You for standing by, and welcome to the Iterion Inc. Q2 Earnings Report. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's call may be recorded.
I would now like to hand the call over to Ilya Grozovsky. Please go ahead.
Thank you. Thank you for joining us today to discuss Atarian's Q2 2021 earnings results. On today's call are Yaniv Sarig, Co Founder and CEO and Arturo Rodriguez, our Chief Financial Officer. A copy of today's press release is available on the Investor Relations section of Atarian's website at atarian. Io.
I would like to remind you that certain statements we will make in this presentation are forward looking statements. And these forward looking statements Reflect Atarian's judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting Atarian's business. Accordingly, you should not place undue reliance on these forward looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward looking statements to be made on this conference call and webcast, We refer you to the disclaimer regarding our forward looking statements that is included in our Q2 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 on the call this morning. Since a lot has happened in this quarter, I'd like to start by summarizing the key points I will be And then take you through more details around each one of them. This has been a challenging quarter for e commerce with supply chain disruptions, inflation and an extreme shift in consumer behavior as the behavior as the opening of stores provided an opportunity for consumers to finally leave their homes. Despite a difficult environment and significant increase in product variable costs, Our sales grew on average 20% on a pro form a basis across all 14 brands compared to the Q2 of 2019. In July, the supply chain constraints turned into a full crisis as container rates increased 500% versus last year, effectively going from manageable to becoming a significant risk.
Despite being in advanced stages of our M and A process with several targets, We did not move forward with the deals at hand as acquiring the targets will just increase our exposure to the astronomical cost of shipping and the difficult comp year on year made the cost of the targets harder to justify. We're in the midst of adopting our supply chain and believe that through partnerships we have with several large logistic We have a path forward to secure a sustainable average cost of container for our needs in the next 12 months. Leveraging these new shipping relationship Requires operational changes that will take a few months to implement. We're withdrawing guidance until we execute on those changes and look forward to provide a new outlook once we've completed our transition and can predictably model the cost, pricing and margins of our product. We believe we have the best in class platform to execute at scale on the We are very excited about the strategy of building the e commerce products company of the future, despite the temporary global shipping crisis.
In fact, thanks to the challenges, We're confident that we will take the right steps to emerge more resilient and better positioned to benefit from the massive long term expected TAM of global e commerce. Now I'd like to go into more details as to how the Q2 evolved, the drivers behind the challenges we're facing and how we're working to quickly resolve them and put us back on track. This last quarter provided a strong reminder that COVID-nineteen is not done disrupting the global economy and that e commerce is not immune to those disruptions. The two main factors that have affected our business in Q2 are the consumer shift in shopping habits as the economy reopened and international shipping Supply chain congestion that turn into a global crisis of unprecedented scale. We strongly believe that these challenges are transient and surmountable.
I'd like to go into more detail now as how each one of these factors has played out and the steps we're taking to address them. Q2 of 2021 came exactly a year after COVID-nineteen's impact on brick and mortar retail caused an explosion in demand for e commerce due to the closure of physical stores. Starting on March 2021, consumers in the U. S. Saw significant ease of social distancing measures, reopening of traditional retail stores, and most importantly, and ease on travel restriction.
The psychological effect of back to normal was not simple to predict. And as I'm sure everyone on this call is aware, Many large companies, including Amazon, have also experienced a difficult quarter due to the challenges quantifying the impact of reopening the economy on e commerce sales. The good news is that generally speaking, we've not lost meaningful market share for our top categories. These categories simply shrunk compared to the same period last year. Looking at our metrics for products across all 14 brands who generated 80% of Q2's revenue, we can share that on a weighted average basis, they maintain their position within the top The 20 highest selling products based on units sold per category.
For context, most categories contain thousands of competing products. Our perspective is that the decline in demand for some of our categories year on year is largely due to consumers' excitement of going back to physical stores after over a year of being locked in at home. It's also evident by looking at the sharp increase in demand for items in other categories that we do not carry such Travel and fashion, the consumers chose to divert their inflation constrained buying power towards experiences and the ability to socialize again at the expense of hard goods. We nevertheless operated under the assumption that we will that with the arrival of summer temperature, essential appliances in our portfolio such as dehumidifiers and air conditioners will not be as severely impacted. We were partially right as June 2 not registered very strong sales in these categories, but still came short The take a short of our expectations as consumers probably welcome the opportunity to leave their home and return to stores.
To give a concrete example that you can see for yourselves using simple tools such as Google Trends, Google searches for Amazon dehumidifiers in June ended up down 30% year over year. Conversely, Google searches for dehumidifiers near me indicating a search for stores carrying dehumidifiers We're at an all time high and slightly over 100% year on year. Finally, we were anticipating June sales to be further boosted by Amazon's decision to move Prime Day from from Q3 to Q2. However, we were disappointed that consumers' reaction to the event and the overall demand we expected not materialize. Although we remain disappointed with the sales we expected for this quarter, we strongly believe that the drastic shift in consumer behavior is a transient and extreme swing in the opposite direction of a pendulum initiated by the COVID-nineteen pandemic.
