Good afternoon, and welcome to the Aterian, Inc. second quarter 2022 earnings report conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I'd like to turn the conference over to Ilya Grozovsky, Vice President of Investor Relations and Corporate Development. You may now go ahead.
Thank you for joining us today to discuss Aterian's second quarter 2022 earnings results. On today's call are Yaniv Sarig, Co-founder and CEO, and Arturo Rodriguez, our Chief Financial Officer. A copy of today's press release is available on the investor relations section of Aterian's website at aterian.io. I would like to remind you that certain statements we make in this presentation are forward-looking statements, and these forward-looking statements reflect Aterian's judgment and analysis as of today, and actual results may differ materially from current expectations based on a number of factors affecting Aterian's business. Accordingly, you should not place undue reliance on these forward-looking statements.
For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this 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 Yaniv.
Thank you, Ilya, and thank you everyone for joining us today. On the call today, I'll go over the following topics. I will start with a quick introduction of Aterian to those who are newer to our story. I will then review the key takeaways from the second quarter of this year. I will then discuss our challenges and how we're dealing with them, including the economy and macro level pressure from supply chain disruptions and inflation. I'll then summarize how we see the long-term prospects for Aterian. For those who are new to the story, here's what you need to know about our company. Aterian is part of a new breed of technology-enabled consumer product companies. We focus on building, acquiring, and partnering with e-commerce brands online. Aterian owns and operates 14 consumer product brands selling products across various categories on channels such as Amazon, Walmart, Shopify, and eBay.
To allow us to scale, we've invested in building our own proprietary software platform called AIMEE. AIMEE enables our team to manage 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 each product at scale effectively across various channels, automate certain marketing and fulfillment tasks, and much more. Our goal in the long term is to become one of the most efficient consumer product companies in the world, expanding our footprint globally while continuing to invest in technology and agile supply chain to drive scale and profitability. Moving now to our key takeaways from the second quarter.
I'll start with a quick summary of the main points and then discuss them in more detail. The economy and retail in particular continue to be disrupted by the aftermath of the pandemic and the supply chain issues that ensued, including inflation and weak consumer demand. As I mentioned in the previous earnings call, although these disruptions are hurting our business in the short term, we are already seeing encouraging signs of supply chain normalization. We continue to be focused on protecting market share for our products as we are taking steps toward preparing to resume growth in 2023. Our efforts are focused on three fronts, normalizing our inventory levels and accelerating the sale of goods that were previously shipped to our warehouse at the then imposed high shipping costs.
It's important that we do so to improve our margins next year as we reorder those goods at a lower cost basis due to declining shipping costs. Implementing improvements to our AIMEE platform and internal processes based on learnings from our past M&A transaction, so that we can restart and execute our accretive acquisition strategy faster and more efficiently. Furthering a strategic collaboration with publishers and media partners to gain a long-term advantage on marketplaces as content commerce continues to scale rapidly and play a critical role in online retail ecosystems. With those important points in mind, I'd like to now discuss each of them in further details. Given that several retailers have already published their Q2 results, a clearer picture of the challenging effects of the pandemic-induced supply chain disruptions are now available.
Large retail platforms such as Walmart, Amazon, and Target are dealing with expensive and excessive amount of inventory, as well as weaker overall consumer demand. Consumers are seeing their buying power diminished by inflation everywhere from the price of gas to everyday essentials. The combination is of course difficult for any business regardless of scale. Aterian is affected by the same forces and is taking several steps to not only navigate those challenges, but in the long term, hopefully benefit from them. We continue to believe that cooling demand for products will eventually bring normalization in shipping costs and reliability of international carriers.
As some of the listeners on the call might already know, encouraging data is already pointing in that direction. As of July 28th, the Drewry spot rate tracking the cost of shipping from Shanghai to L.A. is at $7,199 per 40-foot container. This price represents a 31% year-on-year reduction in cost. A very encouraging sign indeed, and we hope that trend will continue into 2023. We're still a far cry from the pre-pandemic shipping costs, which in 2019 were approximately $4,000 per 40-foot container for the same route. Our team is excited to see signs pointing in the right direction. While the decline of shipping costs is encouraging, it's important to remember that in retail, the effect of such changes can take a while to materialize.
Companies need to first sell the current inventories they carry before they can replenish inventory at a lower cost and recover their margins going forward. For us at Aterian, the time to act is now. We believe that near- to midterm future will offer an opportunity to return to our growth trajectory, and we're taking steps aimed at entering next year in good shape to do so. To that extent, we started working again on launching new products, and we're doing so carefully by investing mainly in select new opportunities that can leverage the success of existing products in our portfolio. In the next couple of weeks, we expect to announce an exciting launch of a cool branded air purifier in partnership with a publisher brand.
