Aterian, Inc.

Thank you for standing by, and welcome to the Ethereum Inc. Q2 earnings report. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star then 1 on your telephone. Please be advised that today's call may be recorded. If you require additional assistance, please press star then 0 to reach an operator. I would now like to hand the call over to Ilya Grazovsky. Please go ahead.

Thank you. Thank you for joining us today to discuss Atarian'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 Atarian's website at atarian.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 Atarion's judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting Atarion'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 you.

Thank you, Ilya, and thank you, everyone, for joining us on the call this morning. Since a lot has happened in this quarter, I'd like to start by summarizing the key points that we'll be discussing today and then take you through more details around each one of them. This has been a challenging quarter for e-commerce, with supply chain disruptions, inflation, and an extreme shift in consumer behavior as the opening of stores provided an opportunity for consumers to finally leave their homes. Despite the difficult environment and significant increase in product variable costs, our sales grew on average 20% on a pro forma basis across all 14 brands compared to the second quarter of 2019. In July, the supply chain constraints turned into a full crisis as container rates increased 500% versus last year, effectively going from manageable to becoming a significant risk. Despite being in advanced stages of our M&A process with several targets, we did not move forward with the deals at hand, as acquiring the targets would just increase our exposure to the astronomical cost of shipping, and the difficult comp year on year made the cost of the targets harder to justify. We're in the midst of adopting our supply chain and believe that through partnerships we have with several large logistic companies, We have a path forward to secure a sustainable average cost of container for our needs in the next 12 months. Leveraging the new shipping relationship requires operational changes that will take a few months to implement. We're withdrawing guidance until we execute on those changes and look forward to provide a new outlook once we've completed our transition and can predictably model the cost, pricing, and margins of our product. We believe we have the best-in-class platform to execute at scale on the highly sought-after strategy of building the e-commerce products company of the future. despite the temporary global shipping crisis. In fact, thanks to the challenges, we're confident that we will take the right steps to emerge more resilient and better positioned to benefit from the massive long-term expected TAM of global e-commerce. Now I'd like to go into more detail as to how the second quarter evolved, the drivers behind the challenges we're facing, and how we're working to quickly resolve them and put us back on track. This last quarter provided a strong reminder that COVID-19 is not done disrupting the global economy and that e-commerce is not immune to those disruptions. The two main factors that have affected our business in Q2 are the consumer shift in shopping habits as the economy reopened and international shipping supply chain congestion that turned into a global crisis of unprecedented scale. We strongly believe that these challenges are transient and surmountable. I'd like to go into more detail now as to how each one of these factors has played out and the steps we're taking to address them. Q2 of 2021 came exactly a year after COVID-19's impact on brick and mortar retail, caused an explosion in demand for e-commerce due to the closure of physical stores. Starting in March 2021, consumers in the U.S. saw significant ease of social distancing measures, reopening of traditional retail stores, and most importantly, an ease on travel restrictions. The psychological effect of back to normal was not simple to predict, and as I'm sure everyone on this call is aware, many large companies, including Amazon, have also experienced a difficult quarter due to the challenges quantifying the impact of reopening the economy on e-commerce sales. The good news is that, generally speaking, we've not lost meaningful market share for our top categories. These categories simply shrunk compared to the same period last year. Looking at our metrics for products across all 14 brands who generated 80% of QQ's revenue, we can share that on a weighted average basis, they maintained their position within the top 20 highest-selling products based on units sold per category. For Compex, most categories contain thousands of competing products. Our perspective of the decline in demand for some of our categories year on year is largely due to consumers' excitement of going back to physical stores after over a year of being locked in at home. It's also evident by looking at the sharp increase in demand for items in other categories that we do not carry, such as travel and fashion, that consumers chose to divert their inflation-constrained buying power towards experiences and the ability to socialize again at the expense of hard goods. We nevertheless operated under the assumption that with the arrival of summer temperature, essential appliances in our portfolio, such as dehumidifiers and air conditioners, would not be as severely impacted. We were partially right, as June turned out to register very strong sales in these categories, but still came short of our expectations as