as of December 31, 2021.2022.
The Company’s major taxing jurisdictions are New Jersey, New York, Florida, Texas, Pennsylvania, Tennessee, Virginia and California. The Company files a U.S. Consolidated income tax return as well as tax returns in certain foreign jurisdictions. The Company is subject to examination in these jurisdictions for all years since inception. Fiscal years outside the normal statute of limitations remain open to audit due to tax attributes generated in the early years which have been carried forward and may be audited in subsequent years when utilized. The Company is not currently under examination for income taxes in any jurisdiction. The
Company may be subject to audits covering a variety of tax matters by taxing authorities in any taxing jurisdiction where the Company conducts business. While the Company believes that the tax returns filed, and tax positions taken are supportable and accurate, some tax authorities may not agree with the positions taken. This can give rise to tax uncertainties which, upon audit, may not be resolved in the Company’s favor. As of December 31, 20202021 and 2021,2022, the Company has not recorded any tax contingency accruals for uncertain tax positions.
|
|
Restated Voting Agreement
On NovemberAugust 16, 2022, Congress passed the Inflation Reduction Act of 2022 (the “IRA”). The IRA introduces a new 15% corporate alternative minimum tax and includes a substantial package of energy and climate-related provisions, among other revenue raisers and incentives. A 1% excise tax on stock repurchases was also introduced in the IRA and this is effective January 1, 2018, Dr. Larisa Storozhenko, Maximus Yaney and Asher Maximus I, LLC (the “Initial Designating Parties”) entered into2023. On June 11, 2022, Congress passed the CHIPS Act of 2022. CHIPS adds a voting agreement with Mr. Asher Delug, oneone-time investment tax credit equal to 25% of a company’s investment in facilities that manufacture semiconductors or semiconductor manufacturing equipment. We evaluated the provisions of the stockholders of the Company and a member of the Company’s board of directors, pursuant to which Mr. Delug will have the power to vote such number of shares of common stock as is equal to: (a) all of the shares of the Company’s common stock beneficially held by the Initial Designating Parties minus (b) such number of shares of common stock representing 19.9% of the total voting power of the Company’s capital stock outstanding with respect to the election of directors, the appointment of officers and any amendments of the Company’s amended and restated certificate of incorporation or amended and restated bylaws (the “Voting Agreement”).
The Voting Agreement was amended and restated pursuant to a new Voting Agreement, dated March 13, 2019, by and among MV II, LLC, Dr. Larisa Storozhenko, Mr. Maximus Yaney, Mr. DelugIRA and the Company (the “Restated Voting Agreement”). Under the Restated Voting Agreement, each of MV II, LLC, Dr. Larisa StorozhenkoCHIPS Act and Mr. Yaney (collectively, the “Designating Parties”) agreed to relinquish the right to vote their shares of the Company’s capital stock, and any of the Company’s other equity interests (collectively, the “Voting Interests”) by granting the Company’s board of directors the sole right to vote all of the Voting Interests as the Designating Parties’ proxyholder. The Voting Interests include all shares of the Company’s common stock currently held by the Designating Parties, as well as any of the Company’s securities or other equity interests acquired by the Designating Parties in the future. Pursuant to the proxy granted by the Designating Parties, the Company’s board of directors is required to vote all of the Voting Interests in direct proportion to the voting of the shares and equity interests voted by all holders other than the Designating Parties. The proxy granted by the Designating Parties under the Restated Voting Agreement is irrevocable. In addition, the Restated Voting Agreement proxyholder may not be changed unless the Company receives the prior approval of The Nasdaq Stock Market LLC.
Under the Restated Voting Agreement, each of the Designating Parties further agreed not to purchase or otherwise acquire any shares of the Company’s capital stock or other equity securities, or any interest in any of the foregoing.
The Restated Voting Agreement became effective on June 12, 2019 and will continue until the earlier to occur of (a) a Deemed Liquidation Event unless, immediately upon such Deemed Liquidation Event, the Company’s common stock is and remains listed on The Nasdaq Stock Market LLC, or (b) Mr. Yaney’s death. For purposes of the agreement, a “Deemed Liquidation Event” means (i) the acquisition of the Company by another entity by means of any transaction or series of related transactions to which the Company is party other than a transaction or series of transactions in which the holders of the Company’s voting securities outstanding immediately prior to such transaction or series of transactions retain, immediately after such transaction or series of transactions, as a result of the Company’s shares held by such holders prior to such transaction or series of transactions, a majority of the total voting power represented by the Company’s outstanding voting securities or such other surviving or resulting entity; (ii) a sale, lease or other disposition of all or substantially all of the Company’s or its subsidiaries’ assets taken as a whole by means of any transaction or series of related transactions, except where such sale, lease or other disposition is to a wholly-owned subsidiary of the Company; or (iii) any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary; however, a Deemed Liquidation Event shall not include any transaction effected primarily to raise capitaldetermined that there was no material impact for the Company or a spin-off or similar divestiture of the Company’s product or Managed PaaS business as part of reorganization of the Company approved by the Company’s board of directors.year ended December 31, 2022.
14.RELATED PARTY TRANSACTION
None.
F-31
15.NET LOSS PER SHARE
|
|
Basic net loss per share is determined by dividing net loss by the weighted-average shares of common stock outstanding during the period. Diluted net loss per share is determined by dividing net loss by diluted weighted-average shares outstanding. Diluted weighted-average shares reflect the dilutive effect, if any, of potentially dilutive shares of common stock, such as options to purchase common stock calculated using the treasury stock method and convertible notes using the “if-converted” method. In periods with reported net operating losses, all options to purchase common stock are deemed anti-dilutive such that basic net loss per share and diluted net loss per share are equal.
The Company’s shares of restricted common stock are entitled to receive dividends and hold voting rights applicable to the Company’s common stock, irrespective of any vesting requirement. Accordingly, although the vesting commences upon the elimination of the contingency, the shares of restricted common stock are considered a participating security and the Company is required to apply the two-class method to consider the impact of the shares of restricted common stock on the calculation of basic and
diluted earnings per share. The Company is currently in a net loss position and is therefore not required to present the two-class method; however, in the event the Company is in a net income position, the two-class method must be applied by allocating all earnings during the period to shares of common stock and shares of restricted common stock.
TheThe following table sets forth the computation of basic and diluted net loss per share (in thousands, except share and per share data):
|
|
|
|
| ||||||
|
| 2021 |
|
| 2022 |
|
|
| ||
Net loss |
| $ | (236,024 | ) |
| $ | (196,292 | ) |
|
|
Weighted-average number of shares used in computing net |
|
| 35,379,005 |
|
|
| 66,529,565 |
|
|
|
Net loss per share, basic and diluted |
| $ | (6.67 | ) |
| $ | (2.95 | ) |
|
|
|
|
|
|
|
|
|
|
| ||
Anti-dilutive shares excluded from computation of net loss per share (in shares) |
|
| 3,027,361 |
|
|
| 13,409,769 |
|
|
|
|
| Year-Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2020 |
|
| 2021 |
| |||
Net loss |
| $ | (58,789 | ) |
| $ | (63,126 | ) |
| $ | (236,024 | ) |
Weighted-average number of shares used in computing net loss per share, basic and diluted |
|
| 13,516,844 |
|
|
| 17,167,999 |
|
|
| 35,379,005 |
|
Net loss per share, basic and diluted |
| $ | (4.35 | ) |
| $ | (3.68 | ) |
| $ | (6.67 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive shares excluded from computation of net loss per share (in shares) |
|
| 3,595,078 |
|
|
| 4,975,759 |
|
|
| 3,027,361 |
|
All other outstanding potentially dilutive securities, including shares of restricted common stock, common stock options (See Note 11) and common stock warrants (See Note 2) were excluded from the computation of diluted net loss per share because including them would have had an anti-dilutive effect.
16.ACQUISITIONS
2019 Acquisitions
Aussie Health Assets
On September 10, 2019, the Company completed the acquisition of the assets of a personal wellness company (the “Aussie Health Assets”), whose products sell primarily on the Amazon US marketplace, for total consideration of $1.3 million, which was comprised of cash of $1.1 million and a promissory note for $0.2 million that accrues interest at a rate of 8% per annum and matures on June 10, 2020. The Company also paid $0.1 million in the form of a working capital payment related to the inventory purchased within sixty days of closing.
The following presents the allocation of purchase price to the assets acquired and liabilities assumed, based on their estimated fair values at acquisition date:
|
| Total |
| |
|
| (in thousands) |
| |
Inventory |
| $ | 297 |
|
Goodwill |
|
| 745 |
|
Intangible assets |
|
| 333 |
|
Net assets acquired |
| $ | 1,375 |
|
The amounts assigned to goodwill and major intangible asset classifications were as follows:
|
| Amount allocated |
|
| Useful life (in years) |
| ||
|
| (in thousands) |
|
|
|
|
| |
Goodwill |
| $ | 745 |
|
| n.a. |
| |
Trademarks |
|
| 310 |
|
|
| 5 |
|
Transition services agreement |
|
| 11 |
|
| < 1 |
| |
Non-competition agreement |
|
| 12 |
|
|
| 3 |
|
Total |
| $ | 1,078 |
|
|
|
|
|
2020 Acquisitions
Truweo Assets
On August 26, 2020, the Company completed the acquisition of the Truweo Assets, whose products sell primarily on the Amazon U.S. marketplace, for total consideration of $16.4 million, which was comprised of cash of $14.0 million and a promissory note for
$2.4 million. The promissory note accrues interest at a rate of 8% per annum, with $0.6 million principal and accrued interest payments due on November 30, 2021, February 28, 2022, and May 31, 2022 and matures on August 22, 2022.16.ACQUISITIONS
The following presents the allocation of purchase price to the assets acquired and liabilities assumed, based on the estimated fair values at acquisition date (in thousands):
| Total |
| |
Inventory | $ | 595 |
|
Intangible assets |
| 4,011 |
|
Goodwill |
| 11,834 |
|
Net assets acquired | $ | 16,440 |
|
The amounts assigned to goodwill and major intangible asset classifications were as follows (in thousands, except the useful life):
| Amount Allocated |
|
| Useful life (in years) | |
Goodwill | $ | 11,834 |
|
| n.a. |
Trademarks |
| 3,900 |
|
| 10 |
Non-competition agreement |
| 100 |
|
| <1 |
Transition services agreement |
| 11 |
|
| 3 |
Net intangible assets |
| 15,845 |
|
|
|
Goodwill is expected to be deductible for tax purposes. The goodwill is attributable to expected synergies resulting from integrating the Truweo products into the Company’s existing sales channels.
Smash Assets
On December 1, 2020, the Company completed the acquisition of the Smash Assets, which consisted of products sold primarily on the Amazon U.S. marketplace, for total consideration comprised of (i) $25.0 million, (ii) 4,220,000 shares of common stock, the cost basis of which was $6.89 (closing stock price at closing of the transaction), of which 164,000 of such shares were issued to the sellers’ brokers, and (iii) a seller note in the amount of $15.6 million, representing the value of certain inventory that the sellers had paid for but not yet sold as of the closing date. In addition, subject to achievement of certain contribution margin thresholds on certain products of the acquired business for the fiscal years ending December 31, 2021 and December 31, 2022, the sellers will be entitled to receive earn out payments.
The following presents the allocation of purchase price to the assets acquired and liabilities assumed, based on the estimated fair values at acquisition date (in thousands):
| Total |
| |
| (in thousands) |
| |
Goodwill | $ | 34,739 |
|
Trademarks |
| 27,600 |
|
Inventory |
| 16,419 |
|
Production deposits |
| 3,382 |
|
AP and other liabilities |
| (3,088 | ) |
|
| 79,052 |
|
The amounts assigned to goodwill and major intangible asset classifications were as follows (in thousands, except the useful life):
| Amount Allocated |
|
| Useful life (in years) | |
Goodwill | $ | 34,739 |
|
| n.a. |
Trademarks |
| 27,600 |
|
| 10 |
Net Intangible Assets |
| 62,339 |
|
|
|
Goodwill is expected to be deductible for tax purposes. The goodwill is attributable to expected synergies resulting from integrating the Smash products into the Company’s existing sales channels.
