Q4 2022 Aterian Inc Earnings Call

Speaker 2: Good afternoon and welcome to the Eterion Inc. 2022 4th Quarter and full year earnings conference call.

Speaker 2: All participants will be in listen-only mode. Should you need assistance, please signal conference specialist by pressing the star key followed by zero.

Speaker 2: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then on your touch tone phone. To withdraw from the question queue, please press star then too. Please note this event is being recorded.

Speaker 2: I would now like to turn the conference over to Elia Grzegorski, Vice President of Investor Relations and Corporate Development. Please go ahead.

Speaker 3: Thank you for joining us today to discuss the Terrians fourth quarter and full year 2022 earnings results. On today's call are Yannick Sarig, co-founder and CEO , and Arturo Rodriguez, our Chief Financial Officer.

Speaker 3: A copy of today's press release is available on the investor relations section of Eterion's website at eterion.io

Speaker 3: Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our fourth quarter and full year earnings release, as well as our filings with the SEC. We do not undertake any obligation to update or alter any forward-looking statements, whether as a result of new information, future events, or otherwise. In addition, the company may refer to certain non-GAAP metrics on this call.

Speaker 3: these metrics can be found in the earnings release filed earlier today. With that, I will turn the poll over to you.

Speaker 4: We focus on building, acquiring, and partnering with e-commerce brands online. Eterion owns and operates several consumer brands selling products across various categories on channels such as Amazon, Walmart, Shopify, and eBay, both domestically and internationally. To allow us to scale, we've invested in building our own proprietary platform called Aimee. Aimee enables our team to manage our business more efficiently by injecting technology into processes that would otherwise have to be executed manually and would require hiring an unscalable and unsustainable workforce. Through its ability to analyze vast amounts of data and automate daily recurring tasks, Aimee allows our team to find new product opportunities we can launch under our brand.

Speaker 4: Our goal in the long term is to become one of the most efficient consumer companies in the world, expanding our food treatment globally while continuing to invest in technology and an agile supply chain to drive scale and profitability. I'll now take a few moments to speak about our Q4 results as well as our goals for 2020-23. As we shared previously, our goal was first and foremost to discount and sell through high cost inventory. As a reminder, due to the shipping container costs skyrocketing in 2021 and 2022, consumer brands across our industry were forced to ship goods at an average cost of $17K per container.

Speaker 4: to stay in business. These additional costs force us to increase our product prices by an average of 20% only to generate an average of 8% contribution margin with some of our seeing as low as 6% contribution margin versus our target of 15% at a normal price.

Speaker 4: As we saw the cost of shipping finally coming down, we took advantage of Q4 last year and the demand that was generated by the holidays. This counter inventory just cycles through our existing goods so we can replenish inventory at a lower cost basis, benefiting from pre-pandemic rates of shipping.

Speaker 4: What we're seeing now is an average cost of container that's closer to $4,000 per container.

Speaker 4: While our adjusted EBTAT took a hit,

Speaker 4: This decision was also critical to preserve the competitive advantage of our product and avoid getting undercut by competitors who would benefit from the lower shipping rates. It's important to understand that our discounting and inventory liquidation efforts do not reflect a weak portfolio. In fact, some of our best products were part of the strategic efforts, all to make room for inventory at a lower cost basis. I'm happy to report our overall inventory position has been reduced from 76 million back when we started our normalization efforts in June of last year to 43 million in Q4. And the risky inventory has improved by $3 million.

Speaker 4: And we expect additional normalization to happen in Q1 with another $3 million to $4 million of inventory cycle through. This cash generation improves our balance sheet heading into 23. Our entire team feels now that Ethereum has surmounted a very difficult period and putting aside remaining inventory normalization we need to accomplish in Q1, we can finally look to pursue growth and profitability again.

Speaker 4: The energy and motivation we have comes from the relief and satisfaction of navigating complex challenges, but also from a continued belief in our vision.

Speaker 4: So what does the road ahead look like?

Speaker 4: focused on achieving adjusted EBTOT profitability in the second half of the for our core business.

Speaker 4: This effort is primarily based on getting our cost basis of products back to pre-early pandemic levels and executing well on our marketing strategies.

Speaker 4: Separately, many of our competitors have not been able to navigate out of the difficult macro-level environment and we're in the process of assessing several significant M&A opportunities to acquire assets from other Amazon aggregators.

Speaker 4: This is an ongoing effort and while we cannot guarantee its results, we are very optimistic about our ability to bolt on substantial amounts of additional contribution margin that will accelerate turning full-year profitable in 2024.

Speaker 4: We're also finally going back to launch new products. While we have already over 20 new products being developed, we're also looking to take our model a step further by starting to develop more differentiated and unique products. While we don't expect to become a hardware company by any means, we're looking to take

Speaker 4: We believe that the insights from our data-driven approach can provide the opportunity to work closely with manufacturers to design more advanced, differentiated features through a bootstrap approach. We're also very much focused on continuing our international expansion. Recently, we've made great progress with our European expansion, and our goal is to be as optimally positioned with our existing portfolio.

Speaker 4: We launched this company back in 2014 because we believe that e-commerce adoption will grow steadily year on year and marketplaces will dominate the lion's share of GMV globally. We were accurate about that prediction.

Speaker 4: And I've focused on building a company that can manage and scale brands and products with a marketplace-first doctrine.

Speaker 4: According to Research by Essential, third-party sales through online marketplaces will account for 59% of all global commerce by 2027.

Speaker 4: We also realized at inception that marketplaces will allow retailers to delegate a lot of their work to the brand.

Speaker 4: to the brands that use them, which makes it difficult for those brands to scale.

Speaker 4: Just a look at the composition of sellers on Amazon tells a pretty remarkable story. While Amazon is not publishing this figure, industry estimates are that third-party sellers on its marketplace generate approximately $390 billion of GMV.

Speaker 4: Of the 1 million plus active sellers out there, industry estimates point to massive fragmentation in only 60,000 sellers passing the 1 million a year revenue threshold and approximately 50 businesses only crossing the 100 million dollar mark.

Speaker 4: So marketplaces of the future and they've removed the barrier of entry that exists in traditional brick and mortar retail allowing almost anyone to sell their products to hundreds of millions of buyers.

Speaker 4: places of the future and they've removed the barrier of entry that exists in traditional brick and mortar retail, allowing almost anyone to sell their products to hundreds of millions of buyers. But this comes at a price.

Speaker 4: Brands must manage all aspects of the business themselves. This includes forecasting, managing inventory, managing prices and discounts, managing marketing. This is where technology comes in. We always believe since inception that the only way to scale a consumer company on marketplaces was to inject technology into its operations to automate the daily tasks required.

Speaker 4: Today we use machine learning to help us reduce the cost of forecasting, media buying, and pricing optimization.

Speaker 4: recent exciting developments in AI should be eye-opening for any business leader out there.

Speaker 4: Attirion is already leveraging large language models such as ChatGPT to help synthesize sentiment in reviews and we're looking to extend our use of AI rapidly to further improve our efficiency. Attirion is a consumer product company, not an AI company.

Speaker 4: But all consumer product companies out there, I believe...

Speaker 4: From all companies out there, I believe that we have the DNA, the expertise, and the culture to leverage technology to achieve a market leading position in our industry over the long term.

