Aterian Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 12, 2024

There are 7 speakers on the call.

Operator

Good afternoon. I would like to welcome you to the Ityrian Inc. Q4 Earnings Report. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

I would now like to turn the call over to Ilya Grozovsky, Vice President, Investor Relations and Corporate Development. You may begin your conference.

Speaker 1

Thank you. Thank you for joining us today to discuss Atarian's 4th 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.

Speaker 1

Before we get started, I want to remind everyone that the remarks on the 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. These 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 statements. 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 Form 10 ks filed on March 16, 2023, and our quarterly report on Form 10 Q filed on November 8, 2023, and our upcoming annual report on Form 10 ks when it is available, on the Investor portion of our website atiterion.

Speaker 1

Io. You should not place undue reliance on these forward looking statements. These statements are made only as of today, and we undertake no obligation to update or revise them for any new information, except 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. 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 Investor portion of our website at attirion.

Speaker 1

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 Joe.

Speaker 2

Thank you, Ilya, and thank you everyone for joining us today. Today, I'm going to touch on our 2023 year, including our Q4 financial results, and I will also discuss the actions we are taking to foster growth for Tyrium in 2024 and beyond, as we remain focused both on achieving adjusted EBITDA profitability in the second half of twenty twenty four and on positioning Atterium for substantial growth beyond 2024.

Speaker 3

Arty will

Speaker 2

then cover in more depth our financial results for the Q4 and will provide our outlook for Q1. For those of you joining for the first time today, a quick primer on Athyrian. Atirion owns and operates its own brands, marketing and selling consumer products in the following categories: home and kitchen appliances and accessories through our Home Labs, Mueller and Puresteam brands health and wellness, primarily through our Squatty Potty brand iron on transfer paper through our PPD or Photo Paper Direct brand and essential oils through an umbrella of brands including healing solutions. We sell our products primarily in the U. S.

Speaker 2

And we derive most of our revenues from the amazon.com marketplace. 2023 was a year of change for Atirion with Arty and I taking the co CEO role last July. Arty and I have a strong partnership and it's been a pleasure to be sharing the role with him. We set out on a mission to focus, simplify and stabilize the Tyrian And together with our team, we have accomplished quite a bit to reposition the company for success in Gorton, and we are excited about the value we believe we can deliver for shareholders. Some of the things we have accomplished thus far include refocusing Ityrian as a consumer products company by eliminating non core initiatives that don't serve our products business, shifting away from internal only developed software to a more agile and efficient third party model, eliminating a significant number of non core SKUs, further strengthening of our balance sheet through the amendment of our credit facility with our lender, restructuring our people and vendor costs to better align with our newly focused core business, reducing the number of seller accounts from 31 accounts to approximately 8, further streamlining our fulfillment operations and further optimization of the marketing performance aspects of our core SKUs.

Speaker 2

We are pleased with the results of these actions thus far and we look forward to growing Tyrium from this baseline. With respect to the Q4, we are pleased with the trend in our operating results and in particular the progress that we have made thus far to stabilize our business, notwithstanding pricing pressure across a number of highly competitive categories and a challenging discretionary spending environment. Our 4th quarter results also reflect the completion of our previously announced SKU liquidation program, which we believe has well positioned us for success in 2024 and beyond. We also continued efforts to optimize the marketing and performance of core SKUs. And while this work is never ending, we made progress on that front across each of our categories and we are seeing early results from these efforts in Q1 of this year.

Speaker 2

In 2024, we will continue our strategy to focus and simplify and to a lesser extent given the work we've done thus far stabilize how we operate in order to not only position Matirion for adjusted EBITDA profitability, but also drive profitable top line growth. We'll be focused on product development, omnichannel expansion and inorganic growth in new and existing categories. With respect to new products in 2024, we will largely be focused on our existing portfolio, refreshing a number of existing products and also launching new products that are variations in our existing portfolio that we believe will provide value to a meaningful segment of consumers. For example, as previously announced, we expanded our essential oils portfolio to address consumer needs for healthier chemical free products, and we have seen promising early results this far. We intend to continue to expand this offering throughout the rest of our Oils brand.

