iPower Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2022; comparative periods ended December 31, 2021. The statements are unaudited. iPower sells home, garden, and pet products primarily online. The 2022 six-month comparison includes Anivia and its subsidiaries, acquired in February 2022, whereas the prior-year period does not include that business for the comparable full period.
Financial performance and position
| Metric | Three months ended Dec. 31, 2022 | Six months ended Dec. 31, 2022 | Prior-year comparison |
|---|---|---|---|
| Revenue | $19.3 million | $45.3 million | Up 12.4% and 31.3%, respectively |
| Gross profit / margin | $8.0 million / 41.4% | $18.0 million / 39.7% | Margins were 44.1% and 43.1% |
| Operating income (loss) | $(4.1) million | $(8.7) million | Prior periods had income of $1.1 million and $2.4 million |
| Net income (loss) attributable to iPower | $(3.3) million | $(7.5) million | Prior periods had income of $0.8 million and $1.7 million |
| Basic and diluted EPS | $(0.11) | $(0.25) | Prior periods were $0.03 and $0.06 |
- Six-month selling and fulfillment expense was $17.8 million, versus $7.3 million a year earlier; total operating expenses more than doubled to $26.6 million. The period included a $3.06 million goodwill impairment charge.
- Six-month operating cash flow was positive $7.78 million, compared with negative $12.24 million a year earlier. The improvement largely reflected lower accounts receivable, inventory, and prepayments, along with higher accounts payable. Investing cash use was $0.13 million; financing cash use was $5.54 million.
- At December 31, cash was $4.00 million; current assets were $42.66 million and current liabilities $19.69 million, for working capital of approximately $22.96 million. Total assets were $62.06 million and equity $25.12 million.
- Borrowings included approximately $9.33 million on the JPMorgan asset-based revolving facility and $2.86 million outstanding on the Anivia purchase note. Operating lease liabilities totaled $9.59 million. The facility had a stated $25 million commitment; management reported approximately $9 million unused credit at December 31. The facility matures in November 2024.
Changes, outlook, and material risks
- Management attributed revenue growth to higher sales volume, product mix and expanded sales to other regions. It cited freight costs and channel/product mix as factors reducing gross margin. Freight charges had declined since September 2022, but management said that trend might not continue.
- Higher advertising, merchant, delivery, storage and fulfillment costs drove expense growth. Management reported advertising and promotion costs of $2.47 million for the six-month period, versus $1.21 million in the prior-year period.
- Management stated that cash, operating cash flow and available revolving credit were expected to fund operations for the next 12 months. It gave no specific revenue or earnings guidance. Working capital declined from $32.3 million at June 30, 2022 to $23.0 million at December 31, 2022.
- On November 11, 2022, JPMorgan waived defaults related to failure to meet a $7.5 million minimum Excess Availability requirement and to provide an accurate availability certificate. The filing says the company paid down $2.4 million of the revolving balance between January 1, 2023 and the report date.
- Amazon Vendor and Seller sales represented 91% of six-month revenue; two suppliers represented 41% of purchases. The company also reported approximately $3.0 million of inventory stored in China and exposure to changes in Chinese laws and economic conditions. DHS, its China operating entity, is consolidated as a VIE through contractual arrangements rather than direct ownership.
- Goodwill was written down by $3.06 million in the first fiscal quarter following lower share price and losses; the remaining balance was $3.03 million. Management reported no further impairment in the second fiscal quarter.
- Disclosure controls and internal control over financial reporting were deemed ineffective. Management cited insufficient technical accounting personnel, weak communication procedures at controlled subsidiaries, and deficiencies in the financial close process; remediation was underway.
- A FINRA arbitration brought by former placement agent Boustead was scheduled for April and May 2023. The company said potential exposure could not be reasonably estimated; CEO Chenlong Tan agreed to reimburse up to $3.5 million, funded solely by sales of his shares. The company also disclosed a Nasdaq minimum-bid-price deficiency, with a stated deadline of May 8, 2023 to regain compliance.
Important facts for investors to verify
- Whether operating cash flow remains positive after the period’s working-capital reductions, especially inventory and receivables.
- Actual availability and covenant compliance under the JPMorgan facility, including the effect of the prior default waiver and subsequent $2.4 million payment.
- Whether freight, fulfillment, advertising and storage costs stabilize enough to restore gross and operating margins.
- Amazon and supplier concentration, inventory quality and demand, and the financial performance and contractual risks of the China VIE.
- Progress on internal-control remediation, the outcome and potential cost of the Boustead arbitration, and Nasdaq listing compliance.