As we get comfortable that the supply chain challenges continue to ease, we will hopefully be able to announce additional progress we're making with accelerating product launches. Given that shipping costs are declining and we have the opportunity to restock our portfolio at a lower cost basis, we started accelerating our sales in July and will continue to do so until the end of the year. We took advantage of Prime Day to normalize inventory levels and had our biggest revenue for the event at a $5 million mark in sales over 2 days. While many of our portfolio products were sold at a strong margin, we also took some aggressive step on several product lines to normalize inventory levels. The short-term trend of top-line-driven strategy will further affect our margins this year, but hopefully will allow us to get back to double-digit contribution margin in 2023.
Our efforts to prepare for reigniting growth include an extensive revamp of our internal processes and further investments in our systems and technology. The investments we're making are the results of our learnings from acquiring nine brands through the M&A transactions the last two years. We continue to believe that a growth opportunity through M&A is an exciting part of our long-term strategy. Our goal is to improve our ability to integrate future M&A acquisitions faster and more efficiently than we've done in the past. As we look into a future where Aterian hopes to continue to grow its revenue through acquisitions, we believe that integration and effective management of the assets we acquire at a relative lower fixed cost are key to driving long-term success.
We're adding several features to our AIMEE platform across forecasting, prioritization of operational requests from our brands and other functions that we expect will allow us to integrate and manage brands, including those we acquire rapidly and efficiently with lower fixed costs. To give a concrete example of how these investments will make a difference, consider a future in which we continue to scale our brand portfolio and need to constantly make budget allocation decisions for our brands. Using the new workflows and systems we're building into and around AIMEE, we expect to be able to automatically prioritize the allocation of capital and fixed costs associated with each brand initiative based on the expected future ROI for Aterian.
The goal is to make sure we have an objective and optimal understanding of what each brand initiative implies for our budget, cash allocation, as well as expected financial outcomes of the aggregate initiatives performed by all the brands in our portfolio. Lastly, we continue to make great progress in our strategic investment in partnerships with publishers as the media industry continues to foray into content commerce. For those who are less familiar with the latest development in e-commerce industry, I would like to reiterate the strategic importance long-term for companies like us. As everyone on this call knows, our business focuses on promoting our brands through various marketplaces such as Amazon, eBay, and Walmart.
In the United States, while most consumers have a favorite retail channel they choose to search for products on, 36% of consumers start their research on Google to learn more about products from expert recommendation and editorial content. Publishers have taken notice, and many of them focus on writing articles about products to review and recommend to consumers items that will fulfill their needs. When publishers recommend a product and send their readers to Amazon, for example, they receive a commission if the consumer ends up buying the recommended product. For Aterian, it's important to play a role in this growing ecosystem and build relationships with publishers in hopes that they decide to write and promote more of our product when their editorial team believes they're a good fit for their audience.
To that end, Aterian has launched DealMojo, a platform that allows publishers to discover new products they can choose to recommend to their audiences while benefiting from additional revenue share and special discounts, which we are looking to streamline through the site. We're pleased so far with the reaction we received for DealMojo and continue to onboard publishers and adapt the product to meet the requirements from an integration perspective. As of the beginning of the year, DealMojo has allowed publishers to promote our products and driven over $7 million in product sales through the beginning of the year. While at this stage, DealMojo is still primarily used by Aterian, we continue to test the prospects of opening it up to other sellers.
With these updates on Q2 and our strategy for the rest of the year, I want to thank everyone on the call for those who follow our progress. We're excited for Aterian's potential return to growth in 2023 as supply chain issues are expected to continue to ease, and we continue to believe that we're on track to build one of the most exciting long-term growth stories in e-commerce and consumer product. I will now pass it on to Ari to discuss our financial results for the quarter.
Thanks, Yaniv, and good evening, everyone. Here are the financial performance details of our second quarter. For the second quarter of 2022, net revenue decreased 14.5% or $9.9 million to $58.3 million from $68.2 million in the year ago quarter, primarily from the decrease in net revenue from our sustained business and launch revenue due to our previously announced plan to pause new product launches. The second quarter net revenue of $58.3 million is comprised primarily of $56.1 million from our organic business, which we note includes revenue from our built brands and acquired brands starting one year after purchase, $1.9 million of net revenue from our acquisitions, and $0.3 million of wholesale.
The year-ago quarter net revenue of $68.2 million was comprised primarily of $29.1 million from our organic business, $33.2 million of net revenue from our acquisitions, and $5.7 million of wholesale. As a reminder, the acquisitions of Photo Paper Direct and Squatty Potty closed on May sixth, 2021, and as a result, moved into our organic category starting May sixth, 2022. Our organic revenue increased by $26.9 million from the move of our acquisition revenue into organic revenue, offset by a reduction in overall organic revenue from reduced sales velocity resulting from increased pricing due to supply chain disruptions and reduced overall consumer spend in the period.
