Thank you for standing by, and welcome to the Aterian, Inc. Q2 earnings report. 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. A lot has happened in this quarter, so I’d like to start by summarizing the key points we will discuss today and then provide more details on each one. This quarter has been challenging for e-commerce due to supply chain disruptions, inflation, and significant shifts in consumer behavior as stores reopened, allowing consumers to leave their homes. Despite these difficulties and a notable rise in product variable costs, our sales increased by an average of 20% on a pro forma basis across all 14 brands compared to the second quarter of 2019. In July, supply chain constraints escalated into a full-blown crisis, with container rates surging 500% compared to last year, shifting from manageable to a significant risk. Although we were in the advanced stages of our M&A process with several targets, we decided not to proceed with the deals as acquiring these targets would increase our exposure to the high shipping costs, making them harder to justify given the tough year-on-year comparisons. We are currently working to adapt our supply chain and believe that through our partnerships with several large logistics companies, we can secure a sustainable average container cost for our needs over the next 12 months. Implementing these new shipping relationships will require operational changes that may take a few months. We are withdrawing guidance until those changes are executed and we look forward to providing an updated outlook once we can predictably model costs, pricing, and margins for our products. We remain confident that our platform is well-equipped to execute at scale on the ambitious goal of becoming the leading e-commerce products company, despite temporary global shipping challenges. These issues will ultimately lead us to take the right steps to emerge more resilient and better positioned to capitalize on the expected growth of the global e-commerce market. Now, I’d like to delve deeper into how the second quarter unfolded, the factors contributing to our challenges, and how we are working to resolve them quickly. This quarter reminded us that COVID-19 continues to disrupt the global economy and that e-commerce is not insulated from these disturbances. The two main factors affecting our business in Q2 were the shift in consumer shopping habits as the economy reopened and international shipping supply chain congestion, which became a global crisis of unprecedented scale. We firmly believe these challenges are temporary and surmountable. I will now elaborate on how each of these factors has manifested and the steps we are taking to tackle them. Q2 of 2021 followed one year after COVID-19's impact on brick-and-mortar retail led to a surge in e-commerce demand due to store closures. Starting in March 2021, U.S. consumers experienced significant easing of social distancing measures, the reopening of retail stores, and the lifting of travel restrictions. The psychological impact of returning to normal was unpredictable, and many large companies, including Amazon, reported difficulties this quarter due to challenges in assessing the effects of the economic reopening on e-commerce sales. Fortunately, we have not lost considerable market share in our top categories, but those categories have contracted compared to the previous year. Metrics for our products across all 14 brands, which generated 80% of Q2's revenue, indicate they maintained their competitiveness within the highest-selling products based on units sold per category. Most categories have thousands of competing products. The drop in demand for some of our categories compared to the previous year is largely attributed to consumers' eagerness to return to physical stores after being confined at home for over a year. This is also seen in the increased demand for products in categories outside our offering, like travel and fashion, as consumers directed their limited spending on experiences and social interactions rather than durable goods. We expected that with summer's arrival, demand for essential appliances like dehumidifiers and air conditioners would remain strong. June showed robust sales in this category, but they still fell short of our expectations as consumers preferred to visit stores. For instance, Google searches for Amazon dehumidifiers in June were down 30% year-over-year, while searches for dehumidifiers available at nearby stores reached an all-time high, up over 100% year-on-year. We anticipated a sales boost in June due to Amazon moving Prime Day from Q3 to Q2, but consumer engagement with the event and the overall demand we hoped for did not materialize. Although we are disappointed with the quarter's sales, we are convinced that the drastic consumer behavior shift is a fleeting and extreme reaction to the pandemic. We align with expert predictions, including eMarketer’s recent update, which anticipates e-commerce adoption to grow at a CAGR of over 15% through 2025. Despite not achieving the expected sales this quarter, we implemented several strategies to lessen the revenue impact by accelerating our channel expansion and moving forward with our M&A strategy. We secured signed letters of intent with targets amounting to combined revenues of $92 million and $19 million in EBITDA. Anticipating completion of due diligence, including potentially one more acquisition this quarter, we raised capital in early June. Unfortunately, in July, the supply chain constraints, which we estimate led to a $17.5 million revenue loss over the last three quarters, took a sudden negative turn. Ocean freight prices escalated from high to historic levels, as reported by Drewry, a UK-based maritime research firm. Most of our M&A targets are facing similar shipping cost pressures and the negative impacts from reduced consumer demand after a record year in 2020, prompting us to pause any transaction that could lead to overpaying or disrupt our core business during this supply chain crisis. To illustrate the dramatic increase in rates, the Freightos index for container shipping from China to the West Coast jumped from an average of $5,560 in the week of June 14 to $13,666 by the week of July 30. The June rates were already up nearly 300% compared to the same week in 2020, when the average was $1,638. By July 30, the rate increase represented a staggering 