Air Conditioners
ATERIAN, INC. Management’s Discussion and Analysis of Financial Conditions and Results of Operations. (form 10-Q) | Rare Techy
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The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and with our audited financial statements and related notes thereto for the year endedDecember 31, 2021 included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 as filed with theSecurities and Exchange Commission (the "SEC") onMarch 16, 2022 . As discussed in the section titled "Special Note Regarding Forward-Looking Statements", the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified in the section titled "Special Note Regarding Forward Looking Statements" and those discussed in the section titled "Risk Factors" under Part II, Item 1A in this Quarterly Report on Form 10-Q. Unless the context otherwise requires, the terms "Aterian ," the "Company," "we," "us" and "our" in this Quarterly Report on Form 10-Q refer toAterian, Inc. and our consolidated subsidiaries, includingAterian Group, Inc.
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We are a technology-enabled consumer products platform that uses "data science"
(which includes 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.com ("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 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 brands include among others, hOmeLabs; Vremi; Squatty
Potty; Xtava; RIF6; Aussie Health ; Holonix; Truweo; Mueller; Pursteam; Pohl and
Schmitt; Spiralizer; Healing Solutions; and Photo Paper Direct.
Business Seasonality and Product Mix
Our individual product categories are typically affected by seasonal sales trends primarily resulting from the timing of the summer season for certain of our environmental appliance products and the fall and holiday season for our small kitchen appliances and accessories. With our current mix of environmental appliances, the sales of those products tend to be significantly higher in the summer season. Further, our small kitchen appliances and accessories tend to have higher sales during the fourth quarter, which includesThanksgiving and the December holiday season. As a result, our operational results, cash flows, cash and inventory positions may fluctuate materially in any quarterly period depending on, among other things, adverse weather conditions, shifts in the timing of certain holidays and changes in our product mix. Each of our products typically goes through the Launch phase and depending on its level of success is moved to one of the other phases as further described below:
i.
Launch phase: During this phase, we leverage our technology to target opportunities identified using AIMEE (Artificial Intelligence Marketplace e-Commerce Engine) and other sources. This phase also includes revenue from new product variations and relaunches. During this period of time, due to the combination of discounts and investment in marketing, our net margin for a product could be as low as approximately negative 35%. Net margin is calculated by taking net revenue less the cost of goods sold, less fulfillment, online advertising and selling expenses. These costs primarily reflect the estimated variable costs related to the sale of a product. ii. Sustain phase: Our goal is for every product we launch to enter the sustain phase and become profitable, with a target average of positive 15% net margin, within approximately three months of launch on average. Net margin primarily reflects a combination of manual and automated adjustments in price and marketing spend. iii. 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. Products can also be liquidated as part of inventory normalization especially when steep discounts are required. 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 35 -------------------------------------------------------------------------------- continue to invest in growth and technology. Due to the impact of the COVID-19 pandemic on the global supply chain, we have had to increase our inventory on hand to avoid disruption in sales. The unpredictability of container availability, space on vessels and shipping lead times, as well as associated manufacturing lead time, has caused us to secure more inventory upfront. Having more inventory on hand not only impacts our working capital but also requires us to increase our storage capacity, through our warehouse network, which of itself has a capital impact.
The following table shows the number of new product launches in our revenue that have been achieved or are expected to be achieved, more than approx.
Three Months Ended September 30, Nine Months Ended September 30,
2021 2022 2021 2022
Launches of new products - 1 40 1
Our growth in direct revenue can be impacted by the timing and the season in
which products are launched and any mergers or acquisitions. There was one new
product launch in the nine months ended September 30, 2022 .
Due to the impact of the COVID-19 pandemic on the global supply chain, we have suspended the launch of new products on a full scale, although we will launch products if the conditions are right.
The sharp increase in shipping costs has made our target competitive pricing difficult to achieve during the second half of 2021 and throughout 2022 and the current unpredictability of shipping container availability, among other factors, 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. As such, in 2022, we increased our inventory on hand levels for existing products to offset the unpredictability of shipping containers. The current macroeconomic conditions which includes high inflation, interest rate increases and general economic slow-down, has led us to reduce our short-term sales forecasts and causing our inventory onhand levels to be higher than desired (i.e. long inventory). As such, we have and continue to sell inventory at reduced margins to normalize inventory to appropriate levels. Although the current macroeconomic conditions have impacted our sales forecasts, we believe the global demand for goods is decreasing which has led to improvement in shipping container availability and costs. We believe shipping container costs and availability to improve further in 2023. Although we believe our supply chain will improve in 2023, we have concerns about the impact ofRussia's invasion ofUkraine on our business including its effects on the global economy, the performance and cost of supply chain and financial markets. We will continue to evaluate the impacts of this, in addition to the impacts of rising inflation, interest rates and the general economic slow-down on our business. As such there are no assurances that the supply chain will indeed improve in 2023 to our satisfaction.
Financial Management Overview
Net Revenue-We derive our revenue from the sale of consumer products, primarily in theU.S. We sell products directly to consumers through online retail channels and through wholesale channels. Direct-to-consumer sales (i.e., direct net revenue), which is currently the majority of our revenue, is done through various online retail channels. We sell on Amazon.com,Walmart.com , and our own websites, with substantially all of our sales made through Amazon.com. For all of our sales and distribution channels, revenue is recognized when control of the product is transferred to the customer (i.e., when our performance obligation is satisfied), which typically occurs at the shipment date. Cost of Goods Sold-Cost of goods sold consists of the book value of inventory sold to customers during the reporting period and the amortization of inventory step-up from acquisitions. Book value of inventory includes the amounts we pay manufacturers for product, tariffs and duties associated with transporting product across national borders, and freight costs associated with transporting the product from our manufacturers to our warehouses, as applicable. When circumstances dictate that we use net realizable value as the basis for recording inventory, we base our estimates on expected future selling prices, less expected disposal costs.The Office of the U.S. Trade Representative has imposed additional tariffs on products imported fromChina . We contract manufacturers, predominantly inChina , through purchase orders, for our consumer products. As such, this exposes us to risks associated with doing business globally, including changes in tariffs, which impact a significant number of our products. We can provide no assurances that future tariff increases will not be enacted. These increases may affect the way we order products, as well as the amount of product we order. If tariff increases are enacted in the future, our pricing actions are expected to be intended to offset the full gross margin impact from such tariffs. Further, we have been affected by the COVID-19 pandemic and related global supply chain disruption. Together, these have led to substantial increases in the costs of our supply chain, specifically, increases in the costs of shipping containers, which we rely on to import our goods. We have increased pricing, when possible, to offset the full gross margin impact which at times has led to reduced sales velocity on certain products. There are no assurances that these pricing actions will not reduce customer orders in the future. 36 -------------------------------------------------------------------------------- We increased our inventory on hand levels for existing products to offset the unpredictability of shipping containers. The current macroeconomic conditions which includes record inflation, interest rate increases and general economic slow-down, has led us to reduce our short-term sales forecasts and causing our inventory onhand levels to be higher than desired. As such, we have and continue to sell inventory at reduced margins to normalize inventory to appropriate levels. Although the current macroeconomic conditions have impacted our sales forecasts, we believe the global demand for goods is decreasing which has led to improvement in shipping container availability and costs. We believe shipping container costs and availability to improve further in 2023. Although we believe our supply chain will improve in 2023, we have concerns about the impact ofRussia's invasion ofUkraine on our business including its effects on the global economy, the performance and cost of supply chain and financial markets. We will continue to evaluate the impacts of this, the COVID-19 pandemic, rising inflation, interest rates and general economic slow-down on our business. As such, there are no assurances that the supply chain will indeed improve in 2023 to our satisfaction. Expenses
Research and
Sales and Distribution Expenses- Sales and distribution expenses consist of
online advertising costs, marketing and promotional costs, sales and e-commerce
platform commissions, fulfillment, including shipping and handling, and
warehouse costs (i.e., sales and distribution variable expenses). Sales and
distribution expenses also include employee compensation and benefits and other
related fixed costs. Shipping and handling expenses are included in our
consolidated statements of operations in sales and distribution expenses. This
includes inbound, pick and pack costs and outbound transportation costs to ship
goods to customers performed by e-commerce platforms or incurred directly by us,
through our own direct fulfillment platform, which leverages AIMEE and our
third-party logistics partners. Our sales and distribution expenses,
specifically our logistics expenses and online advertising, will vary quarter to
quarter as they are dependent on our sales volume, our product mix (i.e.,
products in the launch phase or sustain phase) and whether we fulfill products
ourselves, i.e., fulfillment by merchant ("FBM"), or through e-commerce platform
service providers, i.e., fulfillment by Amazon or fulfilled by Walmart. After a
product launches and reaches the sustain phase, we seek to maintain the product
within its targeted level of profitability. This profitability can be impacted
as each product has a unique fulfillment cost due to its size and weight. As
such, products with less expensive fulfillment costs as a percentage of net
revenue may allow for a lower gross margin, while still maintaining their
targeted profitability level. Conversely, products with higher fulfillment costs
will need to achieve a higher gross margin to maintain their targeted level of
profitability. We are FBM One Day and Two Day Prime certified, allowing us to
deliver our sales through Amazon, to approximately 76% of the U.S. , within one
day and to over 99% of the U.S. within two days, based on our sales history. We
continually review the locations and capacity of our third-party warehouses to
ensure we have the appropriate geographic reach, which helps to reduce the
average last mile shipping zones to the end customer and as such our speed of
delivery improves while our shipping costs to customers decrease, prior to the
impacts on shipping providers' rates.