2021 Acquisitions
Healing Solutions
On February 2, 2021 (the “Closing Date”), the Company entered into and closed the Asset Purchase Agreement with Healing Solutions, LLC (“Healing Solutions”). Pursuant to the Asset Purchase Agreement, the Company purchased and acquired certain assets of Healing Solutions (the “Healing Solutions Assets”) related to Healing Solutions’ retail and e-commerce business under the Healing Solutions’ brands, Tarvol, Sun Essential Oils and Artizen (among others), which primarily sells essential oils through Amazon and other marketplaces (the “Asset Purchase”). The Asset Purchase was accounted for as a business combination using the acquisition method of accounting in accordance with ASC 805, Business Combinations. As consideration for the Asset Purchase, the Company (i) paid to Healing Solutions $$15.3 million in cash (the “Cash Purchase Price”), and (ii) issued 1,387,759shares of common stock to Healing Solutions, the cost basis of which was the closing price per share of the common stock on the Closing Date. At the closing (the “Closing”), the Company withheld $2.0$2.0 million of the Cash Purchase Price to serve as collateral for Healing Solutions’ payment of certain overdue trade payables to be released to Healing Solutions in accordance with the terms of the Asset Purchase Agreement. This amount was paid by the Company within 60 days of the Closing Date.
F-32
In addition, Healing Solutions will be entitled to receive 170,042 shares of common stock (up to a maximum of 280,000 shares pursuant to certain terms and valuation at the measurement date) in respect of certain inventory. The shares will be issued to Healing Solutions following the final determination of inventory values pursuant to the terms of the Asset Purchase Agreement, which determination is expected to occur approximately nine to ten months following the Closing Date and such shares will be subject to vesting restrictions which will lapse on the date that is the one-year anniversary after the Closing Date.Pursuant to the terms of the Asset Purchase Agreement, Healing Solutions is required to use its commercially reasonable efforts to identify one or more suppliers of finished goods inventory of all SKUs that constitute assets acquired in the Asset Purchase (“New Suppliers”) and to initiate discussions with such New Suppliers for the purpose of negotiating new supply agreements between the Company or its affiliates, on the one hand, and the New Supplier, on the other hand, for the purchase of such SKUs following the Closing on terms acceptable to the Company in its sole discretion, acting reasonably. If, on or before the date that is 15 months after the Closing Date, an Earn-Out Consideration Event (as defined in the Asset Purchase Agreement) has occurred, then Healing Solutions shall be entitled to receive up to a maximum of 528,670 shares of common stock (the “Earn-Out Shares”), which number of shares is subject to reduction in accordance with the terms of the Asset Purchase Agreement based on the time period within which the Earn-Out Consideration Event occurs. occurs. See Contingent earn-out liability considerations section below.
The following presents the allocation of purchase price to the assets acquired and liabilities assumed, based on the estimated fair values at acquisition date:
|
| Amount allocated |
| |
|
| (in thousands) |
| |
Cash purchase price |
| $ | 15,280 |
|
1,387,759 shares of Common Stock issued at the Closing |
|
| 39,454 |
|
Seller note for inventory |
|
| 5,285 |
|
Estimated earnout liability |
|
| 11,273 |
|
Total consideration to be paid |
| $ | 71,292 |
|
|
| Amount |
| |
|
| (in thousands) |
| |
Cash purchase price |
| $ | 15,280 |
|
1,387,759 shares of Common Stock issued at the Closing |
|
| 39,454 |
|
Seller note for inventory |
|
| 5,285 |
|
Estimated earn-out liability |
|
| 11,273 |
|
Total consideration to be paid |
| $ | 71,292 |
|
The amounts assigned to goodwill and major intangible asset classifications were as follows:
| ||||
| ||||
|
|
| ||
|
| |||
|
| |||
|
| |||
|
|
|
|
| Total |
| |
|
| (in thousands) |
| |
Inventory |
| $ | 8,215 |
|
Working Capital |
|
| 202 |
|
Trademarks (10 year useful life) |
|
| 22,900 |
|
Goodwill |
|
| 39,975 |
|
Net assets acquired |
| $ | 71,292 |
|
Goodwill is expected to be deductible for tax purposes. The goodwill is attributable to expected synergies resulting from integrating the Healing Solutions’ products into the Company’s existing sales channels.
Squatty Potty Assets
On May 5, 2021, the Company acquired the business of e-commerce and retail company Squatty Potty, LLC (“Squatty Potty”), a leading online seller of health and wellness products, in an asset purchase transaction. Currently, Squatty Potty products are sold in thousands of retail locations including Bed, Bath & Beyond, Walmart and Target. As consideration for Squatty Potty’s assets, the Company paid approximately $19.0$19.0 million in cash. The Company also paid approximately $1.1$1.1 million as consideration related to
acquired inventory. In addition, and subject to the achievement of contribution margin metrics for the year-ended December 31, 2021, the Company agreed to pay Squatty Potty a maximum earn-out of approximately $4.0$4.0 million, payable in shares of common stock or cash at Squatty Potty’s discretion. The Company also agreed to pay Squatty Potty $8.0$8.0 million for transition services, payable in shares of common stock or cash at Squatty Potty’s discretion. See Contingent earn-out liability considerations section below.below.
F-33
The following presents the allocation of purchase price to the assets acquired and liabilities assumed, based on the estimated fair values at acquisition date:
|
| Amount |
| |
|
| allocated |
| |
|
| (in thousands) |
| |
Cash purchase price |
| $ | 19,040 |
|
Transition services payments |
|
| 8,231 |
|
Estimated earn-out liability |
|
| 3,502 |
|
Total consideration |
| $ | 30,773 |
|
| ||||
| ||||
| ||||
|
|
| ||
|
| |||
|
| |||
|
|
|
The amounts assigned to goodwill and major intangible asset classifications were as follows:
| ||||
| ||||
|
|
| ||
|
| |||
|
| |||
|
| |||
|
| |||
|
|
|
|
|
|
| Total |
| |
|
| (in thousands) |
| |
Inventory |
| $ | 1,471 |
|
Working Capital |
|
| 230 |
|
Trademarks (10 year useful life) |
|
| 6,500 |
|
Customer relationships |
|
| 5,700 |
|
Goodwill (1) |
|
| 16,872 |
|
Net assets acquired |
| $ | 30,773 |
|
Photo Paper Direct
On May 5, 2021, the Company closed the acquisition of all outstanding stock of e-commerce company Photo Paper Direct Ltd. (“Photo Paper Direct”), a leading online seller of printing supplies. As consideration for Photo Paper Direct’s stock, the Company paid approximately $8.3$8.3 million in cash and issued approximately 704,500 shares of the Company’s common stock. The Company also paid approximately $5.4$5.4 million in cash as consideration related to Photo Paper Direct’s inventory and other working capital assets, including cash on hand of approximately $3.0$3.0 million. In addition, and subject to the achievement of certain Adjusted EBITDA metrics by December 31, 2021, the Company agreed to issue to Photo Paper Direct a maximum earn-out of $6.0$6.0 million in cash and $2.0$2.0 million in the Company’s common stock. See Contingent earn-out liability considerations Earn-out Liability Considerations sectionbelow.
The following presents the allocation of purchase price to the assets acquired and liabilities assumed, based on the estimated fair values at acquisition date:
| ||||
| ||||
| ||||
|
|
| ||
|
| |||
|
| |||
|
| |||
|
|
|
|
| Amount |
| |
|
| allocated |
| |
|
| (in thousands) |
| |
Cash purchase price |
| $ | 8,293 |
|
704,548 shares of common stock issued |
|
| 11,075 |
|
Working capital adjustment |
|
| 5,338 |
|
Estimated earn-out liability |
|
| 911 |
|
Total consideration |
| $ | 25,617 |
|
F-34
The amounts assigned to goodwill and major intangible asset classifications were as follows:
|
| Total |
| |
|
| (in thousands) |
| |
Inventory |
| $ | 2,846 |
|
PP&E |
|
| 86 |
|
Real Property |
|
| 848 |
|
Working Capital |
|
| 2,144 |
|
Trademarks (10 year useful life) |
|
| 5,400 |
|
Goodwill (1) |
|
| 15,774 |
|
Deferred tax liability (2) |
|
| (1,481 | ) |
Net assets acquired |
| $ | 25,617 |
|
| ||||
| ||||
|
|
| ||
|
| |||
|
| |||
|
| |||
|
| |||
|
| |||
|
|
| ||
|
|
|
|
|
|
|
Pro Forma Information
The following unaudited pro forma information illustrates the impact of the acquisitions on the Company’s net revenue for the years-endedyear-ended December 31, 2021, 2020 and 2019.2021. The acquisitions are reflected in the following pro forma information as if the acquisitions had occurred on January 1, 2019.2021.
|
|
| Year-Ended December 31, 2021 |
| |
Net revenue as reported |
|
| $ | 247,767 |
|
Healing Solutions net revenue (1) |
|
|
| 4,600 |
|
Squatty Potty net revenue (2) |
|
|
| 6,024 |
|
Photo Paper Direct net revenue (3) |
|
|
| 6,334 |
|
Net revenue pro forma |
|
| $ | 264,725 |
|
|
|
|
|
| |
Operating loss as reported |
|
|
| (34,077 | ) |
Healing Solutions operating income (1) |
|
|
| 382 |
|
Squatty Potty operating income (2) |
|
|
| 1,772 |
|
Photo Paper Direct operating income (3) |
|
|
| 1,152 |
|
Operating loss (income) pro forma |
|
| $ | (30,771 | ) |
|
| Year Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2020 |
|
| 2021 |
| |||
|
| (in thousands) |
| |||||||||
Net revenue as reported |
| $ | 114,451 |
|
| $ | 185,704 |
|
| $ | 247,767 |
|
Aussie Health Assets net revenue |
|
| 1,759 |
|
|
| — |
|
|
| — |
|
Smash net revenue (1) |
|
| 42,994 |
|
|
| 83,132 |
|
|
| — |
|
Truweo net revenue (2) |
|
| 7,942 |
|
|
| 11,155 |
|
|
| — |
|
Healing Solutions net revenue (3) |
|
| — |
|
|
| 78,646 |
|
|
| 4,600 |
|
Squatty Potty net revenue (4) |
|
| — |
|
|
| 14,919 |
|
|
| 6,024 |
|
Photo Paper Direct net revenue (5) |
|
| — |
|
|
| 13,721 |
|
|
| 6,334 |
|
Net revenue pro forma |
| $ | 167,146 |
|
| $ | 387,277 |
|
| $ | 264,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss as reported |
| $ | (54,333 | ) |
|
| (34,751 | ) |
|
| (34,077 | ) |
Aussie Health Assets operating income |
|
| 310 |
|
|
| — |
|
|
| — |
|
Smash operating income (1) |
|
| 4,163 |
|
|
| 15,221 |
|
|
| — |
|
Truweo operating income (2) |
|
| 3,616 |
|
|
| 5,484 |
|
|
| — |
|
Healing Solutions operating income (3) |
|
| — |
|
|
| 7,792 |
|
|
| 382 |
|
Squatty Potty operating income (4) |
|
| — |
|
|
| 3,529 |
|
|
| 1,772 |
|
Photo Paper Direct operating income (5) |
|
| — |
|
|
| 3,364 |
|
|
| 1,152 |
|
Operating loss (income) pro forma |
| $ | (46,244 | ) |
| $ | 639 |
|
| $ | (30,771 | ) |
|
|
|
|
|
|
|
|
|
|
The Company engaged a third-party valuation specialist to perform a valuation of the intangible assets acquired for all acquisitions. In performing the valuation, the Company’s management assessed the reasonableness of the projected financial information (“PFI”) by comparing it to the Company’s historical results and financial information for a peer group of the most similar public companies. Based on this review, the Company’s management determined the PFI is reasonable for business and intangible asset valuation purposes.
F-35
Step and Go
On October 4, 2022, the Company acquired Step and Go, a brand in the health and wellness category, for $0.7 million. The acquisition is deemed immaterial to the Company’s Consolidated Financial Statements.
Contingent earn-out liability considerationsEarn-out Liability Considerations
The Company reviews and re-assesses the estimated fair value of contingent consideration on a quarterly basis, and the updated fair value could differ materially from the initial estimates. Adjustments to the estimated fair value related to changes in all other unobservable inputs are reported in operating income.
On December 1, 2020, the Company acquired the assets of leading e-commerce business brands Mueller, Pursteam, Pohl and Schmitt, and Spiralizer (the “Smash Assets”) for total consideration of (i) $25.0$25.0 million, (ii) 4,220,000 shares of common stock, the cost basis of which was $6.89$6.89 (closing stock price at closing of the transaction), of which 164,000 of such shares were issued to the sellers brokers and (iii) a seller note in the amount of $15.6$15.6 million, representing the value of certain inventory that the sellers had paid for but not yet sold as of the closing date.