500% rise year-over-year. The maximum costs reported by Freightos during this period ranged from $15,000 to $25,000. Our costs for containers during this time fell between average and maximum rates quoted. We project needing around 1,600 containers in the next year. With average spot rate increases estimated at around $10,000 per container compared to our previous conservative models, everyone on this call can appreciate how this situation affects our forecasts moving forward. Other consumer brands and retailers have indicated they are taking drastic steps in response to this perfect storm of inflation, inventory shortages, and unprecedented shipping costs. Some large companies have taken major measures, including Home Depot chartering its own container ship. While we recognize the seriousness of this crisis, at Aterian, we are accustomed to managing in volatile environments. Since becoming public in 2019, we have faced various crises related to our business model and have demonstrated adaptability and resilience. We navigated challenges during the trade war and adapted to the complex realities posed by the pandemic in 2020, which included fluctuating demand and supply metrics. We are committed to remaining agile and rapidly adapting to the new environment of 2021 and have initiated several strategic initiatives that we believe will strengthen us in the long term. The crucial step we are taking is adapting our supply chain to reduce the exorbitant shipping container costs. I am pleased to report that we have reached an agreement with three major global logistics firms regarding container capacity that meets our needs at sustainable rates. This agreement involves volume commitments on our part but also necessitates changes in how we prepare containers for shipping from China. Given the variety of products and brands we manage, we will need to consolidate goods more efficiently at the port of origin, and we are currently evaluating several partners for consolidation services. The adjustments needed to meet our new shipping agreement will require a few months for full implementation. As we continue to adapt a vital part of our business to meet this new reality, we have withdrawn our guidance to provide a new outlook that will reflect the impact of shipping cost reductions and completion of operational changes. We do not take this decision lightly. For those questioning our approach, consider this: last Friday, Maersk, one of the largest ocean freight carriers globally, reported outstanding second-quarter earnings, showing a rise of over 300% in net earnings and an 88% improvement in net margins. When analysts inquired about their outlook for 2022, their CFO said they would not speculate beyond the next 3 to 4 months, highlighting the uncertainty we face in this crisis. Navigating these uncharted waters, our priority is to resolve this crisis and return to sustainable adjusted EBITDA profitability. Given the shortfall in our adjusted EBITDA this past quarter, we needed to seek a waiver from our lender High Trail, which Arty will elaborate on. I want to thank High Trail for their support during these challenging weeks as they work with us to understand our situation and our plans to overcome it. I also want to express my gratitude to their team for their trust. To our shareholders, I reiterate that we are committed to exploring every avenue to get back on course and overcome this temporary challenge. The changes we are making to our supply chain mean that we will need to pause launching new products manufactured in Asia. Recent product launches have underperformed because product costs have risen significantly. On average, our last 70 launched products have seen a 25% increase in actual costs compared to what was originally planned, forcing us to raise prices and leaving many under pressure compared to our competitive price targets. This unforeseen cost increase has led to a success rate below 30% for these SKUs, and in some cases, we have had to discontinue certain product lines. For instance, the transportation costs for our chest freezers have now exceeded the manufacturing costs. Given these challenges and manufacturers prioritizing capacity for established clients, our confidence in launching new products and maintaining uninterrupted inventory levels under current conditions is low. Therefore, we are accelerating efforts to source new products from manufacturers in Europe, Canada, and Mexico, and we are optimistic about initial discussions. We are also enthusiastic about potential M&A opportunities, and once supply chains stabilize, we believe we can secure strategic deals that enhance Aterian's value and leverage our platform. Moving forward, our focus will be on channel and international expansion. We have added 97 new products to Walmart.com this year, utilizing Walmart’s fulfillment services. Finally, we plan to invest more resources into our previous initiatives. Although our Platform as a Service remains in early development, we are seeing promising results in offering it as a comprehensive solution to brands. Notably, a brand connected to one of the largest appliance manufacturers and another linked to a significant furniture company have shown satisfaction with our platform and increased the number of SKUs we manage for them. Since the start of the year, our AIMEE platform has successfully shipped over 7,000 units from 11 partner warehouses, conducted 11,000 automated product performance checks, and generated daily machine learning-based forecasts for our Platform-as-a-Service customers. Our technology and last-mile fulfillment strategies have improved unit economics for these customers by about 10%, including our fees, compared to other solutions. Analyzing market potential through our AIMEE research model, we have identified brands with a combined annual GMV of $45 billion that would benefit greatly from our Platform as a Service offering. To conclude this call, while Aterian is still a young company, we are founded on an adaptive, patient, and resilient culture. We look forward to navigating this global crisis and working diligently to restore the company's market capitalization to a stable level that will enable us to enhance our capital structure and continue driving growth through building, buying, and partnering with brands. With that, I will hand it over to Arty to discuss our financial performance in detail.