Our acquisition revenue decreased $31.3 million to $1.9 million from Q2 2022, from $33.2 million in Q2 2021, primarily due to Healing Solutions, Photo Paper Direct, and Squatty Potty being owned for over a year and shifting to our organic categorization. Our sustained revenue landed at $54.1 million for Q2 2022 versus $61.8 million in Q2 2021. The $7.7 million decrease in this revenue is primarily due to increased pricing due to supply chain disruptions and reduced overall consumer spend in the period from a change in consumer buying habits and unfavorable impacts from inflation affecting consumer spending. Our business also saw a year-over-year decrease in launch phase revenue of $3.1 million to $1.3 million.
As planned, we did not launch any new products in this quarter compared to 19 in last year's second quarter. Overall gross margin for the second quarter increased to 53.8% from 48% in the year ago quarter. Our gross margin improvement versus last year's predominantly from a favorable product mix from the inclusions of our acquired brands, offset by increased costs from the supply chain disruptions, specifically increased cost of shipping containers. We believe the increased cost of shipping containers relative to second quarter of 2021 impacted our gross margin negatively by approximately 2.5% in the second quarter of 2022. Our overall Q2 2022 contribution margin, as defined in our earnings release, was 9.7%, which increased compared to the prior year's CM of 8.3%.
Q2 2022 saw our sustained products contribution margin increase 13.3% compared to 12.6% in Q2 2021. Within CM, our sales and distribution expenses continue to be negatively impacted by supply chain disruptions and higher costs in the last mile fulfillment, giving inflationary pressures and carrier tightness in the quarter. Our Q2 variable sales and distribution expenses as a percentage of net revenue increased 44.1% as compared to 43% in the year ago quarter. We expect to see these impacts to continue in the current quarter. While we continue to look for ways to mitigate higher cost dynamics in our supply chain and last mile costs, we believe we'll continue to see CM pressures for the remainder of 2022.
We reported a $10.1 million operating loss for the second quarter of 2022 as compared to a gain of $4.5 million in the second quarter of 2021. Second quarter 2022 operating loss includes a gain of $1.7 million from the change in fair value of earn out liabilities and $6 million of non-cash stock compensation. While the second quarter 2021 operating income includes $23.3 million of a benefit from the change in fair value of earn out liabilities and non-cash stock compensation of $4.9 million. Interest expense was down in Q2 2022 to $0.3 million from $4.7 million in Q2 2021 as part of our debt refinancing, which ultimately reduced our overall debt outstanding today versus 2021.
Net loss in second quarter of 2022 was $16.5 million, which was an improvement from a loss of $36.3 million in the second quarter of 2021. Second quarter 2022 net loss includes $6 million in net charges from changes in fair value of warrants, $6 million of non-cash stock compensation, and a gain of $1.7 million from the net change in fair value of earn-out liabilities. Second quarter 2021 included a $23.3 million benefit from change in fair value of earn-outs, a $29.8 million loss in extinguishment of debt, a $4.4 million loss of change in fair value of warrants, $4.9 million of non-cash stock compensation, and a $1.9 million charge associated with the derivative liability from our term loan in 2021.
Adjusted EBITDA, as defined in our earnings release for the second quarter of 2022, was a loss of $3.7 million, unchanged compared to a loss of $3.7 million in the second quarter of 2021. Turning to the balance sheet, at June 30, 2022, we had cash of $34.8 million compared to $44.5 million at the end of March 31, 2022. This decrease is due to a $4 million final payment from the Squatty Potty earn-out, working capital usage of $5.2 million, and our net loss. Inventory landed at $76.1 million on June 30, 2022, which is slightly higher than the $75.4 million at March 31, 2022, due to softness in net revenues.
Although we did see record Prime Day sales in July, we believe we continue to be long on inventory. As such, we anticipate to move inventory over the next two quarters at reduced margins to help normalize inventory levels. We continue to be impacted by global supply chain disruptions and inflationary pressures globally. While we believe these issues are temporary, they limit our ability to forecast, and as a result, we will not continue to be providing full year guidance at this time. However, as we look at our current Q3 and take into account current global environment, rising inflation, and continued difficulty with supply chain, we believe Q3 2022 net revenues will be between $52 million and $60 million.
The second quarter of 2022 saw continued challenging macroeconomic conditions and unpredictable consumer spending habits, and we expect these challenges to continue for the rest of 2022. However, we are starting to see some relief on supply chain, especially around container costs as we plan 2023. As such, we continue to be very confident and proud of our business. We have built our products, our technology, our logistics network, and most importantly, our dedicated, hardworking people. Aterian continues to persevere, and we'll overcome these challenges and continue to be a leader in our industry. With that, I'll turn it back to the operator to open the call up to questions.
We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question will come from Tom Forte with D.A. Davidson. You may now go ahead.
Great. One question, one follow-up. On the inventory that you intend to liquidate, the inventory you liquidated successfully at Prime Day and over the next two quarters, is there a commonality, meaning that it's, you know, you've considered it more discretionary, or it's within a certain category, like the home category? Actually last question also, how much of it would be attributable to brands you've owned more than a year and brands you've owned less than a year?