As part of the acquisition of the Smash Assets, the sellers of the Smash Assets are entitled to earn-out payments based on the achievement of certain contribution margin thresholds on certain products of the acquired business. Earn-out payments will be due to the sellers for year one, or calendar year 20212022 in the first quarter of 2022, and year two, or calendar year 2022, will be due in the first quarter of 2023. For the year-ended December 31, 20212022 (year one of the earn-out), the earn-out payment will be calculated based on the contribution margin generated on certain products for an amount equal to $1.67$1.67 for every $1.00$1.00 of such contribution margin that is greater than $15.5$15.5 million and less than or equal to $18.5$18.5 million. Such earn-out payment cannot exceed $5.0$5.0 million. In addition, during the year-ending December 31, 2022 (year two of the earn-out), for each $0.5$0.5 million of contribution margin generated on certain products in excess of $15.5$15.5 million, subject to a cap of $27.5$27.5 million, the sellers shall be entitled to receive an amount in cash equal to the value of 0.1 million shares of the Company’s common stock multiplied by the average of the volume-weighted-average closing price per share of the Company’s common stock, for the 30 consecutive trading days ending on December 31, 2022.
As of December 1, 2020, the acquisition date, the initial fair value amount of the earn-out payment was appropriately $9.8 million. As of December 31, 2020, the fair value amount of the earn-out payment with respect to the Smash Assets was approximately $22.5 million, representing a change of fair value impact of approximately $12.7 million. As of December 31, 2021, the fair value amount of the earn-out payment with respect to the Smash Assets was approximately $5.2 million$5.2 million. As of December 31, 2022, there is no remaining earn-out liability related to the calendar year 2022 earnout. The calendar year 2021 earnout is $0.0 millionSmash assets as itearn-out payment was not achieved.earned.
As part of the acquisition of the Healing Solutions Assets, Healing Solutions was entitled to earn-out payments based on the achievement of certain contribution margin thresholds on certain products of the acquired business. If the earn-out consideration event occurred: (i) prior to the date that is nine months following the Closing Date, the Company will issue 528,670 shares of its common stock to Healing Solutions; (ii) on or after the date that is nine months following the Closing Date but before the date that is 12 months following the Closing Date, the Company was to issue 396,502 shares of common stock to Healing Solutions; or (iii) on or after the date that is 12 months following the Closing Date but before the date that is 15 months following the Closing Date (the date that is 15 months following the Closing Date, the “Earn-Out Termination Date”), the Company was to issue 264,335 shares of common stock to Healing Solutions; or after 15 months, the Company would 0tnot had any obligation to issue any shares of its common stock to Healing Solutions.
As of February 2, 2021, the acquisition date, the initial fair value amount of the earn-out payment with respect to the Healing Solutions Assets was appropriately $16.5$16.5 million. In November 2021, the Company issued 1.4 million shares of common stock in full settlement of the earn-out. As of December 31, 20212022 there is 0no remaining earn-out liability related to Healing Solutions.
As part of the acquisition of the Squatty Potty Assets, Squatty Potty is entitled to earn-out payments based on the achievement of certain contribution margin thresholds on certain products of the acquired business. If the earn-out consideration event occurs in 12
months ended December 31, 2021, the maximum payment amount is $3.9$3.9 million and if the termination of the transition service agreement is prior to the date that is nine months following the Closing Date, an additional $3.9$3.9 million.
As of May 5, 2021, the acquisition date, the initial fair value amount of the earn-out payment with respect to the Squatty Potty Assets was appropriately $3.5$3.5 million. As of December 31, 2021, the fair value amount of the2022, there is no remaining earn-out payment with respectliability related to the Squatty Potty Assets was approximately $4.0 million, representing a net change of fair value impact of approximately $0.5 million for year-ended December 31, 2021.Potty.
As of May 5, 2021, the acquisition date of Photo Paper Direct Ltd. (“Photo Paper Direct”), the initial fair value amount of the earn-out payment with respect to the Photo Paper Direct acquisition was appropriately $0.9$0.9 million. As of December 31, 2021 and 2022, the fair value amount of the earn-out payment with respect to the Photo Paper Direct acquisition was approximately $0.0 millionzero as the earnoutearn-out payment was not achieved, representing a net change of fair value impact of approximately $0.9 million for the year-ended December 31, 2021.earned.
F-36
The following table summarizes the changes in the carrying value of estimated contingent earn-out liabilities (in thousands) as of December 31, 20212022 (in thousands):
|
| December 31, 2021 |
| |||||||||||||||||||||||||||||||||||||
|
| Smash Assets |
|
| Healing Solutions |
|
| Squatty Potty |
|
| Photo Paper Direct |
|
| Total |
|
|
|
|
| Year-Ended December 31, 2021 |
|
|
|
| ||||||||||||||||
Balance—January 1, 2021 |
| $ | 22,531 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 22,531 |
| ||||||||||||||||||||
|
| Smash |
|
| Healing Solutions |
|
| Squatty Potty |
|
| Photo Paper Direct |
|
| Total |
| |||||||||||||||||||||||||
Balance –January 1, 2021 |
| $ | 22,531 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
|
| 22,531 |
| ||||||||||||||||||||
Acquisition date fair value of contingent earn-out liabilities and inventory to be settled in shares |
|
| — |
|
|
| 16,558 |
|
|
| 3,502 |
|
|
| 911 |
|
|
| 20,971 |
|
|
| — |
|
|
| 16,558 |
|
|
| 3,502 |
|
|
| 911 |
|
|
| 20,971 |
|
Change in fair value of contingent earn-out liabilities |
|
| (17,291 | ) |
|
| (12,808 | ) |
|
| 481 |
|
|
| (911 | ) |
|
| (30,529 | ) |
|
| (17,291 | ) |
|
| (12,808 | ) |
|
| 481 |
|
|
| (911 | ) |
|
| (30,529 | ) |
Payment of contingent earn-out liability (1) |
|
| — |
|
|
| (3,750 | ) |
|
| — |
|
|
| — |
|
|
| (3,750 | ) | ||||||||||||||||||||
Payment of contingent earn-out liability |
|
| — |
|
|
| (3,750 | ) |
|
| — |
|
|
| — |
|
|
| (3,750 | ) | ||||||||||||||||||||
Balance—December 31, 2021 |
| $ | 5,240 |
|
| $ | — |
|
| $ | 3,983 |
|
| $ | — |
|
| $ | 9,223 |
|
| $ | 5,240 |
|
| $ | — |
|
| $ | 3,983 |
|
| $ | — |
|
| $ | 9,223 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||
|
| Year-ended December 31, 2022 |
|
|
|
|
|
| ||||||||||||||||||||||||||||||||
|
| Smash |
|
| Squatty |
| Total |
|
|
|
|
|
| |||||||||||||||||||||||||||
Balance—January 1, 2022 |
| $ | 5,240 |
|
| $ | 3,983 |
|
| $ | 9,223 |
|
|
|
|
|
| |||||||||||||||||||||||
Change in fair value of contingent earn-out liabilities |
|
| (5,240 | ) |
|
| — |
|
|
| (5,240 | ) |
|
|
|
|
| |||||||||||||||||||||||
Payment of contingent earn-out liability |
|
| — |
|
|
| (3,983 | ) |
|
| (3,983 | ) |
|
|
|
|
| |||||||||||||||||||||||
Balance—December 31, 2022 |
| $ | — |
|
| $ | — |
|
| $ | — |
|
|
|
|
|
|
(1) The $3.8 million payment relating to Healing Solutions earn-out was made with 1.4 million of the Company's common stock in November 2021. This resulted in a settlement charge of $4.2 million due to the difference of fair value of the shares issued on the settlement date versus the fair value of the earn-out on the date of the settlement.
17.GOODWILL AND INTANGIBLES
|
|
The following tables summarize the changes in the Company’s intangible assets as of December 31, 20202021 and December 31, 20212022 (in thousands):
|
| December 1, 2020 |
|
| December 31, 2020 |
|
| December 31, 2020 |
|
| December 31, 2020 |
|
| For the Year-Ended December 31, 2021 |
|
| December 31, 2021 |
| ||||||||||||||||||||||||||
|
| Gross Carrying Amount |
|
| Additions |
|
| Impairments |
|
| Gross Carrying Amount |
|
| Goodwill Impairments |
|
| Accumulated Amortization |
|
| Net Book Value |
|
| Gross Carrying Amount |
|
| Additions |
|
| Impairments |
|
| Net Book Value |
| |||||||||||
Goodwill |
| $ | 745 |
|
| $ | 46,573 |
|
| $ | — |
|
| $ | 47,318 |
|
| $ | — |
|
| $ | — |
|
| $ | 47,318 |
|
| $ | 47,318 |
|
| $ | 72,623 |
|
| $ | — |
|
| $ | 119,941 |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||
|
| December 31, 2020 |
|
| December 31, 2021 |
|
| December 31, 2021 |
|
| December 31, 2021 |
|
| For the Year-Ended December 31, 2022 |
|
| December 31, 2022 |
| ||||||||||||||||||||||||||
|
| Gross Carrying Amount |
|
| Additions |
|
| Impairments |
|
| Gross Carrying Amount |
|
| Goodwill Impairments |
|
| Accumulated Amortization |
|
| Net Book Value |
|
| Gross Carrying Amount |
|
| Additions |
|
| Impairments |
|
| Net Book Value |
| |||||||||||
Goodwill |
| $ | 47,318 |
|
| $ | 72,623 |
|
| $ | — |
|
| $ | 119,941 |
|
| $ | — |
|
| $ | — |
|
| $ | 119,941 |
|
| $ | 119,941 |
|
| $ | 468 |
|
|
| (120,409 | ) |
| $ | — |
|
(1) The Company evaluated current economic conditions during 2022, including the impact of the Federal Reserve further increasing the risk-free interest rate, as well as the inflationary pressure on product and labor costs and operational impacts attributable to continued global supply chain disruptions. The Company believes that these conditions were factors in our market capitalization falling below the book value of net assets during the fiscal quarters ending March 31, 2022 and September 30, 2022. Accordingly, the Company concluded a triggering event had occurred in each of these periods and performed interim goodwill impairment analyses. As a result, the Company recorded a goodwill impairment charge of approximately $29.0 million and $90.9 during the three months ended March 31, 2022 and September 30, 2022, respectively. There was no remaining goodwill on the balance sheet as of September 30, 2022.
On October 4, 2022, the Company acquired Step and Go, a brand in the health and Wellness category, for $0.7 million. As part of the purchase price allocation of the acquisition, $0.5 million was attributed to goodwill. As our market capitalization was further reduced below net assets as of December 31, 2022, we concluded a triggering event has occurred to test goodwill, an impairment loss on goodwill of $0.5 million was recorded for the three months ended December 31, 2022, which is included in impairment loss on goodwill in the Consolidated Statement of Operations for the year-ended December 31, 2022.
The total goodwill impairment charge was approximately $120.4 million for the year-ended December 31, 2022.
