Aterian, Inc.

Good afternoon and welcome to the Ethereum 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 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your touch-tone phone. To withdraw from the question queue, please press star then 2. Please note this event is being recorded. I'd like to turn the conference over to Ilya Grasovsky, Vice President of Investor Relations and Corporate Development. Please go ahead.

Thank you for joining us today to discuss Atarian's fourth quarter and full year 2022 earnings results. On today's call are Yaniv Tsarig, 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 Atarian'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 Eterion's judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting Eterion'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 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. Explanation of these metrics can be found in the earnings release filed earlier today. With that, I will turn the call over to Yaniv.

Thank you, Ilya, and thanks, everyone, on the call. Today, I'm going to go over the following topics. I'll start with a quick introduction of Ethereum for those who are newer 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 newer 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, Shopify, and eBay, both domestically and internationally. To allow us to scale, we've invested in building our own proprietary platform called Amy. Amy 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, Amy 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 chain 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. These additional costs forced 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 that 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 EBITDA took a hit, the decision to liquidate the long inventory now put 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 by $3 million, and we expect additional normalization to happen in Q1 with another $3 million to $4 million of inventory cycled 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. 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 EBITDA 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 micro-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 full-year profitable in 2024. We're also finally going back to launch new products, and 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 lion's share of GMV globally. We were accurate about that prediction and have focused on building a company that can manage and scale brands and products with a marketplace-first doctrine. According to research by Essential, third-party sales through online marketplaces will account for 59% of all global commerce by 2027. We also realized at inception that marketplaces will allow retailers to delegate a lot of their work 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, 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 believed 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. Ethereum 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. Ethereum 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 that 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. Ethereum 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 value chain of e-commerce consumer brands. With that, I'll pass it on to Arti.

Thank you, Neve, and good day, everyone. Here are the financial performance details of our fourth quarter. For the fourth quarter of 22, 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 our strategy of liquidating high-cost inventory. The fourth quarter net revenue of $54.9 million is comprised primarily of $52.3 million of our 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 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 acquisition revenue going into organic revenue, our strategy to sell off higher-priced inventory and normalized inventory levels, offset by reduced consumer demand in the period. Our M&A revenue decreased approximately $27 million, as all our material acquisitions have now been owned for over a year, and that revenue has shifted into the organic revenue categorization. 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-ago 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 software. Our liquidation increased by $5 million from our strategic initiative to sell off higher-priced inventory and normalize 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 2023, though the timing will be opportunistic. 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 Q3-22, primarily attributed to our strategic initiative to sell off higher-priced inventory at normalized inventory levels. Our overall Q4-22 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-priced inventory at normalized inventory levels. Our Q422 SAR sustained product contribution margin decreased to 8.3% versus 16.1% in Q421, as we also reduced pricing to normalize 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 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. Our net loss of the quarter of 20.3 million includes a reserve for barter credits of 1.6 million, 2.7 million 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. 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. 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 2023 and strengthening our balance sheet as we headed into the new year. Turning to the balance sheet, at December 31, we had cash of approximately $43.6 million compared to compared with $26 million at the end of September 30. The increase in cash is primarily driven by the previously reported $20 million capital raise in early October, positive changes in working capital, offset fire 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 31, 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 adjusted EBITDA guidance is beginning to show improvements as we progress towards adjusted EBITDA profitability in the second half of 2023. For the first quarter of 2023, 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 2023 adjusted EBITDA guidance, on average, is a 70% improvement from our Q4 2022 reported adjusted EBITDA, and on average a 40% improvement from Q3 2022 adjusted EBITDA. as we are beginning to see the results of our strategic efforts of liquidating high-cost inventory and normalizing our inventory levels. In closing, 22 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 EBITDA profitable in the second half of 23. We've also strengthened our balance sheet in 22, 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. Ethereum 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. As such, we are very confident and optimistic about Ethereum'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 hands up before pressing the keys. To withdraw from the question queue, please press star then 2. At this time, we will pause momentarily to sum up our roster. 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'd been hoping to. 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? Or, you know, 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 Q1, Q2, Q3, not a big difference there. I'd say to the second part of your question, 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 that are 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, the main goal potentially with the future M&A would be to, as much as possible, diversify from a supply chain perspective.

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 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 inventory that, you know, wasn't brought in at insane container rates?

Yeah, I'll let Artie take that. Go ahead, Artie.

Yep. Thank you, Niamh. No, Alex, I think you nailed it right at the end. I think, you know, 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, you know, 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 And with that, you should drive into profitability. Obviously, you know, consumer spend is 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 seasonal sales, we'll be at better margins. And that's why we can sort of feel pretty confident in what we're saying.

Okay, that's really helpful. Thank you both.

Our next question will come from Brian Kintzlinger with Alliance Global Partners. You may now go ahead.

Great. Thanks so much for taking my questions. I'm 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 know, you don't know the exact number, but And then how is the weak consumer spending environment changing the pace of SKU launches?

Hey, Brian, just to clarify, you know, we're starting to launch products, but, you know, 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 soon. Some of it this year, some of it next year. I think 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 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? essentially paused that for quite a while now. And now that we're finally seeing that 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 second half of this year, and mostly the impact will be felt in 2024. Okay.

And so were there any in the first quarter? in the fourth quarter and expected in the first quarter, or are they all in process right now?

If there were any in the fourth quarter, they would have been product-products that would be what we call variations, which means we 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, you know, I think that the answer is that, you know, with the effort that we're putting on now, we'll be able to, I believe, in the next few months, give a little more clarity on the timeline that we're seeing around those launches happening.

