Aterian Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 8, 2023

There are 8 speakers on the call.

Operator

Afternoon, and welcome to the Aterion Incorporated Second Quarter 2023 Earnings Report Conference Call. All participants will be in listen only mode. After today's presentation, There will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Ilya Grozovsky, Vice President, Investor Relations and Corporate Development, please go ahead.

Speaker 1

Thank you for joining us today to discuss Atarian's 2nd Quarter 2023 Earnings Results. On today's call are Joe Risco and Arturo Rodriguez, our Co CEOs. A copy of today's press release is available on the Investor Relations section of Itterion's website at itterion. Io. Before we get started, I want to remind everyone that the remarks on this call may contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on current management expectations.

Speaker 1

They may include, without limitation, predictions, expectations, targets or estimates, including Regarding our anticipated financial performance, business plans and objectives, future events and developments and actual results Could differ materially from those mentioned. These forward looking statements also involve substantial risks and uncertainties, some of which may be outside of our control and that could cause actual results to differ materially from those expressed or implied by such These risks and uncertainties, among others, are discussed in our filings with the SEC. We encourage you to review these filings for a discussion of these risks, including our annual report on Form 10 ks filed on March 16, 2023, and our quarterly report on Form 10 Q, which is when it is available, These statements are made only as of today, and we undertake no obligation to update or revise them for any new information as required by law. This call will also contain certain non GAAP financial measures, including adjusted EBITDA and adjusted EBITDA margin, which we believe are useful supplemental measures that assist in evaluating Our ability to generate earnings, provide consistency and comparability with our past performance and facilitate period to period comparisons of our core operating results.

Speaker 1

Reconciliation of these non GAAP measures To the most comparable GAAP measures and definitions of these indicators are included in our earnings release, which is available on the Investors portion of our website at attirion. Io. Please note that our definition of these measures may differ from similarly titled metrics presented by other companies. We are unable to provide a reconciliation of non GAAP adjusted EBITDA margin to net income margin, the most directly Comparable GAAP financial measure on a forward looking basis without unreasonable efforts because items that impact this GAAP financial measure are not within the company's control and or cannot be reasonably predicted. With that, I will turn the call over to John.

Speaker 2

Thank you, Ilya, and thank you, everyone, for joining us today. Today, I'm going to discuss our recent management change, The challenges we experienced in the Q2 and then share with you our near term strategy with a focus on our path to adjusted EBITDA profitability. Arty will then cover our financial results for the Q2 and our outlook for Q3. As previously announced, as of July 27, Arty and I have taken on the role of Co CEOs of Ityterion. I want to thank Yaniv Sarig, Co Founder and Former CEO of Atirion, on behalf of myself, Artie, our Board and our people There is relentless and tireless efforts to steward Ityterion.

Speaker 2

It's been a long journey for Arty and I as we both joined Ityterion over 5 years ago prior to its IPO. I'm very proud to say that practically from day 1, Arty and I have been strong business partners, taking Athirion Through its IPO as well as helping Ityrian navigate a number of headwinds over the years, including the tariffs on Chinese imports, The COVID-nineteen pandemic, the supply chain crisis, rapidly escalating costs and now Atyrian's current challenges Given the high consumer inflationary environment and the reductions and shifts in consumer discretionary spending, in particular, for the categories of products that we sell. Artie will continue to serve as CFO and will lead the company operationally, which includes oversight of our supply chain and technology. I will lead primarily on revenue, strategy and growth related initiatives. While there will likely be bumps in the road ahead, Arty and I are excited and grateful for the opportunity to lead Ityrian into the future.

Speaker 2

Moving on to 2nd quarter results. Our results reflect reduced consumer discretionary spending across our portfolio and to some extent unfavorable weather patterns In parts of the United States where we expected stronger sales of our environmental appliances, in particular for our dehumidifier and air conditioning product lines. We also experienced significant pricing pressure in light of the above and were also impacted by competitive dynamics That come with selling on unlimited shelves on marketplaces such as Amazon, which is where we earn almost all of our revenues today. We expect reduced consumer discretionary spending and competitive pricing and other competitive pressures to continue through at least the rest of 2023. Having said that, we do believe that we have a strong set of core products and we will be taking actions in the coming months to better position Athyrium's organic business For sustainable adjusted EBITDA profitability and growth, Atirion's primary goal is to continue to deliver high performing products That provides consumers with great value for the price and that results in good margins for Ityrium.

