What changed in Aterian, Inc.'s 10-K — 2022 vs 2023

Item 1. B usiness. Overview Aterian, Inc. and its subsidiaries (“Aterian”, the “Company”, “we”, “us”, and “our”), is a technology-enabled consumer product company that uses “data science” (which includes but is not limited to, machine learning, natural language processing, and data analytics) to design, develop, market and sell products.

Our fifteen brands are hOmeLabs; Vremi, Squatty Potty; Xtava; RIF6; Aussie Health; Holonix; Truweo; Mueller; Pursteam; Pohl and Schmitt; Spiralizer; Healing Solutions; Photo Paper Direct and Step and Go. To allow us to scale, we have invested in building our own proprietary data science based software technology platform, known as AIMEE.

AIMEE, our “Artificial Intelligence Marketplace Ecommerce Engine” enables our team to manage our business more efficiently by injecting technology into processes that would otherwise have to be executed manually. AIMEE combines large quantities of data, data science and other automation algorithms, at scale, to allow rapid opportunity identification and automated online sales and marketing of consumer products.

AIMEE sources data from various e-commerce platforms, the internet and publicly available data, allowing us to estimate and determine trends, performance and consumer sentiment on products and searches within e-commerce platforms. This functionality, and other data sources, allow us to help determine which products to develop, market and sell on e-commerce marketplaces.

In addition, AIMEE is also connected, through application program interfaces (“APIs”), to multiple e-commerce platforms. This allows us to automate the purchase of marketing, automate various parts of our fulfillment and logistics operations and to automate pricing changes on product listings.

Our History and Corporate Information We were incorporated in Delaware under the name Mohawk Group Holdings, Inc. in March 2018 and we changed our name to Aterian, Inc. in April 2021. As of December 31, 2022, we have multiple operating subsidiaries and we conduct material aspects of our business in the U.S., the Philippines, Poland and China.

Our principal executive offices are located at 37 East 18th Street, 7th Floor, New York, NY 10003. Our website address is www.aterian.io. We do not incorporate the information on, or accessible through, our website into this Annual Report, and you should not consider any information on, or accessible through, our website as part of this Annual Report.

We have included our website address in this Annual Report solely as an inactive textual reference. Our Platform AIMEE, our proprietary technology, is a cloud-based modular platform incorporating a multi-tenant architecture. AIMEE connects to multiple e-commerce platforms and other internet based sources through application program interfaces (“APIs”) in order to ingest data.

At its core, AIMEE ingests data used in product research, analysis and performance and provides the automation of numerous sales, marketing and fulfillment tasks and functions. AIMEE helps us automate and manage the life-cycle of our consumer product portfolio and provides us with the ability to scale our business efficiently.

AIMEE, along with our people, allows us to perform the following key business functions: 1) identify specific product and market opportunities; 2) execute and manage certain online marketing strategies; 3) automate portions of the fulfillment processes; 4) receive inventory visibility; and 5) receive individual product operational and financial performance. 2 We continue to develop AIMEE’s capabilities.

This includes forecasting, inventory management, online marketing and other aspects, which require human judgment and oversight. At its core, AIMEE is designed to intelligently automate many of our business tasks and provides us with the ability to scale our business.

AIMEE is being developed to allow price automatization, media buying and search engine optimization leveraging our proprietary technology software and algorithms we have built into AIMEE. We believe this automation will bring significant competitive advantages for our products. For our SKUs, our advertising investment is focused on online channels and e-commerce platforms.

In certain instances, we compete directly with our third party suppliers who sell their own brands directly to customers, including with respect to certain of our material products such as dehumidifiers.

Item 1A. Ris k Factors. Risks Relating to Our Business We have historically operated at a loss and we may never achieve or sustain profitability or positive cash flows. Further we and our independent registered public accounting firm have expressed substantial doubt about our ability to continue as a going concern.

We have historically operated at a loss and experienced losses after tax of $236.0 million and $196.3 million in the years ended December 31, 2021 and 2022, respectively. In addition, our costs may increase in future periods, which could negatively affect our future operating results and ability to achieve and sustain profitability.

For example, we may need to continue to expend substantial financial and other resources on the ideation, sourcing and development of products, our technology infrastructure, research and development, including the development of new features for our AIMEE software platform, sales and marketing, international expansion and general administration, including expenses related to being a public company.

We have had to rely on a combination of cash flow from operations and new capital in order to sustain our business. Despite the fact that we have raised significant capital, there can be no assurance that we will ever achieve profitability.

Our growth strategy has resulted in operating losses and negative cash flows from operations that raised substantial doubt about our ability to continue as a going concern.

Our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the Year-ended December 31, 2022, that raised substantial doubt about our ability to continue as a going concern.

Further, if we are unable to continue as a going concern, we may be forced to liquidate our assets and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements.

