Aterian, Inc.

Good afternoon, and welcome to the Ethereum Incorporated second quarter 2023 earnings report conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, Please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Ilya Grazovsky, Vice President, Investor Relations and Corporate Development. Please go ahead.

Thank you for joining us today to discuss Atarian's second quarter 2023 earnings results. On today's call are Joe Risco and Arturo Rodriguez, our co-CEOs. Yep. A copy of today's press release is available on the Investor Relations section of Atarian's website at atarian.io. Before we get started, I want to remind everyone that the remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on current management expectations. They may include, without limitation, predictions, expectations, targets, or estimates, including regarding our anticipated financial performance, business plans and objectives, future events and developments, and actual results could differ materially from those mentioned. These forward-looking statements also involve substantial risks and uncertainties, some of which may be outside of our control And that could cause actual results to differ materially from those expressed or implied by such 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 on Form 10-K, filed on March 16, 2023, and our quarterly report on Form 10-Q, which is when it is available. on the investors portion of our website at eterion.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 as required by law. This call will also contain certain non-GAAP financial measures, including adjusted EBITDA and adjusted EBITDA margins, 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 investors portion of our website at eterion.io. Please note that our definition of these measures may differ from similarly titled measures presented by other companies. We are unable to provide a reconciliation of non-GAAP adjusted EBITDA margin to net income margin, the most directly comparable GAAP financial measure on a forward-looking basis without unreasonable efforts because Items that impact this GAAP financial measure are not within the company's control and or cannot be reasonably predicted.

With that, I will turn the call over to John. Thank you, Ilya, and thank you, everyone, for joining us today.

Today I'm going to discuss our recent management change, the challenges we experienced in the second quarter, and then share with you our near-term strategy with a focus on our past, to adjusted EBITDA profitability. Arti will then cover our financial results for the second quarter and our outlook for Q3. As previously announced, as of July 27th, Arti and I have taken on the role of co-CEOs of Ethereum. I want to thank Yaniv Sarig, co-founder and former CEO of Ethereum, on behalf of myself, Arti, our board, and our people for his relentless and tireless efforts to steward Ethereum. It's been a long journey for Arti and I as we both joined Ethereum over five years ago prior to its IPO. I'm very proud to say that practically from day one, Arti and I have been strong business partners, taking Ethereum through its IPO as well as helping Ethereum navigate a number of headwinds over the years, including the tariffs on Chinese imports, the COVID-19 pandemic, the supply chain crisis, rapidly escalating costs, and now Ethereum's current challenges, given the high consumer inflationary environment and the reductions and shifts in consumer discretionary spending, in particular for the categories of products that we sell. Arti will continue to serve as CFO and will lead the company operationally, which includes oversight of our supply chain and technology. I will lead primarily on revenue, strategy, and growth-related initiatives. While there will likely be bumps in the road ahead, Arti and I are excited and grateful for the opportunity to lead Ethereum into the future. Moving on to second quarter results. Our results reflect reduced consumer discretionary spending across our portfolio, and to some extent, unfavorable weather patterns in parts of the United States where we expected stronger sales of our environmental appliances, in particular for our dehumidifier and air conditioning product lines. We also experienced significant pricing pressure in light of the above and were also impacted by competitive dynamics that come with selling on unlimited shelves on marketplaces such as Amazon, which is where we earn almost all of our revenues today. We expect reduced consumer discretionary spending and competitive pricing and other competitive pressures to continue through at least the rest of 2023. Having said that, we do believe that we have a strong set of core products We will be taking actions in the coming months to better position Ethereum's organic business for sustainable adjusted EBITDA profitability and growth. Ethereum's primary goal is to continue to deliver high performing products that provide consumers with great value for the price and that results in good margins for Ethereum. As for our strategy in the near term, Arti and I will be leading with three recurring themes around revenues and operations. focus, simplification, and stabilization. Today, I want to share with you our view on how we intend to focus, which is the first cornerstone on Ethereum's path to profitability. We believe that by narrowing our product portfolio to our most profitable and promising products, like Squatty Potty, for example, we can unlock a path to sustainable profitability, in particular, with the consumer-first and omnichannel strategy. Non-core SKUs and our historical approach to being radically product agnostic have been a drag on Ethereum's profitability in operations and on our ability to focus. This skew rationalization process will be thoughtful and deliberate, will take several months to implement, and we look forward to providing updates on this effort. Continuing on the theme of focus, while technology remains highly important for our success, I want to make clear today that we do not intend to pursue selling our technology as a service. In addition, while affiliate marketing will remain an important component of our overall marketing strategy, we have shut down DealMojo, our affiliate marketing platform. As a reminder, DealMojo was intended to be a platform where, in exchange for a fee, Ethereum would serve as an intermediary, matching publishers and third-party brands that we do not own or control. While not material to our financial results, Not pursuing these initiatives will allow us to drive further focus. Regarding geographic expansion, in particular in Europe, it will not be a focus area for us in the near term. While we do have our squatty potty and our transfer paper businesses currently selling in Europe, and we expect that to continue, for now we do not intend to expand to that geo, given the need to remain highly focused on driving success in the U.S. market. Lastly, Organic growth coming from M&A will continue to be part of our strategic roadmap. To summarize, we believe that by focusing on our best products, starting with the rationalization of non-core and unprofitable SKUs, by driving an omnichannel strategy, and by more thoughtfully launching new products that consumers love, we can deliver a profitable baseline for our business from which we can grow. In the coming months, we look forward to discussing our progress and to also share with you other strategic initiatives relating to our efforts to focus, simplify, and stabilize our business.