In the long term, we agree with expert opinions such as eMarketer, With recent updated estimate, expect e commerce adoption to continue to grow with a CAGR of over 15% through 2025. While the quarter unfolded with softer sale numbers than expected, we executed on several steps to mitigate impact on revenue through accelerating our channel expansion. We also continue to push forward on our M and A strategy as we had previously secured signed LOIs with targets of cumulative revenues of $92,000,000 $19,000,000 EBITDA. In anticipation of completing due diligence, including at least one additional acquisition in the quarter, we raised capital in early June. Unfortunately, in July, the supply chain strains that we estimate have caused us to lose $17,500,000 in revenue over the last three quarters took a dramatic negative turn.
Pressure on ocean freights escalated from our already challenging cost of containers to prices not seen in 30 years according to Drury, a U. K.-based maritime research company. Given that most of our M and A targets suffer from similar exposure to the exponential increase in freight costs And also the negative impact of changing consumer demand coming out of record 2020 years, we decided to hold off on completing any transaction that could result in overpaying for a target That may distract us from navigating our core business through the supply chain crisis. To give everyone some perspective on how steep the July increase in rates was, According to freightoff.com, the rate index for containers from China to the West Coast rose from an average of $55,000 $60 on the week of June 14 to $13,666 by the week of July 30. The June rates, which we believe were Still manageable, we're already up close to 300% versus the same week in 2020 when the average rate was $16.38 By July 30, the rate increase represented a 500% uptick versus rate for the same week year over year.
Keep in mind that the Freddo's index that I'm referring to is an average. The maximum cost reported by Freddo's for this period are between 15,000 $25,000 for the same index. At year end's container costs for these periods were unfortunately somewhere between the average and maximum rates quoted by Freitas. We're currently expecting to need approximately 1600 containers in the next 12 months, with an average increase in rate index of approximately $10,000 per container versus our previous conservative models, I think everyone on the call understands the gravity of the situation for our forecast going forward. Auto consumer brands and retailers have already signaled that they're taking drastic steps in the face of this perfect storm of inflation, inventory shortages astronomically high shipping rates.
We've seen several large companies take dramatic measures, including Home Depot's decision to charter its own container ship. While we do not underestimate the severity of this crisis, at Athene, we're not foreign to dealing with a volatile environment. Since becoming public in 2019, Our company has been subject to various crisis situation related to the nature of our business model, and we've proven our adaptability and resilience in the past. For those who have been following us since 2019, we became public in the midst of a trade war and had to navigate concerns with regards to tariffs imposed on goods from China. In 2020, despite COVID being overall beneficial for e commerce, we needed to adapt to a complex reality, including volatile demand and supply metrics and significant adaptations to our last mile shipping strategy.
We're determined once again to remain agile and adapt rapidly to the new reality of 2021 and I've already put in motion several strategic initiatives that we believe will help us come through a stronger company in the long term. The most critical step we've taken is to adapt our supply chain to To that extent, I'm glad to report we've negotiated through our relationship with 3 large global logistic companies, what we believe is enough container capacity for our needs in the next 12 months at sustainable rates. Those rates include commitments of volume on our part, but more importantly, Still require us to change the way we prepare the containers for shipping from China. Specifically, given the number of products and brands we carry, Additional consolidation of goods across containers will be required at the port of origin. We're already in the process of evaluating several Partners who can provide us with consolidation services.
The adjustments were executed to satisfy our new shipping agreements requirements will necessitate a few months of implementation to be fully operational. Given that this effort is ongoing, that we're materially adopting a critical part of our business to this new environment, we've decided to withdraw our guidance with a goal of providing a new outlook that will include the impact of shipping cost reductions and the completion of operational changes. We're not taking the decision of fully guidance slightly, But for those on the call who are skeptical of our approach, consider the following. Last Friday, Maersk, one of the largest ocean freight carriers in the world, Announced blockbuster second quarter earnings marked by an increase of over 300% in net earnings and an improvement of 88% in net margins. When asked by analysts about the forward looking outlook in 2022, their CFO said, and I quote, we're not going to get drawn into that.
Have visibility into the next 3 or 4 months, and that's what we're comfortable guiding around. Being on the absolute opposite side of the spectrum of this crisis And posting one of the best quarters the company has seen since it was founded in 190 4 is not enough for Merck to tell us what the future holds. We're backing uncharted waters and what matters now is only one thing, slowing this crisis and getting our company back to sustainable adjusted EBITDA profitability at all costs. Given the shortfall in our adjusted EBITDA number this past quarter, we were required to seek a waiver from our lender, Hyt Trail, which Adi will further discuss. I'd like to thank Alender Hightrail, who has worked closely with us in the past few weeks to understand our issues and the steps we're taking to resolve them.
I I want to personally thank their team for their trust. And to our shareholders, I reiterate the same message. We will leave no stone unturned in our efforts get us back on track and get through this temporary challenge. The adaptations we're making to our supply chain means we'll also unfortunately have to pause launch of new products manufactured in Asia. Looking at recent product launches, we've noticed a decrease in performance as product P and L costs have dramatically increased given the current conditions.