General and Administrative Expenses-General and administrative expenses include
compensation and employee benefits for executive management, finance
administration, legal and human resources, facility costs, insurance, travel,
professional service fees, reserves related to litigation settlements 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") during the year ended December 31, 2021 and
the three and nine months ended for September 30, 2022 , and term loan interest
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") during
the year ended December 31, 2021 .
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Results of Operations
Comparison of the last three Months
The following table summarizes our results of operations for the three months endedSeptember 30, 2021 and 2022, together with the changes in those items in dollars and percentages: Three Months Ended September 30, Change 2021 2022 Amount % (in thousands, except percentages) NET REVENUE $ 68,121 $ 66,326$ (1,795 ) (2.6 )% COST OF GOODS SOLD 33,946 36,135 2,189 6.4 GROSS PROFIT 34,175 30,191$ (3,984 ) (11.7 ) OPERATING EXPENSES: Sales and distribution expenses (1) 32,337 33,792 1,455 4.5 Research and development expenses (1) 2,767 1,706 (1,061 ) (38.3 ) General and administrative expenses (1) 10,843 10,369 (474 ) (4.4 ) Impairment loss on goodwill - 90,921 90,921 100.0 Impairment loss on intangibles - 3,118 3,118 100.0 Change in fair value of contingent earn-out liabilities (4,245 ) (774 ) 3,471 81.8 TOTAL OPERATING EXPENSES: 41,702 139,132 97,430 233.6 OPERATING LOSS (7,527 ) (108,941 ) (101,414 ) (1,347.3 ) INTEREST EXPENSE-net 2,786 904 (1,882 ) (67.6 ) LOSS ON INITIAL ISSUANCE OF EQUITY - 12,834 12,834 100.0 CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITY 1,360 - (1,360 ) (100.0 ) LOSS ON EXTINGUISHMENT OF DEBT 106,991 - (106,991 ) (100.0 ) CHANGE IN FAIR VALUE OF WARRANT LIABILITY (8,134 ) (5,528 ) 2,606 32.0 OTHER EXPENSE 5 (174 ) (179 ) (3,580.0 ) LOSS BEFORE INCOME TAXES (110,535 ) (116,977 ) (6,442 ) (5.8 ) PROVISION FOR INCOME TAXES 21 (75 ) (96 ) (457.1 ) NET LOSS$ (110,556 ) $ (116,902 ) $ (6,346 ) (5.7 )% (1)
Cash includes the following stock-based expenses:
Three Months Ended September 30,
2021 2022
(in thousands)
Sales and distribution expenses $2,444
999
Research and development expenses 1,776
511
General and administrative expenses 5,350
1,433
Total stock price $9,570
2,943
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The following table sets forth the components of our results of operations as a
percentage of net revenue:
Three Months Ended September 30,
2021 2022
NET REVENUE 100.0 % 100.0 %
COST OF GOODS SOLD 49.8 % 54.5 %
GROSS PROFIT 50.2 % 45.5 %
OPERATING EXPENSES:
Sales and distribution expenses 47.5 % 50.9 %
Research and development expenses 4.1 % 2.6 %
General and administrative expenses 15.9 % 15.6 %
Impairment loss on goodwill 0.0 % 137.1 %
Impairment loss on intangibles 0.0 % 4.7 %
Change in fair value of contingent earn-out
liabilities (6.2 )% (1.2 )%
TOTAL OPERATING EXPENSES: 61.3 % 209.7 %
OPERATING LOSS (11.1 )% (164.2 )%
INTEREST EXPENSE-net 4.1 % 1.4 %
LOSS ON INITIAL ISSUANCE OF EQUITY 0.0 % 19.3 %
CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITY 2.0 % 0.0 %
LOSS ON EXTINGUISHMENT OF DEBT 157.1 % 0.0 %
CHANGE IN FAIR VALUE OF WARRANT LIABILITY -11.9 % (8.3 )%
OTHER EXPENSE 0.0 % (0.3 )%
LOSS BEFORE INCOME TAXES -162.3 % (176.4 )%
PROVISION FOR INCOME TAXES 0.0 % (0.1 )%
NET LOSS (162.3 )% (176.3 )%
Net Revenue
Funding by product category:
The following table sets forth our net revenue disaggregated by product
categories:
Three Months Ended September 30, Change
2021 2022 Amount %
(in thousands, except percentages)
Direct $ 66,075 $ 63,796 $ (2,279 ) (3.4 )%
Wholesale/Other 2,046 2,530 484 23.7 %
Net revenue $ 68,121 $ 66,326 $ (1,795 ) (2.6 )%
Net revenue decreased $1.8 million , or 2.6%, during the three months ended
September 30, 2022 to $66.3 million , compared to $68.1 million for the three
months ended September 30, 2021 . The decrease in net revenue was primarily
attributable to a decrease in direct net revenue of $2.3 million , or a 3.4%
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 three months ended September 30, 2022 , organic revenue was
$63.8 million and no revenue from our M&A businesses was recorded. For the three
months ended September 30, 2021 , organic revenue was $35.4 million and revenue
from our M&A was $30.7 million . Our organic revenue increased by $28.4 million ,
or 80.2%, during the three months September 30, 2022 ,
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compared to the last three months
Three Months Ended September 30,
2021 2022
(in thousands)
Heating, cooling and air quality $ 29,988 $ 27,179
Kitchen appliances 8,084 10,504
Health and beauty 1,273 3,661
Personal protective equipment 1,298 516
Cookware, kitchen tools and gadgets 5,221 5,128
Home office 4,190 3,045
Housewares 10,418 8,787
Essential oils and related accessories 5,722 6,262
Other 1,927 1,244
Total net revenue $ 68,121 $ 66,326
Heating, cooling and air quality accounted for $27.2 million in net revenue for
the three months ended September 30, 2022 versus $30.0 million for the three
months ended September 30, 2021 , a decrease of $2.8 million primarily driven by
reduced sales volume, which we attribute to reduced consumer demand from
inflationary pressure on consumer spending, and increased sale prices due to
global supply chain disruptions.