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

Thanks, Joe, and welcome to your first earnings call as co-CEO. I'm very honored and humbled to have the opportunity to co-lead Atterian into its futures. Both days in as co-CEO, I'm even more excited to partner with you, Joe, and the rest of the team. Ethereum has some great products and brands supported by an impressive supply chain in tech, and most importantly, our fantastic people. Together with every single person at Ethereum, we are going to continue to successfully navigate some of the remaining obstacles that have challenged us over the past few years, as highlighted earlier by Joe. Joe and I strongly believe that our passive profitability is achievable, though it will take longer than originally anticipated. Regardless of that delay, we have continued to improve our balance sheet, which we believe will give us the runway to get to our goal of adjusting EBITDA profitability. Joe and I have a lot of work to do as we embark on our respective missions. However, our shared initial vision of focusing, simplifying, and stabilizing and tearing towards profitability and ultimately back to growth is resolute. Now, here are the financial performance details of our second quarter. For the second quarter of 2023, net revenues declined 39.5% to $35.3 million from $58.3 million in the year-ago quarter, primarily due to reduced consumer discretionary spending and significant competitive pricing pressures across our portfolio. Looking at our second quarter net revenue by phase as defined in our press release, the $35.3 million broke down as follows. $31 million in sustain, less than $0.1 million in launch, and $4.2 million in liquidate and inventory normalization revenue. The year-ago net revenue of $58.3 million by phase broke down as follows. $54.1 million in sustain, $1.3 million in launch, and $2.9 million in liquidate and inventory normalization. Our sustained net revenue decrease of $23.1 million is from reduced consumer discretionary spending and significant competitive pricing pressure across the portfolio, but in particular, our dehumidifier and air conditioning product lines. Our liquidation net revenue increased by $1.3 million from our strategic initiatives to sell off higher price inventory and to normalize inventory levels. Four new product variations were launched very late in the second quarter, attributing to nominal revenue in the period. We are continuing to plan new product introductions later in 2023, with the timing being opportunistic. Overall gross margin for the second quarter declined to 42.2% from 53.8% in the year-ago quarter and decreased from 54.8% in Q1 of 2023. The reduction was driven by pricing pressures during the period, product mix, our continued strategic initiatives to sell off higher-priced inventory and normalized inventory levels, and a $2.5 million increase in inventory obsolescence reserves. This reserve was primarily from expiring essential oils and other product impacts from changes in our forecast. This reserve had a negative impact of 7.1% on our gross margin. Excluding this impact, our gross margin would have been 49.3%. Our overall Q2 2023 contribution margin, as defined in our earnings release, was negative 3.6%, which decreased compared to prior year's CM of 9.7%, and decreased compared to first quarter's 2023 CM of 5.9%. The decrease in contribution margin was driven by pricing pressure during the period, product mix, our continued strategic initiative to sell off higher price inventory and normalized inventory levels, and $2.5 million increase in inventory obsolescence reserve. Excluding this reserve impact, our CM would have been positive 3.5%. Q2 2023 saw our sustained product contribution margin decline year-over-year to 2.1% versus 13.3% in Q2 of 2022. The decrease in contribution margin was driven by pricing pressure during the period, product mix, our continued strategic initiative to sell off higher-priced inventory, and the $2.5 million increase in inventory obsolescence reserve. Excluding this reserve, impact on our CM for sustained would have been positive 10.1%. Looking deeper into contribution margin for Q2 2023, our variable sales and distribution expenses as a percentage of net revenues increased to 45.8% as compared to 44.1% in the year-ago quarter. This increase in sales and distribution expense is primarily due to product mix and an increase in fulfillment fees and an increase in online advertising costs. In the period, we took a $1.2 million charge for restructuring expenses, primarily from our May 9th announcement of our plan of our workforce reduction. As previously stated, we expect this plan to reduce fixed costs by $6 million annually. We expect to see the effect of those savings to start in Q3 of 2023. Our operating loss of $36.4 million in the second quarter increased from $10.1 million compared to the year-ago quarter, as we continue to normalize our business from the impacts of the supply chain and strengthen our balance sheet by our continued strategic initiative to sell a higher-priced inventory. Our second quarter 2023 operating loss includes $3.2 million of non-cash stock compensation expense, a non-cash loss and impairment intangibles of $22.8 million, and restructuring costs of $1.2 million, while our second quarter 2022 operating loss included a gain of $1.7 million from the change in fair value of earn-out liabilities and $6 million in non-cash stock compensation expense. Our net loss of the quarter, $34.8 million, increased from a loss of $16.3 million in the year-ago quarter as we continue to normalize our business from the impacts of supply chain and strengthening of our balance sheet by our continued strategic initiative to sell higher-priced inventory. Our second quarter net loss of 2023 includes impacts from our operating loss as described earlier, plus a gain of fair value warrant liability of $2.2 million, while our second quarter 2022 net loss includes the impacts of our operating loss, as described earlier, plus $6 million impact from a change in fair value of warrants. Adjusted EBITDA loss of $8 million, as defined in our earnings release, increased from a loss of $3.7 million in the second quarter of 2022. The previously mentioned $2.5 million increase in inventory obsolescence reserve had a negative impact on our adjusted EBITDA. Excluding this impact, our adjusted EBITDA would have been a loss of $5.5 million. Going to the balance sheet, at June 30th, we had a cash of approximately $28.9 million compared to $33.9 million at the end of March 31st, 2023. The decrease in cash as expected is predominantly driven by our net loss in the period, 5.3 million net inflows from working capital, and repayments of approximately $5.5 million on our credit facility. We continue to focus on normalizing our inventory levels in the second quarter of 2023 by liquidating our high-cost non-core inventories. We are pleased with our progress but do need more time to get our inventory at the appropriate levels, especially considering reduced consumer demand. At June 30th, our inventory level was at $36.7 million, down from $40.4 million at the end of the first quarter of 2023, and down from $76.1 million in the year-ago quarter. Our credit facility balance at the end of the second quarter of 2023 was $15.7 million, down from $19.1 million at the end of the first quarter of 2023. As we look at Q3 2023, considering the impact of inflation and a reduction in consumer spend, we believe that net revenues will be between $32.5 million and $37.5 million. This represents a decrease from the same quarter last year of approximately 45% using the middle of the range. We expect to continue to see similar softness in consumer spend for the remainder of the year. For Q3 2023, we expect adjusted EBITDA loss to be in the range of $4.5 million to $5.5 million. We originally targeted adjusted EBITDA profitability in the second half of 2023. However, with continued expectation of softness in consumer spending through at least the rest of 2023, and as we previously announced, we don't believe that profitability is achievable in this year. Although Joe and I are currently working through our strategy and vision, we currently believe that targeting adjusted EBITDA profitability in the summer of 2024 is more realistic than this year. Further, we believe based on our current forecast, we have sufficient cash above our covenants to achieve this goal without raising additional equity. As previously stated, if we pursue additional financing, it will be primarily for growth through M&A. In closing, we believe Ethereum will continue to navigate through obstacles that have challenged us over the past few years. Joe's and my shared initial vision of focusing, simplifying, and stabilizing Ethereum towards profitability is priority one. This goal will take time and tremendous effort, and we are excited for that challenge. We believe our solid balance sheet, led by our cash balance, normalizing inventory levels, and continued access of our credit facility with MidCap, will allow us to be laser-focused in driving our core business towards a just EBITDA profitability. 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 telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Marvin Fong with BTIG. Please go ahead.

