Aterian: Sell On Delayed Profitability Expectations, Likelihood Of Dilution (NASDAQ:ATER)

Note:

I have covered Aterian, Inc. (NASDAQ:ATER) previously, so investors should view this as an update to my earlier articles on the company.

On Thursday, e-commerce brand consolidator Aterian Inc. or “Aterian” reported preliminary Q2 results well below expectations and announced additional management and board changes (emphasis added by author):

Aterian (…) today announced the appointment of Joe Risico and Arturo (Arty) Rodriguez as Co-Chief Executive Officers effective July 26, 2023. They have also joined the Company’s Board of Directors effective that same date. As part of these changes, Mr. William (Bill) Kurtz, the Company’s current lead independent director and a Board member since 2019, has been named the Chair of the Board. Mr. Yaniv Sarig has resigned as CEO and from the Board effective yesterday.

In their new roles as Co-CEO, Mr. Risico will lead strategy and revenue generation, among other things, while Mr. Rodriguez will lead the Company’s technology and development and continue to lead supply chain and finance. Mr. Rodriguez will also continue his present role as Chief Financial Officer.

Q2 revenues are now expected to be in the range of $34.8 million to $35.4 million and adjusted EBITDA loss to be in the range of $8.0 million to $9.0 million, excluding $1.2 million of restructuring expenses as opposed to previously announced ranges of net revenue and adjusted EBITDA loss of $37.0 million to $44.0 million and $4.2 million and $5.2 million (excluding $1.0 million in restructuring expenses), respectively:

In addition, Aterian expects its Q2 ending cash balance to be $28.9 million and borrowings under its credit facility to be $15.7 million.

Based on the company’s cash and debt balances at the end of Q1, Q2 free cash flow calculates to a rather moderate negative $1.6 million but given the company’s weak profitability guidance, I would expect this to be the result of another meaningful inventory draw.

Please note that Aterian’s up to $40 million asset-backed revolving credit facility with a division of MidCap Financial Services LLC (“MidCap”) is subject to substantial minimum liquidity covenants as disclosed in the company’s most recent quarterly report on form 10-Q (emphasis added by author):

We are required to remain in compliance with certain financial covenants required by the MidCap Credit facility. The Credit Agreement imposes certain customary affirmative and negative covenants upon the Company including restrictions related to dividends and other foreign subsidiaries’ limitations. The Credit Agreement minimum liquidity covenant requires that Midcap shall not permit the credit party liquidity at any time to be less than (a) during the period commencing on February 1st through and including May 31st of each calendar year, $12.5 million and (b) at all other times, $15.0 million.

At the end of Q1, the asset-backed credit facility was effectively maxed out and I do not expect this pattern to have changed in Q2. Consequently, I would attribute the lower debt balance to further decreases in the borrowing base.

After giving consideration to the $15 million minimum liquidity covenant, available liquidity was down by more than 35% on a quarter-over-quarter basis to just $13.9 million at the end of Q2.

In the press release, management blamed the disappointing outlook on ongoing softness in the consumer discretionary space.

Adding insult to injury, the company no longer expects to achieve adjusted EBITDA profitability in the second half of this year (emphasis added by author):

We are still very focused on driving the Company to profitability; however, with our expected view of continued consumer softness in 2023, we believe adjusted EBITDA profitability will be more realistic in the summer of 2024 versus the second half of 2023.

With adjusted EBITDA losses expected to continue for the time being, Aterian will likely be required to conduct another equity raise to avoid going concern language in the company’s annual report on form 10-K and fund the business going into next year.

Please note that Aterian might have to consider a reverse stock split going forward as the company remains out of compliance with Nasdaq’s $1 minimum bid price requirement. That said, the exchange has provided the company a 180-day grace period until October 23 to regain compliance. Under certain conditions, Aterian would be eligible for a second 180-day grace period.

Bottom Line

Ongoing weakness in consumer demand has resulted in another guide-down and the delay of Aterian’s adjusted EBITDA profitability target by approximately one year.

With just $13.9 million of available liquidity left at the end of Q2, I would expect the company to conduct another equity raise before the end of this year.

Given the high likelihood of additional near-term dilution and the potential for a reverse stock split later this year, I am downgrading Aterian’s shares from “Hold” to “Sell” and would advise investors to avoid the stock until the company has shored up its liquidity and signs of a recovery in consumer demand start to emerge.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.