Aterian, Inc. (ATER) Q4 2019 Earnings Report, Transcript and Summary

Good afternoon. My name is Germ, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Mohawk Group Holdings Incorporated Q4 Earnings Report. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Ilya Grozovsky, you may begin your conference.

Thank you for joining us today to discuss Mohawk’s fourth quarter and full-year 2019 earning results. On today’s call are Yaniv Sarig, Co-Founder and CEO; and Fabrice Hamaide, Chief Financial Officer. A copy of today’s press release is available on the Investor Relations section of Mohawk’s website at mohawkgp.com. I would like to remind you that certain statements we will make in this presentation are forward-looking statements. And these forward-looking statements reflect Mohawk’s judgment and analysis only as of today and actual results may differ materially from current expectations based on a number of factors affecting Mohawk’s business. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our fourth quarter and full-year 2019 earnings release, as well as our filings with the SEC. We do not undertake any obligation to update or alter any forward-looking statements whether as a result of new information, future events or otherwise. In addition, the company may refer to certain non-GAAP metrics on this call. Explanation of these metrics and a reconciliation of non-GAAP to U.S. GAAP metrics can be found in the earnings release filed earlier today. With that, I will turn the call over to Yaniv.

Thank you, Ilya. I want to thank, everyone, for joining the call today. I will discuss briefly 2019 Q4 and year-end results and review our progress towards our long-term vision for the company. Fabrice will then review in more detail our financial results and our 2020 outlook. Reflecting back on 2019, I’m pleased with our growth and investment in technology to further drive our vision for the CPG company of the future. For the full-year, revenue increased approximately 56% to $114.5 million from – sorry, $73 million in 2018. During the year, we launched 32 total new products, compared to 11 products launched in the prior year. Fourth quarter revenue increased approximately 30% to $25.6 million from $19.7 million a year ago. During the fourth quarter, we launched 18 new products with continued product category diversification, including 14 of the 18 launches being non-environmental products. The progress of our software platform, AIMEE, and our improvements to supply chain and sourcing have allowed us to achieve such growth, while keeping our fixed costs relatively flat. We’re executing on our platform strategy with strong unit economics and path to profitability. Despite our progress and growth, it has become clear to me that our ambitious business model and vision to disrupt the traditional CPG model through technology and under a supply chain is misunderstood and maybe doubted by some. It’s often the case with disruption that is challenging an entire industry that doubts will arise as to the ability of a small company to get so many things right and to align the resources necessary to scale, while working to achieve and maintain profitability in the long run. Misunderstandings, confusion and concerns about a new business model are quite common obstacles that disruptive companies face when they challenge the status quo. In many cases, disruptions come in the form of vertical integration and optimization of capability in an existing archaic [ph] supply chain. For example, at a much larger scale, many doubted Amazon’s ability to build a warehouse and logistic infrastructure underlying the Amazon Prime program or Netflix foray into content creation. In our case, I believe that many doubt our ability to be both a technology and a consumer company. It’s often tempting to seek a doubt and outside observers in their recommendations to choose or what we want to be a tech or product company. It’s difficult to imagine what world we will look – we would have looked at it disruptors see the 2000 pressure to fit into a certain mold, so that they can be better understood. Thankfully, myself and the entire management team are not guided by outside observers or expert