Hey, good evening, Artie and Joe. Joe, welcome to the CEO role. So I had a question just on the initiative to, I guess, rationalize the portfolio and focus on your most profitable offering. So I guess two questions on this, maybe the first one. Could you maybe give us an idea of, you know, what, what, how much of your revenue base, um, you know, will kind of, uh, you know, be included in this kind of more profitable, um, uh, viewpoint. So like, uh, you know, how much can we expect the revenue base to kind of be, um, you know, um, rationalized already.

Do you want to, do you want to take that one already?

Got it, Joe. Thanks. Uh, Marvin, good to hear you. Hope you're doing well. Um, Yeah, it's a good question. Listen, Margo, as Joe said, we're 12 days in. That is our primary focus. We're working through that. We do think that any rationalization we'll do will have some impact, but we don't think right now. It's hard to say, but we don't think it's going to be uber material from a revenue perspective based off where our current guidance is. That said, I do think where we're very excited to do this is we think the impact on the profitability is a lot stronger than it is on the revenue, but we still need time to work through it And as Joe mentioned, we'll be able to hopefully provide more color on that in our next earnings call. But we don't think it's going to be as material, you know, a cut than what we're currently seeing in our current guided numbers.

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

You know, I'll take that one already. I think we're for sure going to be, so we're going to do a line review, Marvin, right, SKU by SKU across all the brands. So it will definitely be surgical now. In the course of that work, we might decide to jettison, you know, one or more brands. that really don't drive any P&L meaningfully today. But it's, you know, right now we're thinking of it more surgically, right? And then we'll see if that expands to brands.

Okay, perfect. And maybe already just one P&L question. So the fixed distribution costing, the kind of increased quarter over quarter, is that just a, a one-time thing? Can we expect that to come back down? I know you mentioned the restructuring savings should start kicking in, but just why did that jump in this quarter and what can we expect going forward?

Yeah, so I think from memory, I think, Marvin, there's some restructuring costs in there, so I think when you back that out, I think it'll probably be more normal, but certainly we do expect that fixed cost to actually start coming down a bit more in Q3 anyway as we kind of action the restructuring.

Perfect. Okay.

Thanks, guys. The next question is from Brian Kinslinger with Alliance Global Partners. Please go ahead.

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

Yeah, Joe, I'll grab that. Thanks. Hey, Brian, how you doing? Hope you're doing well. Listen, we're still working through that, right? I think in some aspects, you know, we went from sometime last year at 76 million, really cut that down to 36. We're very pleased in what we've been doing and how we've been fixing that. But as we said earlier, we've got a little bit more work to do. We didn't really state a number out there, Ryan, but I think in general, what we said in the past is, listen, there's always going to be some component of inventory that we're not pleased with and long on, right? And inventory is never perfect. We want that number to be below 10% of our average balances. I think right now we're probably looking at that number being 15% to 17.5% versus 10%. So from an average basis, that's roughly like $5 million or something like that. So that's kind of the amount I want to sort of work down. But obviously, you know, that's still very fluid as we kind of work with both skew rationalization and the current consumer environment. But that's kind of what we're thinking right now.

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

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

Yeah. Okay. Last question for me. You highlighted returning to profitability on an adjusted EBITDA basis more likely in the summer of 2024. You've cut what sounds like $6 million in annual OPX. In order to get back to positive adjusted EBITDA, do you have to cut more or do you expect it all to come from returning to revenue growth?

Can you grab that? Yeah, thanks.

So, Brian, good question. Listen, we believe as we focus our product portfolio and brand, as Joe mentioned, our CM will naturally recover, right? As I think I highlighted earlier in one of the questions, the rationalization is probably a bigger drag on profitability than its top line revenue. And so when you kind of factor that in, I think, you know, again, early targets, you think the CM probably gets pretty quickly above that 13% number that we haven't seen in a while. and maybe even closer to our target of 15. And I think when you factor that in, even on a reduced revenue, you're kind of right there, especially after the fixed cost cutting that we just did, right? I think our total fixed cost, I think, will be run rating kind of below 23 million. And that's before any type of rationalization on an efficiency that comes out of the supply chain. If we're doing less skews, there's going to be efficiencies that naturally come through that, right? So I think when you factor that all in, I think that's how we kind of see it, and that's what we have line of sight of, but we still have a lot of work to get there, as we mentioned, and we're going to roll up our sleeves and really focus on doing that, but that's kind of how we see it and how we can get there.

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

The next question is from Alex Furman with Craig Hallam Capital Group. Please go ahead.

Hey, guys. Thanks for taking my question. Artie, I think you mentioned about $6 million of annualized cost cuts that you're going to see starting in the current quarter. Can you give us a little bit more granular sense of what that $6 million is, how much of that is headcount versus other fixed expenses? And then how much should we expect to see in the third quarter and the fourth quarter this year? And when would you expect to see the full run rate of that in the P&L? Hey, Alex, how are you doing?

Thanks for the question. I would say that the predominant amount of savings there was people. I would say probably 90% to 95% of that number is coming from people cost at this point in time. I do think that we'll start seeing most of the impacts in Q3, but I would say the full run rate, you probably expect sometime pretty close in Q4, if not totally by Q1. There's a little bit of timing elements there that we have to work through, but you start seeing the impacts of the savings in Q3. You see a lot bigger portion of that in Q4, and then I would say by Q1 of next year, you'll definitely see 100% of that coming through.

