Thank you for standing by, and welcome to the Aterian, Inc. Q2 earnings report. [Operator Instructions]. I would now like to hand the call over to Ilya Grozovsky. Please go ahead.

Thank you. Thank you for joining us today to discuss Aterian's second quarter 2021 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 on this conference call and webcast, we refer you to the disclaimer regarding our forward-looking statements that is included in our second quarter 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 thank you, everyone, for joining us on the call this morning. Since a lot has happened in this quarter, I'd like to start by summarizing the key points that we'll be discussing today and then take you through more details around each one of them. This has been a challenging quarter for e-commerce with supply chain disruptions, inflation and an extreme shift in consumer behavior as the opening of stores provided an opportunity for consumers to finally leave their homes. Despite a difficult environment and significant increase in product variable costs, our sales grew on average 20% on a pro forma basis across all 14 brands compared to the second quarter of 2019. In July, the supply chain constraints turned into a full crisis as container rates increased 500% versus last year, effectively going from manageable to becoming a significant risk. Despite being in advanced stages of our M&A process with several targets, we did not move forward with the deals at hand as acquiring the targets will just increase our exposure to the astronomical cost of shipping, and the difficult comp year-on-year made the cost of the targets harder to justify. We're in the midst of adapting our supply chain and believe that through partnerships we have with several large logistic companies, we have a path forward to secure a sustainable average cost of container for our needs in the next 12 months. Leveraging these new shipping relationship requires operational changes that will take a few months to implement. We're withdrawing guidance until we execute on those changes and look forward to providing you outlook once we've completed our transition and can predictably model the cost, pricing and margins of our products. We believe we have the best-in-class platform to execute at scale on the…

Thanks, Yaniv, and good morning, everyone. Here are the financial performance details of our second quarter. For the second quarter of 2021, net revenue increased 14% to $68.3 million from $59.8 million in the year-ago quarter from an increase in net revenue from our acquisitions offset primarily by a decrease in organic business net revenue and reduction in PPE net revenue. The current quarter revenue of $68.3 million is comprised of $33.6 million of net revenue from our mergers and acquisitions; $34.6 million of our organic business, which is revenue from our built brands and acquired brands after 1 year purchase; and $0.1 million from our PaaS business. The year-ago quarter revenue of $59.8 million was comprised of $53.8 million of organic business; $5.7 million of wholesale, primarily PPE; and $0.3 million of PaaS. As a reminder, our first material acquisition happened in the third quarter of 2020. The decrease in our organic business of $19.2 million is related to a decrease in our sustained products of approximately $16 million to $28.1 million from $44.1 million excluding M&A revenue due to increased pricing of our products affected by shipageddon, which has led to reduced sales velocity; the reopening of retail changing consumer habits in the initial phase of COVID-19, the reopening; and impacts of products that sold well during the initial COVID-19 phase last year but did not have the same repeat performance due to demand and pricing, which represents $4.1 million of the $16 million decrease. Our organic business also saw a decrease in launch revenue of $1.3 million to $4.4 million from $5.7 million. We launched 19 products this quarter versus 8 in last year's quarter and a total of 40 versus 24 same year -- prior year period. Even though the rate of product launch has almost…

[Operator Instructions]. Our first question comes from Brian Nagel with Oppenheimer.

Appreciate all the detail on an obviously difficult quarter. I guess the first question -- Yaniv, just taking a step back. You talked here a lot about just the shipping challenges out there. You're -- Aterian is by no means the only consumer company discussing such challenges, but it seems, just looking at your results, that these challenges had a disproportionately negative impact upon your results. So the first question I have is, as you look at your business, what -- are there factors that make Aterian uniquely susceptible to the shipping crisis at this point? And then I know you discussed the negotiations with your shipping partners, but what other levers do you have to pull here in the nearer term just to offset these substantial rate increases?