opinions. We drive our business based on data. And the data that we have more than ever reinforces our vision for the future of retail on CPG. The data shows that e-commerce continues to grow fast – at a fast pace and that traditional retail continues to lose ground online. Moreover, the Marketplace business model is continuing to grow rapidly around the world. On Amazon, for example, more than 60% of the GSD is already driven by the Marketplace model, and it’s the fastest growing segment in the retail as revenue grows. The Marketplace is dominated by small digital native and direct consumer brands. Sometimes even manufacturers cutting through the traditional supply chain to offer better value direct-to-consumers. The data shows that over 70% of consumer searches on Amazon do not seek a particular brand and prefer choose the best value products, which they can now determine based on a combination of social proof, pricing and feature comparisons. The fundamental power driving this enormous change in the retail sector and CPG industry can be summarized in a simple sentence, focus on the customer interests above all. The markets like business model pioneered by Amazon in the U.S., Alibaba and JD in China, Flipkart in India, and other online retailers around the world is dismantling the traditional retail, because it empowers and prioritize the consumer. By offering the consumer an infinite shelf and millions of products to choose from, by cutting the middleman out and driving competition between manufacturers, marketplaces offer consumers better value. This new retail model is opening the door to a new breed of consumer product companies, one that is aligned with empowering the customers. A breed of company that is more agile, data-driven, customer focus, and most importantly, offers the best value to their product as opposed to trying to justify higher margin and price for their brand image. Mohawk Group is working towards being the leading company in this new breed of CPG companies and is intending to scale this model grew vertically integrating technology with an agile sourcing and supply chain. For external observers, investors and existing shareholders, the question to ask when evaluating their belief in our model is simple. If you believe that e-commerce and specifically marketplaces will continue to grow at the expense of traditional retail, that consumers will continue to flock to marketplaces, because they offer the most competitive value and convenience. The traditional consumer companies who are not developing the necessary capabilities to succeed our marketplace will continue to lose market share as a digital, native, agile and data-driven manufacturers who strive to offer better value through efficiencies, as the largest consumer companies of the future will use technologies to better understand the customer needs through data and to leverage machine learning to automate decision-making around forecasting, pricing and media buying. If you believe that this is the direction retail and CPG are going, we welcome you to join us, partner with us in whatever way you see fit, as we continue to relentlessly pursue this vision. We want to build the most efficient CPG platform for manufacturers and brands, looking to transform themselves to meet the challenges of tomorrow’s retail. We’re going to continue to do so with our own and operated portfolio brands and we’re going to continue to invest in offering our managed SaaS platform to other CPG companies. As I look forward to 2020, I see many signs pointing to an acceleration of the market-based business model and a massive opportunity to capitalize on a formidable transformation in one of the world’s largest industries. We’re looking to build a very large and profitable company and consider ourselves in very early stages of this journey. It will take time for many to understand us and probably in hindsight, only some will realize what we’re seeing now. Myself and the management team are committed to this journey. Thank you, everyone, on this call for your trust in our vision and our ability to exit and generate. With that, I’ll pass it on to Fabrice to walk you through our Q4 and year-end results.

