Q2 2021 Aterian Inc Earnings Call
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Thank you for your patience and I'm pleased and he is standby D. Syrian Inc. Q2 earnings report will begin momentarily. Thank you for your patience and please continue to standby.
And.
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Thank you for standing by and welcome to the Interior and Inc, Q2, and Nishu point at this time, all participants and also the only mode.
After the Speakers' presentation, there'll be a question and answer session.
And that's the question. During this session you will need to press Star then 1 and your telephone.
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Oh, no IV and the call over to Elliot Krasowski. Please go ahead.
Thank you.
Thank you for joining us today and discuss it Terry and <unk> second quarter 2021 earnings results.
On today's call are you and Ive, sorry, 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 Antares website, and a Terry and Dot IL.
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 the Terry and his judgment and analysis only as of today and actual results may differ materially from current expectations based on a number of factors affecting Italians 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 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 and me.
Yeah.
Thank you Julia and thank you, everyone and for joining us from our call. This morning.
Since a lot has happened and this quarter I'd like to start by summarizing the key points and we'll be discussing today and thank you for more details around each 1 of them.
This has been a challenge and more of our ecommerce and supply chain disruptions and inflation and an extreme shifting consumer behavior as the opening of stores provide an opportunity for consumers to find out and eat at homes. Despite.
Despite a difficult environment and significant increase in variable cost. Our sales grew on average 20 per cent and a pro forma basis across all 14 brands compared to the second quarter of 2019.
And July the supply chain constraints, turning for a full crisis and container rates increased 500% Richard last year effectively going from manageable for becoming a significant risk.
Despite being in advanced stages of our M&A process with several targets within that and move forward with the deal at hand, and acquiring the target, we'll just increase our exposure for the astronomical costs and shipping and a difficult comp year on year mid low cost for the target is harder to justify.
1 of the myths of adopting our supply chain and believe that through partnerships. We have with several large logistic companies. We have a path forward to secure and sustainable average deposits container for and eat and the next 12 months.
Leveraging these new shipping relationship requires operational changes that will take a few months to implement.
We are withdrawing guidance something we actually bid on those changes and look forward to provide and your 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 the strategy of building E Commerce products company and for future. Despite the temporary global ship from crisis and fast. Thanks for the challenges. We are confident that we will take the right steps to emerge more and resilient and better positioned to benefit from the massive long term expected Tam and global ecommerce.
Now I would like to go into more details as to how the second quarter of all the drivers behind that we're facing and how we're working for quickly resolve them and put it back on track.
This last quarter provided a strong reminder, that COVID-19 is not done disrupting the global economy, and then E Commerce and 90, new and for those disruptions.
Human factors that have affected our business in Q2, other consumers shift and shopping habits of the economy reopen and international shipping supply chain and congestion that turned into a global crisis of unprecedented scale.
We strongly believe that these challenges are changing and surmountable.
I'd like to go into more detail now is tied to each other how each 1 of these factor thats played out.
And the steps, we're taking to address them.
Q2 of 'twenty, and 'twenty, 1 and exactly a year after the COVID-19 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 and the U S. A significant ease of social distancing measures reopening and traditional traditional retail stores and most importantly, and he is on travel restriction.
Psychologically 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 and have also experienced a difficult for water due to the challenges quantifying the impact of reopening the economy and when E Commerce sales.
The good news is that generally speaking with non lost meaningful market share for our top categories. These categories simply shrunk.
Same period last year.
And there are metrics for products across all 14 brands, who generated 80% of Q2's revenue we can share that on a weighted average basis they maintain their position.
'twenty highest selling product based on units sold per category.
For compact from most categories contains thousands of competing products.
Our perspective is a decline and demand for some of our categories year on year, largely due to consumer excitement and I'm going back for physical stores after over a year of being loved and at home.
And.
And for items and other categories that we do not carry such as travel and fashion.
And as chose without further and inflation constrained buying power towards experiences and the ability to socialize again other expense of hard goods.
We nevertheless operated under the assumption that debt with the arrival of summer temperature essential appliances, and our portfolio such as the humidifiers and air conditioners and will not be as severely impacted.
Partially right as of June for not registered very strong sales and just categories, but still can short.
But they can sort of our expectation that the consumers probably and welcome the opportunity to leave their home and in return for stores.
Could you give a concrete example that you can see for yourselves using simple tools such as Google trend.
Google searches for Amazon and Humidifiers and June ended up down 30% year over year, Conversely, Google searches for dehumidifier near meat, indicating a search for stores and even if ours right and all time high and slightly over 100% year on year.
Finally, we were anticipating June sales can be further boosted by Amazon and decision to move plan and day from Q2 to Q2 from Q3 to get to.
However, we were disappointed and the consumer's reaction for the event and the overall demand we expected non materialized.
Although we remain disappointed with the sales we expected for this quarter, we strongly believe with a drastic shifts and consumer behavior is it transit and extreme swing and the opposite direction of a pendulum initiated by the COVID-19 pandemic.
And the long term, we agree with expert opinion and such as E. Marketer with recent updated estimate and expect ecommerce adoption to continue to grow with a CAGR of over 15% for 2025.
While the quarter unfolded, we took the sale numbers by expected we executed on several steps to mitigate impact on revenue for accelerating a channel expansion. We also continue to push forward on our M&A strategy. As we had previously secured sign otherwise with targets and accumulated revenues of $92 million and 19 million and EBITDA.
