Aterian Inc

Aterian, Inc.

Notes to Condensed Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2023 and 2024 (Unaudited)

Aterian, Inc. (the "Company") 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 beauty products and essential oils.

Our primary brands include Squatty Potty, hOmeLabs, Mueller Living, 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.

Headquartered in New Jersey, the Company also maintains offices in China, the Philippines, and the United Kingdom.

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, at a reduced level, and negative cash flows for the foreseeable future until such time that we reach a scale of profitability to sustain our operations. We have also experienced declining revenues due to macroeconomic factors, including increased interest rates and reduced consumer discretionary spending, and other factors, and we intend to focus our efforts on a more limited number of products. In addition, our recent financial performance has been adversely impacted by inflationary pressures and reduced consumer spending.

In order to execute our growth strategy, we have historically relied on outside capital through the issuance of equity, debt, and borrowings under financing arrangements (collectively “outside capital”) to fund our cost structure, and we expect to continue to rely on outside capital for the foreseeable future, specifically for our M&A strategy. While we believe we will eventually reach a level of profitability to sustain our operations, there can beno assurance we will be able to achieve such profitability or do so in a manner that doesnot require our continued reliance on outside capital. Moreover, while we have historically been successful in raising outside capital, there can beno assurance we will be able to continue to obtain outside capital in the future or do so on terms that are acceptable to us.

As of the date the accompanying Condensed Consolidated Financial Statements were issued (the “issuance date”), we evaluated the significance of the following adverse financial conditions in accordance with Accounting Standard Codification205-40, Going Concern:

• Since our inception, we have incurred significant losses and used cash flows from operations to fund our enterprise. In this regard, during thesix months ended* June 30, 2024,we incurred a net loss of $8.8 million and generated net cash flows from operations of $2.9 million. In addition, as of June 30, 2024,*we had unrestricted cash and cash equivalents of $20.3 million available to fund our operations and an accumulated deficit of $708.6 million.

• We are required to remain in compliance with certain financial covenants required by the MidCap Credit facility (See Note7, Credit Facility, Term Loans and Warrants). We were in compliance with these financial covenants as of* June 30, 2024*, and expect to remain in compliance through at least* June 30, 2025.During February 2024,the Company amended its terms with Midcap Credit Facility extending the term until December 2026and amending certain financial covenants with favorable terms. We can provideno* assurances that we will remain in compliance with our financial covenants. Further, absent of our ability to generate cash inflows from our operations or secure additional outside capital, we will be unable to remain in compliance with these financial covenants. In the event we are unable to remain in compliance with these financial covenants (or other non-financial covenants required by the MidCap Credit Facility), and we are unable to secure a waiver or forbearance, MidCap* may,at its discretion, exercise any and all of its existing rights and remedies, which may*include, among others, accelerating repayment of the outstanding borrowings and/or asserting its rights in the assets securing the loan.

• As of the issuance date, we haveno firm commitments to secure additional outside capital from lenders or investors. While we expect to continue to explore raising additional outside capital, specifically to fund our M&A strategy, there can beno assurance we will be able to obtain capital or do so on terms that are acceptable to us. Accordingly, absent our ability to generate cash inflows from our operations and/or secure additional outside capital in the near term, we* maybe unable to meet our obligations as they become due over the nexttwelve* months beyond the issuance date.

• The Company's plan is to continue to closely monitor our operating forecast, to pursue our M&A strategy, to pursue additional sources of outside capital on terms that are acceptable to us, and to secure a waiver or forbearance from MidCap if we are unable to remain in compliance withone or more of the covenants required by the MidCap Credit Facility. Further, the Company has enacted a strategy to reduce the number of SKUs it sells and willno longer be pursuing future sales of SKUs that are eithernot profitable ornot core to the Company’s strategy. If some or all of our plans prove unsuccessful, we* mayneed to implement short-term changes to our operating plan, including butnot* limited to delaying expenditures, reducing investments in new products, or reducing our sale and distribution infrastructure. We* may*also need to seek long-term strategic alternatives, such as a significant curtailment of our operations, a sale of certain of our assets, a divestiture of certain product lines, a sale of the entire enterprise to strategic or financial investors, and/or allow our enterprise to become insolvent.

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The Company has initiatedtwo restructuring programs over the last15 months to reduce operating costs and right size the workforce to align with the scale of our streamlined operations. In addition, we have reduced the SKU count to solely focus on profitable products that are core to the Company’s strategy. During* February 2024,we extended the term with Midcap Credit Facility until December 2026 (See Note7,* Credit Facility, Term Loans and Warrants) and amended key terms which will add more flexibility to liquidity and strengthen our balance sheet. In consideration of these factors, the Company will monitor profitability and cash flow over the next several quarters to evaluate our ability to continue as a going concern.

Although significant strides have been made in reducing our operating losses and strengthening our balance sheet, uncertainties persist in our business operations and the forecasting of our business. These uncertainties raise substantial doubt about our ability to continue as a going concern. The accompanying Condensed Consolidated Financial Statements have been prepared on the basis that we will continue to operate as a going concern, which contemplates that we will be able to realize assets and settle liabilities and commitments in the normal course of business for the foreseeable future. Accordingly, the accompanying Condensed Consolidated Financial Statements donot include any adjustments that* may*result from the outcome of these uncertainties.