Speaker 2

In addition, we are working hard on our Squatty Potty brand with a view towards further expansion for its flagship toilet stool product and also expanding the product categories under the brand. We will continue to focus on our omni channel strategy, primarily through expansion to new marketplaces that we believe can drive profitable revenues for our existing product portfolio. For example, and as previously disclosed, we launched on TikTok with most of our SKUs. Results to date have not been material. We intend to continue to invest in that platform and to evolve alongside that platform.

Speaker 2

Also in the near term, we'll be launching a number of our products for sale on MercadoLibre in their Mexico based marketplace, one of the leading marketplaces in Latin America. We will also be expanding to Amazon Canada in the near term. And further, we are actively exploring a number of other marketplaces as we endeavor to position our products everywhere consumers are shopping. Regarding our inorganic strategy, M and A remains an area of focus. We recently completed a small investment in 4th and Heart, a leading ghee butter brand in the United States.

Speaker 2

We believe investments in new high growth brands have the opportunity to help drive significant value for Athyrian as well as open up new categories. We intend to continue to explore investing in earlier stage brands. We believe Athyrian can be a valuable partner. Before I pass it along to Aarti, a few words on the Tyrians NASDAQ compliance with the $1 minimum bid rule. We expect to regain compliance prior to the April 22 deadline set up by the NASDAQ through a reverse split.

Speaker 2

And while today we are not providing specifics on the reverse split ratio or timing, what I can say is that we are excited to regain compliance given that we believe we have addressed the most significant underlying operating and other issues that have been affecting our stocks underperformance over these last years. And with that, I'll pass it along to Arty. Thank you.

Speaker 3

Thanks, Joe. It's great to partner with you too. Good evening, everyone. We continue to make progress on our path of focusing, simplifying and stabilizing the Tyrian. We continue to see certain results from these missions, especially on our balance sheet as it continues to get stronger.

Speaker 3

With inventory almost at normalized levels, a great accomplishment considering the levels we were just a year ago. Although our Q4 results are better than anticipated, we still have a long way to go on our path towards adjusted EBITDA profitability. With some more recent moves such as aligning our fixed costs to our go forward size and scale of our focused company and our extension and increased flexibility of our credit facility has further strengthened our balance sheet. We continue to grow more confident that we are on the right path to deliver 2024 second half adjusted EBITDA profitability and we have the balance sheet strength to deliver these results. Now moving to the Q4 results overall, as expected, we saw our revenue decline primarily due to our strategy of discontinuing sales of non core SKUs, coupled with challenging consumer discretionary spending and competitive pricing pressures across our portfolio.

Speaker 3

Coupled with our previously action fixed cost savings, we believe we're starting to see our adjusted EBITDA losses narrowing. Now moving on to the details of the Q4 2023 net revenue. Net revenue declined 40.3 percent to $32,800,000 from $54,900,000 in the year ago quarter. $32,800,000 4th quarter net revenue by phase as defined in our press release broke down as follows: $25,200,000 sustained, dollars 400,000 in launch and $7,200,000 in liquidate and inventory normalization. The year ago quarter net revenue of $54,900,000 by Phase broke down as follows $40,800,000 in sustained, dollars 1,000,000 in launch and $13,100,000 in liquidate and inventory normalization.

Speaker 3

Our sustained net revenue decrease of $15,600,000 is primarily as a result of our SKU rationalization efforts, which have discontinued poorly performing SKUs coupled with reduced consumer discretionary spending and competitive pricing pressures. Our liquidation net revenue decreased by $5,900,000 as the efforts of liquidating high cost inventory has essentially reached its conclusion. 8 variations were launched late in the Q4 and we are continuing to be thoughtful on the timing of our new product launches through 2024. Overall gross margin for the Q4 increased to 51.0% from 37.1% in the year ago quarter, an increase from 49.4 percent in Q3 2023. The improvement was driven by product mix and lower liquidation of higher cost inventory compared to the prior periods.

Speaker 3

Our overall Q4 2023 contribution margin as defined in our earnings release was negative 0.8%, which improved compared to prior year's negative of 11.5% and decreased compared to a Q3 2023 Centimeters of 3%. The year over year increase in contribution margin was driven by product mix and the level of liquidation revenue of higher cost inventory compared to the prior period, offset by competitive pricing pressures on our core business. Q4 2023 saw our sustained products contribution margin decline slightly year over year to 6.9% versus 8.3% in Q4 of 2022. The decrease in contribution margin was driven by competitive pricing pressures and product mix and the completion of moving certain higher cost inventory. Looking deeper into our contribution margin for Q4 2023, our variable sales and distribution expenses as a percentage of net revenue increased to 52.8% as compared to 51.6% in the year ago quarter.