Brian, thanks for the question. So let me break this down for you. First of all, one of the things that makes us, I'd say, a little more susceptible to -- than other consumer companies, as you know, our core business has a strategy around oversized goods. Oversized goods, especially in this quarter, as you think about dehumidifier appliances and other larger air appliances, which are the strongest selling products in this quarter and in Q3, are going to be relatively more impacted by the cost of containers as there's more containers involved in shipping them. And so both there and in the last mile, the increases in shipping costs have been very challenging, as you can tell, right? And so again, as you think of what makes us a little more susceptible, that's one thing, right? The second thing is, look, I mean, in general, we are, in our business model, in our vision, all about getting consumers the best product that money can buy, right? And with our perspective, we're always trying to build products that are high quality, high value. But as you know, right, our contribution margins are delicate, right, from that perspective. We're moving a lot of products. But if performance-wise costs move too much, right, there could be an impact. And so that's also somewhat affecting this year, right? You have to understand that these increase in costs force us to increase our prices, which obviously diminishes the sales, right? It's a domino effect. As you increase prices, you're going to sell less units. And very importantly, if you go too high in price, right, you might even start losing market share and get yourself into a place where it's going to be very hard to take it back -- to get it back,…

It does, Yaniv. That's very helpful. Then the follow-up question, I guess, is probably more for Arty. You talked -- Arty, you talked about in your comments just the renegotiation of the company with your lending partner. As you look at the business now, and understand you've withdrawn guidance, I mean how should we think about just the capital position of the company given the current challenges?

Brian, I hope you're doing well. So listen, I think for all intents and purposes, our first focus, as we said, is getting back to adjusted EBITDA profitability, right? That's number one. And that's what we're going to be focused on in the coming quarters, and that's the most important part of that question. I think as we said before, as you know, we've -- we need to raise capital as part of our M&A strategy, right? And depending on how -- what targets we come in, and especially we are being very focused on that and very concerned about that in the sense of we want to make sure we don't overpay for target, I think we'll always think about potentially raising money or doing something along that line to satisfy that strategy. That said, going back to the original part, profitability in adjusted EBIT, #1 focus. That's what we're going to be doing. And I think as we navigate through that, we'll be established well and from a position of strength and then conceptually look at either debt or capital markets or refinancing to fund our M&A strategy.

If I can add to that, just one on this comment here. It's interesting, Brian, how things obviously moved quite quickly this year, right, for us in the last few quarters. Earlier this year, I can share that we were -- obviously, when the stock price was a much higher number and more stable, we can share that we were in pretty advanced conversations with a few very renowned private equity firms that extended us term sheets up to $250 million, right, that would have really been awesome for us at that point in time. But despite being pretty advanced in due diligence with some of them and validation that was quite satisfying, I think the overall hit in the stock unfortunately made it impossible for us to pursue that. But again, as already said, right, at this point, capital raising would be for M&A only, right, at least from where we're seeing things today. And we just need to fix the profitability. That's the most important thing. And we're going to do that. And then once we're back on track, we look forward to continue our strategy on the M&A, and that's when we need to raise capital, right? So just to give you a little more color, obviously, on what has happened here in the last half year. So...

Our next question comes from Matt Koranda with ROTH Capital.

Just a couple of questions for me. So first of all, it sounded like the $68 million in revenue that we put up in 2Q is sort of the run rate on a go-forward basis for the foreseeable future or at least the next quarter or so. So do any of the new acquisitions like PPD or Squatty Potty added to that 3Q -- or the 2Q run rate? And then can you hit adjusted EBITDA profitability at this level of revenue? Or do we need a material improvement in sales before we get to that level?

Yaniv, I'll grab that one. I think yes, obviously, some of our -- going back to the first part. Some of our acquisitions have some seasonality to it. So I do think given the current visibility today, we think that's more or less the run rate, right? We'll have to see. Weather also plays a factor in Q3 and I believe, around Northeast has been really mild. So we'll have to think about that in the coming weeks, Matt. But I think I also said in my statement that if we had the normative shipping rates and normative last mile rates, we would have been profitable for the quarter, right? I think if we were doing CM at roughly overall 15%, and I think we've seen that last year, Q2 quarter, if we were something near that, we would have tripped into it. So I do think that if we can get the actions in place, we should be able, even on a lower revenue number like that, right, ballpark it, right, you should be able to get to profitability on an adjusted EBITDA basis.