Hey, Tom. Thank you for the question. Yaniv here. So the pattern is just across the board, right? In general, I think that you know, demand is lower than anyone anticipated. I think not just Aterian, but across the board. I think the retail industry is coping with a rapid change in consumer demand, which obviously we all understand is driven by inflation. You know, for us, what's important is to remain very competitive with our pricing, right? If we don't drive a little more normalization of inventory levels across all the categories, right, we will end up potentially being in a situation where as shipping costs come down, our competitors are able to bring back more inventory at a lower cost and potentially underprice us, right?
The two parts to this, right? One is normalizing the inventory so that we have again the ability to stock at a lower cost and protecting our market share by being competitive on the pricing with that. Does that make sense?
Yes. Then, Yaniv, for the second follow-up question, I understand historically that sometimes because you have a large portion of bulkier items, that the container cost and shipping, inflationary situation could be different from you than it is for the industry in general. Right now, are the trends the same for bulkier products as far as container costs and things of that nature?
Demand is down across the board, which means that even smaller items are affected to some extent. You're pointing to a very important point. You're right about that. Obviously, the bigger items, you know, will be more influenced, right? In a way, right, one thing that's important to understand is, I think across the board, we're seeing. We have the luxury of being across many categories, so we see the data pretty clearly, right? Demand is down across most of the categories, in a way that is affecting all products.
You're absolutely right that the larger items, which are a big part of our portfolio, you know, they'll suffer more if we don't normalize inventory levels and bring back goods at lower costs because the dollar difference you know that we would have to increase prices on, right, are gonna be significant and give our competitors an advantage if we don't do something about it, right? That's a good point you're making around the larger items. Just to be clear, across the board, larger and smaller items, demand is lower than we expected.
Great. I'm gonna get back in the queue for more questions. Thank you.
Thank you, Tom.
Our next question will come from Brian Kinstlinger with Alliance Global Partners. You may now go ahead.
Hi, guys. Thanks for taking my questions tonight. In terms of new product launches, is there a target number of SKUs per month you're looking to launch? Will they still be fully AIMEE driven? Will there be any incremental inputs, such as ticket size or margin that give you that cushion to make new SKUs profitable should shipping containers not continue in the favorable direction they're headed? Related to that, what are the shipping assumptions AIMEE makes right now as it makes these decisions?
Thanks, Brian. That's a good question. As I mentioned, you know, during my remarks and also was in the press release, right, we're cautiously starting to work on product development again. As opposed to, you know, previous years before the pandemic, where we had set certain goals in terms of how many products we wanna launch every month, and as you remember, we had some very aggressive goals before the pandemic. In this case, we're being a lot more, I'd say, laser focused on opportunities that are incremental to what is already successful in our portfolio. The thinking there is when you launch a completely new product that is really trying to enter a category where there is no other anchor or no other thing to rely on, right?
The risks are higher and the investment up front is higher. What we're doing here is very specifically pinpointing opportunities where we can augment existing good products with other products that are either bought together or a different size or some kind of other variation. We are trying to basically piggyback on the existing success of our portfolio with very specific products that we're launching. The goal here, long term, right, is to get to a cadence like you were used to, but we're not quite there yet. We're taking this, you know, just more carefully. There is no kind of like monthly product launch goal at this point. But there's some interesting work going on and, you know, a non-negligible amount of products that we're working on right now.
How many of them will make it to the finish line? It's too early to tell because we just started kind of reopening the, you know, this part of our business, right? We're trying to go back into it cautiously because we believe that we're seeing signs out there that point to a more normalized supply chain, which allows us to go back to what we used to do, a more methodic launch of products, right? That's on the first question you had. You know, in terms of the shipping costs, because we've been obviously burned by the ups and downs of the volatility, we are tuning all our assumptions to be more conservative than what we believe the reality will be.
As we mentioned, a couple of other earnings calls, we have better than spot rate prices with some of our, you know, some of our partners, including Amazon, which we're not allowed to exactly disclose how much we're paying. We are being cautious and kind of modeling our products with a higher. Giving ourselves a buffer in case something happens and shipping costs do go back in the wrong direction, we're cautiously adding that buffer in there when we think about the model for these products. Does that make sense? Does that answer your question?
Yeah. That's great. It's good extra detail there. Thank you. It's been a super hot summer, at least here on the East Coast, but I assume everywhere. I would expect your position to benefit as usual. Looking at your revenue range for 3Q tells a different story. Is this category also being heavily discounted, or did you have shortages here, or was it just not enough to offset other discounts that you are seeing?