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 same quarter last year, driven by revenue from our acquisitions, despite a decrease in organic business net revenue and a reduction in PPE net revenue. The current quarter's revenue of $68.3 million includes $33.6 million from mergers and acquisitions, $34.6 million from our organic business, and $0.1 million from our PaaS business. Last year’s quarter revenue of $59.8 million comprised $53.8 million from organic business, $5.7 million from wholesale, mainly PPE, and $0.3 million from PaaS. Our first major acquisition took place in the third quarter of 2020. The $19.2 million decline in organic business stemmed from a $16 million drop in sustained products, which fell from $44.1 million to $28.1 million, excluding M&A revenue, because of increased product pricing due to shipping issues, impacting sales velocity; changes in consumer habits with retail reopening post-COVID-19; and reduced demand for products that performed well last year. Our organic business also experienced a $1.3 million decrease in launch revenue. We launched 19 products this quarter compared to eight last year, totaling 40 versus 24 in the previous year. Despite nearly doubling our product launches, market conditions and necessary price increases due to supply chain issues have led to diminished demand for recently introduced products. We have decided to pause product launches temporarily until the supply chain stabilizes. Our M&A revenue of $33.6 million aligns with expectations for Smash, PPD, and Squatty Potty, aside from seasonal effects and the timing of acquisition closings. Healing Solutions fell slightly short of our expectations due to supply chain challenges and the transition from seller manufacturing to new third-party vendors. However, we remain pleased with the Healing Solutions acquisition and the strength of its brand and products. We believe the initial purchase price remains within an acceptable range. We face ongoing struggles with Truweo and are disappointed with its results so far. As we continue to expand into new markets, we see potential growth for the product but remain cautious at this time. Additionally, we experienced inventory shortages this quarter, impacting our revenue by around $5.6 million compared to $4 million in the same quarter last year. Overall, our gross margin for the second quarter improved to 48.1% from 46.2% year-over-year, but decreased from 54.1% in Q1 2021. The sequential decrease in gross margin is mainly due to product mix, as Q2 and Q3 generally feature our larger goods, which carry lower margins, alongside the initial impacts from the supply chain crisis. Increased shipping costs have negatively influenced our gross margin by approximately 2.1% this quarter. We also recorded a $2.5 million charge related to slow-moving products due to reduced sales forecasts. Our gross margin improvement compared to last year stems from a favorable product mix thanks to our acquired brands. For Q2 2021, our contribution margin is 8.2%, excluding non-cash inventory step-up charges, which reflects a decrease from last year’s 16.8%. Sales and distribution costs have risen due to the global supply chain crisis, increasing our variable expenses to 43% of net revenue for the three months ending June 30, 2021, compared to 29.4% the same time last year. We expect these challenges to persist through 2021. Q2 2021 saw our sustained products contribution margin fall to 12.6% from 19.8% in Q2 2020. Despite the factors mentioned, we anticipate ongoing pressure on contribution margins throughout the year attributed to global shipping costs and rising expenses for last-mile delivery. Adjusted EBITDA for Q2 2021 declined to a loss of $3.9 million from a profit of $3.4 million this time last year. Our reported operating income primarily arose from a change in the fair value of contingent earn-out liabilities, totaling $23.3 million, linked to our share price decline from March to June 2021. Our quarterly net loss was affected by changes in the fair value of warrants totaling $4.4 million and debt extinguishment of $29.8 million related to refinancing finalized in April. As of June 30, 2021, our cash balance was $61.9 million, up from $34.9 million at the end of March 2021. This increase stems from proceeds of $25 million from warrant exercises, $50 million from debt refinancing, and $36 million from equity financing, offset by $48 million used for acquisitions, $19 million for working capital to build up summer inventory, and cash losses. The ongoing COVID-19 pandemic continues to create uncertainty around consumer demand due to price inflation from raw materials, import tariffs, and delivery costs. The recent reopening of much of the country has altered consumer purchasing behaviors, potentially reducing demand for our products. Consequently, this has caused the company to miss its adjusted EBITDA covenant for the three months ending June 30, 2021, with our lender. We have secured a waiver for this default. Due to global macro supply chain challenges, we have also lowered our forecast for the next 12 months. We are engaged in efforts to enhance our financial outlook amidst this global crisis. However, we cannot guarantee that these measures, along with our operational forecast, will keep us compliant with our financial covenants; hence, we've classified our term loan as short-term under accounting rules. We are maintaining active discussions with our lender and will provide updates at our Q3 2021 results release. The global shipping crisis has significantly impacted our business in the short term. We believe this situation is temporary. Excluding ongoing action items and recognizing the challenges in forecasting in this environment, we think the current quarter's revenue reflects what lies ahead. Thus, we believe it's prudent to withdraw our 2021 revenue and adjusted EBITDA guidance due to lack of visibility and forecasting ability. We intend to reinstate guidance once visibility improves. In conclusion, our organic business has decreased quarter-over-quarter but is facing tough comparisons due to COVID-19 and an especially challenging environment. Nevertheless, our organic products remain top sellers on Amazon, and we possess a robust organic brand and product portfolio. Overall, our acquired brands and products have shown solid performance, and we remain confident in their future success. We attribute the current pressure on profitability to the COVID-19 pandemic and related global shipping issues. The ongoing initiatives we discussed are crucial to help us navigate this tough landscape and steer us back to profitability. Assuming we maintain 2020's normative contribution margin rates, which we believe we can in the future, along with our customary adjustments for adjusted EBITDA, we feel we would have achieved profitability for Q2 2021. Even with the influence of the COVID-19 pandemic and global shipping crisis, we have great confidence in our products, both organic and acquired, our technology, logistics networks, and our talented workforce worldwide, as well as the business that Aterian has established. We believe our team will overcome these challenges and maintain our leadership position in the industry.