And anticipation of completing due diligence and closing at least 1 additional acquisition and the quarter, we raised capital and early June.
Unfortunately in July the supply chain strains that we estimate have caused us to lose and $17.5 million in revenue for the last 3 quarters took a dramatic negative churn.
Pressure and ocean freight escalated from already challenging cost of containers to prices and not seen in 30 years. According to jewelry, a UK based American research company.
Given that most of our M&A target suffered from similar exposure to the exponential increase and freight costs and also the negative impacts and changing consumer demand coming out of a record 2020 years, we decided to hold off on completing any transaction that would result, and overpaying for a target what would that mean just struck us from navigating a core business for the supply chain crisis.
To give everyone and some perspective on how steep the July increase and rates was according to Frito Dot com and the rate index for containers from China, and the West Coast Rose from an average of $55.60 on the week of June 2014.
13000, and $666 by the week of July 30th.
The June rates, which we believe were still manageable, we're already up close to 300% versus the same week and 2020, when the average rate was $1638.5.
And by July 30, and the rate decrease represented and a 500% uptake versus wait for the same week year over year.
Keep in mind that the free those index that I'm, referring to is on average the Maximus and maximum cost reported by for for this year is that between $15020.5000 for the same index.
Our clearance container cost for these periods were unfortunately somewhere between the average and maximum rates quoted by fritos.
We're currently expecting to need approximately 1600 containers and the next 12 months.
With an average increase and spot rate index of approximately $10000 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 and the face of this perfect storm of inflation inventory shortages and astronomically high shipping rates.
And several large companies take dramatic measures, including home depot decision to charter its own container ship.
While we do not underestimate the severity of this crisis and up here and we're not for them to dealing with a volatile environment since.
Since becoming public in 2019, our company has been subject to various quite the situation related to the nature of our business model and we've proven our adaptability and resilience and the past.
For those who've 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-19 being overall beneficial for ecommerce and we needed to adapt to a complex reality, including volatile demand and supply and metrics and significant adaptations to our last mile shipping strategy.
We're determined once again to remain agile and of that probably for the new reality of 2020, 1 and have already put in motion and several strategic initiatives that we believe will help us come through stronger company and the long term the.
The most critical step we've taken is to adapt our supply chain to put these opening and the cost of shipping containers back to a more sustainable rate.
To that extent and glad to report we've negotiated for our relationship with 3 large global logistic companies. While we believe has enough capacity for and even the next 12 months at sustainable rates.
Those rates include commitment the 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 and the process of evaluating several partners, who can provide us with consolidation services. The adjustments were exited and dissatisfied and youre shifting and women's requirements will necessitate a few months of implementation to be fully operational.
Given that this effort is ongoing.
And materially adopting a critical part of our business to this new environment, we've decided to withdraw guidance for the goal of providing and your outlook that will include the impact of shipping cost reduction and the completion of operational changes.
We're not taking the decision and fully guidance slightly but for those on the call were skeptical of our approach consider the following.
And last Friday, Merck 1 of the largest ocean freight carriers and the World announced blockbuster second quarter earnings marked by an increase of over 300% and net earnings and an improvement of 88% and net margin.
When asked by analysts about the forward looking outlook for 2022, Theres CFO said and I quote, we're not going to get drawn into that we have visibility into the next 3 or 4 months and that's what we're comfortable guiding around.
Being on the absolute level of debt side of the spectrum of this crisis and posting 1 of the best quarters. The company has seen since it was founded and $90 for is not enough for mirth to tell us for the future holds we're.
And we're back and unchartered waters and.
And I thought it was now there's only 1 thing solving this crisis and getting my company and back to sustainable adjusted EBITDA profitability and all costs.
Given the shortfall and our adjusted EBITDA and number of this past quarter, we were required to seek a waiver from our lender High trail, which audio will further discuss and.
And I could think of lender hydro was closely with us from the past few weeks to understand our issues and the steps, we're taking to resolve them.
I want to personally thank our team for their trust.
And to our shareholders.
And I read the same message, we will leave no stone, Ontario, and and our efforts to get us back on track and get through this temporary challenge.
The other patients, 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 and performance as product P&L cost of dramatically increase given the current conditions.
On average our last 70 product launch and have seen their actual P&L cost versus originally planned costs like 25%, forcing us to increased pricing to absorb some of the difference and putting most of them on the dramatic deficit versus the competitive price target and we anticipate it to hit.
These unfortunate cost increase of effectively reduce our success rate to below 30% for these skus and in some cases and force us to discontinue certain lines of products for example products such as a chest freezer and non anchor and transportation costs that are higher than the product manufacturing cost itself.
Given these challenges and the fiber manufacturers prioritise the capacity toward established lines versus companies, who are launching new products, our confidence and being able to launch and products and maintain uninterrupted inventory level and the current environment is very low.
We have therefore accelerated our attitude with regards to sourcing you apply for manufactured in Europe, Canada, and Mexico, We're still in early stages of evaluating those relationships, but are cautiously optimistic based from the initial dialogues we have so far.
We continue to be very excited about potential M&A opportunities and once the supply chain and stabilizes. We believe that we will be able to secure deals that drive significant strategic value for adhere and and leverage our best in class platform.
From a growth perspective, I'll focus and the next few months will be on channel and international expansion. We've added 97, new products for Walmart Dot com this year picking and vengeance, taking advantage of the Walmart fulfillment as a service.
