Good afternoon and welcome to the Aterian Inc. Second Quarter 2022 Earnings Report Conference Call. All participants will be in listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please note this event is being recorded. I would now like to turn the conference over to Ilya Grozovsky, Vice President of Investor Relations and Corporate Development. You may now go ahead.

Thank you for joining us today to discuss Aterian's second quarter 2022 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 these 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 forward-looking statements that is included in our second quarter earnings release as well as our filings on 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 today. On the call today, I'll go over the following topics. I'll start with a quick introduction to Aterian for those who are new to our story. I'll then review key takeaways from the second quarter of this year. I will then discuss our challenges and how we're dealing with them, including the economy and macro-level pressure from supply chain disruptions and inflation. I'll then summarize how we see the long-term prospects for Aterian. For those who are new to the story, here's what you need to know about our company. Aterian is part of a new breed of technology-enabled consumer product companies. We focus on building, acquiring, and partnering with e-commerce brands online. Aterian owns and operates 14 consumer product brands, selling products across various categories on channels such as Amazon, Walmart, Shopify, and eBay. To allow us to scale, we've invested in building our own proprietary software platform called AIMEE. AIMEE enables our team to manage their business more efficiently by injecting technology into processes that would otherwise have to be executed manually and would require hiring an unscalable and unsustainable workforce. Through its ability to analyze vast amounts of data and automate daily recurring tasks, AIMEE allows our team to find new product opportunities we can launch under our brands, manage these products at scale effectively across various channels, automate certain marketing and fulfillment tasks, and much more. Our goal in the long term is to become one of the most efficient consumer product companies in the world, expanding our footprint globally while continuing to invest in technology and agile supply chains to drive scaling profitably. Moving now to our key takeaways from the second quarter, I'll start with a quick summary of the main points and then discuss them in more detail. The economy and retail, in particular, continues to be disrupted by the aftermath of the pandemic and the supply chain issues that ensued, including inflation and weak consumer demand. As I mentioned in the previous earnings call, although these disruptions are hurting our business in the short term, we are already seeing encouraging signs of supply chain normalization. We continue to be focused on protecting market share for our products as we are taking steps towards preparing to resume growth in 2023. Our efforts are focused on three fronts: normalizing our inventory levels and accelerating the sale of goods that were previously shipped to our warehouse that has been subjected to high shipping costs. It's important that we do so to improve our margins next year as we reorder those goods at a lower cost basis due to declining shipping costs. Implementing improvements to our AIMEE platform and internal processes based on learnings from our past M&A transactions so that we can restart and execute our critical acquisition strategy faster and more efficiently. Filtering our strategic collaboration with publishers and media partners to gain a long-term advantage on marketplaces, as constant commerce continues to scale rapidly and play a critical role in online retail ecosystems. With those important points in mind, I'd like to now discuss each of them in further detail. Given that several retailers have already published their Q2 results, a clearer picture of the challenging effects of the pandemic-induced supply chain disruptions are now available. Large retail platforms such as Walmart, Amazon, and Target are dealing with expensive and excessive amounts of inventory, as well as weaker overall consumer demand. Consumers are seeing their buying power diminished by inflation everywhere from the price of gas to everyday essentials. The combination is, of course, difficult for any business regardless of scale. Aterian is affected by the same forces, and it's taking several steps to not only navigate those challenges but in the long term hopefully benefit from them. We continue to believe that cooling demand for products will eventually bring normalization in shipping costs and reliability from international carriers. As some of the listeners on the call might already know, encouraging data is already pointing in that direction. As of July 28, the jewelry spot rate tracking the cost of shipping from Shanghai to LA is at $7,199 per 40-foot container. This price represents a 31% year-on-year reduction in cost. A very encouraging sign indeed, and we hope that trend will continue into 2023. We are still far from the pre-pandemic shipping costs, which in 2019 were approximately $4,000 per 40-foot container for the same route. But I think it's exciting to see signs pointing in the right direction. While the decline in shipping costs is encouraging, it's important to remember that in retail, the effects of such changes can take a while to materialize. Companies need to first sell the current inventory they carry before they can replenish inventory at a lower cost and recover their margins going