Good afternoon and welcome to the Aterian, Inc. 2022 Fourth Quarter and Full Year Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I'd now like to turn the conference over to Ilya Grozovsky, Vice President of Investor Relations and Corporate Development. Please go ahead.

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

Thank you, Ilya and thanks everyone on the call. Today, I'm going to go over the following topics. I'll start with a quick introduction of Aterian, for those who are newer to our story, I'll then review key takeaways from our fourth quarter of last year. and I'll discuss our goals for 2023. Lastly, I'll address the long-term prospects for Aterian and share why we believe in our vision for the consumer product platform in the future. For those who are new to the story, here's what we need to know about our company. Aterian is part of a new breed of technology-enabled consumer product companies. We focus on building, acquiring and partnering with e-commerce brands online. Aterian owns and operates several consumer brands selling products across various categories on channels such as Amazon, Walmart, Shopify and eBay, both domestically and internationally. To allow us to scale, we've invested in building our own proprietary platform called AIMEE. AIMEE enables our team to manage our business more efficiently by injecting technology into processes that would otherwise have to be executed manually and will require hiring an unscalable and unsustainable workforce. Through its ability to analyze vast amounts of data and automate daily recurring tasks, AIMEE allows our team to find new product opportunities we can launch under our brands, manage these products at scale effectively across various channels, automate certain marketing and fulfillment task and much more. Our goal in the long term is to become one of the most efficient consumer companies in the world, expanding our footprint globally while continuing to invest in technology and an agile supply chain to drive scale and profitability. I'll now take a few moments to speak about our Q4 results as well as our goals for 2023. As we shared previously, our goal…

Thanks, Yaniv and good day, everyone. Here are the financial performance details of our fourth quarter. For the fourth quarter of '22, net revenue declined 13.3% and to $54.9 million from $63.3 million in the year ago quarter, primarily due to reduced consumer demand, offset by a strategy of liquidating high-cost inventory. The fourth quarter net revenue of $54.9 million is comprised primarily of $52.3 million of our organic business, a nominal amount of revenue from our most recent acquisition and $2.6 million of wholesale revenue. The year ago quarter net revenue of $63.3 million was comprised primarily of $31.3 million of our organic business, $27.6 million of net revenue from our acquisitions and $4.4 million of wholesale revenue. Our organic revenue increased by $21 million due to classification of our past acquisition revenue going into organic revenue, our strategy to sell off higher-priced inventory and normalized inventory levels, offset by reduced consumer demand in the period. Our M&A revenue decreased approximately $27 million as all our material acquisitions have now been known for over a year and that revenue has shifted into the organic revenue categorization. Our Q4 acquisition, while nominal from a financial perspective, was strategic and designed to leverage a competitor and drive sales to our other Lean brand and we're pleased with the progress of this strategy to date. Looking at our fourth quarter net revenue by phase, the $54.9 million broke down as follows: million, $0.1 million in launch and $13 million in liquidate and inventory normalization. The year ago quarter net revenues of $63.3 million by phase broke down as follows: $52.7 million in sustained million launch and a late inventory normalization. Our sustained decrease of $12 million relates to renew shifting into liquidation phase and general consumer soft -- our liquidation increased by…

[Operator Instructions] Our first question will come from Alex Fuhrman with Craig-Hallum Capital Group.

Congratulations on what looks like a strong success clearing some of the inventory that you'd been hoping to. I was wondering if you could talk about which categories you've seen the most demand for both during Q4 and now that we've got a couple of months of 2023 under your belt, where you're seeing the most demand? And is that informing where you're looking for M&A? Or are you really looking at all different categories for that?