We face intense competition and if we are unable to compete effectively, our market share and revenue could be diminished which may delay or otherwise hinder our efforts to achieve or maintain profitability.

We cannot assure you that our products will continue to compete favorably or that we will be successful in the face of increasing competition from new products and enhancements introduced by existing competitors or new companies entering the markets in which we operate. We sell our products primarily on marketplaces and primarily on Amazon in the U.S.

Unlike traditional brick and mortar retailers, the consumer who is shopping on marketplaces has a significant number of competing products to select from as there are limited barriers to entry. In addition, the Internet facilitates competitive entry and comparison shopping, which enhances the ability of new and existing businesses to compete against us.

A number of our current and potential competitors have greater resources, longer histories, and/or greater brand recognition. As a result, they may be able to secure better terms from vendors and devote more resources to technology, infrastructure, fulfillment, and marketing then we may be able to.

In addition, some of our competitors aggressively discount their products in order to gain market share, which has resulted in pricing pressures, reduced profit margins and lost market share. Further, social proof for products sold on marketplaces in the form of product ratings and reviews is highly important to our success.

In certain instances we have been unable to maintain such social proof, and we may be unable to maintain such social proof in the future, or competitors may be able to attain better social proof for their products which could have a material impact on our operating results.

For certain significant products in our portfolio such as air conditioners and most of our dehumidifiers, we compete directly with our contract manufacturer who sells its own competing private label products on the marketplaces we sell and who has a lower cost structure and significantly better R&D capabilities.

As a result of competition, our product offerings, whether in new or existing markets, may not be successful, we may fail to gain or may lose business, and we may be required to increase our marketing spending or lower prices, either of which could materially impact our operating results.

We rely on our technology platform, AIMEE, to compete effectively in the markets we operate, but the effectiveness of AIMEE and our other technology may require significant investments which we may be unable to make or which may be unsuccessful.

Our financial projections are highly subjective in nature and our future financial results could vary significantly from our projections and also from quarter-to-quarter. From time to time, we may provide financial projections to our shareholders, lenders, investment community, and other stakeholders and these projections are highly subjective.

Our quarterly revenue and other operating results have varied in the past and are likely to continue to vary significantly from quarter-to-quarter in the future. It is difficult for us to accurately predict the demand for many of our products, or the amount and timing of our future revenue and operating results.

Our projections are based on management’s best estimate 5 of sales using historical sales data and other relevant information available at the time. These projections are highly subjective since product sales can fluctuate substantially.

Additionally, changes in consumer demand, transportation, supplier lead times, costs and availability, raw material costs and availability, and other factors could make our inventory management and sales forecasting more difficult. Further, we base our expense levels and investment plans on sales estimates.

A significant portion of our expenses and investments are fixed, and we are not able to adjust our spending quickly if our sales are less than expected. Due to these and other factors described elsewhere in this section, our future operating results could vary materially from our projections and from quarter-to-quarter.

Further, we believe that quarter-to-quarter comparisons of our operating results are not necessarily meaningful. Moreover, our operating results may not meet the expectations of our equity research analysts or investors. If this occurs, the trading price of our common stock could fall substantially, either suddenly or over time.

Our business is sensitive to the strength of the United States consumer market and any weakness in this market or changes in consumer preferences could adversely affect our business. The strength of the U.S. economy has a significant impact on our performance.

We are dependent on discretionary spending, which is affected by, among other things, unemployment rates, economic and political conditions worldwide, consumer confidence, energy and gasoline prices, interest and mortgage rates, the level of consumer debt and taxation, and financial markets, which are all outside of our control.

A continuing softening of demand, whether caused by changes in customer preferences or a weakening of the U.S. or global economies, may result in decreased revenue.

We believe we have sustained a decline in the sales of our products due to the factors mentioned above, and any continued economic downturn in the U.S could materially and adversely affect our business, operating results and financial condition.

Demand for our products is highly seasonal and dependent on weather conditions which could result in significant variations in our inventory levels and operating results. Weather and other conditions can materially impact the demand for our products.

Demand for our cooling, and air quality products primarily occurs during the summer months and demand for our kitchen appliances and accessories primarily occurs during the fall and holiday season.

Natural disasters (such as wildfires, hurricanes and ice storms), public health crises (such as pandemics and epidemics), or an unusually mild or short summer season may result in unanticipated material fluctuations in consumer demand. These factors could have a material adverse effect on our business, operating results and financial condition.

If we are unable to manage our inventory effectively, our operating results and financial condition could be adversely affected. In the past, we have not always accurately forecasted consumer demand for our products resulting in inventory shortages, excess inventory write offs and lower gross margins.

We are exposed to significant inventory risks that may adversely affect our operating results and financial condition as a result of seasonality, new product launches, rapid changes in product cycles and pricing, defective merchandise, changes in customer demand and consumer spending patterns, changes in consumer tastes with respect to our products, spoilage, adverse actions taken by marketplaces to remove our products, and other factors.