And and finally, we're going for dedicating 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 and happy to share that our focus on offering our platform as a turnkey solution to brand is showing a lot of promise spin.
Specifically our brand owned by 1 of the largest manufacturers appliance and the world and other 1 on biologic furniture company have shown side, it's actually with the plasma and so far and have increased amount of skus or products that we manage for them since the beginning of the year or any platform and successfully shipped over 7000 units from 11 partner warehouses conduct and 11.
Automated product performance hub checks and created daily machine learning based for gas for the platform and the service customer products.
For our tech and last mile fulfillment, and we're improving unit economics for these customers by approximately 10% inclusive of our fees versus other available solution.
Leveraging our research module to analyze the potential market size. We believe that we have been able to identify brand with a collective annual GMB of $45 billion that would greatly benefit from our platform with a service offering.
Leaving everyone with my closing thoughts for this call as I mentioned many times in the past adhere and is it still a young company, but 1 that is built around and agile patient and resilient culture.
We're looking forward for getting through this global crisis, and working hard to bring back the company's market capitalization for a stable base that will allow us to improve our capital structure and continued to drive growth across our efforts to build buy and partner with brands.
With that I'll pass it onto Rd, but thank you for the details of our financial performance.
Thank you Neal and good morning, everyone here other financial performance details of our second quarter for the second quarter of 2021, net revenue increased 14% to $68.3 million from $59.8 million and the year ago quarter from an increase and net revenue from our acquisitions offset primarily by a decrease in our organic business net.
And reduction and PPE net revenue.
The current quarter revenue of $68.3 million is comprised of.
$33.6 million and net revenue from our mergers and acquisitions $34.6 million of organic business, which is revenue from our built brands and acquired brands after 1 year purchase.
And <unk> 1 million of our Pac business.
The year ago quarter revenue of $59.8 million was comprised of $53.8 million of organic business $5.7 million wholesale for Emily PPE and <unk> 3 million of pass as a reminder, our first material acquisition happened and third quarter of 2020, the decrease and our organic business of $19.2 million is related to a decrease and our sustained price.
And approximately 16 million to $28.1 million from $44.1 million, excluding M&A revenue due to increased pricing of our products affected by ship and get and which has led to reduced sales velocity. The reopening of retail changing consumer habits and the initial phase of COVID-19, 3 opening and impacts of products, which sold well during the initial COVID-19 phase last year, but did not have.
And then repeat performance due to demand and pricing, which represents $4.1 million and $16 million decrease.
Our organic business also saw a decrease and launch revenue of $1.3 million to $4.4 million from $5.7 million, we launched banking products this quarter versus eat and last year's quarter and a total of 40 year to date versus 20 force same year prior year period.
Even though the rate of product launches almost doubled within that and have the same success as market conditions and our need to raise pricing due to supply chain crisis led to a decrease in demand and performance of our recently introduced products as.
And as mentioned previously we have decided to pause the launching of our products from the time being until the supply chain normalizes.
Our M&A revenue of $33.6 million in line with expectations for smashed PPD and squatty outside of seasonality and timing of the closing of the acquisition healing.
Sealing solutions slightly off our expectations due to supply chain difficulties and our shift from sellers manufacturing capabilities to new third party vendors as previously planned that said we are still very pleased with healing solutions acquisition and the strength of its brand and products. We still believe the upfront purchase price still falls within an acceptable acquisition purchase multiple.
We continue to struggle with the parents of trail and have been disappointed with its results to date.
As we continue to expand other marketplaces and international markets, we see opportunities to expand the product reach but preferred and we remain cautious at this stage.
Finally on net revenue, we suffered from inventory shorts, and the quarter, which we estimate could be and attack of approximately $5.6 million and the current period as compared to $4 million and the prior year ago period.
Overall gross margin for the second quarter increased to 48, 1% from $46.2 million, sorry, 46, 2% and a year ago quarter and a decrease.
From $54, 1 and the Q1.2021.
Quarter over sequential quarter decrease and gross margins, primarily due to the product mix as Q2, and Q3 tends to be the season for our larger goods, which have lower gross margins, but similar contribution margin versus the rest of our products and the initial impact from gross margin from the supply chain crisis. We believe the increased cost of shipping containers and impacted our gross margin by approximately 2.1% and <unk>.
This quarter alone.
And further we took a charge of $2.5 million appeared related to certain slow moving products due to the reduced sales forecasts.
Our gross margin improvement versus last year's primarily from a favorable product mix from our inclusion for acquired trans pursuing for M&A.
Our overall Q2.2021 contribution margin 8.2% when excluding non cash charges for inventory step up impact from our acquisitions, which decreased compared to prior year of $16.8.
Within <unk>, our sales and distribution costs from negatively impacted by the global so pricing and prices, which drove higher costs and the last fulfillment mile excuse me higher costing and last mile fulfillment given the carrier's tightness in the quarter.
Our variable sales and distribution expenses as a percentage of net revenue increased to 43% for the 3 months ended June 32021, as compared to 29, 4% for the 3 months ended June 32020 weeks, we expect to see these impacts continue for the remainder of 2021.
Q2, 2020, once our sustained parts contribution margin decreased to $12.6 versus $19.8 and Q2.2020.
The accident and as discussed we believe we will continue to see some pressure for the remainder of 2021 to the global shipping crisis increased last mile cost.
