Aterian, Inc.

I would now like to turn the call over to Devin Sullivan of the Equity Group. Please go ahead.

Thank you, John, and thank you all for joining us today to discuss Aterion's second quarter 2025 financial results. On today's call are Arturo Rodriguez, the company's chief executive officer, and Josh Feldman, the company's chief financial officer. A copy of today's press release is available on the investor relations section of Aterion's website at www.aterion.io. Before we get started, I'd like 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 and are based on current management expectations. These may include, without limitation, predictions, expectations, targets, or estimates, including regarding our anticipated financial performance, business plans and objectives, future events and developments, and actual results that 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. you should not place undue reliance on these forward-looking statements. These statements are made only as of today, and we undertake no obligation to update or revise them for any new information except as required by law. This call will also contain certain non-GAAP financial measures, including adjusted EBITDA and adjusted EBITDA margin, which we believe are useful supplemental measures that assist in evaluating our ability to generate earnings, provide consistency and comparability with our past performance, and facilitate period-to-period comparisons of our four operating results. The reconciliation of these non-GAAP measures to the most comparable GAAP measures and the definition of these indicators are included in our press release, which is available on the investor's portion of our website. Please note that our definition of these measures may differ from similarly titled metrics presented by other companies. We are unable to provide a reconciliation of non-GAAP adjusted EBITDA margin to net income margin, the most directly comparable GAAP financial measure on a forward-looking basis without unreasonable efforts because items that impact this GAAP financial measure are not within the company's control and cannot be reasonably predicted. With that said, I'd now like to turn the call over to Arturo Rodriguez. Artie, please go ahead.

Arturo Rodriguez Thank you, Devin, and thank you, everyone, for joining us today. On today's call, I'll be covering, one, a brief overview of our Q2 results, two, a discussion of the tariffs impact on our business and an update on the proactive moves we continue to make to navigate this environment, three, an update on our improved 2025 outlook in light of these developments. Following my remarks, our CFO, Josh, will walk through our second quarter financial results in greater detail. Generally speaking, tariffs and trade policy beginning earlier this year significantly impacted our business, our industry, and consumer decision-making. The ambiguity and uncertainty of the rates and their implementation dictated our decision-making process with respect to pricing, sourcing, and spending, and accelerated our plans to reshape the business for the long term. While the tariff environment created significant headwinds in Q2, we believe that the worst is behind us. We believe the actions we have taken mitigated the impact that tariffs produce and, most importantly, put us back on the path of stabilizing our business. As a result, we expect to generate improved performance results in the second half of 2025 compared to the first half of 2025. Let us take a look at what transpired in Q2. Net revenue was 19.5 million compared to 28 million in Q2 2024. This decline was driven by three main factors. First, strategic price increases to offset anticipated tariff costs and reduce run rates and navigation inventory impacts on the tariffs. Second, a delayed start to the summer season in the Northeast, which primarily impacted sales of our dehumidifiers versus prior year. And third, general softness in the consumer spending, which we attribute to at least partially to the uncertainty surrounding tariff and trade policy. Adjusted EBITDA was a loss of $2.2 million compared to a gain of $0.2 million in the prior year. This change was driven by lower revenue, increased marketing spend, inventory reserve impacts, partially offset by savings from our fixed cost reduction plan. A key operational dynamic of the Amazon marketplace is that its algorithm rewards price stability. In Q2, we proactively adjusted our pricing to offset significant cost pressures. While these actions were essential to preserve our margins, they triggered a pronounced decline in our sales velocity through May and the first half of June. This algorithmic response, while understood, was particularly acute this quarter and was the primary headwind to our revenue. To this, our primary competition, specifically in our dehumidifier space and steam off space, is Amazon 1P, meaning Amazon buys products from brands directly and sells it as an online retailer. And in those segments, we saw Amazon did not raise prices significantly, if at all. As such, this made our products the higher-priced offering for the most part during May and June. Further, in certain humidifier listings, we were already the highest-priced offering and had little room to move up on pricing. We believe we'll continue to see