Speaker 4: In general, I believe that the world will rapidly see two types of businesses forming. Those who build the internal expertise to harness AI as a powerful force that drives efficiency and competitive edge, and those who will be remembered in history books as not agile enough to adapt.

Speaker 4: Aturin does not only wish to be part of the first group, it's already one of the most sophisticated companies when it comes to applying technology to drive the valuation of e-commerce consumer brands.

Speaker 4: With that, I'll pass it on to Arti.

Speaker 5: Thank you, Neve, and good day, everyone. Here are the financial performance details of our fourth quarter.

Speaker 5: For the fourth quarter of 2022, net revenue declined 13.3% to $54.9 million from $63.3 million in the year-ago quarter, primarily due to reduced consumer demand, offset by a strategy of liquidating high-cost inventory.

Speaker 5: The fourth quarter net revenue of $54.9 million is comprised primarily of $52.3 million of our organic business. We'll continue to look at the next portion of this webinar.

Speaker 5: a nominal amount of revenue from our most recent acquisition, and $2.6 million of wholesale revenue.

Speaker 5: A year ago quarter net revenue of $63.3 million was comprised primarily of $31.3 million of organic business.

Speaker 5: A year ago quarter net revenue of $63.3 million was comprised primarily of $31.3 million of organic business, $27.6 million of net revenue from our acquisition,

Speaker 5: and $4.4 million of wholesale revenue. Our organic revenue increased by $21 million due to classification of our past acquisition revenue going into organic revenue.

Speaker 5: Our strategies sell off higher price inventory and normalized inventory levels.

Speaker 5: offset by reduced consumer demand in the period. Our M&A revenue decreased approximately $27 million as all our material acquisitions have now been known for over a year and that revenue has shifted into organic revenue categorization.

Speaker 5: Our Q4 acquisition, while nominal from a financial perspective, was strategic and designed to leverage a competitor and drive sales to one of our other leading brands and we are pleased with the progress of this strategy to date.

Speaker 5: Looking at our fourth quarter net revenue by phase, the $54.9 million broke down as follows. $40.8 million in sustain, $0.1 million in launch, and $13 million in liquidate and inventory normalization.

Speaker 5: The year-go-quarter net revenues of $63.3 million by phase broke down as follows. $52.7 million in sustain, $2.6 million in launch, and $8 million in liquidate and inventory normalization.

Speaker 5: Our sustained decrease of 12 million relates to revenue shifting into liquidation phase and general consumer stock.

Speaker 5: three so the timing will be opportunistic.

Speaker 5: Overall gross margin for the fourth quarter declined to 37.1% from 45.6% in the year ago quarter and decreased from 45.5% in Q322, primarily attributed to our strategic initiative to sell off higher price inventory normalize inventory levels.

Speaker 5: Our overall Q422 contribution margin, as defined in our earnings release, was negative 11.5%, which decreased compared to the prior year CMF 7.9%, which is directly attributed to higher liquidation revenue from our strategic initiative to sell off higher price inventory at a normalized inventory level.

Speaker 5: Our Q422 SAR sustained product contribution margin decreased 8.3% versus 16.1% in Q421, as we also reduced pricing to normalized inventory levels and other listing management initiatives.

Speaker 5: We do expect our sustained contribution margin to improve as we progress in 2023.

Speaker 5: Looking deeper into contribution margin for Q422, our variable sales and distribution expenses as a percentage in that revenue increased to 51.6% as compared to 40.1% in the year ago quarter.

Speaker 5: This increase was primarily due to higher cost supply chain, including last mile fulfillment, and our product mix, including liquidation and normalization of inventory, offset by reduced storage costs.

Speaker 5: We do expect our sales and distribution expenses as a percentage net revenue to improve as we progress in 2023. Our operating loss for the quarter of $22.8 million includes a reserve for barter credits of $1.6 million, $2.7 million in non-cash stock compensation, and a non-cash loss on goodwill of $0.5 million.

Speaker 5: Our net loss of the quarter of $20.3 million includes a reserve for bar to credits of $1.6 million, $2.7 million in non-cash stock compensation, a non-cash loss of goodwill of $0.5, and a gain on fair value of warrant liability of $2.8 million. For the fourth quarter of 2022, our net loss of the quarter of $0.5 million includes a

Speaker 5: was a loss of $16.2 million compared to a loss of $3 million in the fourth quarter of 2021. Our strategic decision of liquidating higher cost inventory and normalizing our inventory levels impacted our justice even in the period.

Speaker 5: However, this was a very important effort leading us to improve our core business and putting us on track to get back to stronger contribution margins in 23 and strengthening our balance sheet as we headed into the new year.

Speaker 5: Turning to the balance sheet, at December 31, we had cash of approximately $43.6 million, compared with $26 million at the end of September 30.

Speaker 5: The increase in cash is predominantly driven by the previously reported 20 million capital raises in early October , positive changes in working capital, offset by our net losses in the period.

Speaker 5: Our working capital improvement was part of our goal to strengthen the balance sheet driven by moving out our more expensive long inventory, and at December 31, inventory landed at $43.3 million. We have made great strides in Q3 and Q4 of improving our inventory composition and reducing our overall inventory, as we expect to be completed with this process by mid Q2-23. Our credit facility balance landed at $21 million, which is down almost $3 million from the sequential quarter, and

Speaker 5: Our adjusted EBITDA guidance is beginning to show improvement as we progress towards adjusted EBITDA profitability in the second half of 2013. For the first quarter of 2013, we expect adjusted EBITDA loss to be in the range of $4.8 million to $5.8 million anticipating continued impact of inventory liquidation.

Speaker 5: This Q1-23 adjusted EBITDA guidance, on average, is a 70% improvement from our Q4-22 reported adjusted EBITDA and on average a 40% improvement from Q3-22 adjusted EBITDA, as we are beginning to see the results of our strategic efforts of liquidating high-cost inventory and normalizing our inventory level. In closing, 2022 is a challenging year, but we have persevered through global supply chain disruptions and a challenging macroeconomic crisis.

Speaker 5: We are excited and proud of the company we are building. Appearing continues to have very strong brands and many of our products continue to be some of the best sellers on Amazon. We continue to have industry leading technology and logistics and most importantly our dedicated and hardworking people continue to do extraordinary work.

Speaker 5: As such, we are very confident and optimistic about Eterion's future. With that, I'll turn it back to the operator to open the call up to questions.

Speaker 2: We will now begin the question and answer session.

Speaker 2: To ask a question, you may press star then 1 on your touch-tone phone. If using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then 2.

Speaker 2: At this time, we'll pause momentarily to assemble our roster.

Speaker 2: Our first question will come from Alex Furman with Craig Hallam Capital Group.

Speaker 6: You may now go ahead. Great guys, thank you for taking my question and congratulations on what looks like a strong success.

Speaker 6: clearing some of the inventory that you'd been hoping to, you know, I was wondering if you could talk about which categories you've seen the most demand for, both during Q4 and, you know, now that we've got a couple months of 2023 under your belt, you know, where you're seeing the most demand and is that informing where you're looking for M&A?

Speaker 4: because of all the efforts we've done on liquidation, we've gotten more success across pretty much the board when it comes to the categories. As typical with the seasonality of Q4 versus Q1, Q2, Q3, not a big difference there. I'd say to the second part of your question, what we're looking for when it comes to acquisitions.