Speaker 2

As for our strategy in the near term, Ardie and I will be leading with 3 recurring themes around revenues and operations: Focus, simplification and stabilization. Today, I want to share with you our view on how we intend to focus, which is the first cornerstone on Athyrium's path to profitability. We believe that by narrowing our product portfolio to our most profitable and promising products, Like Squatty Potty, for example, we can unlock the path to sustainable profitability, in particular with the consumer first and omnichannel strategy. Non core SKUs and our historical approach to being radically product agnostic have been a drag on Atirion's profitability and operations and on our ability to focus. This SKU rationalization process will be thoughtful and deliberate, will take several months to implement We look forward to providing updates on this effort.

Speaker 2

Continuing on the theme of focus, while technology remains highly important for our success, I want to make clear today that we do not intend to pursue selling our technology as a service. In addition, while affiliate marketing will remain an important component Of our overall marketing strategy, we have shut down Deal Mojo, our affiliate marketing platform. As a reminder, Deal Mojo was intended to be a platform where in exchange for a fee, Deterion would serve as an intermediary, matching publishers and third party brands that we do not own or control. While not material to our financial results, not pursuing these initiatives will allow us to drive further focus. Regarding geographic expansion, in particular in Europe, it will not be a focus area for us in the near term.

Speaker 2

While we do have our Squatty Potty and our transfer paper businesses currently selling in Europe and we expect that to continue, For now, we do not intend to expand to that geo, given the need to remain highly focused on driving success in the U. S. Market. Lastly, organic growth coming from M and A will continue to be part of our strategic roadmap. To summarize, We believe that by focusing on our best products, starting with the rationalization of non core and unprofitable SKUs, By driving an omnichannel strategy and by more thoughtfully launching new products that consumers love, we can deliver a profitable baseline for our business In the coming months, we look forward to discussing our progress and to also share with you other strategic initiatives relating to our efforts to focus, simplify and stabilize our business.

Speaker 2

With that, I'll pass it along to Artie. Thank you.

Speaker 3

Good evening, everyone. Thanks, Joe, and welcome to your first earnings call as co CEO. I'm very honored and humbled to have the opportunity to co lead the Tyrian into its futures. Both days in as Co CEO, I'm even more excited to partner with you, Joe, and the rest of the team. Tiering has some great products and brands supported by an impressive supply chain and tech and most importantly are fantastic people.

Speaker 3

Together with every single person at a tiering, we are going to continue to successfully navigate some of the remaining obstacles that have challenged us over the past few years as highlighted earlier by Joe. Joe and I strongly believe that our path to profitability is achievable, though it will take longer than originally anticipated. Regardless of the have continued to improve our balance sheet, which we believe will give us the runway to get to our goal of adjusted EBITDA profitability. Joe and I have a lot of work to do as we embark on our respective mission. However, our shared initial vision of focusing, simplifying and stabilizing and tiering towards profitability and ultimately back to growth is resolute.

Speaker 3

Now here are the financial performance details of our Q2. For the Q2 of 2023, net revenues declined 39.5 percent to 35,300,000 From $58,300,000 in the year ago quarter, primarily due to reduced consumer discretionary spending and significant competitive pricing pressures across our portfolio. Looking at our 2nd quarter net revenue by phase as defined in our press release, the $35,300,000 broke down as follows: $31,000,000 in sustained, Less than $100,000 in launch and $4,200,000 in liquidate and inventory normalization revenue. The year ago net revenue of $58,300,000 by phase broke down as follows $54,100,000 in sustained, dollars 1,300,000 in launch and $2,900,000 in liquidated inventory normalization. Our sustained net revenue decrease of $23,100,000 is from reduced consumer discretionary spending by $1,300,000 from our strategic initiatives to sell off higher price inventory and to normalize inventory levels.

