Good afternoon. And welcome to the Aterian Incorporated Third Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] 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. Please go ahead.

Thank you for joining us today to discuss Aterian’s third 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 third 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 today. On the call today, I'll go over the following topics. I'll start with quick introduction with Aterian for those who are new to our story. I will then review key takeaways from the third quarter of this year. I'll then discuss our challenges and how we're dealing them, including the economy, macro level pressure from supply chain disruptions and inflation, I will then summarize how we see the long-term prospects for Aterian. For those who are newer to the story, here is 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 own and operates its many consumer brands, selling products across various categories and channels such as Amazon, Walmart, Shopify, and eBay, both domestically and internationally. To allow us to scale, we've invested in building our own proprietary software platform called AIMEE. AIMEE enables our team to manage our 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 to 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 companies in the world. Expanding our footprint globally, we’re continuing to invest in technology and agile supply chain to drive scale and profitability. Moving on to our key takeaways from our third quarter, I'll start with a quick summary of the…

Thank you, Yaniv, and good evening everyone. Here are the financial performance details of our third quarter. For the third quarter of 2022 net revenue decreased 2.6% or $1.8 million to $66.3 million from $68.1 million in the year ago quarter primarily due to softer consumer demand on marketplaces offset by increased net revenue due to our decision to sell off the inventory through reduced pricing, to decrease our inventory levels on hand. Third quarter net revenue of $66.3 million is comprised primarily of $63.8 million of organic business, which we note includes revenue from our built brands and acquired brands starting one-year after purchase and $2.5 million of wholesale and another. The year ago quarter net revenue of $68.1 million was comprised of approximately $35.4 million from our organic business, $30.7 million of net revenue from our mergers and acquisitions and $2 million of wholesale and another. Our organic revenue increased by $28.4 million from the classification of our past acquisition revenue into organic revenue offset by reduction in overall organic revenue due to reduced overall consumer spend in the period further offset by an increased net revenue from our decision to sell off inventory through reduced pricing to decrease our inventory level on hand. Our acquisition revenue decreased to zero from third quarter of 2022 from $30.7 million at a third quarter 2021 due to all our acquisitions being owned for over a year and shifting into the organic revenue categorization. Our sustained net revenue was $54.2 million for the third quarter of 2022 compared to $59.8 million in the third quarter of 2021. The decrease is related to softer consumer demand on marketplaces offset by increased net revenue from our decision to sell off inventory to reduce pricing to decrease our inventory levels on hand. Our launch…

[Operator Instructions] The first question is from Brian Nagel with Oppenheimer. Please go ahead.

Hi, good afternoon.

Good afternoon, Brian.

[Indiscernible]

Pardon me. Mr. Nagle, this is the conference operator. Your audio is breaking up to the point of being unable to understand it. If you could possibly disconnect and dial back into the call, we'll get you right back into the queue again.

Okay.

Our next question will be from Brian Kinstlinger with Alliance Global Partners. Please go ahead.

Great, thanks. Am I clear?

Yes, sir. Please go ahead.

Great, thanks. First you mentioned the launch of your first new SKU and sometime can you share your plans with us regarding SKU launches in 2023, assuming current conditions hold, including global shipping rates, is there a monthly or quarterly target? I know a long time back you had given targets. Is there anything you can share with us regarding that next year?

Hey, thank you, Brian. This is going to here. Thanks for the question. So, yes, as you mentioned this was – it's great for us to go back and launching products and I know you said one product in the third quarter. I also want to mention we also working on what we call variations of products, meaning all sorts of additional products that supplement existing products as part of our efforts. In general though we don't have a concrete goal yet given the fluidity of everything that's happening on supply chain? But the goal is to start increasing the amount of products that we launch as we get more comfortable that what we're seeing on the supply chain is here to stay, that's really kind of how we think about it at this point. Artie, if you want to add anything.

Yes. No. I think to me that's a good answer. I think the other side, Brian; I think keep in mind in the past we were definitely doing a lot more volume of products. I think one of the things we're also thinking about is about lesser bigger products too. As, as we think about 2023 but to Yaniv's point, it's still very volatile; so I don't think we have anything concrete from targets, but those are the things we're definitely working on.

Okay. And then as you're evaluating M&A opportunities, which you've announced one, you've got increased capital, I figure those targets also have the same inventory of high attach shipping rates, high price COGS overall. So how does that impact the strategy and as you acquire companies, how does that impact the acquisitions?