The kitchen appliances were called
Housewares accounted for$8.8 million in net revenue for the three months endedSeptember 30, 2022 compared to 10.4 million in net revenue for the corresponding period in 2021, a decrease of$1.6 million primarily driven by reduced sales volume, which we attribute to reduced consumer demand from inflationary pressure on consumer spending, increased sale prices due to global supply chain disruptions and inventory shorts due to manufacturing delays. Essential oils and related accessories accounted for$6.3 million in net revenue for the three months endedSeptember 30, 2022 compared to$5.7 million in net revenue for the corresponding period in 2021, an increase of$0.5 million primarily due to growth in our existing products and new products obtained through M&A businesses.
Cost of Goods Sold and Net Income
Three Months Ended September 30, Change
2021 2022 Amount %
(in thousands)
Cost of goods sold $ 33,946 $ 36,135 $ 2,189 6.4 %
Gross profit $ 34,175 $ 30,191 $ (3,984 ) (11.7 )%
Cost of goods sold increased by $2.1 million , from $34.0 million for the three
months ended September 30, 2021 to $36.2 million for the three months ended
September 30, 2022 primarily by liquidation of high priced excess inventory. The
increase in cost of goods sold was attributable to an increase of $12.7 million
in cost of goods sold from our M&A businesses partially offset by a decrease of
$12.9 million in cost of goods sold from our organic business.
Gross profit decreased from 50.2% for the three-months ended September 30, 2021
to 45.5% for the three months ended September 30, 2022 . The decrease in gross
profit was primarily due to the increase in shipping container costs and
liquidation of high priced excess inventory during the three months ended
September 30, 2022 . We expect to see impacts in our gross margin for the rest of
2022, due to the cost of shipping containers and due to our expectation of
liquidating high priced excess inventory for the remainder of 2022.
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Sales and Distribution Expenses
Three Months Ended September 30, Change
2021 2022 Amount %
(in thousands)
Sales and distribution costs
Sales and distribution expenses, which included e-commerce platform commissions, online advertising and logistics expenses (i.e., variable sales and distribution expense), increased to$33.8 million for the three months endedSeptember 30, 2022 from$32.3 million for the three months endedSeptember 30, 2021 . This increase is primarily attributable to our e-commerce platform commissions, online advertising, selling and logistics expenses increasing due to product mix and increased costs to$29.4 million in the three months endedSeptember 30, 2022 as compared to$26.8 million in the prior period. This has been offset by a decrease in stock-based compensation expense of$1.4 million . Our sales and distribution fixed costs (i.e. salary and office expenses) also increased to$3.3 million for the three months endedSeptember 30, 2022 from$3.1 million for the three months endedSeptember 30, 2021 , primarily due to an increase in headcount expenses for branding, marketing and customer service. As a percentage of net revenue, sales and distribution expenses increased to 50.9% for the three months endedSeptember 30, 2022 from 47.5% for the three months endedSeptember 30, 2021 . E-commerce platform commissions, online advertising, selling and logistics expenses included within sales and distribution expenses, as a percentage of net revenue, were 44.4% for the three months endedSeptember 30, 2022 as compared to 39.4% for the three months endedSeptember 30, 2021 . This increase in sales and distribution expenses is predominantly due to product mix, an increase in e-commerce platform service provider fulfillment fees, and an increase in last mile shipping costs, specifically for oversized goods, due to the demand on those third-party providers' delivery networks.
Research and Development Expenses
Three Months Ended September 30, Change
2021 2022 Amount %
(in thousands)
Research and development expenses $2,767 $1,706
The decrease in research and development expenses was primarily due to a decrease in stock-based compensation expense,
General and Administrative Expenses
Three Months Ended September 30, Change
2021 2022 Amount %
(in thousands)
General and administrative expenses
$ (474 ) (4.4 )% The decrease in general and administrative expenses was primarily due to a decrease in stock compensation expense of$3.9 million partially offset by an increase in litigation settlements of$1.8 million , increase in legal costs of$0.9 million and inventory donations of$0.5 million . Impairment loss on goodwill Three Months Ended September 30, Change 2021 2022 Amount % (in thousands) Impairment loss on goodwill $ - $ 90,921$ 90,921 100.0 % We evaluated current economic conditions during the third quarter of 2022, including the impact of theFederal 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 ofSeptember 30, 2022 . Accordingly, we concluded a triggering event had occurred and performed interim goodwill impairment analyses and determined that our goodwill was fully impaired as ofSeptember 30, 2022 . As a result, we recorded a goodwill impairment charge of approximately$90.9 million in the three months endedSeptember 30, 2022 . 41 --------------------------------------------------------------------------------
Impairment loss on intangible assets
Three Months Ended September 30, Change
2021 2022 Amount %
(in thousands)
Impairment loss on intangibles $ - $ 3,118 $ 3,118 100.0 %
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, we compared the fair value to the carrying amount of the
asset group and recorded an intangible impairment charge of $3.1 million in the
three months ended September 30, 2022 .
Change the fair value of external financial liabilities
Three Months Ended September 30, Change
2021 2022 Amount %
(in thousands)
Change the fair value of external financial liabilities
(81.8 )%
The change in fair value of contingent earn-out liabilities was related to our
M&A, which includes a re-assessment of the estimated fair value of contingent
consideration as part of the purchase price, primarily driven by the fluctuation
in our share price since the date of each acquisition and contribution margin
projections.
Interest expense, net
Three Months Ended September 30, Change
2021 2022 Amount %
(in thousands)
Interest expense, net $ 2,786 $ 904 $ (1,882 ) (67.6 )%
The decrease in interest expense, net, was primarily related to the payment of
the High Trail loan in the prior period which had higher borrowings and interest
rates compared to this current period which only includes our MidCap credit
facility.
Change the fair market value of the warranty liability
Three Months Ended September 30, Change
2021 2022 Amount %
(in thousands)
Change in fair market value of
warrant liability $ (8,134 ) $ (5,528 ) $ 2,606 (32.0 )%
The change in fair market value of warrant liability during the three months
ended September 30, 2022 was related to the change in fair market value of the
warrant liabilities from the prefunded warrants and common stock warrants from
our March 2022 equity raise as compared to the expense activity during the three
months ended September 30, 2021 , which was attributable to the issuance of the
warrants in connection with the High Trail December 2020 Note and the February
2021 Note and related change in the fair value of warrant liability and loss on
initial issuance of warrants for the prior period, which was primarily driven by
the extinguishment of the warrants.