Nasdaq Listing -On April 24, 2023,we received a letter from the Listing Qualifications Staff of The Nasdaq Stock Market LLC (“Nasdaq”) indicating that, based upon the closing bid price of our common stock for the last30 consecutive business days, the Company is currently in compliance with the requirement to maintain a minimum bid price of$1.00 per share for continued listing on The Nasdaq Capital Market, as set forth in Nasdaq Listing Rule5550(a)(2) (the “Bid Price Notice”). The Bid Price Notice provided a compliance period of180 calendar days from the date of the Bid Price Notice, or until October 23, 2023,to regain compliance with the minimum closing bid requirement, pursuant to Nasdaq Listing Rule5810(c)(3)(A). Following a request we made on* October 13, 2023,on October 24, 2023,we received a letter from Nasdaq granting the Company an additional180* days, or until* April 22, 2024,*to regain compliance with the minimum closing bid requirement (the “Extension Notice”).

Nasdaq notified the Company in the Compliance Notice that from* March 22, 2024to April 5, 2024the closing bid price of the Company’s common stock had been$1.00* per share or greater and, accordingly, the Company had regained compliance with Nasdaq Listing Rule5450(a)(1) and that the matter was now closed.

On* August 11, 2023,Aterian's shareholders approved discretionary authority to our Board to (A) amend our Amended and Restated Certificate of Incorporation to effectone* or more consolidations of the issued and outstanding shares of our common stock, par value $0.0001 per share, pursuant to which the shares of Common Stock would be combined and reclassified at ratios within the range from1-for-2 up to1-for-30 and (B) determine whether to arrange for the disposition of fractional interests by stockholders entitled thereto, to pay in cash the fair value of fractions of a share of Common Stock as of the time when those entitled to receive such fractions are determined, or to entitle stockholders to receive from our transfer agent, in lieu of any fractional share, the number of shares of Common Stock rounded up to the next whole number, and to amend our Amended and Restated Certificate of Incorporation in connection therewith.

On* March 20, 2024,the Company filed a Certificate of Amendment to its Amended and Restated Certificate of Incorporation of the Company with the Secretary of State of Delaware (the “Certificate of Amendment”) to affect a1* - for -12 reverse stock split (the “Reverse Stock Split”) of the shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”). The Certificate of Amendment didnot decrease the number of authorized shares of Common Stock. No fractional shares were issued in connection with the Reverse Stock Split. Any fractional shares that would otherwise have resulted from the Reverse Stock Split were rounded up to the nearest whole number. The Reverse Stock Split impacted all holders of the Common Stock proportionally and didnot impact any stockholder’s percentage ownership of Common Stock (except to the extent the Reverse Stock Split results in any stockholder owning fractional shares).

The Common Stock began trading on a Reverse Stock Split-adjusted basis on the Nasdaq on* March 22, 2024.*All share and per share data has been retroactively adjusted to reflect the Reverse Stock Split.

**Restructuring -On May 9, 2023,the Company announced a plan to reduce expenses by implementing a reduction in its current workforce impacting approximately 50 employees and 15 contractors, primarily in the Philippines. The Company recognized restructuring charges of $1.6 million for the year-ended December 31, 2023.

On* February 8, 2024,the Company committed to a fixed cost-cutting plan, including a reduction in workforce which resulted in the termination of approximately 17 employees and 26 contractors globally. The Company recognized restructuring charges of $17 thousand and $0.6 million for thethree* andsix months ended* June 30, 2024,*respectively.

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Basis of Presentation—The Condensed Consolidated Financial Statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Unaudited Interim Financial Information—The accompanying interim Condensed Consolidated Financial Statements are unaudited and have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments necessary for the fair presentation of the Company's financial position as of* June 30, 2024* and the results of its operations and its cash flows for the periods ended* June 30, 2024and2023*. The financial data and other information disclosed in these notes related to thethree andsix months ended* June 30, 2024and2023* are also unaudited. The results for thethree andsix months ended* June 30, 2024* arenot necessarily indicative of results to be expected for the year ending* December 31,*2024, any other interim periods or any future year or period.

The Condensed Consolidated Balance Sheet as of* December 31, 2023,presented herein, has been derived from the Company’s audited Consolidated Financial Statements for the fiscal year then ended. These unaudited Condensed Consolidated Interim Financial Statements should be read in conjunction with our Annual Report on Form10*-K for the year ended* December**31,* 2023 as filed with the SEC on* March 19, 2024 (“Annual Report”) and have been prepared on a consistent basis with the accounting policies described in Note2* of the Notes to Consolidated Financial Statements included in our Annual Report. Our accounting policies didnot change during thesix months ended* June 30, 2024,other than with respect to the new accounting pronouncements adopted as described in Note2,* Recent Accounting Pronouncements.

Use of Estimates—Preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period covered by the financial statements and accompanying notes. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from those estimates.

Principles of Consolidation—The Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Restricted Cash—As of* December 31, 2023*, the Company has classified the following as restricted cash: $0.1 million related to its Chinese subsidiary within “Other Non-current Assets” on the Consolidated Balance Sheets and $2.0 million related to a letter of credit within "Prepaid and Other Current Assets" on the Consolidated Balance Sheets.