Speaker 3

Four new product variations were launched very late in the Q2, attributing phenomenal revenue in the period. We are continuing to plan new product introductions later in 2023 with the timing being Overall gross margin for the 2nd quarter declined to 42.2% from 53.8% in the year ago quarter and decreased from 54.8 percent in Q1 of 2023. The reduction was driven by pricing pressures during the period, Product mix, our continued strategic initiatives to sell off higher price inventory and normalized inventory levels and a $2,500,000 increase in inventory obsolescence reserve. This reserve was primarily from expiring essential oils and other product impacts from changes in our forecast. This reserve had a negative impact of 7.1% on our gross margin.

Speaker 3

Excluding this impact, our gross margin would have been 49.3%. Our overall Q2 2023 contribution margin, as defined in our earnings release, It was negative 3.6%, which decreased compared to prior year's Centimeters of 9.7% and decreased compared to Q1's 2023 Centimeters of 5.9 The decrease in contribution margin was driven by pricing pressure during the period, product mix, our continued strategic initiative to sell off higher priced inventory and normalized inventory levels and $2,500,000 increase in inventory obsolescence reserve. Excluding this reserve impact, our Centimeters would have been positive 3.5%. Q2222023 saw our sustained product contribution margin decline year over year to 2.1% versus 13.3% in Q2 of 2022. The decrease in contribution margin was driven by pricing pressure during the period, product mix, our continued strategic initiatives to sell off higher price Inventory and the $2,500,000 increase in inventory obsolescence reserve.

Speaker 3

Excluding this reserve impact on our Centimeters for sustained would have been positive 10.1%. Looking deeper into contribution margin for Q2 2023, our variable sales and distribution expenses as a percentage of net revenues increased to 45.8% as compared to 44.1% in the year ago quarter. This increase in sales and distribution expense is primarily due to product mix and an increase in fulfillment fees and an increase in online advertising costs. In the period, we took a $1,200,000 charge for restructuring expenses primarily from our May 9th announcement of our plan of our workforce reduction. As previously stated, we expect this plan to reduce fixed costs by $6,000,000 annually.

Speaker 3

We expect to see the effect of those savings to start in Q3 of 2023. Our operating loss of $36,400,000 in the 2nd quarter increased from $10,100,000 compared to the year ago quarter as we continue to normalize our business from the impact of supply chain, Restructuring cost of $1,200,000 while our Q2 2022 operating loss included a gain of $1,700,000 from the change in fair value of earn out liabilities and $6,000,000 non cash stock compensation expense. Our net loss for the quarter of $34,800,000 increased from a loss of $16,300,000 in the year ago quarter as we continue to normalize our business from the impacts of supply chain and strengthening of our balance sheet by our continued strategic initiative Our 2nd quarter net loss of 2023 includes impacts from our operating loss as described Earlier, plus a gain of fair value warrant liability of $2,200,000 while our Q2 2022 net loss includes the impacts Of our operating loss as described earlier, plus $6,000,000 impact from a change in fair value of warrants. Adjusted EBITDA loss of $8,000,000 as Finding our earnings release increased from a loss of $3,700,000 in the Q2 of 2022. The previously mentioned $2,500,000 increase in inventory had a negative impact on our adjusted EBITDA.

Speaker 3

Excluding this impact, our adjusted EBITDA would have been a loss of $5,500,000 Going to the balance sheet, at June 30, we had a cash of approximately $28,900,000 compared to $33,900,000 at the end of March 31, 2023. The decrease in cash as expected is predominantly driven by our net loss in the period, dollars 5,300,000 net inflows from working capital and repayments of approximately $5,500,000 on our credit facility. We continue to focus on normalizing our inventory levels in the Q2 of 2023 by liquidating our high cost non core inventory. We are pleased with our progress, but do need more time to get our inventory at the appropriate levels, especially considering reduced consumer demand. At June 30, our inventory level was at $36,700,000 down from $40,400,000 at the end of the Q1 of 2023 and down from $76,100,000 in the year ago quarter.