Alex, Yaniv here. I'll take that question. Good question. Overall, as we mentioned, overall consumer demand is a little softer, right? But because of all the efforts we've done on liquidation, we've got more success across pretty much the Board when it comes to the categories as typical with the seasonality of Q4 versus Q1, Q2 Q3, not a big difference there. I think I'd say to the second part of your question, the -- where we're looking for when it comes to acquisitions, I said in general, we want to diversify our portfolio a little bit. If possible, right, M&A is more opportunistic but as much as possible from, I think, the supply chains that have hurt us in the last few years. So we're definitely tending to centered a little more towards consumer product companies that are making their goods not necessarily in Asia but maybe in the U.S. or Eastern Europe, South America. But of course, we're looking and leaving our eyes open to any of the opportunities. But again, if possible, we would the main goal potentially with the future M&A would be as much as possible, diversify from a supply chain perspective.

Okay, that's really helpful. And then can you give us a little bit more color on the bridge of how you get from what you just reported and what you're guiding to in Q1 to being adjusted EBITDA positive in the second half of the year. It looks like what you're guiding to for profitability in Q1 is better than -- I was expecting at least a much smaller than expected loss. How do you walk us from that in Q1 being positive in the second half of the year? Is it primarily gross margin as you start to sell through inventory that wasn't brought in at insane container rates.

Yes. I'll let Arty add. Go ahead, Arty.

Yes. No, Alex, I think you nailed it right at the end. I think -- as we said previously, it takes a couple of quarters here to get rid of this really expensive inventory that we brought in strategically back pre late 2021 but we had to take the impact, unfortunately and pay those container rates. As you move that through, you're going to get back to a place where you can get back to target type CMs, right? And with that, you should drive into profitability. Obviously, consumer spend is always a question mark but we do feel very confident that I think once we move through this more expensive inventory and nature that we're bringing in that's starting to land in April and May. For Q3 and even parts of our Q2 seasonal sales will be at better margins. And that's why we can sort of be pretty confident in what we're seeing.

Our next question will come from Brian Kinstlinger with Alliance Global Partners.

Sorry, I joined late, if you answered this in your prepared remarks but with the company releasing new SKUs now, maybe you can update us on how many SKUs were released in the fourth quarter. maybe how many you're expecting in the first quarter and maybe the full year rough numbers. You don't have the exact number but -- and then how is the weak consumer spending environment changing the pace of SKU launches?

Brian, just to clarify, we're starting to launch products but as you know, we're at that process takes time. And so -- my comment was on the fact that we have over 20 products that have been worked on and will be launched some of it this year, some of it next year. I think the impact you'll see is that through this year, we will continue to develop and launch products and most of it will come in 2024. So as you remember, right, the main reason we paused launching products was because of the unreliability of supply chains, both in terms of good arriving on time with all the delays that we've seen in the past but also very importantly, right, the fluctuations in cost of shipping were so unpredictable that it just creates a situation where you plan to launch a product and by the time it arrives, your cost basis is higher than you expected and that's just not leading towards a good launch, right? So we essentially paused that for quite a while now. And now that we're finally seeing that stability in the supply chain, both in terms of the price of shipping but also the reliability, we're getting confident to go back to get and launch these products. But most of that the impact of these products and the launches happening will happen again second half of this year and mostly the impact will be felt in 2024.

Okay. And so are there any in the first in the fourth quarter and expected in the first quarter? Or are they all in process right now?

So if there were any in the fourth quarter, there would have been product products that would be what we call variations means we kind of like to think of them as another version of an existing product. That's where we would have felt more comfortable. I don't -- it's not as material as when we typically do the launches that you're thinking about. And so again, I think that the answer is that with the efforts that we're putting on now, we'll be able to do it at least in the next few months, give a little more clarity on the time line that we're seeing around those launches happening.

And then as I've read more so in the private market, I think some -- there's some undercapitalized fulfilled by Amazon companies that are struggling. Are you beginning to see any fire sales and how aggressive and you when do you expect to be this year in 2023 on M&A?