Demand for products can change significantly between the time inventory is ordered and the date of sale. In addition, when we begin selling a new product, it may be difficult to establish vendor relationships, determine appropriate product or component selection, and accurately forecast demand.

We carry a broad selection of products and also carry significant inventory levels of certain products, such as cooling, and air quality products and kitchen appliances, and at times we are unable to sell our products in sufficient quantities or to meet demand during the relevant selling seasons.

Any one of the inventory risk factors set forth above may adversely affect our operating results and financial condition. Increased costs of raw materials, energy, labor, transportation and platform fees charged by marketplaces may adversely affect our business, operating results and financial condition.

Significant increases in the cost and reductions in the availability of raw materials, energy, labor, transportation, and increases in tariffs and platform fees charged by marketplaces have negatively impacted our business, operating results and financial condition. Our contract manufacturers purchase significant amounts of metals and plastics to manufacture our products.

In addition, they also purchase significant amounts of electricity to supply the energy required in their production processes.

Global political instabilities such as the Russian invasion of Ukraine and tensions between China and Taiwan and other factors may result in higher metal, plastic, electric, transportation and product costs, or could impair our ability to obtain products at marketable rates or at all. We are heavily dependent on inbound sea, rail and truck freight.

Disruptions in the global supply chain and freight networks, has, and may continue to limit inbound and outbound shipment capacity and increase our cost of goods sold and certain operating expenses.

All forward-looking statements included in this Annual Report are based on information available to us as of the time we file this Annual Report and, except as required by law, we undertake no obligation to update publicly or revise any forward-looking statements.

Overview We are a technology-enabled consumer products platform that uses “data science” (which includes but is not limited to, machine learning, natural language processing, and data analytics) to design, develop, market and sell products. Today, we predominantly operate through online retail channels such as Amazon.com (“Amazon”) and Walmart, Inc.

Today, we own and operate brands that sell products in multiple categories, including home and kitchen appliances, kitchenware, cooling and air quality appliances (dehumidifiers, humidifiers and air conditioners), health and beauty products and essential oils.

Our fifteen brands include, hOmeLabs; Vremi; Squatty Potty; Xtava; RIF6; Aussie Health; Holonix; Truweo; Mueller; Pursteam; Pohl and Schmitt; Spiralizer; Healing Solutions; Photo Paper Direct and Step and Go.

Seasonality of Business and Product Mix Our individual product categories are typically affected by seasonal sales trends primarily resulting from the timing of the summer season for certain of our environmental appliance products and the fall and holiday season for our small kitchen appliances and accessories.

With our current mix of environmental appliances, the sales of those products tend to be significantly higher in the summer season. Further, our small kitchen appliances and accessories tend to have higher sales during the fourth quarter, which includes Thanksgiving and the December holiday season.

As a result, our operational results, cash flows, cash and inventory positions may fluctuate materially in any quarterly period depending on, among other things, adverse weather conditions, shifts in the timing of certain holidays and changes in our product mix. Product mix can affect our gross profit and the variable portion of our sales and distribution expenses.

The impact of the COVID-19 pandemic on the global supply chain, the unpredictability of container availability, space on vessels and shipping lead times, as well as associated manufacturing lead time, led us to secure more inventory upfront which affected our business and operating results in 2022.

Having more inventory on hand not only impacts our working capital but also requires us to increase our storage capacity, through our warehouse network, which of itself has a capital impact. Our direct revenue can be impacted by the timing and the season in which products are launched as well as the impact of mergers and acquisitions.

Financial Operations Overview Net Revenue— We derive our revenue from the sale of consumer products, primarily in the U.S. We sell products directly to consumers through online retail channels and through wholesale channels. Direct-to-consumer sales (i.e., direct net revenue), which is currently the majority of our revenue, is done through various online retail channels.

We sell on Amazon.com, Walmart.com, and our own websites, with substantially all of our sales made through Amazon.com. For all of our sales and distribution channels, revenue is recognized when control of the product is transferred to the customer (i.e., when our performance obligation is satisfied), which typically occurs at the shipment date.

Cost of Goods Sold— Cost of goods sold consists of the book value of inventory sold to customers during the reporting period and the amortization of inventory step-up from acquisitions.

Book value of inventory includes the amounts we pay manufacturers for product, tariffs and duties associated with transporting product across national borders, and freight costs associated with transporting the product from our manufacturers to our warehouses, as applicable.

When circumstances dictate that we use net realizable value as the basis for recording inventory, we base our estimates on expected future selling prices, less expected disposal costs.

Expenses: Research and Development Expenses— Research and development expenses include compensation and employee benefits for technology development employees, travel-related costs and fees paid to outside consultants related to the development of our intellectual property. 16 Sales and Distribution Expenses— Sales and distribution expenses consist of online advertising costs, marketing and promotional costs, sales and e-commerce platform commissions, fulfillment, including shipping and handling, and warehouse costs (i.e., sales and distribution variable expenses).