Great question. We are also, you know, looking at the demand for these goods where we are very strong in these quarters, seeing weakness there as well. I think most of it is just driven by inflation in general and obviously prices of products both offered by us and our competitors are more expensive than they used to be, right? I think a combination of general inflation plus higher prices is causing a little bit more weakness than we would expect despite the heat that you mentioned, right? Again, and as I mentioned also in my remarks, we've been doing quite well at preserving market share for these products.
What I mean by that is that the weakness we're seeing, right, seems to be just an overall trend where in those particular categories that maybe consumers are going to stick around for their old AC for another year, whereas in the past they wouldn't, right? Or you know wait for as we've seen across the board, Prime Day was quite substantial for us, but also a lot of others. It looks like consumers are being more price sensitive and you can see in these big days, right, that there's potentially more demand kind of concentrated in those times, right? Those two things I would point out to you.
In general, yes, it looks at the end of the day, there's weakness in demand across the board, and it's affecting those categories as well, despite the heat waves that we're seeing.
Great. One last question, then I'll get back in the queue. The higher shipping container prices has not just turned your new SKUs or new launches upside down, but also M&A obviously as it's more difficult to be profitable there. Are you close to getting more serious on M&A? I know you made a comment about it, but are you close to getting more serious on M&A? Should we think that's more 2023? Just then maybe talk about, are valuations similar to the past? You had some, you know, interesting cheap acquisitions you've made, but are they actually cheaper given the market conditions or something similar? Thank you.
Yeah. So a great question, as I mentioned in my remarks and, you know, as you described, right? We definitely think of M&A as playing a big part in our growth in the future. A lot of the efforts we're taking on now are preparing for reigniting this and being operationally even better at it than we used to be in the past, learning from all we've learned from the nine acquisitions we've done. In general, you know, we're keeping a finger on the pulse all the time and definitely listening to the market.
As you mentioned as well, the shipping crisis and the container cost have been one parameter that has made us kind of like take a step back a little bit and be more observant right now, as opposed to pulling the trigger on some of those deals. I think again, just like the container costs coming down affecting organic growth and, you know, launching new products, we're optimistic that we'll be able to reignite this M&A engine, you know, in hopefully the future, right? When exactly? It's something that, again, we haven't put a date to it, but we're doing a lot of work in the background to, as I said, prepare operationally for it and also just high level explore many different potential strategies from an M&A perspective, right?
For example, would we wanna maybe focus more on certain categories? Do we want to diversify more from supply chains in Asia, right? Those are all questions we're asking ourselves and doing a lot of work in the background, all in preparation to hopefully reignite M&A, as soon as we feel ready and as soon as we feel that the targets out there are not going to be, you know, dramatically affected by further supply chain issues.
Great. Thanks so much.
Thank you.
Our next question will come from Matt Koranda with Roth Capital. You may now go ahead.
Hey, guys. Good evening. So just wanted to dig into the third quarter revenue guidance for a moment here, if I could. Sounds like down 18% at the midpoint. Just wanted to get a sense for how much of the pressure, the year-over-year pressure are you seeing from sort of depth of discounting versus volume declines, if you could maybe disentangle those. Then what categories do you expect to hold up a little bit better than that 18% down versus be a little bit worse maybe?
Ari, do you wanna take that?
Yeah. Thanks, Yaniv. I'll maybe start with the second one there, Matt. Listen, I think we've been seeing it across the board, right? I don't think there's any one particular category that hasn't been affected by this consumer pressure or consumer reduced spend, right? Again, you know, Q2 and Q3 is driven by our ACs and dehumidifiers, though the numbers have been down and from what we anticipated. We still felt like we did great from a market share perspective. As Yaniv said, that, you know, we've been able to maintain market share on our core products, if not gain some in some areas. So when we look at the numbers, the decrease is definitely a kind of just general across the board decrease. I think that answers the second one.
Now, going to the first, I think it was about discounts and, like, the slowdown being discounting. Listen, we've had to raise prices, I think. You know, we know we had to raise prices, sorry, in order to offset our increased costs. That said, you know, we do discounts as, you know, throughout the period as needed, right? It's one of our tactics that we use depending on, you know, looking at the dynamics across competition and other things. That's something that definitely, you know, some function that Amy helps determine.
That said, what was interesting when we did Prime Day this year is we did see that there's a tremendous amount of sales on Prime Day, you know, our record days for us, which hints to the fact that consumers will be, you know, price sensitive or you know, price takers in a sense in looking for the deal. As we think about some of the longer inventory strategies that we're working on for Q3 and Q4, that will be something we consider. Certainly I think it's still a very volatile situation that we're trying to work through, but certainly I think that hopefully answers your question.
Yeah, that's helpful, Ari. Thank you. And then just was curious if you could maybe touch on the gross margin implications of the inventory clearing activity you're gonna be doing. I'd assume sequentially lower and maybe even lower on a year-over-year basis is sort of what we should be penciling in. But just any commentary on sort of how we should be thinking about the gross margin, right, for the rest of the year.
