Aterian Inc

PART I

Item 1. Business.

See the sections contained within this Annual Report entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” for further information.

About Aterian

Aterian, Inc. (“Aterian”, the “Company”, “we”, “us”, and “our”) is a technology-enabled consumer products company that predominantly operates through online retail channels such as Amazon and Walmart. The Company operates its owned brands, which were either incubated or purchased, selling products in multiple categories, including home and kitchen appliances, kitchenware, air quality appliances, health and wellness products and essential oils.

Our primary brands include Squatty Potty; hOmeLabs; Mueller; Pursteam; Healing Solutions; and Photo Paper Direct. We generate revenue primarily through the online sales of our various consumer products with substantially all of our sales being made through the Amazon U.S. marketplace.

Products

The Company sells a wide-range of products across multiple categories, including home and kitchen appliances, kitchenware, cooling and air quality appliances such as dehumidifiers, health and beauty products, essential oils and more. These products are sold under the Company’s owned brands, which were either incubated or acquired. Our primary brands include Squatty Potty; hOmeLabs; Mueller; Pursteam; Healing Solutions; and Photo Paper Direct "(PPD)". We generate revenue primarily through the online sales of our various consumer products with substantially all of our sales being made through the Amazon U.S. marketplace.

While we pursue growth from our existing product portfolio and from new product launches, we also intend to pursue growth through strategic acquisitions of brands that we believe will integrate well with our business.

Intellectual Property and Technology

We rely primarily on a combination of trade secrets, trademarks, employee and third-party nondisclosure agreements and licensing arrangements (including open source software) to protect our intellectual property. We generally do not pursue patent applications as a means of protecting our intellectual property. We have applied to register or have registered certain of our trademarks in the U.S. and other jurisdictions, and we will pursue additional trademark registrations to the extent we believe they would be beneficial and cost-effective.

We believe that the use of technology allows us to automate and ingest data to create efficiencies within our sales and marketing and our supply chain. This ability to leverage technology is important for our business considering that predominately all our net revenue is generated via e-commerce marketplaces. Historically, we developed the majority of our technology internally. However, in February 2024, we announced that we have shifted our technology platform away from a fully internally developed model to an integrated third-party, best-of-breed model.

Customers

Our customers are mainly individual online consumers who purchase our products primarily on Amazon US, and to a lesser extent on our owned and operated websites and other marketplaces, such as Walmart. In 2022 and 2023, approximately 89% and 88% of our revenue was through the Amazon sales platform, respectively.

Seasonality

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

Sales and Marketing

Our sales and marketing strategy and approach is focused on online channels and e-commerce platforms. Currently our primary focus on advertising spend is online across Amazon, Google and Facebook.

Third-Party Manufacturing & Logistics

During 2023, we purchased the substantial majority of our finished products from suppliers in China. We do not maintain long-term purchase contracts with suppliers and operate mainly on a purchase order basis. We negotiate purchases from our foreign suppliers in U.S. dollars. We purchased our inventory from approximately 59 suppliers, four of which represented more than 10% of purchases during the year-ended December 31, 2023. While we believe the loss of any one supplier would not have a long-term material adverse effect on our business due to the availability of other suppliers, the loss of a supplier could, in the short term, materially and adversely impact our business.

The principal raw materials used by our third-party suppliers to manufacture our products are plastic, glass, steel, copper, aluminum and packaging materials. We believe adequate quantities of raw materials are available from various suppliers.

We use a combination of Amazon warehouses, other third-party warehouse and logistics partners to fulfill direct-to-consumer orders, through agreements or terms of services. In addition to fulfillment by Amazon warehouses, we use geographically distributed third-party warehouses in the U.S. to deliver orders within one to two days through ground shipment to most customers.

Competition

The consumer goods and e-commerce markets are highly competitive and dynamic. We compete primarily against numerous third-party brands and sellers on marketplaces for each of our products. Competition is based on price, product features and quality, strong ratings and reviews, effective marketing, visibility and location on the online shelf and supply chain excellence, which is mostly the ability to deliver products to customers in one to two days. 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.

Government Regulation

We are subject to a variety of U.S. federal, state and local laws and international laws, including but not limited to those governing the processing of payments, consumer protection, the privacy of consumer information and other laws regarding unfair and deceptive trade practices. We are also subject to various environmental laws, rules and regulations, such as California’s Proposition 65.

The products sold by us are also subject to regulation by U.S. governmental agencies, including the U.S. Consumer Product Safety Commission, the Federal Trade Commission, United States Food and Drug Administration, the U.S. Environmental Protection Agency, the U.S. Department of Energy and similar state and international regulatory authorities, such as the California Energy Commission. We do not estimate any significant capital expenditures for environmental control matters either in the current fiscal year or in the near future.

We are also subject to regulations relating to our supply chain. For example, the California Transparency in Supply Chains Act requires retail sellers that do business in California to disclose their efforts to eradicate slavery and human trafficking in their supply chains. As part of our vendor qualification process, we review suppliers’ operations for compliance with applicable labor and workplace standards and other applicable laws, including laws prohibiting child labor, forced labor and unsafe working conditions.

A significant portion of our products are currently manufactured in China. The enactment of new legislation, executive actions, or changes in current laws related to international trade affecting trade agreements, changes in tariffs, trade barriers, price and exchange controls and other regulatory requirements or changes in sourcing patterns could adversely affect the Company’s operations and result in additional expenses.

Although we have not suffered any material restrictions from doing business in the past due to government regulations, significant impediments may arise in the future as we expand product offerings.

From time to time, we dispose of or donate obsolete inventory in compliance with applicable laws and regulations.

People

The human capital objectives we focus on in managing our business include attracting, developing, and retaining key personnel. We believe our management team has the experience necessary to effectively implement our growth strategy and continue to drive stockholder value. We provide competitive compensation, which includes a focus on stock-based compensation, and benefits to attract and retain key personnel, while also providing a safe, inclusive and respectful workplace. As of December 31, 2023, we had 114 full-time employees, and 52 independent contractors. As of December 31, 2023, our employees and contractors are based in offices, shared workspaces and remote work locations in the U.S., China, the U.K., the Philippines, and in Poland. We also contract with 21 consultants, in Ukraine, Serbia, Israel, and Costa Rica.

On February 8, 2024, the Company committed to a fixed cost-cutting plan, including a reduction in workforce which will result in the termination of approximately 21 employees and 27 contractors globally. The Company expects to substantially complete this reduction by the end of the first quarter of 2024.

Available Information

The Company’s corporate website is located at https://ir.aterian.io. The Company files reports and other information with the SEC pursuant to the information requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company makes available free of charge, on or through its website, the Company’s annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with the SEC. Information contained on the Company’s website is not part of this Annual Report on Form 10-K or any other report filed with the SEC. Readers may also read and copy any document the Company files at the SEC’s website at www.sec.gov.