our products being the highest-priced offering through 2025, before pricing becomes more competitive in 2026. I'll speak a bit more about the pricing dynamic in just a moment. To help offset our drops in daily run rates, our team ran various promotions through the period, which led to an increase of advertising spend in the period above our usual targeted amounts. This led to inefficiencies, especially with our higher price offerings, in our spend and conversions, leading to an additional one-time spend of advertising of $0.9 million. The resulting forecast reduction required us to take an inventory reserve of $0.7 million. Regardless, our inventory levels are healthy, but we are holding approximately $3 million more than desired. This is due to our strategic decision to go long on inventory to navigate tariffs along with some of the sales slowdown, which we believe will unwind over the coming few quarters. Finally, beyond the late start of our seasonal business, we observed broader consumer softness. For example, in several categories, our products maintained their bestseller rank, indicating we held market share. However, the total sales volume at the rank was down year over year, pointing to what we believe is a weaker consumer demand overall. Now, to the actions we announced previously in May, as our initial response is tariffs, we believe these are still the right decisions. Here is the update on those six key points of that plan. Number one, fixed cost reduction plan. As part of our immediate response to tariffs, we announced a fixed cost reduction initiative targeting 5 to 6 million in annualized savings. To date, we believe we have secured approximately 5.5 million of those savings, of which 3.8 million is primarily coming from headcount reductions we implemented in May this year. And the remaining 1.7 we expect to see from vendor savings taking effect throughout the rest of 2025. We expect to see the full vendor savings impact starting sometime in Q1 of 2026. We continue to search for the remaining savings, which we believe can be identified and secured over the coming six months. In parallel, our team is actively leveraging AI to enhance productivity. Our focus for AI today is on creating operating leverage and scale for future growth rather than immediate headcount reduction. For example, we successfully implemented AI in our customer service operations, which has improved service quality metrics even with a smaller team. We expect to make a separate announcement in September around our AI improvements in customer service and leveraging AI. Finally, we continue to see how AI deployed in our data platform along with some other third-party tools can unlock efficiencies and insights to our operations. We see this as a continued area of opportunity for Ethereum in finding ways to create savings and efficiencies. Number two, accelerated resourcing. We are making progress on our resourcing initiatives. While the financial incentive to move manufacturing out of China is less pronounced at the incremental 30% tariff rate versus the peak incremental rate of 145, significant opportunities remain, particularly for those products subject to multiple tariff layers. That said, we did manufacture a portion of our demodifiers from Indonesia this year, which avoided the peak incremental Chinese tariffs. So, in that respect for 2025, we have shifted down from 100% Chinese manufactured dehumidifiers in 2024 to approximately 65% in 2025. As such, we still see opportunities to source from outside China in categories which not only see the effects from the 2025 tariffs of 30%, but also see the effects from the 2017 Section 301 tariffs, of which on average are an incremental 25% for certain of our products. For example... Beverage refrigerators from China would be subject to approximately 58% tariffs. As such, we think opportunities to find better costing for products with both 2017-301 tariffs and 2025 tariffs still exist outside of China. Number three, pausing on launches in certain new categories. We paused new category launches from China in Q2, particularly hard electronic goods. However, now that reciprocal tariffs have for the most part stabilized, for now, we are restarting new product launches in the hard electronic goods space but at a much more focused approach. We expect the launches to take place in the second half of 2026. Number four, inventory and supply chain optimization. We were able to navigate through peak tariffs in May and June and brought in most of our goods avoiding the peak 2025 incremental tariffs of 145% predominantly landing at approximately 30% for the incremental tariffs. We did this by working with both our manufacturers and supply chain partners, including the use of our bonded warehouses. As we look forward, we continue to look at diversification as a long-term goal to allow for not only savings but optionality, but this will take time now that the tariffs have landed at this level. Number five, strategic pricing adjustments. As we said earlier, we implemented price increases to navigate the volatility of a shifting cost structure related to tariffs. and related impacts of supply chain to conserve margins based on our new expected costs, and to reduce our run rates to allow for inventory management as part of tariff mitigation. Further, our