Aterian, Inc.

is maybe just elaborate on what exactly needs to happen for us to see selling distribution leverage in the back half of the year, and is 2021 a good proxy to use? I think we were floating around the 46% to 48% of sales range, whereas for the past couple of quarters, we've been kind of mid to high 50s. So is 2021 a good proxy to use, and what exactly needs to happen to see meaningful leverage in the back half of the year?

Arti, you want to take that as well?

Yes. Thanks, Geneve. No, I wouldn't necessarily say 2021 is a good proxy. I think those numbers that you mentioned there, we do see that, you know, getting below 50-ish percent, right? I think we just did this past quarter, 48.8, that we just mentioned, gets us very close. I think the other side, as Geneve mentioned in the past, you know, the normalization of container rates will allow our gross margin to pick up a couple points allow us to get back to normalized pricing which allows to increase the velocity all these things play into that but i don't i don't know if we'll get back to like sub 46 that you're quoting i think you know high 40s is probably the right number just like we did this quarter maybe you'll see that improve a point or two uh over the coming quarters but certainly that's kind of the target we're going to be i think You're right. In Q4 and Q3, we saw those numbers being as high as 50% or 55%, but I think we're going to be probably closer to the higher 40s, like Q1, as you're seeing right now.

Thanks, Az. That's all for me.

The next question comes from Brian Kinslinger of Alliance Global Partners. Please go ahead.

Great. Thanks for taking my questions. Um, revenue from sustain was down about 25% year over year in the first quarter. And based on two Q guidance, it appears a year over year decline, although you don't give guidance in each of the line items is going to accelerate by a meaningful percentage. Um, first of all, is that a sign that you think the economy is getting weaker? Um, and traffic is going to get weaker. And then on the other hand, is that the kind of baseline we should think about for the next few quarters is. a little more accelerated than the first quarter saw.

Marty, I think a good one for you to take as well.

Yeah, thanks, Yaniv. Good question, Ryan, and good to hear you. Listen, as Yaniv said, we've seen general softness across the board. Church volumes are down on some key sites that we sell on. I think if you go across, you know, other, you know, news announcements from other companies, you've seen that it's been very difficult and volatile to predict. I do think that we are guiding, and as we said, at the middle of the range, as I quoted, 30% would be the drop-off. I think as you get into Q3 and Q4 that we're not guiding at this point. I would assume that we would see something similar, maybe a little bit less than 30%. Maybe it's like 25%, 28%, but certainly that's kind of what we're looking at right now. Obviously, the other side to be very careful about, you know, Q2 and Q3 is always a very, just driven by heat and summer and seasonality. And we sell a lot of humidifiers in these seasonal periods. So depending on how that, you know, how the kind of summer unfolds, sometimes it unfolds later and you have a little bit more, you know, a little bit less numbers in Q2, a little bit more in Q3. And I think right now, weather's been a little bit unpredictable, I think, in the sense that we've seen a lot of fluctuation there and across the country in general. We're not going to get into the reasons why we think that. That's for another time. But certainly, I think it does make that bit difficult. But I think if you're looking at that similar number going forward, I think that would be conservative. Great.

Follow-up. Clearly, you've announced the difficult enacting of headcount reductions given the demand trends. Those cuts obviously implied some level needed to get to profitability of revenue. What is that new revenue target that gets you roughly to a break-even on adjusted EBITDA, either on an annual or quarterly basis?

Well, I guess this is not really a guidance question. You're asking for a number. Artie, any thoughts on how to answer that the best way?