Sales and distribution expenses also include employee compensation and benefits and other related fixed costs. Shipping and handling expenses are included in our consolidated statements of operations in sales and distribution expenses.

This includes inbound, pick and pack costs and outbound transportation costs to ship goods to customers performed by e-commerce platforms or incurred directly by us, through our own direct fulfillment platform, which leverages AIMEE and our third-party logistics partners.

Our sales and distribution expenses, specifically our logistics expenses and online advertising, will vary quarter to quarter as they are dependent on our sales volume, our product mix and whether we fulfill products ourselves, i.e., fulfillment by merchant (“FBM”), or through e-commerce platform service providers, i.e., fulfillment by Amazon (“FBA”) or fulfilled by Walmart (“WFS”).

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 most customers within one or two days.

We continually review the locations and capacity of our third-party warehouses to ensure we have the appropriate geographic reach, which helps to reduce the average last mile shipping zones to the end customer and as such our speed of delivery improves while our shipping costs to customers decrease, prior to the impacts on shipping providers’ rates.

General and Administrative Expenses —General and administrative expenses include compensation and employee benefits for executive management, finance administration, legal, and human resources, facility costs, insurance, travel, professional service fees and other general overhead costs, including the costs of being a public company.

Interest Expense, Net — Interest expense, net includes the interest cost from our credit facility and term loans, and includes amortization of deferred finance costs and debt discounts from our credit facility (the “Credit Facility”) with MidCap Funding IV Trust (“MidCap”) and our term loans in 2021 with High Trail Investments SA LLC (“High Trail SA”) and High Trail Investments ON LLC (“High Trail ON” and, together with High Trail SA, “High Trail”). 17 Results of Operations Comparison of Years-Ended December 31, 2021 and 2022 The following table summarizes our results of operations for the years-ended December 31, 2021 and 2022, together with the changes in those items in dollars and percentage: Year-Ended December 31, Change 2021 2022 Amount % (in thousands, except percentages) NET REVENUE $ 247,767 $ 221,170 $ (26,597 ) (10.7 ) % COST OF GOODS SOLD 125,904 115,652 (10,252 ) (8.1 ) % GROSS PROFIT 121,863 105,518 (16,345 ) (13.4 ) % OPERATING EXPENSES: Sales and distribution (1) 127,369 121,139 (6,230 ) (4.9 ) % Research and development (1) 9,837 6,012 (3,825 ) (38.9 ) % General and administrative (1) 45,099 38,239 (6,860 ) (15.2 ) % Impairment loss on goodwill — 120,409 120,409 100.0 % Impairment loss on intangibles — 3,118 3,118 100.0 % Settlement of a contingent earn-out liability 4,164 — (4,164 ) (100.0 ) % Change in fair value of contingent earn-out liabilities (30,529 ) (5,240 ) 25,289 82.8 % TOTAL OPERATING EXPENSES: 155,940 283,677 127,737 81.9 % OPERATING LOSS (34,077 ) (178,159 ) (144,082 ) 422.8 % INTEREST EXPENSE—net 12,655 2,603 (10,052 ) (79.4 ) % GAIN ON EXTINGUISHMENT OF SELLER NOTE — (2,012 ) (2,012 ) (100.0 ) % LOSS ON INITIAL ISSUANCE OF EQUITY — 18,669 18,669 100.0 % CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITY 3,254 — (3,254 ) (100.0 ) % LOSS ON EXTINGUISHMENT OF DEBT 138,859 — (138,859 ) (100.0 ) % CHANGE IN FAIR VALUE OF WARRANT LIABILITY 26,455 (470 ) (26,925 ) (101.8 ) % LOSS ON INITIAL ISSUANCE OF WARRANTS 20,147 — (20,147 ) (100.0 ) % OTHER EXPENSE (INCOME)—net 45 (281 ) (326 ) (728.9 ) % LOSS BEFORE INCOME TAXES (235,492 ) (196,668 ) 38,824 (16.5 ) % PROVISION (BENEFIT) FOR INCOME TAXES 532 (376 ) (908 ) (170.7 ) % NET LOSS $ (236,024 ) $ (196,292 ) $ 39,732 (16.8 ) % (1) Amounts include stock-based compensation expense as follows: Years-Ended December 31, Change 2021 2022 Amount % (in thousands, except percentages) Sales and distribution expenses $ 6,809 $ 5,014 $ (1,795 ) (26.4 ) % Research and development expenses 5,339 1,871 (3,468 ) (65.0 ) % General and administrative expenses 16,839 7,709 (9,130 ) (54.2 ) % Total stock-based compensation expense $ 28,987 $ 14,594 $ (14,393 ) (49.7 ) % 18 The following table sets forth the components of our results of operations as a percentage of net revenue: Year-Ended December 31, 2021 2022 (in thousands, except percentages) NET REVENUE 100.0 % 100.0 % COST OF GOODS SOLD 50.8 52.3 GROSS PROFIT 49.2 47.7 OPERATING EXPENSES: Sales and distribution 51.4 54.8 Research and development 4.0 2.7 General and administrative 18.2 17.3 Impairment loss on goodwill — 54.4 Impairment loss on intangibles — 1.4 Settlement of a contingent earn-out liability 1.7 — Change in fair value of contingent earn-out liabilities (12.3 ) (2.4 ) TOTAL OPERATING EXPENSES: 63.0 128.2 OPERATING LOSS (13.8 ) (80.5 ) INTEREST EXPENSE—net 5.1 1.2 GAIN ON EXTINGUISHMENT OF SELLER NOTE — (0.9 ) LOSS ON INITIAL ISSUANCE OF EQUITY — 8.4 CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITY 1.3 — LOSS ON EXTINGUISHMENT OF DEBT 56.0 — CHANGE IN FAIR VALUE OF WARRANT LIABILITY 10.7 (0.2 ) LOSS ON INITIAL ISSUANCE OF WARRANTS 8.1 — OTHER EXPENSE (INCOME)—net — (0.1 ) LOSS BEFORE INCOME TAXES (95.0 ) (88.9 ) PROVISION (BENEFIT) FOR INCOME TAXES 0.3 (0.2 ) NET LOSS (95.3 ) % (88.7 ) % Net Revenue Revenue by Product Categories : The following table sets forth our net revenue disaggregated by product categories: Year-Ended December 31, Change 2021 2022 Amount % (in thousands, except percentages) Direct $ 235,817 $ 214,168 $ (21,649 ) (9.2 ) % Wholesale 11,950 7,002 (4,948 ) (41.4 ) % Net revenue $ 247,767 $ 221,170 $ (26,597 ) (10.7 ) % 19 Net revenue decreased $26.6 million, or 10.7%, during the year-ended December 31, 2022 to $221.2 million, compared to $247.8 million for the year-ended December 31, 2021.