primary competition, specifically in our dehumidifier space and steam off space, is Amazon 1P. And in those segments, we saw that Amazon did not raise prices significantly, if at all. However, we believe this is transitory. Even though we have raised prices first in many categories, We believe the market will eventually increase prices, including Amazon 1P, and we will be priced more competitively in 2026. As such, we believe run rates will improve in 2026 and beyond, assuming no material changes to consumer purchasing habits. Number six, new product launches in low-tariff regions. We believe our push into consumables is still a great strategic objective. Many of the items we are exploring can be sourced in the U.S. and carry better contribution margins than our current hard electronic goods. Further, the U.S. sourced nature of these goods will limit our exposure to continued risks around tariffs. In particular, we are seeing opportunities for consumables in the health and beauty space, and we expect to announce launches around Healing Solutions brand in that space in October 2025. With that, we are very proud to announce the launch of the Squatty Potty Flushable Wipes. In less than a year, we have been able to source and bring to the market one of the best flushable wipes in the space. Our wipes are flushable and septic safe, but always remember to follow the flushing guidelines. They're safe for sensitive skin, safe for eczema-prone skin. They're 100% plant-based fibers, 99% water and plant-based formulas, hypoallergenic and dermatologically tested, cruelty-free, no animal testing on these, pH balanced, alcohol-free, Formulated without harsh chemicals, oils, parabens, and sulfates, they meet the IWSFG and GD4 product guidelines for flushability and they're FSC certified, which is the Forest Sustainability Council. These wipes are a great premium product designed for everyone in your family and not just for dudes. Plus, they look great in your bathrooms. These wipes will be live for sale in the United Kingdom on Amazon.co.uk next week and will be live for sale in the United States on both Amazon.com and our Squatty Potty website shortly after Labor Day. We will start various marketing campaigns in September to spread the word about how these wipes are the number one way to feel fresh after number two. I would like to congratulate the team on a very impressive achievement. While Q2 was a challenging quarter, the swift and decisive actions we've taken are expected to yield results and put us back to track on stabilizing the business. Josh will provide details on the guidance, but in short, on slightly better H2 net revenues versus H1, we are expecting to be between break-even to a slight loss of $1 million on adjusted EBITDA. A big improvement versus H1, but still more work to do. We've also remained focused on preserving our balance sheet as we work our way through this period. We believe our current liquidity position will be sufficient to support the current business through its evolving tariff environment and broader macroeconomic backdrop. In closing, the recent tariff volatility has been a significant market disruption. However, the work we've done over the past years to improve our operations and strengthen our financial position has given us the resilience to navigate this environment. We believe that won't be the same for many smaller companies. Even with today's uncertainty, for us, we believe Ethereum's future remains strong and bright. The actions we've detailed today are already fostering stability and have set the stage for a stronger second half. While the near-term growth plans were impacted, our strategic pivot to consumables, beginning with this exciting Squatty Potty launch, will build a more resilient and profitable Ethereum over the long term. Our fundamental goal is still unchanged, to build a growing, profitable company. We thank our team for their dedication and tenacity, and to our shareholders, thank you for your continued support and patience. We believe the best is yet to come for Ethereum. And with that, I'll turn it over to Josh. Thanks, Arti. Good evening, everyone. As Arti mentioned, Q2 was a difficult quarter as we adjusted pricing to offset rising costs driven by tariffs and supply chain volatility. While necessary to preserve margins, These changes triggered a decline in sales velocity on Amazon, which penalizes price instability. Promotional efforts to offset volume declines led to higher advertising spend with lower returns and slower sales extended inventory timelines requiring additional reserves. However, as we look forward, we've taken decisive steps to strengthen performance in the second half. Our fixed cost reduction plan is tracking well with $5.5 million in savings already identified, and AI is driving early wins in customer service efficiency. We've begun resourcing outside China to reduce tariff exposure with more diversification to come. While prices increases impact the Q2, we expect market normalization in 2026 to restore competitiveness. Our new U.S.