Thanks, Yaniv, and good afternoon, everyone. Let me first start with a potential accounting update relating to the timing of our non-cash stock-based compensation expense recognition. We received the communication this morning from our outside auditors, Deloitte. Though reviewed by Deloitte in our 2019 Q2 and Q3 filings and despite no change of rules, it appears that we may need to refile our financial statements for these two periods. In particular, we reported stock-based compensation expense relating to our 2019 Equity Plan beginning as of the IPO date in June 2020, over the future service period, which was two years of vesting. Deloitte has just informed us that it believes the company should have taken a charge at the IPO date for stock-based compensation for the period between the grant date and IPO date for certain grants. And further, Deloitte believes that a portion of the expense should have been front-loaded as opposed to straight line over the service period. As a result, you may need to refile our financials for Q2 and Q3 of 2019. And so we expect to do this quickly, given the minor nature of this change, the changes to our full-year 2019 results would only be for the operating income and net income levels, and will be reflected in our Form 10-K for 2019 to be filed with the SEC. I would like to note that this change would have no – would not have an impact on our reporting figures for 2019 with respect to net revenue, gross margin, contribution margin, adjusted EBITDA or cash, all of which we believe reflect the company’s core operational performance. This change and the corresponding acceleration of non-cash stock-based compensation expense recognized in 2019 also means that our future quarterly non-cash stock-based compensation expense would be correspondingly reduced. As previously indicated, we’re still evaluating this matter and discussing it in real-time with our outside auditors and we’ll make a determination to refile our financial statements for Q2 and Q3 of 2019, who will notify investors promptly after the determination is made and in accordance with our SEC reporting obligations. Now moving to reviewing the operational performance details of our fourth quarter and full-year 2019. For the fourth quarter of 2019, net revenue increased 30.1% to $25.6 million from $19.7 million in the year ago period. The increase was primarily attributable to increased direct sales volume of $5.6 million, or 28.7% from growth of existing products, as well as new products launched in 2019 and late 2018. Gross margin for the fourth quarter decreased from a year ago to 35.4% and was down 773 basis points on a sequential basis. Our margins were impacted by a number of growth factors, including a higher percentage of revenue in launch phase in the fourth quarter versus the third quarter, as we launched 18 products during the fourth quarter. In fact, approximately $0.8 million of write-off of expired inventory products, primarily supplements, and the third quarter gross margin includes accrual reversals associated with our recall program that is materially complete, a governmental agency penalty associated with certain non-core products and a charge due to the liquidation of certain older products that we had discontinued, which positively impacted Q3 gross margin by 800,000. Excluding the write-off of expired inventory products, our gross margin for the fourth quarter would have been 38.6% versus the gross margin in the third quarter of 41.2%, excluding the 800,000 mentioned above. As Yaniv mentioned, going forward, we’ll be reporting our net revenue by phases of launch, sustain, SaaS, liquidation and other. We defined the launch phase, with which on average, last approximately three months as the period of time where we are investing aggressively in marketing spend being pricing, coupons, brand rebates or advertising have a negative contribution margin on the product in order to gain a foothold in the marketplace. As defined, contribution margin is revenue minus all of our variable costs. After the launch phase, products are expected to enter the sustain phase. We target that these products will have a positive contribution margin of 10% or more. Our target contribution margin can be impacted by charges related to excess inventory, exceptional logistics charges related to Amazon and FedEx relationship, and all prime status to name a few. Finally, the other category include SaaS and liquidation and other. For our fourth quarter 2019, our sustain revenue was approximately $20.3 million versus our Q3 sustain revenue of $36.2 million. For our Q4 2019, our launch revenue was approximately $3 million versus our Q3 launch revenue of $2.8 million. In Q4 2019, we launched 18 products, though the majority in late December versus all the three in Q3 2019. Our Q4 2019 SaaS revenue was approximately $0.3 million versus our Q3 SaaS revenue of $0.3 million. Finally, for Q4 2019, liquidation and other revenue was approximately $2 million versus our Q3 liquidation and other revenue of $1.4 million. Our overall Q4 2019 contribution margin was 6.6% versus our Q3 2019 contribution margin of 8%. Q4 carries more legacy products, which carry a lower contribution margin than our target. It was also negatively impacted by additional cost of fulfillment as we used express instead of standard ground to compensate for the FedEx/Amazon issue and maintain our prime status. Also, our Q3 2019 contains the $1.4 million reversal of the recall reserve, which is included in contribution margin. You can find more information by phases in the financial tables of the press release. Fixed cost for Q4 2019 was $5.9 million, or 23.1% as a percentage of net revenue, as compared to $6.6 million, or 33.5% in the year ago period. The improvement in fixed cost highlights our ability to launch new products and grow revenue, while keeping fixed costs essentially flat, thanks to the high degree of automation