On average, our last 70 product launches have seen their actual P and L costs versus originally planned costs rise 25%, forcing us to increase pricing to absorb some of the difference and putting most of them under dramatic deficit versus the competitive price target we anticipated to hit. These unfortunate cost increases have effectively reduced our success rate to below 30% for these SKUs. And in some cases, have forced us to discontinue certain lines of products. For example, products such as our chest freezer are now incurring transportation costs that are higher than the product manufacturing cost itself. Given these challenges and the fact that manufacturers prioritize their capacity toward established clients versus companies who are launching new products, our confidence in being able to launch new We have therefore accelerated our answer with regards to sourcing new products for manufacturers in Europe, Canada and Mexico.
We're still in early stages of evaluating those relationships, but are cautiously optimistic based on the initial dialogues we have so far. We continue to be very excited about potential M and A opportunities. And once the supply chain stabilizes, we believe that we will be able to secure deals that drive significant strategic value for Atiran and leverage our best in class platform. From a growth perspective, our focus in the next few months will be on channel and international expansion. We've added 97 new products to walmart.com this year, taking advantage of the Walmart fulfillment of the service.
And finally, we're going to dedicate more resources to our past efforts. While I want to continue to point out that our platform as a service is still in early stages, I'm happy to share that our focus on offering our platform as a turnkey solution to brands is showing a lot of promise. Specifically, A brand owned by one of the largest manufacturer's appliance in the world and another one owned by a large furniture company have shown satisfaction with the platform so far and have increased the amount of SKUs or products that we manage for them. Since the beginning of the year, our AIMI platform has successfully shipped over 7,000 units from 11 partner warehouses, conducting 11,000 automated product performance health checks and created daily machine learning based forecasts for the platform as a service customer products. Through our tech and last mile fulfillment, we're improving unit economics for these customers by approximately 10%, inclusive of our fees versus other available solution.
Leveraging our AIMI research model to analyze the potential market size, we believe that we have been able to identify brands with a collective annual GMV of $45,000,000,000 that would greatly Leaving everyone with my closing thoughts for this call, as I mentioned many times in the past, Atirean is still a young company, but one that is built around an agile, patient and resilient culture. We're looking forward to getting through this global crisis and working hard to bring back the company's market capitalization to a stable base that will allow us to improve our capital structure and continue to drive growth across our efforts to build, buy and partner with brands. With that, I'll pass it on to Arty to take you through the details of our financial performance.
Thanks, Yaniv, and good morning, everyone. Here are the financial performance details of our Q2. For the Q2 of 2021, Net revenue increased 14 percent to $68,300,000 from $59,800,000 in the year ago quarter from an increase in net revenue from our acquisitions, offset primarily by a decrease in organic business net revenue and reduction in PPE net revenue. The current quarter revenue of $68,300,000 is comprised of $33,600,000 of net revenue from our mergers and acquisitions $34,600,000 of our organic business, which is revenue from our built brands and acquired brands after 1 year purchase and $100,000 of our past business. The year ago quarter revenue of $59,800,000 was comprised of $53,800,000 of our organic business, $5,700,000 of wholesale, predominantly PPE and $300,000 of pass.
As a reminder, our first material acquisition happened in Q3 of 2020. The decrease in organic business of $19,200,000 is related to a decrease in our sustained products of approximately $16,000,000 to 28,100,000 $44,100,000 excluding M and A revenue due to increased pricing of our products affected by Shippagedon, which has led to reduced sales velocity, the reopening of retail changing consumer habits in the initial phase of COVID-nineteen, the reopening and impacts of products which sold well during the initial COVID-nineteen phase last year, but did not have Same repeat performance due to demand and pricing, which represents $4,100,000 to the $16,000,000 decrease. Our organic business also saw a decrease in launch revenue of 1,300,000 $4,400,000 from $5,700,000 We launched thanking products this quarter versus 8 in last year's quarter and a total of 40 year to date versus 24 same year prior year period. Even though the rate of products launches almost doubled, we do not have the same success as market conditions and Our need to raise pricing due to supply chain crisis has led to a decrease in demand and performance of our recently introduced products. As mentioned previously, we have decided to pause the launching of our products from the time being until Our M and A revenue of $33,600,000 is in line with expectations for Smash, PPD and Squatty outside of seasonality and timing of the closing of the acquisitions.
Healing Solutions slightly off our expectations due to supply chain difficulties in 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 Torrance Trail and have been disappointed with its results to date. As we continue to expand other marketplaces in international markets, We see opportunities to expand the product's reach, but for now, we remain cautious at this stage.
Finally, on net revenue, We suffered from inventory shorts in the quarter, which is what we estimate to be an impact of approximately $5,600,000 in the current period as compared to $4,000,000 in the prior year ago period. Overall gross margin for the 2nd quarter increased to 48.1 percent from $46,200,000 sorry, 46.2 percent in the year ago quarter and a decrease of from 54.1% in Q1 2021. The quarter over sequential quarter decrease in 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 impacts of gross margin from the supply chain crisis. We believe the increased cost of shipping containers impacted our gross margin by approximately 2.1% in this quarter alone. And further, we took a charge of $2,500,000 in the period related to certain slow moving products due to reduced sales forecasts.