Yes, it's a great question and you're absolutely right there. There's a lot of companies out there that are struggling and going through a lot of the challenges we went through in the last 1.5 years, let say, right? And again, some of them are really in a very difficult situation. So we're very active talking to a lot of these competitors, exploring different opportunities, spending a lot of time with this. And as I mentioned in my remarks, we can't guarantee any outcome but with the amount of effort that we're putting out there and the things we're seeing, we were overall quite optimistic that we'll be able to find some opportunities with distressed assets that are actually quite good, right? I mean I think a lot of the things we're seeing, obviously, it goes through the spectrum, right? But there's a lot of really good assets out there that we're basically dealing with the same situation where the demand of COVID and on the other side, the pressure of supply chain is the perfect 1 that would these great assets in a challenging position. And so we're as I mentioned, quite active talking to all these companies, they're looking for these opportunities. We're hoping to have an exciting thing to share with everyone but it's still work in progress at this point.

Last question I've got is when you first went public, there was a very pronounced seasonality to your business. Help us understand today how we should think about seasonality for the year in the different quarters.

Yes. So I think the big difference from when we first IPO-ed and today, right, was at the time, I think Q2 and Q3 were kind of like the 2 strongest quarters and Q1 and Q4 were quite like behind. I think given the profile of the acquisitions we've done and some changes to our portfolio, Q4 now is becoming a much stronger quarter, right and I think has the potential in a more normalized environment to see us even doing better over time. Q1 still is the one lag behind but it's really it's really, again, just the composition of the portfolio that we have. And so you're still in a position where Q2 and Q3 are the strongest Q4 right behind there and then Q1 is still behind the 3 of them right when you compare it to back when we IPOed.

Our next question will come from Marvin Fong with BTIG.

I guess my first question, just on the first quarter revenue outlook down maybe something like 20% year-over-year. Just wondering if you could help us understand, I mean, how much of that is the consumer demand softness that you alluded to? Or is any of it just that you're entering the quarter with a little bit less inventory than you were in the same quarter last year. I just wanted to understand that dynamic a little bit better.

Yes. Maybe I'll start and see if Arty wants to add anything. But just in general, Marvin, 1 of the, I think, maybe benefits of how we run our business and the different brands that we have across different categories, is that as opposed to probably other companies who are maybe just active in one category, we have a little bit more wider visibility on demand. And the answer is, as you kind of mentioned yourself, right, is really mainly driven by consumer demand being soft, right? I think that's no surprise given the overall economic outlook around us. But again, what's really good that we're seeing so far when it comes to our businesses, we're always kind of looking at that demand in the context of the entire category and we have good visibility to the fact that it's not that we're losing market share but more of that just a soft demand across the board, right? Arty, I don't know if you want to add anything but that's kind of like overall how we are looking at this.

Yes. No, that's right, Yaniv. I think that's what we're seeing that. I still think we still feel very confident on the year. I think we pointed in the past about being overall kind of flattish on the revenue side. So I just think a little bit -- we're seeing some of the consumer demand softness early in the year and then it should pick up back to where we believe will be Q3 and Q4 revenues for us. I think the other side of that Marvin is even at that lower amount, you could see the adjusted EBITDA guidance improvement, right? It's a good testament of how we've really focused on clearing out the inventory that really set us up for a good 2023. And I think that's the other part of it, even though the revenue is low, you sort of see already the improvement based on the guide of the adjusted EBITDA on the profitability of the quarter.

Yes. I mean you guys kind of basically touched on my next question which was sort of you're reiterating reaching EBITDA breakeven in the second half of the year, you guys feel good in the sense that the consumer remains weak or even gets a little bit weaker, that you've stress tested it and you still feel good that you get that even if the consumer is softer.