As of* June 30, 2024*, the Company has classified the following as restricted cash: $0.1 million related to its Chinese subsidiary within “Other Non-current Assets” on the Condensed Consolidated Balance Sheets and $2.0 million related to a letter of credit within "Prepaid and Other Current Assets" on the Condensed Consolidated Balance Sheets.

Inventory and Cost of Goods Sold—The Company’s inventory consists almost entirely of finished goods. The Company currently records inventory on its balance sheet on afirst-infirst-out basis, or net realizable value, if it is below the Company’s recorded cost. The Company’s costs include the amounts it pays manufacturers for product, tariffs and duties associated with transporting product across national borders, and freight costs associated with transporting the product from its manufacturers to its warehouses, as applicable. The valuation of our inventory requires us to make judgments, based on available information such as historical data, about the likely method of disposition, such as through sales to individual customers or liquidations, and expected recoverable values of each disposition category. Changes to the relevant assumptions and projections would impact our consolidated financial results in periods subsequent to recording these estimates. If we anticipate a change in assumptions such as future demand or market conditions to be less favorable than our previous estimates, additional inventory write-downs* maybe required. Conversely, if we are able to sell inventories that had been written down to a level below the ultimate realized selling price in a previous period, sales would be recorded with a lower orno* offsetting charge to cost of sales.

The “Cost of goods sold” line item in the consolidated statements of operations consists of the book value of inventory sold to customers during the reporting period. When circumstances dictate that the Company use net realizable value as the basis for recording inventory, it bases its estimates on expected future selling prices less expected disposal costs.

Accounts Receivable—Accounts receivable are stated at historical cost less allowance for credit losses. On a periodic basis, management evaluates its accounts receivable and determines whether to provide an allowance or if any accounts should be written off based on a past history of write-offs, collections and current credit conditions. A receivable is considered past due if the Company hasnot received payments based on agreed-upon terms. The Company generally doesnot require any security or collateral to support its receivables. The Company performs ongoing evaluations of its customers and maintains an allowance for credit losses. As of* December 31, 2023* and* June 30, 2024*, the Company had an allowance for credit losses of $0.1 million.

Revenue Recognition—The Company accounts for revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic606, Revenue from Contracts with Customers (“ASC Topic606”). The Company derives its revenue from the sale of consumer products. The Company sells its products directly to consumers through online retail channels and through wholesale channels.

For direct-to-consumer sales, the Company considers customer order confirmations to be a contract with the customer. Customer confirmations are executed at the time an order is placed throughthird-party online channels. For wholesale sales, the Company considers the customer purchase order to be the contract.

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For all of the Company’s sales and distribution channels, revenue is recognized when control of the product is transferred to the customer (i.e., when the Company’s performance obligation is satisfied), which typically occurs at shipment date. As a result, the Company has a present and unconditional right to payment and record the amount due from the customer in accounts receivable.

Revenue from consumer product sales is recorded at the net sales price (transaction price), which includes an estimate of future returns based on historical return rates. There is judgment in utilizing historical trends for estimating future returns. The Company’s refund liability for sales returns was $0.2 million at* December 31, 2023* and $0.3 million at* June 30, 2024*, which is included in accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheet and represents the expected value of the refund that will be due to its customers.

The Company evaluated principal versus agent considerations to determine whether it is appropriate to record platform fees paid to Amazon as an expense or as a reduction of revenue. Platform fees are recorded as sales and distribution expenses and arenot recorded as a reduction of revenue because the Company owns and controls all the goods before they are transferred to the customer. The Company can, at any time, direct Amazon, or similarly direct otherthird-party logistics providers (“Logistics Providers”), to return the Company’s inventory to any location specified by the Company. It is the Company’s responsibility to make customers whole following any returns made by customers directly to Logistic Providers and the Company retains the back-end inventory risk. Further, the Company is subject to credit risk (i.e., credit card charge backs), establishes prices of its products, can determine who fulfills the goods to the customer (Amazon or the Company) and can limit quantities or stop selling the goods at any time. Based on these considerations, the Company is the principal in this arrangement.

Net Revenue by Category. The following table sets forth the Company’s net revenue disaggregated by sales channel and geographic region based on the billing addresses of its customers:

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Net Revenue by Product Categories. The following table sets forth the Company’s net revenue disaggregated by product categories for thethree andsix months ended* June 30, 2024and2023*:

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Intangibles—We review long-lived assets for impairment when performance expectations, events, or changes in circumstances indicate that the asset's** carrying value maynot* 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.

On* March 20, 2023,the Company made certain leadership changes in our essential oil business resulting in a change in strategy and outlook for the business resulting in a reduced portfolio offering. This reduction in the portfolio was impactful to our essential oil business's future revenues and profitability and as a result the Company made revisions to our internal forecasts. The Company concluded that this change was an interim triggering event for thethree* months ending* March 31, 2023indicating the carrying value of our essential oil business's long-lived assets including trademarks may**not* be recoverable. Accordingly, the Company performed an interim impairment test of the trademark and assessed the recoverability of the related intangible assets by using level3 inputs and comparing the carrying value of an asset group to the net undiscounted cash flow expected to be generated. The recoverability test indicated that certain definite-live trademark intangible assets were impaired. The Company concluded the carrying value of the trademark exceeded its estimated fair value which was determined utilizing the relief-from-royalty method to determine discounted projected future cash flows which resulted in an impairment charge. The Company recorded an intangible impairment charge of $16.7 million during thethree months ending* March 31, 2023*within impairment loss on intangibles on the consolidated statement of operations.