I was just adjusted EBITDA as defined in our earnings release for the quarter of 2021 reduced to a loss of $3.9 million from a profit of $3.4 million of second quarter.
We reported operating income for the quarter predominantly due to income from the change in fair value of contingent earn out liabilities of $23.3 million, which is related to the decrease of our share price at June 32021 versus March 31.2021.
And finally on the P&L, our net loss for the quarter is impacted by charges from the changes in fair value of warrants on a net basis of $4.4 million and extinguishment of debt of $29.8 million related to our refinancing completed in April.
Turning to the balance sheet at June 32021, we had cash of $61.9 million compared to $34.9 million at the end of March 2021 increase.
The increase and cash is currently driven by financing proceeds from the exercise of warrants a $25 million and refinancing our debt net and 50 million and cash and our recent equity financing of 36 million offsetting the cash used from the purchases.
Our mergers and acquisition assets $48 million working capital usage and 19, as we built up inventory for the summer season and cash net loss.
As discussed and announced the COVID-19 pandemic continues to bring uncertainty to consumer demand and price increases related raw materials importing goods, including tariffs and the cost of delivering goods to consumers is less inflation across United States.
Couple of the recent reopening of the majority of the country. We have noticed changes because they were buying habits, which may have reduced demand for our products as such these impacts have led us to miss at the company and Miss It adjusted EBIT Covenant for 3 months ended June 32, and 21 with our lender as of today, we have secured a waiver for the Stifel.
Further due to the global macro supply chain impacts that the company has reduced its forecast for the next 12 months.
We are working.
Through various action items to help improve the financial forecast and allow it to navigate through this global crisis.
There is no assurance these action items, along with the company's operating forecast for the 12 months, we'll be able to maintain compliance with our financial kind of lender. We have moved our our term loans are short term as required and the accounting rules, we continue to be and positive active conversation, where lender and expect to have additional updates when we announce our Q3.2021 results.
As mentioned the global shipping crisis has had a pronounced impact and our business and the short and the short term and we're not.
Not certain when the crisis will conclude but we do believe this is temporary and not permanent.
Excluding the <unk> and is being worked on as discussed.
Nice and considering a difficult thing to forecast. This current environment. We do believe it's it's.
We do believe the current quarter's revenue are more or less indicative for the coming quarters that said, we believe it's prudent for us to withdraw our 2021 revenue and adjusted EBITDA guidance, given the lack of visibility and corresponding ability to forecast, while we continue to negatively navigate this global crisis.
We expect to resume providing guidance as soon as our visibility improves.
And closing our organic business has decreased quarter over quarter, but against very difficult Covid, 19, comparable and and uniquely difficult environment, regardless organic products continue to be some of the best sellers and Amazon.
Strong organic brand and product portfolio overall, our acquired brands and products have performed well and we remain very confident and their future success.
We believe the current purchase and our profitability is acutely related to the COVID-19, pandemic and related global shipping prices.
The actions and progress as we previously mentioned our key for us to help navigate through this difficult environment and will help direct us back towards profitability.
For example, assuming 2020 normative contribution margin rates.
We still believe we could we would have achieved.
Excuse me for example, assuming 2020 normative contribution rates.
Which we still believe we can achieve and the future and with our typical and disclosed adjustments and adjusted EBITDA. We believe we would have been profitable for Q2.2021.
Although we have been impacted by the COVID-19, pandemic and related global shipping crisis, we are very confident and proud of our products, both organic and acquired our technology, our logistic networks, our people across the globe and about the overall business. We had a tear and have built we believe it's here and we'll overcome these challenges and continue to be a leader and our industry.
With that I'll turn it back to the operator to open up the call for questions.
As a reminder to ask a question. Please press Star then 1 is for your question asked and answered and you'd like to remove yourself from the Q press the pound key.
Our first question comes from Brian Nagel with Oppenheimer. Your line is open.
Good morning.
And I appreciate all the detail and morning, Brian.
Difficult quarter.
Here's the first question that you need.
And a step back.
You talked a lot about.
The shipping challenges out there.
Maturity and by no means.
You only consumer company discussing such challenges.
And as I was looking at your results yet.
These charges had a disproportionately negative impact upon the results for the quick first question I have is if you look at your business.
What other factors that make criterion.
Equally susceptible for the shipping prices at this point and then I know you discussed.
Negotiations with your shipping partners, but what other levers do you have to pull here and the nearer term.
Offset offset the substantial rate increases.
Hi, Brian Thanks for the question.
So let me let me break this down for you for.
First of all 1 of the 1 other things that makes us, let's say a little more susceptible to and.
Other consumer companies and as you know our core business.
And has a strategy around oversized good oversized goods, especially and this quarter as you think about the humidifier appliances and other larger airplanes, which are the strongest selling product and this quarter and in Q3 are going to be relatively more impacted by the cost of containers and theres more containers involved and shipping them.
And so both there and and the last mile increases and shipping costs.
Been very challenging as you can tell but.
And so again as you.
Think of what makes us the other ones susceptible at 1 thing. The second thing is looking and in general we are in our business model and our vision all about getting consumers the best product that money can buy and what.
And that perspective, we're always trying to build products that are high quality high value, but as you know right our contribution margin or a delicate right from that perspective, we're moving a lot of products.
But.
<unk>.
Performance wise cost move too much right, there could be and impact and so that's also somewhat affecting this year right.
