Aterian Q1 2025 Earnings Report

Thank you for standing by, and good day, everyone. My name is Argy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Atcarion, Inc. Q1's 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. Thank you. I would now like to turn the call over to Devin Tullivan of The Equity Group. Please go ahead.

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 Q1 results and how they reflect continued progress from the foundational changes we made throughout 2024. '2, a summary of the actions we're taking to proactively navigate the recently announced tariff environment and its broader macroeconomic effect. And three, an update on our 2025 outlook in light of these developments.

Following my remarks, our CFO Josh will walk through our first quarter financial results in greater detail. For the first quarter of twenty twenty five, net revenue was $15,400,000 compared to $20,200,000 in Q1 twenty twenty four. This decline primarily reflects our previously announced SKU rationalization, which prioritize our most profitable products, along with softer consumer demand and reduced Amazon traffic due to changes in its affiliate program. Adjusted EBITDA loss slightly improved to $2,500,000 from $2,600,000 While we observed some softness in the consumer demand during the latter part of the quarter, we were pleased with the overall performance. Looking beyond Q1, the landscape shifted significantly following the 04/02/2025 announcement on global trade policies, particularly those impacting imports from China.

While incremental tariff rates have just come down this week to 30% from their peak of 145%, they remain materially higher than historical norms and we expect continued volatility. Our 2025 plan anticipated increased tariff exposure, but the speed and magnitude of these policy shifts both upwards and downwards have introduced volatility, supply chain constraints and ongoing uncertainty, especially as consumer spend remains cautious. At Atterion, resilience, tenacity and agility are part of our DNA. For some time now, we have been actively strategizing around long term growth and sourcing, consistently landing on diversified product mix and supply chain as critical to ensuring sustainable growth and profitability. While tariffs have certainly been impactful, they're ultimately accelerating the execution of this strategy to ensure we maintain the financial runway to evolve and strengthen our business.

Today, we're announcing a set of decisive strategic initiatives designed to minimize the operational impacts of tariffs and broader macroeconomic pressures. While many of these were already part of our long term roadmap, the current environment requires a faster pace of execution. At a high level, we are focused on four strategic moves, each within our control that we believe will position Tyrion for long term success. First, is accelerating our plan of resourcing and diversifying our manufacturing. Two, advancing our evolution toward a more resilient model by deepening our expansion to consumables, the majority of which will be US manufactured.

Three, strategically raising prices. And four, reducing fixed cost. In detail, I'll add color and expand on each of these actions. The first accelerated resourcing, which will include inventory and supply chain optimization. We are fast tracking efforts to move production and diversify into regions with more favorable cost and tariff structures.

Our new goal is to manufacture no more than 30% of our goods in China by the end of twenty twenty accelerating our previous target of reducing Chinese sourcing to below 40% by the second half of twenty twenty six. We've already seen some early wins. For example, we shifted certain dehumidifier reorders from mid summer delivery from China to Indonesia. We are partnering with our manufacturing base to identify cost saving opportunities, renegotiate pricing and shift fulfillment to non U. S.

Geographies as part of our geo expansion when possible. This allows us to redirect certain inventory while mitigating tariff impacts. While our Chinese partners remain highly collaborative, reshoring to The U. S. Is not currently viable for our electrical products in the near term.

Number two, new product launches from low tariff region. Our Squatty Potty flushable wipes continue to track for late Q3 twenty twenty five launch. With that, we are doubling down on consumable products and we will launch additional wipe based products in 2025. We are further expanding our consumable push and expect to announce additional U. S.

Source consumable products launching in 2025, which are predominantly exempt from tariffs. We expect to announce those items specifically no later than our next earnings call. With this, we are temporarily pausing new category launches from Asia, particularly hard electronic goods until we can resource or gain more clarity on the trade environment. Number three, strategic pricing adjustments. We are implementing pricing increases across our portfolio to recoup margin loss and moderate velocity, retiming orders to provide runway to find alternative resourcing avenues, and to buy time to see how the tariff ninety day windows conclude.

And finally, number four, fixed cost reduction. As part of our response to the tariff announces, we launched a fixed cost reduction initiative targeting 5,000,000 to $6,000,000 in annualized savings. Approximately $4,000,000 of that will come from headcount reductions, including open roles, predominantly in The U. S. By consolidating teams under smaller leadership structure with most of the changes taking full effect in Q3.