of our business model. The adjusted EBITDA for the fourth quarter of 2019 decreased to a loss of $7.6 million from $2.7 million in the third quarter of 2019, which is the direct impact of lower revenue due to seasonality. Q4 carries more legacy products in sustain, which carry a lower contribution margin than our target, an impact of approximately $0.8 million of write-off of expired inventory products in liquidation and other and while maintaining essentially flat fixed costs. Third quarter 2019 adjusted EBITDA contains a net positive impact in liquidation and other of 800,000, probably driven by the recall, reserve, reversal and other items described earlier. Turning to our full-year results. For 2019, net revenue increased 56.2% to $114.5 million from $73.2 million in the year ago period. The increase was primarily attributable to increased direct sales volume of $42.3 million, or 61.3% from growth of existing products, as well as new products launched in 2019 and late 2018. Gross margin in 2019 increased from a year ago to 39.4%. For 2019, our sustain revenue was approximately $97.2 million, our launch revenue was approximately $9.8 million, and our SaaS revenue was approximately $1.7 million. Finally for 2019, our liquidation and other revenue was approximately $5.7 million. Our overall 2019 full-year contribution margin improved to 2.2% versus our 2018 contribution margin of negative 10.6%, reflecting both the increased revenue of sustain and improved unit economics. Fixed cost for 2019 was $22.1 million, or 19.3% as a percentage of net revenue, as compared to $21 million, or 28.7% in 2018. The improvement in our fixed costs as a percentage of net revenue, again, highlights our ability to launch new products and grow revenue, while keeping fixed costs essentially flat. Thanks to the high degree of automation in our business model. As this breakout shows, we believe that our pathway to profitability is a function of more products being launched and reaching the sustain phase, margin expansion of our sustain products and continuing to keep our fixed costs stable. As a reminder, approximately 80% of our products launched over the past year have entered sustain. 2019 full-year EBITDA improved to a loss of minus $19.5 million from minus $28.6 million loss in 2018. The continued improvement in adjusted EBITDA is attributable to growth in our business from our existing products and new product launches, our continued improvements in our operating expense leverage as we continue to grow our revenue and maintaining our fixed costs essentially flat, thanks to the high degree of automation in our business model. Turning to the balance sheet. As of December 2019, we had cash of $30.4 million, compared with $35.7 million at the end of the September 2019 and $20 million as of December 31, 2018. Cash used in operating activities for the fourth quarter was $12.1 million, compared to cash provided by operating activities of $3.1 million in the third quarter of 2019, which was impacted by increased cash operating loss and increased cash usage in working capital, as we increased our inventory on hand for the traditional seasonal impact of Chinese New Year, and because of the threat of additional tariffs previously announced in the third quarter of 2019. Overall cash burn was $5.3 million, compared to $2.4 million in the third quarter of 2019. Our total debt as of December 31, 2019 were $37.9 million, consisting of borrowings under our revolving credit facility and our $50 million term loan, as compared to total debt of $30.1 million at the end of the third quarter 2019. It’s increasing, that is a direct reflection of our planned increased inventory. Moving to the coronavirus. With regard to the coronavirus, first and foremost, our thoughts are with everyone affected by this global health emergency, in particular, our team based in Shenzhen. In terms of its impact on our supply chain, it is still too early to tell it will experience any meaningful disruption. Going into the Chinese New Year and anticipating potential new tariffs, we built up our inventory as part of our normal course of business. The various has impacted the manufacturers that we work with in various ways. Some factories are up and running and close to full capacity, some are still ramping up capacity as workers slowly return, and others are idle as they wait for their workforce to make it back. These delays may materially impact the schedule of product launches for Mohawk starting in Q2. We continue to believe that we will be able to launch up to 20 new products during the first quarter. We’ll also continue to believe that in 2020, we’ll be able to double the amount of products that we launched in 2019. But the timing of those launches may be delayed. As it relates to potential impacts from the coronavirus and access to replenishment inventory, and thanks to our long inventory position. We do not expect any significant impact in the first-half of 2020. But should the manufacturing capacity not resume to normal – more normal course of business by the end of April, we may experience inventory shortages in a more meaningful way starting in Q3, which would have some impact on our second-half revenues and adjusted EBITDA. We’ll continue to monitor the situation very closely, obviously. Guidance for 2020. For 2020, we currently expect net revenue to be in the range of $160 million to $170 million, driven primarily by continued growth of our existing product portfolio and the positive contribution from new products launched in 2020 and late 2019. This outlook incorporates potential inventory constraints for existing products and potential delays in new product launches primarily in the second-half of the year, due to the impact from the COVID-19, the company expects positive adjusted EBITDA in the third quarter of 2020 still. With that, I’ll turn it back to the operator to open the call for your questions.