Losses on initial issuance of equity
Three Months Ended September 30, Change
2021 2022 Amount %
(in thousands)
Losses on initial issuance of equity $ –
100.0 % We recorded a charge related to theSeptember 29, 2022 securities purchase agreement for common stock and associated warrants for the three months endedSeptember 30, 2022 as we deemed the agreement non cancellable. The$12.8 million expense is derived from the anticipated fair-value of the issuances of equity attributable to the expected issuance of common shares and common stock 42 --------------------------------------------------------------------------------
is a guarantee of the expected results we will receive. We closed and issued the common stock and related warrants
Comparison of the last nine months
The following table summarizes our results of operations for the nine months endedSeptember 30, 2021 and 2022, together with the changes in those items in dollars and percentages: Nine Months Ended September 30, Change 2021 2022 Amount % (in thousands) NET REVENUE$ 184,446 $ 166,268 $ (18,178 ) (9.9 )% COST OF GOODS SOLD 91,464 81,118 (10,346 ) (11.3 ) GROSS PROFIT 92,982 85,150 (7,832 ) (8.4 ) OPERATING EXPENSES: Sales and distribution expenses (1) 96,716 88,632 (8,084 ) (8.4 ) Research and development expenses (1) 7,220 4,582 (2,638 ) (36.5 ) General and administrative expenses (1) 31,807 29,481 (2,326 ) (7.3 ) Impairment loss on goodwill - 119,941 119,941 100.0 Impairment loss on intangibles - 3,118 3,118 100.0 Change in fair value of contingent earn-out liabilities (11,949 ) (5,240 ) 6,709 56.1 TOTAL OPERATING EXPENSES: 123,794 240,514 116,720 94.3 OPERATING LOSS (30,812 ) (155,364 ) (124,552 ) (404.2 ) INTEREST EXPENSE-net 11,877 2,043 (9,834 ) (82.8 ) 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 ) LOSS ON EXTINGUISHMENT OF DEBT 136,763 - (136,763 ) (100.0 ) CHANGE IN FAIR VALUE OF WARRANT LIABILITY 26,455 2,365 (24,090 ) (91.1 ) LOSS ON INITIAL ISSUANCE OF WARRANT 20,147 - (20,147 ) (100.0 ) OTHER EXPENSE (INCOME) 43 (199 ) (242 ) (562.8 ) LOSS BEFORE INCOME TAXES (229,351 ) (176,230 ) 53,121 23.2 PROVISION FOR INCOME TAXES 64 (243 ) (307 ) (479.7 ) NET LOSS$ (229,415 ) $ (175,987 ) $ 53,428 23.3 % (1)
Cash includes the following stock-based expenses:
Nine Months Ended September 30,
2021 2022
(in thousands)
Selling and distribution expenses $ 4,968 $ 4,228 Research and development expenses
3,880
1,418
General and administrative expenses 12,482
6,208
Total cost of stock
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The following table sets forth the components of our results of operations as a
percentage of net revenue:
Nine Months Ended September 30,
2021 2022
NET REVENUE 100.0 % 100.0 %
COST OF GOODS SOLD 49.6 % 48.8 %
GROSS PROFIT 50.4 % 51.2 %
OPERATING EXPENSES:
Sales and distribution expenses 52.4 % 53.3 %
Research and development expenses 3.9 % 2.8 %
General and administrative expenses 17.2 % 17.7 %
Impairment loss on goodwill 0.0 % 72.1 %
Impairment loss on goodwill 0.0 % 1.9 %
Change in fair value of contingent earn-out
liabilities (6.5 )% -3.2 %
TOTAL OPERATING EXPENSES: 67.0 % 144.6 %
OPERATING LOSS (16.6 )% (93.4 )%
INTEREST EXPENSE-net 6.4 % 1.2 %
GAIN ON EXTINGUISHMENT OF SELLER NOTE 0.0 % (1.2 )%
LOSS ON INITIAL ISSUANCE OF EQUITY 0.0 % 11.2 %
CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITY 1.8 % 0.0 %
LOSS ON EXTINGUISHMENT OF DEBT 74.1 % 0.0 %
CHANGE IN FAIR VALUE OF WARRANT LIABILITY 14.3 % 1.4 %
LOSS ON INITIAL ISSUANCE OF WARRANT 10.9 % 0.0 %
OTHER EXPENSE (INCOME) 0.0 % (0.1 )%
LOSS BEFORE INCOME TAXES (124.2 )% (106.0 )%
PROVISION FOR INCOME TAXES 0.0 % (0.1 )%
NET LOSS (124.3 )% (105.9 )%
Net Revenue
Funding by product category:
The following table sets forth our net revenue disaggregated by product
categories:
Nine Months Ended September 30, Change
2021 2022 Amount %
(in thousands, except percentages)
Direct $ 180,308 $ 161,853 $ (18,455 ) (10.2 )%
Wholesale/Other 4,138 4,415 277 6.7 %
Net revenue $ 184,446 $ 166,268 $ (18,178 ) (9.9 )%
Net revenue decreased $18.2 million , or 9.9%, during the nine months ended
September 30, 2022 to $166.3 million , compared to $184.5 million for the nine
months ended September 30, 2021 . The decrease in net revenue was primarily
attributable to a decrease in direct net revenue of $18.5 million , or a 10.2%
which was due to softness in consumer demand partially offset by liquidation of
higher priced excess inventory during the three months ended September 30, 2022 .
Direct net revenue consists of both organic net revenue and net revenue from our
M&A. For the nine months ended September 30, 2022 , organic revenue was $149.6
million and revenue from our M&A businesses was $11.5 million . For the nine
months ended September 30, 2021 , organic revenue was $87.8 million and revenue
from our M&A businesses was $92.7 million . Our organic
44
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revenue increased by $61.9 million , or 70.5%, during the nine months September
30, 2022 , as compared to the nine months ended September 30, 2021 , as M&A net
revenue has moved into organic net revenue after one year from purchase.
Nine Months Ended September
30,
2021 2022
(in thousands)
Heating, cooling and air quality $ 62,968 $ 56,835
Kitchen appliances 29,208 27,438
Health and beauty 6,736 12,452
Personal protective equipment 2,957 1,565
Cookware, kitchen tools and gadgets 16,867 14,229
Home office 7,710 10,077
Housewares 26,709 23,478
Essential oils and related accessories 23,017 17,102
Other 8,274 3,092
Total net revenue $ 184,446 $ 166,268
Heating, cooling and air quality accounted for $56.8 million in net revenue for
the nine months ended September 30, 2022 versus $63.0 million for the nine
months ended September 30, 2021 , a decrease of $6.2 million primarily driven by
reduced sales volume, which we attribute to reduced consumer demand from
inflationary pressure on consumer spending, increased sale prices due to global
supply chain disruptions which has reduced our sales velocity and inventory
shorts due to delayed receipt of goods.
Kitchen appliances accounted for $27.4 million in net revenue for the nine
months ended September 30, 2022 compared to $29.2 million in net revenue for the
corresponding period in 2021, a decrease of $1.8 million primarily driven by
reduced sales volume, which we attribute to reduced consumer demand from
inflationary pressure on consumer spending, increased sale prices due to global
supply chain disruptions which has reduced our sales velocity and inventory
shorts due to delayed receipt of goods.
Cookware, kitchen tools and gadgets accounted for approximately $14.2 million in
net revenue for the nine months ended September 30, 2022 compared to $16.9
million in net revenue for the corresponding period in 2021, a decrease of $2.7
million primarily driven by reduced sales volume, which we attribute to reduced
consumer demand from inflationary pressure on consumer spending, increased sale
prices due to global supply chain disruptions which has reduced our sales
velocity and inventory shorts due to delayed receipt of goods.
Home office products accounted for $10.1 million in net revenue for the nine
months ended September 30, 2022 compared to $7.7 million in net revenue for the
corresponding period in 2021, an increase of $2.4 million primarily due to
growth in our existing products and new products obtained through M&A
businesses.
Essential oils and related accessories accounted for $17.1 million in net
revenue for the nine months ended September 30, 2022 compared to 23.0 million in
net revenue for the corresponding period in 2021, a decrease of $5.9 million
primarily driven by reduced sales volume, which we attribute to reduced consumer
demand from inflationary pressure on consumer spending, increased sale prices
due to global supply chain disruptions which has reduced our sales velocity, and
increased sale prices due to global supply chain disruptions and inventory
shorts due to manufacturing delays.
Cost of Goods Sold and Net Income
Nine Months Ended September 30, Change
2021 2022 Amount %
(in thousands)
Cost of goods sold $ 91,464 $ 81,118 $ (10,346 ) (11.3 )%
Gross profit $ 92,982 $ 85,150 $ (7,832 ) (8.4 )%
Cost of goods sold decreased by $10.3 million , from $91.5 million for the nine
months ended September 30, 2021 to $81.1 million for the nine months ended
September 30, 2022 primarily from reduced sales volumes. The decrease in cost of
goods sold was primarily attributable to a decrease of $34.8 million in cost of
goods sold from our M&A businesses offset by an increase of $21.8 million in
cost of goods sold from our organic businesses.