forward. For us at Aterian, the time to act is now. We believe that the near- to mid-term future will offer an opportunity to return to our growth trajectory, and we're taking steps aimed at entering next year in good shape to do so. To that extent, we started working again on launching new products. And we're doing so carefully by investing mainly in select new opportunities that can leverage the success of existing products in our portfolio. In the next couple of weeks, we expect to announce an exciting launch of a co-branded air purifier in partnership with a publisher brand. As we get comfortable that the supply chain challenges continue to ease, we will hopefully be able to announce additional progress we're making with accelerating product launches. Given that shipping costs are declining and we have the opportunity to restock our portfolio at a lower cost basis, we started accelerating our sales in July and will continue to do so until the end of the year. We took advantage of Prime Day to normalize inventory levels and had our biggest revenue for the event at the $5 million mark in sales over two days. While many of our portfolio products were sold at a strong margin, we also took some aggressive steps on several product lines to normalize inventory levels. The short-term trend of a top-line driven strategy will further affect our margins this year, but hopefully will allow us to get back to a double-digit contribution margin in 2023. Our efforts to prepare to reignite growth include an extensive revamp of our internal processes and further investments in our systems and technology. The investments we're making are the result of our learnings from acquiring nine brands in M&A transactions in the last two years. We continue to believe that growth opportunity through M&A is an exciting part of our long-term strategy. Our goal is to improve our ability to integrate future M&A acquisitions faster and more efficiently than we've done in the past. As we look into a future where Aterian hopes to continue to grow its revenue through acquisition, we believe that integration and effective management of the assets we acquire at relatively lower fixed costs are key to driving long-term success. We're adding several features to our AIMEE platform across forecasting, prioritization of operational requests from our brand, and other functions that we expect will allow us to integrate and manage brands, including those we acquire rapidly and efficiently with lower fixed costs. To give a concrete example of how these investments will make a difference, consider a future in which we continue to scale our brand portfolio and constantly make budget allocation decisions for our brands. Using the new workflows and systems we're building into and around AIMEE, we expect to be able to automatically prioritize the allocation of capital and fixed costs associated with each brand initiative, based on the expected future ROI for Aterian. The goal is to ensure we have an objective and optimal understanding of what each brand initiative implies for budget, cash allocation, as well as expected financial outcomes of the aggregate initiatives performed by all the brands in our portfolio. Lastly, we continue to make great progress in our strategic investment in partnerships with publishers, as the media industry continues to foray into constant commerce. For those who are less familiar with the latest development in the e-commerce industry, I would like to reiterate the strategic importance long-term for companies like us. As everyone on this call knows, our business focuses on promoting our brand through various marketplaces, Amazon, eBay, and Walmart. In the United States, while most consumers have a favorite retail channel, 36% of consumers start their research on Google to learn more about products from expert recommendations and editorial content. Publishers have taken notice, and many of them focus on writing articles about product reviews and recommend to consumers items that will fulfill their needs. When publishers recommend a product and send their readers to Amazon, for example, they receive a commission if the consumer ends up buying the recommended product. For Aterian, it's important to play a role in this growing ecosystem and build relationships with publishers in hopes that they decide to write and promote more of our products when their editorial team believes they're a good fit for their audience. To that end, Aterian has launched DealMojo, a platform that allows publishers to discover new products they can choose to recommend to their audiences, while benefiting from additional revenue share and special discounts, which we're looking to streamline to the site. We're pleased so far with the reaction we've received for DealMojo and continue to onboard publishers and adapt the product to meet the requirements from an integration perspective. As of the beginning of the year, DealMojo has allowed publishers to promote our products and drive over $7 million in product sales through the beginning of the year. While at this stage, DealMojo is still primarily used by Aterian, we continue to test the prospect of opening it up to other sellers. With these updates on Q2 and our strategy for the rest of the year, I want to thank everyone on the call. For those who follow our progress, we're excited for Aterian's potential return to growth in 2023 as supply chain issues are expected to continue to ease, and we continue to believe that we're on track to build one of the most exciting long-term growth stories in e-commerce and consumer products. I will now pass it on to Arty to discuss our financial results for the quarter.