The decrease in net revenue was primarily attributable to a decrease in direct net revenue of $21.6 million, or a 9.2% decrease. This was primarily due to softness in consumer demand partially offset by liquidation of higher priced excess inventory. Direct net revenue consists of both organic net revenue and net revenue from our mergers and acquisitions (“M&A”).

For the year-ended December 31, 2022, organic revenue was $201.9 million and revenue from our M&A businesses was $11.5 million. For the year-ended December 31, 2021, organic revenue was $118.4 million and revenue from our M&A businesses was $120.9 million.

Our organic revenue increased by $83.5 million, or 70.5%, during the year-ended December 31, 2022, as compared to the year-ended December 31, 2021 as M&A net revenue has moved into organic net revenue after one year from purchase.

We also saw a decrease in wholesale revenue of $5.0 million versus the prior year, primarily from a decrease in the sale of personal protective equipment (“PPE”) in the year-ended December 31, 2022.

Year-Ended December 31, 2021 2022 (in thousands) Heating, cooling and air quality $ 73,685 $ 67,797 Kitchen appliances 43,180 40,551 Health and beauty 15,579 17,485 Personal protective equipment 6,073 1,564 Cookware, kitchen tools and gadgets 22,933 19,526 Home office 12,352 13,322 Housewares 33,951 33,041 Essential oils and related accessories 27,444 23,604 Other 12,570 4,280 Total net revenue $ 247,767 $ 221,170 Heating, cooling and air quality accounted for $67.8 million in net revenue for the year-ended December 31, 2022 compared to $73.7 million for the year-ended December 31, 2021.

This decrease was primarily driven by reduced sales volume, which we attribute to reduced consumer demand from inflationary pressure on consumer spending and increased sales prices due to global supply chain disruptions offset by liquidation of higher priced inventory.

Kitchen appliances accounted for $40.6 million in net revenue for the year-ended December 31, 2022 compared to $43.2 million in net revenue for the corresponding period in 2021, a decrease of $2.6 million.

This decrease was primarily driven by reduced sales volume, which we attribute to reduced consumer demand from inflationary pressure on consumer spending, increased sales prices due to global supply chain disruption which has reduced our sales velocity offset by liquidation of higher priced inventory.

Health and beauty accounted for $17.5 million in net revenue for the year-ended December 31, 2022 compared to $15.6 million in net revenue for the corresponding period in 2021, an increase of $1.9 million. The increase is primarily attributable to new products obtained through M&A partially offset by reduced consumer demand.

Cookware, kitchen tools and gadgets accounted for $19.5 million in net revenue for the year-ended December 31, 2022 compared to $22.9 million in net revenue for the year-ended December 31, 2021.