Okay. Got it. And then just on the waiver that you've obtained. Can you just speak to the total anticipated share dilution from issuance of shares of High Trail and then from the restriking of warrants? And then how long does the waiver last? And then -- I guess let's start there and then continue.

Yes. Okay. Good question. I think the shares will be issued today based off the closing price and some multiple there. There'll be some dilution, but the majority of that dilution will go to pay down principal, so it's not like a penalty. It's going to reduce the amount of debt open, which will ultimately reduce interest rates -- I mean, interest payments, things like that. We'll be filing those final numbers either later tonight or tomorrow morning as an 8-K. The waivers is for a quarter, right? We waived our Q2 default. We are thinking about and working on forecast to ultimately present to the lender at some point in the future as part of our Q3 results to see if we can secure a broader waiver. I think we felt prudent just to do 1 quarter because of the lack of visibility and all the action items we're doing. We didn't want to put ourselves in a situation where perhaps the -- we wanted to put ourselves in a position of strength, I would say, right? Reality is, as we navigate over the coming months, as we said, we'll have more information as we announce our Q3 numbers, but we certainly felt that it was more prudent to do the narrow waiver today and do something broader as we approach Q3.

Okay. And the broader negotiation, I guess, would stem from potentially removing certain covenants like the minimum EBITDA covenants on a quarterly basis? I mean maybe you could speak to a little bit about the nature of the discussions.

Well, all remains to be seen, right? There's a lot of things we are working on to sort of help us get to a much more longer-term solution.

Our next question comes from Brian Kinstlinger with Alliance Global Partners.

You talked about the new relationships with several logistics companies that's going to help secure enough containers for 12 months at reduced costs from the spot rates. In terms of enough containers for 12 months, reconcile that with procuring inventory and estimated shipping cost, is it a fraction, maybe 75% of the capacity you would have hoped for maybe a quarter or 2 ago, maybe less? And then in terms of the spot rates, are we -- are you locked into 2Q average rates, a little worse than that, a little better than that? Maybe some context on those things would be great.

So can you just repeat the first question again, like in terms of -- can you repeat that question?

Yes. I'm curious. When you say you have enough containers for 12 months, at what capacity are those containers? Meaning do you only have 75% of the shipping capacity that maybe you would have hoped for at the beginning of the year or the beginning of the quarter? 12 months doesn't tell me a lot other than you have some inventory coming over. So I'm curious about capacity versus your original expectation or hopes. And then spot rates are the second question. Where are you based on the recent past given we've seen this historical rise?

Yes. So thank you. No, it's clear now. So again, when we say for the next 12 months, right, we are looking at currently -- based on current run rates and estimates that we have, which still need to be remodeled as we put in lower cost, right, but in general, we think that the number of containers that we're needing is around 1,600 containers in the next 12 months. And what we meant with having secured or having prices with some of these larger logistics players is that the entire 1,600 containers, based on agreements and negotiations that we have put in place from a pricing perspective, we believe that we have a pricing that is way more sustainable than what spot prices are, still probably more in line with what prices were recently, meaning like since the beginning of the year, but again, much, much better than what they are now, right, which I believe, as of this morning, the spot prices crossed the $20,000 mark, I believe, for the West Coast. But -- so that's on that, right? So getting a much more sustainable rate, closer to probably what we've seen beginning of the year, I'd say. And capacity-wise, enough in our belief to reach 1,600 containers that we need for the next 12 months. Sorry, what was the second question again?

No, I think you've got both of them. So my other -- I have 2 more questions. The first one is you talked about needing to make some changes in your business so you can consolidate for these new relationships. How long is that going to take? Is it a 3-month process, 6 months, much longer? Just take us through how long that might take.