Thanks, Yaniv, and good evening everyone. Here are the financial performance details of our second quarter. For the second quarter of 2022, net revenue decreased 14.5% or $9.9 million to $58.3 million from $68.2 million in the year-ago quarter, primarily from the decrease in net revenue from our sustained business and launch revenue due to our previously announced plan to pause new product launches. The second quarter net revenue of $58.3 million is comprised primarily of $56.1 million from organic business, which we note includes revenue from our build brands and acquired brands starting one year after purchase, $1.9 million of net revenue from our acquisition, and $0.3 million of wholesale. The year-ago quarter net revenue of $68.2 million was comprised primarily of $29.1 million from our organic business, $33.2 million of net revenue from our acquisitions, and $5.7 million of wholesale. As a reminder, the acquisitions of Photo Paper Direct and Squatty Potty closed on May 6, 2021 and as a result, moved into our organic category starting May 6, 2022. Our organic revenue increased by $26.9 million from the move of our acquisition revenue into organic revenue, offset by a reduction in overall organic revenue from reduced sales velocity resulting from increased pricing, due to supply chain disruptions and reduced overall consumer spending in the period. Our acquisition revenue decreased $31.3 million to $1.9 million from Q2 2022, from $33.2 million in Q2 2021, primarily due to Healing Solutions, Photo Paper Direct, and Squatty Potty being owned for over a year and shifting to organic categorization. Our sustained revenue landed at $54.1 million for Q2 2022 versus $61.8 million in Q2 2021. The $7.7 million decrease in this revenue is primarily due to increased pricing caused by supply chain disruptions and reduced overall consumer spend in the period from a change in consumer buying habits and unfavorable impacts from inflation affecting consumer spending. Our business also saw a year-over-year decrease in the launch phase revenue of $3.1 million to $1.3 million. As planned, we did not launch any new products in this quarter compared to last year’s second quarter. Overall gross margin for the second quarter increased to 53.8% from 48% in the year-ago quarter. Our gross margin improvement versus last year's predominantly resulted from a favorable product mix from the inclusions of acquired brands, offset by increased costs from the supply chain disruptions specifically increased cost of shipping containers. We believe the increased cost of shipping containers relative to the second quarter of 2021 impacts our gross margin negatively by approximately 2.5% in the second quarter of 2022. Our overall Q2 2022 contribution margin as defined in our earnings release was 9.7, which increased compared to the prior year CM of 8.3%. Q2 2022 saw our sustained products contribution margin increase to 13.3% compared to 12.6% in Q2 2021. Within contribution margin, our sales and distribution expenses continue to be negatively impacted by supply chain disruptions and higher costs in the last mile fulfillment given inflationary pressures and carrier tightness in the quarter. Our Q2 variable sales and distribution expenses as a percentage of net revenue increased to 44.1% as compared to 43% in the year-ago quarter. We expect to see these impacts continue in the current quarter. While we continue to look for ways to mitigate higher cost dynamics in our supply chain and last-mile costs, we believe we will continue to face contribution margin pressures for the remainder of 2022. We reported a $10.1 million operating loss for the second quarter of 2022 as compared to a gain of $4.5 million in the second quarter of 2021. The second quarter 2022 operating loss includes a gain of $1.7 million from the change in fair value of earnout liabilities and $6 million of non-cash stock compensation while the second quarter 2021 operating income includes $23.3 million of benefit from the change in fair value of earnout liabilities and non-cash stock compensation of $4.9 million. Interest expense was down in Q2 2022 to $0.3 million from $4.7 million in Q2 2021. That's part of our debt refinancing, which ultimately reduced our overall debt outstanding today versus 2021. The net loss in the second quarter of 2022 was $16.5 million, which was an improvement from a loss of $36.3 million in the second quarter of 2021. The second quarter 2022 net loss includes $6 million in net charges from changes in fair value of warrants, $6 million of non-cash stock compensation, and a gain of $1.7 million from the net change in fair value of earnout liabilities. While the second quarter of 2021 included a $23.3 million benefit from change in fair value earnouts and $29.8 million loss in extinguishment of debt, a $4.4 million loss of change in fair value of warrants, $4.9 million of non-cash stock compensation, and a $1.9 million charge associated with the derivative liability from our term loan in 2021. Adjusted EBITDA as defined in our earnings release for the second quarter of 2022 was a loss of $3.7 million unchanged compared to a loss of $3.7 million in the second quarter of 2021. Turning to the balance sheet at June 30, 2022, we had cash of $34.8 million compared to $44.5 million at the end of March 31, 2022. This decrease is due to $4 million final payments and Squatty Potty earnout, working capital usage of $5.2 million in our net loss. Inventory landed at $76.1 million at June 30, 2022, which is slightly higher than $75.4 million at March 31, 2022 due to softness in net revenues. Although we did see record Prime Day sales in July, we believe we continue to be long on inventory. As such, we anticipate to move inventory over the next two quarters that could reduce margins to help normalize inventory levels. We continue to be impacted by global supply chain disruptions and inflationary pressures globally. While we believe these issues are temporary, they limit our ability to forecast, and as a result, we will not continue to be providing full-year guidance at this time. However, as we look at our current Q3, and taking into account the global environment, rising inflation, and continued difficulty with the supply chain, we believe Q3 2022 net revenues will be between $52 million and $60 million. The second quarter '22 saw continued challenging macroeconomic conditions and unpredictable consumer spending habits, and we expect these challenges to continue for the rest of 2022. However, we are starting to see some relief on supply chain, especially around container costs as we plan for 2023. As such, we continue to be very confident and proud of our business, our products, our technology, our logistic network, and, most importantly, our dedicated hardworking people. Aterian continues to persevere and we will overcome these challenges and continue to be a leader in our industry. With that, I'll turn it back to the Operator to open the call up to questions.