The decrease of $3.4 million is driven by reduced sales volume, which we attribute to reduced consumer demand from inflationary pressures on consumer spending, increased sales prices due to global supply chain disruption which has reduced our sales velocity offset by liquidation of higher priced inventory.

Housewares accounted for $33.0 million in net revenue for the year-ended December 31, 2022 compared to $34.0 in net revenue for the year-ended December 31, 2021. The decrease in revenue of $1.0 million is primarily attributable to reduced consumer demand partially offset by new products obtained through acquisitions.

Essential oils and related accessories accounted for $23.6 million in net revenue for year-ended December 31, 2022 compared to $27.4 million in net revenue for the year-ended December 31, 2021.

The decrease in net revenue of $3.8 million is primarily driven by reduced sales volume, which we attribute to reduced consumer demand for inflationary pressure on consumer spending, increased sales prices due to global supply disruptions and inventory shorts due to manufacturing delays. 20 Cost of Goods Sold and Gross Margin Year-Ended December 31, Change 2021 2022 Amount % (in thousands, except percentages) Cost of goods sold $ 125,904 $ 115,652 $ (10,252 ) (8.1 ) % Gross profit $ 121,863 $ 105,518 $ (16,345 ) (13.4 ) % Cost of goods sold decreased by $10.3 million from $125.9 million for the year-ended December 20, 2021 to $115.7 million for the year-ended December 21, 2022 primarily from reduced sales volume.

The decrease in cost of goods sold is primarily attributable to the decrease of $45.5 million in cost of goods sold from our acquired businesses, as acquisitions move into organic after one year of purchase, partially offset by an increase in cost of goods sold of $29.5 million from our organic businesses.

Gross profit decreased from 49.2% for the year-ended December 31, 2021 to 47.7% for the year-ended December 31, 2022. The decrease in gross profit is primarily attributable to the impact of increased costs of supply chain and liquidation of high priced excess inventory.

This is partially offset by product mix as our net revenue increased from our M&A businesses, which have higher gross margin than our organic business gross margin.

The majority of our M&A businesses' net revenue tends to be from smaller products that have higher gross margins versus our organic business' net revenue, which tend to be oversized goods with lower gross margin.

We expect to see impacts in our gross margin for the first half of 2023 due to our expectation of continued liquidation of high priced excess inventory partially offset by improving shipping container rates.

Sales and Distribution Expenses Year-Ended December 31, Change 2021 2022 Amount % (in thousands, except percentages) Sales and distribution expenses $ 127,369 $ 121,139 $ (6,230 ) (4.9 ) % Sales and distribution expenses which included e-commerce platform commissions, online advertising and logistics expenses (i.e., variable sales and distribution expense), decreased to $121.1 million for the year-ended December 31, 2022 from $127.4 million for the year-ended December 31, 2021.

Although net revenue decreased year over year, our e-commerce platform commissions, online advertising, selling and logistics expenses were flat at $103.3 million for the year-ended December 31, 2022 and December 31, 2021. This is attributable to higher storage costs and fulfillment costs due to fuel surcharges, an increase in Amazon fees, and marketing investments in certain businesses.

Our sales and distribution fixed costs (e.g., salary and office expenses) decreased to $17.9 million for the year-ended December 31, 2022 from $24.1 million for the year-ended December 31, 2021 primarily due to approximately $4.1 million of bad debt reserve from our dispute with a certain PPE supplier which was recorded during the year-ended December 2021 and did not recur in 2022.

Sales and distribution expenses for the year-ended December 31, 2022 included a decrease in stock-based compensation expense of $1.8 million. As a percentage of net revenue, sales and distribution expenses increased to 54.8% for the year-ended December 31, 2022 from 51.4% for the year-ended December 31, 2021.

E-commerce platform commissions, online advertising, selling and logistic expenses included within sales and distribution expenses, as a percentage of net revenue, were 46.7% for the year-ended December 31, 2022 compared to 41.7% for the year-ended December 31, 2021.

This rate increase is primarily attributable to product mix, an increase in storage costs, 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 network.

Research and Development Expenses Year-Ended December 31, Change 2021 2022 Amount % (in thousands, except percentages) Research and development expenses $ 9,837 $ 6,012 $ (3,825 ) (38.9 ) % The decrease in research and development expenses was primarily attributable to a decrease in stock-based compensation expense of approximately $3.5 million. 21 General and Administrative Expenses Year-Ended December 31, Change 2021 2022 Amount % (in thousands, except percentages) General and administrative expenses $ 45,099 $ 38,239 $ (6,860 ) (15.2 ) % The decrease in general and administrative expenses was primarily due to a decrease in stock-based compensation expense of $9.2 million partially offset by an increase of $2.6 million related to legal settlement fees (See note 12 of Consolidated Financial Statements in this annual report on form 10-K) and $1.7 million in inventory donations.