Yeah. Listen, Matt, another good question. I think we hinted. Like, I think we're still very early on all the plans that we're working on to move the long inventory. I think, you know, we hint. You know, I said it, we're gonna see a little bit of pressure continuing. I think some of that's gonna really boil down to how we take advantage of both, you know, this anticipated second Prime Day and also the holiday seasons. I think, you know, I'm not speaking for Yaniv and his team, but we got some interesting things that we're working on that obviously could, you know, move inventory but not necessarily impact margins materially. That said, I don't think we're pointing to exactly a margin impact.
I would assume you would see some pressure depending on how we move those long inventories, but it's not something we're pointing to publicly yet 'cause we still gotta work through it. I don't know if you wanna add anything there, Yaniv.
No, I think it's well said, Ari.
Okay, maybe just last one for me, guys. It sounds like we should be flushing some inventory, and usually seasonally you guys do clear some inventory into the fourth quarter. I'd assume, you know, lower inventory balance at the end of the year relative to the second quarter. Any other additional color or just some clarity that you could provide on, you know, sort of where you expect to end the year in terms of inventory balance would be super helpful.
Yaniv, you want me to grab that one?
Ari, do you want it? Yep.
Yeah, yeah.
Go ahead.
Thanks, Yaniv. Yeah, another great question, Matt. You know, listen, you know, we made a bet, right? We purchased inventory back in September, October 2021 to avoid supply chain issues, and then the world continued to unravel, right? Between the unfortunate conflict in Eastern Europe and obviously this record inflation that we've seen in the country, you know, record since 40 years ago, right? I think all those things were not anticipated when we ordered inventory in September, October of last year. That said, am I—I'm long on inventory. We're at roughly $75 million or $76 million at the end of June. I would love to see that go down for sure. I don't think we're pointing to an exact number.
I think, you know, just to think out loud, if that was, you know, $10-$15 million lower, that'd be great, right? I think that would be awesome. I think the good news about a lot of our products, like ACs and dehumidifiers, those are things that we'll sell next year anyway, right? A lot of it's really depending on where we see an opportunity to you know, move inventory where we think we're long, but at the same time, if it's not a great opportunity and something that affects the long-term tail of that product, we won't pull the trigger and we'll just sell it next year. Hard to point out, but certainly something that we're not measuring to a number. We're just
Trying to always do what's best for each individual product.
Very helpful. I'll leave it there, guys. Thank you.
Our next question will come from Brian Nagel with Oppenheimer. You may now go ahead.
No, thank you. Good afternoon. Thanks for taking my questions. My first question, I think this might be a bit of a follow-up, but or potentially even repetitive, so I apologize, but, you know, just with respect to the demand environment. I mean, look at like you said in, you know, the prepared comments, I mean, it's no secret right now there are demand issues out there across consumer and across retail, and clearly, Aterian has seen this. As you, I guess the question, obviously, as you look at the business, I mean, what gives you the confidence as you're looking at your weaker sales that it's more macro-related as opposed to something either specific with your products or competitive, like there's some type of building competitive pressure?
Hey, Brian. Good. Thank you for the question. You know, we are very much, you know, as opposed to a traditional retailer with the amount of data that is flowing through our systems have a pretty good handle of where we are, you know, in terms of our market position, right? You know, as already mentioned earlier, you know, through our analysis, we're seeing that for the large majority of our top products, you know, we're actually doing well. In some cases, we even are gaining market share. In some cases, obviously, not as well.
In general, I'm pretty happy with that despite, you know, again, the numbers, you know, being down year-over-year, that this is a very important thing to outline, right? Relative to the demand in the categories, you know, we're not seeing the decrease being linear with the decrease in the sales, right? Which points out overall to across categories, just weaker demand. On top of that, you have other metrics like, you know, searches, search volumes and all sorts of other metrics that we look at.
We feel quite confident with all this data, you know, that I think brands that operate in a more brick-and-mortar retail might not have that we're seeing just the effect of inflation and higher prices across the board being the main culprit right here, right? That's why we again, you know, as we look at these results year-over-year, the most important thing for us has been to get through this storm by, you know, controlling as much as we can our position in the categories so that while prices of shipping come down, as we said earlier, right? We can restock inventory at a lower cost basis and be back again at a better margin.
Again, the data is abundant enough for us to feel confident that we're overall doing a pretty decent job at protecting market share, and that as, again, the cost of shipping comes down, we should be able to regain better margins and potentially even, you know, drive further growth there, right? Does that make sense? Brian, does that answer your question?
No, that's. Yeah, no, it makes sense. It's very helpful, Yaniv. Look, the second question I have, and I guess it's also, you know, so to say, bigger picture in nature, but, you know, as you're kinda as Aterian and your team has been, you know, kind of managing through the, you know, these disruptions this season of the COVID or in some cases now post-COVID disruptions. We've all been waiting, kind of, for that restart. Now, today on the conference call, you're talking about, you know, looking ahead now to an increased pace of product launches. I think, I don't know if you mentioned M&A, but that would probably be in your sights, too.