When we look at various targets right now, obviously as you mentioned, right, we're seeing some of the same impediments that that hurt us and others in the industry, right? And for us, I think patience is extremely important here. We're seeing a lot of these targets, as I said struggling and kind of trying to find the best way forward. And so for us as I mentioned, right, we don't want to overpay, so we want to make sure that what we're looking at in terms of value in these companies. The impact is already in there and that we can really kind of wrap our heads around what's the actual path forward for this asset, right? In general though it's a positive thing, right? We are now in a position where we believe that there could be a lot of opportunities for us to acquire accretive contribution margin generating businesses at much lower cost that it would be, it would've been probably a year ago, right? When we still saw the COVID effect inflating some of the numbers of these targets, right? So again, the bottom line is we're being cautious and waiting and patient to see exactly where some of these targets are going to land before we pull the trigger, but we think the opportunities are there and we're working on that.

My last question and I'll get back into queue. You commented that you are seeing shipping rates about back to levels of pre-COVID. As we look at your gross margin and obviously mix does matter but as we look at your gross margin with that said, and the cuts you're making, should we assume when you get back to profitability you'll have similar gross margins where we saw low-to-mid 50% range when that occurs in the second half of the year? Is that the assumption that gets you there?

Artie, you want to take that one?

Yes. Brian, I think you're thinking about it the right way. I think product mix is very important in that, and as we're clearing out inventory that that also kind of also has an effect depending on how successful we are there. But yes, I think if you think about the ideal model, it's definitely in the, the kind of mid-50s right? As you're pointing out to, and then obviously other factors that contribute into CM, which would be our variable sales and distribution costs would also factor in that, that's certainly the numbers you're putting out there, that range is definitely something that we should theoretically be achieving.

Great. Thank you so much. I'll get back into queue.

The next question is from Brian Nagel with Oppenheimer. Please go ahead.

Hi, hope you can hear me better now. We're having some phone issues here.

That's much better.

Okay, cool. So the question, I was asking this with regard to the liquidation of the product here in the quarter. I guess it is the thought process behind, I mean, you seems that you liquidated it; obviously it took the hit to contribution margin. Was there any consideration of just allowing that product, albeit higher cost or there higher cost associated to kind of work through the system naturally? And then do you run the – I mean, I don't, the actual I guess the question I'm asking is the volume of product that was liquidated. Is there the risk that you pulled forward some demand that could impact sales of products in the coming quarters that have a lower – potentially lower cost associated with them?

Hey, Brian, good questions. Let me take those. So first of all, the logic behind it is, as you're obviously covering us for a while. You know that we had to bring in a lot of inventory at a cost basis that was very high given the shipping container rates. But obviously like any other company in this industry, we couldn't stop selling, right? So we had to eat those costs and increase our pricing, which to the consumer, right, which drove less top line sales and also less contribution margin. And now that we're seeing the container shipping come down, we're still sitting on a lot of inventory that we brought in at this cost basis that's too high. And so the risk of not cycling through that inventory and letting it just follow its due course is that, if our competitors in the particular product lines that we are in are able to do that before us, in 2023 their cost basis will be lower and they'll be able to commend pricing that could be damaging to us in terms of market share, right? They could undercut us on price. So in a way for us, we believe that again that the supply chain is normalizing and that it's very important for us to go – to recycle through that inventory so that we can bring back inventory at a cost basis that is competitive. Does that make sense on your first question?

Yes. That makes perfect sense. Yes, I get it. And then if I could follow up.

And then in terms of...

Yes. Go ahead.

Yes. In terms of pulling forward demand, sorry, just, yes, I think that's what you asked, right? I don't think that – we don't think of it like that. I think instead we're looking at it as an opportunity to capture more market share from our competitors, right? As I said while as we are looking at this excess inventory we are looking at this as life gives you lemons, so make lemonade with them right? There's one advantage of having that excess inventory that if we're willing to take this back, that we can come back and bring in more inventory at a cheaper cost basis. Selling it now at a lower price, although it hurts our margin, allows us to take market share from our competitors, right? And our goal is to basically align the product kind of like inventory level with the optimal run rate that we can achieve and the highest possible margin when we bring them back in. So meaning that as we're kind of normalizing and liquidating gas’ inventory by being very aggressive on pricing, we're capturing market share. And then hopefully we time it well with the arrival of more inventory at a lower cost basis to retain that market share while now also having the expanded margin, right? Does that make sense how I explained it?

Yes, it makes perfect, sense. That makes perfect sense. I get it. If I could just follow-up a question, I guess may be more [indiscernible] this may be a, flying saucer maybe a follow-up to the prior questions. I apologize I was cut up the call for a bit. So, we've been talking now about, even with your response prior question, I mean, one of the biggest issues that Aterian has been dealing with is this massive increase in shipping costs. Okay, so now you're saying the shipping costs have retreated significantly back to, I mean, essentially it seems very close to pre-pandemic levels. So as we think about recognizing there is a lot of moving parts here, but as we think about the kind of the earnings power, if you will, of Aterian through 2023, how much of the shipping costs having now moderated? In and of itself, how much of the tailwind to earnings could that be?

Brian, it was a little choppy, but I think you are saying, how much can you repeat just the last part? How would, just the last question, can you repeat the question?