The remaining 1,000,000 to 2,000,000 will be realized gradually through broader fixed cost efficiency. We expect these saving initiatives to be fully in place by early twenty twenty six. For those employees impacted, I would like to thank them for their incredible achievement. And I'm certain they will continue to prosper in their postitarian lives. We remain committed to driving long term growth via new product introductions, channel expansions and entering new international markets combined with operating efficiencies and cost discipline.

Supported by a strong balance sheet and the decisive actions already underway, we are confident in our ability to navigate this period of adjustment and successfully execute our long term strategy. We will preserve capital as part of this process and firmly believe that we can navigate these headwinds without raising equity capital in 2025. To ensure this, our Board of Directors has paused the initiation of our previously announced share repurchase program, which was scheduled to start this month in May 2025 and runs through March 2027. That said, we continue to believe Atyrian stock is significantly undervalued and we remain committed to long term shareholder value creation. Once the current environment stabilizes, we'll revisit the timing and structure of our buyback program.

While these actions improve our long term positioning, the current volatility makes forecasting difficult. As such, we're withdrawing our guidance. While our fundamentals remain strong, we are reassessing how pricing, supply chain dynamics and consumer behavior will evolve during the rest of 2025. That said, we continue to believe the actions we are taking position Atirion to return to growth and profitability beyond 2025 even under prolonged tariff pressure. Assuming we execute as planned, we do not foresee a return to the outside losses of the past.

In closing, just three months ago, we shared that Atari was pivoting from a turnaround story into a growth story. While recent macroeconomic shifts present new headwind, we remain confident in our long term trajectory. We are focused both on short term mitigation and long term value creation. Four key moves, all which we believe we control will help us address the short term impacts from tariffs to strengthen and diversify Atarian. Over the long term, ultimately unlocking value creation.

To reconfirm, we're one, accelerating our plan of resourcing diversifying our manufacturing. Two, advancing our evolution to a more resilient model by deepening our expansion into consumables, majority of which will be U. S. Manufactured long term. Three, raising prices.

And four, reducing fixed costs. Even in the face of tariff pressures, our goal remains clear to build a growing profitable company. The initiatives we've outlined today are not a change in direction. They represent an acceleration of the transformation we began in 2024. While the tariff landscape is more significant than we anticipated, our size and agility allows us to respond quickly and decisively.

Despite today's uncertainty, we believe Aturion's future is strong and the opportunities ahead of us are significant. Lastly, I want to thank our team and our shareholders. We've navigated significant change over the past eighteen months. And with continued discipline and agility, we believe the best is yet to come for Aturion. With that, I'll turn it over to Josh.

Thanks, Arty. Good evening, everyone. As Arty mentioned, the tariff landscape shifted dramatically in early April requiring immediate and decisive action. While our 2025 plans already contemplated heightened tariff exposure, the speed and scope of the changes went well beyond our expectations. Our response has been focused on executing what's within our power to ensure margin preservation and long term competitiveness.

In response to the recent tariff announcements, we've initiated a fixed cost reduction program aimed at generating $5,000,000 to $6,000,000 in annualized savings. Roughly $4,000,000 of these savings will come from U. S. Headcount reductions primarily achieved by consolidating teams under a leaner leadership structure with most changes taking effect by the end of Q3. The remaining 1,000,000 to $2,000,000 will be driven by broader fixed cost efficiencies implemented over time.

We expect to fully realize the benefit of these initiatives by early twenty twenty six. Turning to Q1, while we saw some softness in consumer demand, particularly late in the quarter, we're pleased with our progress. Net revenue for the first quarter of twenty twenty five declined 24% to $15,400,000 from $20,200,000 in the year ago quarter, primarily reflecting last year's SKU rationalization and changes program. Adjusting for the impact of SKU rationalization, net revenue would have only declined approximately 19%. Our launch revenue was $400,000 during Q1 twenty twenty five and Q1 twenty twenty four.

As planned, we have one new product category launch in the first quarter. While we are suspending our Asian sourced product launches for 2025, we are shifting our focus to consumable sourced in The U. S. Overall gross margin for the first quarter decreased to 61.4% from 65.1% in the year ago quarter. The year over year decline was primarily related to product mix.