consumers probably welcomed the opportunity to leave their home and return to stores. To give a concrete example that you can see for yourselves using simple tools such as Google Trends, Google searches for Amazon dehumidifiers in June ended up down 30% year-over-year. Conversely, Google searches for dehumidifiers near me, indicating a search for stores carrying dehumidifiers, were at an all-time high and slightly over 100% year-over-year. Finally, we were anticipating June sales to be further boosted by Amazon's decision to move Prime Day from Q3 to Q2. However, we were disappointed in the consumer's reaction to the event and the overall demand we expected not materialized. Although we remain disappointed with the sales we expected for this quarter, we strongly believe that the drastic shift in consumer behavior is a transient and extreme swing in the opposite direction of a pendulum initiated by the COVID-19 pandemic. In the long term, we agree with expert opinions such as eMarketer, whose recent updated estimate expects e-commerce adoption to continue to grow with a CAGR of over 15% for 2025. While the quarter unfolded with softer sale numbers than expected, we executed on several steps to mitigate impact on revenue through accelerating our channel expansion. We also continued to push forward on our M&A strategy as we had previously secured signed LOIs with targets of cumulative revenues of $92 million and $19 million EBITDA. In anticipation of completing due diligence and closing at least one additional acquisition in the quarter, we raised capital in early June. Unfortunately, in July, the supply chain strains that we estimated have caused us to lose $17.5 million in revenue over the last three quarters took a dramatic negative turn. Pressure on ocean freight escalated from an already challenging cost of containers to prices not seen in 30 years, according to Drury, a U.K.-based maritime research company. Given that most of our M&A targets suffer from similar exposure to the exponential increase in freight costs, and also to negative impacts of changing consumer demand coming out of records 2020 years, we decided to hold off on completing any transaction that could result in overpaying for a target or that may distract us from navigating our core business with the supply chain crisis. To give everyone some perspective on how steep the July increase in rates was, according to Freightos.com, the rate index for containers from China to the West Coast rose from an average of $55.60 on the week of June 14th to $13,666 by the week of July 30th. The June rates, which we believed were still manageable, were already up close to 300 percent versus the same week in 2020, when the average rate was $1,638. By July 30th, the rate increase represented a 500 percent uptick versus rate for the same week year over year. Keep in mind that the FREDOS index that I'm referring to is an average. The maximum cost reported by Fritos for these periods are between $15,000 and $25,000 for the same index. Adherence container costs for these periods were unfortunately somewhere between the average and maximum rates quoted by Fritos. We're currently expecting to need approximately 1,600 containers in the next 12 months. With an average increase in spot rate index of approximately $10,000 per container versus our previous conservative models, I think everyone on the call understands the gravity of the situation for our forecast going forward. Other consumer brands and retailers have already signaled that they're taking drastic steps in the face of this perfect storm of inflation, inventory shortages, and astronomically high shipping rates. We've seen several large companies take dramatic measures, including Home Depot's decision to charter its own container ship. While we do not underestimate the severity of this crisis, at Ethereum, we're not foreign to dealing with a volatile environment. Since becoming public in 2019, our company has been subject to various crisis situations related to the nature of our business model, and we've proven our adaptability and resilience in the past. For those who have been following us since 2019, we became public in the midst of a trade war and had to navigate concerns with regards to tariffs imposed on goods from China. In 2020, despite COVID being overall beneficial for e-commerce, we needed to adapt to a complex reality, including volatile demand and supply metrics, and significant adaptations to our last-mile shipping strategy. We're determined, once again, to remain agile and adapt rapidly to the new reality of 2021, and have already put in motion several strategic initiatives that we believe will help us come through a stronger company in the long term. The most critical step we've taken is to adapt our supply chain to cut the exorbitant cost of shipping containers back to a more sustainable rate. To that extent, I'm glad to report that we've negotiated to our relationship with three large global logistic companies what we believe is enough container capacity for our needs in the next 12 months at sustainable rates. Those rates include commitments of volume on our part, but more importantly, still require us to change the way we prepare the containers for shipping from China. Specifically, given the number of products and brands we carry, additional consolidation of goods across containers will be required at the port of origin. We're already in the process of evaluating several partners who can provide us with consolidation services. The adjustments were executed to satisfy our new shipping agreements requirements will necessitate a few months