Gross margin improvement versus last year is predominantly from the favorable product mix from our inclusion of our acquired brands pursuant to M and A. Our overall Q2 2021 contribution margin is 8.2% when excluding non cash charges from inventory step up impacts from our acquisitions, which decreased compared to prior year Centimeters of 16.8%. Within Centimeters, our sales and distribution costs were negatively impacted by the global supply chain crisis, which drove higher cost than the last fulfillment mile excuse me, higher cost than last mile fulfillment given the carriers 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 30, 2021, as compared to 29.4% for the 3 months ended June 30, 2020. We expect to see these impacts continue for the remainder of 2021.
Q222 saw our sustained products contribution margin decrease to 12.6% versus 19.8% in Q2 2020. Outside of the action items discussed, we believe we will continue to see Centimeters pressure for the remainder of 2021 due to the global shipping crisis and increased last mile cost. Adjusted EBITDA, as defined in our earnings release for the quarter of 2021, reduced to a loss of $3,900,000 from a profit of $3,400,000 in the 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 23,300,000 which is related to the decrease of our share price at June 30, 2021 versus March 31, 2021. And finally, on the P and L, our net loss for the quarter is impacted by charges from the changes in fair value of warrants on a net basis of $4,400,000 and the extinguishment of debt of $29,800,000 related to our refinancing completed in April.
Turning to the balance sheet. At June 30, 2021, we had cash of $61,900,000 compared to $34,900,000 at the end of March 2021. The increase in cash is primarily driven by financing proceeds from the exercise of warrants of $25,000,000 refinancing our debt netting $50,000,000 in cash And our recent equity financing of $36,000,000 offsetting the cash used from the purchases of our mergers and acquisition assets of 48,000,000 Working capital usage of 'nineteen as we build up inventory for the summer season and cash net loss. As discussed and announced, the COVID-nineteen The pandemic continues to bring uncertainty to consumer demand as price increases relate to raw materials, importing goods, including tariffs and the cost of delivering goods to consumers has led to inflation Coupled with the recent reopening of the majority of the country, we have noticed changes to consumer buying habits, which may have reduced demand for our products. As such, these impacts have led us to miss the company to miss its adjusted EBITDA covenant for the 3 months ended June 30, 2021 with our lender.
As of today, we have secured a waiver for this default. Further, not only due to the global macro supply chain impacts, 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 us to navigate through this global crisis. As there is no assurance these action items along with the company's operating forecast 12 months will be able to maintain compliance with our financial commitments with the lender. We have moved our term loan to short term as required in the accounting rules.
We continue to be in positive active conversation with our lender and expect to have additional updates when we announce our Q3 2021 results. As mentioned, the global shipping crisis Had a pronounced impact on our business in the short term, and we're not certain when the crisis will conclude, but we do believe this is temporary and not permanent. Excluding the action items being worked on as discussed by Yaniv and considering the difficulty in the forecast in this current environment, we do believe it's We do believe the current quarter's revenue are more or less indicative of the coming quarters. That said, we believe it's prudent for us to withdraw our 2021 revenue adjusted EBITDA guidance given the lack of visibility and corresponding ability to forecast while we continue to navigate through this global crisis. We expect to resume providing guidance as soon our visibility improves.
In closing, our organic business has decreased quarter over quarter, against very difficult COVID-nineteen comparables in a uniquely difficult environment. Regardless, our organic products continue to be some of the best sellers on Amazon. We have a very strong organic brand and product portfolio. Overall, our acquired brands and products have performed well, and we remain very confident in their future success. We believe the current pressures on our profitability is acutely related to the COVID-nineteen pandemic and related global shipping crisis.
The actions and progress, as Assuming 2020 normative contribution margin rates, we still believe we could we'd have achieved excuse me, for example, assuming 2020 normative contribution rates, which we still believe we can achieve in the future. And with our typical and disclosed adjustments on adjusted EBITDA, we believe we would have been profitable for Q2 2021. Although we've been impacted by the COVID-nineteen pandemic and related global shipping crisis, we are very confident and proud of our products, Orthorganic and Enquire, Our technology, our logistic networks, our people across the globe and about the overall business we at Atirean have built. We believe Atirean will overcome these challenges and continue to be a leader in our industry. With that, I'll turn it back to the operator to open up the call for questions.
Our first question comes from Brian Nagel with Oppenheimer. Your line is
open. Good morning. I appreciate all the detail.
Good morning, Brian.
It's a difficult quarter. Chris, the first question you need, but taking a step back, you talked here a lot about the shipping challenges out there. You're But Chirion is by no means the only consumer company discussing such challenges. But it seems as looking at your results that These challenges had a disproportionately negative impact upon your results. The first question I have is, as you look at your business, What are the factors that make Athyrian uniquely susceptible to the shipping crisis at this point?