Impairment loss on Goodwill Year-Ended December 31, Change 2021 2022 Amount % (in thousands, except percentages) Goodwill $ — $ (120,409 ) $ (120,409 ) (100.0 ) % We evaluated current economic conditions during 2022, including the impact of the Federal Reserve further increasing the risk-free interest rate, as well as the inflationary pressure on product and labor costs 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 during 2022. Accordingly, we concluded a triggering event had occurred and performed interim goodwill impairment analyses during the three months ended March 31, 2022 and September 30, 2022 which resulted in impairment charges of $29.0 million and $90.9 million, respectively.

There was no remaining goodwill on the balance sheet as of September 30, 2022. On October 4, 2022, the Company acquired Step and Go, a brand in the health and wellness category, for $0.7 million. As part of the purchase price allocation of the acquisition, $0.5 million was attributed to goodwill.

As our market capitalization was further reduced below net assets as of December 31, 2022, an impairment loss on goodwill of $0.5 million was recorded for the three months ended December 31, 2022, which is included in impairment loss on goodwill in the Consolidated Statement of Operations for the year-ended December 31, 2022.

As a result of these analyses, we recorded a total goodwill impairment charge of approximately $120.4 million for the year-ended December 31, 2022.

Impairment loss on Intangibles Year-Ended December 31, Change 2021 2022 Amount % (in thousands, except percentages) Impairment loss on Intangibles $ — $ (3,118 ) $ (3,118 ) (100.0 ) % Certain asset groups experienced a significant decrease in sales and contribution margin during 2022. This was considered an interim triggering event for the three months ended September 30, 2022.

Based on the analysis of comparing the undiscounted cash flow to the carrying value of the asset group, one group tested indicated that the assets may not be recoverable.

For this asset group, we compared the fair value to the carrying amount of the asset group and recorded an intangible impairment charge of $3.1 million for the year-ended December 31, 2022.

Change in fair value of contingent earn-out liabilities Year-Ended December 31, Change 2021 2022 Amount % (in thousands, except percentages) Settlement of a contingent earn-out liability $ 4,164 $ — $ (4,164 ) (100.0 ) % Change in fair value of contingent earn-out liabilities $ (30,529 ) $ (5,240 ) $ 25,289 82.8 % The settlement of a contingent earn-out liability for the year-ended December 31, 2021 was due to the difference of fair value of the shares issued on the settlement date versus the fair value of the earn-out on the date of the settlement. 22 The 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 Year-Ended December 31, Change 2021 2022 Amount % (in thousands, except percentages) Interest expense $ 12,655 $ 2,603 $ (10,052 ) (79.4 ) % 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 rate compared to this current period which only includes our Midcap credit facility.

Gain on extinguishment of seller note Year-Ended December 31, Change 2021 2022 Amount % (in thousands, except percentages) Gain on extinguishment of seller note $ — $ 2,012 $ 2,012 100.0 % The gain on extinguishment of seller note during the year-ended December 31, 2022 was attributable to the settlement of the Truweo seller note, which resulted in a $2.0 million gain on extinguishment of seller note upon the extinguishment of debt.

Loss on initial issuance of equity Year-Ended December 31, Change 2021 2022 Amount % (in thousands, except percentages) Loss on initial issuance of equity $ — $ 18,669 $ 18,669 100.0 % The loss on initial issuance of equity is attributable to the issuance of common shares and initial valuation of the prefunded warrants and common stock warrants from our March 2022 equity raise of $5.8 million in March 2022.

Further, in September 2022, we recorded a charge related to the September 29, 2022 securities purchase agreement for common stock and associated warrants for the three months ended September 30, 2022 as we deemed the agreement non cancellable.

The $12.8 million expense is derived from the anticipated fair-value of the issuances of equity attributable to the expected issuance of common shares and common stock warrants versus the anticipated proceeds to be received by us. We closed and issued the common stock and associated warrants on October 4, 2022.

Change in fair value of derivative liability Year-Ended December 31, Change 2021 2022 Amount % (in thousands, except percentages) Change in fair market value of derivative liability $ 3,254 $ — $ (3,254 ) 100.0 % The change in fair market value of derivative liability during the year-ended December 31, 2021 is attributable to the term loan from High Trail as we fair-valued certain embedded derivatives within the term loan, primarily around default interest rates. 23 Loss on extinguishment of debt Year-Ended December 31, Change 2021 2022 Amount % (in thousands, except percentages) Loss on extinguishment of debt $ 138,859 $ — $ (138,859 ) (100.0 ) % The loss on extinguishment of debt for the year-ended December 31, 2021 is attributable to the payment and termination of the December 2021 Note (as defined in Note 6 to our Consolidated Financial Statements included in this Annual Report), the February 2022 Note (as defined in Note 6 to our Consolidated Financial Statements included in this Annual Report) and our prior credit facility, which resulted in $29.8 million in loss on extinguishment of debt consisting of unamortized deferred finance costs, the extinguishment of the majority of the April 2022 Note loan, which resulted in $107.0 million in loss on extinguishment of debt and the extinguishment of the High Trail Note loan, which resulted in $2.1 million in loss on extinguishment of debt.