You have to understand that he's increase and cost force us to increase our prices, which obviously diminishes the sales right. It's a domino effect as you increase prices youre going to sell less units and and very importantly, if you go too high and price right and you you might even start losing market share and get yourself into a place where.
It's going to be very hard to take it back to get it back right and so we've navigated that through.
The quarter rise by basically optimizing pricing.
To find that sweet spot, where we're performing well enough to.
And we maintained market share, which overall again on our core lines and we believe we've done well and doing that.
And without again, creating long term impact it's too.
And for them right.
So that does answer the question sorry, it was and I would think Oh, yeah, what else what can we do it right. So yeah. The number 1 thing we can do about it really we need to reduce the cost for shipping and just really something that.
It's been extremely accentuated right and the last few months and.
Look I mean.
We have we're confident that again.
This is a temporary thing but the question is how do we make it even more temporary for us and as we said and the remarks and and our press release, we have multiple relationships with large companies that we can use the pricing that we have with them to secure a sustainable cost of containers going forward volume as we have to make some other page.
<unk> to our supply chain to get there, which will take us a few more months and went out.
The most important thing that we're working on at this point.
Hopefully that answered your question Brian.
It does.
Very helpful. And then the follow up question I guess probably work already.
You talk already you talked about your comments just the renegotiation of covenant with your lending partner and as you look at the business now and I understand you've withdrawn guidance and how should we think about just the capital position of the company given the current challenges.
More and probably and hopefully hope you're doing well so listen I think for for all intents and purposes. Our first focus as we said is getting back to adjusted EBITDA profitability right. That's number 1 and that's what we're going to focus on and the coming quarters and that's the most important part of that question I think as we said before as you know.
And we need to raise capital as part of any strategy right and depending on how what targets, we come in and and especially we are being very focused on that and very concerned about that in the sense of 1 of them.
Make sure we don't overpay for target I think we will always think about potentially raising money or doing something along the lines to satisfy that strategy that said going back to the original part profitability adjusted EBIT number 1 focus that's what we're gonna be doing and I think as we navigate through that.
And will be will be established well and.
And from a position of strength and then conceptually look at either debt or capital markets or refinancing debt to fund our M&A strategy.
Okay got it if I can add to that and just.
1.1 when this comment here.
It's interesting, Brian and how things, obviously and moved quite quickly this year right.
For us and the last few quarters earlier this year.
And I can I can share that and we were obviously when the stock price was at a much higher number and.
Stable.
And I can share that we werent for.
Advanced conversations with a few.
Private equity firms.
That extended out the term sheets to up to 10% and $50 million right that would have really been.
Awesome for us at that point in time, but.
By being pretty advanced pretty advanced due diligence and some of them and and validation that was quite satisfying and I think the.
Overall.
And and the stock Unfortunately, and made it impossible for us to pursue that but again I've already said right at this point capital raising would be for M&A only right.
From from what we're seeing things today and.
And.
We just need to fix the profitability. That's the most important thing and we're going to do that and then once we are back on track and we look forward to continuing our strategy on the M&A and Thats, what we would need to raise capital right. So.
Could you give a little more color, obviously with health care and in the last half year or so.
I appreciate it thank you.
Our next question comes from Matt Koranda with Roth Capital. Your line is open.
Yeah.
Hey, guys good morning.
Just a couple of questions for me so first of all it sounded like the 68 million.
And revenue.
And we put up and <unk> is sort of the run rate alright.
On a go forward basis for the foreseeable future or at least for next quarter or so.
So do any other new acquisitions like PPD or it's quite probably add to that <unk> or the <unk> run rate and then can you hit adjusted EBITDA profitability at this level of revenue.
And in a material improvement and sales before we get the debt levels.
Maybe I'll grab that 1 I think the yes.
Yes, yes.
And obviously some of our going back for the first part some of our acquisitions have some seasonality to it. So so I do think.
Given the current visibility today, we think that's more or less the run rate, we'll have to see you know.
Whether it's also plays a factor in Q3 and I believe around northeast it's been really.
Yes, Michael So we'll have to think about that and the coming weeks, Matt, but I think I also said in my statement that if we had the normative shipping rates and and normative last mile race, and we would've been profit for the quarter I think.
We were doing <unk> of roughly.
Overall, 15% and I think we've seen that last year Q2 quarter. We work something here that we would have tripped into it. So I do think that if we can get the accident and place we should be able even on a lower revenue number like that right and.
Ballpark it right you should be able to get to profitability and adjusted EBITDA basis.
Okay got it and then just on.
The waiver that you've obtained can you just speak to the total anticipated share dilution from issuance of share. So high trial and then from a re striking of warrants and then how long does the waiver last.
And then.
I guess.
I'll start there and then.
Tenure.
Yes, Okay. Good question I think.
The shares will be issued today based off the closing price and some.
There'll be some dilution, but the majority of that dilution will go to pay down principal so it's not like a penalty it's going to reduce the amount of debt open, which ultimately reduce interest rates and interest payments and things like that.
We will be filing and those final numbers, either reconnect tomorrow morning, and the 8-K.
Hey.
The waivers is per quarter right, we waived and our Q2 default we are thinking about and working on forecast and ultimately presented to the lender at some point and the future is part of our Q3 results to see if we can secure broader waiver I think I think we felt prudent and thats due to 1 quarter because because of the lack of visibility and all the accident for doing we didn't want it.