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

Sure. I can, I can take that one already. Um, So Squatty Potty is a great brand, right? It's the product, right, is Squatty Potty, right? So that's a great brand. We have a few other brands, Pure Steam. We have an oils brand, our paper brand. You know, we've got some home and kitchen appliance brands. These are all brands that, again, have some skews in them that need to be rationalized but that have some really, really great products in them. And so, you know, we'll provide more color on, you know, where we think we're going to make, you know, bigger bets, you know, in the coming months, Alex. But those are, you know, those are the areas where, you know, we think we'll be spending most of our time for now.

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

You're welcome. Thank you.

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

Hey, guys. Good evening. Just wanted to get a little bit more color on explicitly what's driving sort of the erosion in year-over-year declines in the third quarter. The third quarter outlook, I think, implies things have gotten a little worse in the last month, I guess. So what categories in particular have you seen erosion in? And then maybe could you clarify for us, like, are you Are you losing top of search in any of those categories? Because it seems a little too stark to chalk it all up to macro weakness. So just wanted to see if you could maybe put a finer point on sort of are there some categories where maybe we've lost top of search? And then just lastly, maybe address the pricing dynamic versus unit volume pressure that you're seeing. It sounds like you're saying that there's some pricing pressure and some competition in some key categories. So maybe just put a finer point on that as well for us.

Artie, I can try to address this, and then maybe you can just jump in over me. Perfect, Joe. Thank you. Okay. So, Matt, in the second quarter, the environmental appliances are the products that we expect to sort of drive most of the P&L. So those are our air conditioners and dehumidifiers. When it comes to dehumidifiers, it's interesting. So I spoke about this in my remarks a little bit. You know, there was a loss of rank there. You know, we had a product that, and this is part of the challenges of being on a marketplace, right? We had a product that came into the category that's not actually a dehumidifier, but it took the bestseller tag away from us. So you know that that's, you know, the bestseller tag is very differentiating, and when you lose that tag, you take an immediate hit on velocity, right, sales velocity. On top of that, and again, this is the challenge of being on the marketplace, there are other competitors that are getting a bestseller tag that they don't deserve to have. So if you're in front of your computer and you type in dehumidifier, you'll see a brand called Nine Sky. And that product has the bestseller tag on it. But when you click on the bestseller tag, right, and do the work, you'll see that it's the number one ranked product for Christmas stockings, okay? So, you know, there are players out there that are sort of gaming the algorithm. It's confusing consumers. We had another product come in to the category that also shouldn't have the tag, all of which, you know, creates... makes it harder for the consumer to find our product, even though we know we have a great product and it's well-priced and it does the job. And so, you know, that's the kind of dynamic that, you know, that we're seeing, you know, sort of in the dehumidifier category, right? And that, you know, and those kinds of things can sort of make or break you, right, in the quarter. And then, you know, because the weather is, You know, it hasn't been incredible humidity in the second quarter, right? It started out rather, you know, a rather mild season. You know, folks are loaded up on inventory, right? And they need to exit for the season. So, you know, prices come down. And so, you know, you start to see a little bit of pressure that way as well. You know, that's what I've got for you. I don't know if there's a follow-up or already if you want to add anything there.

No, I think, Joe, you answered it well. I think, Matt, to your point, we did see some improvement in our run rates, especially when we got into July, because I think in some aspects it started heating up. So we did see the numbers increase a bit, but we're still being very cautious as we guided because, you know, the consumer spend and some of these other very particular good points that Joe brought up are just, you know, we're just trying to be cautious there, right? We don't, you know, we have We've seen some improvements, but we're still being cautious. So that's why I think when you look at the guide, we're kind of almost flat to Q2. And keep in mind, you know, really similar to Q2, Q3 has like two strong months, and then September starts to wane. And even August, second half of August tends to wane. Weather's been very unpredictable, so maybe we'll have some good news at the end, but certainly we're being cautious there, and that's why the numbers look relatively flat in Q3 versus Q2.

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

Yeah, look, we don't have, you know, Jeff Bezos on speed dials. But we have our people constantly filing complaints. We do have Amazon representatives that will take our phone call. But it's a very large org. We know they care about these things. Integrity on the marketplace is super important. But it's not just something that gets fixed overnight, Matt.

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

Yeah. Yeah, sure. Sure. Sure, Matt. Uh, the, the, um, I think we, we said in prepared marks, it was, uh, predominantly, uh, expiring essential oils, especially with the consumer downturns that we saw. You know, we had some big plans for moving out of those oils, and unfortunately, we couldn't get them done in time when something expires. And in reality, when they expire within a certain day range, right, you've got 60 days to sell it, you still have to take the charge because Amazon won't let you put it on the platform.

Okay. Got it. I'll take the rest of my time, guys. Thank you.

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

Thanks. 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 calls. I wanted to thank all of 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. Question number one, what is the progress with your European expansion?

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

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

I'll grab this one too, Artie. So, you know, the quick update there is, you know, we expect to get the approval to affect the reverse split. Right now, again, the theme of the day is focus. For us, closing in on the path to adjusted EBITDA profitability is the name of the game. We continue to think about whether we will need to reverse the stock. And, you know, that's really all we can comment on at this time. But, you know, we're doing the work. We're evaluating it. We're thinking a lot about it.

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

Thank you, Ilya. So, look, I just want to say, you know, Artie and I are extremely grateful, you know, that... You know, we get these questions and, you know, we appreciate the engagement. We appreciate the support. We realize that we're largely a retail stock today. You know, I think, you know, before Artie and I, you know, took this role, we were both fiduciaries at Ethereum. And, you know, we endeavor always to be transparent, right? That's extremely important for us. So, you know, we expect to continue to be transparent. For us, we know we have a lot of work to do, and hopefully if we can get on that path to profitability, that will go a long way to reestablishing confidence.

Great. Thank you. This concludes the question and answer portion of the call. In terms of the upcoming calendar, Ethereum Management will be participating in the H.C. Wainwright 25th Annual Global Investment Conference on September 11th through 15th in New York. the 2023 LD Micro Main Event 16, October 3rd through 5th in Los Angeles, Craig Hallam 14th Annual Alpha Select Conference in New York on November 16th. We look forward to speaking with you on future calls. This ends our call.