Yeah, you know, I think, Brian, good question. Listen, I think a lot of it depends on how... our CM unfolds. Like we've always had a target model CM of 15%, right? And that's something we've talked about and publicly and a lot of our investor presentations. I don't, I don't think we get there this year, but certainly I think we're heading in that right direction. So a lot of it's really going to be a blend. Like, and again, I'm making up numbers, but you know, if you look, you know, if you run rated our fixed costs from the last, you know, last couple of years, you know, you're kind of in those 30 numbers. We just announced we're saving six or you're doing 24 million to fix costs or something like that. Right. So I think in some aspects, if you look at, you know, 160, 170 million, depending on the CM, you can probably get to something that's above adjusted EBITDA, profitability, right? If you go a little bit lower, you're probably at a break even. So I think we're not guiding to that right now because I think things are a bit volatile and we're still working on a lot of different things. We're launching some products that you need mentioned. So I think we're still focused on a lot of things, but I don't, in that that could change the numbers to the positive, but I certainly think that it's going to be a little bit of a split in the sense of how you actually get to that. I think we're not necessarily targeting what that break-even point is from a number perspective. We're just really focused on, you know, getting through this restructuring that we've announced, getting to, you know, cleaning up the inventory. We're finalizing it in Q2, and I think hopefully the summer season goes as we expect, and we'll be able to give a little bit better information on the numbers as we progress into August.

Great. Thanks. And then the last question I have, based on your comments on the M&A environment and being able to complete some of the acquisitions you may have looked at, should we expect until the market's on stronger footing and the economy's on stronger footing, M&A's on hold for now? Is that what I'm reading into those comments?

Sorry, can you just review the last piece of this, and then should we expect... Yeah, I'm just... Sorry.

Yeah, I'm just wondering, is M&A essentially what you want to communicate is on hold right now until the economy is on stronger footing?

No, I would not say that. I think we're very actively looking at things. It's more that the same challenges we have are affecting others. And there's still, I think, a lot of, you know, I think on every side there's I think a little bit of wanting to understand what stability is and price discovery around what these assets are looking for forward. And we just like, again, as we continue to be very active in this environment, we believe there's still a lot of opportunity and believe that, again, in the long term, it's still a very big part of our strategy. There's just too much noise for us in some of these situations right now to pull the trigger. That being said... everything's dynamic, right? Just like we are dynamically moving and adjusting, these other companies and assets that we're looking at are also quickly adjusting. So I wouldn't say that we would have to wait for any type of normalization. It's more that we're going to continue to follow these opportunities very closely, and if the opportunity comes because of the stress or any other momentum thing that's happening in another company, we might still do something earlier if we can, right? But we just need to get comfortable that, you know, that what we're looking at is in a position that we can take it on, right? So, yep.

Great. Thank you.

No problem.

Once again, if you would like to ask a question, please press star, then one. And our next question will come from Alex Furman of Craig Hallam Capital Group. Please go ahead.

Hey, guys. Thanks for taking my question. I wanted to ask about the headcount reduction initiative. Can you give us a sense of what most of the eliminated positions are and your plan to absorb those responsibilities across the rest of the organization? And then it looks like you had two pretty senior positions eliminated as part of this restructuring? Are there going to need to be any hires kind of around the edges to replace some of what you've lost? Or is the thinking that your existing organization minus the 70 employees and 30 contractors can handle pretty much everything you're talking about now on the current revenue base?

A great question. I'll start with the end of it, which is in terms of hiring and plans. Right now, there is no plan to hire any significant role or replace. We believe the current organization is capable of getting us where we need to get on the profitability side. As I mentioned in my remarks, the organization was sized and built and designed to rapidly scale to much larger numbers based on the trends that we were seeing back in 2020. And really what's going to happen really is that you know, the team that's left is just going to have to work harder for sure. It's going to benefit from a lot of things, you know, tools and infrastructure that we build to automate a lot of things. And, you know, had we grown at the speed at which we expected, you know, I think the team that was here before we had to, unfortunately, cut our headcounts, you know, that team would have been in a good position starting position to scale very, very quickly, right? For the current team today, you know, if all of a sudden we have the opportunity to scale at a hyperscale, right, which obviously the environment that we live in today doesn't allow for it, right, it would be much harder. Whereas the team that was here before, you know, was able to do that and to very quickly adapt to, you know, ingest more companies that we would buy, assimilate them, and then run them as well as we can going forward, right? The difference is just we just cannot, we will not be able to go as fast if we had the opportunity to, but I just don't believe that the opportunity to move as fast as we thought we could back, you know, probably, you know, not too long ago, right, that doesn't seem to be there anymore, right? So, again, bottom line is the team that is today is sized correctly for where we're trying to get to profitability, and from there we expect to build and grow with profitability and growth kind of going hand-in-hand, right, until the environment changes again, maybe, and hyper-growth is all the rage, and we might reevaluate. But right now, we believe this is a better size theme for the environment we're in and to get us to our goals of profitability. Artie, I don't know if you want to add anything.