[Operator Instructions] Your first question comes from the line of Tom Forte of D.A. Davidson. Your line is now open.

Great. Thank you. I have two questions. First off on Prime. I wanted to know to what extent Amazon moving to one day was helping you and to what extent it may be having a negative impact on you? And then as it pertains to China in your supply chain, I wanted to know at a high level, if the tariff issue in 2019 and then the coronavirus issue in 2020 is having you reconsider the role that China plays in your supply chain? Thank you.

Yes. Thanks, Tom, for those questions. So on the – moving to one day, as we had indicated back in the at the end of Q3, we ourselves were actually working to actually move to one day shipping ourselves and be one of the first, if not the first seller to be one day enabled across the nation, both because of better quality of service for the consumers, but also because it was creating an opportunity for margin expansion as it reduced the overall cost of fulfillment by moving the inventory closer to the consumers and therefore, having a last – a shorter last mile. So we’ve made significant progress on that front. And we already have now eight operational and shipping warehouses will be at nine by the end of the quarter of March, which will mean that we’ll have a one day prime shipping coverage of over 90% of the continental U.S. population. So as such, the moving to one day by Amazon, we’re following the same path, and it goes back to what Yaniv were saying consumer first, right? So that’s on that point. On the coronavirus and the change of supply chain on our site. So as we said before, right, I mean, one of the key driving elements that we actually look for is to always do and make sure that we stay competitive against the rest of our competition, and therefore, look for the best quality and the best cost, so that we can provide the best value to the consumers and stay competitive with our competitors. Now, with that said, we are – thanks to our existing manufacturers starting to actually look and actually we’ll have a couple of products that will actually be sourced outside of China in Q2 and potentially more, as our manufacturers are actually moving and enabling new manufacturing platforms with the same quality and cost ratio, which is really important, and as such, it will allow us to be – to diversify away from China to moving away from tariffs and providing ultimately a better value to the consumer as well.

Thank you, Fabrice.

Yes.

Your next question comes from the line of Brian Kinstlinger of Alliance Global Partners. Your line is now open.

Hi, guys, thanks for taking my questions. The first one, I wanted to understand, I think, before successful product launch would generate a $1.5 million revenue – in annual revenue, the press release and your comments was a $0.5 million, I think. So is that an issue right now with understanding how the supply chains would be impacted? Or do you think $500,000 of annual revenue is the new bogey?

No, it’s still a $1.5 million. The reason why we mentioned $0.5 million is, because otherwise we have a comparable number to last year in the S-1. When you look at the graphic in S-1 of the number of new products that we launched, significant new product, the definition was $0.5 million or more. So that’s reason why we mentioned that reference, so that we have compatibility of data. But overall, we’re still on plan, both for the launches that we did in 2019 and the ones that we’re doing in 2020 to be at $1.5 million per year average.

Great. And then can you talk about the early successes, it may be too early, but the non-environmental products, obviously, in the past, your revenue has been driven by those environmental products. So I think, it’s important to understand how that success is going so far?

Yes. So I mean, we – obviously, not all of our products are made out of launch, right? For the ones who made out of launch, we are still at 80% success ratio, we got it, right? And remember that, I think, it’s – of 18 of the new products that we launched, we’re non-environmental products, right? And we’re still for those who already came out of launch – of the launch phase, we’re still at 80% success ratio.

Got it. Thank you. And then you’ve commented you expected about 20 new products. It sounds like in the first quarter, which is almost done. So I’m – I assume that’s going to be close to there. I guess, my question more so is with difficulty in getting shipments, do you risk at all not having enough inventory to meet early demand? How are you handling that?

So it’s a good question. It depends – our forecast was significantly understated. And that would mean that those products would be amazingly more successful and bland. But otherwise, no, the replenishments process should actually work well, and in due course, remember that when we build inventory for those new products, we actually build three-month plus of inventory, right, for between three and four months for those. That means that even if the manufacturers and all of those products got on water, almost all of them, actually, three of them, four of them actually made it right after Chinese New Year on the water, but all of the others actually made it before Chinese New Year on the water. And by the time you launch them, if you clown – if you account for three to four months of inventory built up originally, again, unless the coronavirus and therefore, the manufacturing capacity does not come back to normal before the end of April or by the end of April, then we might have a shortage of inventory on those new launches come the beginning of Q2 – of the end of Q2 and beginning of Q3.

Great Last question I have is debt to Amazon? I thought I was reading about shipment delays, because more people, given the virus, one new purchase via e-commerce as opposed to go to retail stores and it may be impacting timing of receiving shipments. Are you having any impact? Is it impacting you in anyway? And how do you guard that again subpar ratings for something like this that’s out of your control?

So you – I’m not sure I understand the question. But are you saying that, because that would – that creates more demand on Amazon and therefore, shipping delays is that what you’re talking about?