You may now disconnect. Thank you. Thank you. Thank you.

Good afternoon, and welcome to the Ethereum Incorporated second quarter 2023 earnings report conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, Please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Ilya Grazovsky, Vice President, Investor Relations and Corporate Development. Please go ahead.

Thank you for joining us today to discuss Atarian's second quarter 2023 earnings results. On today's call are Joe Risco and Arturo Rodriguez, our co-CEOs. Yep. A copy of today's press release is available on the Investor Relations section of Atarian's website at atarian.io. Before we get started, I want to remind everyone that the remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on current management expectations. They may include, without limitation, predictions, expectations, targets, or estimates, including regarding our anticipated financial performance, business plans and objectives, future events and developments, and actual results could differ materially from those mentioned. These forward-looking statements also involve substantial risks and uncertainty, 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 on Form 10-K, filed on March 16, 2023, and our quarterly report on Form 10-Q, which is when it is available. on the investors portion of our website at eterion.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 as required by law. This call will also contain certain non-GAAP financial measures, including adjusted EBITDA and adjusted EBITDA margins. 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 investors portion of our website at eterion.io. Please note that our definition of these measures may differ from similarly titled measures presented by other companies. We are unable to provide a reconciliation of non-GAAP adjusted EBITDA margin to net income margin, the most directly comparable GAAP financial measure on a forward-looking basis without unreasonable efforts because Items that impact this GAAP financial measure are not within the company's control and or cannot be reasonably predicted.

With that, I will turn the call over to John. Thank you, Ilya, and thank you, everyone, for joining us today.

Today I'm going to discuss our recent management change, the challenges we experienced in the second quarter, and then share with you our near-term strategy with a focus on our path to adjusted EBITDA profitability. Arti will then cover our financial results for the second quarter and our outlook for Q3. As previously announced, as of July 27th, Arti and I have taken on the role of co-CEOs of Ethereum. I want to thank Yaniv Sarig, co-founder and former CEO of Ethereum, on behalf of myself, Arti, our board, and our people for his relentless and tireless efforts to steward Ethereum. It's been a long journey for Arti and I as we both joined Ethereum over five years ago prior to its IPO. I'm very proud to say that practically from day one, Arti and I have been strong business partners, taking Ethereum through its IPO as well as helping Ethereum navigate a number of headwinds over the years, including the tariffs on Chinese imports, the COVID-19 pandemic, the supply chain crisis, rapidly escalating costs, and now Ethereum's current challenges, given the high consumer inflationary environment and the reductions and shifts in consumer discretionary spending, in particular for the categories of products that we sell. ARTI will continue to serve as CFO and will lead the company operationally, which includes oversight of our supply chain and technology. I will lead primarily on revenue, strategy, and growth-related initiatives. While there will likely be bumps in the road ahead, Arti and I are excited and grateful for the opportunity to lead Aterion into the future. Moving on to second quarter results. Our results reflect reduced consumer discretionary spending across our portfolio and to some extent unfavorable weather patterns in parts of the United States where we expected stronger sales of our environmental appliances, in particular for our dehumidifier and air conditioning product lines. We also experienced significant pricing pressure in light of the above and were also impacted by competitive dynamics that come with selling on unlimited shelves on marketplaces such as Amazon, which is where we earn almost all of our revenues today. We expect reduced consumer discretionary spending and competitive pricing and other competitive pressures to continue through at least the rest of 2023. Having said that, we do believe that we have a strong set of core products and we will be taking actions in the coming months to better position Ethereum's organic business for sustainable, adjusted EBITDA profitability and growth. Ethereum's primary goal is to continue to deliver high-performing products that provide consumers with great value for the price and that results in good margins for Ethereum. As for our strategy in the near term, Arti and I will be leading with three recurring themes around revenues and operations. focus, simplification, and stabilization. Today, I want to share with you our view on how we intend to focus, which is the first cornerstone on Ethereum's path to profitability. We believe that by narrowing our product portfolio to our most profitable and promising products, like Squatty Potty, for example, we can unlock a path to sustainable profitability, in particular with the consumer-first and omnichannel strategy. Non-core SKUs are and our historical approach to being radically product agnostic have been a drag on Ethereum's profitability in operations and on our ability to focus. This skew rationalization process will be thoughtful and deliberate, will take several months to implement, and we look forward to providing updates on this effort. Continuing on the theme of focus, while technology remains highly important for our success, I want to make clear today that we do not intend to pursue selling our technology as a service. In addition, while affiliate marketing will remain an important component of our overall marketing strategy, we have shut down DealMojo, our affiliate marketing platform. As a reminder, DealMojo was intended to be a platform where, in exchange for a fee, Ethereum would serve as an intermediary, matching publishers and third-party brands that we do not own or control. While not material to our financial results, Not pursuing these initiatives will allow us to drive further focus. Regarding geographic expansion, in particular in Europe, it will not be a focus area for us in the near term. While we do have our squatty potty and our transfer paper businesses currently selling in Europe, and we expect that to continue, for now we do not intend to expand to that geo given the need to remain highly focused on driving success in the U.S. market. Lastly, Organic growth coming from M&A will continue to be part of our strategic roadmap. To summarize, we believe that by focusing on our best products, starting with the rationalization of non-core and unprofitable SKUs, by driving an omnichannel strategy, and by more thoughtfully launching new products that consumers love, we can deliver a profitable baseline for our business from which we can grow. In the coming months, we look forward to discussing our progress and to also share with you other strategic initiatives relating to our efforts to focus, simplify, and stabilize our business. With that, I'll pass it along to Artie.

Thank you. Good evening, everyone.