And then I know you discussed the negotiations with your shipping partners, but what other levers do you have to pull here in the nearer term Just to offset these substantial rate increases?
Hey, Brian. Thanks for the question. So let me break this down for you. First of all, one of the things that makes us, I'd say, a little more susceptible to And other consumer companies is, as you know, our core business, has a strategy around oversized goods. Oversized goods, Especially in this quarter, as you think about dehumidifier appliances and other larger air appliances, which are the strongest selling products, in this quarter and in Q3, Are going to be relatively more impacted by the cost of containers as there is more containers involved in shipping them.
And so both there and in the last mile, the increases in shipping costs have been very challenging as you can tell, right? And so again, as you think of what makes us a little more susceptible, that's one thing, right? The second thing is, Look, I mean, in general, we are in our business model and our vision all about getting consumers the best Product, their money can buy, right? And with our perspective, we're always trying to build products that are high quality, high value. But as you know, right, our contribution margins are delicate, right, from that perspective.
We're moving a lot of products, but if Performance wise, costs move too much, right, that there could be an impact. And so that's also somewhat affecting this year, right? You have to understand that the increase in costs forced us to increase our prices, which obviously diminishes the sales, right? It's a domino effect. As you Increased prices, you're going to sell less units.
And very importantly, if you go too high in price, right, 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 The quarter, right, by basically optimizing pricing, to find that sweet spot where we're performing well enough to maintain market share, which overall, again, on our core lines, we believe we've done well at doing that. And without, again, treating long term impact, that's too meaningful, right? Yes. So that does answer the question?
Sorry, was there another thing? Oh, yes. What else can we do, right? So yes, the number one thing we can do, right, is really we need to reduce the cost of shipping. It's just really something that It's been extremely accentuated, right, in the last few months.
And look, I mean, 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 in the remarks and in our press release, we have Multiple relationships with large companies that we can use the pricing that we have with them Secure a sustainable cost of containers going forward. The problem is we have to make some adaptations to our supply chain to get there, which will take us a few more months. And we're now this is most important thing that we're working on at this point. Hopefully, that answers the question, Brian.
It does, Jamie. That's very helpful.
Then the follow-up question, I guess,
is probably more for Arty. You talked already talked about in your comments just the renegotiation of covenant with your lending partner. As you look at the business now and understand you've Withdraw on guidance. I mean, how should we think about just the capital position of the company given the current challenges?
Good morning, Brian. Hope you're doing well. So listen, I think 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 be focused on in the coming quarters, and that's the most important part of that question.
I think, As we said before, as you know, we need to raise capital as part of our strategy, right? And depending on how What targets we come in and especially we are being very focused on that and very concerned about that in the sense of want to make sure we don't overpay for target. I think we'll 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 is number one focus. That's what we're going to be doing.
And I think as we navigate through that, we'll be established well And from position strength and then conceptually look at either debt or capital markets or refinancing to fund our M and A strategy.
Okay. Got it.
If I can add to that, just one comment here. It's interesting, Brian, how things Obviously, moved quite quickly this year, right, for us in the last few quarters. Earlier this year, I I can share that we were obviously when the stock price was a much higher number and more stable, we I can share that we were in Pretty advanced conversations with a few very renowned private equity firms that extended our term sheets Up to $250,000,000 right, that would have really been awesome for us at that point in time. But despite being Pretty advanced due diligence with some of them and validation that was quite satisfying. I think the overall But in the stock, unfortunately, made it impossible for us to pursue that.
But again, as I already said, right, At this point, capital raising would be for M and A only, right, at least from where we're seeing things today. 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're back on track, We look forward to continuing our strategy on the M and A and that's where we need to raise capital, right. So just to give you a little more color, obviously on what has occurred in the last half year.
Appreciate. Thank you.
Our next question comes from Matt Koranda with Roth Capital. Your line is open.
Hey, guys. Good morning. Just a couple of questions from me. So first of all, it sounded like The $68,000,000 in revenue that we put up in 2Q is sort of the run rate on a go forward basis for the foreseeable future or at least the Quarter or so. So do any of the new acquisitions like PPD or Squatty Potty add to that 3Q or the 2Q run rate?
And then can you hit adjusted EBITDA profitability at this level of revenue? Or do we need a material improvement in sales before we get to that level?
Neve, I'll grab that one. I think
Yes, go ahead.
Yes, you'll obviously some of our Going back to the first part, some of our acquisitions have some seasonality to it. So I do think given the current visibility today, we think that's more or less the run rate, right? We'll have See, weather also plays a factor in Q3 and believe it or not, Northeast has been really mild. So we'll have to think about that in the coming weeks, Matt. But think I also said in my statement that if we had the normative shipping rates and normative last mile rates, we would have been profitable for the quarter, right?
I think If we were doing Centimeters of roughly overall 15%, and I think we've seen that last year Q2 quarter, we were something near that, we would Tripped into it. So I do think that if we can get the action items in 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 on 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 shares of Hightrail and then from the restriking of warrants. Then how long does the waiver last? And then I guess, let's start there and then we'll continue.