We will now begin the question-and-answer session. Our first question will come from Thomas Forte with D.A. Davidson. You may now go ahead.

So one question and one follow-up. So, on the inventory that you intend to liquidate, was the inventory liquidated successfully on Prime Day and over the next two quarters? Is there a commonality, meaning that it’s considered more discretionary or it's within a certain category like the home category? And then actually, last question, also, how much of it would be attributable to brands you've owned for more than a year versus brands you've owned for less than a year?

Hey, Tom, thank you for the question. Yaniv here. So, the pattern is just across the board, right? In general, I think that the demand is lower than anyone anticipated. I think not just for Aterian but across the board, I think the retail industry is coping with a rapid change in consumer demand, which obviously we all understand is driven by inflation. And for us, what's important is to remain very competitive with pricing, right? If we don't drive a little more normalization of inventory levels across all the categories, we will potentially end up in a situation where, as shipping costs come down, our competitors are able to bring back more inventory at a lower cost and potentially underprice us, right? And so, there's two parts to this one. One is normalizing the inventory so that we have again, the ability to restock at a lower cost and protecting our market share by being competitive on the pricing with that. Does it make sense?

Yes. And then, Yaniv, for the second follow-up question. I understand historically that sometimes because you have a large portion of bulkier items, the container cost and shipping inflationary situation would be different for you than it is for the industry in general. So right now, are the trends the same for both your products as far as container costs and things of that nature?

Demand is down across the board, which means that even smaller items are affected to some extent, but I must emphasize you're pointing to a very important point and you're right about that. Obviously, the bigger items will be more influenced, right. But in a way, right, one thing that's important to understand is that I think across the board, we're seeing and we have the luxury of being across many categories. So we see the data pretty clearly, right. Demand is down across multiple categories in a way that is affecting all products. But you're absolutely right that the larger items, which are a big part of our portfolio, they'll both suffer more if we don't normalize inventory levels and bring back goods at lower costs because the dollar difference that we would have to increase prices on is going to be significant and give our competitors an advantage if we don't do something about it, right. So, that's a good point you're making around the larger items. But just to be clear, across the board, larger and smaller items, demand is lower than we expected.

Our next question will come from Brian Kinstlinger with Alliance Global Partners. You may now go ahead.

In terms of new product launches, is there a target number of SKUs per month you're looking to launch? Will there still be fully AIMEE driven? And will there be any incremental inputs such as ticket size or margin that gives you that cushion to make new SKUs profitable if shipping containers don’t continue in the favorable direction they're headed? And related to that, what are the shipping assumptions AIMEE makes right now as it makes these decisions?

Thanks, Brian. That's a good question. So, as I mentioned during my remarks and also was in the press release, we're cautiously starting to work on product development again. And as opposed to previous years before the pandemic, where we had set certain goals in terms of how many products we want to launch every month. And as you remember, we had some very aggressive goals before the pandemic. In this case, we're being a lot more, I'd say, laser-focused on opportunities that are incremental to what is already successful in our portfolio. And the thinking there is when you launch a completely new product, that is really sort of entering a category where there is no other anchor or no other thing to rely on, right? The risks are higher, and the investment upfront is higher. What we're doing here is very specifically pinpointing opportunities where we can augment existing good products with other products that are either bought together, or a different size, or some kind of other variations. So, we are trying to basically piggyback on the existing success of our portfolio with very specific products that we're launching. And the goal here, long-term, right, is to get to a cadence like you were used to, but we're not quite there yet. We're taking this just more carefully. So, there is no kind of like monthly product launch goal at this point. But there's some interesting work going on and a non-negligible amount of product that we're working on right now. So how many of them will make it to the finish line? It's too early to tell because we just started kind of reopening this part of our business, right. We're trying to go back into it cautiously because we believe that we're seeing signs out there that point to a more normalized supply chain, which allows us to go back to what we used to do with more methodical product launches, right? So, that's the first question you had. In terms of the shipping costs, because we've been obviously burned by the ups and downs of volatility, we are touting all our assumptions to be more conservative than we believe the reality will be. So, as we mentioned in a couple of our earnings calls, we have better than spot rate prices with some of our partners including Amazon, which we're not allowed to exactly disclose how much we're paying. But we are being cautious and kind of modeling our products with a higher cost to give ourselves a buffer in case something happens and shipping costs do go back in the wrong direction. We're cautiously adding that buffer in there when we think about the model for this product. Does that make sense? Does that answer your question?