Speaker 3

The increase in sales and distribution expenses is predominantly due to product mix and an increase in fulfillment costs. Our operating losses of $8,200,000 in the 4th quarter improved from a loss of $22,800,000 compared to the year ago quarter, improvement of approximately 63.8%, primarily driven by the improvement in Centimeters and the reduction of fixed costs. Our Q4 2023 operating loss includes $1,600,000 of non cash stock compensation expense, a reserve for barter credits of $300,000 and a non cash loss on impairment of intangible of $300,000 While our Q4 2022 operating loss includes $2,700,000 of non cash stock compensation expense, a reserve of barter credits of $1,600,000 and a non cash loss on the impairment of goodwill of 500,000 Our net loss for the quarter of $7,700,000 improved from a loss of $20,300,000 a year ago quarter, an improvement of approximately 62%, primarily driven by the improvement in Centimeters and the reduction of fixed costs. Our Q4 2023 net loss includes $1,600,000 in non cash stock compensation expenses, non cash loss of impairment of intangible $300,000 and reserve part of credits of $300,000 while our Q4 2022 net loss includes $2,700,000 of non cash stock compensation expenses, a reserve for barter credits of $1,600,000 non cash loss and impairment of goodwill of $500,000 and a gain on fair value of warrant liability of $2,800,000 Our adjusted EBITDA loss of $5,600,000 as defined in our earnings release improved by 65.4 percent from a loss of $16,200,000 in the Q4 of 2022, primarily driven by the improvement in Centimeters and the reduction of fixed costs.

Speaker 3

Moving on to the balance sheet. At December 31, 2023, we had cash of approximately CAD20 1,000,000 compared with CAD28 1,000,000 at the end of September 30, 2023. The decrease in cash as expected is primarily driven by our net loss in the period and our decision to build up inventory in advance of the 2024 season to avoid tariff impacts, specifically for our beverage cooler. This higher inventory balance should remain through Q3 of 2024. At December 31, our inventory level was at $20,400,000 down from $31,500,000 at the end of the Q3 of 2023 and down from $43,700,000 in the year ago quarter.

Speaker 3

We are happy to report that we believe that our current inventory of $20,000,000 is almost at the appropriate level and the high cost inventory normalization that we have been working on for many quarters is now behind us. As we mentioned, our inventory includes an additional $3,000,000 of beverage coolers purchased in advance to mitigate tariff risks. Our credit facility balance at the end of the Q4 of 2023 was $11,100,000 down from $14,200,000 at the end of the Q3 of 2023 and down almost 50% from $21,100,000 in the comparable prior year period. We recently rightsized and extended our credit facility by 2 years to December 2026. Deterior now has access to $17,000,000 in current commitments, which can be increased to $30,000,000 allowing sufficient flexibility for growth when needed.

Speaker 3

Also, the credit facility extension reduces the minimum liquidity financial covenant from a peak of $15,000,000 down to $6,800,000 of cash on hand and or availability, providing further flexibility as the company focuses on adjusted EBITDA profitability and eventual growth. We believe today based on our current forecasts, our extended credit facility coupled with our existing cash has further strengthened our balance sheet as we continue on our path towards adjusted EBITDA profitability in the second half of twenty twenty four. As we look at Q1, twenty twenty four, considering the continued challenges in the consumer environment, we believe that net revenue will be between $18,000,000 $21,000,000 Using the middle of the range, this would be an approximately 45% decrease from last year's Q1, primarily driven from a reduction in SKUs from our strategic SKU rationalization and certain competitive pressures and a 40% decrease from our sequential quarter of Q4 2023 primarily from our seasonality and our strategic SKU rationalization. As a reminder, our Q1 is our lowest quarter and we expect that Q1 will drive slightly lower seasonal splits than previous years. As we have previously discussed, our decreasing net revenue is expected as we continue to focus our go forward business on our best brands and products.