Speaker 3

Our credit facility balance at the end of the Q2 of 2023 was $15,700,000 down from $19,100,000 at the end of As we look at Q3 2023, considering the impact of inflation and the reduction in consumer spend, We believe that net revenues will be between $32,500,000 $37,500,000 This represents a decrease from the same quarter last year of approximately 45% We expect to continue to see similar softness in consumer spend for the remainder of the year. For Q3 3, 2023, we expect adjusted EBITDA loss to be in the range of $4,500,000 to $5,500,000 We originally targeted adjusted EBITDA in the second half of twenty twenty three, however, with continued expectation of softness in consumer spending through at least the rest of 2023. And as we previously announced, We don't believe that profitability is achievable in this year. Although Joe and I are currently working through our strategy and vision, we currently believe that targeting adjusted EBITDA profitability in the summer of 20 4 is more realistic than this year. Further, we believe based on our current forecast, we have sufficient cash above our covenants to achieve this goal without raising additional equity.

Speaker 3

As previously stated, if we pursue additional financing, it will be probably for growth through M and A. In closing, we believe Atterion will continue to navigate through obstacles that have challenged us over the past few years. Joe's and my shared initial vision of focusing, simplifying and stabilizing Aterian towards profitability is priority 1. This goal will take time and tremendous effort and we are excited for that challenge. We believe our solid balance sheet led by our cash balance, normalizing inventory levels and continued access of our credit MidCap will allow us to be laser focused in driving our core business towards adjusted EBITDA profitability.

Speaker 3

With that, I'll turn it back to the operator to open the call up to questions.

Operator

We will now begin the question and answer At this time, we will pause momentarily to assemble our roster. Our first question comes from Marvin Fong with BTIG. Please go ahead.

Speaker 4

Hey, good evening, Marty and Joe. And Joe, welcome to the CEO role. So I I had a question just on the initiative to, I guess, rationalize the portfolio and focus on your most profitable So I guess two questions on this, maybe the first one. Could you maybe give us an idea of How much of your revenue base will kind of be included in this Kind of more profitable viewpoint. So like how much Can we expect the revenue base to kind of

Speaker 2

be rationalized? Arty, do you want to take that one, Arty?

Speaker 3

Got it, Joe. Thanks. Marvin, good to hear you. Hope you're doing well. Yes, it's a good question.

Speaker 3

Listen, Marvin, as Joe said, we're 12 days in. That is our primary focus. We're working through that. We do think that any rationalization will do, will have some impact, but we don't think right now, it's hard to say, but we don't think it's going to be Uber material from a revenue perspective based off where our current guidance is. That said, I do think where we're Very excited to do this.

Speaker 3

We think the impact on the profitability is a lot stronger than it is on the revenue, but we still need time to work through it. And as Joe mentioned, we'll be able to We provide more color on that in our next earnings call, but we don't think it's going to be as material Cut than what we're currently seeing in our current consumers current guidance numbers.

Speaker 4

Okay, great. And I guess another question on just sort of this topic, but I know you said you're just 12 days in, but is it possible that Whole brand might be eliminated or is this going to be more like surgical and what we do the cross brand kind of looked at?

Speaker 2

I'll take that one, Arty. I think we're for sure going to be so we're going to do a line review, Marvin, right, SKU by SKU Across all the brands. So it will definitely be surgical now. In the course of that work, we might decide To jettison 1 or more brands that really don't drive any P and L meaningfully today. But it's right now, we're thinking of it more surgically, right?

Speaker 2

And then we'll see if that expands to brands.

Speaker 4

Okay, perfect. And maybe, Arty, just one P and L question. So the fixed distribution cost in the Kind of increased quarter over quarter. Is that just a one time thing? Can we expect that to come back down?

Speaker 4

I know you mentioned the restructuring savings should just start But just why did that jump in this quarter and what can we expect going forward?

Speaker 3

Yes. So I think from memory, I think Martin, there's some restructuring So I think when you back that out, I think it'll probably be more normal. But certainly, we do expect that fixed cost to actually start coming down a bit more in Q3 anyway as

Operator

The next question is from Brian Kinstlinger with Alliance Global Partners. Please go ahead.

Speaker 5

Hi. Thanks for taking my questions, guys. First one maybe you answered, sorry I missed it. Can you talk about how much inventory you still have remaining as part of the planned liquidation process from the SKUs that were high priced

Speaker 3

Yes, Joe. I'll grab that. Thanks. Hey, Brian, how are you doing? Hope you're doing well.