Yes, that's great. It's good to get extra detail. Thank you. It's been a super hot summer, at least here on the East Coast, but I assume everywhere. And so I would expect your position to benefit as usual. But looking at your revenue range for Q3 tells a different story. Is this category also being heavily discounted? Or did you have shortages here? Or was it just not enough to offset other discounts that you are seeing?

Great question. And we are also looking at the demand for these goods where we are very strong in these quarters, seeing weakness there as well. I think most of it is just driven by inflation in general. And obviously, prices of products both offered by us and our competitors are more expensive than they used to be, right. So, I think a combination of general inflation plus higher prices is causing a little bit more weakness than we would expect, despite the heat that you mentioned, right. But again, as I mentioned also in my remarks, we've been doing quite well preserving market share for these products. So what I mean by that is that the weakness we're seeing seems to be just an overall trend where in those particular categories, maybe consumers are going to stick around for their old AC for another year, whereas in the past they wouldn't, right, or, you know, wait for, as we've seen across the board Prime Day was quite substantial for us, but also for a lot of others. It looks like consumers are being more price sensitive. And you can see these big days right that there is definitely more demand kind of concentrated in those times, right. So those two things, I would point out too, but in general, yes, there was at the end of the day, weakness in demand across the board. And it's affecting those categories as well, despite the heat waves that we're seeing.

Great. One last question I'll get back in the queue. The higher shipping container prices have not just turned your new SKUs or new launches upside down, but also M&A obviously, as it's more difficult to be profitable there. Are you close to, and I know you made a comment about it, but are you close to getting more serious on M&A? Should we think that's more for 2023? And then maybe talk about if valuations are similar to the past. You had some interesting cheap acquisitions you've made, but are they actually cheaper given the market conditions or something similar?

Yes, it's a great question and as I mentioned in my remarks, as you described, right, we definitely think of M&A as being a big part of our growth in the future. And a lot of the efforts we're taking on now are preparing for reigniting this and being operationally even better at it than we used to be in the past, learning from all we've learned from the nine acquisitions we've done. In general, we're keeping a finger on the pulse all the time and definitely listening to the market. As you mentioned as well, the shipping crisis and the container costs have been one parameter that has made us kind of like take a step back a little bit and be more observant right now as opposed to pulling the trigger on some of those deals. And I think, again, just like the container costs coming down, affecting organic growth on using by launching new products, we're optimistic that we'll be able to reignite this M&A engine, and hopefully in the future, right, but when exactly, it's something that again, we haven't put a date to it, but we're doing a lot of work in the background to, as I said, prepare operationally for it. And also just high-level explore many different potential strategies from an R&D perspective, right. For example, we want to maybe focus more on certain categories. Do we want to diversify more from supply chains in Asia? Those are all questions we're asking ourselves and doing a lot of work in the background, all in preparation to hopefully reignite M&A as soon as we feel ready. And as soon as we feel that the targets out there are not going to be dramatically affected by further supply chain issues.

Our next question will come from Matt Koranda with Roth Capital. You may now go ahead.

So just wanted to dig into the third quarter revenue guidance for a moment here, if I could, sounds like down 18%. At the midpoint, just wanted to get a sense for how much of the pressure, the year-over-year pressure, are you seeing from sort of depth of discounting versus volume declines? If you can maybe disentangle those and then, what categories do you expect to hold up a little bit better than that 18% down versus build worse maybe?

Arty, do you want to pick up?

Yes, thanks Yaniv. To start with the second question, we have noticed a general decline across all categories. There's no specific category that has remained unaffected by the consumer spending pressure. In Q2 and Q3, although our air conditioners and humidifiers saw lower numbers than expected, we believe we performed well in terms of market share. We managed to maintain, and in some areas, even gain market share on our core products. The decline we observed is indeed a general trend. Now addressing the first question about discounts and the slowdown, we have had to raise prices to counter our increased costs. However, we still offer discounts as needed based on competitive dynamics and other factors, and this is something AIMEE helps us analyze. Interestingly, during Prime Day this year, we experienced record sales, indicating that consumers are indeed sensitive to pricing and looking for deals. As we plan our inventory strategies for Q3 and Q4, this will be a consideration. It's still a volatile situation that we are navigating, but I hope that clarifies your questions.