F-37
The following tables summarize the changes in the Company’s intangible assets as of December 31, 20202021 and December 31, 20212022 (in thousands):
|
| January 1, 2021 |
|
| Year-Ended December 31, 2021 |
|
| December 31, 2021 |
|
| December 31, 2021 |
| ||||||||
|
| Gross Carrying Amount |
|
| Additions |
|
| Impairments (1) |
|
| Accumulated Amortization |
|
| Net Book Value |
| |||||
Trademarks |
| $ | 31,810 |
|
| $ | 34,100 |
|
| $ | — |
|
| $ | (6,332 | ) |
| $ | 59,578 |
|
Non-competition agreement |
|
| 111 |
|
|
| — |
|
|
| — |
|
|
| (54 | ) |
|
| 57 |
|
Transition services agreement |
|
| 23 |
|
|
| — |
|
|
| — |
|
|
| (23 | ) |
|
| — |
|
Customer relations |
|
| — |
|
|
| 5,700 |
|
|
| — |
|
|
| (380 | ) |
|
| 5,320 |
|
Other |
|
| — |
|
|
| 700 |
|
|
| — |
|
|
| (700 | ) |
|
| — |
|
Total intangibles |
| $ | 31,944 |
|
| $ | 40,500 |
|
| $ | — |
|
| $ | (7,489 | ) |
| $ | 64,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
| January 1, 2022 |
|
| Year-Ended December 31, 2022 |
|
| December 31, 2022 |
|
| December 31, 2022 |
| ||||||||
|
| Gross Carrying Amount |
|
| Additions |
|
| Impairments (1) |
|
| Accumulated Amortization |
|
| Net Book Value |
| |||||
Trademarks |
| $ | 65,910 |
|
|
| 192 |
|
| $ | (3,087 | ) |
| $ | (13,008 | ) |
| $ | 50,007 |
|
Non-competition agreement |
|
| 111 |
|
|
| — |
|
|
| (31 | ) |
|
| (80 | ) |
|
| — |
|
Transition services agreement |
|
| 23 |
|
|
| — |
|
|
| — |
|
|
| (23 | ) |
|
| — |
|
Customer relations |
|
| 5,700 |
|
|
| — |
|
|
| — |
|
|
| (950 | ) |
|
| 4,750 |
|
Other |
|
| 700 |
|
|
| — |
|
|
| — |
|
|
| (700 | ) |
|
| — |
|
Total intangibles |
| $ | 72,444 |
|
| $ | 192 |
|
| $ | (3,118 | ) |
| $ | (14,761 | ) |
| $ | 54,757 |
|
|
| December 1, 2020 |
|
| December 31, 2020 |
|
| December 31, 2020 |
| |||||||||||||||||||
|
| Gross Carrying Amount |
|
| Additions |
|
| Impairments |
|
| Gross Carrying Amount |
|
| Goodwill Impairments |
|
| Accumulated Amortization |
|
| Net Book Value |
| |||||||
Trademarks |
| $ | 310 |
|
| $ | 31,500 |
|
| $ | — |
|
| $ | 31,810 |
|
| $ | — |
|
| $ | (442 | ) |
| $ | 31,368 |
|
Non-competition agreement |
|
| 11 |
|
|
| 100 |
|
|
| — |
|
|
| 111 |
|
|
| — |
|
|
| (19 | ) |
|
| 92 |
|
Transition services agreement |
|
| 12 |
|
|
| 11 |
|
|
| — |
|
|
| 23 |
|
|
| — |
|
|
| (23 | ) |
|
| — |
|
Total intangibles |
| $ | 333 |
|
| $ | 31,611 |
|
| $ | — |
|
| $ | 31,944 |
|
| $ | — |
|
| $ | (484 | ) |
| $ | 31,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2020 |
|
| December 31, 2021 |
|
| December 31, 2021 |
| |||||||||||||||||||
|
| Gross Carrying Amount |
|
| Additions |
|
| Impairments |
|
| Gross Carrying Amount |
|
| Goodwill Impairments |
|
| Accumulated Amortization |
|
| Net Book Value |
| |||||||
Trademarks |
| $ | 31,810 |
|
| $ | 34,100 |
|
| $ | — |
|
| $ | 65,910 |
|
| $ | — |
|
| $ | (6,332 | ) |
| $ | 59,578 |
|
Non-competition agreement |
|
| 111 |
|
|
| — |
|
|
| — |
|
|
| 111 |
|
|
| — |
|
|
| (54 | ) |
|
| 57 |
|
Transition services agreement |
|
| 23 |
|
|
| — |
|
|
| — |
|
|
| 23 |
|
|
| — |
|
|
| (23 | ) |
|
| — |
|
Customer relations |
|
| — |
|
|
| 5,700 |
|
|
| — |
|
|
| 5,700 |
|
|
| — |
|
|
| (380 | ) |
|
| 5,320 |
|
Other |
|
| — |
|
|
| 700 |
|
|
| — |
|
|
| 700 |
|
|
| — |
|
|
| (700 | ) |
|
| — |
|
Total intangibles |
| $ | 31,944 |
|
| $ | 40,500 |
|
| $ | — |
|
| $ | 72,444 |
|
| $ | — |
|
| $ | (7,489 | ) |
| $ | 64,955 |
|
(1) Certain asset groups experienced a significant decrease in sales and contribution margin through September 30, 2022. This was considered an interim triggering event for the three months ended September 30, 2022. Based on the analysis of comparing the undiscounted cash flow to the carrying value of the asset group, one group tested indicated that the assets may not be recoverable. For this asset group, the Company compared the fair value to the carrying amount of the asset group and recorded an intangible impairment charge of $3.1 million. The Company did not have a triggering event during the three months ended December 31, 2022. For the year-ended December 31, 2022, the total impairment charge for intangibles was $3.1 million.
The following table sets forth the estimated aggregate amortization of our in-place intangible assets and favorable intangible assets for the next five years and thereafter (amounts in thousands):
2022 |
| $ | 7,228 |
|
2023 |
|
| 7,214 |
|
2024 |
|
| 7,171 |
|
2025 |
|
| 7,130 |
|
2026 |
|
| 7,130 |
|
Thereafter |
|
| 29,082 |
|
Total |
| $ | 64,955 |
|
|
|
Securities Purchase Agreement and Warrants
On March 1, 2022, the Company entered into Securities Purchase Agreements (the “Purchase Agreements”) with certain accredited investors identified on the signature pages to the Purchase Agreements (collectively, the “Purchasers”) pursuant to which, among other things, the Company issued and sold to the Purchasers, in a private placement transaction (the “Private Placement”), (i) 6,436,322 shares of the Company’s 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 “Private Placement”). 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. The Private Placement closed on March 4, 2022. The Company intends to use the proceeds from the Private Placement for working capital purposes, the conduct of its business and other general corporate purposes, which may include acquisitions, investments in or licenses of complementary products, technologies or businesses, operating expenses and capital expenditures. In connection with the Private Placement, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with the Purchasers, pursuant to which the Company agreed to register for resale the Shares, as well as the shares of Common Stock issuable upon exercise of the Warrants (the “Warrant Shares”). Under the Registration Rights Agreement, the Company has agreed to file a registration statement covering
the resale by the Purchasers of the Shares and Warrant Shares (together, the “Registrable Securities”) within 30 days following the agreement date.
Securities Class Action
On March 10, 2022,
2023 |
| $ | 6,821 |
|
2024 |
|
| 6,801 |
|
2025 |
|
| 6,759 |
|
2026 |
|
| 6,759 |
|
Thereafter |
|
| 27,617 |
|
Total |
| $ | 54,757 |
|
|
|
|
|
the Company reached an agreement in principle, subject to negotiation of a formal memorandum of understanding, the execution of final settlement documents, and court approval, to resolve the securities class action lawsuit that was initiated on May 13, 2021, in the U.S. District Court for the Southern District of New York by Andrew Tate, naming the Company, Yaniv Sarig and Fabrice
Hamaide as defendants. 18.If that process does not succeed, the Company is prepared to continue the full defense of this action. The agreement in principle contemplates that the Company will pay $1.3 million and the Company has recorded an accrual for such amount SUBSEQUENT EVENTS
within “accounts payable” on the consolidated balance sheetsNone..
ATERIAN, INC. AND SUBSIDIARIESF-38
Schedule II—Valuation and Qualifying Accounts and Reserves
(All amounts in thousands)
|
| Balance at Beginning of Period |
|
| Charged to Costs & Expenses |
|
| Charged to Other Accounts |
|
| Accounts Written Off or Deductions |
|
| Balance at End of Period |
| |||||
Description |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-ended December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
| $ | 0 |
|
| $ | 35 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 35 |
|
Deferred tax valuation allowance |
| $ | 15,167 |
|
| $ | 0 |
|
| $ | 14,036 |
|
| $ | 0 |
|
| $ | 29,203 |
|
Year-ended December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
| $ | 35 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | (35 | ) |
| $ | 0 |
|
Deferred tax valuation allowance |
| $ | 29,203 |
|
| $ | 0 |
|
| $ | 8,620 |
|
| $ | 0 |
|
| $ | 37,823 |
|
Year-ended December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
Deferred tax valuation allowance |
| $ | 37,823 |
|
| $ | 0 |
|
| $ | 9,493 |
|
| $ | 0 |
|
| $ | 47,316 |
|
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)). Our principal executive officer and principal financial officer have concluded, based on their evaluation, that our disclosure controls and procedures were effective as of December 31, 2021.2022. This Annual Report does not include an attestation report of our registered public accounting firm. Our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting as long as we are an “emerging growth company” pursuant to the provisions of the JOBS Act.
Management Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)). Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Annual Report. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their control objectives.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2021.2022. In making this assessment, management used the criteria set forth in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in “Internal Control-Integrated Framework.” Based on management’s assessment using the COSO criteria, management has concluded that our internal control over financial reporting was effective as of December 31, 2021.2022.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 20212022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
69
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The following table provides information regarding our executive officers and directors as of December 31, 2022:
Name | Age | Position(s) | ||||
Executive Officers: | ||||||
Yaniv Sarig | 45 | President and Chief Executive Officer, Director | ||||
Arturo Rodriguez | 47 | Chief Financial Officer | ||||
Joseph A. Risico | 49 | Chief Legal Officer and Head of M&A | ||||
Mihal Chaouat-Fix | 43 | Chief Product Officer | ||||
Roi Zahut | 35 | Chief Technology Officer | ||||
Non-Employee Directors: | ||||||
Bari A. Harlam | 61 | Director | ||||
William Kurtz | 65 | Director | ||||
Susan Lattmann | 54 | Director | ||||
Sarah Liebel | 40 | Director | ||||
Cynthia Williams | 55 | Director | ||||
There are no family relationships among any of the directors or executive officers except that Yaniv Sarig and Mihal Chaouat-Fix are siblings.
Executive Officers
Yaniv Sarig has served as a director and our President and Chief Executive Officer since September 2018, is a co-founder of Aterian Group, Inc. (“Aterian Opco”) and has served as a director and President and Chief Executive Officer of Aterian Opco since June 2014. Prior to co-founding Aterian, Mr. Sarig led the Financial Services Engineering department at Coverity, a leading software startup providing code quality and security solutions for top financial institutions and hedge funds in New York including NYSE, Nasdaq, JPMC and Barclays, from April 2012 to April 2014. Before joining Coverity, Mr. Sarig held lead technical roles at Bloomberg from October 2011 to April 2012 and EPIQ Systems, Inc. (Nasdaq: EPIQ), a legal process outsourcing company, from February 2006 to October 2011. Prior to moving to New York City, Mr. Sarig lived in Israel where he held various software engineering roles at startups from various industries including companies involved in digital printing solutions and military navigation systems. Mr. Sarig also served in the IDF Special Forces from November 1995 to November 1998, where he obtained the rank of Sergeant First Class. Mr. Sarig holds a Bachelor of Science in Computer Science from Touro College, is fluent in English, French, Hebrew and C++. We believe that Mr. Sarig is qualified to serve as a member of our Board of Directors (“Board”) based on the perspective and experience he brings as our co-founder and President and Chief Executive Officer.
Arturo Rodriguez has served as our Chief Financial Officer since March 2021. Prior to that, he served as our Senior Vice President of Finance since September 2017. Prior to joining the Company, Mr. Rodriguez served as Chief Accounting Officer and Global Controller for Piksel, Inc. from July 2012 to September 2017 and also held the role of Interim Chief Operating Officer in 2017. From 2000 to 2011, Mr. Rodriguez held several financial leadership roles with the Atari Group, most notably Acting Chief Financial Officer of Atari, Inc. (Nasdaq: ATAR) from 2007 to 2008, and Deputy CFO of Atari SA (Euronext: ATA) from 2008 to 2010. Mr. Rodriguez started his career at Arthur Andersen LLP in 1997 and is a CPA in the State of New York. Mr. Rodriguez holds a Bachelor of Business Administration – Accounting from Hofstra University.
Joseph A. Risico has served as our Chief Legal Officer since March 2021 and Head of M&A since July 2021. Prior to that, he served as our General Counsel since September 2018 and has served as General Counsel for Aterian Opco since February 2018. Prior to joining Aterian, Mr. Risico held a number of legal and business positions, most recently at AutoModality, Inc., a UAV flight control software company, where he served as Chief Operating Officer and General Counsel from February 2017 to February 2018, Ecovative Design LLC, a biomaterials company, where he served as General Counsel and Head of Business Development from August 2011 to February 2017, and 3M Company, where he served as the General Counsel of 3M’s corporate ventures business from May 2010 to July 2011. Mr. Risico started his legal career as a corporate associate at the law firm of Cravath, Swaine & Moore LLP from August 2001 to June 2006. Mr. Risico holds a B.A. from New York University with concentrations in accounting and economics and a J.D. from Columbia Law School. Mr. Risico also holds a CPA (not active).
Mihal Chaouat-Fix has served as our Chief Supply Chain Officer since February 2023 and previously our Chief Product Officer since September 2018. Prior to taking the Chief Product Officer role, since June 2014, Ms. Chaouat-Fix served as our Chief Operating Officer,
70
where she was responsible for our day-to-day leadership and operational management. Prior to joining Aterian, Ms. Chaouat-Fix worked in various strategic roles from April 2000 to March 2014 at Gottex Models Ltd., an international fashion swimwear company. Among her various roles spanning operations and marketing, she oversaw manufacturing, supply chain and distribution of 12 million units a year to over 40 countries world-wide.
Roi Zahut has served as our Chief Technology Officer since January 2019. Prior to joining Aterian, he served in a number of roles, including as the CTO of the Advanced Analytics global consulting team at IBM and as the architect of IBM Metropulse, a retail & CPG analytics platform, from October 2016 to January 2019. Prior to that, Mr. Zahut lived in Israel where he held senior technical, business and data science roles in startups and consulting companies including IBM Israel from January 2015 to October 2016, Brainbow Ltd from October 2013 to January 2015 and Matrix IT Ltd, an information technology company, from October 2008 to October 2011, working across industries (CPG, industrial and defense). Mr. Zahut also served in the Israeli Air Force from September 2005 to October 2008 where he obtained the rank of Sergeant First Class. Mr.Zahut holds an MSc in Neuroscience with distinction from Bar Ilan University.