During thethree months ended* June 30, 2023,the Company had a substantial decrease in its market capitalization, primarily relating to a decrease in share price. Further, the Company continued to see reduced net revenues across its portfolio due primarily to the then current macroeconomic environment reducing demand for consumer discretionary goods. Finally, during thethree* months ending* June 30, 2023,the Company implemented a strategy of rationalizing certain less profitable products and reducing its product offering, specifically related to its kitchen appliance products. As a result of this rationalization, along with the reduced demand for its products, the Company made certain revisions to its internal forecasts for its Paper business and Kitchen appliance business. The Company concluded that these factors were an interim triggering event for thethree* months ending* June 30, 2023indicating the carrying value of our Paper and Kitchen appliance business’s long-lived assets, including trademarks, may**not* be recoverable. Accordingly, the Company performed an interim impairment test of the trademark and assessed the recoverability of the related intangible assets by using level3 inputs and comparing the carrying value of an asset group to the net undiscounted cash flow expected to be generated. The recoverability test indicated that certain definite-live trademark intangible assets were impaired. The Company concluded the carrying value of the trademark exceeded its estimated fair value which was determined utilizing the relief-from-royalty method to determine discounted projected future cash flows which resulted in an impairment charge. The Company recorded an intangible impairment charge of $22.8 million for the Paper business and Kitchen appliance business during thethree months ending* June 30, 2023*within impairment loss on intangibles on the consolidated statement of operations.

During thethree months ended* December 31, 2023,the Company continued to see reduced revenue in its paper business resulting in certain revisions to its internal forecasts. Due to these revisions in forecast due to reduced demand, the Company concluded this was an interim triggering event for thethree* months ending* December 31, 2023indicating the carrying value of our Paper business’s long-lived assets, including trademarks, may**not* be recoverable. Accordingly, the Company performed an interim impairment test of the trademark and assessed the recoverability of the related intangible assets by using level3 inputs and comparing the carrying value of an asset group to the net undiscounted cash flow expected to be generated. The recoverability test indicated that certain definite-live trademark intangible assets were impaired. The Company concluded the carrying value of the trademark exceeded its estimated fair value which was determined utilizing the relief-from-royalty method to determine discounted projected future cash flows which resulted in an impairment charge. The Company recorded an intangible impairment charge of $0.3 million for the Paper business during thethree months ending* December 31, 2023*within impairment loss on intangibles on the consolidated statement of operations.

These fair value measurements require significant judgements using Level3 inputs, such as discounted projected future cash flows, which arenot observable from the market, directly or indirectly. There is uncertainty in the projected future cash flows used in the Company’s impairment analysis, which requires the use of estimates and assumptions. If actual performance doesnot achieve the projections, or if the assumptions used in the analysis change in the future, the Company* maybe required to recognize additional impairment charges in future periods. Key assumptions in the impairment models included a discount and royalty rate. The Company believes our procedures for determining fair value are reasonable and consistent with current market conditions as of June 30, 2024.*

There wereno triggering events to test intangibles for impairment loss during thesix months ended* June 30, 2024.*

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 result in corresponding changes to our expectations about future estimated cash flows. If our adjusted expectations of the operating results donot materialize, we* maybe required to record intangible impairment charges, which may*be material.

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Fair Value of Financial Instruments—The Company’s financial instruments, including net accounts receivable, accounts payable, and accrued and other current liabilities are carried at historical cost. At* June 30, 2024*, the carrying amounts of these instruments approximated their fair values because of their short-term nature. The Company’s credit facility is carried at amortized cost at* December 31, 2023* and* June 30, 2024* and the carrying amount approximates fair value as the stated interest rate approximates market rates currently available to the Company. The Company considers the inputs utilized to determine the fair value of the borrowings to be Level2 inputs.

The fair value of the stock purchase warrants issued in connection with the Company’s common stock offering on* March 1, 2022were measured using the Black-Scholes model. Inputs used to determine the estimated fair value of the warrant liabilities include the fair value of the underlying stock at the valuation date, the term of the warrants, and the expected volatility of the underlying stock. The significant unobservable input used in the fair value measurement of the warrant liabilities is the estimated term of the warrants. Upon the issuance of the stock purchase warrants, the Company evaluated the terms of each warrant to determine the appropriate accounting and classification pursuant to FASB ASC Topic480,* Distinguishing Liabilities from Equity (“ASC480**”), and FASB Accounting Standards Codification Topic815, Derivatives and Hedging (“ASC815**”). Based on the Company’s evaluation and due to certain terms in the warrant agreements, it concluded the stock purchase warrants should be classified as liability with subsequent remeasurement as long as such warrants continue to be classified as liabilities.