Put ourselves in a situation where.
Perhaps the the 1 and first I will in a position of strength I would say it right right reality is as we navigate over the coming months as we said, we'll have more information as we and after Q3 numbers, but we certainly felt that was more printers do the narrow labor today, and and do something broader as we approached Q3.
Okay, and the broader negotiations I guess with what stem from.
Essentially removing certain covenants like the minimum EBITDA covenants on a quarterly basis and then.
Could speak to a little bit about the nature of the discussions.
For all remains to be seen right. There's a lot of things, we're working on to sort of help us get to a much more longer term solution.
Okay, Alright, and I'll talk about gift. Thanks for that's it for me.
Okay.
Our next question comes from Brian Kinsinger with Alliance Global Partners. Your line is open.
Great. Thanks for taking my questions you talked about.
New relationships with several logistics company, that's going to help secure enough containers for 12 months.
Reduce costs and the spot rates and terms of containers for 12 months and <unk>.
Reconciling that with procuring inventory and and SG&A and shipping cost.
Is it a fraction maybe 75% of the capacity you would have hoped for.
And maybe a quarter or 2 ago, maybe less and then in terms of the spot rates.
Are you locked and get <unk> average rates, a little worse, and then a little better than that maybe some context and those things would be great.
Yeah.
So can you can you hear me this will be the first question again in terms of can you repeat that im curious yeah.
I'm curious.
And when you say you have enough containers for 12 months.
What capacity are those containers, meaning do you only have 75 per cent of the shipping capacity and maybe you would've hoped for at the beginning of the year and that being in the quarter.
At 12 months doesn't tell me a lot other than you know.
You have some inventory coming over from curious about capacity versus your original expectations or hopes and then spot rates and a second question here where are you based on our recent past given we've seen historical right.
Yeah. So thanks for that and I know, it's clearer now.
And when we say for that for the next 12 months right.
Are looking at.
Currently based on current run rates and estimates that we have which still need to be remodeled.
And we put in a lower cost right, but in general we think that the number of containers that were.
What are you doing at around 600 containers and the next 12 months.
And what we meant with having secured or having prices with some of these larger logistics players is that the entire 1600 containers based on agreements and negotiations and we have put in place from a pricing perspective, we believe that.
We have a pricing that is way more sustainable than what.
And what spot prices are still probably more in line with what prices.
And we're recently.
Since the beginning of the year, but again, a much much better than what they are now right, which I believe as of this morning, the spot prices across the $20000 Mark I believe for the West coast, but so.
That's on that right so again.
And much more sustainable rates closer to <unk>.
And what we've seen.
And beginning of the year I'd say.
And capacity wise enough.
The lease to reach 600 containers other we need for the next 12 months.
So and what was the second question again.
No I think you've got both of them assuming they had 2.
2 more questions. The first 1 is.
You talked about needing to make some changes in your business. So you can.
And consolidate.
And for these new.
Relationships, how long is that going to take is it a 3 months process 6 months for much longer just take us through how long that might take.
Yes, it's going to take a few months we have already started of course right. That's something that's been and works.
We believe that day.
There are a few months.
And we're already seeing where we're taking advantage of some of these relationships and shipping containers at better rates, but.
Really be able to maximize those rates for our entire portfolio for the 12 months 12 months.
And then of consolidation and I'll have to happen and the port of origin. So we will basically need to use a company we're already working with a couple of potential partners there.
Consolidated containers across several.
Several brands that we have and ship them and a certain way.
To allow us to benefit from these rates and again, we believe that it's a matter of a few months.
Why don't we prudent I think.
I think that's.
The momentum you're seeing but it's not big and I think that long I think it's a matter of a few months before we get there.
Great last question I had in light of the comments and the mild weather and.
And in light of the supply issues do you see.
And we'll expect the typical seasonality notwithstanding acquisitions and acquisitions it seems a little bigger 3 Q.
Not talking about magnitude of course still your strongest quarter, followed by fourth quarter or is that really difficult to predict really at this point given what we've seen in August and July so far.
Yeah.
And I can tell.
Yeah, I think there are difficult to predict I think.
And they're difficult to predict I do think that historically Q3 has been our strongest I think.
It's been a really difficult quarter, right and a sense of a lot of factors that we mentioned in Q2 leading into Q3.
And it will be interesting you'll see is Q4, because obviously we have it.
Our first year with the full quarter of smashed products and healing solutions would have stronger Christmas season type type product offering. So we will see that but for now I would say that like I said, it's it's probably more equal across the Q2 number is probably more indicative of a very similar amount for Q3 and Q4.
Great. Thank you guys so much.
Yes.
Our next question comes from Marvin Fong with <unk>. Your line is open.
Oh good morning, Thanks for taking my questions.
Maybe a couple for me.
Last quarter, and we talked about.
Potentially.
Adjusting prices to kind of recapture the higher container cost and it seems like this quarter.
And you kind of hit a barrier in terms of what consumers are willing to bear in terms of price increases and maybe you could just.
You know discuss.
And the pricing strategy going forward are you seeing price increases from other other your competitors.
Our cost for product lines I know that you.
You mentioned that your weighted average sales rankings are holding up but maybe you could just revisit.
Revisit the topic of from pricing.
And.
Second question just thought you did discuss moving some production to other Europe, or Canada or Mexico.
Maybe you could just discuss.