Yes. It's going to take a few months. We've already started, of course, right? That's something that's been in the works. We believe that it's a matter of a few months. We're already seeing -- we've been taking advantage of some of these relationships and shipping containers at better rates. But to really be able to maximize those rates for our entire portfolio for the 12 months -- the next 12 months, there's an element of consolidation that has to happen in the port of origin. So we will basically need to use a company -- we're already working with a couple of potential partners there to consolidate containers across the several brands that we have and ship them in a certain way that would allow us to benefit from these rates. And again, we believe that it's a matter of a few months. We want to be prudent. I think that remains to be seen, but it's not going to take that long. I think it's a matter of a few months before we get there.

Great. Last question I had, in light of the comments on the mild weather, in light of the supply issues, do you still expect the typical seasonality? Notwithstanding acquisitions have changed a little bit, is 3Q, not talking about magnitude, of course, still your strongest quarter, followed by fourth quarter? Or is that really difficult to predict really at this point given what we've seen in August and July so far?

Arty, do you want to...

I can -- yes, yes. I think they're difficult to predict. I think -- yes, they're difficult to predict. I do think that historically, yes, Q3 has been our strongest. I think it's been a really difficult quarter, right, in the sense of a lot of factors that we mentioned in Q2 leading into Q3. What will be interesting to see is Q4 because, obviously, we have -- it will be our first year with a full quarter of Smash products and Healing Solutions. We have stronger Christmas season type product offering. So we'll see that. But for now, I would say -- like I said, it's probably more equal across, right? The Q2 number is probably more indicative, very similar for Q2 and Q4.

Our next question comes from Marvin Fong with BTIG.

Maybe a couple for me. Last quarter, we talked about potentially adjusting prices to kind of recapture the higher container cost. And it seems like this quarter, you kind of hit a barrier in terms of what consumers are willing to bear in terms of price increases. Maybe you could just discuss the pricing strategy going forward. Are you seeing price increases from other -- your competitors across your product lines? I know that you mentioned that your weighted average sales rankings are holding up, but maybe you could just revisit the topic of pricing. And second question, just -- you did discuss moving some production to other -- to Europe or Canada or Mexico. Maybe you could just discuss what that cost profile would look like versus your China cost base, maybe excluding shipping costs obviously. But maybe you could start right there.

Sure, yes. Thanks for the question. So as you mentioned, right, we had no choice but to increase prices to absorb the increased costs. But as I explained earlier, there is really a little bit of a science there that has to be very carefully thought, right? If you can think about it right. It's really depending a lot on also the inventory that your competitors already have at potentially lower cost basis and their ability to potentially maintain price. So there's a point in time, which could last months, right, where you could be to an advantage or disadvantage, I guess, to your competitors based on what prices have they paid to ship their product in, right? So in that transition period that we're in now, it's quite chaotic, right? You have some competitors who are able to maintain lower prices, but you kind of know that at some point in time, it's going to have to go up. But the question is: What do you do until then? Are you going to let them take more market share and potentially hurt the long-term success of your products, right? So in the longer term, right, I think everything will equalize. But in the short term, of course, everyone, I believe, is facing the same situation as us, right? Everyone has been planning potentially for stronger numbers but seeing cost increase, having to raise prices. And it's really kind of -- it's a game of chess a little bit that you have to play in every category, right, to make sure that you can maintain your position. And I think again, overall, I think that we've been able to do that. It's just the categories have also shrunk as I think consumers have seen inflation hitting their pocket everywhere, from their coffee to buying an appliance, right? And I think that plays a big factor. But we really did, I think, what's right for the longer term and then really kind of chased as much profitability as possible at the expense of long-term potential. And much, much difficult -- a more difficult challenge is trying to bring back market share. So that's how we can navigate it and manage pricing. And again, I believe that over time, there will be some equalization with an advantage to those who were able to negotiate hopefully better rates. And again, that's something that we're very focused on. Does that answer your question?