Speaker 4: I think in general we probably want to diversify our portfolio a little bit if possible, right? M&A is more opportunistic, but as much as possible from I think the supply chains that have hurt us in the last few years. So we're definitely tending to set our eyes a little more towards, you know, consumer product companies that are...

Speaker 4: making their goods not necessarily in Asia but maybe in the U.S. or Eastern Europe , South America. But of course, we're looking and leaving our eyes open to any of the opportunities. But again, if possible, we would – the main goal potentially with the future M&A would be to as much as possible diversify from a supply chain perspective. But for the past shot, the M&A willproject to roll you on the patents of M&A or sponsor Orikult and all or evennamet but no Ed

Speaker 6: Okay, that's really helpful. Thank you for that. And then can you give us a little bit more color on the bridge of how you get from what you just reported and what you're guiding to in Q1 to being adjusted EBITDA positive.

Speaker 6: in the second half of the year, it looks like what you're guiding to for profitability in Q1 is better than, you know, I was expecting at least a much smaller than expected loss. You know, how do you walk us from that in Q1 to being positive in the second half of the year? Is it primarily gross margin as you start to sell through?

Speaker 6: inventory that you know wasn't wasn't brought in at at insane container rates Yeah, I'll let Arti take that. Yep, thank you. No, Alex. I think you nailed it right at the end. I think you know as we said previously It's it's taken us a couple quarters here to get rid of this really expensive inventory that we brought in strategically

Speaker 5: Obviously, you know, consumer spends always a question mark, but we do feel very confident that I think once we move through this more expensive inventory and the inventory that we're bringing in that's starting to land in April and May for Q3 and even parts of our Q2. So at the moment in the 2022 meeting with a number of unions including Pe disguise and

Speaker 5: seasonal sales will be at better margins and that's why we can sort of do pretty confident what we're saying. Okay, that's really helpful. Thank you both. Our next question will come from Brian Kinslinger with Alliance Global Partners.

Speaker 5: seasonal sales, we'll be at a better margin. That's why we can do pretty confident in what we're saying. Okay, that's really helpful. Thank you both. Our next question will come from Brian Kinslinger with Alliance Global Partners. You may now go ahead.

Speaker 7: Great, thanks so much for taking my questions. Sorry, I joined late if you answered this in your prepared remarks, but with the company releasing new SKUs now, maybe you can update us on how many SKUs were released in the fourth quarter, maybe how many are expected in the first quarter, and maybe for the full year RUC numbers. You don't know the exact number, but then how is the weak consumer spending environment changing the pace of SKU launches?

Speaker 4: Hey Brian , just to clarify, we're starting to launch products, but as you know, that process takes time, and so my comment was on the fact that we have over 20 products that have been worked on and will be launched, some of it this year, some of it next year. I think that...

Speaker 4: The impact you'll see is that through this year, we will continue to develop and launch products, and most of it will come in 2024. So, as you remember, the main reason we paused launching products is because we're not going to be able to launch products in the future.

Speaker 4: was because of the unreliability of supply chains, both in terms of goods arriving on time with all the delays that we've seen in the past, but also very importantly, right, the fluctuations in cost of shipping were so unpredictable that it just creates a situation where...

you know, you plan to launch a product and by the time it arrives, your cost basis is higher than you expected, and that's just not leading towards a good launch, right? So we, you know, essentially paused that for quite a while now, and now that we're finally seeing a stability in the supply chain, both in terms of

the price of shipping, but also the reliability, we're getting confident to go back again and launch these products. But most of that, the impact of these products and the launches happening will happen again the second half of this year, and mostly the impact will be felt in 2024.

Were there any in the fourth quarter and expected in the first quarter or are they all in process right now?

So if there were any in the fourth quarter, there would have been product products that would be what we call variations, which means we kind of like think of them as another version of an existing product. That's where we would have felt more comfortable. It's not as material as when we typically do the launches that you're thinking about.

And so again, I think that the answer is that with the effort that we're putting on now, we'll be able to, as I believe in the next few months, give a little more clarity on the timeline that we're seeing around those launches happening. Great. And then as I've read, more so in the private market, we're seeing a lot of growth in the

I think there's some undercapitalized, fulfilled by Amazon companies that are struggling. Are you getting to see any fire sales? And how aggressive can you and you expect to be this year in 2023 on M&A?

Yeah, that's a great question and you're absolutely right there. There's a lot of companies out there that are struggling, going through a lot of the challenges we went through in the last year and a half, I'd say, right? And again, some of them are really in very difficult situations. So we're very active.

talking to a lot of these competitors, exploring different opportunities, spending a lot of time on this and as I mentioned in my remarks.

We can't guarantee any outcome, but with the amount of effort that we're putting out there and the things we're seeing, we were overall, you know, quite optimistic that we'll be able to find some opportunities with the stressed assets that are actually quite good, right? I mean, I think a lot of the things we're seeing, you know, already it goes through the spectrum, right? But there's a lot of really good assets out there.

that we're basically dealing with the same situation where, you know, the demand of COVID and on the other side, the pressure of supply chains caused the perfect storm that put these great assets in a challenging position. And so we're, as I mentioned, quite active talking to all of these companies and looking for these opportunities.

We're hoping to have an exciting thing to share with everyone, but it's still a work in progress at this point.

Thank you. Last question I've got is when you first went public, there was a very pronounced seasonality to your business. I really appreciate that.

Help us understand today how we should think about seasonality for the year and the different quarters.

Yes, so I think, you know, I think the big difference from when we first IPO'd and today, right, was at the time, I think Q2 and Q3 were kind of like the two strongest quarters and Q1 and Q4 were quite like behind. I think, you know, given the profile of the acquisitions we've done and some changes to up with.

is the composition of the portfolio that we have. And so you're still in a position where Q2 and Q3 are the strongest, Q4 right behind there and then Q1 still behind the three of them, right, when you compare it to the back end where we IPO'd. Q4, Q5, Q6, Q8, Q9, Q10, Q11, Q12, Q13, Q14, Q15, Q16, Q17, Q18, Q19, Q19, Q20, Q22,

Great, thank you so much. Thank you. Our next question will come from Marvin Fong with BTIG. You may now go ahead.

Great, thanks for taking my questions. Good evening. I guess my first question, just on the first quarter revenue outlook, down maybe something like 20% year over year, just wondering if you could help us understand how much of that is...

the consumer demand softness that you alluded to or is any of it just that you're entering the quarter with a little bit less inventory than you were in the same quarter last year? Just wanted to understand that dynamic a little bit better. Yeah, maybe I'll start it and see if I already want to add anything. But just in general...

visibility on demand? And the answer is, as you kind of mentioned yourself, it's really mainly driven by consumer demand being soft. I think that's no surprise given the overall economic.

kind of outlook around us, but again, what's really good that we're seeing so far when it comes to our business is we're always kind of looking at that demand in the context of the entire category and we have good visibility to the fact that it's not that we're losing market share, but more that just this soft demand across the board, right?

I don't know if you want to add anything, but that's kind of like overall how we're looking at it. Yeah, no, and that's right, Yaneev. I think that's why we're seeing that, and I still think we still feel very confident on the year. I think we pointed in the past about being overall kind of flattish on the revenue side, so I just think a little bit it's...