Is that something that’s going on? I had seen an article and I didn’t dig too much into it. I’m just curious if – given an influx of e-commerce purchase has impacted shipping time at all, so that if you’re on prime and getting one or two days, it might not be getting there one or two. Is that an issue that’s happening at all, or is that not something actually you experienced?

No, not at all. We’re not seeing that at all.

Okay. Great to know. Thank you.

Yep.

Your next question comes from the line of Matt Koranda of ROTH Capital Partners. Your line is now open.

Hey, guys, good evening, and thanks for the question. So just wanted to step back and think about how you guys built the revenue guidance of $160 million to $170 for 2020. So if I kind of think about a baseline of about $115 million for the year in 2019, and give you kind of a baseline of growth off of that of, call it, maybe 10%, 15%, 20%, it gets you into the $125 million to $135 million range. So are we assuming there’s an incremental, call it, $25 million to $35 million coming from product launches to get to that $160 million to $170 million, just talk to me about sort of how you built that?

Yes. So it’s a – it’s pretty close, actually, from a numbers perspective. The real challenge that we have is, because we have the launches of second-half, right, which actually could be significantly delayed, the revenue recognition in the year is actually lower, right? So that’s one of the big challenge that we have and we have uncertainty there, right? And the reason is not just in manufacturing itself. Remember that even our office, for example, we have – you have employee rotation limitations, for example, in China that apply today, so not all of our employees can be in the office at the same time. When you want to do – when you launch products, you have to do QC and test the samples. And that means that we cannot have all of our testing who’s actually in the office, for example, at the same time that delays the process of testing and therefore, validating and therefore launch. So that is one of the key elements. And we may experience as well some replenishment issues with some of the manufacturers that since not all of the manufacturers at 100% capacity at this stage. So it is built on a potentially less than the 15% calculation that you have on the existing base and some impact on the launches, not so much in total number of launches, but in the timing of those and therefore, the revenue recognition.

Got it. That makes sense. And then just the goal is still to get to, I assume 60 product launches or higher. But are we counting some of the acquired products from Aussie Health in that [indiscernible] or not only organic sort of product launches?

It’s only organic – 100% organic.

Okay, perfect. And then the other thing I was curious about. So if launches begin to kind of spill into the back-half of the year, as it seems like is a bit of your base case. I mean, how much does that impact the EBITDA profitability guidance that you’ve given for Q3? Or is that – are you already factoring in some hit from additional launches in Q3 into that positivity EBITDA guide?

So remember that, because of the model, right, where you go with from launch to sustain and the cash break-even points being approximately six months, the – that means that it’s going to have almost no impact to the EBITDA, maybe slightly negative impact to the overall EBITDA, because you’re going to recognize the products that you would launch, for example, in Q2 would start being positive EBITDA and cash in Q4. The products that you would launch in Q3, if you launch it in Q4, it would actually delay the investment and therefore the negative impact to EBITDA and cash as well, right? So overall, it’s a little bit of a wash, slightly negative to the EBITDA impact, but not massively. Overall, it would – what it actually would mean is that, it would actually mean that you would actually see more growth in 2021, right, because the – you would get more impact of 2019 – not 2020 launches, right? That’s really where it would be.

Okay. And I assume if you’re down at the bottom of the range in the $160 million range, just theoretically, that would mean that a significant portion of the 60 product launches were pushed into the back-half of the year, Q3, Q4, essentially?

That’s correct. That’s correct.

Okay, got it. That’s helpful. And then last one, thank you for the color on the sustain – the breakdown of sustain versus launch versus SaaS and liquidation that was super helpful to see. In terms of the sustain contribution margin, like I’m calculating something around the north of 6% in 2019. Can you talk about sort of how that sustained contribution margin category should trend in 2020? I know that the goal is sort of 10% in terms of the bogey. But like, where do we think that’s headed? What are the levers we have to pull to push it into the 10% range? Can we get there in 2020, or is that more of a multi-year step?