Gross profit improved from 50.4% for the nine months ended September 30, 2021 to
51.2% for the nine months ended September 30, 2022 . The improvement in gross
margin was due to a change of product mix as our net revenue increased from our
M&A businesses, which have a higher gross margin than our organic business'
gross margin, offset by the impact of increased costs of our supply chain and
liquidation of high priced excess inventory. The majority of our M&A businesses'
net revenue tends to be from smaller products
45
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that have higher gross margins versus our organic business' net revenue, which
tends to be oversized goods that have lower gross margins. We expect to see
impacts in our gross margin for the rest of 2022, due to the cost of shipping
containers and due to our expectation of liquidation of high priced excess
inventory for the remainder of 2022.
Sales and Distribution Expenses
Nine Months Ended September 30, Change
2021 2022 Amount %
(in thousands)
Sales and distribution costs
$ (8,084 ) (8.4 )% Sales and distribution expenses, which included e-commerce platform commissions, online advertising and logistics expenses (i.e., variable sales and distribution expense), decreased to$88.6 million for the nine months endedSeptember 30, 2022 from$96.7 million for the nine months endedSeptember 30, 2021 . This decrease of$8.1 million is primarily attributable to the decrease in the volume of products sold in the nine months endedSeptember 30, 2022 , as our e-commerce platform commissions, online advertising, selling and logistics expenses decreased to$74.9 million in the nine months endedSeptember 30, 2022 as compared to$77.9 million in the prior period. Our sales and distribution fixed costs (i.e., salary and office expenses) also decreased to$9.5 million for the nine months endedSeptember 30, 2022 from$13.9 million for the nine months endedSeptember 30, 2021 as the prior period contains a$4.1 million bad debt reserve from a dispute with a certain PPE supplier. Sales and distribution expenses for the nine months endedSeptember 30, 2022 included a decrease in stock-based compensation expense of$0.7 million . As a percentage of net revenue, sales and distribution expenses increased to 53.3% for the nine months endedSeptember 30, 2022 from 52.2% for the nine months endedSeptember 30, 2021 . E-commerce platform commissions, online advertising, selling and logistics expenses included within sales and distribution expenses, as a percentage of net revenue, were 45.1% for the nine months endedSeptember 30, 2022 as compared to 42.2% for the nine months endedSeptember 30, 2021 . This increase in sales and distribution expenses is predominantly due to product mix, an increase in e-commerce platform service provider fulfillment fees, and an increase in last mile shipping costs, specifically for oversized goods, due to the demand on those third-party providers' delivery networks. We expect to see these cost increases continue in the near-term.
Research and Development Expenses
Nine Months Ended September 30, Change
2021 2022 Amount %
(in thousands)
Research and development expenses $7,220 $4,582
The decrease in research and development expenses was primarily due to a decrease in stock-based compensation expense,
General and Administrative Expenses
Nine Months Ended September 30, Change
2021 2022 Amount %
(in thousands)
General and administrative expenses
$ (2,326 ) (7.3 )% The decrease in general and administrative expenses was primarily due to a decrease in stock compensation expense of$6.3 million partially offset by an increase of$2.6 million related to the legal settlement (see Note 9 of our condensed consolidated financial statements in this Quarterly Report on Form 10-Q for additional details) and$0.8 million in inventory donations. Impairment loss on goodwill Nine Months Ended September 30, Change 2021 2022 Amount % (in thousands) Impairment loss on goodwill - 119,941 119,941 100.0 46
-------------------------------------------------------------------------------- We evaluated current economic conditions during the third quarter of 2022, including the impact of theFederal 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 ofSeptember 30, 2022 . Accordingly, we concluded a triggering event had occurred and performed interim goodwill impairment analyses and determined that our goodwill was fully impaired as ofSeptember 30, 2022 . As a result, we recorded a goodwill impairment charge of approximately$90.9 million in the three months endedSeptember 30, 2022 . We also had a triggering event during the three months endedMarch 31, 2022 and recorded an impairment charge of$29.0 million . For the nine months endedSeptember 30, 2022 , total goodwill impairment was approximately$119.9 million .
Impairment loss on intangible assets
Three Months Ended September 30, Change
2021 2022 Amount %
(in thousands)
Impairment loss on intangibles $ - $ 3,118 $ 3,118 100.0 %
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 nine 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, we compared the fair value to the carrying amount of the
asset group and recorded an intangible impairment charge of $3.1 million in the
nine months ended September 30, 2022 .
Change the fair value of external financial liabilities
Nine Months Ended September 30, Change
2021 2022 Amount %
(in thousands)
Change in fair value of
contingent earn-out liabilities $ (11,949 ) $ (5,240 ) $ 6,709 (56.1 )%
The change in fair value of contingent earn-out liabilities was related to our
M&A, which includes a re-assessment of the estimated fair value of contingent
consideration as part of the purchase price, primarily driven by the fluctuation
in our share price since the date of each acquisition and contribution margin
projections.
Interest expense, net
Nine Months Ended September 30, Change
2021 2022 Amount %
(in thousands)
Interest expense, net $ 11,877 $ 2,043 $ (9,834 ) (82.8 )%
The decrease in interest expense was primarily related to the payment in the
High Trail loan in the prior period which had higher borrowings and interest
rates compared to this current period which only includes our MidCap credit
facility.
Credits on cancellation of customer note
Nine Months Ended September 30, Change
2021 2022 Amount %
(in thousands)
Proceeds for cancellation of customer note $ –
The gain on extinguishment of seller note in the nine months endedSeptember 30, 2022 was attributable to the settlement of the Truweo seller note, which resulted in a$2.0 million in gain on extinguishment of seller note upon the extinguishment of the debt.
Losses on initial issuance of equity
47 --------------------------------------------------------------------------------
Nine Months Ended September 30, Change
2021 2022 Amount %
(in thousands)
Losses on initial issuance of equity $ –
100.0 % The loss on initial issuance of equity is attributable to the issuance of common shares and initial valuation of the prefunded warrants and common stock warrants from ourMarch 2022 equity raise of$5.8 million inMarch 2022 . Further, inSeptember 2022 , we recorded a charge related to theSeptember 29, 2022 securities purchase agreement for common stock and associated warrants for the three months endedSeptember 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 onOctober 4, 2022 .
Change the fair market value of the warranty liability
Nine Months Ended September 30, Change
2021 2022 Amount %
(in thousands)
Change in fair market value of
warrant liability $ 26,455 $ 2,365 $ (24,090 ) (91.1 )%
The change in fair market value of warrant liability during the nine months
ended September 30, 2022 was related to the change in fair market value of the
warrant liabilities from the prefunded warrants and common stock warrants from
our March 2022 equity raise as compared to the expense activity in nine months
ended September 30, 2021 was attributable to the issuance of the warrants in
connection with the December 2020 Note and the February 2021 Note and related
change in the fair value of warrant liability and loss on initial issuance of
warrants for the nine months ended September 30, 2021 , which was primarily
driven by the extinguishment of the warrants.