We're seeing some of the consumer demand softness early in the year, and then it should pick up back to where we believe will be stronger Q3 and Q4 revenues for us. I think the other side of that, Marvin, is even at that lower amount, you can see the EBITDA guidance improvement, right? It's a good testament of how we've really focused on clearing out the inventory to really set us up for a good 2023.

I think that's the other part of it. Even though the revenue is low, you can sort of see already the improvement based off the guide, or the adjust either on the profitability of the quarter. Yeah, I mean, you guys kind of basically touched on my next question, which was sort of, you know, get you reiterating reaching the top.

break even in the second half of the year, you know, you guys feel good in the sense that, you know, the consumer remains weak or even gets a little bit weaker, that you've stress tested it and you still feel good that you can hit that even if...

the consumer is softer. Yeah, I mean I think yes, I think you're right. First of all, the categories, the consumer softness across the board, right? But I think also our experience with some of the categories and the positioning that we have on those in Q3 is giving us a lot of comfort around that.

But again, the most important point here is really the cost base of the product, right? The contribution margin expansion that we were expecting is due to the fact that the efforts that we put into force is to make room for that inventory, the lower cost basis is going to create that margin expansion. And you know, our logistics team is...

done a great job at securing a very significant amount of the inventory needed for the second half at a lower cost, which also gives us a lot of comfort around that, right? I guess there was a lot of challenges, again, as I mentioned in the last year and a half, right? Not just about the price of shipping, but also the ability to even get your goods on a ship.

And so now we feel quite confident in our projections given the fact that we were able to secure position on the ship at a lower cost and that we made room for that inventory to replace the older inventory, right? All these things combined give us that comfort with our prediction.

Gotcha. And I guess my last question, maybe a more fun topic is you mentioned leveraging chat GPT and open AI and that sort of thing. And I was curious, you know, I think you guys had always employed some form of AI, you know, looking at reviews and helping guide your your business decisions and product decisions. Could you just kind of expand on, you know, what's

what capabilities you're achieving now or expect to achieve in the near future with these new large language models that maybe you weren't able to as efficiently in the past.

Yeah, absolutely. So, you know, we use machine learning and automation across many different aspects of our business. I think, you know, if you really want to bucket them into two kind of big areas, one is understanding the consumer, their sentiment, what they think about other products, what they think about our products. And the other side of it is just managing the complex quantitative data, the efforts of managing the products, right, which includes...

you know, for example, forecasting, which is where we have developed, you know, our own machine learning based forecasts and things like media buying and pricing, they use automation as well, right? So,

When it comes to what you mentioned with Chai GPD and large language models, I think the excitement obviously for us is huge. And as I mentioned in my comments before, we already started looking at – I mean, looking at what we are already using Chai GPD.

to in a way actually augment some of the efforts that we've had with our own code around sentiment analysis and reviews. But you know, the most important thing that I think a lot of people that are not necessarily in the weeds on AI don't realize is that

The hardest thing about AI is actually having good data. And when I say that, what I mean is a lot of organizations, except for, especially in the consumer product industry that is not necessarily tech-driven, right, you know, are not necessarily designed or have the DNA or have the systems and infrastructure and access and their own data in a way, you know, set up for AI, right? And that's something that really gives us some advantage, right, because we...

We're a consumer company, right, but we're a consumer company that uses all of technology and thinks like a technology company. We have put ourselves in a position through the years of effort that we put to where we are set up to use AI across the board in many different ways. And again, with the large language models, you know, I think that we'll see in the next few years a lot of disruption across.

and all the efforts that we've made to kind of make the data available to our own algorithms, we have the ability now to overlay these advances of technology and get even more efficiency across many different functions, right? So we're very excited about everything that's happening out there and we're really happy that we again set ourselves for success by always...

Seeing that future and preparing for it, and you know not waiting for it to happen I should putting it to work with our own hands right so really excited about all that stuff And what it could do for us in the future That sounds great. Thanks a lot you need and are you thank you. Thanks Marvin

Again, if you have a question, please press star then 1. Our next question will come from Matt Caronda with RothMKM. You may now go ahead.

Hey guys, it's Mike Zabren on from Matt. So the recent heavy discounting makes a lot of sense, even on the more premier products, but just any visibility on when we can expect a halt or even a reduction in the level of discounting and to what extent is pulling back on that heavy discounting factor into

our inventory levels, we can bring back the product at normal costing because now we're back to like pre-pandemic pricing from a shipping container perspective. And so as such, the view we've been saying is that as we enter the second half of the year, all that should be normalized. So we should be back to more normalized pricing along with normalized costing to get through a normalized contribution margin or starting to see a good chunk of that.

normal level of competitive discounting in the second half of the year, but first half of the year we should get through all of the discounting to clear the excess inventory. Am I understanding that correct? Yeah, yes, I mean you're always doing some form of discounting and price adjustments.

to stay at the competitive landscape depending on the season. That's normal. Yeah, you're right. You should see more normal pricing type positions as we enter the second half for sure. Got it. This makes sense. Just one more for me. How are we circumventing the Amazon FBA fees? So I understand you guys have 3PL sites and FBA at your disposal but...

Maybe just speak to how we're optimizing between using Amazon versus the 3PL sites to get products to customers. That's actually a great question. There's a barking sound player there.

Really, the answer is, as you know, Matt, we put a lot of effort in building a network of 3PLs that's connected to our AIMI platform, which, as you remember, we use to do our own fulfillment for the larger items, but also for the smaller items, which typically gets fulfilled through FBA, we store those items in our own 3PL before we send them to FBA to go and get fulfilled. The answer to your question relies on...

Really, how can we optimize the 3PL distribution of the products that go to FBA to reduce the cost of FBA? Meaning, you know, if you have, again, we have I think at this point over 19 3PLs, might be maybe one less because we're optimizing all the time. But, you know, when our…

warehouses to which we ship them so that we can, A, have less inventory in FBA and, B, spend less money sending it to FBA which then offsets a little bit some of those kind of higher FBA fees that we're seeing recently, right? So again, our network of warehouses doesn't only give us an advantage when it comes to oversized items. So, again, our network of warehouses does not only give us an advantage when it comes to oversized items, right? So, again, our network of warehouses doesn't only give us an advantage when it comes to

because our fulfillment there is quite competitive with FBA, but also for the smaller items, with the fulfillment will happen for FBA, the distribution to be as good as possible to the FBA centers helps a lot. That's all for me. Thanks guys. That's all for me. Thanks guys.

there is quite competitive with FBA, but also for the smaller items where the fulfillment will happen for FBA, the distribution to be as good as possible to the FBA centers helps a lot. That's all for me. Thanks, guys. Thank you. That's all for me.

It appears there are no further questions. This concludes our question and answer session. I would like to turn the conference back over to Ilya Grzegovski for any closing remarks.

Thanks. As part of our shareholder perks program, which as a reminder investors can sign up for at paterian.io forward slash perks, participants have the ability to ask management questions on our earnings calls.

I want to thank all of the Shareholder Perks participants for their loyalty, their participation in the program, and for their questions.

I have picked a few of the most popular questions this quarter and that they have sent in. So here they are. First question is... When did isolation begin and when is the root cause of this ecology?

When do you intend to be fully operational in Europe and do you plan to cover more European countries in the future? Thank you Leah, I see you here.