Yes. Okay. Good question. I think the shares will be issued today based off the closing price and some multiple there. 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 will reduce interest rates, I mean interest payments, things like that. We'll be filing those final numbers either late tonight or tomorrow morning in the 8 ks. The waivers is for a quarter, right? We waived our Q2 default.
We are thinking about and working on forecast to ultimately present to the lender at some point in the future as part of our Q3 results to see if we can secure a broader waiver. I think we felt prudent to do the 1 quarter because Because of the lack of visibility and all the action items we're doing, we didn't want to put ourselves in a situation where perhaps The we wanted for ourselves in a position to shrink, I would say, right? Reality is as we navigate over the coming months, as we said, we'll have more information as we Announce our Q3 numbers, but we certainly felt there was more prudent to do the narrow waiver today and do something broader as we approach Q3.
Okay. And the broader negotiations, I guess, would stem from potentially removing certain covenants like the minimum EBITDA covenants on a quarterly basis. I mean, maybe you could speak to a little bit about the nature of the discussions.
All remains to be seen, right? There's a lot of things we are working on to sort of help us get to a Much more longer term solution.
Okay. All right. I'll jump back in queue. Thanks, that's it for me.
Our next question comes from Brian Kinstlinger with Alliance Global Partners. Your line is open.
Great. Thanks for taking my questions. You talked about the new relationships with several logistics companies that's going to help secure enough containers for 12 months At reduced cost in the spot rates. In terms of enough containers for 12 months, reconcile that with procuring inventory And estimated shipping cost, is it a fraction, maybe 75% of the capacity you would have hoped for, Maybe a quarter or 2 ago, maybe less. And then in terms of the spot rates, are we are you locked into 2Q average rates, a little worse than that, a little better than that, maybe some context on those things would be great.
Can you hear me just repeat the first question again, like in terms of can you repeat that first please?
Yes. I'm curious, when you say you have enough containers for 12 months, at what capacity are those containers? Meaning, do You only have 75% of the shipping capacity maybe you would have hoped for at the beginning of the year or the beginning of the quarter. 12 months Doesn't tell me a lot other than you have some inventory coming over. So I'm curious about capacity versus your original expectation Or hopes.
And then spot rates is the second question. Where are you based on the recent past given we've seen this Historical rise.
Yes. So thank you. No, it's clear now. So again, when we say for the next 12 months, We are looking at currently based on current run rates and estimates that we have, which still need to be remodeled as we Put in lower cost rate, but in general, we think that the number of containers that we're needing is around 1600 containers in 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 that we have put in place From a pricing perspective, we believe that we have a pricing that is way more sustainable than What spot prices are still probably more in line with what prices were recently, meaning like 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 crossed $20,000 mark, I believe, for the West Coast. But, so that's on that, right? So again, a much more sustainable rate closer to Probably what we've seen beginning of the year, I'd say, and capacity wise enough In our belief to reach 1600 containers as we need for the next 12 months. Sorry, what was the second question again?
No, I think you got both of them. So my other question I had 2 more questions. The first one is, you talked about needing to make some changes In your business, so you can consolidate for these new Relationships, how long is that going to take? Is it a 3 month process, 6 months, much longer? Just take us through how long that might take.
Yes, it's going to take a few months. We've already started, of course, right? That's something that's been in works. We believe that it's a matter of a few months. We're already seeing we're already taking advantage of some of these relationships and shipping containers at better rates.
But To really be able to maximize those rates for our entire portfolio for the 12 months the next 12 months, There's an element of consolidation that has to happen in the port of origin. So we will basically need to use a company We're already working with a couple of potential partners there, to consolidate containers across the several brands that we have and ship them in a certain way, that would allow us to benefit from these rates. And again, we believe that it's a matter of a few months. Want to be prudent. I think that it's with the remains to be seen, but it's not going to take that long.
I think it's a matter of a few months before we get there.
Great. Last question I have in light of the comments on the mild weather, in light of the supply issues, Do you still expect the typical seasonality, notwithstanding acquisitions have changed a little bit as 3Q, Not talking about magnitude, of course, still your strongest quarter followed by 4th quarter or is that really difficult to predict really at this point given what we've In August July so far.
Marty, I think they're difficult to predict. I think it's difficult to predict. I do think that historically, yes, Q3 has been the strongest. I think it's been a really Difficult quarter, right, in the sense of a lot of factors that we mentioned in Q2 leading into Q3. It will be interesting we'll see is Q4 because obviously we have It will be our 1st year with the full quarter of SMASH products and Healing Solutions will have stronger Christmas season type product offerings.
So we'll see that. But for now, I would say, Like I said, it's probably more equal across, right? The Q2 number is probably more indicative of a very similar number for Q3 and Q4.
Great. Thank you guys so much.
Our next question comes from Marvin Fong with BTIG. Your line is open.
Good morning. Thanks for taking my questions. Maybe a couple for me. Last quarter, we talked about Potentially adjusting prices to kind of recapture the higher container costs and it seems like this quarter You kind of hit a barrier in terms of what consumers are willing to bear in terms of price increases. Maybe you could just Discuss the pricing strategy going forward.