Yes, just how should we think about the earnings tailwind that could come as a result of the shipping costs having moderated so significantly?

Yes, I mean, okay, yes, now I heard you. Yes. Listen, I mean, as you know, right, this has been the epicenter of our challenges right in the last year plus. And for us it's been a very tough time to run our business with reduced margins and products that need to be priced at a place where they become more difficult for consumers to buy. Right? And so there's a lot of advantages of obviously seeing those costs coming down. First, again, we can lower our prices and go back to our targets 15%, 16% contribution margin, meaning that we should also gain more sales. Right? More revenue on the top line. So this is just tremendous for us. The only thing I'll say though is that we are also generally the economy is not in its best place. So for us, I think, one of the most challenging questions is where is consumer to demand is going to be. We know that we should be able to get to more competitive pricing for consumers, and we should see significant increase in our contribution margin, which are all great tailwinds for us. The underlying questions that we're still and we've been, I think, overall conservative round how we think about it is where our consumers are going to be given that everything points out to a challenging time for the economy going forward, right? So I think, again, on one hand, great news and again, potentially a strong tailwinds for us, right with improved margin while we can have more competitive prices. And again, just to be clear, right, this is after we cycle through our inventory, right? So we still have work to do there, but that's great news. The big question is where are consumers going to be, where is overall demand is going to be? And I think we've taken an overall conservative view of that. So we still feel good about the picture for Aterian.

Got, it. I appreciate that. Thank you.

[Operator Instructions] The next question is from Matt Koranda with Roth Capital. Please go ahead.

Hey guys, good evening. Can you just help us understand the $45 million to $55 million range that you put out for the fourth quarter for revenue? I guess just what I'm trying to understand is why the drop off sequentially versus a third quarter despite it just seems like you're signaling there's more liquidation of inventory to come, so I would expect sort of you to stay on the gas on revenue, but just any clarification or puts and takes on sort of what's going on with the range for fourth quarter?

Artie you want to take that one?

Yes. Yes, thank you Yaniv. Hey, Matt. Listen, Matt, I think, as you Yaniv said, there is still – we're trying to do be aggressive and move this inventory at the same time, there is a lot of volatility in what we're seeing from a consumer spend, right and what the consumer sentiment is, especially going to Q4. I think in some aspects we saw a relatively decent Prime Day, but certainly not as strong as the Prime Day in June and I think that's what Amazon also pointed towards when they talked about it. At the same time you are right discounting pricing is going to perhaps push volumes up, but it's really hard to say. I think when we looked at it and we look at our range, I think, it's still very common and very core to our business that we still see the same splits, right? I think Q2 and Q3 have historically have always been our strongest products. We drive a lot of dehumidifiers and AC they are some of the best-selling products on Amazon. Q4 has always been lower price points conceptually we do good numbers and good units, and we have a lot of best sellers that hit Q4, like our steam mops and other things like that. But certainly it's never been at the levels of our Q2, Q3. I think when you look at it from our split perspective, if I'm thinking about the middle of that range that would put you roughly at like – doing 23%, 24%, which isn't far off to what we've historically done. So I don't think it's really far off there. You're right, if we're a lot more successful in that, we could be pushing higher range or beyond that, but right now, I think, considering the macroeconomic conditions, I think, we're being prudent there and I think that's a comfortable range in line with historical percentages.

Okay, fair enough. And then just wanted to get a sense for how we expect margins to trend. Any help on just sort of how much of the fourth quarter mix you expect to be liquidation revenue versus sort of sustain? And then should we expect sort of a similar contribution margin on a go-forward basis coming from that liquidation until you get through the inventory the higher cost inventory that you want to clear?

Artie I'll let you answer that one too.

Yes. Thanks, Yaniv. Matt, another good question. We got a lot of opportunities and a lot of interest in both how we liquidate and how we liquidate products on Amazon. I would hope that we do better than what just saw in this quarter, but we're still too early in the process a lot; it's going to depend on how Black Friday and Cyber Monday goes. I think conservatively I would look at the splits that you see in our press release between sustain and liquidate in the back of the tables. I would look at those and say, I would assume consist.

Okay. Alright. Got it. Yes, consistency makes sense. And then help us understand the context for the profitable on EBITDA in the third quarter of next year. Are you just effectively saying that you still have inventory, higher cost inventory to work through, that will take until all the way through the first half of 2023? Do we see some light at the end of the tunnel on sort of outbound shipping that might be percolating that we're counting on in the third quarter? Like what are the kind of the positives that you see coming in the third quarter that kind gets you the visibility into positive EBITDA in the third quarter of 2023?

Artie I'll let you answer that one too.