Yes. I mean I think -- yes, I think you're right. First of all, the category -- the consumer softness across the board, right? But I think also our experience with some of the categories and the positioning that we have on those in Q2, Q3 is giving us a lot of comfort around that. But again, the most important point here is really the cost base of the product, right? The contribution margin expansion that we were expecting is due to the fact that the efforts that we put in Q4 to make room for that inventory at a lower cost basis is going to create that money expansion. And our logistics team has done a great job of securing a very significant amount of the inventory we needed for the second half at a lower cost which also gives us a lot of comfort around that, right? I guess there was a lot of challenges Again, as I mentioned in the last 1.5 years, right, not just about the price of shipping but also the ability to even get your goods on a ship. And so now we feel quite confident in our projections given the fact that we were able to secure a position on the ship at a lower cost and then we made room for that inventory to replace the older inventory, right? All these things combined give us that comfort with our prediction.

Got you. And I guess my last question, maybe a more fun topic is you mentioned leveraging ChatGPT and OpenAI and that sort of thing. And also curious, I think you guys had always employed some form of AI looking at reviews and helping guide your -- our business decisions and product dividends. Could you just kind of expand on what capabilities you're achieving now or expect to achieve in the near future with these new large language models that maybe you weren't able to efficiently in the past.

Yes, absolutely. So we use machine learning and automation across many different aspects of our business. I think if you really want to bucket in the 2 kind of big areas is 1 is understanding the consumer, their sentiment, what they think about other products, they think about our products. And the other side of it is just managing the complex quantitative they do the effort of managing the products, right which includes, for example, forecasting which is where we have developed our own machine learning base forecast and things like media buying and pricing, they use automation as well, right? So when it comes to what you mentioned with ChatGPT and large language model, I mean, I think the excitement obviously for us is huge. And as I mentioned in my comments before, we already looking at -- I mean looking -- we are already using ChatGPT to, in a way, actually augment some of the efforts that we've had with our own code around sentiment analysis on reviews. But Marc, the most important thing that I think a lot of people that are not necessarily in the weeds on AI don't realize is that -- the hardest thing about AI is actually having good data. And when I say that, what I mean is a lot of organization, except -- especially in the consumer product industry that is not necessarily a fact driven, right? Not necessarily designed or have the DNA or have the systems and infrastructure and access -- and their own data in a way set up for AI, right? And that's something that really gives us some advantage, right? Because we -- we're a consumer company, right but we're a consumer company that uses all our technology and things like a technology company, we have…

[Operator Instructions] Our next question will come from Matt Koranda with ROTH MKM.

It's Mike Zabran on for Matt. So the recent heavy discounting makes a lot of sense even on the more premier products but just any visibility on when we can expect a halt or even a reduction in the level of discounting? And to what extent is pulling back on that heavy discounting factored into the half EBITDA profitability expectation?

Arty, I'll let you take that?

Yes. Yes. No, I think again, if you follow discounting and pricing on Amazon, it's a bit dynamic, right? But the point here was if we can clear out all this expensive inventory and normalize our inventory levels, we can bring back to product at normal costing because now we're back to like pre-pandemic pricing from a shipping container perspective. And so as such, the view we've been saying is that as we enter the second half of the year, all that should be normalized. So we should be back to more normalized pricing along with normalized costing to get to a normalized contribution margin or starting to see a good chunk of that in Q3 and into Q4. So that's why we're really pointing towards that same half point. We could get that a little bit earlier into Q2 but we're really not -- we can't really say on that. So that's why we're really focused on the second half right now.

Okay. So normal level of competitive discounting in the second half of the year but first half of the year, we should get through all of the discounting to clear the excess inventory. Am I understanding that correct?

Yes, yes. I mean you're always doing some form of discounting and price adjustments just to stay at the competitive Landscape depending on the season. That's normal, yes. But yes, you're right. You should see more normal pricing type position as we enter the second half, for sure.

Got it. That makes sense. Just 1 more for me. How are we circumventing the Amazon SBA fees? So I understand you guys have 3PL sites and FDA at your disposal but maybe just speak to how we're optimizing between using Amazon versus 3 pill sites to get products to customers.