of implementation to be fully operational. Given that this effort is ongoing, that we're materially adapting a critical part of our business to this new environment, we've decided to withdraw our guidance with the goal of providing a new outlook that will include the impact of shipping cost reduction and the completion of operational changes. We're not taking the decision of pulling guidance lightly, but for those on the call who are skeptical of our approach, consider the following. Last Friday, Maersk, one of the largest ocean freight carriers in the world, announced blockbuster second quarter earnings marked by an increase of over 300 percent in net earnings and an improvement of 88 percent in net margins. When asked by analysts about the forward-looking outlook in 2022, their CFO said, and I quote, we're not going to get drawn into that. We have visibility into the next three or four months, and that's what we're comfortable guiding around. Being on the absolute opposite side of the spectrum of this crisis, and posting one of the best quarters the company has seen since it was founded in 1904 is not enough for MERS to tell us what the future holds. We're backing uncharted waters, and what matters now is only one thing, solving this crisis and getting our company back to sustainable adjusted EBITDA profitability at all costs. Given the shortfall in our adjusted EBITDA numbers this past quarter, we were required to seek a waiver from our lender, Hytrail, which Artie will further discuss. I'd like to thank our lender, Hytrail, who has worked closely with us in the past few weeks to understand our issues and the steps we're taking to resolve them. I want to personally thank their team for their trust. And to our shareholders, I reiterate the same message. We will leave no stone unturned in our efforts to get us back on track and get through this temporary challenge. The adaptations we're making to our supply chain means we'll also, unfortunately, have to pause launch of new products manufactured in Asia. Looking at recent product launches, we've noticed a decrease in performance as product P&L costs have dramatically increased given the current conditions. On average, our last 70 product launches have seen their actual P&L costs versus originally planned costs rise 25%, forcing us to increase pricing to absorb some of the difference and putting most of them on the dramatic deficit versus the competitive price target we anticipated to hit. These unfortunate cost increases have effectively reduced our success rate to below 30% for these SKUs. and in some cases have forced us to discontinue certain lines of products. For example, products such as our chest freezer are now incurring transportation costs that are higher than the product manufacturing costs itself. Given these challenges and the fact that manufacturers prioritize their capacity toward established clients versus companies who are launching new products, our confidence in being able to launch new products and maintain uninterrupted inventory level in the current environment is very low. We have therefore accelerated our efforts with regards to sourcing new products for manufacturers in Europe, Canada, and Mexico. We're still in early stages of evaluating those relationships, but are cautiously optimistic based on the initial dialogues we have so far. We continue to be very excited about potential M&A opportunities, and once the supply chain stabilizes, we believe that we will be able to secure deals that drive significant strategic value for Ethereum and leverage our best-in-class platform. From a growth perspective, our focus in the next few months will be on channel and international expansion. We've added 97 new products to Walmart.com this year, taking advantage of the Walmart fulfillment of the service. And finally, we're going to dedicate more resources to our past efforts. While I want to continue to point out that our platform as a service is still in early stages, I'm happy to share that our focus on offering our platform as a turnkey solution to brands is showing a lot of promise. Specifically, a brand owned by one of the largest manufacturers of appliance in the world and another one owned by a large furniture company have shown satisfaction with the platform so far and have increased the amount of SKUs or products that we manage for them. Since the beginning of the year, our AMI platform has successfully shipped over 7,000 units from 11 partner warehouses, conducting 11,000 automated product performance health checks, and created daily machine learning-based forecasts for the platform-as-a-service customer products. Through our tech and last-mile fulfillment, we're improving unit economics for these customers by approximately 10% inclusive of our fees versus other available solutions. Leveraging our AMI research module to analyze the potential market size, we believe that we have been able to identify brands with a collective annual GMV of $45 billion that would greatly benefit from our platform as a service offering. Leaving everyone with my closing thoughts for this call, as I mentioned many times in the past, Ethereum is still a young company, but one that is built around an agile, patient, and resilient culture. We're looking forward to getting through this global crisis and working hard to bring back the company's market capitalization to a stable base that will allow us to improve our capital structure and continue to drive growth across our efforts to build, buy, and partner with brands. With that, I'll pass it on to Arti to take you through the details of our financial performance.