Non-Employee Directors
Bari A. Harlam has served as a director since February 2020, and is a business leader, marketer, educator and author. In February 2020, she co-founded Trouble LLC, a pro-social, experience brand. Ms. Harlam has served on the Boards of Directors of Eastern Bank since February 2014, Champion Petfoods LP since April 2020, OneWater Marine Inc. (Nasdaq: ONEW) since May 2020 and Rite Aid (NYSE: RAD) since September 2020, and serves as the chair of the Compensation Committee for OneWater Marine Inc., as the chair of the Nominating and Governance Committee of Rite Aid and as the chair of the Risk, Trust, Innovation and Charitable Foundation Committees of Eastern Bank. From April 2018 to March 2020, she served as EVP, Chief Marketing Officer North America at Hudson’s Bay Company (TSX: HBC). Prior to her time at Hudson’s Bay Company, she was EVP, Membership, Marketing & Analytics at BJ’s Wholesale Club (NYSE: BJ) from July 2012 to December 2016. Before joining BJ’s Wholesale Club, she served as Chief Marketing Officer at Swipely, now called Upserve, from August 2011 to July 2012 and prior to that, she served as SVP, Marketing at CVS Health (NYSE: CVS) from 2000 to August 2011. Early in her career, she was a Professor at Columbia University from July 1989 to July 1992 and The University of Rhode Island from July 1992 to July 2000. In addition, she was an Adjunct Professor at The Wharton School at The University of Pennsylvania from January 2015 to May 2018. She received a Bachelor of Science, a Master of Science and a Ph.D. in Marketing from The University of Pennsylvania, The Wharton School. We believe Ms. Harlam is qualified to serve as a member of our Board due to her experience in the consumer packaged goods and retail industries as well as her expertise in marketing.
William Kurtz has served as a director since August 2019. Mr. Kurtz is a senior financial and operations executive with over 30 years of experience operating as chief financial officer or chief operating officer at several private and public technology companies on the East Coast and in Silicon Valley. Since 2016, he has served as a member of the board of directors of Verint Systems Inc., a customer experience software SaaS company, and he currently serves as chairman of its Audit Committee and as a member of the Nominating & Governance Committee. Mr. Kurtz has served as the Chief Financial and Commercial Officer for Ripcord, Inc. since January 2021 and as its Chief Commercial Officer since April 2021 and served as its interim Chief Executive Officer from June 2021 through January 2022 while the company conducted a search for a chief executive officer. He is also a member of the Board of Ripcord Inc. Mr. Kurtz also served as a Strategic Advisor for Bloom Energy Corporation, a manufacturer of on-site power generation platforms, from January 2019 to January 2021 and previously served as its Chief Commercial Officer (from May 2015 to December 2018) and Chief Commercial & Financial Officer (from March 2008 to May 2015). Mr. Kurtz has also held a number of CFO or other senior finance and operations roles at a variety of organizations, including Novellus Systems, Inc. (from September 2005 to February 2008), Engenio Information Technologies, Inc. (from March 2004 to August 2005), 3PARdata, Inc. (from July 2001 to February 2004), Scient Corporation (from August 1998 to June 2001), AT&T Corporation (from July 1983 to July 1998) and Price Waterhouse & Co./Brout & Company (from June 1979 to July 1983). Mr. Kurtz also served as a member of the board of directors and chair of the audit committee of Violin Memory Inc. (from November 2014 to February 2017), PMC-Sierra, Inc. (from April 2003 to January 2016), AuraSound, Inc. (from August 2010 to April 2012), ONStor, Inc. (from January 2008 to July 2009) and Redback Networks Inc. (from October 1999 to January 2007). Mr. Kurtz holds a Bachelor of Science in Commerce from Rider University and a Master of Science in Management Sciences from Stanford University. We believe Mr. Kurtz is qualified to serve as a member of our Board due to his experience in chief financial officer and chief operating officer roles and his experience in private and public technology companies.
Susan Lattmann has served as a director since February 2022. Ms. Lattmann currently serves on the board of directors for Landsea Homes Corporation (Nasdaq: LSEA), a national residential home builder, since December 2021, where she is the co-chair of the Compensation Committee. Ms. Lattmann also currently serves on the board of directors for Farmer Focus, a private organic chicken company, since November 2021 where she is the chair of the Audit Committee as well as ArcTrust III, a private growth and income real estate investment trust, since November 2020.Ms. Lattmann is presently the Chief Financial Officer for The Row, an international luxury apparel retailer since July 2021. Previously, she worked for Bed Bath & Beyond Inc. (Nasdaq: BBBY), from August 1996 to December 2019, where she held several roles, including Chief Financial Officer (2014-2018) and Chief Administrative Officer (2018-2019). She began her professional career with Arthur Andersen LLP. Ms. Lattmann received her Bachelor of Science degree with honors from Bucknell University and is a certified public accountant. We believe Ms. Lattmann is qualified to serve as a member of our Board due to her extensive financial and leadership experience.
71
Sarah Liebel has served as a director since February 2022. Ms. Liebel has served as Chief Growth Officer and President of Consumer Products at BetterUp, a digital coaching company, since March 2022. Prior to joining BetterUp, Ms. Liebel served as Chief Revenue Officer at 1stdibs.com, Inc. (Nasdaq: DIBS) from January 2019 to March 2022, where she oversaw the sales and operations teams at the company, including Customer Experience, Logistics, Business Operations, Trade & Private Client sales. Before joining 1stdibs in 2015, Ms. Liebel was most recently at Groupon, Inc. (Nasdaq: GRPN). During her five year tenure at Groupon, she held a number of leadership roles, including running operations & sales at Ideeli, a fashion flash sales e-commerce company, after it was acquired by Groupon, as well as leading deals on the corporate development team. Ms. Liebel received her Bachelor of Science from Tulane University and her MBA from Northwestern’s Kellogg School of Management. We believe Ms. Liebel is qualified to serve as a member of our Board due to her experience in revenue generation, e-commerce and business leadership.
Cynthia Williams has served as a director since April 2022. Ms. Williams currently serves as President of the Wizards of the Coast and Digital Gaming Division of Hasbro, Inc. (Nasdaq: HAS). Prior to her role at Hasbro, Inc., Ms. Williams served as Vice President and General Manager at Microsoft Corporation (Nasdaq: MSFT) from September 2018 to February 2022. She previously worked at Amazon.com, Inc. (Nasdaq: AMZN) from August 2007 to July 2018 where she led their Fulfillment by Amazon division. Ms. Williams received her BSBA from Western Carolina University in 1989 and her MBA from Wake Forest University in 1995. We believe Ms. Williams is qualified to serve as a member of our Board due to her significant technology and e-commerce expertise.
Legal Proceedings with Directors or Executive Officers
There are no legal proceedings related to any of our directors or executive officers that require disclosure pursuant to Items 103 or 401(f) of Regulation S-K.
Code of Conduct and Ethics
Our Board has adopted a Code of Conduct and Ethics that applies to all of our employees, officers and directors, including our Chief Executive Officer and other employees. We have posted the Code of Conduct and Ethics on our website at https://ir.aterian.io/corporate-governance/governance-highlights under “Governance Documents”. The Code of Conduct and Ethics can only be amended by the approval of our audit committee of the Board (the “Audit Committee”) and any waiver to the Code of Conduct and Ethics for an executive officer or director may only be granted by the Audit Committee and must be timely disclosed as required by this itemapplicable law. We expect that any amendments to the Code of Conduct and Ethics, or any waivers of its requirements, will be containeddisclosed on our website.
Audit Committee
We have a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. Our Audit Committee is comprised of Mr. Kurtz, Ms. Lattmann, Ms. Liebel and Ms. Williams. Ms. Lattmann serves as Chairperson of the committee. Each member of the Audit Committee must be independent as defined under the applicable rules and listings standards of The Nasdaq Stock Market LLC (the “Nasdaq Rules”) and SEC rules and financially literate under the Nasdaq Rules. Our Board has determined that each member of the Audit Committee is “independent” and “financially literate” under the Nasdaq Rules and the SEC rules and that Ms. Lattmann is an “audit committee financial expert” under the rules of the SEC. The responsibilities of the Audit Committee are included in a written charter. The Audit Committee acts on behalf of our Board in fulfilling our Board’s oversight responsibilities with respect to our accounting and financial reporting processes, the systems of internal control over financial reporting and audits of financial statements and reports, and also assists our Board in its oversight of the quality and integrity of our financial statements and reports and the qualifications, independence and performance of our independent registered public accounting firm. For this purpose, the Audit Committee performs several functions. The Audit Committee’s responsibilities include, among others:
• | appointing, determining the compensation of, retaining, overseeing and evaluating our independent registered public accounting firm and any other registered public accounting firm engaged for the purpose of performing other review or attest services for us; |
• | prior to commencement of the audit engagement, reviewing and discussing with the independent registered public accounting firm a written disclosure by the prospective independent registered public accounting firm of all relationships between us, or persons in financial oversight roles with us, and such independent registered public accounting firm or their affiliates; |
• | determining and approving engagements of the independent registered public accounting firm, prior to commencement of the engagement, and the scope of and plans for the audit; |
• | monitoring the rotation of partners of the independent registered public accounting firm on our audit engagement; |
72
• | reviewing with management and the independent registered public accounting firm any fraud that includes management or other employees who have a significant role in our internal control over financial reporting and any significant changes in internal controls; |
• | establishing and overseeing procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters and the confidential and anonymous submission by employees of concerns regarding questionable accounting or auditing matters; |
• | reviewing the results of management’s efforts to monitor compliance with our programs and policies designed to ensure compliance with laws and rules; and |
• | reviewing and discussing with management and the independent registered public accounting firm the results of the annual audit and the independent registered public accounting firm’s assessment of the quality and acceptability of our accounting principles and practices and all other matters required to be communicated to the Audit Committee by the independent registered public accounting firm under generally accepted accounting standards, the results of the independent registered public accounting firm’s review of our quarterly financial information prior to public disclosure and our disclosures in our periodic reports filed with the SEC. |
The Audit Committee reviews, discusses and assesses its own performance and composition at least annually. The Audit Committee also periodically reviews and assesses the adequacy of its charter, including its role and responsibilities as outlined in its charter, and recommends any proposed changes to our Board for its consideration and approval.
Typically, the Audit Committee meets at least quarterly and with greater frequency if necessary. Our Board has adopted a written charter of the Audit Committee that is available to stockholders on our internet website at https://ir.aterian.io/corporate-governance/governance-highlights under “Governance Charters”.
Director Nominations
No material changes have been made to the procedures by which security holders may recommend nominees to our Board from those that were described in our definitive proxy statement on Schedule 14A to beDefinitive Proxy Statement for our 2022 Annual Meeting of Stockholders that was filed with the SEC on June 15, 2022.
Delinquent Section 16(a) Reports
Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file reports of ownership and changes in ownership with the SEC. Officers, directors, and greater than 10% stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based solely upon a review of the copies of such forms and amendments thereto, we believe that, during 2021, none of our officers, directors, and greater than 10% beneficial owners failed to file on a timely basis the reports required by Section 16(a).
Item 11. Executive Compensation.