So if you remember that, that contribution margin is actually made up of a mix, both of the historical products which were not in that 10% baseline, right, started at 80% baseline in 2018. So we still carry products that are actually older than that, maybe that’s the benefit of the model is. Once you get a product in sustain, I mean, they’re going to stay there for years, right? So though, they’re not at 10%, they’re still positive marginal contribution and therefore, you want to keep them, because it’s positive cash and positive EBITDA, right, that would be great than the percentage itself. So that’s one key element. The second one is for all of the new products, we actually are actually starting at a higher target. So we keep improving the target as our cost basis moves down, in particular, on the logistics. Also, the new products that we launch are now at a 12% target when moved to sustain. So that’s going to help the overall average. And finally, we keep on doing cost improvements, obviously. That’s one of the reason why we had actually looked at moving to nine warehouses and the one day shipping. That alone we should add approximately 1% – 1.2% of additional CM [ph] overall, just the move to one day, because it reuses the zones, right, the average zone from zone 3.5, where we are today to a zone 2.6 on average. And then it – the usual process on that unit economics, which is the bigger you become a buyer of those products, the more purchasing power you have and then you start working on the COGS and therefore, the gross margin itself, right? So that’s the way little by little you gain shop, right, overall to that CM on an overall basis. Make sense?

Total sense. Yes. Thank you for the clarity, guys, and I’ll jump back in queue.

Thank you.

Your next question comes from the line of Allen Klee of National Securities. Your line is now open.

Yes. Hello. You talked about April being when you think that things get back to maybe normalizing on from your suppliers. What can you explain what that space what you’re basing that on?

So I didn’t say that – hey, I think that April would be better. I said that if it doesn’t get to normal by the end of April, then we would actually have replenished – potentially replenishing problem and further delays in launches hence to – hence why we’re being careful when it comes to guidance, right? Now for the moment, what I can tell you is that, we have approximately under the toll sourcing that we have. So let’s say, for example, mediums, our biggest manufacturer is up and running at close to 90% of capacity today, overall. And interestingly enough, they actually have allocated more of their capacity to international orders than to domestic. The reason being that the domestic consumption is taking a dive and therefore, they don’t need to actually manufacture as much for their domestic needs. So we don’t expect any significant delays there. But, again, not all of our suppliers are back and running. Approximately, the vast majority, let’s say, that the vast majority of our suppliers are open. They all have manufacturing open and they all add 50% to 60% plus in capacity at this stage that year climbing up, right? The base at which they climb up is very difficult to predict. Hence, our caution or safe view of where the business is going to go, because the reason being that a lot of the rules are actually being states enacted and they can change from one day to the other. I mean, the fact of reopening, but having specific health protection rules, for example, both in offices and in machinery floors, did not exist two weeks ago and got enacted by the Congress, the fact of having to apply for that approval, which did not exist and got enacted by the government as well two weeks ago. And they may come up with new rules that we don’t know of, which would actually continue to restrict increase in capacity, right? So it’s a very fluid environment. It’s getting better for sure, but very fluid environment and that’s reason why if we have – if they – everybody comes back to normal by the end of April, we’ll be fine. If it lasts longer, and thanks to our long position in inventory. If it’s – if it actually goes beyond that, then we might hurt.

Okay. Thank you. And so you’ll likely have – having to fund negative operating cash flows in the, at least, the first-half. How – what’s the strategy about how you think about funding that?

So, I mean, we keep on – we closed with $30 million. We burned $5.3 million in Q4. So we’ve got – and it’s one of our lowest quarter with Q1. And then as usual, Q2 and Q3, as you know, because of both seasonality, in particular, actually and working capital improvements, because we’re going to be in Q1 – end of Q4 and Q1 at the lowest point or the point, we’re from a working capital perspective, we do burn cash, but actually, recoup that cash when you got to the high season and therefore, our inventory turns increases. So we don’t feel like we don’t believe that we have any cash issue to actually fund the next two quarters of negative cash flows with the cash that we have on hand.

Okay. How – can you help us understand as you’re building out your third-party logistics rather than relying on the marketplaces like Amazon? How that has a positive impact on margins?