Blooms related to free shipping
Nine Months Ended September 30, Change
2021 2022 Amount %
(in thousands)
Derivative related to offering of
common stock $ - $ 14,797 $ 14,797 100.0 %
It’s up there
Financial Resources and Finance
Cash Flows for the Last Nine Months
The following table provides information about our cash flow for the nine months ended
Nine Months Ended September 30,
2021 2022
(in thousands)
Cash used in operating activities $ (40,449 ) $ (19,541 )
Cash used in investing activities (44,887 ) (29 )
Cash provided by financing activities 95,272
11,231
Effect of exchange rate on cash (434 ) (936 )
Net change in cash and cash equivalents for the period $9,502 (9,275)
Net cash used in operating activities was$40.5 million for the nine months endedSeptember 30, 2021 , resulting from our net cash losses from operations of$15.9 million and cash usage from working capital of$24.5 million from changes in accounts receivable, purchases of inventory and insurance and payments of accounts payable. 48 --------------------------------------------------------------------------------
Funds used in operating activities
For the nine months endedSeptember 30, 2021 , net cash used in investing activities of$44.9 million was primarily for the acquisition of the assets fromHealing Solutions, LLC for$15.3 million , the assets fromSquatty Potty, LLC for$19.0 million and the acquisition ofPhoto Paper Direct Ltd. of$10.6 million .
For nine months it ends
Income That Financial Services Provide
For the nine months endedSeptember 30, 2021 , cash provided by financing activities of$95.2 million was primarily from proceeds from borrowings from the High TrailApril 2021 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 , offset by repayments of the High TrailDecember 2020 Note andFebruary 2021 Note of$59.5 million , repayments of the High TrailApril 2021 Note of$10.1 million and$9.2 million of repayments of notes issued to certain sellers in connection with our M&A activity. For the nine months endedSeptember 30, 2022 , cash provided by financing activities of$11.9 million was primarily from proceeds from an equity offering of$27.0 million and borrowings from the Credit Facility of$107.7 million offset by$2.9 million of repayments of notes issued to certain sellers in connection with our M&A activity, repayments of the Credit Facility of$116.9 million and payment of the Squatty Potty assets of$4.0 million . Sources of Liquidity and Going Concern-As ofSeptember 30, 2022 , we had total cash and cash equivalents of$26.0 million and an accumulated deficit of$605.0 million . In addition, our net loss and net cash used in operating activities amounted to$176.0 million and$19.5 million , respectively, for the nine months endedSeptember 30, 2022 . OnSeptember 29, 2022 , the Company entered into a securities purchase agreement for 10,643,034 shares of common stock and accompanying warrants to purchase 10,643,034 shares of common stock for the gross proceeds of$20.2 million which were received upon closing onOctober 4, 2022 . See Note 6. 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 M&A ("M&A strategy"). In addition, our recent financial performance has been adversely impacted by the COVID-19 global pandemic and related global shipping disruption, in particular with respect to substantial increases in supply chain costs for shipping containers (See COVID-19 Pandemic and the Supply Chain below for additional details). As a result, we have incurred significant losses and will remain dependent on outside capital for the foreseeable future until such time that we can realize our strategy of growth by generating profits through our organic growth and M&A strategy, and reduce our reliance on outside capital. Given the inherent uncertainties associated with executing our growth strategy, as well as the uncertainty associated with the ongoing COVID-19 global pandemic, recent record increases in inflation and related global supply chain disruption, we can provide no assurances that we will be able to obtain sufficient outside capital or generate sufficient cash from operations to fund our obligations as they become due over the next twelve months from the date these condensed consolidated financial statements were issued. Since our inception, we have been able to successfully raise a substantial amount of outside capital to fund our growth strategy. However, as ofSeptember 30, 2022 , we have had no firm commitments of additional outside capital from current or prospective investors or lenders. Furthermore, given the inherent uncertainties associated with our growth strategy, we may be unable to remain in compliance with the financial covenants required by the agreement governing our Credit Facility with MidCap (the "Midcap Credit Facility") over the next twelve months. These uncertainties raise substantial doubt about our ability to continue as a going concern. In order to alleviate substantial doubt, we plan to continue to closely monitor our operating forecast, pursue additional sources of outside capital, and pursue our M&A strategy. If we are (a) unable to improve our operating results, (b) obtain additional outside capital on terms that are acceptable to us to fund our operations and M&A strategy, and/or (c) secure a waiver or forbearance from the Lender if we are unable to remain in compliance with the financial covenants required by the MidCap Credit Facility, we may make significant changes to our operating plan, such as delaying expenditures, reducing investments in new products, delaying the 49 -------------------------------------------------------------------------------- development of our software, reducing our sale and distribution infrastructure or otherwise significantly reducing the scope of our business. Moreover, if we breach the financial covenants under the MidCap Credit Facility and fail to secure a waiver or forbearance from the lender, such breach or failure could accelerate the repayment of the outstanding borrowings under the MidCap Credit Facility 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 MidCap Credit Facility will be successfully refinanced on terms that are acceptable to us. COVID-19 Pandemic and the Supply Chain- The full impact of the COVID-19 pandemic on our supply chain, including the impact associated with preventive and precautionary measures that we, other businesses and governments are taking, continues to evolve. During 2022 to date, we continue to be impacted by the COVID-19 pandemic and related global shipping disruption. Together these have led to substantial increases in supply chain costs, in particular for shipping containers, which we rely on to import our goods, as reduced reliability and timely delivery of shipping containers and have substantially increased our last mile shipping costs on our oversized goods. These cost increases have been particularly substantial for oversized goods, which is a material part of our business. The reduced reliability and delivery of such shipping containers is forcing us to spend more on premium shipping to ensure goods are delivered, if at all, and the lack of reliability and timely delivery has further down chain impacts as it takes longer for containers to be offloaded and returned. Further, this global shipping disruption is forcing us to increase our inventory on-hand, including by advance ordering and taking possession of inventory earlier than expected, negatively impacting our working capital. Third party last mile shipping partners, such asUPS and FedEx, continue to increase the cost of delivering goods to the end consumers as their delivery networks continue to be impacted by the COVID-19 pandemic. The COVID-19 pandemic continues to bring uncertainty to consumer demand as price increases related to raw materials, the importing of goods, including tariffs, and the cost of delivering goods to consumers has led to inflation across theU.S. As such, we have noticed changes in consumer buying habits, which may lead to further reduced demand for our products. Further, recent record inflation has added additional pressure to the cost of our supply chain. Furthermore, we have concerns about the impact ofRussia's invasion ofUkraine on our business including its effects on the global economy, the performance and cost of supply chain and financial markets. We will continue to evaluate the impacts of this. We continue to consider the impact of the COVID-19 pandemic on our supply chain on the assumptions and estimates used when preparing our consolidated financial statements including inventory valuation, and the impairment of long-lived assets. These assumptions and estimates may change as the current situation evolves or new events occur, and additional information is obtained. If the economic conditions caused by the COVID-19 pandemic and the negative impact on our supply chain worsen beyond what is currently estimated by management, such future changes may have an adverse impact on our results of operations, financial position, and liquidity. MidCap Credit Facility - December 2021-OnDecember 22, 2021 , we entered into the MidCap Credit Facility 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$50.0 million subject to a borrowing base consisting of, among other things, inventory and sales receivables (subject to certain reserves), and (ii) we agreed to issue toMidCap Funding XXVII Trust a warrant to purchase up to an aggregate of 200,000 shares of our common stock, in exchange for the Lenders extending loans and other extensions of credit to us under the MidCap Credit Facility. OnDecember 22, 2021 , we used$27.6 million of the net proceeds from the initial borrowing under the MidCap 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 MidCap Credit Facility for working capital and general corporate purposes. The MidCap Credit Facility contains a financial covenant that requires that we maintain a minimum unrestricted cash balance or minimum borrowing availability of (a)$12.5 million during the period fromFebruary 1st through and includingMay 31st of each calendar year, and (b)$15.0 million of cash on hand at all other times thereafter. At our election, we may elect to comply with an alternative financial covenant that would require us to maintain a minimum borrowing availability under the MidCap Credit Facility of$10.0 million at all times. We are in compliance with the minimum liquidity covenant as of the date these condensed consolidated financial statements were issued and currently do not anticipate electing the alternative financial covenant over the next twelve months. As ofSeptember 30, 2022 , we had approximately$23.9 million outstanding on the MidCap Credit Facility and$4.0 million of availability on the MidCap Credit Facility. 