Assets and liabilities recorded at fair value on a recurring basis in the Condensed Consolidated Balance Sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The authoritative guidance on fair value measurements establishes athree-tier fair value hierarchy for disclosure of fair value measurements as follows:

Level1**—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level2**—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that arenot active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

Level3**—Unobservable inputs that are supported by little orno market data for the related assets or liabilities.

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The following table summarizes the fair value of the Company’s financial assets that are measured at fair value as of* December 31, 2023* and* June 30, 2024* (in thousands):

A summary of the activity of the Level3 liabilities carried at fair value on a recurring basis for the year-ended* December 31, 2023* and thesix months ended* June 30, 2024* is as follows (in thousands):

Recent Accounting Pronouncements

The JOBS Act permits an emerging growth company to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to use this extended transition period until we areno longer an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period. As a result, our financial statements* may**not* be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

In* August 2023,the FASB finalized ASU2023*-09, Income Taxes (Topic740). This ASU provides for certain updates to enhance the transparency about companies’ exposure to changes in tax legislation and the global tax risk they* mayface. Under the guidance, companies will be required to provide a breakout of amounts paid for taxes between federal, state, and foreign taxing jurisdictions, rather than a lump sum amount. Further, the rate reconciliation will require disaggregation intoeight* specific categories, with these categories further disaggregated by jurisdiction and for amounts exceeding5 percent of their domestic tax rate. The rate reconciliation will need to also disclose both dollar amounts and percentages. This standard is effective for fiscal years beginning after* December 15, 2024.*

In* November 2023,the FASB issued ASU2023*-07, Improvements to Reportable Segment Disclosures (“ASU2023-07”), which requires a company to disclose additional, more detailed information about a reportable segment’s significant expenses, even if there isone reportable segment, and is intended to improve the disclosures about a public entity’s reportable segments. The ASU is effective for fiscal years beginning after* December 15, 2023,and for interim periods beginning after December 15,*2024, with early adoption permitted. We are currently evaluating the impact of the adoption of ASU2023-07 on our consolidated financial statements.

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Accounts receivable consisted of the following as of* December 31, 2023and June 30, 2024 (*in thousands):

Inventory consisted of the following as of* December 31, 2023* and* June 30, 2024* (in thousands):

The Company’s inventory on-hand is held either with Amazon or the Company’s otherthird-party warehouses. The Company doesnot have any contractual right of returns with its contract manufacturers. The Company’s inventory on-hand held by Amazon was approximately $5.0 million and $4.0 million as of* December 31, 2023* and* June 30, 2024*, respectively.

Prepaid and other current assets consisted of the following as of* December 31, 2023* and* June 30, 2024* (in thousands):

Accrued expenses and other current liabilities consisted of the following as of* December 31, 2023* and* June 30, 2024* (in thousands):

The Company sponsors, through its professional employer organization provider, a401(k) defined contribution plan covering all eligible US employees. Contributions to the401(k) plan are discretionary. Currently, the Company doesnot match or make any contributions to the401(k) plan.

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MidCap Credit Facility

On* December 22, 2021,*the Company entered into a Credit and Security Agreement (the “Credit Agreement”) together with certain of its subsidiaries party thereto as borrowers, the entities party thereto as lenders, and Midcap Funding IV Trust, as administrative agent, pursuant to which, among other things, (i) the Lenders agreed to provide athree year revolving credit facility in a principal amount of up to $40.0 million subject to a borrowing base consisting of, among other things, inventory and sales receivables (subject to certain reserves), and (ii) the Company agreed to issue to MidCap Funding XXVII Trust a warrant (the “Midcap Warrant”) to purchase up to an aggregate of 16,667 shares of common stock of the Company, par value $0.0001 per share, in exchange for the Lenders extending loans and other extensions of credit to the Company under the Credit Agreement.

The obligations under the Credit Agreement are a senior secured obligation of the Company and rank senior to all indebtedness of the Company. Borrowings under the Credit Agreement bear interest at a rate of Term Secured Overnight Financing Rate ("Term SOFR"), which is defined as SOFR plus 0.10%, plus 5.50%. The Company will also be required to pay a commitment fee of 0.50% in respect of the undrawn portion of the commitments, which is generally based on average daily usage of the facility during the immediately preceding fiscal quarter. The Credit Agreement doesnot require any amortization payments.

The Credit Agreement minimum liquidity covenant, which includes the Company’s unrestricted U.S. cash plus the revolving loan availability, requires that Midcap shallnot permit the credit party liquidity at any time to be less than (a) during the period commencing on* February1st* through and including* May31st* of each calendar year, $12.5 million and (b) at all other times, $15.0 million. The Credit Agreement includes events of default that are customary for these types of credit facilities, including the occurrence of a change of control.

The Midcap Warrant has an exercise price of $56.40 per share, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, is immediately exercisable, has a term often years from the date of issuance and is exercisable on a cash or cashless basis.

On* February 23, 2024,the Company amended its asset backed credit facility with MidCap Financial Trust. The Credit Facility term was extended to December 2026*and gives the Company access to $17 million in current commitments which can be increased, subject to certain conditions, to $30.0 million. The Credit Facility extension reduced the minimum liquidity financial covenant from a peak of $15.0 million to $6.8 million of U.S. cash on hand and/or availability in the Credit Facility. The extension fee was less than $0.1 million.