Our overall Q1 twenty twenty five contribution margin as defined in our earnings release was 13.4%, a decrease from 14.1% in Q1 twenty twenty four. Our contribution margin decrease primarily relates to the reduction in gross margin partially offset by lower logistics costs as a percentage of revenue. Looking deeper into our contribution margin for Q1 twenty twenty five, our variable sales and distribution expenses as a percentage of net revenue decreased to 48% as compared to 51% in the year ago quarter. This decrease in sales and distribution expenses as a percentage of revenue is primarily due to product mix and a reduction in logistics costs as a percentage of revenue. Our operating loss of $3,700,000 in the first quarter of twenty twenty five narrowed from a loss of $5,300,000 in the year ago quarter, an improvement of approximately 30%, primarily driven by a reduction of fixed costs due to our cost cutting initiatives initiated in Q1 twenty twenty four.

Our first quarter twenty twenty five operating loss included 800,000.0 of non cash stock compensation expense, while our first quarter twenty twenty four operating loss included $1,700,000 of non cash stock compensation expense and $600,000 of restructuring costs. Our net loss for the first quarter of twenty twenty five of $3,900,000 improved by approximately 25% from a loss of $5,200,000 in the year ago quarter, primarily driven by a reduction in fixed costs. Our adjusted EBITDA loss of $2,500,000 as defined in our earnings release improved compared to an adjusted EBITDA loss of $2,600,000 in the first quarter of twenty twenty four, primarily due to reduction of fixed costs. So even with our 24% sales reduction year over year, our loss slightly improved due to our continual focus on profitability. Moving on to the balance sheet.

At 03/31/2025, we had cash of approximately $14,300,000 compared with $18,000,000 at 12/31/2024. While we do not expect to utilize cash for our cost reduction plan and general corporate purposes, cash preservation will remain top of mind as we go through the year. Borrowings on our credit facility went from $6,900,000 as of the end of the fourth quarter of twenty twenty four to $7,500,000 at the end of the first quarter of twenty twenty five. The credit facility balance is down from $9,400,000 in the year ago quarter end. At 03/31/2025, our inventory level was at $18,100,000 up from $13,700,000 at the end of the fourth quarter of twenty twenty four and down from $18,500,000 in the year ago quarter end.

Increased inventory levels in the first quarter primarily reflect buildup in advance of anticipated demand trends for our seasonal air quality products. Given the fast moving tariff developments and resulting uncertainty around pricing, supply chain timing and consumer response, we're withdrawing our previously issued 2025 outlook. While we remain confident in the direction of our business and the underlying improvements we've made, current volatility makes it impractical to provide reliable guidance at this time. You recall that on our fourth quarter call, we also provided a three year CAGR objective of at least 10% to 12% for 2025 to 2027. We are withdrawing that as well given the current volatility.

That said, we believe the actions we're taking now are setting the foundation for a return to growth and profitability beyond 2025 even if elevated tariffs remain in place. For the balance of the year, we are intentionally scaling back unit volume in Q2 and Q3 while implementing targeted price increases to better manage inventory and protect margins as best as possible. These actions along with our cost reduction initiatives are expected to moderate our adjusted EBITDA losses, especially over the next two quarters, while allowing us to maximize revenue generation during this period of transition. We anticipate a more significant margin impact in Q4 when the full effect of the tariffs is expected to take hold, although this will be tempered by the recent announcement of reductions in China tariffs. Importantly, based on our liquidity position, the cost saving measures now underway and our focus on preserving cash, I will reiterate Arty's comments that we believe we are well positioned to navigate the current environment without raising additional equity capital this year.

In closing, I want to acknowledge the tremendous progress our team has made in reshaping Acurion into a more focused, more agile and more resilient business. The actions we've taken while difficult are critical to positioning the company for sustainable growth and profitability. I especially want to thank those team members who are departing as part of our cost reduction efforts. Their dedication and contributions have helped lay the foundation for the next phase of Aturion's journey. We're deeply grateful for their impact and we wish each of them continued success.

Looking ahead, I'm confident that the steps we're taking today will strengthen our position for the future. With a streamlined operation, our continued discipline on margins and a strong balance sheet, we are well equipped to manage near term volatility and deliver long term value for our shareholders. With that, I'll turn it back to the operator for Q and A.