So, obviously, we're really excited about Europe . It's been something that we wanted to do for a while, but the supply chain crisis was preventing us from making moves a little earlier. But in general, as we mentioned in the private press release, we already have good infrastructure setup…

We currently don't expect to go into further countries in Europe , but really it's about maximizing what we're already in, which are the biggest markets, and just sending more of our products there. That's the big effort here in 2023 is now that the supply chain is going to be a little bit more efficient.

issues have cleared, we're focused on making sure that we can maximize the amount of our existing portfolio products that are not yet in Europe that we can bring to market in Europe , which again, should have a significant effect on 2024, right? Once we've achieved that, we could then look at other countries in Europe , but there's no current plan to do that at this point. There's enough work with what we're doing.

It was almost, it was probably $73 million back in June when it went up down to $43 million. We still have a bit of inventory on the balance sheet that remains longer and we're going to clear it out through the end of the second quarter at most. And you know, I'll see you in the next one.

Really, our target is to get to less than 5% long inventory, which I think at this point is quite achievable based on the progress we've made in Q4 and continuous work that you want.

Great. Okay. And the last question was, what was the health and wellness brand that you acquired in October of 2022 and how will that come to market?

Yeah, so there was a lot of, you know, a lot of interest in this and, you know, here's what we want to share, right? So we bought a small competitor to Squatty Potty. It was a competitor that, you know, had a product specifically that was competing against that brand and was actually undercutting our price.

and hurting ourselves at the squatty potty level. We had the opportunity to acquire this very small brand because they were like a lot of other consumer companies in a difficult position. We did it really just because we wanted to control that lifting and stop undercutting squatty potty.

which is a long-term investment, right, because if we, if that competitor has gone through the challenges that they had and continues to invest in their business, they could have further chips at our Squatty Body brand and so we just took advantage of that and brought that product in so that it's not a long-term issue for us, right? So... First of all, I'm just going to zoom into it again and I'm going to discuss the hip-hop culture play over what's happening in the Away from

Great. This concludes the Q&A portion of the call. In terms of upcoming calendar, Atarian Management will be participating in the 35th Annual Roth Conference, March 12-14 in Laguna Niguel, California. We look forward to speaking with you on future calls. This ends our call and you may now disconnect. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

I.

Good afternoon and welcome to the Eterion Inc. 2022 4th Quarter and full year earnings conference call.

All participants will be in listen-only mode. Should you need assistance, please signal conference specialist by pressing the star key followed by zero.

After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then on your touch tone phone. To withdraw from the question queue, please press star then 2.

Please note this event is being recorded. I would like to turn the conference over to Ilya Grzegovski, Vice President of Investor Relations and Corporate Development. Please go ahead. Thank you for joining us today to discuss the Terrians' fourth quarter and full year 2022 earnings results.

On today's call are Yannick Sarig, co-founder and CEO , and Arturo Rodriguez, our Chief Financial Officer. A copy of today's press release is available on the Investor Relations section of Eterion's website at eterion.io. I would like to remind you that certain statements we will make in this presentation are forward-looking statements.

and these forward-looking statements reflect a Tyrian's judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting a Tyrian's business. Accordingly, you should not place undue reliance on these forward-looking statements.

For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our fourth quarter and full year earnings release, as well as our filings with the SEC. We do not undertake any obligation to update or alter any folders.

Thanks everyone on the call.

Today I'm going to go over the following topics. I'll start with a quick introduction of Etherea and for those who are new to our story. I'll then review key takeaways from our fourth quarter of last year and I'll discuss our goals for 2023.

Lastly, I'll address the long-term prospects for Ethereum and share why we believe in our vision for the consumer product platform of the future. For those who are new to the story, here's what we need to know about our company. Ethereum is part of a new breed of technology-enabled consumer product companies. We focus on building, acquiring, and partnering with e-commerce brands online. Ethereum owns and operates several consumer brands selling products across various categories on channels such as Amazon, Walmart, and other social media platforms.

the vast amounts of data and automate daily recurring tasks, Aimee allows our team to find new product opportunities we can launch under our brand, manage these products at scale, effectively across various channels, automate certain marketing and fulfillment tasks and much more. Our goal in the long term is to become one of the most efficient consumer companies in the world, expanding our food treatment globally while continuing to invest in technology and an agile supply chain to drive scale and profitability.

I'll now take a few moments to speak about our Q4 results as well as our goals for 2020-23. As we shared previously, our goal was first and foremost to discount and sell through high cost inventory. As a reminder, due to the shipping container costs skyrocketing in 2021 and 2022, consumer brands across our industry were forced to ship goods at an average cost of $17K per container to stay in business. We hope you enjoyed this video and if you did, please subscribe to our channel.

These additional costs force us to increase our product prices by an average of 20%, only to generate an average of 8% contribution margin, with some of our products seeing as low as 6% contribution margin versus our target of 15% at a normal price. As we saw the cost of shipping finally coming down, we took advantage of Q4 of last year and the demand that was generated by the holidays to discount our inventory to cycle through our existing goods.

so we can replenish inventory at a lower cost basis, benefiting from pre-pandemic rates of shipping. What we're seeing now is an average cost of container that's closer to $4,000 per container. While our adjusted EBTAT took a hit, we're seeing a lower cost of container that's closer to $4,000 per container.

The decision to liquidate the long inventory now puts us on track to get back the stronger contribution margin starting in Q1 and Q2 of this year and leading to our guidance of turning Adjusted EBITDA profitable in the second half of 2023. This decision was also critical to preserve the competitive advantage of our product and avoid getting undercut by competitors who would benefit from the lower shipping rates. It's important to understand that our discounting and inventory liquidation efforts do not reflect a weak portfolio.

In fact, some of our best products were part of the strategic efforts, all to make room for inventory at a lower cost basis. I'm happy to report our overall inventory position has been reduced from 76 million back when we started our normalization efforts in June of last year to 43 million in Q4. And the risky inventory has improved.

and putting aside remaining inventory normalization we need to accomplish in Q1, we can finally look to pursue growth and profitability again.

The energy and motivation we have comes from the relief and satisfaction of navigating complex challenges, but also from a continued belief in our vision.

So what does the road ahead look like? I want to outline some of our goals in the next few months and explain how they tie into our vision. First and foremost, in line with the Q4 effort, we're laser focused on achieving adjusted EBTOP profitability in the second half for our core business.

This effort is primarily based on getting our cost basis of products back to pre-early pandemic levels and executing well on our marketing strategies. Separately, many of our competitors have not been able to navigate out of the difficult macro-level environment and we're in the process of assessing several significant M&A opportunities to acquire assets from other Amazon aggregators.

This is an ongoing effort and while we cannot guarantee its results, we're very optimistic about our ability to bolt on substantial amounts of additional contribution margin that will accelerate turning fully or profitable in 2024. We're also finally going back to launch new products.

While we have already over 20 new products being developed, we're also looking to take our model a step further by starting to develop more differentiated and unique products. While we don't expect to become a hardware company by any means, we believe that the insights from our data-driven approach can provide the opportunity to work closely with manufacturers to design more advanced, differentiated features through a bootstrap approach.

We're also very much focused on continuing our international expansion. Recently, we've made great progress with our European expansion and our goal is to be as optimally positioned with our existing portfolio in Europe in 2024. Finally, I want to speak briefly about the long-term prospects for Ethereum. We launched this company back in 2014 because we believe that e-commerce adoption will grow steadily year on year and marketplaces will dominate the long-term.