I guess the question I have is, we have supply chain, given what you're saying, seems to be improving, but would you also wait for the demand dynamics to improve before you really start to push the lever on growth again?
Not necessarily. I think that, look, demand is weaker year-over-year, but it's still, you know, there's still obviously a lot of business going on in e-commerce. In general, we're very optimistic about e-commerce continuing to take, you know, bites of retail on a percentage basis every year, right? We don't think e-commerce is going anywhere, and we just continue to push forward.
What we don't wanna be doing is, you know, launching products or buying companies at the wrong time where our chances of success are gonna be lower, you know, because basically we bought them right at the peak of this COVID driven wave of e-commerce growth, and then, you know, we overpaid for them or because we launched a product at a time where the shipping costs was so outrageous that we just set ourselves from a P&L perspective at the product level to fail against the existing incumbents, right? It's just, you know, at the end of the day, we are not here to generate growth just for the sake of growth. We wanna be a fast-growing, profitable company, and we strongly believe that our model can allow for that in a normalized environment.
Whether the demand comes back roaring, like it used to in 2020 or not, it matters less, right? That the same rules of engagement are there. What I think matters the most is can we rely on supply chains to bring our goods to our warehouses, where we wanna ship, sell them to customers at a predictable cost, you know, at a cost that is not different the day we submitted our purchase order to the manufacturer versus what it ended up being our cost when selling the product by the time it arrived to the warehouse because of the volatility of all the other costs in between, right? That's really the key for us to be igniting growth.
Again, as already said, and I mentioned also earlier, there is very positive things happening out there that are showing us the light at the end of the tunnel. Hopefully, again, the world doesn't have any more Black Swan type of surprises for us ahead. You know, I think once we feel that stability is there, we wanna go back and drive growth pretty aggressively. I think, again, the signs are pointing in the right direction. Hopefully that makes sense, Brian.
It does. Very helpful, I appreciate it. Thank you.
Thank you.
Again, if you have a question, please press star then one. Our next question will be a follow-up from Tom Forte with D.A. Davidson. You may now go ahead.
Great. Thanks. I had a handful of follow-ups, so feel free to give short answers. All right, the first follow-up question I had is, can you give your thoughts on competition among companies that are focused on selling on Amazon, including if others are willing to discount their inventory more to move it?
Yeah. Definitely we're seeing, you know, in a way, the same pattern, right? Like, across the board, a lot of companies are facing the same situation where demand is not where they need to be, and, a lot of times you'll be facing a situation where you almost see a bit of a desperation in some of their product with lowering the price to a place where you can tell that they just wanna get out of it, right? And those are the places where our team has to pay close attention to make sure that, you know, we don't react the wrong way, right? And we've gotten pretty good at that.
I think we've learned a lot during the last year or so to how to really understand if this competition is here to stay or is someone you know trying to you know just undercut us because they're really desperate to get rid of their inventory. Again, overall, we've got I think the right analytics to understand that and the right experience on our team level so that we can make the right decisions when we see that happening. Does that make sense?
Yes. Historically, you've operated on a pretty light headcount model, but I'm wondering if there's opportunities to add talent with layoffs at other tech firms.
Sorry, I couldn't hear the last part of the question. Can you repeat that, please?
Historically, you've operated with a pretty light headcount, but I wanted to know-
Yep.
If you thought there were opportunities to add talent given the layoffs at other technology firms?
Oh, yeah, absolutely. You know, we obviously, as you and I probably spoke a few times, right, for us, the most important thing is, can we run this business with a very aggressive fixed cost, as you said, right? Like a headcount that's light. At the same time, as you mentioned, there is a lot of talent out there that has been laid off. Of course, we are keeping our eyes open and on different channels looking for bringing in that talent. We strongly believe that quality over quantity is the name of the game here across all the different departments. We will absolutely, you know, pull the trigger on hiring people if they are the right talent and when you got them.
We're not gonna become a company that just hires tons of people because they can't run the business another way. Again, everything for us is about efficiency. Yeah, that's a good question.
Great. Couple more. Anecdotally, it seems like Amazon's taking longer to deliver products. I know you've got some pretty good data. Are Prime-eligible products not the needle mover they once were?
You know, I think again, it's just mainly due just across the board with just disruptions in different aspects of the supply chain. I don't know if I can deduce that there is any potential kind of like, you know, revisiting of what Prime means. I think Amazon, just like everyone else, is dealing with complexities of last mile shipping. I think it's a little early for me to comment and say that there's something changing with how Prime, you know, what Prime means for consumers and for Amazon. We'll keep tracking it and love to follow up with you on that if I think that there's a more meaningful thing going on here.
