The Worst May Be Over for Aterian Investors

Investors in e-commerce and technology-enabled consumer products company Aterian (NASDAQ:ATER) stock may have noted the addition of two unique risks in the latest quarterly report (10Q) filed on Aug. 9.

The first risk factor is related to elevated short-seller activity on ATER stock. The company linked the risk to a short-seller report from Culper Research published in May. ATER stock price declined by 81% between late May and Aug. 20, this year. A staggering 17% of the company’s public float remains shorted. I think the fall has to do with a shipping crisis and a looming default on debt covenants (at that time).

However, short-seller activity isn’t a risk that shareholders would worry much about today. Should the company bounce back to profitable organic growth and solve its disproportionately peculiar shipping troubles, it will shame naysayers. Short sellers may be “squeezed” out of the trade, and if that happens ATER stock investors will rejoice in bankable triple-digit gains.

That said, there’s another risk factor relating to the ownership of Aterian’s common stock that may concern ordinary shareholders today. Actually, I bet that ATER stock investors don’t want to see this risk factor re-appear in the company’s third-quarter earnings report.

ATER Stock’s Unique and Frustrating Risk Factor

Aterian offered 2,666,667 new common shares for sale under a private placement transaction that closed on June 15. The company raised $40 million in gross proceeds in the transaction and boosted its liquidity profile – that’s great. However, this transaction is proving to be more expensive for ATER stock investors.

As was explained in Aterian’s second-quarter financial results:

“We have not yet filed a resale registration statement as required under the terms of the securities purchase agreement entered into in connection with our June 2021 private placement financing and have paid and will owe additional liquidated damages until such registration statement is filed.”

The company explained that pursuant to the private placement agreement, it “agreed” that if it did not register the said shares with the U.S. Securities and Exchange Commission (SEC) by July 15, “…and on each monthly anniversary thereafter,” it would pay liquidated damages of $0.6 million.

ATER did not file the securities with the SEC. The shares remained unregistered by Aug. 9 (the 10Q filing date). Therefore, the company paid $0.6 million to the investors in July, and would “continue to accrue liquidated damages until such time as the Registration Statement is filed.”

The said damages have a limit of up to $4 million. If shares remain unregistered, this represents a staggering 10% of the transaction’s gross proceeds. That’s a significant “return of capital” to identified stock investors.

Add to that the 7% in fees paid to the private placement agent. Net proceeds from the deal could potentially decline by 17%. This is before accounting for any expense reimbursements to the placement agent.

Why the Holdup in the Registration Process

In an SEC filing on June 10, Aterian revealed that “…subject to the Investors’ reasonable cooperation and provision of any required information, the company has agreed to use commercially reasonable efforts to file a registration statement.”

The SEC reduced registration fees substantially from $$129.80 per million dollars in the fiscal year 2020 to $109.10 per million for the fiscal year 2021. Perhaps it’s a matter of other costs that commercially necessitated the delay in registration. Otherwise, there must be another reason for the expensive late registration

Did Aterian’s Management Deliberately Delay?

Reading between the lines, one can assume that management thought paying $0.6 million per month in damages to selected ATER stock investors was a worthwhile expense.

Concerning the registration of the June issued shares, Aterian had agreed “…subject to certain exceptions, not to enter into any agreement to issue or announce the issuance or proposed issuance of any Common Stock or Common Stock equivalents for a period of 60 days after the date the Registration Statement is declared effective.”

Investors know that Aterian defaulted on its outstanding debt during the quarter. The company was in negotiations with its lender on that critical issue. To resolve the matter, the lender accepted stock in lieu of cash in a $76.6 million debt repayment deal that concluded in September.

One can reasonably conclude that ATER deliberately delayed registering the June 2021 securities. Paying $0.6 million monthly in damages appears a necessary expense to keep options open while engaging a big lender.

Otherwise, I’d assume the situation could have been worse if the June shares were registered before default settlements. The company would have breached its June shareholder agreement, with more significant consequences.

Investor Takeaway

It appears that Aterian was in a severe crisis that required sacrifices. Management had to keep stock issuance options open until it reached a settlement with big lender High Trail Investments.  It’s safe to assume that ATER was free to register all newly issued common stock batches after the September debt resolutions.

Considering the company renegotiated its shipping contracts and locked in reasonable rates, the worst could be over for ATER stock.

On the date of publication, Brian Paradza did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Brian Paradza is an investing enthusiast who was awarded the CFA Charter in 2019. A strong believer in fundamentals-based long-term investing, Brian learns from gurus like Warren Buffett but acknowledges human behavioral tendencies that drive short-term “madness”. You may find him inquisitive as he examines tech investing opportunities, cannabis, blockchains, and the new cryptocurrencies asset class.