That's actually a great question. and really, the answer is, as you know, Matt, like we put a lot of effort in building a network of 3PLs that's connected to our Amy platform which, as you remember, we used to do our own fulfillment for the larger items but also for the smaller items which typically gets fulfilled to BA, restore those items in our own 3PL before we send them to FDA to go to going in fulfilled, right? And the answer to your question relies on really how can we optimize the BPL distribution of the products that go to FDA to reduce the cost of NBA, meaning if you have -- again, we have, I think, at this point, over 19 3PLs, maybe 1 less because we're optimizing all the time. When our logistics department receives containers, they actually use a bunch of different models that we put together to figure out what's the optimal way to send those inventories to 3PL. And the goal there for that inventory is to be as close as possible to the FDA warehouses to which we ship them so that we can, a, have less inventory in FBA and b, spend less money sending it to A which then offsets a little bit some of those kind of higher FAs that we're seeing recently right? So again, our network of warehouses doesn't only give us an arena when it comes to oversized items because our fulfillment there is quite competitive with FDA. But also for the smaller items, where the fulfillment will happen to FVA, the distribution to be as so as possible to the FBS standards helps a lot.

It appears there are no further questions. This concludes your question-and-answer session. I would like to turn the conference back over to Ilya Grozovsky for any closing remarks.

Thanks. As part of our shareholder Perks program which, as a reminder, investors can sign up for a riper participants have the ability to ask management questions on our earnings calls. I want to thank all of the shareholder Perks participants for their loyalty, their participation in program and for their questions. I have picked a few of the most popular questions this quarter and that they have sent in. So here they are. First question is, when do you intend to be fully operational in Europe and do you plan to cover more European countries in the future?

Thanks, Ilya. So obviously, we're really excited about Europe. It's been something that we wanted to do for a while but the supply chain crisis was preventing us from making moves a little earlier. But in general, as we mentioned in the prior press release, we already have good infrastructure set up in some of the most important countries. And we currently don't expect to go into further countries in Europe. But really, it's about maximizing what we're already in which are the biggest markets and just sending more of our products there, right? That's the big effort here in 2023. Is now that the supply chain issues are cleared, we're focused on making sure that we can maximize the amount of our existing portfolio products that are not yet in Europe that we can bring to market in Europe which again, should have a significant effect on 2024, right? Once we've achieved that, we could then look at other countries in Europe but there's no current plan to do that at this point there's up work with what we're doing.

Great. Next question was, when do you expect to clear inventory purchased during Covid and start benefiting from the lower shipping costs.

Yes. So as already mentioned as well, right, we made great progress on reducing the inventory. I mean, it was almost -- it was probably $73 million back in June down to $43 million. We still have a bit of inventory on the balance sheet that remains longer and we're going to clear it out through the end of the second quarter at most. And really, our target is to get to less than 5% long inventory which I think at this point is quite achievable based on the progress we've made in Q4 and continuous work in Q1.

Great. okay. And the last question was what was the health wellness brand that you acquired in October of 2022? And how will that come to market?

Yes. So there was a lot of interest in this. And here's what we want to share, right? So we bought a small competitor to Square party. It was a competitor that had a product specifically that was competing against that brand and was actually undercutting our price and hurting our sales at the quad-pay level. We had the opportunity to acquire this very small brand because they were like a lot of other consumer companies in a difficult position. And we did it really just because we wanted to control the listing and stop undercutting body which is a long-term investment, right? Because if we if that competitor has gone through the challenges that they had and continue to invest in their business, they could have further chips at our Swift brand. And so we just took advantage of that and brought that product in, so that they're not a long-term issue for us, right?

Got it. Great. This concludes the Q&A portion of the call. In terms of upcoming calendar, Aterian management will be participating in the 35th Annual ROTH Conference, March 12 through 14 in Laguna Nigel, California. We look forward to speaking with you on future calls. This ends our call and you may now disconnect. Thank you.

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