Speaker 3

Listen, we're still working through that, right? I think in some aspects, we went from sometime last year at $76,000,000 really cut that down to We're very pleased in what we've been doing and how we've been fixing that. But as we said earlier, we've got a little bit more work to do. We didn't really state a number out there, Ryan, but I think In general, what we said in the past is, listen, there's always going to be some component of inventory that we're not pleased with and long on, right, inventory is never perfect. We want that number to be below 10% of our average balances.

Speaker 3

I think right now, we're probably looking at that number being 15% to 17.5% versus 10 So from an average basis, so it's roughly like $5,000,000 or something like that. So that's kind of the amount I want to sort of work down. But obviously, that's still very fluid as we kind of work with both SKU rationalization and the current consumer environment, but that's kind of what we're thinking right now.

Speaker 2

Got it. Thanks.

Speaker 5

And then you obviously highlighted the pricing pressure in the cooling and air quality products. That's been a meaningful piece of your business, at least historically. I'm curious since the end of the quarter, have you begun to see pricing pressure on other SKUs?

Speaker 2

I can take that Arden, you can jump in. I would say that generally speaking, It's in pockets, but there's pricing pressures across The portfolio, right? In some cases, though, we have some very strong products that do well, have very strong margins, they're best sellers. And then in other areas that I think are a little more discretionary, you're seeing pressure there as well, right? People, sellers want Obviously, get their daily run rates and also get out of their inventory.

Speaker 5

Yes. Okay. Last question for me. You highlighted returning to profitability On an adjusted EBITDA basis, more likely in the summer of 2024, you've cut what sounds like $6,000,000 in annual OpEx. In order to get back to positive adjusted EBITDA, do you have to cut more

Speaker 2

or will or do

Speaker 5

you expect it all to come from returning to revenue growth?

Speaker 3

So Brian, good question. Listen, we believe as we focus our product portfolio and brand, as Joe mentioned, our CMO naturally recover, right? As I think I highlighted earlier in one of the questions, The rationalization is probably a bigger drag on profitability than it is top line revenue. And so when you kind of factor that in, I think, Again, early targets, you think the Centimeters probably gets pretty quickly above that 13% number that we haven't seen in a while and maybe even closer to our target of 15. I think when you factor that in, even on a reduced revenue, you're kind of right there, especially after the fixed cost And that's before any type of rationalization on an efficiency that comes out of the supply chain for doing less SKUs, there's going to be efficiencies that naturally come through that, right.

Speaker 3

So I think When you factor that all in, I think that's how we kind of see it and that's what we have line of sight of, but we still have a lot of work to get there as we mentioned And

Speaker 5

we're going to roll

Speaker 3

up our sleeves and really focus on doing that, but that's kind of how you kind of that's how we see it and how we can get there.

Speaker 5

Great. Good luck, guys. Thank you so much.

Speaker 2

Thank you, Brian.

Speaker 3

Thanks, Brian.

Operator

The next question is from Alex Fuhrman with Craig Hallum Capital Group. Please go ahead.

Speaker 3

Hey guys, thanks for taking my question.

Speaker 6

Arty, I think you mentioned about $6,000,000 of annualized cost cuts that you're going to see starting In the current quarter, can you give us a little bit more granular sense of what that $6,000,000 is? How much of that is Headcount versus other fixed expenses, and then how much should we expect to see in the Q3 and the Q4 this year and when would you expect to see the full run rate of that in the P and L?

Speaker 3

Hey, Alex. How are you doing? And thanks for the question. I would say that the predominant amount of savings there was people. I would say probably 90% to 95% of that number is coming from people cost at this point in time.

Speaker 3

I do think that we'll start seeing Some of the most of the impacts in Q3, but I would say the full run rate, you'd probably expect some time in pretty close in Q4, if not solely by Q1. There's a little bit of timing elements there that we have to work through, but you start seeing the impacts of the savings in Q3, you see a lot bigger portion of that in Q4 and then would say by Q1 of next year, you'll definitely see 100% of that coming through.

Speaker 6

Okay. That's really helpful. And then can you just kind of from a high level just give us a sense here of as you think about rationalizing some SKUs, what right now are your top performing most profitable brands that you're really going to be willing to put

Speaker 2

Sure. I can take that one, Arty. So Look, Squatty Potty is a great brand, right? It's the product, right, is Squatty Potty, right? So That's a great brand.