The Company is in compliance with the financial covenants contained within the Credit Agreement as of* June 30, 2024.*

The Company’s credit facility consisted of the following as of* December 31, 2023* and* June 30, 2024* (in thousands):

Interest Expense, Net

Interest expense, net consisted of the following for thethree andsix months ended* June 30, 2023* and2024 (in thousands):

Securities Purchase Agreement and Warrants

On* March 1, 2022,the Company entered into Securities Purchase Agreements (the “Purchase Agreements”) with certain accredited investors identified on the signature pages to the Purchase Agreements (collectively, the “Purchasers”) pursuant to which, among other things, the Company issued and sold to the Purchasers, in a private placement transaction (the“2022* Private Placement”), (i)536,361 shares of the Company’s common stock (the “Shares”), and accompanying warrants to purchase an aggregate of 402,271 shares of common stock, and (ii) prefunded warrants to purchase up to an aggregate of 251,155 shares of common stock (the “Prefunded Warrants”) and accompanying warrants to purchase an aggregate of 188,366 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 $34.92, and each Prefunded Warrant and accompanying Common Stock Warrant were sold together at a combined price of $34.92, for gross proceeds of approximately $27.5 million. In connection with the2022 Private Placement, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) with the Purchasers, pursuant to which the Company agreed to register for resale the Shares, as well as the shares of common stock issuable upon exercise of the Warrants (the “Warrant Shares”). Under the Registration Rights Agreement, the Company agreed to file a registration statement covering the resale by the Purchasers of the Shares and Warrant Shares within30 days following the agreement date. The Company filed such resale registration statement on* March 28, 2022,and it was declared effective by the SEC on April 8, 2022.*

Upon the issuance of the Prefunded Warrants and stock purchase warrants, the Company evaluated the terms of each Warrant to determine the appropriate accounting and classification pursuant to ASC480 and ASC815. Based on the Company’s evaluation and due to certain terms in the warrant agreements, it concluded the Prefunded Warrant and the stock purchase warrants should be classified as liabilities with subsequent remeasurement at each quarter so long as such warrants remain to be classified as liabilities. The Company recorded an initial liability on issuance of $19.0 million from this conclusion. As of* June 30, 2024*, the Company has $0.5 million as the liability related to the Warrants.

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The Company hasthree equity plans:

2014 Amended and Restated Equity Incentive Plan

The board of directors of Aterian Group, Inc., a subsidiary of the Company (“AGI”), adopted, and AGI’s stockholders approved, the Aterian Group, Inc.2014 Equity Incentive Plan on* June 11, 2014.On March 1, 2017,AGI’s board of directors adopted, and AGI’s stockholders approved, an amendment and restatement of the2014* Equity Incentive Plan (as amended, the “Aterian2014 Plan”). As of* June 30, 2024*, there wereno shares reserved for future issuance under the Aterian2014 Plan.

2018 Equity Incentive Plan

The Company’s board of directors (the “Board”) adopted the Aterian, Inc.2018 Equity Incentive Plan (the*“2018* Plan”) on* October 11, 2018.The2018* Plan was approved by its stockholders on* May 24, 2019.As of June 30, 2024*,614,733 shares were reserved for awards available for future issuance under the2018 Plan.

Options granted to date under the Aterian2014 Plan and the2018 Plan generally vest either: (i) over afour-year period with 25% of the shares underlying the options vesting on thefirst anniversary of the vesting commencement date with the remaining 75% of the shares vesting on a pro-rata basis over the succeedingthirty-six months, subject to continued service with the Company through each vesting date, or (ii) over athree-year period with 33 1/3% of the shares underlying the options vesting on thefirst anniversary of the vesting commencement date with the remaining 66 2/3% of the shares vesting on a pro-rata basis over the succeedingtwenty-four months, subject to continued service with the Company through each vesting date. Options granted are generally exercisable for up to 10 years subject to continued service with the Company.

Inducement Equity Incentive Plan

On* May 27, 2022,*the Compensation Committee of the Board (the “Compensation Committee”) adopted the Aterian, Inc.2022 Inducement Equity Incentive Plan (the “Inducement Plan”). The Inducement Plan will serve to advance the interests of the Company by providing a material inducement for the best available individuals to join the Company as employees by affording such individuals an opportunity to acquire a proprietary interest in the Company.

The Inducement Plan provides for the grant of equity-based awards in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance units and performance shares solely to prospective employees of the Company or an affiliate of the Company provided that certain criteria are met. Awards under the Inducement Plan* mayonly be granted to an individual, as a material inducement to such individual to enter into employment with the Company or an affiliate of the Company, who (i) hasnot* previously been an employee or director of the Company or (ii) is rehired following a bona fide period of non-employment with the Company. The maximum number of shares available for grant under the Inducement Plan is 225,000 shares of the Company’s common stock (subject to adjustment for recapitalizations, stock splits, reorganizations and similar transactions). The Inducement Plan is administered by the Compensation Committee and expiresten years from the date of effectiveness. As of* June 30, 2024*,193,476 shares were reserved for future issuance under the Inducement Plan.