Right. And then, as I've read, more so in the private market, I think there's some undercapitalized, fulfilled by Amazon companies that are struggling. Are you beginning to see any fire sales? And how aggressive... can you and you expect to be this year in 2023 in 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 in 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're overall, you know, quite optimistic that we'll be able to find some opportunities with distressed assets that are actually quite good, right? lot of the things we're seeing you know obviously it goes through the spectrum right but but there's a lot of really good assets out there that um 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 in in a challenging position and so we're as i mentioned quite active talking to all 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. Help us understand today how we should think about seasonality for the year and the different quarters.

Yeah, so I think, you know, I think the big difference from when we first IPO'd and to 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 likely high. And I think, you know, given the profile of the acquisitions we've done and some changes to our portfolio, Q4 now is becoming a much stronger quarter, and I think has the potential in a more normalized environment to see us even doing better over time. Q1 still is the one leg behind, but it's really, again, just 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 to back then when we IPO'd.

Great. Thank you so much.

Ron, 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, you know, down maybe something like 20% year over year, just wondering if you could help us understand, I mean, 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 and see if Ari wants to add anything. But just in general, Marvin, 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 have a little bit more of a wider visibility on demand. And, you know, the answer is, as you kind of mentioned yourself, right, is really mainly driven by consumer demand being soft, right? I think that's no surprise given, you know, the overall economic situation. 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 the soft demand across the board, right? Ari, I don't know if you want to add anything, but that's kind of like overall how we're looking at this.

Yeah, no, and that's right, Yaniv. 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've pointed in the past about, you know, being overall kind of flattish on the revenue side. So I just think a little bit, 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 could see the adjusted EBITDA guidance improvement, right? You know, it's a good testament of how we've really, you know, focused on clearing out the inventory to really set us up for a good 2023. And 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 of the adjusted EBITDA 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 reiterating reaching EBITDA 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.

Yeah, I mean, I think, yes, I think you're right. 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 Q2, 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 effort that we put in Q4 to make room for that inventory, the lower cost basis, is going to create that margin expansion. And 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? 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? So 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 ChatGTT and OpenAI and that sort of thing. And I was just curious, you know, I think you guys had always employed some form of AI, you know, looking at reviews and helping guide your business decisions and product decisions. Could you just kind of expand on, you know, what capabilities you're 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 day-to-day efforts of managing the products, which includes, for example, forecasting, which is where we have developed our own machine learning-based forecast and things like media buying and pricing. They use automation as well. When it comes to what you mentioned with ChatGPT and large language model, I mean, I think the excitement, obviously, for us is huge. And as I mentioned in my comments before, we already started looking at, we are already using ChatGPT 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, especially in the consumer product industry that is not necessarily as tech-driven, right, are not necessarily designed or have the DNA or have the systems and infrastructure and their own data in a way, you know, set up for AI, right? And that's something that really gives us an advantage, right? Because we're a consumer company, right? But we're a consumer company that uses a lot of technology and thinks like a technology company. We have put ourselves in a position through the years of effort 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 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 uh to normalize it to make it available to these models are going to be the ones benefiting from it right and i think that's where Again, both with our proprietary software 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 working seeing that future and preparing for it and, you know, not waiting for it to happen, actually putting it to work with our own hands, right? So really excited about all this stuff and what it could do for us in the future.

That sounds great. Thanks a lot, Yeniv and Arti.

Thank you.

Thanks, Marvin.

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

Hey, guys. It's Mike Zabran 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 even a profitability expectation?

Audio, did you take that?

Yeah. Yeah, no, I think... Again, if you follow discounting and pricing on Amazon, it's a bit dynamic, right? But the point here was if we can clear out all this expensive inventory and normalize our inventory levels, we can bring back the product at normal costing because now we're back to 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 to a normalized contribution margin. We're starting to see a good chunk of that in Q3 and into Q4. That's why we're really pointing towards that second half point. We could get that a little bit earlier into Q2, but we can't really say on that, so that's why we're really focused on the second half right now.

Okay, so, you know, 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 discount 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 from 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. And, really, the answer is, as you know, Matt, we put a lot of effort in building, you know, a network of 3PLs that's connected to our AMI platform, which, as you remember, we used to do our own fulfillment for the larger items. 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 to getting it fulfilled, right? And the answer to your question relies on really how can we optimize the 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, 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 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 standards helps a lot.

That's all for me. Thanks, guys. Thank you.

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 Grasovsky for any closing remarks.

Ilya Grasovsky Thanks. As part of our shareholder perks program, which as a reminder, investors can sign up for at tarian.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've picked a few of the most popular questions this quarter and that they have sent in. So here they are. First question is, when do you intend to be fully operational in Europe and do you plan to cover more European countries in the future?

Thanks, Ilya. So, yeah, 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, you know, as we mentioned in the previous press release, we already have good infrastructure set up in 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 where 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 are 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 to 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.

Great, thanks. Next question was, when do you expect to clear inventory purchase during COVID and start benefiting from the lower shipping costs?

Yeah, so as already mentioned, you know, as well, right, we made great progress on reducing the inventory. I mean, it was almost $73 million back in June, went up down to $43 million. You know, 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, 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 in Q1.

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 our sales at this quality level. We had the opportunity to acquire this very small brand because there 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 squatty body, uh, which is a longterm investment, right? Because if we, if that competitor has gone through the challenges that they had and continue to invest in their business, they could have further chips at our squatty body brand. And so we just took advantage of that. And, uh, brought that product in so that they're not a long-term issue for us, right?

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, and you may now disconnect. Thank you.

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