Yes. So I mean, remember, it’s because of the product mix that we have. A very significant set of the – of our products and revenue is made with products that are classified as oversized from a logistics perspective and Amazon is very expensive. What it comes through oversized shipping charges and warehousing, the biggest reason being that they don’t really want to have too much of that inventory, because it takes a lot of warehousing space and Amazon needs to fulfill its promise, which is get everything store. And in order to do that on “limited” warehousing capacity, oversized products actually is a problem for them. So they’re very expensive on the fulfillment side. And that’s the reason why we moved to FBM which is fulfilled by merchant, because we actually could get much better costs by doing through third-party logistics partners, so without investing CapEx ourselves, warehousing – doing warehousing through CBLs and having own deals with FedEx and UPS. We could actually reduce very significantly our fulfillment cost and therefore, both remain competitive, but at the same time improve significantly margins, right? That’s the reason why we moved to IBM, with because of that product mix of oversized products. We still have quite a significant portion of our revenue approximately 30% that is actually fulfilled via FBA, because they’re not oversized. They’re standard sized and there FBA and Amazon – FBA is actually the best cost solution to actually deliver the product to our consumers.

Interesting. When you look at who you’re competing with, to what degree do you find its Amazon private label brands, or is it mostly other CPG companies?

Yes. Allen, this is Yaniv. Let me take it. It’s a good question. It really varies across different categories, or in general, the way we think about bringing products to the market is really based on the analysis of the competitive landscape in every particular stream of demand that consumers are looking for the product, right? And from that perspective, we will not enter a certain category sort of search or stream on-demand if we thought that the competition was strong in irregardless of it, it’s a well-known brand, AmazonBasics, a third-party seller that is very good in their digital media capabilities, a manufacturer. So at any point in time, there obviously is going to be some type of competition in every possible against stream of demand that we’re going out there. But it’s not like there’s always the same competitor every time, right? In every particular landscape, there’s going to be someone else. And again, traditionally, we avoid entering certain spaces with the categories too strong and really focus on where we see an advantage through the software and through the data that we have, again, without really going to pay attention too much as to whether the nature of that competitor, but it’s more to the data telling us that we can actually beat them.

Okay. Thank you. My last question is – and you’ve kind of given us a lot of the pieces, but maybe if you could just help what the final thing is? If we would look at it all of the quarters in 2020, can you give us a sense of seasonality of – from what you’ve said of, kind of what percent of revenue, you think will show up in each one of the quarters based on what you know today?

Yes. So based on what we know, I mean, you know that it’s the challenges. I know the seasonality or existing products as of one date, but I don’t know the seasonality of all the products that we will launch in the rest of the year for the ones that we have not yet identified in place before, because, of course, those products have not yet been ideated and identified, right? So it’s always subjected to movement, but we don’t expect any change more or less from a distribution perspective than the distribution of revenue that we had in 2019 should be brought essentially for the moment the same for 2020 in terms of [Multiple Speakers]…

Okay. Thank you so much.

[Operator Instructions] Your next question comes from the line of Brian Kinstlinger of Alliance Global Partners. Your line is now open.

Yes, great. Just one follow-up. We haven’t talked much about the SaaS business in a while. And I’m just wondering, obviously, we can see the revenue profile has been flattish. Have there been any discussions with potential customers that lead you to believe at some point in this year, we could start to see a change in that trend, or guys trying to impact that so much as well that it may be another year?

This is Yaniv, I’ll take that. In general, again, we’re still very, very excited about the SaaS opportunity, it is – and it’s very much of high priority for us. As you know, we’ve also had a couple of press releases talking about the fact that we’re kind of expanding a little bit, the quick print of our software by putting it on the Amazon Marketplace for sellers in the Microsoft Marketplace to sellers. And I’ve also made a few hires to help us, again, grow this side of the business. Just to give you a little bit of numbers, right now, we’re having active conversation and negotiations with approximately 46 different companies across a variety of product categories that include large – larger brands and some digital native brands. We already signed a couple of contracts in the first two months of the year. And we really are going to continue to invest in the side of the business and expect to see the base picking up in Q2 and beyond. So very much a priority. We’re investing in edge. We’ve made again a few changes to our product and offering and on the conversations we’re having so far is exciting.

Great to hear. Thank you.

There are no further questions at this time. Speakers, you may continue.

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Thank you.

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