The following Compensation Discussion and Analysis describes the material elements of compensation for the following individuals who served as our name executive officers for the year that ended on December 31, 2022 (“Named Executive Officer”), which consist of our principal executive officer, up to two other most highly compensated executive officers who were serving as executive officers as of December 31, 2022, and up to two additional individuals who would have been most highly compensated executive officers but for the fact that such individual was not serving as an executive officer as of December 31, 2022 are:
• | Yaniv Sarig, our President and Chief Executive Officer; |
• | Joseph A. Risico, our Chief Legal Officer and Head of M&A; and |
• | Roi Zahut, our Chief Technology Officer |
Summary Compensation Table
The following table sets forth certain information with respect to the compensation paid to our Named Executive Officers for the fiscal years ended December 31, 2021 and 2022:
73
|
|
|
|
|
|
| Salary/Fees |
|
| Bonus |
|
| Stock Awards |
| All Other Compensation |
|
| Total |
| ||||||
Name and principal position |
|
|
| Year |
|
| $ |
|
| $ |
|
| $(1) |
| $ |
|
| $ |
| ||||||
Yaniv Sarig |
|
|
|
| 2022 |
|
|
| 349,999 |
|
|
| — |
|
|
| 1,051,900 |
|
| 19,227 |
|
|
| 1,421,126 |
|
President and Chief Executive Officer |
|
|
|
| 2021 |
|
|
| 333,333 |
|
|
| — |
|
|
| 4,681,790 |
|
| 16,400 |
|
|
| 5,031,523 |
|
Joseph A. Risico - Chief Legal Officer and Head of M&A |
|
|
|
| 2022 |
|
|
| 310,000 |
|
|
| — |
|
|
| 977,768 |
|
| 8,309 |
|
|
| 1,296,077 |
|
Roi Zahut - Chief Technology Officer |
|
|
|
| 2022 |
|
|
| 310,000 |
|
|
| — |
|
|
| 977,768 |
|
| 6,955 |
|
|
| 1,294,723 |
|
(1) | The amounts in this column represent the aggregate grant date fair value of the restricted stock awards computed in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 718. Assumptions used in the calculation of these amounts are included in Note 11 to our Consolidated Financial Statements included in this Annual Report on Form 10-K. These amounts do not reflect the actual economic value that will be realized by the Named Executive Officer upon the vesting of the restricted stock awards or the sale of the common stock underlying such restricted stock awards. |
Narrative Disclosure to Summary Compensation Table
Employment and Severance Agreements
Yaniv Sarig—We entered into an offer letter with Mr. Sarig, dated April 1, 2015. Pursuant to the offer letter, Mr. Sarig’s base salary was initially $120,000 per year. During his employment, Mr. Sarig has received various base salary adjustments and his salary at the beginning of 2021 was $300,000 per year, which was increased to $350,000 per year, effective May 1, 2021. In January 2023, we amended Mr. Sarig’s salary to be received in mostly Common Stock. Per the terms of that amendment, Mr. Sarig is to receive $60,000 in cash and $290,000 in common stock of the Company after adding a 1.15x multiplier which results in 331,104 shares being issued based on the 20-day average closing price of the Company’s common stock on January 18, 2023. The shares are subject to vesting and will vest in full on January 19, 2024. Mr. Sarig’s employment is at will and may be terminated at any time by us or Mr. Sarig, with or without cause.
Joseph A. Risico — We entered into an offer letter with Mr. Risico, dated February 8, 2018. Pursuant to the offer letter, Mr. Risico’s base salary was initially $250,000 per year. During his employment, Mr. Risico has received various base salary adjustments and his salary at the beginning of 2022 was $310,000 per year.
Roi Zahut — We entered into an offer letter with Mr. Zahut, dated January 14, 2019. Pursuant to the offer letter, Mr. Zahut's base salary was initially $225,000 per year. During his employment, Mr. Zahut has received various base salary adjustments and his salary at the beginning of 2022 was $310,000 per year.
Base Salaries/Compensation
Our salaries recognize the experience, skills, knowledge, and responsibilities required of all employees, including our Named Executive Officers. Base salaries and base compensation are reviewed annually, typically in connection with our annual performance review process, and adjusted from time to time to realign salaries and compensation with market levels after taking into account individual responsibilities, performance and experience. As of December 31, 2022, the annual meetingbase salaries or base compensation for Mr. Sarig was $350,000. The annual and base salaries or base compensation for Messrs. Risico and Zahut was $310,000.
Bonuses
For the year ended December 31, 2022, no bonuses were paid to our Named Executive Officers and none of stockholdersour Named Executive Officers received any non-equity incentive compensation.
Equity Compensation
Although we do not have a formal policy with respect to the grant of equity incentive awards to our executive officers, we believe that equity grants provide our executives with a strong link to our long-term performance, create an ownership culture and help to align the interests of our executives and our stockholders. In addition, we believe that equity grants with a time-based vesting feature promote executive retention because this feature incentivizes our executive officers to remain in our employment during the vesting period. Accordingly, our Board periodically reviews the equity incentive compensation of our Named Executive Officers and from time to time may grant equity incentive awards to them.
74
On May 27, 2022, we granted 314,000 and 291,871 shares of our common stock subject to restricted stock awards to Mr. Sarig, Mr. Risico and Mr. Zahut, respectively, pursuant to the Aterian, Inc. 2018 Equity Incentive Plan (the “Proxy Statement”“2018 Plan”), of which 14,000, 12,400 and 12,400 shares vested immediately for the respective recipients. Of the balance, 1/3rd of the shares of restricted common stock shall vest on May 27, 2023, and 1/12th of shares of restricted common stock shall vest each quarterly period thereafter, as described in more detail in the “Outstanding Equity Awards at December 31, 2022” table below.
Perquisites, Health, Welfare and Retirement Plans and Benefits
We provide healthcare coverage to our employees. In addition, we have adopted a 401(k) plan for eligible employees. However, we do not currently match any portion of the contributions made by our employees to the 401(k) plan.
Outstanding Equity Awards at December 31, 2022
The following table presents certain information concerning outstanding equity awards held by each of the Named Executive Officers at December 31, 2022:
|
|
|
|
| Option awards |
| Stock awards |
| |||||||||||||||
Name |
| Grant date |
|
| Number of securities underlying unexercised options (#) exercisable |
|
| Number of securities underlying unexercised options (#) unexercisable |
| Option exercise price per share ($) |
|
| Option expiration date |
| Number of shares or units of stock that have not vested (#) |
|
| Market value of shares or units of stock that have not vested (1) ($) |
| ||||
Yaniv Sarig |
| 6/30/2021 |
|
| — |
|
| — |
| — |
|
| — |
|
| 125,007 |
|
| $ | 96,255 |
| ||
|
| 5/27/2022 |
|
| — |
|
| — |
| — |
|
| — |
|
| 300,000 |
|
| $ | 231,000 |
| ||
Joseph A. Risico |
| 6/30/2021 |
|
| — |
|
| — |
| — |
|
| — |
|
| 48,003 |
|
| $ | 36,962 |
| ||
|
| 5/27/2022 |
|
| — |
|
| — |
| — |
|
| — |
|
| 279,471 |
|
| $ | 215,193 |
| ||
|
| 12/28/2018 |
|
|
| 26,937 |
|
| — |
| 9.72 |
|
| 12/28/2028 |
| — |
|
| — |
| |||
Roi Zahut |
| 6/12/2019 |
|
|
| 21,165 |
|
| — |
|
| 10.00 |
|
| 6/12/2029 |
| — |
|
| — |
| ||
|
| 6/30/2021 |
|
| — |
|
| — |
| — |
|
| — |
|
| 48,003 |
|
| $ | 36,962 |
| ||
|
| 5/27/2022 |
|
| — |
|
| — |
| — |
|
| — |
|
| 279,471 |
|
| $ | 215,193 |
|
(1) | Represents the market value of the unvested shares underlying the restricted stock awards as of December 31, 2022, based on the closing price of our common stock on such date, as reported on the Nasdaq Capital Market, which was $0.77 per share. These amounts do not reflect the actual economic value that will be realized by the Named Executive Officer upon the vesting of the restricted stock awards or the sale of the common stock underlying such restricted stock awards. |
Non-Employee Director Compensation
Effective August 1, 2021, our compensation committee of the Board (the “Compensation Committee”) approved a formal non-employee director compensation policy. Pursuant to such policy, our non-employee directors were paid the following amounts for the year ended December 31, 2022 (prorated for service for a partial year), which, we expectat each director’s election was payable one-third in cash and two-thirds in shares of restricted common stock: (i) $150,000 per year to file not later than 120 days aftereach director; (ii) $15,000 per year to the endchairperson of the Audit Committee; (iii) $10,000 per year to the chairperson of each of the Compensation Committee and the nominating and corporate governance committee of the Board (the “Nominating and Corporate Governance Committee”); (iv) $7,500 per year to other members of the Audit Committee; and (v) $5,000 to other members of each of the Compensation Committee or the Nominating and Corporate Governance Committee. In addition, upon their joining the Board, each of Ms. Liebel, Ms. Lattmann and Ms. Williams received an initial stock award equal to $200,000 as of the day prior to their joining.
The following table sets forth summary information concerning compensation paid or accrued to the members of our year-endedBoard for services rendered to us for the fiscal year ended December 31, 2022:
75
|
|
|
| Fees Earned or Paid in Cash |
|
| Option Awards |
|
| Stock Awards |
| All Other Compensation |
|
| Total |
| |||||
Name(1) |
|
|
| $ |
|
| $(2) |
|
| $(3) |
| $ |
|
| $ |
| |||||
Bari A. Harlam |
|
|
| $ | 65,000 |
|
|
| — |
|
| $ | 96,205 |
|
| — |
|
| $ | 161,205 |
|
Susan Lattmann |
|
|
| $ | 62,917 |
|
|
| — |
|
| $ | 310,401 |
|
| — |
|
| $ | 373,318 |
|
Sarah Liebel |
|
|
| $ | 54,368 |
|
|
| — |
|
| $ | 310,401 |
|
| — |
|
| $ | 364,769 |
|
William H. Kurtz |
|
|
| $ | 92,676 |
|
|
| — |
|
| $ | 96,205 |
|
| — |
|
| $ | 188,881 |
|
Cynthia Williams |
|
|
| $ | 51,590 |
|
|
| — |
|
| $ | 287,975 |
|
| — |
|
| $ | 339,565 |
|
(1) | Yaniv Sarig, our President and Chief Executive Officer and one of our Named Executive Officers, is not included in this table as he is an employee of ours and therefore receives no compensation for his service as a director. Mr. Sarig’s compensation is included in the section entitled “Summary Compensation Table” of this Annual Report on Form 10-K above. |
(2) | The amounts in this column represent the aggregate grant date fair value of the option awards computed in accordance with FASB ASC Topic 718. Assumptions used in the calculation of these amounts are included in Note 11 to our Consolidated Financial Statements included in this Annual Report on Form 10-K. These amounts do not reflect the actual economic value that will be realized by the director upon the vesting of the stock options, the exercise of the stock options or the sale of the common stock underlying such stock options. As of December 31, 2022, none of our non-employee directors held options to purchase shares of common stock. |
(3) | The amounts in this column represent the aggregate grant date fair value of the restricted stock awards computed in accordance with FASB ASC Topic 718. Assumptions used in the calculation of these amounts are included in Note 11 to our Consolidated Financial Statements included in this Annual Report on Form 10-K. These amounts do not reflect the actual economic value that will be realized by the director upon the vesting of the restricted stock awards or the sale of the common stock underlying such restricted stock awards. As of December 31, 2022, our non-employee directors held the following number of shares of restricted common stock: Ms. Harlam 21,098 shares; Ms. Lattmann 62,253; Ms. Liebel 62,253; Mr. Kurtz; 21,098 and Ms. Williams 103,403 shares. |
Compensation Committee Interlocks and Insider Participation
Our Compensation Committee consists of four directors, each of whom is a non-employee director: Ms. Harlam, Ms. Lattmann, Mr. Kurtz and Ms. Williams with Ms. Williams serving as the Chairperson of the Compensation Committee. During 2021, none of the foregoing were an officer or employee of ours, was formerly an officer of ours or had any relationship requiring disclosure by us under Item 404 of Regulation S-K. No interlocking relationship as described in Item 407(e)(4) of Regulation S-K exists between any of our executive officers or Compensation Committee members, on the one hand, and is incorporated in this report by reference.
Item 11. Executive Compensation.
Information required by this item will be containedthe executive officers or compensation committee members of any other entity, on the other hand, nor has any such interlocking relationship existed in the Proxy Statement, which we expect to file not later than 120 days after the end of our year-ended December 31, 2021 and is incorporated in this report by reference.past.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information required
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth additional information as of December 31, 2022 with respect to the shares of common stock that may be issued upon the exercise of options and other rights under our existing equity compensation plans and arrangements in effect as of December 31, 2022. The information includes the number of shares covered by, this item willand the weighted average exercise price of, outstanding options and the number of shares remaining available for future grant, excluding the shares to be containedissued upon exercise of outstanding options.