-sourced product launches offer higher margins and less volatility, helping position us for more stable, efficient growth ahead. Turning to the results for Q2, net revenue for the second quarter of 2025 declined 30.5% to $19.5 million from $28 million in the year-ago quarter, primarily reflecting the reduction in consumer demand as we increased pricing to mitigate the impact of tariffs on our cost of goods sold. Our launch revenue was $0.3 million during Q2 2025 compared to $0.5 million in Q2 2024. While we have postponed our Asian source product launches for 2025, we are shifting our focus to consumables sourced in the U.S. Overall, gross margin for the second quarter decreased to 54.3% from 60.4% in the year-ago quarter. The year-over-year decline was primarily related to product mix, and an obsolescence charge taken on long inventory as a result of buildup to avoid higher tariffs. I want to stress that these goods are not outdated or unsellable, and that we do expect a reduction in this long inventory over the next six to nine months. Our overall Q2 2025 contribution margin, as defined in our earnings release, was 7.8 percent, a decrease from 7.4 percent in Q2 2024. Our contribution margin decrease primarily relates to the reduction in gross margin and an increase in marketing costs during the quarter. Assuming a normalized level of marketing spend and excluding the impact of the obsolescence charge taken in the period, our contribution margin for Q2 would have been closer to 15 percent. Looking deeper into our contribution margin for Q2 2025, Our variable sales and distribution expenses as a percentage of net revenue increased to 46.5 percent as compared to 43 percent in the year-ago quarter. This increase in sales and distribution expenses as a percentage of revenue is primarily due to product mix and an increase in marketing costs. Our operating loss of 4.5 million in the second quarter of 2025 increased from a loss of 3.2 million in the year-ago quarter primarily driven by reduced sales volume and contribution margin compared to the prior year period. Our second quarter 2025 operating loss included $1.8 million of restructuring costs and $0.1 million of non-cash stock compensation expense, while our second quarter 2024 operating loss included $2.9 million of non-cash stock compensation expense. Our net loss for the second quarter 2025 of 4.9 million increased by approximately 34 percent from a loss of 3.6 million in the year-ago quarter, primarily driven by a reduction in sales volume and contribution margin. Our adjusted EBITDA loss of 2.2 million, as defined in our earnings relief, decreased compared to an adjusted EBITDA gain of 0.2 million in the second quarter of 2024, primarily due to reduction in sales volume due to increased prices, increased marketing costs, and an obsolescence charge taken on long inventory. Moving on to the balance sheet. At June 30, 2025, we had cash of approximately $10.5 million compared with $18 million at December 31, 2024. Borrowings on our credit facility went from $6.9 million as of the end of the fourth quarter of 2024 to $7.2 million at the end of the second quarter of 2025. The credit facility balance is down from $2.4 million in the year-ago quarter end. At June 30, 2025, our inventory level was at $18.5 million, up from $13.7 million at the end of the fourth quarter of 2024, and up from $18.4 million in the year-ago quarter end. Increased inventory levels in the second quarter primarily reflected buildup in advance of tariffs and the resulted demand trends for our seasonal air quality products, resulting in a higher proportion of our working capital being tied up in inventory. As we look ahead to the second half of 2025, our focus remains on stabilizing the business while positioning for renewed growth in 2026. The combination of targeted cost savings U.S.-sourced product launches, focused marketing, and disciplined cash management gives us confidence in our ability to navigate ongoing tariff pressures. With these measures in place, we expect the following results for the remainder of the year. We expect net revenue for the six months ending December 31, 2025, of $36 million to $38 million, and adjusted EBITDA, a break-even to a loss of $1 million. This compares to net revenues of $34.8 million and an adjusted EBITDA loss of $4.7 million for the six months ended June 30, 2025. Importantly, based on our liquidity position, the cost-saving measures now underway and our focus on preserving cash, we believe we are well-positioned to navigate the current environment without raising additional equity capital this year. We also expect our working capital position to improve through the remainder of 2025. Tariff volatility is hitting the entire industry, but thanks to the work we've done to strengthen our balance sheet, Ethereum is well-positioned to navigate this environment with flexibility and focus. The actions we've taken, while difficult, have been deliberate. I'm especially excited about the shift into consumables, starting with the launch of Squatty Potty flushable wipes. It's a strategic move that we believe will strengthen our business over time. Our goal remains the same, to build a strong, growing company. I want to thank our team for their effort and execution and our shareholders for their continued support. The steps we've taken now are setting us up for greater stability and long-term success. By executing on these initiatives, we're building a more resilient Ethereum positioned for continued growth well into the future. With that, we'll open it up for questions.