ATER - Aterian Inc.: Downgrading On Substantially Reduced Expectations Amid Weak Consumer Demand

2023-06-06 20:43:36 ET

Summary

• Aterian, Inc. reported Q1 results in line with recently updated guidance, but the company's second quarter and full-year revenue outlook fell well short of expectations.
• After giving effect to covenants governing the company's revolving credit facility, available liquidity at quarter end calculated to just $21.7 million.
• Company announced plans to right-size the organization with headcount reductions expected to result in annualized cost savings of $6.0 million.
• Adding insult to injury, Aterian might have to consider a reverse stock split going forward as the company remains out of compliance with the Nasdaq's $1 minimum bid price requirement.
• Given substantially reduced expectations, limited financial wiggle room, and the potential requirement for a reverse stock split, I am downgrading the company's shares to "Hold".

Note:

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

Last month, e-commerce brand consolidator Aterian Inc. or "Aterian" reported first quarter results in line with the company's recently updated guidance:

The company's cash position of $33.9 million was down by $9.6 million on a sequential basis but some of the decrease was attributable to net unfavorable changes in working capital.

While contribution margin and Adjusted EBDITA were up sequentially, the company remains far away from its target model:

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 quarterly report on form 10-Q:

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.

With the revolving credit facility effectively maxed out, available cash calculated to just $21.7 million at quarter end after giving consideration to the $12.5 million minimum liquidity covenant:

The outstanding balance on the MidCap credit facility as of December 31, 2022 and March 31, 2023 was $21.1 million and $19.1 million, respectively. The Company had $0.3 million of availability on the Midcap credit facility as of March 31, 2023. We are in compliance with the financial covenants contained within the Credit Agreement as of March 31, 2023.

While management reiterated expectations for Aterian achieving profitability on an Adjusted EBITDA basis in the second half of the year, second quarter revenue guidance of $37 million to $44 million fell well short of consensus estimates at that time.

On the conference call , management blamed the disappointing outlook on ongoing weakness in consumer demand and warned of " similar softness for the remainder of the year " with revenues expected to be down between 25% and 30% on a year-over-year basis.

As a result, Aterian decided to implement a substantial workforce reduction with expected annualized savings of approximately $6.0 million.

In addition, the company announced the separation from its Chief Supply Chain Officer and Chief E-Commerce Officer with responsibilities being assumed by other senior executives.

The Company plans to reduce expenses by implementing a reduction in its current workforce leading to approximately $6.0 million of annualized savings. This headcount reduction will impact approximately 70 employees and 30 contractors, primarily in the Philippines. The reduction in headcount is part of the Company’s strategy to increase efficiency and to drive focus as part of its second half 2023 adjusted EBITDA profitability goal. The Company expects to substantially complete the reduction in headcount by the end of the second quarter of 2023. The Company expects to recognize restructuring charges in connection with the headcount reduction plan, primarily from severance, of between $1.0 million to $1.3 million. The Company expects the charges will be recognized primarily in the second quarter of 2023, with the majority of such charges anticipated to be paid by the end of the third quarter of 2023.

As part of this headcount reduction, our Chief Supply Chain Officer, Michal Chaouat-Fix, will be transitioning away from the Company. Arturo Rodriguez, our Chief Financial Officer, will also assume the additional responsibilities of supply chain and operations as our Interim Chief Operating Officer. In addition, Tim Stanton, our Chief E-Commerce Officer, will transition away from the Company, Phil Lepper, our Senior Vice President of Revenue will assume Tim’s responsibilities.

Adding insult to injury, Aterian might have to consider a reverse stock split going forward as the company remains out of compliance with the 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, the company would be eligible for a second 180-day grace period.

Bottom Line

While Aterian Inc. reported first quarter results largely in line with recently updated guidance, the company's revenue outlook for Q2 and the remainder of the year fell well short of expectations as consumer demand continues to be weak.

Consequently, the company decided to right-size the organization with expected annual savings of $6.0 million. Based on these actions, management reiterated expectations for the company to achieve Adjusted EBITDA profitability in the second half of the year.

With the company's revolving credit facility effectively maxed out and a little over $20 million of available cash on the balance sheet at the end of Q1, the company's financial wiggle room appears to be limited at this point.

Lastly, Aterian Inc. might be required to execute on a reverse stock split going forward.

Given the issues discussed above, I am downgrading the company's shares from " Speculative Buy " to " Hold " and would advise investors to avoid the stock until signs of a recovery in consumer demand start to emerge.

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