We also realized at inception that marketplaces will allow retailers to delegate a lot of their work to the brand.

to the brands that use them, which makes it difficult for those brands to scale. Just a look at the composition of sellers on Amazon tells a pretty remarkable story. While Amazon is not publishing this figure, industry estimates are that third-party sellers on its market list generate approximately $390 billion of GMV. Of the 1 million plus active sellers out there, the market is now trading at $3.5 billion.

Industry estimates point to massive fragmentation with only 60,000 sellers passing the 1 million a year revenue threshold and approximately 50 businesses only crossing the $100 million mark.

So marketplaces of the future and they've removed the barrier of entry that exists in traditional brick and mortar retail allowing almost anyone to sell their products to hundreds of millions of buyers. But this comes at a price. Brands must manage all aspects of the business themselves. This includes forecasting, managing inventory, managing prices and discounts, managing marketing. This is where technology comes in.

We always believe since inception that the only way to scale a consumer company on marketplaces was to inject technology into its operations to automate the daily tasks required.

Today we use machine learning to help us reduce the cost of forecasting, media buying, and pricing optimization. Recent exciting developments in AI should be eye-opening for any business leader out there.

Attainment is already leveraging large language models such as ChatGPT to help synthesize sentiment in reviews and we're looking to extend our use of AI rapidly to further improve our efficiency.

Atirian is a consumer product company, not an AI company, but all consumer product companies out there, I believe, from all companies out there, I believe that we have the DNA, the expertise and the culture to leverage technology to achieve a market leading position in our industry over the long term. In general, I believe that the world will rapidly see two types of businesses forming.

Those who build the internal expertise to harness AI as a powerful force that drives efficiency and competitive edge, and those who will be remembered in history books as not agile enough to adapt. Atiran does not only wish to be part of the first group, it's already one of the most sophisticated companies when it comes to applying technology to drive the valuation of e-commerce consumer brands. With that, I'll pass it on to Arti. Thank you, Niamh, and good day, everyone.

Here are the financial performance details of our fourth quarter. For the fourth quarter of 2022, net revenue declined 13.3 percent to $54.9 million and $63.3 million in the year-ago quarter, primarily due to reduced consumer demand, offset by our strategy of liquidating high-cost inventory. The fourth quarter net revenue of $54.9 million is comprised primarily of $52.3 million of organic business.

a nominal amount of revenue from our most recent acquisition, and $2.6 million of wholesale revenue. The year-ago quarter net revenue of $63.3 million was comprised primarily of $31.3 million of our organic business, $27.6 million of net revenue from our acquisition, and $4.4 million of wholesale revenue. Our organic revenue increased by $21 million due to classification of our past acquisitions

Our Q4 acquisition, while nominal from a financial perspective, was strategic and designed to leverage a competitor and drive sales to one of our other leading brands and we are pleased with the progress of this strategy to date.

Looking at our fourth quarter net revenue by phase, the $54.9 million broke down as follows. $40.8 million in sustain, $0.1 million in launch, and $13 million in liquidate and inventory normalization.

The year-go-quarter net revenues of $63.3 million by phase broke down as follows. $52.7 million in sustain, $2.6 million in launch, and $8 million in liquidate and inventory normalization.

Our sustained decrease of $12 million relates to revenue shifting into liquidation phase and general consumer softness. Our liquidation increased by $5 million from our strategic initiative to sell off higher price inventory and normalized inventory levels.

Finally, on revenue, our launch revenue declined as we previously disclosed our pausing of launching new products in 2022. The current launch revenue is primarily attributed to new variations of existing products in the quarter. We are currently planning new product introductions for 23, though the timing will be opportunistic.

Overworld gross margin for the fourth quarter declined to 37.1% from 45.6% in the year ago quarter and decreased from 45.5% in Q322.

primarily attributed to our strategic initiative to sell off higher price inventory at a normalized inventory level. Our overall Q422 contribution margin, as defined in our earnings release, was negative 11.5%, which decreased compared to the prior year CM of 7.9%, which is directly attributed to higher liquidation revenue.

from our strategic initiative to sell off higher price inventory at normalized inventory levels. Our Q4-22 SARS sustained product contribution margin decreased 8.3% versus 16.1% in Q4-21, as we also reduced pricing to normalized inventory levels and other listing management initiatives. We do expect our sustained contribution margin to improve as we progress in 2023.

Looking deeper into contribution margin for Q422, our variable sales and distribution expenses as a percentage of net revenue increased to 51.6% as compared to 40.1% in the year ago quarter. This increase was primarily due to higher cost supply chain, including last mile fulfillment, and our product mix, including liquidation and normalization of inventory, offset by reduced storage costs. We do expect our sales and distribution expenses as a percentage net revenue.

to improve as we progress in 2023. Our operating loss for the quarter of $22.8 million includes a reserve for bar to credit of $1.6 million, $2.7 million in non-cash stock compensation, and a non-cash loss on goodwill of $0.5 million.

Our net loss of the quarter of $20.3 million includes a reserve for bar to credits of $1.6 million, $2.7 million in non-cash stock compensation, a non-cash loss of goodwill of $0.5 million, and a gain on fair value of warrant liability of $2.8 million. Adjusted EBITDA, as defined in our earnings release, for the fourth quarter of 2022, was a loss of $16.2 million compared to a loss of $3 million in the fourth quarter of 2021. Our strategic decision of liquidating higher-cost inventory and normalizing our inventory levels impacted our adjusted EBITDA in the period.

working capital offset by our net losses in the period. Our working capital improvement was part of our goal to strengthen the balance sheet driven by moving out our more expensive long inventory and at December 31, inventory landed at $43.3 million. We have made great strides in Q3 and Q4 of improving our inventory composition and reducing our overall inventory as we expect to be completed with this process by mid Q2-23.

Our credit facility balance landed at $21 million, which is down almost $3 million from the sequential quarter and down almost $12 million from December 31st, 2021, as our cash position has improved from capital raise and as we continue to normalize inventory. This reduced balance also resulted in lower interest expense. As we look at Q1-23, which is typically our lowest revenue quarter and taking into account the current global environment inflation, we believe net revenue will be between $32 and $36 million. Our just leave it at guidance is beginning to show improvement.

as we progress towards adjusted EBITDA profitability in the second half of 23. For the first quarter of 23, we expect adjusted EBITDA loss to be in the range of $4.8 million to $5.8 million, anticipating continued impact of inventory liquidation. This Q1 23 adjusted EBITDA guidance, on average, is a 70% improvement from our Q4 or 22 reported adjusted EBITDA and on average a 40% improvement from Q3 22 adjusted EBITDA. As we are beginning to see the results of our strategic efforts of liquidating high-cost inventory and normalizing our inventory level.

In closing, 2022 is a challenging year, but we have persevered through global supply chain disruptions and a challenging macroeconomic condition. We have significantly reduced our inventory by moving on high-cost inventory and normalizing our inventory levels, which we believe puts us in a positive position to be adjusted even if profitable in the second half of 23.

We've also strengthened our balance sheet in 2022, which gives us flexibility to navigate the current macroeconomic environment as it continues to unfold and allowing us to be laser focused on driving our core business. We are excited and proud of the company we are building. Atiering continues to have very strong brands and many of our products continue to be some of the best sellers on Amazon. We continue to have industry leading technology and logistics and most importantly our dedicated and hard-working people continue to do extraordinary work.