Yes. Listen; we said earlier, Q3 tends to be our strongest quarter, May, June for our summer products are always a little questionable depending on weather and other things. And to your point just to give you a little bit of understanding, I'm ordering my summer's products today and tomorrow, right? In the next month, I already put my POs in, right. So those products at the lower shipping container rates don't show up until, May, June, right. So I think in some standpoints, that's why I think we're pointing towards there. We're hoping that any of the long inventory related to my summer products will be gone by then, as Yaniv mentioned in his remarks that we're going to start seeing the improvement in Q2 of 2023. But certainly we hope if everything goes our approach that we would see the full impact of the improvement in Q3 2023, hence why we're pointing to that particular period.

Okay. Got it. And then maybe last one either Yaniv or Arty you can take this one. Just what are you seeing in the broader pricing environment? I guess, are you seeing competitive pressure from some of those more stressed competitors that are trying to clear inventory? Are you seeing folks stamp pad and you are benefiting in this environment by being able to kind of be more aggressive on price and take share? Just wanted to kind of get a better sense for like, the overall context of what's going on with pricing that you observed across your categories?

Hey Matt it’s a good question. Let me take that one. And I guess the answer here is as you might expect right, we're seeing kind of interesting patterns of companies looking to also discount and adjust inventory prices down and kind of trying to normalize their position as well. What's interesting is to really try to kind of like differentiate between those who are trying to do this and will come back to be competitors and those who are throwing the towel, and that's not always easy to do. Literally our teams are looking at our analytics and evaluating on a per product and category, if we should be worried about certain price cutting, or should we actually see that as a positive? There is no one clear answer across the board, as you can imagine, depending on the category, and the type of products and the type of competitor that we're up against, we could be looking at a competitor that is again just throwing the towel and we can see their price reduction, as a temporary threat or some that maybe are trying to be more opportunistic and think like us long term about how they can maybe take advantage of this situation and replenish. Right? But in the meantime, try to be more aggressive on taking market share. So, there's not a clear cut answer across the board, but it's a very good question. And our teams are tactically very much on top of it. So I think, again, our investment in analytics and our ability to look at all this data point in real time allow us to manage pretty well both situations.

Okay. Awesome. Appreciate it guys.

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

Thanks. 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 our earnings call. I wanted to thank all of the shareholder perks participants for their loyalty, their participation in the program, and their questions. I have picked a few of the most popular questions that they have sent in. Here we go. With shipping costs significantly down and almost at pre-pandemic levels, does the management team finally see a turnaround and return to profitability in 2023? Yaniv?

Yes, Ilya, thank you. So, as we said the answer is yes, it's management's focus and our target to see adjust EBITDA profitability in the third quarter of 2023. And as we said also in the press release, this is driven by two forces, right? One is obviously, as we talked about, the lower shipping costs, but also some cost reductions that we're taking. And again, it's really kind of the focus on management right now to prepare us for that.

Great. Okay. The next question was, can you talk a little bit about your recent acquisition and future acquisition strategy?

Yes, so the recent acquisition, the brand that fits really well in our current portfolio, I think, I've seen some assumptions online it might be an essential oil brand. It's not the case. For competitive reasons, we're not going to disclose any further here on what that particular brand was. But in terms of future acquisitions, we're actively looking into opportunities, especially when it comes to consolidating brand assets that we think are synergistic to our portfolio. And especially we believe that in current environment there might be opportunities. And as I said earlier, we're just being cautious and taking our time to really make sure that we are bringing in the right type of assets. So really cherry picking brands or selling products that would feed our current portfolio. But this is all ongoing and we'll continue to make progress on it.

Okay. Great. And then the last question, and perhaps the most important question was how do you plan to increase shareholder value?

So yes, I think as we mentioned earlier and probably the most important thing is we're working really hard towards profitability. As we mentioned, also, we started kind of like, although slowly right, we're started to work again on developing new products that we can launch. I think we made a lot of efforts behind the scenes to expand our capabilities in Europe. And it's been on our to-do list on for a while to put more efforts into Europe. But again, the shipping, pricing increase had kind of like prevented that from happening earlier. Now that things are starting to get better, we want to take advantage of the efforts we've put in place to expand our footprint in Europe. So I think that's going to be exciting, although it will take time. And then finally, we're looking to add opportunities – for opportunities to add incremental brands to our platform via acquisitions. And I think again, to get all these efforts we should allow us to increase revenue and lead to adjusted EBITDA profitability. And again, hopefully unlock much more shareholder value. Management is very much focused on all these things.

Great. Thank you Yaniv. So this concludes the Q&A portion of the call. In terms of the upcoming calendar, Aterian Management will be participating in the BTIG Technology Innovation Summit November 15, which will be held virtually; the 13th Annual Craig-Hallum Alpha Select Conference, November 17 in New York City; and the Roth 11th Annual Roth Deer Valley Conference, December 14 through 17 We look forward to speaking with you on future calls. This ends our call and you may disconnect. Thank you.