Change in fair market value of warrant liability Year-Ended December 31, Change 2021 2022 Amount % (in thousands, except percentages) Change in fair market value of warrant liability $ 26,455 $ (470 ) $ (26,925 ) (101.8 ) % Loss on initial issuance of warrants $ 20,147 $ — $ (20,147 ) (100.0 ) % The change in fair market value of the warrant liability during the year-ended December 31, 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.

The change in fair market value of warrant liability during the year-ended December 31, 2022 was related to the change in fair market value of the warrant liabilities from the prefunded warrants and common stock warrants from our March 2022 equity raise.

The loss on initial issuance of warrants for the year-ended December 31, 2021 was primarily driven by the increase of our share price since the original issuance of the warrants.

Liquidity and Capital Resources Cash Flows for Years-Ended December 31, 2021 and 2022 The following table provides information regarding our cash flows for the years-ended December 31, 2021 and 2022: Year-Ended December 31, 2021 2022 (in thousands) Cash used by operating activities $ (41,969 ) $ (17,477 ) Cash used in investing activities (44,905 ) (677 ) Cash provided by financing activities 95,569 26,996 Effect of exchange rate on cash (477 ) (528 ) Net change in and restricted cash for the period $ 8,218 $ 8,314 Net Cash Used in Operating Activities Net cash used by operating activities was $42.0 million for the year-ended December 31, 2021, resulting from our net cash losses from operations of $24.4 million and cash usage from working capital of $17.6 million from changes in accounts receivable, purchase of inventory and insurance and payments of accounts payable.

Net cash used by operating activities was $17.5 million for the year-ended December 31, 2022, resulting from our net cash losses from operations of $37.2 million, offset by cash from working capital of $19.7 million from changes in accounts receivable, purchase of inventory and insurance and payments of accounts payable and accrued expenses.

The reduction of inventory and accounts payable in 2022 relate to the decrease in inventory purchases in 2022 compared to 2021 and our efforts to normalize inventory levels by liquidating higher cost inventory.

The decrease in accounts receivable year over year relates to a reduction in sales volume during the last month of the quarter, December 2021 versus December 2022, and timing from a significant wholesale receivable from 2021 collected in 2022. 24 Net Cash Used in Investing Activities Net cash used in investing activities of $44.9 million for the year-ended December 31, 2021 was primarily for the acquisition of the assets from Healing Solutions, LLC (“Healing Solutions”) for $15.3 million, the assets from Squatty Potty, LLC for $19.0 million and the acquisition of Photo Paper Direct Ltd. of $10.6 million.

Net cash used in investing activities for the year-ended December 31, 2022 was primarily from the acquisition of Step and Go for $0.6 million.

Net Cash Provided by Financing Activities For the year-ended December 31, 2021, cash provided by financing activities of $95.6 million was primarily from proceeds from borrowings from the High Trail April 2022 Notes of $110.0 million, proceeds from cancellation of a warrant of $16.9 million and proceeds from an equity offering of $36.7 million, net, proceeds from exercise of stock options of $9.0 million, borrowings of $20.0 million of Midcap credit facility offset by repayments of the High Trail December 2021 Note and February 2022 Note of $59.5 million, repayments of the High Trail April 2022 Note of $10.1 million, repayments of the High Trail December 2022 Note of $27.5 million and $10.5 million of repayments of notes issued to certain sellers in connection with our M&A activity.

For the year-ended December 31, 2022, cash provided by financing activities of $27.0 million was primarily from the net proceeds from the March and October 2022 equity raise of $46.8 million partially offset by the net repayment of borrowings from the Midcap credit facility of $12.2 million, the payment of earn-out to Squatty Potty of $4.0, and the repayment of note to Smash of $3.4 million.

Liquidity and Going Concern As an emerging growth company in the early commercialization stage of its lifecycle, we are subject to inherent risks and uncertainties associated with the development of our enterprise.

In this regard, substantially all of our efforts to date have been devoted to the development and sale of our products in the marketplace, which includes our investment in organic growth at the expense of short-term profitably, our investment in incremental growth through mergers & acquisitions (“M&A strategy”), our recruitment of management and technical staff, and raising capital to fund the development of our enterprise.

As a result of these efforts, we have incurred significant losses and negative cash flows from operations since our inception and expect to continue to incur such losses and negative cash flows for the foreseeable future until such time that we reach a scale of profitability to sustain our operations.

In addition, our recent financial performance has been adversely impacted by the COVID-19 global pandemic and related global shipping disruption, in particular with respect to substantial increases in supply chain costs for shipping containers (See COVID-19 Pandemic and the Supply Chain below for additional details).