Yeah, no, great answer, Niamh. Yeah, listen, we've made difficult decisions. We still feel comfortable that this is a good-sized organization to do what we need to do and to provide growth. Maybe Tini's pointing out at the same time. speed and rigor that we were initially anticipating early in the year, but certainly we feel we have the talent and the dedication and the wherewithal to manage the business and grow the business with this team. Yeah, you know, we're all taking on additional responsibilities. I think that's kind of in our DNA. We kind of believe we can all do better and be more efficient, and we're going to try that, and we're all up for the challenge. We're kind of excited by this, though it's sad to see colleagues go. We got a lot of work to do and I think we're going to be able to do some exciting things with this team.

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

This concludes our question and answer session. I would like to turn the conference back over to Ilya Grasovsky for any closing remarks.

Thank you. As part of our shareholder perks program, which, as a reminder, investors can sign up for at eterion.io forward slash perks. Participants have the ability to ask management questions on our earnings call. I wanted to thank all the shareholder perks participants for their loyalty, their participation in the program, and their questions. I have picked a few of the most popular questions that they have submitted. First question is, please update us on the European expansion. Yannick?

Yep. Thanks, Ilya. Yes, so the good news on that is we continue to add products and we see a lot of opportunity for growth. As we mentioned in previous calls, that effort is going to take time just because of the nature of our business and the time that it takes to bring the products from a regulatory perspective to be compliant with European standards, to manufacture them, to ship them there. Europe is, again, a very important opportunity for growth for us. It's just going to take time as we continue to add more and more products there, and we look forward to updating everyone on future calls on the progress that we're making there.

Thanks. Next question is, is Ethereum going bankrupt, Arti or Yaniv?

Yeah, let me take that. The answer is categorically no. We are in a very strong cash position. We have minimal debt with only an ABL, and we're very far from any of the debt covenants. We don't believe that we have any reason to be worried about anything close to bankruptcy at this point. We just are adapting to the environment, and we're adapting to an environment that favors profitability and making some tough calls along the way. But really, that's it. Artie, I don't know if you want to add anything.

No, you need well said. I mean, listen, we have a great partner with MidCap and our credit facility. We have access to increase that credit facility up to $40 million as needed. I think, you know, we have very light covenants on that. As you mentioned, I think we're in good shape. As we said, we spent the last 12 months really trying to clean up our balance sheet and strengthen it, and I think we've done a great job there. We've got a good cash balance. We have good working capital access through our ABL. with MidCap, and then ultimately, you know, we worked hard to normalize this inventory balance, which is going to put us in a good position to continue to run the business and be nimble and flexible as the current environment unfolds.

Okay, thank you. Next question is, is Ethereum going to do a reverse split in Uber or ARTI?

Yep, let me take it in ARTI. To remind everyone, we have 180 days to regain compliance with NASDAQ. then we will probably likely be granted another 180 days. We're not going to comment, you know, further on the stock price. And again, the focus is really on just getting us to, you know, second half adjusted EBITDA profitability at this point. Artie, I don't know if you want to add anything to that.

No, I think that's well said, Genevieve.

Thanks.

Great. This concludes the Q&A portion of the call. In terms of the upcoming calendar, The Tyrian Management will be participating in the Sidoti MicroCap Conference, May 10th through 11th, which will be held virtually, and the Oppenheimer Consumer Growth and E-Commerce Conference, which will be held virtually June 12th to 14th. We look forward to speaking with you on future calls, and this ends our call. You may now disconnect.