76
|
| Number of securities to be issued upon exercise of outstanding options, warrants and rights(a) |
|
| Weighted-average exercise price of outstanding options, warrants and rights(b)(1) |
|
| Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a)(c)(2) |
| |||
Equity compensation plans approved by security holders(3)(4) |
|
| 320,027 |
|
| $ | 9.73 |
|
|
| 724,880 |
|
Equity compensation plans not approved by security holders(5) |
|
| 48,569 |
|
| $ | 6.13 |
|
|
| 2,131,935 |
|
Total |
|
| 368,596 |
|
| $ | 9.26 |
|
|
| 2,856,815 |
|
(1) | Consists of the weighted average exercise price of outstanding options as of December 31, 2022. |
(2) | Consists entirely of shares of common stock that remain available for future issuance under the 2018 Plan as of December 31, 2021. |
(3) | Consists of options outstanding as of December 31, 2022 under the 2018 Plan. |
(4) | The number of shares of our common stock available for issuance under the 2018 Plan will automatically increase on January 1st of each year, for a period of not more than nine years, beginning January 1, 2020 and ending on (and including) January 1, 2028 by the lesser of (i) 15% of the shares deemed outstanding as of the preceding December 31, minus the number of shares in the share reserve (which for this purpose includes shares issued and issuable pursuant to the Aterian Group, Inc. Amended and Restated 2014 Equity Incentive Plan (the “2014 Plan”) as of immediately prior to the increase, or (ii) such number of shares as determined by our Board. |
(5) | Consists of options outstanding as of December 31, 2022 under the 2014 Plan and securities remaining available for future issuance for the 2014 Plan and the Inducement Equity Incentive Plan. |
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of December 31, 2022, with respect to the beneficial ownership of shares of our common stock by:
• | each of our directors; |
• | each of the Named Executive Officers; |
• | all of our current directors and executive officers as a group; and |
• | each person, or group of affiliated persons, known to us to be the beneficial owner of more than five percent of our common stock. |
This table is based upon information supplied by officers, directors and principal stockholders and a review of Section 16 filings and/or Schedules 13D and 13G, if any, filed with the SEC. Other than as set forth below, we are not aware of any beneficial owner of more than five percent of our common stock as of March 24, 2022. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the Proxy Statement, which we expecttable below have sole voting and investment power with respect to file not later than 120 days afterall shares of common stock that they beneficially own, subject to applicable community property laws.
We have determined beneficial ownership in accordance with the endrules of the SEC. We have deemed shares of our year-endedcommon stock subject to warrants and options that are currently exercisable or exercisable within 60 days of March 24, 2022 to be outstanding and to be beneficially owned by the person holding the option for the purpose of computing the percentage ownership of that person but have not treated them as outstanding for the purpose of computing the percentage ownership of any other person. Percentage ownership of our common stock is based on 80,752,290 shares of our common stock outstanding as of December 31, 2021 and2022.
Unless otherwise noted below, the address of each beneficial owner listed in the table is incorporated in this report by reference.c/o Aterian, Inc., 37 East 18th Street, 7th Floor, New York, NY 10003.
77
|
|
| Beneficial Ownership of Common Stock |
|
| |||||
|
|
| Number of Shares |
|
| %(1) |
|
| ||
Greater than 5% Stockholders: |
|
|
|
|
|
|
|
| ||
Armistice Capital Master Fund Ltd. |
|
|
| 14,080,303 |
| (2) |
| 14.9 |
| % |
|
|
|
|
|
|
|
|
| ||
Named Executive Officers and Directors: |
|
|
|
|
|
|
|
| ||
Yaniv Sarig |
|
|
| 1,075,254 |
| (3) | 1.3 |
| % | |
Joseph Risico |
|
|
| 558,201 |
| (4) | * |
|
| |
Roi Zahut |
|
|
| 497,533 |
| (5) | * |
|
| |
William Kurtz |
|
|
| 103,743 |
| (6) | * |
|
| |
Bari A. Harlam |
|
|
| 112,900 |
| (7) | * |
|
| |
Susan Lattmann |
|
|
| 103,923 |
| (8) | * |
|
| |
Cynthia Williams |
|
|
| 124,500 |
| (9) | * |
|
| |
Sarah Liebel |
|
|
| 103,923 |
| (10) | * |
|
| |
All current executive officers and directors as a group (11 persons) |
|
|
| 3,836,404 |
| (11) |
| 4.7 |
| % |
* | Denotes less than 1%. |
(1) | For each person and groupincluded in this table, percentage ownership is calculated by dividing the number of shares beneficially owned by such person or group by the sum of the number of shares of common stock outstanding as of March 15, 2023, plus the number of shares of common stock that such person or group had the right to acquire within 60 days after March 15, 2023. |
(2) | Comprised of 14,080,303 warrants that are exercisable within 60 days after March 15, 2023. The securities are directly held by Armistice Capital Master Fund Ltd. (the “Master Fund”), a Cayman Islands exempted company, and may be deemed to be indirectly beneficially owned by (i) Armistice Capital, LLC (“Armistice”), as the investment manager of the Master Fund; and (ii) Steven Boyd, as the Managing Member of Armistice Capital. Armistice and Steven Boyd disclaim beneficial ownership of the reported securities except to the extent of their respective pecuniary interest therein. The address of Armistice Capital Master Fund Ltd. is c/o Armistice Capital, LLC, 510 Madison Avenue, 7th Floor, New York, NY 10022. |
(3) | Mr. Sarig’s holdings consist of (i) 269,524 shares of common stock held directly (ii) 758,111 shares of restricted common stock that are subject to vesting and (iii) 47,619 warrants that are exercisable within 60 days after March 15, 2023. The shares of restricted common stock have voting rights irrespective of any vesting requirements. |
(4) | Mr. Risico's holdings consist of (i) 156,171 shares of common stock held directly, (ii)26,937 shares of common stock issuable pursuant to stock options that are exercisable within 60 days after March 15, 2023, (iii) 327,474 shares of restricted common stock that are subject to vesting, and (iv) 47,619 of warrants that are exercisable within 60 days after March 15, 2023. The shares of restricted common stock have voting rights irrespective of any vesting requirements. |
(5) | Mr. Zahut’s holdings consist of (i) 141,751 shares of common stock held directly, (ii) 21,165 shares of common stock issuable pursuant to stock options that are exercisable within 60 days after March 15, 2023 (iii) 327,474 shares of restricted common stock that are subject to vesting and (iv) 7,143 of warrants that are exercisable within 60 days after March 15, 2023. The shares of restricted common stock have voting rights irrespective of any vesting requirements. |
(6) | Comprised of: (i) 82,645 shares of common stock held directly, and (ii) 21,098 shares of restricted common stock that are subject to vesting. The shares of restricted common stock have voting rights irrespective of any vesting requirements. |
(7) | Comprised of: (i) 91,802 shares of common stock held directly, and (ii) 21,098 shares of restricted common stock that are subject to vesting. The shares of restricted common stock have voting rights irrespective of any vesting requirements. |
(8) | Comprised of: (i) 41,670 shares of common stock held directly, and (ii) 62,253 shares of restricted common stock that are subject to vesting. The shares of restricted common stock have voting rights irrespective of any vesting requirements. |
(9) | Comprised of: (i) 21,907 shares of common stock held directly, and (ii) 103,403 shares of restricted common stock that are subject to vesting. The shares of restricted common stock have voting rights irrespective of any vesting requirements. |
(10) | Comprised of (i) 41,670 of shares of common stock held directly, and (ii) 62,253 shares of restricted common stock have voting rights irrespective of any vesting requirements. |
78
(11) | Comprised of shares included under “Named Executive Officers and Directors”, and the following held by two of our other executive officers: (i) 353,905 shares of common stock held directly, (ii) 520,212 shares of restricted common stock that are subject to vesting and (iii) 268,025 shares of common stock issuable pursuant to stock options exercisable within 60 days after March 24, 2022. The shares of restricted common stock have voting rights irrespective of any vesting requirements. |
Information required by
Related Party Transactions
Other than the director and executive officer compensation arrangements discussed in Part II, Item 8 of this itemAnnual Report on Form 10-K, there have not been any transactions since January 1, 2022 that we have been a party to and in which the amount involved exceeded or will be containedexceed $120,000, and in which any of our directors, executive officers, beneficial owners of more than 5% of our capital stock, or their immediate family members, have had or will have a direct or indirect material interest.
Policies and Procedures for Related Party Transactions
Our Board has adopted a written related person transaction policy, effective as of June 14, 2019, to set forth the Proxy Statement,policies and procedures for the review and approval or ratification of related person transactions. This policy covers, with certain exceptions set forth in Item 404 of Regulation S-K under the Securities Act of 1933, as amended (the “Securities Act”), any transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships in which we expectwere or are to file not later than 120 days afterbe a participant, the endamount involved exceeds $120,000 and a related person had or will have a direct or indirect material interest, including, without limitation, purchases of goods or services by or from the related person or entities in which the related person has a material interest, indebtedness, guarantees of indebtedness and employment by us of a related person. A related person is any individual who is, or who has been at any time since the beginning of our year-ended December 31, 2021last fiscal year, one of our directors or executive officers, or a nominee to become one of our directors, any person known to be the beneficial owner of more than 5% of any class of our voting securities or any immediate family member of any of the foregoing persons. Additionally, any firm, corporation or other entity by which any of the foregoing persons is employed or in which such person is a general partner or principal, or in a similar position, or in which such person has a 10% or greater beneficial ownership interest, will also be deemed to be a related person. Transactions involving compensation for services provided to us as an employee, consultant or director are not considered related-person transactions under this policy. As provided by our audit committee charter, our Audit Committee is responsible for reviewing and approving in advance any related party transaction.
Director Independence
Under the Nasdaq Rules, a majority of the members of our Board must satisfy the Nasdaq criteria for “independence.” No director qualifies as independent under the Nasdaq Rules unless our Board affirmatively determines that the director does not have a relationship with us that would impair independence (directly or as a partner, stockholder or officer of an organization that has a relationship with us). Our Board has determined that Mses. Harlam, Lattmann, Liebel and Williams and Mr. Kurtz are independent directors as defined under the Nasdaq Rules. Mr. Sarig is incorporated in this report by reference.not independent under the Nasdaq Rules as a result of his position as our Chief Executive Officer.
Item 14. Principal Accounting Fees and Services.Services
Information required by this item will be contained in
The following table represents aggregate fees billed to us for the Proxy Statement, which we expect to file not later than 120 days after the end of our year-endedfiscal years ended December 31, 2021 and December 31, 2022 by Deloitte & Touche LLP, our independent registered public accounting firm for such periods. All fees described below were approved by the Audit Committee.
|
|
|
| Fiscal Year Ended December 31, |
| |||||
|
|
|
| 2021 |
|
| 2022 |
| ||
Audit Fees(1) |
|
|
| $ | 1,204,010 |
|
| $ | 1,524,207 |
|
Tax Fees (2) |
|
|
|
| 125,000 |
|
|
| 89,638 |
|
All Other Fees(3) |
|
|
|
| 3,800 |
|
|
| 4,126 |
|
Total Fees |
|
|
| $ | 1,332,810 |
|
| $ | 1,617,971 |
|
(1) | Audit Fees consist of actual fees for professional services performed by Deloitte & Touche LLP for the audit of our 2021 and 2022 annual financial statements and the review of quarterly financial statements for 2022 and 2021. Audit fees also include $150,000 of 2021 fees and $256,171 of 2022 fees for professional services performed by Deloitte & Touche LLP for reviews of registration statements and issuances of consents, comfort letters and services that are normally provided in connection with regulatory filings or engagements. |
(2) | Consists of fees for tax compliance and consulting. |
79
(3) | Consists of fees for an accounting research tool. |
Audit Committee’s Pre-Approval Policies and Procedures
The Audit Committee has adopted a policy for the pre-approval of audit and non-audit services rendered by our independent registered public accounting firm, Deloitte & Touche LLP. The policy generally allows for pre-approval of specified services in the defined categories of audit services, audit-related services and tax services up to specified amounts. Pre-approval may also be given as part of the Audit Committee’s approval of the scope of the engagement of the independent registered public accounting firm or on an individual case-by-case basis before the independent registered public accounting firm is incorporated inengaged to provide each service. The pre-approval of services may be delegated to one or more of the Audit Committee’s members, but the decision must be reported to the full Audit Committee at its next scheduled meeting. By the adoption of this reportpolicy, the Audit Committee has delegated the authority to pre-approve services to the Chairperson of the Audit Committee, subject to certain limitations.
The Audit Committee has determined that the rendering of the services other than audit services by reference.Deloitte & Touche LLP is compatible with maintaining the independent registered public accounting firm’s independence.
80
Item 15. Exhibits, Financial Statement Schedules.