What that cost profile would look like versus your China, China cost base.
Excluding shipping costs, obviously, but.
Maybe maybe could start right there.
Sure.
Yes, thanks for the question.
So as you as you mentioned right, we had no choice, but to increase prices to absorb the increased cost but.
As I explained earlier, there is really a little bit of a science there that has to be carefully thought right.
You can think about it right.
It is really depending a lot and also the inventory that your competitors already have with potentially lower cost basis and their ability to potentially maintain price and theres, a point and time, which could last month's right, where you could be doing and advantage or disadvantage against your competitors based on what prices they pay to ship the product and right. So in that transition period.
For now it's quite chaotic, but some competitors and are able to maintain lower prices, but just kind of know that at some point and time and it's going to have to go up for the question is what do you do until then.
And you're going to let them take more market share and potentially for the long term success of your products right. So.
And the longer term right I think everything will equalize, but but in the short term of course, everyone. I believe is facing the same situation with US right and 1 has been planning potentially for stronger numbers, but seeing cost increase having to raise prices and it's.
It's really kind of.
And for game of chest, a little bit of you have to play in every and every category and right to make sure that you can maintain your position and I think again overall.
Things that we've been able to do that it's just that the categories are also shrunk because I think consumers have seen inflation hitting their pocket everywhere from their coffee to.
2 buying and appliance right.
And I think that plays a big factor, but we really did I think whats right for the longer term and then really kind of chase as much profitability as possible at the expense of <unk>.
Long term potential much much difficult more difficult challenges kind of bring back market share.
So that's how we can navigate and manage pricing and again I believe that overtime.
There will be some equalization with and advantage to those and we're able to negotiate hopefully.
Better rate and again, that's something that we're very focused on.
Does that answer your question.
Yeah.
Thank you.
<unk>.
And I was just curious you know what I mean, you mentioned Prime day, a little disappointing maybe you can just discuss across your across your portfolio, which.
Basically across the board, but the organic sales growth was disappointing or were there certain categories that were more impacted than others.
And especially seasonal but any commentary there would be would be great. Thank you yes.
For all product lines were impacted demand and just any callers was lowered again as I said in my remarks before I really see this quarter is like the exact.
Kind of a swing and dependent on the opposite way for the same quarter last year right where.
Basically ecommerce and where is the only option and specific Amazon was a huge beneficiary of it it's clear that.
This quarter is the exact opposite quarter to that of.
Last year were <unk>.
Humans, who have been and Lockups are coming out of the lock ups and any opportunity they have to get out of their home. If it is go into a store that you haven't seen and a long time as wanted to pursue and as I mentioned and also in my remarks riders. There is evidence of that now and in fact right.
And look at Google trends, and others, you'll see that more and more.
Consumer this quarter and have decided to almost.
And an extreme way shop and stores because that was available for them, where it because it was not and the last year right thing doesn't affect there I think that again that pound and swing, it's got to find a middle ground and the good news is and the long term right, it's going to be and the benefits of E Commerce and and that's what we're betting on and this quarter is.
Obviously, now and what we wanted to see but.
To us and the long term, we're still continuing on track and what we're doing is I think the future from our perspective is just debt.
Tough comp versus the same quarter last year for share and with a global crisis and inflation, it's a perfect storm, but we had to face right. So that's how we see it but at this point and.
And again as already mentioned and I've said as well and number 1 priority is to cut those costs to get back for adjusted EBITDA positive and then from there continue to drive forward right zone.
And that's how we think about it.
Got it alright, thanks, so much.
Oh.
Our next question comes from Alexia <unk> with D. A Davidson your line is open.
Yeah.
Thanks, so much for taking my questions I have 2.
So first and you touched on this a little but wanted to know if management beliefs that legit.
Thanks, inflationary pressure, especially when it comes to container costs.
And as transitory or could this last through 2022.
And then second for the e-commerce industry in general to what does management and attribute the notion that for changes in consumer behavior to use e-commerce more and why only temporary and why would this change more sticky so to speak.
And.
That debt thanks for the questions.
Absolutely.
And the supply chain and quite this is transitory right it will pass.
And I quoted.
I put it the Maersk and my in my.
Some some comments from executives and Louis and my prepared remarks, and 1 that I didn't quote.
Was a PS.
1 of the executives made a remark on their call debt. They expect that some points prices to grow sharply down just as fast as they went sharply up right now.
When does that happen exactly at the very difficult question to answer again as I said in my and my remarks previously right. There on the other side of this equation right they've had incredible growth and profits obviously for this crisis and benefiting enormously from Ed yet themselves right I'm not that clear on when exactly does that.
Side, it's a very complex thing I think to react to figure out right and theres. So many elements involved here.
Obviously economies around the world are and injecting a lot of capital.
And to their economies to drive.
And those economies to move and and consumers could not spend that money and anything else by products.
And of course that creates and sustained demand for products around the world.
Half the products.
Before the crisis were shipped by airplanes airplanes that are typically filled with passengers now that the capacity of airplanes would passengers and the minute you have enormous capacity requirements from boats 1 that the world.
And does not prepared to handle and Thats. The result of whats happening, but at some point in time things will equalize and theyre going to happen, but this year is it going to happen by Chinese new year is it going to happen by the end of 2020..2 there is a lot I mean I've spent.
Many many many hours really many experts opinion, there and I don't think there's 1 that is exactly.
And with no exactly for.
Ross.