Our first question comes from Brian Nagel with Oppenheimer.

I appreciate the detailed insights about what has clearly been a challenging quarter. My first question is for Yaniv. You've mentioned the shipping challenges extensively. While Aterian is not the only consumer company facing these issues, your results suggest that these challenges have had a particularly significant negative effect on your performance. What factors make Aterian particularly vulnerable to the current shipping crisis? Additionally, while you mentioned negotiations with your shipping partners, what other strategies do you have available in the short term to mitigate these substantial rate increases?

Brian, thank you for your question. Let me explain this for you. One factor that makes us more susceptible compared to other consumer companies is our core business strategy focused on oversized goods. In this quarter, products like dehumidifiers and larger air appliances, which are our best sellers, have been more affected by container shipping costs due to the larger number of containers required. Both shipping and last-mile delivery costs have been quite challenging. Additionally, our business model is centered around providing consumers with high-quality, high-value products. However, our contribution margins are sensitive. We are moving a lot of products, but if costs rise too much, it could adversely affect us. These cost increases force us to raise prices, which can lead to lower sales. This creates a domino effect: as prices go up, we sell fewer units, and if prices rise too high, we risk losing market share, making recovery difficult. We’ve navigated these challenges by optimizing our pricing to maintain market share without causing significant long-term damage to our core lines, which we believe we have managed to do well. Regarding your other question, the primary thing we can do is to reduce shipping costs, which have been particularly problematic in recent months. We believe this situation is temporary, but we are focused on how to make it temporary for us. As mentioned in our remarks and press release, we have established relationships with large companies that can help us secure sustainable container costs moving forward. However, we must adapt our supply chain, which will take some additional time. This is our top priority right now. I hope that answers your question, Brian.