Are you seeing price increases from other your competitors Across your product lines, I know that you mentioned that your weighted average sales rankings are holding up, but maybe you could just revisit the topic of 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 cost base, maybe excluding shipping costs, obviously, but Maybe you could start right there. Sure.
Thanks for the question. So As you mentioned, right, we had no choice but to increase prices to absorb the increased costs. But As I explained earlier, there is really a little bit of a science there that has to be carefully thought, right? If you think about it, right, It's really depending a lot on also the inventory that your competitors already have on potentially lower cost basis and their ability to potentially maintain price. So there's a point in time, Which could last months, right, where you could be either an advantage or disadvantage against your competitors based on what prices have they paid to ship the product in, right.
So in that Transition period that we're now, it's quite chaotic, right? You have some competitors who are able to maintain lower prices, but kind of know that at some point in time, it's going to have to go up, but the question is what do you do until then? Are you going to let them take more market share and potentially hurt the long term success of your products, right? So In the longer term, right, I think everything will equalize. But in the short term, of course, everyone, I believe, Is facing the same situation as us, right?
Everyone has been planning potentially for stronger numbers, but seeing cost increase, having to raise prices. And It's really kind of a game of chess a little bit that you have to play in every category, right, to make sure that you can maintain your position. And I think, again, overall, I think that we've been able to do that. It's just that the categories have also shrunk as I think consumers have seen inflation hitting their pocket everywhere from their coffee To buying an appliance, right? And I think that played a big factor.
But we really did, I think, what's Right for the longer term and then really kind of chase as much profitability as possible at the expense of long term potential much, much Difficult more difficult challenges trying to bring back market share. So that's how we can navigate it and manage pricing. And again, I believe that Over time, there will be some equalization with an advantage to those who are able to negotiate hopefully Better rates, and again, that's something that we're very focused on. Did that answer your question? Yes, it did.
Thank you.
And I was just curious, I mean, you mentioned Prime Day a little Pointing. Maybe you could just discuss across your portfolio, which was it basically across the board That the organic sales growth was disappointing or were there certain categories that were more impacted than others, Potentially seasonal, but any commentary there would be great. Thank you.
Yes. All product lines were impacted. Demand And just in e commerce was lowered. Again, as I said in my remarks before, I really see this quarter as like the exact Kind of swinging the pennant on the opposite way to the same quarter last year, right, where basically e commerce was the only option and specifically Amazon was A huge beneficiary of it. It's clear that this quarter is the exact opposite quarter to that of last year where Consumers who have been in lockups are coming out of these lockups and any opportunity they have to get out of their home if it's Going to a store that they haven't seen in a long time, right, is one that they'll pursue.
And as I mentioned also in my remarks, right, there There's evidence of that now in Intacct, right? As you can look at Google Trends and others, you'll see that more and more Consumers this quarter have decided to almost in an extreme way shop in stores because that was available to them versus it was not in the last year, right? I think there's an effect there. I think that, again, that tailwind swing is going to find a middle ground. And the good news is in the long term, right, it's going to be in the benefits of e commerce and that's what we're betting on.
And this quarter is obviously not what we wanted to see, but To us in the long term, we're still continuing by track and what we're doing is I think the future from that perspective is just that It's a tough comp versus the same quarter last year for sure. And with the global crisis and inflation, it's a perfect storm that we had Right. So that's how we see it at this point. And again, as already mentioned and I said as well, the number one priority is to cut those costs to get back to adjusted Positive and then from there continue to drive forward, right. So that's how we think about it.
Got you. All right. Thanks so much, Andy.
Our next question comes from Alexia Symmesidis with D. A. Davidson. Your line is open. Thanks so much for taking my questions.
I have 2. So first, and you touched on this a little, but Is transitory or could this last through 2022? And then second, for the e commerce industry in general, To what does management attribute the notion that the changes in consumer behavior to use e commerce more, were only temporary? And why wasn't this change
more sticky, so to speak.
Yes, thanks for the questions. So absolutely, the supply chain crisis It is transitory, right? It will pass. I quoted Maersk in my Some comments from executives at Merus in my prepared remarks. One that I didn't quote was that these one of the executives made a remark On their call that they expect at some points prices to go sharply down just as fast as they went sharply up.
Right now, when does that happen exactly? It's a very difficult question to answer. Again, as I said in my remarks previously, right, they're on the other side of this equation, right? They've had Incredible growth and profits, obviously, through this crisis and benefiting enormously from it, yet Themselves, right, are not that clear on when exactly does that subside. It's a very complex thing, I think, to figure out, right?
There's so many elements involved here. Obviously, economies around the world have been injecting a lot of capital into their economies to drive those economies to move and consumers Could not spend their money on anything else but products. And of course, that creates insane 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 day of airplanes with passengers diminish, you have enormous capacity requirements from boats, one that the world is not prepared to handle and that's But at some point in time, things will equalize.