The Inducement Plan hasnot been and willnot be approved by the Company’s stockholders. Awards under the Inducement Plan will be made pursuant to the exemption from Nasdaq stockholder approval requirements for equity compensation provided by Nasdaq Listing Rule5635(c)(4), which permits Nasdaq listed companies to make inducement equity awards to new employees withoutfirst obtaining stockholder approval of the award.

Reverse Stock Split

On* March 20, 2024,the Company filed a Certificate of Amendment to its Amended and Restated Certificate of Incorporation of the Company with the Secretary of State of Delaware (the “Certificate of Amendment”) to affect a1* -for-12 reverse stock split (the “Reverse Stock Split”) of the shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”). The Certificate of Amendment didnot decrease the number of authorized shares of Common Stock. No fractional shares were issued in connection with the Reverse Stock Split. Any fractional shares that would otherwise have resulted from the Reverse Stock Split were rounded up to the nearest whole number. The Reverse Stock Split impacted all holders of the Common Stock proportionally and didnot impact any stockholder’s percentage ownership of Common Stock (except to the extent the Reverse Stock Split results in any stockholder owning fractional shares).

The reverse stock split is deemed an equity restructuring pursuant to ASC718, Compensation - Stock Compensation. The Company's equity plans incorporate anti-dilutive provisions for existing equity awards, including restricted stock and stock options, to maintain the value of all awards post-reverse stock split. Consequently, there wereno change in the fair value of the awards attributable to the reverse stock split, andno impact on stock-based compensation for thethree andsix months ending* June 30, 2024.*

The Common Stock began trading on a Reverse Stock Split-adjusted basis on the Nasdaq on* March 22, 2024.*All share and per share data has been retroactively adjusted to reflect the Reverse Stock Split.

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The following is a summary of stock option activity during thesix months ended* June 30, 2024*:

() The number of options and exercise price per share have been retroactively restated to reflect theone* fortwelve (1 for12) reverse stock split, which was effective on* March 22, 2024.*

As of* June 30, 2024*, all options have been fully expensed.

A summary of restricted stock award activity within the Company’s equity plans and changes for thesix months ended* June 30, 2024* is as follows:

() The number of shares and grant date fair value per share have been retroactively restated to reflect theone* fortwelve (1 for12) reverse stock split, which was effective on* March 22, 2024.*

As of* June 30, 2024*, the total unrecognized compensation expense related to unvested shares of restricted common stock was $5.8 million, which the Company expects to recognize over an estimated weighted-average period of 2.5 years.

Stock-based compensation expense is allocated based on the cost center to which the award holder belongs. The following table summarizes the total stock-based compensation expense by function, including expense related to consultants, for thethree andsix months ended* June 30, 2023* and2024 (in thousands):

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Basic net loss per share is determined by dividing net loss by the weighted-average shares of common stock outstanding during the period. Diluted net loss per share is determined by dividing net loss by diluted weighted-average shares outstanding. Diluted weighted-average shares reflect the dilutive effect, if any, of potentially dilutive shares of common stock, such as options to purchase common stock calculated using the treasury stock method and convertible notes using the “if-converted” method. In periods with reported net operating losses, all options to purchase common stock are deemed anti-dilutive such that basic net loss per share and diluted net loss per share are equal.

The Company’s shares of restricted common stock are entitled to receive dividends and hold voting rights applicable to the Company’s common stock, irrespective of any vesting requirement. Accordingly, although the vesting commences upon the elimination of the contingency, the shares of restricted common stock are considered a participating security and the Company is required to apply thetwo-class method to consider the impact of the shares of restricted common stock on the calculation of basic and diluted earnings per share. The Company is currently in a net loss position and is thereforenot required to present thetwo-class method; however, in the event the Company is in a net income position, thetwo-class method must be applied by allocating all earnings during the period to shares of common stock and shares of restricted common stock.

The following table sets forth the computation of basic and diluted net loss per share (in thousands, except share and per share data):

() The number of shares and per share amounts have been retroactively restated to reflect theone* fortwelve (1 for 12) reverse stock split, which was effective on* March 22, 2024.*

Sales or Other Similar Taxes—Based on the location of the Company’s current operations, the majority of sales tax is collected and remitted either by the Company or on its behalf by e-commerce marketplaces in most states within the U.S. To date, the Company has hadno actual or threatened sales and use tax claims from any state where it doesnot already claim nexus or any state where it sold products prior to claiming nexus. However, the Company believes that the likelihood of incurring a liability as a result of sales tax nexus being asserted by certain states where it sold products prior to claiming nexus is probable. As of* December 31, 2023* and* June 30, 2024*, the Company estimates that the potential liability, including current sales tax payable is approximately $1.0 million and $1.1 million, which has been recorded in accrued and other current liabilities on the Condensed Consolidated Balance Sheet. The Company believes this is the best estimate of an amount due to taxing agencies, given that such a potential loss is an unasserted liability that would be contested and subject to negotiation between the Company and the state, or decided by a court.