And then just was curious if you could maybe touch on the gross margin implications of the inventory clearing activity we're going to be doing at a same sequentially lower or maybe even lower on a year-over-year basis is sort of what we should be penciling in, but just any commentary on the gross margin for us?

Yes. Listen, Matt, those are the questions we hinted. I think we're still very early on all the plans that we're working on for the long inventory. I think we hinted, I said, we're going to see a little bit of pressure continuing. I think some of that's going to really boil down to how we take advantage of both this anticipated second Prime Day and also the holiday seasons. I think, I'm not speaking for you even his team but they got we got some interesting things that we're working on that obviously could move inventory, but not necessarily impacting margins materially. That said, I don't think we're pointing to exactly a margin impact. I would assume you would see some pressure depending on how we move those long inventories, but it’s not something we’re pointing to publicly because we're still going to work through it. I don't know if you want to add anything there, Yaniv?

No, I think it's well said, Arty.

Okay, maybe just last one for me, guys. It sounds like we should be flushing some inventory. And usually, seasonally, you guys do clear some inventory in the fourth quarter, so I assume lower inventory balance at the end of the year relative to the second quarter, but any other additional color or just some clarity that you could provide on sort of where you expect to end the year in terms of inventory balance would be super helpful?

Yaniv, do you want me to grab that one?

Yes.

Thanks, Yaniv. Yes, another great question, Matt. Listen, we made a bet, right? We purchased inventory back in September-October 2021 to avoid supply chain issues and then the world continued to unravel between the unfortunate conflict in Eastern Europe, and obviously, this record inflation that we've seen in the country, record-high since four years ago. So I think all those things were not anticipated when we ordered inventory in September, October of last year. That said, I am long on inventory. We're at roughly $75 million or $76 million at the end of June. I would love to see that go down for sure. I don't think we're pointing to an exact number. I think just to think aloud if that was $10 million or $15 million lower, that'd be great, right? I think that would be awesome. I think the good news about a lot of our products like ACs and humidifiers, those are things that will sell next year anyway. So, a lot of it's really dependent on where we see an opportunity to move inventory, where we think we're long. But at the same time, if it's not a great opportunity and something that affects the long-term tail of that product, we won't pull the trigger and just sell it next year. So hard to pinpoint, but certainly something that we're not measuring to a number, we're just trying to always do what's best for each individual product.

Our next question will come from Brian Nagel with Oppenheimer. You may now go ahead.

It's my first question. I think this might be a bit of a follow-up or potentially even repetitive. So I apologize. But just with respect to the demand environment, if we look at like you said in the prepared comments, I mean, it's no secret right now. There are demand issues out there across consumers, across retailers, and clearly Aterian has seen this. But as you get the question, obviously, you look at the business, what gives you the confidence as you're looking at your weaker sales, that it's more macro related, as opposed to something either specific with your products or there's some type of building competitive pressure?

Hey, Brian, thanks for the question. And we are very much, as opposed to a traditional retailer with the amount of data that is flowing into our systems, have a pretty good handle of where we are in terms of our market position, right? And as Arty already mentioned earlier, through our analysis, we're seeing that for the large majority of our top products, we're actually doing well. In some cases, we are even gaining market share in some cases, obviously not as well. But in general, I'm pretty happy with that, despite, again, the numbers being down year-over-year. This is a very important thing to outline, right? Relatively to the demand in the categories, we're not seeing the decrease being linear with a decrease in sales, which points out overall to across categories just weaker demand. And on top of that, you have other metrics like searches, search volumes, and all sorts of other metrics that we look at. And so, we feel quite confident with all this data that I think brands that operate in a more brick-and-mortar retail might not have, that we're seeing just the effect of inflation and higher prices across the board being the main culprit right here. And so, that's why we again, as we look at these results here on year, the most important thing for us has been to get through this storm by controlling as much as we can our position in the categories so that where prices of shipping come down, as we said earlier, right, we can restock inventory at a lower cost basis and be back again, at a better margin. So again, the data is abundant enough for us to feel confident that we're overall doing a pretty decent job of protecting market share, and that, again, once the cost of shipping come down, we should be able to regain better margins and potentially even drive further growth there, right. Does that make sense, Brian? Does that answer your question?