It does, Yaniv. That's very helpful. The follow-up question is probably more for Arty. Arty, you mentioned in your comments the renegotiation with your lending partner. Given the current challenges and the fact that you've withdrawn guidance, how should we view the company's capital position?

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 focusing 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 need to raise capital as part of our M&A strategy, right? And depending on 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 the 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 EBITDA is our number one focus. That's what we're going to be doing. And I think as we navigate through that, we'll be established well from a position of strength and then conceptually look at either debt or capital markets or refinancing to fund our M&A strategy.

I'll add to that by noting how quickly things have changed for us this year over the last few quarters. Earlier this year, when our stock price was significantly higher and more stable, we were in advanced discussions with several prominent private equity firms who had offered us term sheets up to $250 million, which would have been very beneficial at the time. However, despite being well into the due diligence process with some of them and receiving positive validation, the decline in our stock price made it impossible for us to move forward. As mentioned, raising capital at this point would be solely for M&A based on our current outlook. Our priority now is to improve profitability, which is essential, and we are committed to achieving that. Once we are back on track, we will be eager to continue our M&A strategy and seek to raise capital then. This provides additional context on what has transpired in the last six months.

Our next question comes from Matt Koranda with ROTH Capital.

I have a couple of questions. First, it seems that the $68 million in revenue we reported in the second quarter is the expected run rate for the foreseeable future, at least for the next quarter. Do any of the new acquisitions, like PPD or Squatty Potty, contribute to that figure in the third quarter or maintain the second quarter run rate? Also, can we achieve adjusted EBITDA profitability at this level of revenue, or do we need a significant increase in sales to reach that point?

I believe some of our acquisitions exhibit seasonality. Given our current visibility, we think that $68 million in revenue is roughly our run rate going forward. We also need to take weather into account, particularly since the Northeast has been quite mild. As I mentioned earlier, if we had standard shipping and last-mile rates, we would have reported a profit for the quarter. If we were working at around 15% overall, similar to last year's second quarter, we could have reached profitability. Therefore, if we implement the necessary actions, we should be able to achieve profitability on an adjusted EBITDA basis, even at a lower revenue level.

Okay. Can you discuss the total expected share dilution from the issuance of shares of High Trail and the restriking of warrants? Also, how long is the waiver effective? Let's start with that and continue.

Yes, that's a good question. I believe the shares will be issued today based on the closing price and a certain multiple. There will be some dilution, but most of it will be used to pay down principal, so it's not exactly a penalty. This will reduce our outstanding debt, which should help lower interest payments. We will file the final numbers either later tonight or tomorrow morning as an 8-K. The waiver lasts for one quarter; we have waived our Q2 default. We are currently working on forecasts to present to the lender in the future as part of our Q3 results, with the aim of securing a broader waiver. We thought it was wise to do a one-quarter waiver due to the limited visibility and the various actions we are taking. We wanted to position ourselves effectively. As we move through the next few months and prepare to announce our Q3 results, we will have more information, but we felt it was more sensible to opt for a narrow waiver for now and consider a broader one as we get closer to 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 are 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 a quarter or two ago, maybe less? And then in terms of the spot rates, 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.

Yes, could you please repeat the first question regarding the containers and shipping costs?

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 you might 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, thank you. It's clear now. When we say for the next 12 months, we are currently looking at around 1,600 containers based on our existing run rates and estimates, which we will need to adjust as we implement lower costs. However, we believe that the agreements we have with larger logistics providers will allow us to secure the entire 1,600 containers at prices that are much more sustainable than current spot prices. These prices are likely comparable to what we experienced earlier this year but significantly better than the current levels. As of this morning, I believe spot prices for the West Coast exceeded $20,000. Overall, we expect to obtain a more sustainable rate similar to what we observed at the beginning of the year, and we are confident in our ability to meet the demand for 1,600 containers over the next 12 months. Sorry, what was the second question again?