50 -------------------------------------------------------------------------------- Securities Purchase Agreement and Warrants-OnMarch 1, 2022 , we entered into Securities Purchase Agreements (the "Purchase Agreements") with certain accredited investors identified on the signature pages to the Purchase Agreements (collectively, the "Purchasers") pursuant to which, among other things, we issued and sold to the Purchasers, in a private placement transaction, (i) 6,436,322 shares of our common stock (the "Shares"), par value$0.0001 per share (the "Common Stock"), and accompanying warrants to purchase an aggregate of 4,827,242 shares of common stock, and (ii) prefunded warrants to purchase up to an aggregate of 3,013,850 shares of common stock (the "Prefunded Warrants") and accompanying warrants to purchase an aggregate of 2,260,388 shares of common stock. The accompanying warrants to purchase Common Stock are referred to herein collectively as the "Common Stock Warrants", and the Common Stock Warrants and the Prefunded Warrants are referred to herein collectively as the "Warrants". Under the Purchase Agreements, each Share and accompanying Common Stock Warrant were sold together at a combined price of$2.91 , and each Prefunded Warrant and accompanying Common Stock Warrant were sold together at a combined price of$2.9099 , for gross proceeds of approximately$27.5 million . OnSeptember 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 warrant to purchase one share of common stock. The remaining 116,666 of the Shares and the accompanying warrants to purchase 116,666 shares of common stock were sold to certain 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 onOctober 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") and associated warrants for the three months endedSeptember 30, 2022 . We also concluded both the forward contract and the warrants should be classified within stockholders' equity within the condensed consolidated balance sheet as ofSeptember 30, 2022 . 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 condensed consolidated statement of operations for the nine months endedSeptember 30, 2022 . Non-GAAP Financial Measures We believe that our financial statements and the other financial data included in this Quarterly Report on Form 10-Q have been prepared in a manner that complies, in all material respects, with generally accepted accounting principles in theU.S. ("GAAP"). However, for the reasons discussed below, we have presented certain non-GAAP measures herein. We have presented the following non-GAAP measures to assist investors in understanding our core net operating results on an on-going basis: (i) Contribution Margin; (ii) Contribution margin as a percentage of net revenue; (iii) EBITDA (iv) Adjusted EBITDA; and (v) Adjusted EBITDA as a percentage of net revenue. These non-GAAP financial measures may also assist investors in making comparisons of our core operating results with those of other companies. As used herein, Contribution margin represents gross profit less amortization of inventory step-up from acquisitions (included in cost of goods sold) and e-commerce platform commissions, online advertising, selling and logistics expenses (included in sales and distribution expenses). As used herein, Contribution margin as a percentage of net revenue represents Contribution margin divided by net revenue. As used herein, EBITDA represents net loss plus depreciation and amortization, interest expense, net and provision for and benefit from income taxes. As used herein, Adjusted EBITDA represents EBITDA plus stock-based compensation expense, changes in fair-market value of earn-outs, amortization of inventory step-up from acquisitions (included in cost of goods sold), changes in fair-market value of warrant liability, professional fees and transition costs related to acquisitions, loss from extinguishment of debt, impairment of goodwill, loss on initial issuance of equity, litigation reserve and other expenses, net. As used herein, Adjusted EBITDA as a percentage of net revenue represents Adjusted EBITDA divided by net revenue. Contribution margin, EBITDA and Adjusted EBITDA do not represent and should not be considered as alternatives to loss from operations or net loss, as determined under GAAP. 51 -------------------------------------------------------------------------------- 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. Contribution margin and Contribution margin as a percentage of net revenue are two of our key metrics in running our business. All product decisions made by us, from the approval of launching a new product and to the liquidation of a product at the end of its life cycle, are based on measurements 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"), to gross margin to inform users of our financial statements of what our product profitability is at each period prior to fixed costs (such as sales and distribution expenses such as salaries as well as research and development expenses and general administrative expenses). By excluding these fixed costs, we believe this allows users of our financial statements to understand our products performance and allows them to measure our products performance over time. We present EBITDA, Adjusted EBITDA and Adjusted EBITDA as a percentage of net revenue because we believe each of these measures provides an additional metric to evaluate our operations and, when considered with both our GAAP results and the reconciliation to net loss, provide useful supplemental information for investors. We use these measures with financial measures prepared in accordance with GAAP, such as sales and gross margins, to assess our historical and prospective operating performance, to provide meaningful comparisons of operating performance across periods, to enhance our understanding of our operating performance and to compare our performance to that of our peers and competitors. We believe EBITDA, Adjusted EBITDA and Adjusted EBITDA as a percentage of net revenue are useful to investors in assessing the operating performance of our business without the effect of non-cash items. Contribution margin, Contribution margin as a percentage of net revenue, EBITDA, Adjusted EBITDA and Adjusted EBITDA as a percentage of net revenue should not be considered in isolation or as alternatives to net loss, loss from operations or any other measure of financial performance calculated and prescribed in accordance with GAAP. Neither EBITDA, Adjusted EBITDA or Adjusted EBITDA as a percentage of net revenue should be considered a measure of discretionary cash available to us to invest in the growth of our business. Our Contribution margin, Contribution margin as a percentage of net revenue, EBITDA, Adjusted EBITDA and Adjusted EBITDA as a percentage of net revenue may not be comparable to similar titled measures in other organizations because other organizations may not calculate Contribution margin, Contribution margin as a percentage of net revenue, EBITDA, Adjusted EBITDA or Adjusted EBITDA as a percentage of net revenue in the same manner as we do. Our presentation of Contribution margin and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by the expenses that are excluded from such terms or by unusual or non-recurring items. We recognize that EBITDA, Adjusted EBITDA and Adjusted EBITDA as a percentage of net revenue, have limitations as analytical financial measures. For example, neither EBITDA nor Adjusted EBITDA reflects:
•
our capital expenditures or future requirements for capital expenditures or mergers and acquisitions; • the interest expense or the cash requirements necessary to service interest expense or principal payments, associated with indebtedness; • depreciation and amortization, which are non-cash charges, although the assets being depreciated and amortized will likely have to be replaced in the future, or any cash requirements for the replacement of assets; • changes in cash requirements for our working capital needs; or • changes in fair value of contingent earn-out liabilities, warrant liabilities, and amortization of inventory step-up from acquisitions (included in cost of goods sold).
In addition, Adjusted EBITDA excludes non-cash expenses for stock-based compensation, which will remain a key component of our long-term incentive compensation package.
We also recognize that contribution margin and contribution margin as a percentage of net income are limitations as analytical income metrics. For example, the contribution margin does not reflect:
•
general and administrative expense necessary to operate our business;
•
research and development expenses necessary for the development, operation and
support of our software platform;
•
the fixed costs portion of our sales and distribution expenses including
stock-based compensation expense; or
•
changes in fair value of contingent earn-out liabilities, warrant liabilities,
and amortization of inventory step-up from acquisitions (included in cost of
goods sold).