Yes, that makes sense. It's very helpful, Yaniv. I'm looking at my second question, which has a broader perspective. As Aterian and your team navigate through various disruptions, including those related to COVID and now the post-COVID phase, we have all been anticipating a restart. In your conference calls, you mention an increased pace of product launches, and while I’m not sure if you brought up mergers and acquisitions, I assume they are also on your radar. My question is whether, given the improvements in the supply chain you've mentioned, you would wait for demand dynamics to improve before you really start to focus on growth again.

Not necessarily. I think that the demand is weaker year-on-year, but there's still obviously a lot of business going on in e-commerce. And in general, we're very optimistic about e-commerce continuing to take bites of retail on a percentage basis every year, right? We don't think e-commerce is going anywhere, and we just continue to push forward. Well, what we don't want to be doing is launching products or buying companies at the wrong time where our chances of success are going to be lower because basically we bought them right at the peak of this COVID-driven wave of e-commerce growth, and then we overpaid for them, or because we launched a product at a time where the shipping costs were so outrageous that we just set ourselves from a P&L perspective at the product level to fail against the existing incumbents, right? So it's just, you know, at the end of the day, we are not here to generate growth just for the sake of growth. We want to be a fast-growing profitable company. And we strongly believe that our model can allow for that in a normalized environment. And so, whether the demand comes back roaring like it used to in 2020 or not, it matters less right that there's the same rules of engagement are there. What I think matters the most is can we rely on supply chains to bring our goods to our warehouses where we want to ship sell them to customers at a predictable cost, at a cost that is not different? The day we submitted our purchase order to the manufacturer versus what it ended up being our cost for selling the product at the time it arrived to the warehouse because of the volatility of all the other costs in between, right? That's really the key for us to reignite growth. And again, as I already said and I mentioned earlier, there are very positive things happening out there that are showing us the light at the end of the tunnel. Hopefully, again, the world doesn't have any more black-swan type surprises for us ahead. But I think once we feel that stability is there, we want to go back and drive growth pretty aggressively, and I think, again, designed to point in the right direction, hopefully that makes sense, Brian?

Our next question will be a follow-up from Thomas Forte with D.A. Davidson. You may now go ahead.

Great, thanks, a handful of follow-up. So you need feel free to give short answers. But the first follow-up question I had is. Can you give your thoughts on competition among companies that are focused on selling on Amazon including if others are willing to discount their inventory more to move it?

Yes, definitely, we're seeing in a way, the same pattern, right? Like across the board, a lot of companies are facing the same situation where demand is not where they need to be. And a lot of times, you'll be facing a situation where you almost see a bit of a desperation in some other product or lowering the price to a place where you can tell that they're trying to get out of it, right? And those are the places where our team has to pay close attention to make sure that we don't react the wrong way, right? And we've gotten pretty good at that. I think we've learned a lot during the last year or so how to really understand if this competition is here to stay or is someone trying to just undercut us because they're really desperate to get rid of their inventory. So again, overall, we've got I think, the right analytics to understand that and the right experience on our team level so that we can make the right decisions when we see that happening. Does that make sense?

Yes. And then, I want to you to, historically, you’ve operated on a pretty light headcount model. But I'm wondering if there's an opportunity to add talent with layoffs at other tech firms?

Oh, yes, absolutely. We, obviously, as you and I probably spoke a few times about it, for us, it's the most important thing is. Can we run this business with a very aggressive fixed cost? As you said, right, like a headcount at slide. At the same time, as you mentioned, there's a lot of talent out there that has been laid off. And of course, we are keeping our eyes open on different channels looking for bringing in that talent. We strongly believe that quality over quantity is the name of the game here across all the different departments. And so, we will absolutely pull the trigger on hiring people if they are the right talent and when we find them, but we're not going to become a company that just hires tons of people because they can't run the business another way; where again, everything for us is about efficiency. So yes, that's a good question.

Great couple of more. So anecdotally, it seems like Amazon's taking longer to deliver products. So I know you've got some pretty good data, are prime eligible products not the needle mover they once were?

I believe the issues we're facing are largely related to widespread disruptions in various parts of the supply chain. It's difficult for me to conclude that there's any significant change in the perception of what Prime means. Like many others, Amazon is navigating the complexities of last-mile shipping, so I feel it's a bit premature for me to comment on any shifts in what Prime signifies for consumers. However, we will continue to monitor the situation, and I would be happy to discuss it further if I notice anything more substantial.

So you have great vantage points when it comes to marketplaces in general. So when you look right now, at Amazon, Walmart, and Alibaba, are there any important similarities or differences to call out in near-term trends?