I have two more questions. First, you mentioned that you need to make some changes in your business to consolidate for these new relationships. How long will that take? Is it a three-month process, six months, or much longer? Please walk us through the timeline.

Yes. It's going to take a few months. We've already started, and that's been in the works. We believe it will take a few months. We're already taking advantage of some of these relationships and shipping containers at better rates. However, to fully maximize those rates for our entire portfolio over the next year, we need to consolidate at the port of origin. We are currently collaborating with potential partners to consolidate containers across our various brands and ship them in a way that allows us to benefit from these rates. We believe it will take a few months. We want to be cautious, but we expect it won't take too long. We think it will be a matter of a few months before we achieve this.

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 Q3, 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 think they are difficult to predict. Historically, Q3 has been our strongest quarter, but this year has presented many challenges that we discussed in Q2 leading into Q3. It will be interesting to see how Q4 plays out since it will be our first year with a full quarter of Smash products and Healing Solutions, along with stronger offerings for the Christmas season. For now, I would say the numbers are likely more balanced, with Q2 serving as a good indicator that is quite similar to what we expect for Q4.

Our next question comes from Marvin Fong with BTIG.

Maybe I have a couple of questions. Last quarter, we discussed the possibility of adjusting prices to recover higher container costs. It appears that this quarter, you encountered a limit in what consumers are willing to accept for price increases. Could you elaborate on the pricing strategy going forward? Are you observing price hikes from your competitors across your product lines? I know you mentioned that your weighted average sales rankings are stable, but could you revisit the topic of pricing? Also, you talked about relocating some production to Europe, Canada, or Mexico. Can you discuss what the cost profile might be compared to your costs in China, excluding shipping costs? Perhaps you could start with that.

Thank you for the question. As you noted, we had to raise prices to cover the increased costs. However, this situation requires careful consideration, as it heavily depends on the inventory levels of our competitors who may have lower cost bases and their capacity to maintain their pricing. There's a period, which could extend for months, where one could either have an advantage or disadvantage in relation to competitors based on their shipping costs. Currently, the market is quite turbulent. Some competitors are managing to keep their prices low, but it's evident that prices will inevitably rise. The question becomes how to respond during this interim. Do we allow them to capture more market share, potentially jeopardizing the long-term success of our products? In the long run, I believe that everything will stabilize, but in the short term, many companies are facing challenges similar to ours. Everyone was anticipating stronger performance yet is dealing with cost increases and the need to adjust prices. It's somewhat of a strategic game across all categories to maintain our position. Overall, I feel we have successfully navigated this, though we've noticed a shrinkage in categories as consumers feel the impact of inflation across various sectors, from coffee to appliances. We've made decisions focused on long-term strategy while trying to maximize profitability in the short term, even at the cost of long-term potential. The more challenging task ahead will be regaining market share. We believe that with time, there will be an equalization, benefitting those who secured better negotiation rates, which we are prioritizing. Does that address your question?

Yes, it did. I was just curious about Prime Day, which seemed a little disappointing. Could you discuss whether the organic sales growth was generally disappointing across your portfolio, or were some categories more affected than others? It might be seasonal, so any insights would be appreciated.

Yes, all product lines were affected. Demand in e-commerce decreased. I see this quarter as a complete reversal compared to the same quarter last year, when e-commerce was the sole option and Amazon significantly benefited. This quarter marks a stark contrast, as consumers emerging from lockdowns are eager to visit stores they haven't seen in a while. There's evidence, based on Google Trends, that more consumers are choosing to shop in stores this quarter due to the availability of that option, which was not present last year. I believe this shift demonstrates a transition toward a balance. While this quarter didn't meet our expectations, we maintain a long-term vision that favors e-commerce. We are still on track despite the challenges posed by the global crisis and inflation, which created a difficult comparison with last year's quarter. Our primary focus remains on reducing costs to achieve adjusted EBITDA positivity and then to progress from there. That's our perspective at this time.

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 stickier, so to speak?