It's just about again continuing to be agile and doing everything we can to reduce the cost and find solutions drive and that's what we're doing now.
In terms of the consumers' adoption of E Commerce and stickiness again.
And the other day.
That's going to continue to increase in my opinion and the long term right and I think many experts across.
Consulting companies and other extra.
Expert opinions and believe that right.
Again, this quarter and exceptionally challenging because as I said at the exact opposite of the quarter.
And the same quarter last year, right, where E. Commerce was the only thing available and all other sudden consumers, who maybe are big adopters of ecommerce, but have not seen a store and so long.
Referred to potentially leave their home for Goodbye This air conditioner or whatever is it that they need light and so it's hard to tell but.
And that stickiness is there it's just that it's been impacted by a pretty extreme scenario, which is the reopening of stores right and the reopening of.
Of socializing and.
But at the end of the day I think that debt to cash will remain and we will see continuous adoption and increased adoption of e-commerce and and he used to them.
Great. Thank you.
Our next question comes from Brett Hendrickson with Nicole MS Capital. Your line is open.
Hey, good morning, hopefully you can hear me, okay, and final colder allergies or something.
I just had a couple of questions about kind of what you can do to make changes here you know you mentioned Maersk had.
That said, we don't have visibility on 3 or 4 months and that is true. The only thing is and the last 10 days or so both global ship lease and and Thanos and those of other companies that actually own the underlying shifts and leased them to maersk and other liner companies.
Got charters rolling off.
And the coming months and they expect and some cases to raise the lease rates by 2 or 3 acts and.
And so obviously maersk and others are going to have to find a way to pass it on and the cost of containers and so I worry this isn't transitory and Americas I think the second largest customer of global ship lease third for last week for my question is.
The shipping companies and that along 10 years, and agile and raise rates, putting capex into those ships and they feel like they deserve. This I think the only thing that to crush. This gets the price back down is for people to make changes in terms of where they are sourcing goods. So my question is how fast.
And what would how fast could you could you ship certain large bulkier items shift the sourcing to Canada, and Mexico or wherever and whenever.
To give up and be in terms of manufacturing costs and I'm just curious on that and then I have a couple of others too.
Yes, it's a great question.
In general right now our opinion and as for existing lines and we're not going to try to change where the products that are already and sustain and I'm going to be manufactured right. It's more for launching new products, we're launching new products.
The 2 challenges 1 and between the time, you kind of like centralize on an idea and build the potential P&L for it and the time the product set it starts selling and people can take 6 to 8 months right and in that time, the volatility of price and can create a situation where by the time you are launching the P&L of your product is very different and wonder.
We had planned and that's very that's challenging right because you're all of a sudden you.
And.
And that sort of theory on how youre going to interest and and category would sit and features and price points and other kind of element you counted on but they are going out there and the second thing that's challenging is that.
Especially when products are being launched at the beginning continuous inventory replenishment of essential right think of it this way the retailer the online retailers algorithms are constantly trying to figure out. If this product is going to continue to perform well ride and when not only do you.
Pricing that is all over the place you also.
Basically our reliability of containers.
Around 50% and.
Manufacturers.
Lead times that can vary dramatically as well because they are also impacted by the supply chain. So all these things together and make it very tough to launch in Europe, but for existing products at this point.
We're just looking to reduce the price of shipping and continue to navigate this storm right it would be and we'd be very challenging and trying to move their manufacturing at this level.
So that's how we think about it and as I've said in my remarks previously were in conversations with manufacturers in different places and Mexico and Europe.
And conversations are going well, but obviously, we need a few more months to see if we can be a reliable supply chain for the launch of other products right.
And then.
Yeah go ahead, sorry go ahead.
Well I was just going to non related question I was just going to ask.
You mentioned youre.
Youre going to use third party logistics companies more can you talk more about and she thinks there are some silver bullet or at least nearly from something close to a silver bullet and there for you because I'm.
I'm just worried that.
Everybody is and the same boat and no pun intended and where they're all everyone's looking to use a third party customer who is a third party provider, who can help them around these container rates and that the <unk>.
Situations, so bad debt a third party.
And there's a shortage of containers and so I don't know what a third party company can do for you, but help me understand if there's something that can be.
Yeah, and and I'm going to say this cautiously.
Not that it's necessarily a silver bullet, but a lot of our hope they're actually real.
And that into a relationship with Amazon itself.
We are taking part of and.
Amazon Global logistics and.
New program of Amazon and global logistics that will 1 of the first 1 of the earliest companies that is part of it where Amazon is looking to help.
There are sellers and a way of right through this.
And was created in general right, but they've been.
Very helpful and the discussion so far.
And again I am cautiously optimistic about it.
1 challenge and it also and you program from debt for them right and so I think it's.
The conversations are really.
And I'm missing and we're already leveraging some of these pass through that program.
But there's still more work to be done there, so, but but that's my opinion, where.
I think we might have.
A strong chance of really kind of like solving debt to just.
<unk> ambition to help their ecosystem of third party sellers to navigate through it.
There are no further questions question and turn the call back over to area Krasowski for closing remarks.
Thank you.
In terms of the upcoming calendar.
Terry and management will be participating and the D. A Davidson and 20th annual software and Internet Conference on September 9.
Thank you for joining us on the call today, we look forward to speaking with you on future calls this ends our call.
This concludes the program and you may now disconnect everyone have a great day.
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