As such, we are very confident and optimistic about Tyrian's future.

With that, I'll turn it back to the operator to open the call up to questions. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch tone phone.

If using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then 2. At this time, we will pause momentarily to assemble our roster.

Our first question will come from Alex Furman with Craig Hallam Capital Group.

Our first question will come from Alex Furman with Craig Hallam Capital Group. You may now go ahead.

Great guys, thank you for taking my question and congratulations on what looks like a strong success. Clearing some of the inventory that you've been hoping to, I was wondering if you could talk about which categories you've seen the most demand for both.

during Q4 and now that we've got a couple months of 2023 under your belt, where you're seeing the most demand and is that informing where you're looking for M&A or are you really looking at all different categories for that?

Hey Alex, Yaniv here. I'll take that question. Good question. Overall, as we mentioned, overall consumer demand is a little softer, right? But because of all the efforts we've done on liquidation, we've gotten more success across pretty much the board when it comes to the categories, as typical with the seasonality of Q4 versus Q3.

Q1, Q2, Q3, not a big difference there. I think to the second part of your question, you know, where we're looking for when it comes to acquisitions, I think in general we probably want to diversify our portfolio a little bit if possible, right? M&A is more opportunistic, but as much as possible from I think the supply chains that have hurt us in the last few years. So we're definitely tending to set our eyes a little more towards, you know, consumer product companies.

Thank you for that. And then can you give us a little bit more color on the bridge of how you get from what you just reported and what you're guiding to in Q1 to being adjusted EBITDA positive in the second half of the year? It looks like what you're guiding to for profitability in Q1 is better than, I was expecting at least EBITDA positive.

I'll let Arti take that. Go ahead Arti. Thanks, you need. No, Alex, I think you nailed it right at the end. I think, as we said previously, it's taken us a couple quarters here to get rid of this really expensive inventory that we brought in strategically back pre-

you know, late 2021, but we had to take the impact, unfortunately, and pay those container rates. As you move that through, you're going to get back to a place where you can get back to target type DMs, right? And with that, you should drive into profitability.

Obviously, you know, consumer spends always a question mark, but we do feel very confident that I think once we move through this more expensive inventory and the inventory that we're bringing in that's starting to land in April and May for Q3 and even parts of Q2 is going shore into spring.

seasonal sales will be at a better margins and that's why we can sort of do pretty confident what we're saying. Okay, that's really helpful. Thank you both. Our next question will come from Brian Kinslinger with Alliance Global Partners. You may now go ahead.

Great, thanks so much for taking my questions. Sorry, I joined late if you answered this in your prepared remarks, but with the company releasing new SKUs now, maybe you can update us on how many SKUs were released in the fourth quarter, maybe how many are expected in the first quarter, and maybe for the full year rough numbers. You don't know the exact number, but how is the weak consumer spending environment changing the pace of SKU launches?

The impact you'll see is that through this year we will continue to develop and launch products and most of it will come in 2024. So as you remember, right, the main reason we paused launching products was because of the unreliability of supply chains, both in terms of goods arriving on time with all the delays that we've seen in the past.

But also very importantly, right, that the fluctuations in cost of shipping were so unpredictable that it just creates a situation where, you know, you plan to launch a product and by the time it arrives, your cost basis is higher than you expected and that's just not leading towards a good launch, right? So we, you know, essentially paused that for quite a while now and now that we're finally seeing a stability in the supply chain both in terms of...

the price of shipping, but also the reliability, we're getting confident to go back again and launch these products. But most of that, the impact of these products and the launches happening will happen again in the second half of this year and mostly the impact will be felt in 2024. Okay. And so, were there any in the fourth quarter and expected in the first quarter or are they all in process right now? So, if there were any in the fourth quarter, there would have been product products that would be what we call variations, which means we kind of like think of them as...

fulfilled by Amazon companies that are struggling. Are you getting to see any fire sales? And how aggressive can you, and do you expect to be this year in 2023 on M&A? Yeah, that's a great question. And you're absolutely right there. There's a lot of companies out there.

that are struggling, going through a lot of the challenges we went through in the last year and a half, I'd say, right? And again, some of them are really in very difficult situations. So we're very active talking to a lot of these competitors, exploring different opportunities, spending a lot of time on this. And as I mentioned in my remarks, we can't guarantee any outcome, but with the amount of effort that we're putting out there and...

where the demand of COVID and on the other side, the pressure of supply chains caused the perfect storm that put these great assets in a challenging position. And so we're, as I mentioned, quite active talking to all of these companies and looking for these opportunities.

We're hoping to have an exciting thing to share with everyone, but it's still a work in progress at this point. John Kieschnick Thank you. Last question I've got is when you first went public, there was a very pronounced seasonality to your business. Help us understand today how we should think about seasonality for the year and the different quarters.

Yeah, so I think the big difference from when we first IPO'd and today, right, was at the time I think Q2 and Q3 were kind of like the two strongest quarters and Q1 and Q4 were quite like behind. I think, you know, given the profile of the acquisitions we've done and some changes to our portfolio.

of the portfolio that we have. And so you're still in a position where Q2 and Q3 are the strongest, Q4 right behind there, and then Q1 still behind the three of them, right, when you compare it to the back end where we IPO'd. Great. Thank you so much.

And so you you're still in a position where you're doing you three are the strongest you for right behind there And then you want still still behind the three of them right when you compare to back then when we IPO Great. Thank you so much Thank you

Our next question will come from Marvin Fong with BTIG. You may now go ahead. Great. Thanks for taking my questions. Good evening. I guess my first question, just on the first quarter revenue outlook, down maybe something like 20% year over year, just wondering if you could help us understand how much of that is.

the consumer demand softness that you alluded to, or is any of it just that you're entering the quarter with a little bit less inventory than you were in the same quarter last year? Just wanted to understand that dynamic a little bit better. Yeah, maybe I'll start it and see if I already want to add anything. But just in general, Marvin, you know, one of the, I think, maybe benefits of how we run our business and the different brands that we have across different categories is that as opposed to probably other companies who are maybe just active in one category, we are...

it's not that we're losing market share, but more that just this soft demand across the board, right? Adi, I don't know if you want to add anything, but that's kind of like overall how we're looking at it. Yeah, no, and that's right, Yunev. I think that's why we're seeing that, and I still think, you know, we still feel very confident on the year. I think we pointed in the past about, you know, being overall kind of flattish on the revenue side, so I just think a little bit of...

We're seeing some of the consumer demand softness early in the year, and then it should pick up back to where we believe will be stronger Q3 and Q4 revenues for us. I think the other side of that, Marvin, is even at that lower amount, you can see the EBITDA guidance improvement, right? It's a good testament of how we've really focused on clearing out the inventory to really set us up for a good 2023.

I think that's a good part of it, even though the revenue's low, you can sort of see already the improvement based off the guide of the adjust either on the profitability of the quarter. Yeah, I mean you guys kind of basically touched on my next question, which was sort of, you know, you were reiterating reaching even up, break even in the second half of the year. You know, you guys feel good in the sense that, you know, the consumer remains weak or even gets a little bit weaker, that you've stress tested it and you still feel good you can hit that even if the consumer is softer.

Yeah, I mean, I think, yes, I think you're right. Like, first of all, the categories, so consumer softness across the board, right, but I think also our experience with some of the categories and the positioning that we have on those in Q3 is giving us a lot of comfort around that. Again, the most important point here is really the cost base of the product, right?