Legal Proceedings—The Company is party to various actions and claims arising in the normal course of business. The Company doesnot believe that the final outcome of these matters will have a material adverse effect on the Company’s financial position or results of operations. In addition, the Company maintains what it believes is adequate insurance coverage to further mitigate risk. However,no assurance can be given that the final outcome of such proceedings willnot materially impact the Company’s financial condition or results of operations. Further,no assurance can be given that the amount or scope of existing insurance coverage will be sufficient to cover losses arising from such matters.

Settlement Agreement—On* May 2, 2021,the Company entered into a settlement agreement withone* of the Company’s suppliers who agreed to pay the amount of $3.0 million to the Company inthree installments of $1.0 million each, with thefirst payment to be paid on or before* May 31, 2021,thesecond* payment to be paid on or before* September 30, 2021,and thethird* payment to be paid on or before* November 30, 2021.Further, the supplier agreed to deliver certain goods as part of this settlement by September 30, 2021.Through the date of the accompanying Condensed Consolidated Financial Statements, the supplier hasnot* paid in full its requiredfirst payment of $1.0 million nor has it delivered the required quantity of goods. The Company fully reserved $4.1 million within prepaid and other current assets on its Consolidated Financial Statements during the year-ended* December 31, 2022and December 31, 2023.The Company has commenced legal action against the supplier and certain other parties to the matter. One of the parties to the matter has filed for bankruptcy and such legal action is being stayed until the resolution of such bankruptcy. The Company continues to reserve its legal options and rights on this matter as of June 30, 2024.*

Mueller Action—In* October 2021,the Company received a class action notification and pre-lawsuit demand letter demanding corrective action with respect to the marketing, advertising and labeling of certain products under the Mueller brand (the “Mueller Action”). In April 2022,the parties reached an agreement in principle to resolve this potential action for $0.5 million in cash and $0.3 million worth of coupons, which the Company accrued $0.8 million in thethree* months ended* March 31, 2022,subject to court approval. The court preliminarily approved the settlement on August 3, 2023and final approval was granted May 8, 2024.*

Earn-out Payment Dispute—On* February 24, 2022,the Company received a notice disputing the Company’s calculation of the earn-out payment to be paid to Josef Eitan and Ran Nir pursuant to the Stock Purchase Agreement (the “PPD Stock Purchase Agreement”), dated as of May 5, 2021,by and among the Company, Truweo, LLC, Photo Paper Direct Ltd, Josef Eitan and Ran Nir. The Company is in discussions with representatives of Mr. Eitan and Mr. Nir, who believe they are entitled to the full earn-out amount (£6,902,816 or approximately $8.8 million) under the terms of the PPD Stock Purchase Agreement, whereas the Company believes they arenot.* Mr. Eitan and Mr. Nir filed a motion to compel arbitration in the Southern District of New York on* September 14, 2022,which was granted on May 18, 2023.The parties engaged an independent accountant to resolve the dispute, as required by the PPD Stock Purchase Agreement and the Southern District of New York. In February 2024,the independent accountant ruled in favor of the Company and determined that the Company owesno earn-out. Therefore, the Company believes it hasno* liability to the sellers.

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The following tables summarize the changes in the Company’s intangible assets as of* December 31, 2023* and* June 30, 2024* (in thousands):

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The following table sets forth the estimated aggregate amortization of the Company’s intangible assets for the nextfive years and thereafter (amounts in thousands):

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On* May 9, 2023,the Company announced a plan to reduce expenses and re-align the organization’s structure by implementing a reduction in its current workforce impacting approximately 50 employees and 15 contractors, primarily in the Philippines. The headcount reduction is part of the Company's cost-saving initiatives to navigate challenges in the industry and to better position itself for future growth opportunities. The Company incurred $1.6 million of restructuring charges during the year-ended December 31, 2023.*

On* February 8, 2024,the Company committed to a fixed cost-cutting plan, including a reduction in workforce which resulted in the termination of approximately 17 employees and 26 contractors globally. The Company recognized restructuring charges of $17 thousand and $0.6 million for thethree* andsix months ended* June 30, 2024,*respectively.

The accounting for the restructuring costs follows the provisions of ASC420, "Accounting for Costs Associated with Exit or Disposal Activities," which requires the recognition of a liability once the restructuring plan is communicated to affected employees and meets the criteria of being probable and reasonably estimable. The Company recognizes a liability for employee severance, other benefits, and involuntary terminations on the communication date.

The following table provides a summary of the restructuring costs incurred:

(1) Includes reversal of costs associated with a contract settlement during thethree andsix months ended* June 30, 2024.*

The following table provides a summary of the Company's total restructuring reserve:

As of* June 30, 2024*, the Company has a liability of $0.2 million for restructuring costs which are included in accrued expenses and other current liabilities on the consolidated balance sheet. As of* June 30, 2023,*the Company has a liability of $0.6 million for restructuring costs, of which $0.5 million is included in accrued expenses and other current liabilities and $0.1 million is included in other liabilities on the consolidated balance sheet.

As of* December 31, 2023,*the Company had a liability of $0.2 million for restructuring costs, of which $0.1 million was included in accrued expenses and other current liabilities and $0.1 million was included in other liabilities on the consolidated balance sheet.

The Company will continue to assess the restructuring plan's progress and provide updates as required in future financial statements if there are material changes to the initial estimates or additional significant restructuring activities.

None.

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