Speaker 3

Our primary focus today continues to be getting to adjusted EBITDA profitability in the second half of twenty twenty four. For Q1 twenty twenty four, we expect adjusted EBITDA loss to be in the range of $2,500,000 to 3,500,000 dollars The middle of this range represents an improvement of approximately 30% compared to Q1 2023 and a 48% improvement from a sequential quarter of Q4 2023. Again, we continue to be laser focused on our target of turning adjusted EBITDA profitability in the second half of twenty twenty four. And with our Q1 guide, you can see we're starting to realize some of the results of all our hard work and initiatives. We also believe based on our forecasts, we have sufficient cash above our covenants to achieve our goal without raising additional equity.

Speaker 3

As previously stated, if we pursue additional financing, it will be predominantly for growth through M and A. We do expect a few housekeeping items in the coming weeks. We do expect to refile our S3 shelf to allow us to opportunistically raise capital as part of our M and A strategy over the coming year or 2. If we decide to do so and if we decide to acquire any brands, we believe this is good corporate governance. Finally, as we do annually, we expect to file our F8 shortly after the 10 ks.

Speaker 3

In closing, we believe our products, our strong balance sheet and with our cornerstone to focus simplify and stabilize, we are turning the quarter and look forward with confidence as we continue on our path towards adjusting our profitability and ultimately to maximize shareholder value. With that, I'll turn it back to the operator to open the call to questions.

Operator

Your first question comes from the line of Brian Kinstlinger with Alliance Global Partners. Your line is open.

Speaker 4

Great. Thank you. I just wanted to start at a high level about the demand trends. The year over year decline in the sustained revenue has been consistent for the last 3 or 4 quarters, but the pressure appears to be getting worse, at least based on the Q1 guidance. I'm sure there's an inflationary environment that's not making it any easier on consumers, yourself, supplier pricing.

Speaker 4

I know you talked about seasonality, but help us understand what you're seeing in terms of this significant down step down in revenue in the Q1 in sustained, please?

Speaker 2

Arty, maybe you touch on this a bit and I'll come in on the back end. Just around okay.

Speaker 3

Yes. Hey, Brian. Hope you're doing well. So yes, I mean, listen, we've been working very hard, right? We've said previously we've cut well north of 1700 SKUs.

Speaker 3

So some of the decrease you're seeing is the fact that we're really trying to focus this business down to our most profitable and best most profitable products and brands. So we do expect this revenue decrease. There is definitely still environmental pressures out there, right? Consumer spend seems to still be volatile. But overall, we're very happy to sort of kind of where we're tracking to.

Speaker 3

Again, being our goal, being the most important is getting to adjusted EBITDA profitability. The fact that the Q1 guide is in the middle of roughly $20,000,000 or $19,500,000 isn't surprising to us, especially considering the amount of SKUs we've cut out. I think the seasonality impacts and other things that we're doing to stabilize the business may have a little bit of the effect in that number where you mentioned it may be lower, but I don't think overall we think that's a trend that we'll continue to see in the sense of an overall shrink quarter to quarter that you've seen in the previous years, especially as we've rationalized our SKUs.

Speaker 2

Yes. That's great, Arty. I would just add that to some extent, we've lost some share and I believe we talked about this the last time Brian. And so for some of the SKUs that go forward, which again we're excited about, we've done some work to regain share there. We have sustained some loss there.

Speaker 2

So I think a little some of it is that. And then I would just say overall demand in general, I think is it looks pretty resilient. And I think that the challenge is for us is to compete, right, and to win sales for our products. So we're feeling pretty good about it, about the work we're doing to make sure we can do that.

Speaker 4

And then 2 more and I'll do them both and I'll move on step by step in the back of the queue. Was is there any revenue from the SKUs that you're getting rid of in the 4th quarter, whereas in the Q1, you'll have no revenues, there was some benefit in that 4th quarter? That's the first question. And the second question is, with the cost cutting announced a few weeks ago, what's the new quarterly revenue run rate that you believe gets you to an adjusted EBITDA profit?

Speaker 2

RDM, you want to go for that?

Speaker 3

Yes. Brian, if you could repeat that first part of that question. I got the second part. I just want to hear the first part.

Speaker 4

Yes. Sorry. You were mentioning that in the Q1, the SKUs that you're getting rid of has an impact. I'm curious was there from some of the SKUs you've discontinued, was there revenue in the December quarter or is there won't be in the current March quarter? That's the first question.