The contribution margin expansion that we were expecting is due to the fact that the efforts that we put into Q4 to make room for that inventory at the lower cost basis is going to create that margin expansion. And, you know, our logistics team has done a great job at securing a very significant amount of the inventory needed for the second half at a lower cost, which also gives us a lot of comfort around that, right? Like there was a lot of challenge.

Gotcha. And I guess my last question maybe a more fun topic is you mentioned leveraging chat GPT and open AI and that sort of thing and I was curious you know I think you guys had always employed some form of AI you know looking at reviews and helping guide your your business decisions and product decisions. Could you just kind of expand on you know what capabilities you're achieving now or expect to achieve in the near future with these new large language models?

products, right, which includes, you know, for example, forecasting, which is where we have developed, you know, our own machine learning base forecast and things like media buying and pricing. They use automation as well, right? So when it comes to what you mentioned with Chai GPD and large language models, I mean, I think the exciting thing is that we have developed a new machine learning base, right? So when it comes to what you mentioned with Chai GPD and large language models, I mean, I think the exciting thing is that we have developed a new machine learning base, right?

But you know, the most important thing that I think a lot of people that are not necessarily you know, in the weeds on AI don't realize is that

The hardest thing about AI is actually having good data. And when I say that, what I mean is a lot of organizations, except for, especially in the consumer product industry, that is not necessarily tech-driven, right, are not necessarily designed or have the DNA or have the systems and infrastructure and their own data in a way set up for AI, right? And that's something that really gives us some advantage, right, because we...

We're a consumer company, right, but we're a consumer company that uses all of technology and thinks like a technology company. We have put ourselves in a position through the years of effort that we put to work that we are set up to use AI across the board in many different ways. And again, with the large language models, you know, I think that we'll see in the next few years a lot of disruption across many different functions of business, but I think only companies that actually have put the effort to prepare themselves to put that data to normalize it to make it available to these models.

So, really excited about all the stuff and what it could do for us in the future. That sounds great. Thanks a lot, Yunez and Arti. Thank you. Thanks, Marvin.

So, really excited about all that stuff and what it could do for us in the future. That sounds great. Thanks a lot, Yannick and Arti. Thank you. Thanks, Marvin. Again, if you have a question, please press star then 1.

Our next question will come from Matt Caronda with RothMKM. You may now go ahead. Hey guys, it's Mike Zabren on for Matt. So the recent heavy discounting makes a lot of sense even on the more premier products, but just any visibility on when we can expect a halt or even a reduction in the level of discounting and to what extent is pulling back on that heavy discounting factored into the second half.

perspective. And so as such, the view we've been saying is that as we enter the second half of the year,

All that should be normalized so we should be back to more normalized pricing along with normalized costing to get through a normalized Contribution margin or starting to see you know a good chunk of that in in in q3 and into q4 That's why we're really pointing towards that second half point You know we could get that a little bit earlier into q2, but we're really not we can't really say on that so that's why we're

am I understanding that correct? Yeah yes I mean you're always doing some form of discounting and price adjustments just to stay at the competitive landscape depending on the season that's normal yeah but yeah you're right you should see more normal pricing type positions as we enter the second half for sure. Got it, that makes sense. Just one more for me, how are we circumventing the Amazon SBATs?

I understand you guys have 3PL sites and FDA at your disposal, but maybe just speak to how we're optimizing between using Amazon versus the 3PL sites to give products to customers. That's actually a great question. Really, the answer is, as you know, Matt, we put a lot of effort in building a network of 3PLs that's connected to our AIMI platform.

As you remember, we used to do our own fulfillment for the larger items, but also for the smaller items which typically gets fulfilled through FBA, we store those items in our own 3PL before we send them to FBA to go and get fulfilled. The answer to your question relies on really how can we optimize

the 3PL distribution of the products that go to FBA to reduce the cost of FBA. Meaning, you know, if you have, again, we have I think at this point over 19 3PLs, might be maybe one less because we're optimizing all the time, but, you know, when our logistics department receives containers, they actually use a bunch of different models that we put together to reduce the cost of FBA.

figure out what's the optimal way to send those inventories to the 3PL. And the goal there for that inventory is to be as close as possible to the FBA warehouses to which we ship them so that we can A, have less inventory in FBA and B, spend less money sending it to FBA, which then offsets a little bit some of those kind of higher FBA fees that we're seeing recently, right? So again, our network of warehouses doesn't only give us an advantage when it comes to oversized items.

Because our fulfillment there is quite competitive with FBA. But also for the smaller items, where the fulfillment will happen for FBA, the distribution to be as good as possible to the FBA centers helps a lot. That's all for me. Thanks guys.P.M.

It appears there are no further questions. This concludes our question and answer session. I would like to turn the conference back over to Ilya Grisovski for any closing remarks. Thanks. As part of our shareholder perks program, which as a reminder investors can sign up for at www.etterion.io. Welcome to Grand Minneapolis O'Brien Radio Show.

Participants have the ability to ask management questions on our earnings calls. I want to thank all of the Shareholder Perks participants for their loyalty, their participation in the program, and for their questions. I've picked a few of the most popular questions this quarter that they have sent in. So here they are. The first question is, when do you intend to be fully operational in Europe ?

Do you plan to cover more European countries in the future? Thanks, Ilya. I see you here. So obviously we're really excited about Europe . It's been something that we wanted to do for a while, but the supply chain crisis was preventing us from making moves a little earlier. But in general, as we mentioned in the private press release, we already have good infrastructure set up.

some of the most important countries and we currently don't expect to go into further countries in Europe , but really it's about maximizing what we're already in, which are the biggest markets, and just sending more of our products there, right? That's the big effort here in 2023 is now that the supply chain issues have cleared, we're focused on making sure that we can maximize the amount of our existing portfolio products that are not yet in Europe , that we can bring to market in Europe , which again, shouldn't have a significant effect on 2024, right?

Once we've achieved that, we could then look at other countries in Europe , but there's no current plan to do that at this point. There's enough work with what we're doing. Great, thanks. Next question was, when do you expect to clear inventory purchase during COVID and start benefiting from the lower shipping costs?

As I already mentioned, as well, we made great progress on reducing the inventory. It was almost, I think, $73 million back in June , went up down to $43 million. We still have a bit of inventory on the balance sheet that remains longer and we're going to clear it out through the end of the second quarter at most. You know!

Really, our target is to get to less than 5% long inventory, which I think at this point is quite achievable based on the progress we've made in Q4 and continuous work that you want. Great. Okay, and the last question was, what was the health and wellness brand that you acquired in October of 2022, and how will that come to market? Yeah, so there was a lot of interest in this. And yeah —

small brand because they were like a lot of other consumer companies in a difficult position. And we did it really just because we wanted to control that listing and stop undercutting Swatty Body which is a long-term investment, right? Because if we, if that competitor has gone through the challenges that they had and continued to invest in their business, they could have further chips at our Swatty Body brand.

And so we just took advantage of that and brought that product in so that it's not a long-term issue for us. Got it. Great. This concludes the Q&A portion of the call. In terms of upcoming calendar, Atarian Management will be participating in the 35th Annual Roth Conference, March 12th through 14th in Laguna Niguel, California. We look forward to speaking with you on future calls. This ends our call.