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Organization and Description of Business
9 Months Ended
Sep. 30, 2021
Organization Consolidation And Presentation Of Financial Statements [Abstract]  
Organization and Description of Business

1.

ORGANIZATION AND DESCRIPTION OF BUSINESS

Aterian, Inc. and its subsidiaries, formerly known as Mohawk Group Holdings, Inc., (“Aterian” or the “Company”), is a technology-enabled consumer products platform 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 fourteen 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 essentials oils.

Headquartered in New York, Aterian’s offices can also be found in China, Philippines, Israel and Poland.

Healing Solutions AcquisitionOn February 2, 2021, the Company acquired certain assets of Healing Solutions, LLC (“Healing Solutions”) assets related to its retail and ecommerce business under the Healing Solutions’ brands, Tarvol, Sun Essential Oils and Artizen (among others), which primarily sells essential oils primarily through Amazon and other marketplaces (see Note 10).

Squatty Potty Assets AcquisitionOn 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. In addition, Squatty Potty products are sold in retail locations including Bed, Bath & Beyond, Walmart and Target (see Note 10).

Photo Paper Direct AcquisitionOn 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 (see Note 10).

Equity RaiseOn 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 per Share, with proceeds to the Company, net of offering costs, of $36.7 million.

Debt Repayment On August 9, 2021, the Company’s 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 the Company that High Trail declared an event of default under the April 2021 Notes (as defined in Note 6) as a result of the Company’s failure to maintain Adjusted EBITDA as required under the terms of the Company’s debt arrangements with High Trail. On September 22, 2021, the Company reached an agreement with High Trail to pay down and amend its outstanding secured term debt (see Note 6).

Going ConcernThe Company has been impacted by the impact of the COVID-19 pandemic and related global supply chain disruptions.  Together these have led to substantial increases in the costs of its supply chain, in particular, shipping containers, which the Company relies on to import its goods, and have reduced the reliability and timely delivery of such shipping containers and substantially increased the Company’s last mile shipping costs on its oversized goods. These cost increases have been particularly substantial for oversized goods, which are a material part of the Company’s business.  The increased cost in our supply chain has negatively impacted the Company in the three months ended September 30, 2021, and the Company believes it will continue to negatively impact the Company for at least the next six to nine months. The reduced reliability and delivery of such shipping containers is forcing the Company 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 supply chain impacts as it takes longer for containers to be offloaded and returned. Further, this global supply chain disruption is forcing the Company to increase its inventory on-hand, including advance ordering and taking possession of inventory earlier than expected, impacting its 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 by the COVID-19 pandemic. In addition, the Company may be adversely impacted by rising costs of the commodity raw materials used to produce its products. 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 the United States. Coupled with the recent reopening of the majority of the country, the Company has noticed changes to consumer buying habits, which may have reduced demand for its products. Further, the Company has increased sale prices on the goods it sells to offset the increased supply chain costs which led to reduced demand for its goods. As

such, the Company has reduced its forecasts for 2021 and in August 2021 it withdrew its guidance for 2021 net revenue and Adjusted EBITDA.

As such, these impacts led the Company to breach certain of its covenants with its lender High Trail and High Trail equitized its loan during the third quarter of 2021, reducing an aggregate of $76.3 million of principal amount of its notes through the issuance of an aggregate of 12,154,161 shares of the Company’s common stock and paying down $8.7 million of principal in cash. The remaining $25.0 million term loan is now due in April 2023.The financial Adjusted EBITDA covenants were renegotiated and all other material terms remain the same. As of the date of this Quarterly Report on Form 10-Q, the Company is in compliance with its financial covenants with High Trail. 

Further, due to this global supply chain disruption, the Company has reduced its forecast for the next twelve months. The Company has been taking, and plans to continue to take, various actions to help improve its financial forecasts and allow it to navigate through this 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 cancelling some or all of its product launches, reducing fixed costs and increasing its inventory on-hand to ensure products are available on time to sell.  As there can be no assurance that these actions along with the Company’s operating forecast for the twelve months following the issuance of the accompanying consolidated financial statements will be attained such that the Company will be able to maintain compliance with its financial covenants with its lender and meet its obligations as they become due, these negative financial conditions raise substantial doubt about the Company’s ability to continue as a going concern.

Management plans to continue to closely monitor its operating forecast and may pursue additional sources of financing and/or capital to fund its operations or to continue its merger and acquisition strategy.  If the Company is unable to improve its operating results, secure any necessary waivers from its lender, and/or obtain additional sources of financing and capital on acceptable terms (if at all) for its merger and acquisition strategy, the Company may have to make significant changes to its operating plan, such as delay expenditures, reduce investments in new products, delay the development of its software, reduce its sale and distribution infrastructure, or otherwise significantly reduce the scope of its business. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

COVID-19 PandemicThe full impact of the COVID-19 pandemic, including the impact associated with preventative and precautionary measures that the Company, other businesses and governments are taking, continues to evolve as of the date of this Quarterly Report on Form 10-Q. During 2021, the Company experienced negative impacts to its margins related to increased international freight demands, lack of shipping containers and general international freight congestion due to the continued increased demand of goods being sold on ecommerce marketplaces. The Company has experienced, and expects to continue to experience, an increase in last-mile shipping costs as shipping providers’ delivery networks continue be stressed due to increased demand from the increase of goods sold on ecommerce marketplaces. 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 the United States. Coupled with the recent reopening of the majority of the country, the Company has noticed changes in consumer buying habits that may have reduced demand for its products. The Company continues to consider the impact of COVID-19 based on the assumptions and estimates used when preparing the accompanying condensed 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 COVID-19 worsen beyond what is currently estimated by management, such future changes may have an adverse impact on the Company's results of operations, financial position, and liquidity.