What happened
A day after making big gains on renewed short-squeeze momentum, shares of Aterian (ATER +1.70%) stock are now plummeting in Thursday's trading. The company's share price was down roughly 18% in the daily session as of 12 p.m. EDT.
The big sell-off appears to be driven by news that the company has reached an agreement with lender High Trail to pay down $66.3 million in debt plus interest on that principal amount. Why would that trigger a sell-off? It's because Aterian is once again turning to sale of new shares as a way to strengthen the balance sheet.
Image source: Getty Images.
So what
Take a look at the chart below, which tracks Aterian's outstanding share count over the last year and does not include the new shares that will be issued to pay down outstanding debts to High Trail.
ATER Shares Outstanding data by YCharts
The company is currently operating at a loss, and it's frequently turned to the sale of new shares to raise capital. With even more new shares being created, that could put a significant dent in the short squeeze thesis on the stock.
Even with the sale of the new shares, Aterian will still be on the hook for $25 million in debt to High Trail, which will now come due in April 2023 after the recent restructuring. Aterian management sees the completed deal as opening the doors to pursuing its mergers and acquisitions strategy. The company's core business revolves around identifying in-demand product categories on Amazon's e-commerce marketplace and then purchasing or partnering with companies that produce those goods.
Now what
Even with the sale of the new shares, Aterian will still be on the hook for $25 million in debt to High Trail, which will now come due in April 2023 after the recently agreed upon restructuring. The creation of new shares will presumably lower the total percentage of shares outstanding sold short, at least in the near term. That doesn't completely sink the potential for another short-squeeze powered rally, but both long-term investors and those looking to play the squeeze angle have reasons to be concerned about dilution.