Thanks, Joe, and welcome to your first earnings call as co-CEO. I'm very honored and humbled to have the opportunity to co-lead Ethereum into its futures. Both days in as co-CEO, I'm even more excited to partner with you, Joe, and the rest of the team. Ethereum has some great products and brands supported by an impressive supply chain and tech, and most importantly, our fantastic people. Together with every single person at Ethereum, we are going to continue to successfully navigate some of the remaining obstacles that have challenged us over the past few years, as highlighted earlier by Joe. Joe and I strongly believe that our passive profitability is achievable, though it will take longer than originally anticipated. Regardless of that delay, we have continued to improve our balance sheet, which we believe will give us the runway to get to our goal of adjusted EBITDA profitability. Joe and I have a lot of work to do as we embark on our respective missions. However, our shared initial vision of focusing, simplifying, and stabilizing and tiering towards profitability and ultimately back to growth is resolute. Now, here are the financial performance details of our second quarter. For the second quarter of 2023, net revenues declined 39.5% to $35.3 million from $58.3 million in the year-ago quarter, primarily due to reduced consumer discretionary spending and significant competitive pricing pressures across our portfolio. Looking at our second quarter net revenue by phase as defined in our press release, the $35.3 million broke down as follows. $31 million in sustain, less than $0.1 million in launch, and $4.2 million in liquidate and inventory normalization revenue. The year-ago net revenue of $58.3 million by phase broke down as follows. $54.1 million in sustain, $1.3 million in launch, and $2.9 million in liquidate and inventory normalization. Our sustained net revenue decreased of $23.1 million is from reduced consumer discretionary spending and significant competitive pricing pressure across the portfolio, but in particular, our dehumidifier and air conditioning product lines. Our liquidation net revenue increased by $1.3 million from our strategic initiatives to sell off higher price inventory and to normalize inventory levels. Four new product variations were launched very late in the second quarter, attributing phenomenal revenue in the period. We are continuing to plan new product introductions later in 2023, with the timing being opportunistic. Overall gross margin for the second quarter declined to 42.2% from 53.8% in the year-ago quarter and decreased from 54.8% in Q1 of 2023. The reduction was driven by pricing pressures during the period, product mix, our continued strategic initiative to sell off higher-priced inventory and normalized inventory levels, and a $2.5 million increase in inventory obsolescence reserves. This reserve was primarily from expiring essential oils and other product impacts from changes in our forecast. This reserve had a negative impact of 7.1% on our gross margin. Excluding this impact, our gross margin would have been 49.3%. Our overall Q2 2023 contribution margin, as defined in our earnings release, was negative 3.6%, which decreased compared to prior year's CM of 9.7%, and decreased compared to first quarter's 2023 CM of 5.9%. The decrease in contribution margin was driven by pricing pressure during the period, product mix, our continued strategic initiative to sell off higher price inventory and normalized inventory levels, and $2.5 million increase in inventory obsolescence reserve. Excluding this reserve impact, our CM would have been positive 3.5%. Q2 2023 saw our sustained product contribution margin decline year over year to 2.1% versus 13.3% in Q2 of 2022. The decrease in contribution margin was driven by pricing pressure during the period, product mix, our continued strategic initiative to sell off higher-priced inventory, and the $2.5 million increase in inventory obsolescence reserve. Excluding this reserve, impact on our CM for sustained would have been positive 10.1%. Looking deeper into contribution margin for Q2 2023, our variable sales and distribution expenses as a percentage of net revenues increased to 45.8% as compared to 44.1% in the year-ago quarter. This increase in sales and distribution expense is primarily due to product mix and an increase in fulfillment fees and an increase in online advertising costs. In the period, we took a $1.2 million charge for restructuring expenses, primarily from our May 9th announcement of our plan of our workforce reduction. As previously stated, we expect this plan to reduce fixed costs by $6 million annually. We expect to see the effect of those savings to start in Q3 of 2023. Our operating loss of $36.4 million in the second quarter increased from $10.1 million compared to the year-ago quarter, as we continue to normalize our business from the impacts of the supply chain and strengthening our balance sheet by our continued strategic initiative to sell a higher-priced inventory. Our second quarter 2023 operating loss includes $3.2 million of non-cash stock compensation expense, a non-cash loss and impairment intangibles of $22.8 million, and restructuring costs of $1.2 million, while our second quarter 2022 operating loss included a gain of $1.7 million from the change in fair value of earn-out liabilities and $6 million of non-cash stock compensation expense. Our net loss of the quarter, $34.8 million, increased from a loss of $16.3 million in the year-ago quarter as we continue to normalize our business from the impacts of supply chain and strengthening of our balance sheet by our continued strategic initiative to sell higher-priced inventory. Our second quarter net loss of 2023 includes impacts from our operating loss as described earlier, plus a gain of fair value warrant liability of $2.2 million, while our second quarter 2022 net loss includes the impacts of our operating loss, as described earlier, plus $6 million impact from a change in fair value of warrant. Adjusted EBITDA loss of $8 million, as defined in our earnings release, increased from a loss of $3.7 million in the second quarter of 2022. The previously mentioned $2.5 million increase in inventory obsolescence reserve had a negative impact on our adjusted EBITDA. Excluding this impact, our adjusted EBITDA would have been a loss of $5.5 million. Going to the balance sheet, at June 30th, we had a cash of approximately $28.9 million compared to $33.9 million at the end of March 31st, 2023. The decrease in cash as expected is predominantly driven by our net loss in the period, $5.3 million net inflows from working capital, and repayments of approximately $5.5 million on our credit facility. We continue to focus on normalizing our inventory levels in the second quarter of 2023 by liquidating our high-cost non-core inventories. We are pleased with our progress but do need more time to get our inventory at the appropriate levels, especially considering reduced consumer demand. At June 30th, our inventory level was at $36.7 million, down from $40.4 million at the end of the first quarter of 2023, and down from $76.1 million in the year-ago quarter. Our credit facility balance at the end of the second quarter of 2023 was $15.7 million, down from $19.1 million at the end of the first quarter of 2023. As we look at Q3 2023, considering the impact of inflation and a reduction in consumer spend, we believe that net revenues will be between $32.5 million and $37.5 million. This represents a decrease from the same quarter last year of approximately 45% using the middle of the range. We expect to continue to see similar softness in consumer spend for the remainder of the year. For Q3 2023, we expect adjusted EBITDA loss to be in the range of $4.5 million to $5.5 million. We originally targeted adjusted EBITDA profitability in the second half of 2023, however, with continued expectation of softness in consumer spending through at least the rest of 2023. And as we previously announced, we don't believe that profitability is achievable in this year. Although Joe and I are currently working through our strategy and vision, we currently believe that targeting adjusted EBITDA profitability in the summer of 2024 is more realistic than this year. Further, we believe based on our current forecast, we have sufficient cash above our covenants to achieve this goal without raising additional equity. As previously stated, if we pursue additional financing, it will be primarily for growth through M&A. In closing, we believe Ethereum will continue to navigate through obstacles that have challenged us over the past few years. Joe's and my shared initial vision of focusing, simplifying, and stabilizing Ethereum towards profitability is priority one. This goal will take time and tremendous effort, and we are excited for that challenge. We believe our solid balance sheet, led by our cash balance, normalizing inventory levels, and continued access of our credit facilities mid-cap, will allow us to be laser-focused in driving our core business towards a just ebit of profitability. 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 telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Marvin Fong with BTIG. Please go ahead.