Speaker 2

We have a few other brands, Pure Steam. We have an oils brand, our paper brand. We've got some home and kitchen appliance brands. These are all brands that again have some SKUs in them that need to be rationalized, but that Have some really, really great products in them. And so we'll provide more color Where we think we're going to make bigger bets in the coming months, Alex, but Those are the areas where we think we'll be spending most of our time for now.

Speaker 6

Okay. That's very helpful. Thank you very much.

Speaker 4

You're welcome.

Operator

The next question is from Matt Koranda with Roth MKM. Please go ahead.

Speaker 7

Hey guys, good evening. Just wanted to get a little bit more color on explicitly what's driving sort of the erosion in year over year declines In the Q3, the Q3 outlook, I think implies things have gotten a little worse in the last month, I guess. So what Categories in particular have you seen erosion in? And then maybe could you clarify for us like are you losing top of search in any of those categories or Because it seems a little too stark to chalk it all up to macro weakness. So just wanted to see if you could maybe put a finer point on sort of are there some categories where maybe we've lost top of search?

Speaker 7

And then, just lastly, maybe address the pricing dynamic versus unit volume pressure that you're seeing. It sounds like you're saying that there's some pricing pressure and some competition in some key categories. So maybe just put a finer point on that as well for us.

Speaker 2

Arty, I can try to address this and then maybe you can just jump in over me.

Speaker 3

Perfect, Joe. Thank you.

Speaker 2

Okay. So, Matt, in the Q2, right, the environmental appliances are the products that We expect to sort of drive most of the P and L. So those are our air conditioners and dehumidifiers. When it comes to dehumidifiers, It's interesting. So I spoke about this in my remarks a little bit.

Speaker 2

There was a loss of rank there. We had a product that and this is part of the challenges of being on a marketplace, right? We had a product that came into The category that's not actually a dehumidifier, but it took the bestseller tag away from us. So you know that that's The bestseller tag is very differentiating and when you lose that tag, you take an immediate hit on velocity, right, sales velocity. On top of that, and again, this is the challenges of being on the marketplace.

Speaker 2

There are other competitors, right, that are getting a best seller tag that they don't deserve to have. So if you're in front of your computer And you type in dehumidifier, you'll see a brand called 9sky and that product Has the best seller tag on it, but when you click on the best seller tag, right, and do the work, you'll see That is the number one ranked product for Christmas stockings, okay? So It's there are players out there that are sort of gaming the algorithms. It's confusing consumers. We had another product come in To the category that also shouldn't have the tag, all of which creates makes it harder for the consumer Find our product even though we know we have a great product and it's well priced and it does the job.

Speaker 2

And so that's The kind of dynamic that we're seeing sort of in the dehumidifier category, right? And that and those kinds of things can sort of Make or break you, right, in the quarter. And then because the weather, it hasn't been incredible Humidity in the second quarter, right? It started out rather a rather mild season. Folks are loaded up on inventory, right, and they need to exit for the season.

Speaker 2

So prices come down. And You start to see a little bit of pressure that way as well. That's what I've got for you. I don't know if there's a follow-up or Artie if you want to add anything there.

Speaker 3

No, I think, Joe, you answered it well. I think, Matt, to your point, We did see some improvement in our run rates, especially when we got into July, because I think in some aspects, it started heating up. So we did see the numbers increase a But we're still being very cautious as we guided because the consumer spend and some of these other very particular Good point that Joe brought up are just we're just trying to be cautious there, right? We don't we have we've seen some improvements, but we're So that's why I think when you look at the guide, we're kind of almost flat to Q2. And keep in mind, really similar to Q2, Q3

Speaker 7

And then maybe just as a follow-up to Joe's comments, it's interesting. I guess, how do you raise that sort of, for lack of a better term, like the seller gamesmanship with Amazon, what's your avenue for redress? Is Amazon receptive to you guys sort of highlighting some of the challenges with the product listing That you mentioned, how do you get through that?

Speaker 2

Yes. We look, we don't have Jeff Bezos on speed dial. But we have our people constantly filing complaints. We do have Amazon representatives that will take our phone call, right, but it's a very large org. We know they care about these things, right?