Yes, it did. And I was just curious. I mean you mentioned Prime Day, a little disappointing. Maybe you can just discuss, across your portfolio, which -- was it basically across the board that the organic sales growth was disappointing? Or were there certain categories that were more impacted than others? Potentially seasonal, but any commentary there would be great.

Yes. No, all product lines were impacted. Demand in e-commerce was lower. Again, as I said in my remarks before, I really see this quarter as like the exact -- kind of swing of the pendulum on the opposite way to the same quarter last year, right, where, basically, e-commerce was the only option. And specifically, Amazon was a huge beneficiary of it. It's clear that this quarter is the exact opposite quarter to that of last year, where consumers who have been in lockups are coming out of these lockups. And any opportunity they have to get out of their home, if it's going to a store that they haven't seen in a long time, right, is one that they'll pursue. And as I mentioned also in my remarks, right, there's evidence of that now and insight, right. As you can look at Google Trends and others, you'll see that more and more consumers this quarter have decided to, almost in an extreme way, shop in stores because that was available to them versus it was not in the last year, right? I think there's an effect there. I think that -- again, that TAM swing is going to find a middle ground. And the good news is, in the long term, right, it's going to be in the benefit of e-commerce, and that's what we're betting on. And this quarter is obviously not what we wanted to see, but to us in the long term, we're still continuing on our track. And what we're doing is -- I think the future from that perspective is just that it's a tough comp versus the same quarter last year for sure. And with the global crisis and inflation, it's a perfect storm that we had to face, right? So that's how we see it at this point. And again, as already mentioned and I said as well, the #1 priority is to cut those costs to get back to adjusted EBITDA positive and then from there, continue to drive forward, right? So that's how we think about it.

Our next question comes from Alexia Tsimikas with D.A. Davidson.

I have two. So first, and you touched on this a little, but I wanted to know if management believes the logistics inflationary pressure, especially when it comes to container costs, is transitory. Or could this last through 2022? And then second, for the e-commerce industry in general, to what does management attribute the notion that the changes in consumer behavior to use e-commerce more are only temporary? And why wasn't this change more sticky, so to speak?

Yes. Thanks for the questions. So absolutely, the supply chain crisis is transitory, right? It will pass. I quoted Maersk in my -- some comments from executives at Maersk in my prepared remarks, one that I think was at least -- one of the executives made a remark on their call that they expect, at some point, prices to go sharply down just as fast as they went sharply up. Right now, who -- when does that happen exactly? That's a very difficult question to answer. Again, as I said in my remarks previously, right, they're on the other side of this equation, right? They've had incredible growth in profits, obviously, through this crisis and benefiting enormously from it. Yet, themselves, right, are not that clear on when exactly does that subside. It's a very complex thing, I think, to figure out, right? There's so many elements involved here. Obviously, economies around the world have been injecting a lot of capital into their economies to drive those economies to move and for consumers to not spend their money on anything else but products. And of course, that's creating same demand for products around the world. Half the products before the crisis were shipped by airplanes that are typically filled with passengers. Now that the capacity of airplanes with passengers diminished, you have enormous capacity requirements on boats, one that the world is not prepared to handle, and thus, the result is what's happening. But at some point in time, things will equalize. Is it going to happen by the end of this year? Is it going to happen by Chinese New Year? Is it going to happen by the end of 2022? There's a lot -- I mean I've spent many, many, many hours reading many experts' opinion there, and…

Our next question comes from Brett Hendrickson with Nokomis Capital.