Thank you for the questions. The supply chain crisis is indeed temporary and will eventually resolve. I referenced some comments made by executives at Maersk earlier, where one mentioned they anticipate that prices will drop just as rapidly as they increased. However, pinpointing when exactly this will occur is quite challenging. As I mentioned earlier, the executives at Maersk have seen significant profit growth during this period and are still not clear on when the situation will stabilize. There are many factors at play, especially with global economies injecting capital to stimulate growth and drive consumer spending primarily on products, which has created high demand. Before the crisis, half of the products were shipped via passenger planes, but with reduced passenger capacity, there is now a huge demand for shipping by boats, which the world is currently struggling to manage. Nevertheless, we expect things will eventually balance out. The timing for that is uncertain – will it be by the end of this year, by Chinese New Year, or by the end of 2022? After extensive research on expert opinions, I don’t believe anyone has a definitive answer. Our focus remains on being agile, cutting costs, and finding solutions to navigate this situation. Regarding the sustained growth of e-commerce, I believe that its adoption will continue to increase in the long term. Many experts share this view. This quarter has been particularly challenging because it's the opposite of the same quarter last year when e-commerce was the only option available. Now, many consumers who previously relied on online shopping may prefer to visit stores in person after a long time. It’s still difficult to assess the impact fully. However, we believe the fundamentals of e-commerce usage still hold strong, despite being influenced by the reopening of physical stores and social activities. Ultimately, I think the trend toward increased e-commerce adoption will persist in the coming years.

Our next question comes from Brett Hendrickson with Nokomis Capital.

Hopefully, you can hear me. I'm dealing with a cold or allergies. I have a couple of questions regarding potential changes. You mentioned that Maersk stated they don't have visibility beyond 3 or 4 months, which is accurate. However, in the last 10 days, both Global Ship Lease and Danaos, along with other companies that own and lease ships to Maersk and other liner companies, have indicated they have charters expiring soon and expect to increase lease rates by 2 to 3 times. Consequently, Maersk and others will need to find a way to pass these costs onto container prices. This makes me concerned that the situation may not be temporary. I believe Maersk is the second largest customer of Global Ship Lease, which reported last week. My question is that these shipping companies have faced a decade of stagnated rates while investing in their vessels, and they feel it's time for an adjustment. The only way to reduce these prices is for companies to reassess their sourcing strategies. How quickly could you shift the sourcing of large bulky items to Canada, Mexico, or elsewhere? What would the implications be regarding manufacturing costs? I'm just interested in that. I also have a couple of additional questions.

Yes, that's a great question. Currently, our view is that for existing product lines, we won’t be changing the manufacturing locations. Our focus is more on launching new products, which comes with two challenges. First, there is usually a gap of 6 to 8 months from the time we develop an idea and create a potential profit and loss statement until the product actually starts selling. During that period, pricing volatility can lead to significant differences between the initial P&L and what we experience when launching, which can be quite difficult. Our assumptions about entering a market with specific features, pricing, and other critical factors may not hold true. Second, consistency in inventory replenishments is crucial during product launches. Retailers’ online algorithms constantly assess whether a product will continue to perform well. With fluctuating prices and about a 50% reliability rate for shipping containers, along with varying manufacturer lead times due to supply chain issues, these factors complicate new product launches. For existing products, we aim to lower shipping costs and navigate the current challenges without relocating manufacturing at this stage. We are engaging with manufacturers in locations such as Mexico and Europe, and while discussions are progressing positively, we need more time to ensure we can depend on these supply chains for a successful product launch.

Okay. And then...

Yes, go ahead. Sorry, go ahead.

I was just going to ask about your mention of using third-party logistics companies more. Can you elaborate on whether you believe there’s something truly effective about that approach? I'm concerned that many companies are in the same situation, all searching for a third-party provider to assist with container rates. The circumstances are dire, with a container shortage, so I'm not sure what a third-party company could offer. Could you clarify this for me?

Yes, and I want to express this carefully. While it may not be a definitive solution, much of our optimism is connected to our relationship with Amazon. We are participating in a new program called Amazon Global Logistics, and we are among the first companies to join. This initiative is aimed at assisting their sellers. Amazon has been quite supportive in our discussions thus far, and I remain cautiously optimistic about the potential. The challenge is that this program is also new for them. Nevertheless, our conversations hold promise, and we are already utilizing some of the benefits from this program, although there is still more work ahead. In my view, this partnership presents a strong opportunity for us to address our challenges, given Amazon's desire to support their network of third-party sellers in navigating these issues.

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.