(a)Exhibits.
|
|
|
| Incorporated by Reference | ||||||
Exhibit Number |
| Description |
| Form |
| File Number |
| Filing Date |
| Exhibit |
|
|
|
|
|
|
|
|
|
|
|
2.1† |
|
| 8-K |
| 001-38937 |
| 12/1/2021 |
| 2.1 | |
|
|
|
|
|
|
|
|
|
|
|
2.2† |
|
| 8-K |
| 001-38937 |
| 2/3/2021 |
| 2.1 | |
|
|
|
|
|
|
|
|
|
|
|
2.3† |
|
| 8-K |
| 001-38937 |
| 5/11/2022 |
| 2.1 | |
|
|
|
|
|
|
|
|
|
|
|
2.4† |
|
| 8-K |
| 001-38937 |
| 5/11/2022 |
| 2.2 | |
|
|
|
|
|
|
|
|
|
|
|
3.3 |
|
| 8-K |
| 001-38937 |
| 4/30/2022 |
| 3.2 | |
|
|
|
|
|
|
|
|
|
|
|
3.4 |
| Amended and Restated Certificate of Incorporation of Aterian, Inc. |
| 8-K |
| 001-38937 |
| 4/30/2022 |
| 3.3 |
|
|
|
|
|
|
|
|
|
|
|
3.2 |
|
| 8-K |
| 001-38937 |
| 6/1/2022 |
| 3.2 | |
|
|
|
|
|
|
|
|
|
|
|
4.1 |
|
| S-1/A |
| 333-231381 |
| 5/24/2020 |
| 4.1 | |
|
|
|
|
|
|
|
|
|
|
|
4.2+ |
|
| S-1 |
| 333-231381 |
| 5/10/2020 |
| 4.2 | |
|
|
|
|
|
|
|
|
|
|
|
4.3 |
| Warrant to Purchase Stock, issued to MidCap Financial Trust on September 4, 2018. |
| S-1 |
| 333-231381 |
| 5/10/2020 |
| 4.3 |
|
|
|
|
|
|
|
|
|
|
|
4.4 |
| Form of Warrant, issued to Katalyst Securities LLC and its assigns on September 4, 2018. |
| S-1 |
| 333-231381 |
| 5/10/2020 |
| 4.4 |
|
|
|
|
|
|
|
|
|
|
|
4.5 |
| Form of Warrant, issued to Horizon Technology Finance Corporation on December 31, 2020. |
| S-1 |
| 333-231381 |
| 5/10/2020 |
| 4.5 |
|
|
|
|
|
|
|
|
|
|
|
4.6 |
|
| S-1 |
| 333-231381 |
| 5/10/2020 |
| 4.6 | |
|
|
|
|
|
|
|
|
|
|
|
81
|
|
|
| Incorporated by Reference | ||||||
Exhibit Number |
| Description |
| Form |
| File Number |
| Filing Date |
| Exhibit |
|
|
|
|
|
|
|
|
|
|
|
4.7 |
| Warrant to Purchase Shares of Common Stock, issued to Third Creek Advisors, LLC on August 18, 2021. |
| 10-Q |
| 001-38937 |
| 11/9/2021 |
| 4.7 |
|
|
|
|
|
|
|
|
|
|
|
4.8 |
|
| 8-K |
| 001-38937 |
| 12/27/2022 |
| 4.1 | |
|
|
|
|
|
|
|
|
|
|
|
4.9* |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
10.1# |
|
| S-1/A |
| 333-231381 |
| 5/24/2020 |
| 10.1 | |
|
|
|
|
|
|
|
|
|
|
|
10.2# |
|
| S-1 |
| 333-231381 |
| 5/10/2020 |
| 10.2 | |
|
|
|
|
|
|
|
|
|
|
|
10.3# |
|
| S-1 |
| 333-231381 |
| 5/10/2020 |
| 10.3 | |
|
|
|
|
|
|
|
|
|
|
|
10.4# |
|
| S-8 |
| 333-232087 |
| 5/28/2921 |
| 10.3 | |
|
|
|
|
|
|
|
|
|
|
|
10.5# |
|
| S-1 |
| 333-231381 |
| 5/10/2020 |
| 10.5 | |
|
|
|
|
|
|
|
|
|
|
|
10.6# |
|
| S-8 |
| 333-232087 |
| 6/12/2020 |
| 10.4 | |
|
|
|
|
|
|
|
|
|
|
|
10.7# |
|
| S-1 |
| 333-256635 |
| 5/28/2022 |
| 10.17 | |
|
|
|
|
|
|
|
|
|
|
|
10.8# |
|
| S-1 |
| 333-231381 |
| 5/10/2020 |
| 10.18 | |
|
|
|
|
|
|
|
|
|
|
|
10.9#+ |
| Employment Agreement dated May 14, 2018, by and between Aterian Group, Inc. and Joseph Risico. |
| S-1 |
| 333-231381 |
| 5/10/2020 |
| 10.10 |
|
|
|
|
|
|
|
|
|
|
|
10.10#+ |
|
| S-1 |
| 333-231381 |
| 5/10/2020 |
| 10.11 | |
|
|
|
|
|
|
|
|
|
|
|
10.11# |
| Employment Agreement dated April 1, 2015, by and between Aterian Group, Inc. and Yaniv Sarig. |
| S-1 |
| 333-231381 |
| 5/10/2020 |
| 10.14 |
|
|
|
|
|
|
|
|
|
|
|
10.12# |
|
| S-1 |
| 333-231381 |
| 5/10/2020 |
| 10.15 | |
|
|
|
|
|
|
|
|
|
|
|
10.13#+ |
| Employment Agreement dated November 27, 2018, by and between Aterian Group, Inc. and Roi Zahut. |
| S-1 |
| 333-231381 |
| 5/10/2020 |
| 10.16 |
|
|
|
|
|
|
|
|
|
|
|
10.14 |
|
| S-1 |
| 333-231381 |
| 5/10/2020 |
| 10.19 | |
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10.15 |
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| 8-K |
| 001-38937 |
| 12/1/2021 |
| 10.3 | |
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10.16+ |
| Non-Negotiable Promissory Note, dated December 1, 2021, from Aterian, Inc. to 9830 Macarthur LLC. |
| 8-K |
| 001-38937 |
| 12/1/2021 |
| 10.4 |
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10.17 |
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| 8-K |
| 001-38937 |
| 2/3/2022 |
| 10.3 | |
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10.18+ |
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| 8-K |
| 001-38937 |
| 2/3/2022 |
| 10.4 | |
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82
83
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| Incorporated by Reference | ||||||
Exhibit Number |
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| Description |
| Form |
| File Number |
| Filing Date |
| Exhibit |
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2.1† |
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| 8-K |
| 001-38937 |
| 12/1/2020 |
| 2.1 | |
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2.2† |
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| 8-K |
| 001-38937 |
| 2/3/2020 |
| 2.1 | |
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2.3† |
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| 8-K |
| 001-38937 |
| 5/11/2021 |
| 2.1 | |
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2.4† |
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| 8-K |
| 001-38937 |
| 5/11/2021 |
| 2.2 | |
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3.2 |
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| Certificate of Amendment to Amended and Restated Certificate of Incorporation of Aterian, Inc. |
| 8-K |
| 001-38937 |
| 4/30/2021 |
| 3.1 |
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3.3 |
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| 8-K |
| 001-38937 |
| 4/30/2021 |
| 3.2 | |
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3.4 |
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| Amended and Restated Certificate of Incorporation of Aterian, Inc. |
| 8-K |
| 001-38937 |
| 4/30/2021 |
| 3.3 |
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3.2 |
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| 8-K |
| 001-38937 |
| 6/14/2019 |
| 3.2 | |
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4.1 |
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| S-1/A |
| 333-231381 |
| 5/24/2019 |
| 4.1 | |
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4.2+ |
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| S-1 |
| 333-231381 |
| 5/10/2019 |
| 4.2 | |
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4.3 |
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| Warrant to Purchase Stock, issued to MidCap Financial Trust on September 4, 2018. |
| S-1 |
| 333-231381 |
| 5/10/2019 |
| 4.3 |
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4.4 |
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| Form of Warrant, issued to Katalyst Securities LLC and its assigns on September 4, 2018. |
| S-1 |
| 333-231381 |
| 5/10/2019 |
| 4.4 |
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4.5 |
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| Form of Warrant, issued to Horizon Technology Finance Corporation on December 31, 2019. |
| S-1 |
| 333-231381 |
| 5/10/2019 |
| 4.5 |
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4.6 |
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| S-1 |
| 333-231381 |
| 5/10/2019 |
| 4.6 | |
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| Incorporated by Reference | ||||||
Exhibit Number |
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| Description |
| Form |
| File Number |
| Filing Date |
| Exhibit |
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4.7 |
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| Warrant to Purchase Shares of Common Stock, issued to Third Creek Advisors, LLC on August 18, 2020. |
| 10-Q |
| 001-38937 |
| 11/9/2020 |
| 4.7 |
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4.8 |
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| 8-K |
| 001-38937 |
| 12/27/2021 |
| 4.1 | |
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4.9* |
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10.1# |
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| S-1/A |
| 333-231381 |
| 5/24/2019 |
| 10.1 | |
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10.2# |
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| S-1 |
| 333-231381 |
| 5/10/2019 |
| 10.2 | |
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10.3# |
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| S-1 |
| 333-231381 |
| 5/10/2019 |
| 10.3 | |
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10.4# |
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| S-8 |
| 333-232087 |
| 5/28/2921 |
| 10.3 | |
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10.5# |
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| S-1 |
| 333-231381 |
| 5/10/2019 |
| 10.5 | |
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10.6# |
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| S-8 |
| 333-232087 |
| 6/12/2019 |
| 10.4 | |
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10.7# |
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| S-1 |
| 333-256635 |
| 5/28/2021 |
| 10.17 | |
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10.8# |
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| S-1 |
| 333-231381 |
| 5/10/2019 |
| 10.18 | |
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10.9#+ |
|
| Employment Agreement dated May 14, 2018, by and between Aterian Group, Inc. and Joseph Risico. |
| S-1 |
| 333-231381 |
| 5/10/2019 |
| 10.10 |
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10.10#+ |
|
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| S-1 |
| 333-231381 |
| 5/10/2019 |
| 10.11 | |
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10.11# |
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| Employment Agreement dated April 1, 2015, by and between Aterian Group, Inc. and Yaniv Sarig. |
| S-1 |
| 333-231381 |
| 5/10/2019 |
| 10.14 |
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10.12# |
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| S-1 |
| 333-231381 |
| 5/10/2019 |
| 10.15 | |
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10.13#+ |
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| Employment Agreement dated November 27, 2018, by and between Aterian Group, Inc. and Roi Zahut. |
| S-1 |
| 333-231381 |
| 5/10/2019 |
| 10.16 |
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10.14 |
|
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| S-1 |
| 333-231381 |
| 5/10/2019 |
| 10.19 | |
|
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10.15 |
|
|
| 8-K |
| 001-38937 |
| 12/1/2020 |
| 10.3 | |
|
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10.16+ |
|
| Non-Negotiable Promissory Note, dated December 1, 2020, from Aterian, Inc. to 9830 Macarthur LLC. |
| 8-K |
| 001-38937 |
| 12/1/2020 |
| 10.4 |
|
|
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10.17 |
|
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| 8-K |
| 001-38937 |
| 2/3/2021 |
| 10.3 | |
|
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10.18+ |
|
|
| 8-K |
| 001-38937 |
| 2/3/2021 |
| 10.4 | |
|
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Incorporated by Reference | |||||||||||||||||||
Exhibit Number | Description |
| Form |
| File Number |
| Filing Date |
| Exhibit | ||||||||||
31.1* | |||||||||||||||||||
31.2* | |||||||||||||||||||
32.1** | |||||||||||||||||||
101.INS | Inline XBRL Instance Document | ||||||||||||||||||
101.SCH | Inline XBRL Taxonomy Extension Schema Document | ||||||||||||||||||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||||||||||||||||||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | ||||||||||||||||||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | ||||||||||||||||||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||||||||||||||||||
104 | Cover Page Interactive Data File (embedded within the Inline XBRL) |
* Filed herewith. ** Furnished herewith. # Indicates management contract or compensatory plan or arrangement. + Non-material schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company hereby undertakes to furnish supplemental copies of any of the omitted schedules and exhibits upon request by the Securities and Exchange Commission. † Non-material schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company hereby undertakes to furnish supplemental copies of any of the omitted schedules and exhibits upon request by the Securities and Exchange Commission.
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Item 16. Form 10-K Summary.
None.
84
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
ATERIAN, INC. | ||
By: | /s/ Yaniv Sarig | |
Yaniv Sarig | ||
President and Chief Executive Officer | ||
Date: | March 16, |
85
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints, jointly and severally, Yaniv Sarig, Arturo Rodriguez and Joseph A. Risico, and each of them acting individually, as his or her attorney-in-fact, each with full power of substitution and resubstitution, for him or her in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Signature | Title | Date | |||||
/s/ Yaniv Sarig | President, Chief Executive Officer and Director | March 16, 2023 | |||||
Yaniv Sarig | (Principal Executive Officer) |
| |||||
| |||||||
/s/ Arturo Rodriguez | Chief Financial Officer | ||||||
|
(Principal Accounting and Financial Officer) | March 16, | |||||
| |||||||
/s/ William Kurtz | Director | ||||||
|
| March 16, | |||||
| |||||||
/s/ Susan Lattmann | Director | March 16, 2023 | |||||
|
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| |||||
| |||||||
/s/ Sarah Liebel | Director | March 16, 2023 | |||||
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| |||||
| |||||||
/s/ Cynthia Williams | Director | March 16, 2023 | |||||
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| |||||||
/s/ Bari Harlam | Director | March 16, 2023 | |||||
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| |||||||
75
86