Is it going to happen by the end of this year? Is it going to happen by New Year, is it going to happen by the end of 2022? There's a lot I mean, I've spent many, many, many hours Reading many experts' opinion there, and I don't think there's one that is exactly would know exactly. For us, It's just about again continuing to be agile and doing everything we can to reduce the costs and find solutions, right? And that's what we're doing now.
In terms of the consumers adoption of e commerce and stickiness, again, at the end of the day, we know That's going to continue to increase in my opinion in the long term, right? And I think many experts across consulting companies and other Expert opinions, right, believe that, right? I think again, this quarter is exceptionally challenging because as I said, It's the exact opposite of the quarter, the same quarter last year, right, where e commerce was the only thing available. And now all of a sudden consumers who maybe are big adopters of e commerce, but have not seen a store in so long, had preferred to potentially leave their home for to buy this air conditioner or whatever is it that they need, right? And so it's hard yet to tell.
But in our opinion, that stickiness It's just that it's been impacted by a pretty extreme scenario, which is the reopening of stores, right, and the reopening Of socializing and, but at the end of the day, I think that stickiness will remain and we'll see continuous adoption And increased adoption of e commerce in the years to come.
Great. Thank you. Our next question comes from Brett Hendrickson with Nokomis Capital. Your line is open.
Hey, good morning. Hopefully, you can hear me okay. I'm finding a cold or allergies or something. I just had a couple of questions about kind of what you can do to make changes here. You mentioned Merus And that said, we don't have visibility beyond 3 or 4 months, and that's true.
The only thing is in the last 10 days or so, both Global Ship Lease and Donos, and those are the companies that actually own the underlying ships and lease them to Maersk and other liner companies have said they've got charters rolling off In the coming months and they expect in some cases to raise the lease rates by 2x or 3x. And so obviously, Maersk and others Are going to have to find a way to pass that on the cost of containers. So I worry this isn't transitory. I know Maersk is, I think, the 2nd largest customer of Global Ship, please. 3rd quarter last week.
So my question is, these shipping companies have had a long 10 years of not being able to raise rates, putting CapEx into their ships and they feel like They deserve this. I think the only thing to crush this to get the price back down is for people to make changes in terms of where they're sourcing goods. So my question is, What would how fast could you could you ship certain large bulk items, shift the sourcing to Canada or Mexico or wherever? And What would the give up be in terms of manufacturing costs? 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 is for existing lines. We're not going to try to change where the products that Already in sustained and going to be manufactured, right? It's more for launching new products. With launching new products, There are 2 challenges.
1, between the time you kind of like set your eyes on an idea and build the potential P and L for it and the time the product It starts selling, it typically takes 6 to 8 months, right? And in that time, the volatility of pricing can create a situation where by the time you're launching, P and L of your product is very different than what you had planned. And that's very that's challenging, right? Because you all of a sudden you had certain And that's certain theory on how you can enter a certain category with certain features, price points and other kind of elements you're counting on, but those are not there. And the second thing that's challenging is that, especially when products are being launched in the beginning, continuous inventory replenishment are 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, right? And when not only do you have pricing that is all over the place, you also have basically a reliability of containers that's Around 50% and manufacturers lead times that can vary dramatically as well because they're also impacted by the supply chain. So All these things together make it very tough to launch new products. But for existing products at this point, we're just looking to reduce the price of shipping And continue to navigate the storm, right?
It would be very challenging to try to move their manufacturing at this level. So that's how we think about it. As I said in my remarks previously, we're in conversations with manufacturers in different places in Mexico and Europe. Coaches are going well, but obviously, we need a few more months to see if we can really rely on those supply chains to launch a lot of products, right? Yes, go ahead.
Sorry, go ahead. Well, I was just going to ask, You mentioned, you're going to use 3rd party logistics companies more. Can you talk more about if you think there's some silver bullet or at least nearly Something close to silver bullet in there for you because I'm just worried that everybody is in the same boat, no pun intended, where they're all everyone's looking to use a third party A third party provider who can help them around these container rates and that the situation is so bad that a third party I mean, there's a shortage of containers, so I don't know what a third party company
Yes. And I'm going to say this cautiously. Not that it's necessarily a silver bullet, but a lot of our hopes are actually relating to our relationship with Amazon itself. We are taking part of Amazon Global Logistics, our new program, Amazon Global Logistics that we're one of the first one of the earliest companies that is part of it, where Amazon is looking to help They're sellers in a way, right, through this. It was created in general, right, but they've been very helpful in the discussion so far.
Again, I'm cautiously optimistic about it. The one challenge is it's also a new program for them, right? And so I think It's the conversations are really, promising and we're already leveraging some of these costs through that program, But there's still more work to be done there. So but that's in my opinion where I think we might have A strong chance of really kind of like solving this through just their ambition to help their ecosystem of third party sellers Good day, sir.
There are no further questions. I'd like to turn the call back over to Ilya Grozovsky for closing remarks.
Thank you. In terms of the upcoming calendar, Deterion management will be participating in the D. A. Davidson 20th We look forward to speaking with you on future calls. This ends our call.
This concludes the program. You may now disconnect. Everyone, have a great day.