Hopefully, you can hear me okay. I'm fighting a cold or allergies or something. I just had a couple of questions about kind of what you can do to make changes here. You mentioned Maersk had said, "We don't have visibility beyond 3 or 4 months." And that's true. The only thing is, in the last 10 days or so, both Global Ship Lease and Danaos and those other companies that actually own the underlying ships and lease them to Maersk and other liner companies have said they've got charters rolling off in the coming months and they expect, in some cases, to raise the lease rate by 2x or 3x. And so obviously, Maersk and others are going to have to find a way to pass that on to cost of containers. So I worry this isn't transitory. I know Maersk is, I think, the second largest customer of Global Ship Lease that reported last week. So my question is -- these shipping companies have had a long 10 years of not being able to raise rates, putting CapEx into those ships, and they feel like they deserve this. I think the only thing to crush this, to get the price back down is for people to make changes in terms of where they're sourcing goods. So my question is how fast could you shift -- certain large bulky items, shift the sourcing to Canada or Mexico or wherever? And what would the give up be in terms of manufacturing costs? I'm just curious on that. And then I have a couple of others, too.

Yes. It's a great question. In general, right now, our opinion is for existing lines. We're not going to try to change where the products that are already in sustained are going to be manufactured, right? It's more for launching new products. With launching new products, there's 2 challenges. One, between the time you kind of like set your eyes on an idea and build a potential P&L for it and the time the product starts selling, it typically takes 6 to 8 months, right? And in that time, the volatility of pricing can create a situation where, by the time you're launching, the P&L of your product is very different than what you had planned, and that's very -- that's challenging, right, because all of a sudden, you have certain -- had a certain theory on how you can enter a certain category with certain features, price points and other kind of elements you counted on, but those are not there. And the second thing that's challenging is that especially when products are being launched in the beginning, continuous inventory replenishments are essential, right? Think of it this way, the retailer -- the online retailers' algorithms are constantly trying to figure out if this product is going to continue to perform well, right? And when -- not only do you have pricing that is all over the place, you also have basically a reliability of containers that's around 50% and manufacturer lead times that can vary dramatically as well because they're also impacted by the supply chain. So all these things together make it very tough to launch new products. But for existing products, at this point, we're just looking to reduce the price of shipping and continue to navigate this storm, right? It would be very challenging to try to move their manufacturing at this level. So that's how we think about it. As I said in my remarks previously, we're in conversations with manufacturers in different places, in Mexico, in Europe. And conversations are going well, but obviously, we need a few more months to see if we can really rely on those supply chains to launch a lot of products, right?

Okay. And then...

Yes, go ahead. Sorry, go ahead.

Well, I was just going to -- kind of related question. I was just going to ask -- you mentioned you're going to use third-party logistics companies more. Can you talk more about if you think there's some silver bullet or at least nearly something close to silver bullet in there for you? Because I'm just worried that everybody is in the same boat, no pun intended, where they're all -- everyone is looking to use a third-party customer -- a third-party provider who can help them around these container rates and that the situation is so bad that a third party -- I mean there's a shortage of containers, so I don't know what a third-party company can do for you. But help me understand. Maybe there's something they can do.

Yes. And I'm going to say this cautiously. Not that it's necessarily a silver bullet, but a lot of our hopes are actually relating to our relationship with Amazon itself. We are taking part of Amazon Global Logistics -- a new program of Amazon Global Logistics that we're one of the first -- one of the earliest companies that is part of it, where Amazon is looking to help their sellers in a way, right, through this. It was created in general, right? But they've been very helpful in the discussion so far. Again, I'm cautiously optimistic about it. The one challenge is it's also a new program for them, right? And so I think it's -- the conversations are really promising, and we're already leveraging some of these costs through that program, but there's still more work to be done there. So -- but that's, in my opinion, where I think we might have a strong chance of really kind of like solving this through just their ambition to help their ecosystem of third-party sellers to navigate through this.

There are no further questions. I'd like to turn the call back over to Ilya Grozovsky for closing remarks.

Thank you. In terms of the upcoming calendar, Aterian management will be participating in the D.A. Davidson 20th Annual Software and Internet Conference on September 9. Thank you for joining us on the call today. We look forward to speaking with you on future calls. This ends our call.

This concludes the program. You may now disconnect. Everyone, have a great day.