Summary
• ATER has renegotiated its financial debt and is being squeezed by its lender.
• In the short term, Aterian will suffer a massive capital dilution effect.
• In the long term, the sustainability of the business is key.
Investment Thesis
According to our analysis, several red lights have been found about Aterian Inc. (NASDAQ:ATER). We are bearish on this stock, and the main reasons are the company’s poor cash-burning business, its current distressed financial structure, and concerns about its management team.
Ater has renegotiated its financial debt and is being squeezed by its lender
After the USD 21.8 mln debt renegotiation occurred in August 2021, Aterian (from now on “the company”) and its lender High Trail (hereinafter “the lender”) on September 22 have further renegotiated financial debt (USD 91.3 mln promissory notes due 2024) following lender notification of an event of default.
In order to waive the event of default, the parties agreed to renegotiate the financial debt. The main terms of the agreement are as follows:
1. High Trail required Aterian accelerated repayment of USD 76.6 mln (USD 66.3 mln principal amount + 15%) and agreed to be repaid in shares of the company. The lender has the right to require in full or a portion of the repayment and agreed to require the reimbursement as soon as possible. After the lender’s request, the number of shares to be issued will be based on 80% of the average of the lowest two VWAPs over a trading period of 10 days. On top of this, until November 1, 2021, Aterian cannot issue new shares.
2. The maturity date of the remaining USD 20mln promissory notes has been anticipated by one year to April 1, 2023.
3. The parties have also renegotiated covenants on the remaining USD 20mln debt (allowed CAPEX, target Ebitda), and the minimum liquidity level has been reduced to USD 15mln (from USD 30 mln).
4. Should the company breach covenants again and/or fail to deliver shares following the lender’s call to pay, the lender has certain rights to modify the agreement to protect its committed capital.
This is what CEO has declared after reaching the agreement: “I am excited to share with our shareholders that Aterian has reached an agreement with its lender to satisfy the majority of its outstanding term debt and has made material progress in reducing its container shipping costs thanks to the support of various strategic shipping partners. These are two important steps that we expect to strengthen our balance sheet and cash flows in the future and allow Aterian to create a capital structure optimized for growth and profitability in 2022.”
Our view on this agreement and Aterian recent agreement and perspectives.
In the short term: massive capital dilution effect
Aterian has been forced to renegotiate its debt, and, in our view, there is little room for management and shareholders to be happy. In the short term, the lender will highly likely try to force down the share price to get more shares at the time of the payment call. Clearly, the lower the average price in the ten days following the call, the higher the number of shares the lender will get.
It is worth considering the lender can short the shares with no risk to be squeezed to close the position as the shares to short will be served to the lender by the company.
This reminds us of the late 90’s song Killing Me Softly. In this case, the lender will softly kill Aterian with its own shares, and the CEO is very excited. We find his statement rather sarcastic.
Considering that the lender has 3,5mln warrants with an exercise price set at 1 cent (reduced from USD 5,12), the overall effect is that we don’t know the final dilutive effect on ATER share capital.
We guess potential dilution might be in a range between 40% and 60%.
In the long term: the sustainability of the business is key
In the long term, the company is now called to demonstrate whether its business model is sustainable and would generate profitability in 2022.
The management claims to have “made material progress in reducing its container shipping costs thanks to the support of various strategic shipping partners.”
This is, in our view, a generic statement that tells nothing about a company’s ability to manage its path to profitability.
We continue to believe that the Company is not anymore a growth story, and AIMEE has nothing to do with Artificial Intelligence. In our view, ATER remains a reseller of cheap stuff, and its poor margins and modest revenue organic growth won’t change much even after shipping constraints are eased. Given the recent shave in consensus estimates, the market seems to agree with us.
Even assuming that the company would find its path to profitability in 2022, it is to consider that it will necessarily need further capital injections. Given Aterian’s recent history, we believe that private debt funds would be reluctant to finance the company.
The company will likely be forced to issue new shares at a discount to finance its operations.
We won’t extend us this time trying to model the company’s future path to profitability. We highlight that the number of shares might at least double over the next year, given all the above elements. Even assuming current market valuation to be fair, factoring in the dilution effect, shares are expected to fall sharply.
Conclusions
Aterian, in our view, is the sum up of the negative elements we would avoid when looking at an equity story: poor and cash-burning business, distressed financial structure, and management raising serious concerns (to use a euphemism given recent statements made by CEO). The company looks like a falling knife!