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

Artie, do you want to take that one, Artie?

Got it, Joe. Thanks. And Marvin, good to hear you. Hope you're doing well. Thank you. Yeah, it's a good question. Listen, Marvin, as Joe said, we're 12 days in. That is our primary focus. We're working through that. We do think that any rationalization we'll do will have some impact, but we don't think right now. It's hard to say, but we don't think it's going to be uber material from a revenue perspective based off where our current guidance is. That said, I do think where we're very excited to do this is we think the impact on the profitability is a lot stronger than it is on the revenue, but we still need time to work through it And as Joe mentioned, we'll be able to hopefully provide more color on that in our next earnings call. But we don't think it's going to be as material, you know, a cut than what we're currently seeing in our current consumers – current guided numbers.

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

You know, I'll take that one already. I think we're for sure going to be, so we're going to do a line review, Marvin, right, SKU by SKU across all the brands. So it will definitely be surgical now. In the course of that work, we might decide to jettison, you know, one or more brands. that really don't drive any P&L meaningfully today. But it's, you know, right now we're thinking of it more surgically, right? And then we'll see if that expands to brands.

Okay, perfect. And maybe already just one P&L question. So the fixed distribution cost, the kind of increase quarter over quarter, is that just a, a one-time thing? Can we expect that to come back down? I know you mentioned the restructuring savings should start kicking in, but just why did that jump in this quarter and what can we expect going forward?

Yeah, so I think from memory, I think, Marvin, there's some restructuring costs in there, so I think when you back that out, I think it'll probably be more normal, but certainly we do expect that fixed cost to actually start coming down a bit more in Q3 anyway as we kind of action the restructuring.

Perfect. Okay.

Thanks, guys. The next question is from Brian Kinslinger with Alliance Global Partners. Please go ahead.

Hi, thanks for taking my questions, guys. First one, maybe you answered. Sorry, I missed it. Can you talk about how much inventory you still have remaining as part of the plan liquidation process from the SKUs that were high-priced or overbought? Already?

Yeah, Joe, I'll grab that. Thanks. Hey, Brian, how you doing? Hope you're doing well. Listen, we're still working through that, right? I think in some aspects, you know, we went from sometime last year at 76 million, we really cut that down to 36. We're very pleased in what we've been doing and how we've been fixing that. But as we said earlier, we've got a little bit more work to do. We didn't really state a number out there, Ryan, but I think in general, what we said in the past is, listen, there's always going to be some component of inventory that we're not pleased with and long on, right? Inventory is never perfect. We want that number to be below 10% of our average balances. I think right now we're probably looking at that number being 15% to 17.5% versus 10%. So from an average basis, that's roughly like $5 million or something like that. So that's kind of the amount I want to sort of work down. But obviously, you know, that's still very fluid as we kind of work with both skew rationalization and the consumer environment, but that's kind of what we're thinking right now.

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

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

Yeah. Okay. Last question for me. You highlighted returning to profitability in the adjusted EBITDA basis more likely in the summer of 2024. You've cut what sounds like $6 million in annual op-ex. In order to get back to positive adjusted EBITDA, do you have to cut more or do you expect it all to come from returning to revenue growth?

Go ahead, Rodney. Grab that. Yeah, thanks.

So, Brian, good question. Listen, we believe as we focus our product portfolio and brand, as Joe mentioned, our CM will naturally recover, right? As I think I highlighted earlier in one of the questions, the rationalization is probably a bigger drag on profitability than its top-line revenue. And so when you kind of factor that in, I think, you know, again, early targets, you think the CM probably gets pretty quickly above that 13% number that we haven't seen in a while. and maybe even closer to our target of 15. And I think when you factor that in, even on a reduced revenue, you're kind of right there, especially after the fixed cost cutting that we just did, right? I think our total fixed cost, I think, will be run rating kind of below 23 million. And that's before any type of rationalization on an efficiency that comes out of the supply chain. If we're doing less skews, there's going to be efficiencies that naturally come through that, right? So I think when you factor that all in, I think that's how we kind of see it, and that's what we have the line of sight of. But we still have a lot of work to get there, as we mentioned, and we're going to roll up our sleeves and really focus on doing that. But that's kind of how you kind of – that's how we see it and how we can get there.

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

The next question is from Alex Furman with Craig Hallam Capital Group. Please go ahead.

Hey, guys. Thanks for taking my question. Artie, I think you mentioned about $6 million of annualized cost cuts that you're going to see starting in the current quarter. Can you give us a little bit more granular sense of what that $6 million is, how much of that is? headcount versus other fixed expenses? And then how much should we expect to see in the third quarter and the fourth quarter this year? And when would you expect to see the full run rate of that in the P&L? Hey, Alex, how are you doing?

Thanks for the question. I would say that the predominant amount of savings there was people. I would say probably 90% to 95% of that number is coming from people cost at this point in time. I do think that we'll start seeing most of the impacts in Q3, but I would say the full run rate, you probably expect sometime pretty close in Q4, if not totally by Q1. There's a little bit of timing elements there that we have to work through, but you start seeing the impacts of the savings in Q3. You see a lot bigger portion of that in Q4, and then I would say by Q1 of next year, you'll definitely see 100% of that coming through.