Speaker 3

Yes. So for sure, you can and it's not necessarily it's not something we plan to disclose, but you could sort of see the liquidation numbers that you've seen in our table that we provided in the press release. When you look at sustained versus liquidation, like some of that number is it won't be there. So that's part of the drop down on top of the So I mean there's nothing in sustain.

Speaker 4

Yes, yes. Sorry, there's nothing in sustain. I mean, there's no revenue from these SKUs you're getting

Speaker 3

Very little. Very, very, very, very, very, very, very, very, very, very, very, very Now as to the second part, what do we think the run rate revenue is going to be? I think listen, I don't think we're ready to talk about that in kind of full disclosure. I think we've guided the Q1 number to be roughly again, I'm just speaking in the middle of range $20,000,000 I think in some aspects the way we look at our path to positive adjusted EBITDA is really about first the focus, which is reducing the SKUs and number 2, cutting our fixed cost. I think when you look at where our key brands and products will shake out towards the second half of the year, we do think that those products will be back to like a 15% plus type Centimeters, which will be healthy.

Speaker 1

I think when you look at

Speaker 3

the $4,000,000 of savings that we announced just in February on top of the savings we announced earlier in 2023, I think those combinations is what's going to get us to that kind of profitability on top of some other initiatives that Joe mentioned as we continue to simplify and stabilize. I think because our primary focus is just the EBITDA, we're still working through that kind of that back end of the year. So I think in theory, I don't think we're ready to actually give that number out today. I think we'll be more in line of sight when we get into later in the year in Q2. But we do feel that that we have line sight of getting to that goal, especially with those initiatives that we've kind of achieved so far.

Speaker 4

Okay. Thank you.

Operator

Your next question comes from the line of Matt Koranda with Roth MKM. Your line is open.

Speaker 5

Hey, guys. It's Mike Zebrin on for Matt. Maybe just starting with new products. You recently talked about adding beverage cooler products and expanding essential oils. Given the consumer purchasing environment is still relatively deal sensitive, how are we thinking about balancing these new product introductions with maintaining market share and adhering to a price sensitive consumer in 2024?

Speaker 5

I guess just given we're working towards a higher margin profile in the coming quarters.

Speaker 2

Yes, it's fair question. I'll grab this one, Arty, and maybe you can chime in. For sure, it's a challenge, right? All the things you ticked off are challenged, right? But when we think about the portfolio, we think somewhat in terms of good, better, best.

Speaker 2

I think some of our products, with the way historically we've gone to market, a number of those products are sort of geared towards sort of the better, best kind of version of a product. And so some of the things that we're doing are aimed at getting sort of the good product, right, that more value for the price to the consumer through variations. That to the extent you're on Amazon, right, those variations usually, right, not always, but usually show up on the same listing. And so now if you think about that listing now, it's addressing a broader market of consumers. And so hopefully if you did your job well, you're getting more conversion on that listing, you're getting market share, you're getting ranking, right, which means you're going to be more prominent, you're going to have a more prominent placement.

Speaker 2

And so we're not going to go crazy with new product launches, right, but there are a number of areas where we think it's appropriate for us to come to market. And so let me stop there. Does that address your question?

Speaker 6

Yes. That's clear.

Speaker 5

Last I guess last one from me. On the profitability target in the second half, there's a lot of moving parts of the business right now. It looks like we're doing the right things to prioritize profitability, which is great. I guess, what could potentially push this profitability data out? Are we factoring in a lower promo environment or any certain pickup in product categories?

Speaker 5

Maybe just provide more color on if the profitability guide counts on any change in the macro environment? And I know we talked about new market expansion earlier in the call. Is that factored in? And just speak to why we're confident in where the bar is set?

Speaker 2

Arty, you want to take that one? Yes.

Speaker 3

I think it's a good question. Listen, we feel very confident right now, right? What we just said it 4 minutes ago on our earnings, our prepared remarks. We do feel that we're very well situated to continue to make progress and focus in stabilizing some client business and that should unlock that goal of the second half adjusted EBITDA profitability. I think specifically on our SKUs side of the house, listen, Joe said that we're doing a lot of great things.