I think Amazon continues to invest heavily in attracting sellers, giving them more tools and technologies, something that we’ve seen in the past, and it's very encouraging for us, right? The more data and analytics, we can pull out of their APIs, the more we can make better decisions. We're seeing Walmart make surprising progress on that front as well with many more products on the marketplace site including their ads that seem to be accelerating the progress in terms of delivering them to sellers. So overall, what I'm seeing is that marketplaces are just becoming stronger and stronger. And I think, again, the thesis that we build this company around that brands are going to have to be very good at selling on marketplaces continues to be very strong. And so, that’s something that, again, is very encouraging for us as we continue to push forward on our vision. When it comes to Alibaba, we don’t use that platform as much, right? And it’s a question that I wouldn’t know exactly how to answer compared to Amazon or Walmart. It's just because it's a more cross-border e-commerce platform that is running more wholesale type of sales. But again, when it comes to marketplaces in general around the world, I think the writing’s on the wall. Marketplaces will continue to represent a very big part of e-commerce and retail, not just in the U.S., but everywhere. And so, we’re excited to continue to build that theory and to be a company that is designed to execute well on marketplaces.

So historically based on your SKU set, the fourth quarter percent of sales was usually less than was needed for the e-commerce market in general. I know you're not giving an outlook. But when you're looking at your current SKU set, do you think you're still in a position where your fourth quarter wouldn't necessarily be a high watermark?

That's a great question. And cautiously say that, obviously, we don't give guidance for the fourth quarter at this point. But you know, given that we are, as we described, right, we want to normalize inventory. Typically, Q4 has a lot of opportunities for that. So that could help us there, I'd say from a sales perspective. But again, I'm saying that cautiously, it’s a lot of things can happen between now and Q4. And the world is so volatile that we again, are looking for more stability before we can give better guidance as far as beyond the next quarter. I’m cautiously optimistic that we will have opportunities in Q4 pending again many other things that are happening in the world because they could affect that, but overall, I’m cautiously optimistic about that.

This concludes our question-and-answer session. I would like to turn the conference back over to Ilya Grozovsky for any closing remarks.

Thank you. As part of our shareholder perks program, which, as a reminder, investors can sign up for at aterian.io/perks. Participants have the ability to ask management questions on earnings call. I wanted to thank all the shareholder perks participants for their loyalty, their participation in the program, and their questions. I've picked a few of the most popular questions that they have sent in. The first question is, do you believe you are well capitalized enough to seek out acquisition targets in the next couple of quarters, Yaniv, Arty?

Thanks, Ilya. So, yes, let me think that. In general, future M&A will require additional fundraising. We are in the process of describing earlier to further define our M&A strategy going forward based on our learnings, and we're looking at various options to secure the most capital-efficient structure for those transactions. But in general, we will need to raise more money for acquisition, but we are looking again at many different options to do in the most efficient way.

All right. Our next question is, have you considered acquiring complementary brands to the brands that you currently own? Or are you only interested in new verticals?

Yes, that's a great question. And it goes hand in hand with what I've described before, as we kind of review everything that unfolded with the brands that we acquired. There's definitely some interesting questions that arise including specifically this one, which is to really kind of focus a little bit more on certain categories and basically further strengthening the moats that we have in certain categories by acquiring brands that are complementary or in some verticals, right. So that's something that we're looking at. Again, we're leveraging the time that we have here in the next few months to study that strategy further.

And the last question from the perks program is, shipping costs are down as of late, do you expect them to move back up or do you believe the worst is behind you for the foreseeable future?

Yes, good question. So again, as I mentioned also in the previous article, we believe that the current economic downturn will stabilize shipping rates because of obviously lower demand, right? And it seems to be happening as we speak, the cost of shipping containers internationally is declining. So that's a good thing. So we believe in general, right, that the worst is behind us. But again, as I said earlier, we remain a bit concerned about geopolitical tensions that could create further setbacks, black swan events that we couldn't foresee from where we are. The world is still a bit uncertain. So, we're keeping an eye on that. But overall, we're cautiously optimistic that the worst is behind us. And the trends that we're seeing are pushing us towards, as I mentioned, right, reducing inventory levels so that we can bring back inventory at a lower cost and preparing to drive growth again, hopefully, right. So, yes, that's the answer.

Great. Thanks. This concludes the Q&A portion of the call. In terms of the upcoming calendar, Aterian management will be participating in the HC Wainwright 24th Annual Global Investment Conference in New York City, from September 12 through September 14. We look forward to speaking with you on future calls. This ends our call, you may now disconnect. Thank you.