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

Sure. I can, I can take that one already. Um, So look, Squatty Potty is a great brand, right? It's the product, right, is Squatty Potty, right? So that's a great brand. We have a few other brands, Pure Steam. We have an oils brand, our paper brand. You know, we've got some home and kitchen appliance brands. These are all brands that, again, have some skews in them that need to be rationalized but that have some really, really great products in them. And so, you know, we'll provide more color on, you know, where we think we're going to make, you know, bigger bets, you know, in the coming months, Alex. But those are, you know, those are the areas where, you know, we think we'll be spending most of our time for now.

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

You're welcome. Thank you.

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

Hey, guys. Good evening. Just wanted to get a little bit more color on explicitly what's driving sort of the erosion in year-over-year declines in the third quarter. The third quarter outlook, I think, implies things have gotten a little worse in the last month, I guess. So what categories in particular have you seen erosion in? And then maybe could you clarify for us, like, are you Are you losing top of search in any of those categories? Because it seems a little too stark to chalk it all up to macro weakness. So just wanted to see if you could maybe put a finer point on sort of are there some categories where maybe we've lost top of search? And then just lastly, maybe address the pricing dynamic versus unit volume pressure that you're seeing. It sounds like you're saying that there's some pricing pressure and some competition in some key categories. So maybe just put a finer point on that as well for us.

Artie, I can try to address this, and then maybe you can just jump in over me. Perfect, Joe. Thank you. Okay. So, Matt, in the second quarter, the environmental appliances are the products that we expect to sort of drive most of the P&L. So those are our air conditioners and dehumidifiers. When it comes to dehumidifiers, it's interesting. So I spoke about this in my remarks a little bit. You know, there was a loss of rank there. You know, we had a product that, and this is part of the challenges of being on a marketplace, right? We had a product that came into the category that's not actually a dehumidifier, but it took the bestseller tag away from us. So you know that that's, you know, the bestseller tag is very differentiating, and when you lose that tag, you take an immediate hit on velocity, right, sales velocity. On top of that, and again, you know, this is the challenge of being on the marketplace, there are other competitors, right, that are getting a bestseller tag that they don't deserve to have. So if you're in front of your computer and you type in dehumidifier, you'll see a brand called Nine Sky. And that product has the bestseller tag on it. But when you click on the bestseller tag, right, and do the work, you'll see that it's the number one ranked product for Christmas stockings, okay? So, you know, there are players out there that are sort of gaming the algorithm. It's confusing consumers. We had another product come in to the category that also shouldn't have the tag, all of which, you know, creates – uh, makes it harder for the consumer to find our product, even though we know we have a great product and it's well priced and it does the job. And so, you know, that's, that's the kind of dynamic that, you know, that we're, that we're seeing, you know, sort of in the dehumidifier category, right. And that, you know, and those kinds of things can sort of make or break you right in the quarter. Um, and then, you know, because the weather, You know, it hasn't been incredible humidity in the second quarter, right? It started out rather, you know, a rather mild season. You know, folks are loaded up on inventory, right? And they need to exit for the season. So, you know, prices come down. And so, you know, you start to see a little bit of pressure that way as well. You know, that's what I've got for you. I don't know if there's a follow-up or already if you want to add anything there.

No, I think, Joe, you answered it well. I think, Matt, to your point, we did see some improvement in our run rates, especially when we got into July, because I think in some aspects it started heating up. So we did see the numbers increase a bit, but we're still being very cautious as we guided because, you know, the consumer spend and some of these other very particular good points that Joe brought up are just, you know, we're just trying to be cautious there, right? We don't, you know, we have... We've seen some improvements, but we're still being cautious. So that's why I think when you look at the guide, we're kind of almost flat to Q2. And keep in mind, you know, really similar to Q2, Q3 has like two strong months, and then September starts to wane. And even August, second half of August tends to wane. Weather's been very unpredictable, so maybe we'll have some good news at the end, but certainly we're being cautious there, and that's why the numbers look relatively flat in Q3 versus Q2.

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

Yeah, look, we don't have, you know, Jeff Bezos on speed dials. But we have our people constantly filing complaints. We do have Amazon representatives that will take our phone call. But it's a very large org. We know they care about these things. Integrity on the marketplace is super important. But it's not just something that gets fixed overnight, Matt.

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

Yeah. Yeah, sure. Sure. Sure, Matt. Uh, the, um, I think we, we said in prepared marks, it was, uh, predominantly, uh, expiring essential oils um especially with the consumer downturns that we saw you know we had some big plans for for moving out of those oils and and unfortunately which we couldn't get them done in time when something expires and in reality when they expire within a certain day range right you've got 60 days to sell it um you still have to take the charge because amazon won't let you put it on the platform okay got it i'll take the rest of my online guys thank you

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

Thanks. 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 calls. I wanted to thank all of 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. Question number one, what is the progress with your European expansion?

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

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

I'll grab this one too already. So, you know, the quick update there is, you know, we expect to get the approval to affect the reverse split. Right now, again, the theme of the day is focus. For us, closing in on the path to adjusted EBITDA profitability is the name of the game. We continue to think about whether we will need to reverse the stock. And, you know, that's really all we can comment on at this time. But, you know, we're doing the work. We're evaluating it. We're thinking a lot about it.

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

Thank you, Ilya. So, look, I just want to say, you know, Artie and I are extremely grateful, you know, that... You know, we get these questions and, you know, we appreciate the engagement. We appreciate the support. We realize that we're largely a retail stock today. You know, I think, you know, before Artie and I, you know, took this role, we were both fiduciaries at Ethereum. And, you know, we endeavor always to be transparent, right? That's extremely important for us. So, you know, we expect to continue to be transparent. For us, we know we have a lot of work to do, and hopefully if we can get on that path to profitability, that will go a long way to reestablishing confidence.

Great. Thank you.

This concludes the question and answer portion of the call. In terms of the upcoming calendar, Ethereum Management will be participating in the H.C. Wainwright 25th Annual Global Investment Conference on September 11th through 15th in New York. the 2023 LD Micro Main Event 16, October 3rd through 5th in Los Angeles, Craig Hallam 14th Annual Alpha Select Conference in New York on November 16th. We look forward to speaking with you on future calls. This ends our call. You may now disconnect.