Speaker 3

There's still pressures out there, but we're trying to mitigate that through a lot of the actions and initiatives that he highlighted in his prepared remarks. The nice thing about the SKU rationalization is that we're really putting all our energy and focus around our core SKUs and brands. So there's a lot more attention that we give today to every single one of the remaining brands and products and perhaps in the past the company was doing when it was dealing with 4,000 SKUs across 14 brands. So I do think that allows us to be a little bit more protective and reaction to any type of macro environment that may happen. And again, listen, the world is very wild these days.

Speaker 3

There's a lot of things that few years ago probably never talked about. But certainly, I do feel that the way we're currently set up does mitigate some of that risk and gives us some protections. That said, I think as Joe said, we're very focused on omni channel expansion, which is important to us because I think the one thing that we feel we are very concentrated is we are still very concentrated on Amazon where almost 85% of our revenue north of that is there. I think some of the initiatives that the team is doing will hopefully help diversify us that over certainly through the second half of the year into next year, in order to mitigate any type of impacts you may see from there.

Speaker 5

That's clear. I appreciate that. Just want to nail down on, is there any new market expansion that we called out in the call? Is that factored into the guide?

Speaker 2

No.

Speaker 5

Okay. So that would just be icing on top if we were successful in those efforts?

Speaker 2

Yes. I mean, I think Arty and I think that marketplace expansion is important. And we're I think if we're being fair, maybe we're a little bit behind where we should be on that. But you just have to keep in mind that you don't exactly light up the marketplace and it automatically materializes into results, right? Particularly when you're thinking about a market, a new phenomenon like a TikTok, for example.

Speaker 2

I know we see lots of reports of products that do extremely well seemingly overnight. I think the rest of the world, it's a little more complicated. So it's important, we're going to be in the marketplace, as I mentioned, there are going to be other ones. And then we think it will be these as longer term pillars of growth for the company, right?

Speaker 5

Got it. Very clear. I'll hop back in the queue. Thanks, guys. Thank

Operator

Your next question comes from Marvin Fong with BTIG. Your line is open.

Speaker 6

Thanks for taking my questions and congratulations on all the progress. I guess I'll ask maybe one of the more obvious questions, but I think a lot of us saw the bankruptcy at Thrasio, which is probably or has been in the works for a while, but you guys did announce this small acquisition. So any change in that in the assets that might be for sale? And also should we view the way that you sort of use both cash and stock for 4th and Hard as sort of a good template for how you might structure any deals for the foreseeable future?

Speaker 2

Yes, Adi, I'll take this and you can jump in. Yes, we saw the Trazio bankruptcy and yes, it's been in the works to our knowledge. The way we think about the aggregator space is largely, largely, right, they're all under tons and tons of duress. And then it's really not the aggregators at this point, it's largely the lenders, right? They have there are a couple of lenders.

Speaker 2

They have very significant portfolios of aggregators to which they've loaned money to. And so what you're largely seeing in the space is the lenders pushing together their portfolio companies. So that's sort of the next wave versus I think, DuraSio, which went they're looking to try to reorganize, right? I think most of the lenders that are trying to consolidate their portfolios, that's the next move. Obviously, all their portfolio companies have significant amounts of debt.

Speaker 2

But the hope is that by consolidating them together, they will find a way out of this. And so what that means for us is in the midtermmedium term, not likely to be opportunities to buy assets from those aggregators. Not that we're looking for that, right, 4th and Hard obviously has nothing to do with aggregators, right. We're kind of looking way beyond that at this point, Marvin. Having said that, if there was an opportunity, we would look at it, but it's not something we really think about at this point.

Speaker 6

Okay, that's fair. And I guess, yes, you mentioned bringing in the cooler inventory early to avoid tariffs. And I guess just as a broader topic, I mean, there's some if the election goes a certain way, we may see much higher tariffs from product from China. So could you just kind of remind us your strategy? I think you had in the past talked about efforts to kind of diversify your supplier base into other countries.

Speaker 6

Is that still the case? Have you moved some production outside of China or where do we stand there? And how do you have just a general strategy if in fact tariffs do rise?

Speaker 2

Yes, Arty's got this one.

Speaker 3

I'll grab that, Joe. Thanks. Thanks, Martin. I guess, political belief aside, I think we've seen some very large numbers announced by our former President Trump and as far as campaign rhetoric. Listen, especially with SKU rationalization as we see that kind of completion come to completion.