52
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EBITDA and Contribution Margin Summary
Three Months Ended September 30, Nine Months Ended September 30,
2021 2022 2021 2022
(in thousands, except percentages)
Gross profit $ 34,175 $
30,191
Contribution margin
$ 8,232 $ 743$ 20,028 $ 10,223 Gross profit as a percentage of net revenue 50.2 % 45.5 % 50.4 % 51.2 % Contribution margin as a percentage of net revenue 12.1 % 1.1 % 10.9 % 6.1 % Net Loss$ (110,556 ) $ (116,902 ) $ (229,415 ) $ (175,987 ) EBITDA$ (105,877 ) $ (114,204 ) $ (212,717 ) $ (168,424 ) Adjusted EBITDA $ 728 $
(9,064)
Net loss as a percentage of revenue
(162.3 )% (176.3 )% (124.4 )% (105.8 )%
Adjusted EBITDA as a percentage of
net revenue 1.1 % (13.7 )% (2.3 )% (10.4 )%
Adjusted EBITDA
EBITDA represents net loss plus depreciation and amortization, interest expense,
net and provision for and benefit from income taxes. Adjusted EBITDA represents
EBITDA plus stock-based compensation expense, changes in fair-market value of
earn-outs, amortization of inventory step-up from acquisitions (included in cost
of goods sold), change in fair-market value of warrant liability, professional
fees and transition costs related to acquisitions, loss from extinguishment of
debt, impairment of goodwill, loss on initial issuance of equity, litigation
reserve and other expenses, net. As used herein, Adjusted EBITDA as a percentage
of net revenue represents Adjusted EBITDA divided by net revenue.
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The following table provides a reconciliation of EBITDA and Adjusted EBITDA to
net loss, which is the most directly comparable financial measure presented in
accordance with GAAP:
Three Months Ended September 30, Nine Months Ended September 30,
2021 2022 2021 2022
(in thousands, except percentages)
Net loss $ (110,556 ) $ (116,902 ) $ (229,415 ) $ (175,987 )
Add:
Provision for (benefit from) income
taxes 21 (75 ) 64 (243 )
Interest expense, net 2,786 904 11,877 2,043
Depreciation and amortization 1,872 1,869 4,757 5,763
EBITDA (105,877 ) (114,204 ) (212,717 ) (168,424 )
Other expense (income), net 5 (174 ) 43 (199 )
Impairment loss on goodwill - 90,921 - 119,941
Impairment loss on intangibles - 3,118 - 3,118
Change in fair value of contingent
earn-out liabilities (4,245 ) (774 ) (11,949 ) (5,240 )
Amortization of inventory step-up
from acquisitions (included in cost
of goods sold) 875 - 4,916 -
Gain on extinguishment of seller
note - - - (2,012 )
Loss on initial issuance of equity - 12,834 - 18,669
Change in fair value of derivative
liability 1,360 - 3,254 -
Loss on extinguishment of debt 106,991 - 136,763 -
Change in fair market value of
warrant liability (8,134 ) (5,528 ) 26,455 2,365
Loss on initial issuance of warrant - - 20,147 -
Professional fees related to
acquisitions 53 - 1,450 -
Litigation reserve - 1,800 - 2,600
Transition cost from acquisitions 130 - 1,314 -
Transition cost from Photo Paper
Direct acquisition - - 696 -
Reserve on dispute with PPE supplier - - 4,100 -
Stock-based compensation expense 9,570 2,943 21,330 11,854
Adjusted EBITDA $ 728 $
(9,064)
Net loss as a percentage of revenue
(162.3 )% (176.3 )% (124.4 )% (105.8 )% Adjusted EBITDA as a percentage of net revenue 1.1 % (13.7 )% (2.3 )% (10.4 )%
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.
Three Months Ended September 30, Nine Months Ended September 30,
2021 2022 2021 2022
(in thousands, except percentages)
Gross Profit $ 34,175 $ 30,191 $ 92,982 $ 85,150
Add:
Amortization of inventory step-up
from acquisitions (included in cost
of goods sold) 875 - 4,916 -
Less:
E-commerce platform commissions, online advertising, selling and logistics expenses (26,818 ) (29,448 ) (77,870 ) (74,927 ) Contribution margin$ 8,232 $ 743 $ 20,028$ 10,223 Gross Profit as a percentage of net revenue 50.2 % 45.5 % 50.4 % 51.2 % Contribution margin as a percentage of net revenue 12.1 % 1.1 % 10.9 % 6.1 % 54
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Discretionary Accounting Principles and Decision Making
Our unaudited condensed consolidated financial statements have been prepared in accordance withU.S. generally accepted accounting principles ("GAAP"). The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no material changes to our critical accounting policies as compared to the critical accounting policies and significant judgments and estimates as disclosed in our Annual Report on Form 10-K for fiscal year endedDecember 31, 2021 , as filed with theSEC onMarch 16, 2022 (our "Annual Report"). For additional information, please refer to Note 2 of our condensed consolidated financial statements in this Quarterly Report on Form 10-Q.
Subsequent Measurement of Interest-We operate under a business segment that is the same as our reporting segment in accordance with 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 quarter and third quarter that required an interim assessment of goodwill. We evaluated current economic conditions during the third quarter of 2022, including the impact of theFederal 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 ofSeptember 30, 2022 . Accordingly, we concluded a triggering event had occurred and performed interim goodwill impairment analyses and determined that our goodwill was fully impaired as ofSeptember 30, 2022 . We engaged a third-party valuation specialist to assist management in performing an interim goodwill impairment test inSeptember 2022 . For goodwill, impairment testing is based upon the best information available using a combination of the discounted cash flow method (a form of the income approach) and the guideline public company method, 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 our market capitalization. Due to the sustained decline in our stock price leading up to and subsequent toSeptember 30, 2022 , we used the market capitalization as ofSeptember 30, 2022 to determine the fair value of the reporting unit. As a result, we recorded a goodwill impairment charge of approximately$90.9 million in the three months endedSeptember 30, 2022 . We also had a triggering event during the three months endedMarch 31, 2022 and recorded an impairment charge of$29.0 million . For the nine months endedSeptember 30, 2022 , total goodwill impairment was approximately$119.9 million .
We believe that our assumptions and estimates are fair and reasonable, and any changes in assumptions or estimates could affect our reported financial results.
While we believe our conclusions regarding the estimates of fair value of our
reporting unit is appropriate, these estimates are subject to uncertainty and by
nature include judgments and estimates regarding various factors. These factors
include the rate and extent of growth in the markets that our reporting unit
serves, the realization of future sales price and volume increases, fluctuations
in price and availability of key raw materials, future operating efficiencies
and, as it pertains to discount rates, the volatility in interest rates and
costs of equity.
Some of the inherent estimates and assumptions used in determining fair value of
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. While we believe we have made reasonable estimates and
assumptions to calculate the
55
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fair values of our reporting unit, it is possible changes could occur. As for
our reporting unit, if in future years, the reporting unit's actual results are
not consistent with our estimates and assumptions used to calculate fair value,
we may be required to recognize material impairments to goodwill. We will
continue to monitor its reporting unit for any triggering events or other signs
of impairment. We may be required to perform additional impairment testing based
on changes in the economic environment, disruptions to our business, significant
declines in operating results of our reporting unit, further sustained
deterioration of our market capitalization, and other factors, which could
result in impairment charges in the future. Although management cannot predict
when improvements in macroeconomic conditions will occur, if consumer confidence
and consumer spending decline significantly in the future or the market
capitalization deteriorates significantly from current levels, it is reasonably
likely we will be required to record impairment charges in the future that could
be material to our consolidated balance sheet or results of operations.
Subsequent Measurement of Intangibles-We review long-lived assets for impairment
when performance expectations, events, or changes in circumstances indicate that
the asset's carrying value may not be recoverable. The evaluation is performed
at the lowest level of identifiable cash flows by comparing the carrying value
of the asset group to the undiscounted cash flows. If the evaluation indicates
that the carrying amount of the assets may not be recoverable, any potential
impairment is measured based upon the fair value of the related asset or asset
group as determined by an appropriate market appraisal or other valuation
technique.
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 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. We recorded an
intangible impairment charge of $3.1 million in the three months ended September
30, 2022 within impairment loss on intangibles on the condensed consolidated
statement of operations.
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.
If our adjusted expectations of the operating results do not materialize, we may
be required to record intangible impairment charges, which may be material.
While we believe our conclusions regarding the estimates of recoverability of
our asset 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 asset
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.
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