Speaker 2

Integrity on the marketplace is super But it's not just something that gets fixed overnight, Matt.

Speaker 7

Okay. All right. Fair enough. And then just on the inventory write down, can you guys cover maybe I missed it too, I've been bouncing between calls here. What was that focused in any particular category, where maybe you're winding down product or Maybe just put explicitly spell out what was written down for us if you could.

Speaker 3

Yes. Sure, sure, sure, Matt. I think we said in the prepared remarks, it was predominantly expiring essential oils, Especially with the consumer downturns that we saw, we had some big plans for moving out of those oils and unfortunately, which We couldn't get

Speaker 5

them done in time when some

Speaker 3

of the expires. And in reality, when they expire within a certain day range, right? You've got 60 days to sell it. You still have to take the charge because Amazon won't let you put it on the platform.

Operator

At this time, I'd like to turn the conference over to Ilya Grozovsky. Please go ahead.

Speaker 1

Thanks. As part of our shareholder perks program, which as a reminder, investors can sign up for ataterion. Ioperks, Participants have the ability to ask management questions on our earnings calls. I wanted to thank all of the shareholder Perks participants for their loyalty, their Question number 1, what is the progress with your European expansion?

Speaker 2

I think I addressed this in the remarks. We are right now, We've got a lot of wood to chop right with SKU rationalization, and we think there's a lot of opportunity in the U. S. Markets, and that's where we want to focus. Having said that, we appreciate that international expansion is important and it's something we will continue to think about it when the time is right for the company.

Speaker 1

Great, thanks. Update on the reverse split efforts given the annual meeting adjournment?

Speaker 2

I'll grab this one too, Marty. So the quick update there is We expect to get the approval to affect the reverse split. We right now, again, the theme of the day is focus. So for us, Closing in on the path to adjusted EBITDA profitability is the name of the game. We continue to think about whether we will need to reverse stock And that's really all we can comment on at this time.

Speaker 2

But we're doing the work, we're evaluating it, we're thinking a lot about it.

Speaker 1

Great. And the last question was, what is the plan to increase transparency and regain shareholder confidence?

Speaker 2

Thank you, Ilya. So look, I just want to say, Arty and I are extremely grateful that We get these questions and we appreciate the engagement. We appreciate the support. We realize that we're largely a retail stock today. I think before Arty and I took this role, we were both fiduciaries At Atterion, we endeavor always to be transparent, right?

Speaker 2

That's Extremely important for us. So we expect to continue to be transparent. And for us, We know we have a lot of work to do. And hopefully, if we can get on that path to profitability, That will go a long way to reestablishing confidence.

Speaker 3

Great. Thank you.

Speaker 1

This concludes the question and answer portion of the In terms of the upcoming calendar, Aterion Management will be participating in the H. C. Wainwright 25th Annual Global Investment Conference on September 11 through in New York the 2023 LD Micro Main Event 16 October 3 through 5 in Los Angeles Craig Hallum, 14th Annual Alpha Select Conference in New York on November 16th. We look forward to speaking with you on future calls.

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Key Takeaways

  • New Co-CEOs Joe Risco and Arturo Rodriguez have assumed leadership—Joe on revenue and strategy, Arturo on operations—driving a plan centered on focus, simplification and stabilization to reach adjusted EBITDA profitability.
  • Q2 net revenue fell 39.5% to $35.3 million, gross margin declined to 42.2% from 53.8%, and adjusted EBITDA loss widened to $8 million, reflecting weak consumer spending, pricing pressure and weather headwinds.
  • The company is undertaking a SKU rationalization to concentrate on its highest-margin products such as Squatty Potty, has closed its Deal Mojo affiliate platform and is pausing near-term European expansion.
  • A planned $6 million annual cost reduction from workforce cuts will begin to impact in Q3/Q4, with Q3 guidance of $32.5–37.5 million in revenue and a $4.5–5.5 million adjusted EBITDA loss, and a goal of profitability by summer 2024.
  • Operational challenges include competitive Amazon marketplace dynamics that have hurt product rankings—especially in dehumidifiers—and a $2.5 million increase in inventory obsolescence reserve due to expiring essential oils.
AI Generated. May Contain Errors.
Earnings Conference Call
Aterian Q2 2023
00:00 / 00:00