Great. Last two. You have great vantage point when it comes to marketplaces in general. When you look right now at Amazon, Walmart, and Alibaba, are there any important similarities or differences to call out on near-term trends?
Yeah, I think Amazon continues to invest heavily in attracting sellers, giving them more tools and technology, something that we, you know, have seen in the past and is very encouraging for us, right? The more data and analytics we can pull out of their APIs, the more we can make better decisions. We're seeing Walmart make surprising, you know, progress on that front as well with many more products on the marketplace side, including their ads that are seen to be accelerating the progress in terms of delivering them to sellers. Overall, what I'm seeing is that marketplace is just becoming stronger and stronger.
I think again, the thesis that we built this company around, that brands are gonna have to be very good at selling on our marketplace, continues to be very strong. That's something that again, is very encouraging, for us as we continue to push forward on our vision. When it comes to Alibaba, you know, we don't use that platform as much, right? It's, you know, a question that I wouldn't know exactly how to answer, compared to Amazon or Walmart. It's just because it's a more cross-border e-commerce platform that is running more wholesale type of sales. Again, when it comes to marketplaces in general around the world, I think that the writing's on the wall.
Marketplaces will continue to represent a very big part of e-commerce and retail, not just in the US, but everywhere. We're excited to, you know, continue to build Aterian to be a company that is designed to execute well on marketplaces.
Great. Last one. Thanks for taking all my questions. Historically, based on your SKU set, the fourth quarter percent of sales was usually less than it was maybe for the e-commerce market in general. I know you're not giving an outlook, but when you look at your current SKU set, do you think you're still in a position where your fourth quarter wouldn't necessarily be your high-water mark?
That's a great question, and cautiously say that, obviously we don't give guidance for fourth quarter at this point. You know, it. You know, given that we are, you know, in, as we described, right, we wanna normalize inventory, typically Q4 has a lot of opportunities for that. That could help us there, I'd say from a sales perspective. Again, I'm saying that cautiously. It's. A lot of things can happen between now and Q4, and the world is so volatile that, we again are looking for more stability before we can give better guidance as, you know, as far as, beyond the next quarter, right?
I'm cautiously optimistic that we'll have opportunities in Q4, pending, again, many other things that are happening in the world that could affect that. Overall, cautiously optimistic about that.
Great. Thank you, Yaniv. Thank you, Arti.
Thank you, Tom.
Thanks, Tom.
This concludes our question and answer session. I would like to turn the conference back over to Ilya Grozovsky for any closing remarks.
Thank you. As part of our Shareholder Perks Program, which as a reminder, investors can sign up for at aterian.io/perks, participants have the ability to ask management questions on our earnings call. I wanted to thank all 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. First question is: Do you believe you are well-capitalized enough to seek out acquisition targets in the next couple of quarters? Yaniv, Arti?
Thanks, Ilya. Yeah, let me take that. In general, you know, future M&A will require additional fundraising. We're in the process I described earlier to further define our M&A strategy going forward based on our learnings, and we're looking at various options to secure the most capital-efficient structure for those transactions. In general, yeah, we will need to raise more money for acquisitions, but we are looking again at many different options to do it in the most efficient way.
Great. Next question is: Have you considered acquiring complementary brands to the brands that you currently own, or are you only interested in new verticals?
Yeah, it's a great question, and it goes hand in hand with what I described before. As we kind of review, you know, everything that unfolded with the brands that we acquired, there's definitely some interesting questions that arise, including specifically this one, which is to really kind of focus a little bit more on certain categories and, you know, basically further strengthening the moat that we have in certain categories by acquiring brands that are complementary, or in some verticals, right? That's something that we're looking at. You know, again, we're leveraging the time that we have here in the next few months to study that strategy further.
Great. The last question from the perks program is: Shipping costs are down as of late. Do you expect them to move back up, or do you believe the worst is behind you for the foreseeable future?
Yeah, good question. Again, as I mentioned also in the previous earnings call, we believe that the current economic downturn will stabilize shipping rates because of obviously, you know, lower demand, right? It seems to be happening as we speak. The cost of shipping containers internationally is declining. That's a good thing. We believe in general, right, that the worst is behind us. Again, as I said earlier, we remain a bit concerned about geopolitical tensions that could create further setbacks, you know, black swan events that we couldn't foresee from where we are. The world is still a bit in turmoil.
We're keeping an eye on that, but overall, we're cautiously optimistic that the worst is behind us and, the trends that we're seeing are pushing us towards, as I mentioned, right, reducing inventory levels so that we can bring back inventory at a lower cost and, preparing to drive growth again, hopefully, right? Yeah, that's the answer.
Great. Thanks. This concludes the Q&A portion of the call. In terms of the upcoming calendar, Aterian management will be participating in the H.C. Wainwright & Co. 24th Annual Global Investment Conference in New York City, September twelfth through September fourteenth. We look forward to speaking with you on future calls. This ends our call. You may now disconnect.