Speaker 3

Right now, about 85% of our inventory is produced in China with about 15% bottles or assembled in North America, which is an improvement over the last year, especially through some rationalization since kind of I think in 2022 or even earlier, we're kind of closer to like 95% or something like that. So we have improved on that. That said, a lot of our remaining categories, it's difficult to move away from China, right? Electronic, any electronics, we continue to look and see opportunities for that, but it is difficult. And outside of buying

Speaker 2

inventory that we did

Speaker 3

with the beverage coolers and that which we have flexibility to do some of that, if there were tariffs to be implemented, it's not just to a tiering, it's really across the board. So it would hit us and our competitors equally. The other side too, like we got listen the election is still it seems like very far away though it's always in everyone's front page paper these days. I do think we have some time to continue to think through that. And I do think the other side of that is it's kind of against what the Fed's and the public desire is right now.

Speaker 3

Everyone trying to reduce inflation, so hopefully interest rates come down. So I do think if tariffs were enacted, I do think that they're probably not going to be as widespread or as large as currently promised during what we're seeing in the current campaigns, because I think it's the antithesis of what they're trying to do for inflation is from an administration perspective.

Speaker 6

Got you. Okay, that's all fair. Thanks so much, Alex. I'll hop back in queue.

Operator

There are no further questions at this time. I will now turn the call back over to Leo Grozovsky for closing remarks.

Speaker 1

As part of our shareholder perks program, which is a reminder, investors can sign up for aditarion. Ioperks. Participants have the ability to ask management questions on our earnings call. I wanted to thank all the shareholder Perks participants for their loyalty and their participation in the program and their questions. I've picked a few of the most popular questions that they have submitted.

Speaker 1

The first question, does Atterion have any plans to buy back company shares?

Speaker 4

Joe?

Speaker 2

Yes, yes. I'll grab this one. So, again, just on behalf of Arty and myself, again, as Elyse said, we're grateful for the folks that are in Perks and the retail folks that follow us and support us. So in the near term foreseeable future, the answer is no. Cash that we have on hand, we want to we think is going to be best deployed by investing into Ityrium to pursue the strategies we've talked about on the call today.

Speaker 1

Great. Next question is, can the company provide an update on its efforts on TikTok specifically?

Speaker 2

Yes. So as I discussed earlier, we've got, I believe, most of our products there, if not all of our products on the platform. And what we're the results to date are again not material to our results. Having said that, we are spending time investing, leaning in to that platform just to do our best to sort of dial in a formula recipe that translates into results. Again, just a reminder, right, TikTok is a discovery platform, right?

Speaker 2

People are buying, seeing content and then making a decision to buy versus Amazon, where people are coming to the platform with the product in mind and they're searching for it specifically. So there's an adjustment there. There's a learning curve. We're working hard on it. We'll continue to talk about TikTok.

Speaker 2

And so again, appreciate the question. And that's where we are today.

Speaker 1

Great. Thank you. This concludes the Q and A portion of the call. In terms of the upcoming calendar, Terian management will be participating in the 36th Annual ROTH Conference on March 17th to 19th in Laguna Niguel, California. We look forward to speaking with you on future calls.

Speaker 1

And this ends our call. You may now disconnect.

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Key Takeaways

  • Refocused operations: Management slashed non-core SKUs from 31 to eight, streamlined fulfillment, outsourced software, and restructured costs to stabilize the business and strengthen the balance sheet.
  • Q4 financials: Net revenue fell 40.3% to $32.8 million due to SKU rationalization and pricing pressures, but gross margin rose to 51.0% and adjusted EBITDA loss improved 65.4% to $5.6 million.
  • 2024 profitability target: The company aims to reach adjusted EBITDA profitability in H2 2024 by focusing on product portfolio refurbs, omni-channel expansion (TikTok, MercadoLibre, Amazon Canada) and selective M&A.
  • Balance sheet health: Cash of C$201 million, normalized inventory of $20.4 million (plus $3 million beverage coolers), and a two-year credit facility extension to December 2026 with $17 million in commitments bolster liquidity without new equity.
  • Q1 2024 guidance: Expects net revenue of $18–21 million (∼45% y/y decline) and an adjusted EBITDA loss of $2.5–3.5 million, representing ∼30% y/y improvement amid continued SKU rationalization and cost savings.
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Earnings Conference Call
Aterian Q4 2023
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