iPower Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2022. The request metadata says “2021 Q3,” but the filing covers 2022 Q3.
Business context
iPower sells indoor gardening, hydroponic and related products, primarily online. It reported one operating segment and described growth from higher sales volume, improved online marketing and sales expansion into Canada, Europe and Asia. On February 15, 2022, it acquired Anivia Limited and related entities, including a China-based operating business consolidated through a variable-interest-entity structure. It also formed Global Social Media, LLC, which it controls, and a 40%-owned logistics joint venture, Box Harmony, LLC.
Financial results
| Metric | Three months ended March 31, 2022 | Three months ended March 31, 2021 | Nine months ended March 31, 2022 | Nine months ended March 31, 2021 |
|---|---|---|---|---|
| Revenue | $22.81 million | $13.13 million | $57.30 million | $39.35 million |
| Gross profit / margin | $9.21 million / 40.4% | $5.76 million / 43.9% | $24.08 million / 42.0% | $16.28 million / 41.4% |
| Operating income / margin | $1.38 million / 6.0% | $0.79 million / 6.0% | $3.80 million / 6.6% | $2.72 million / 6.9% |
| Net income attributable to iPower | $1.18 million | Loss of $0.21 million | $2.87 million | $1.13 million |
| Diluted EPS | $0.042 | Loss of $0.010 | $0.106 | $0.056 |
For the nine-month period, revenue increased 45.6% and attributable net income rose 153.6% year over year. Gross margin improved modestly over nine months, which management attributed in part to a greater share of higher-margin in-house brands; management said those brands average a gross margin about 20% higher than third-party brands. In the March quarter, gross margin declined year over year amid higher import duties and freight costs. Operating expenses rose 49.6% over nine months, and operating margin fell from 6.9% to 6.6%.
- Cash flow: Cash used in operating activities was $14.76 million for the nine months, versus $4.79 million used in the prior-year period. The filing attributes the greater use primarily to increased receivables and inventory, income tax payments and growth-related working capital.
- Cash and liquidity: Cash was $2.64 million at March 31, 2022, down from $6.65 million at June 30, 2021. Working capital was $33.67 million, compared with $23.28 million. The balance sheet implies a current ratio of about 2.8.
- Debt and leases: The company reported $11.17 million of net long-term ABL borrowings, a $3.63 million acquisition promissory note balance including premium and accrued interest, and $0.46 million outstanding on its SBA loan. Operating lease liabilities totaled $9.36 million. The JPMorgan ABL facility is up to $25 million; management reported approximately $13.0 million of unused availability.
- Working capital assets: Accounts receivable rose to $19.08 million from $7.90 million, and inventory rose to $22.41 million from $13.07 million. The filing recorded a $70,000 credit-loss allowance and $188,233 inventory-obsolescence allowance at March 31, 2022.
Material changes and unusual items
- The Anivia acquisition consideration was $10.63 million: $5.53 million in restricted shares, a promissory note valued at $3.60 million and $1.50 million cash payable. The cash portion remained unpaid at the report date because the seller’s bank account had not been opened. The acquisition added $6.09 million of goodwill and $5.17 million of identifiable intangible assets.
- The company drew on its JPMorgan asset-based revolving facility, reporting $11.6 million in proceeds from long-term loans during the nine-month period. The facility is secured by company assets and matures November 12, 2024.
- Amazon Vendor and Seller sales accounted for 89% of nine-month revenue, up from 78% in the prior-year period; Amazon receivables represented 92% of total receivables at March 31, 2022. Two suppliers accounted for 27% of nine-month purchases.
- On May 16, 2022, after quarter-end, iPower and subsidiaries obtained a limited JPMorgan waiver for specified non-financial covenant/documentation defaults, including delayed compliance certificates and deposit control agreements. The loan parties agreed to cure the defaults and pay related fees.
- On May 12–13, 2022, the company approved a $60,000 CFO cash bonus and options for 3.0 million shares to the CEO and 330,000 shares to the CFO. The options have a $1.12 exercise price and vest subject to specified market-capitalization and revenue or operating-income targets.
Outlook, risks and contingencies
Management said existing cash, operating cash flows and available JPMorgan borrowing capacity should be sufficient to fund operations for the next 12 months. It expected working capital to remain near its then-current level and said cash generation could improve as supply chains normalize, supplier credit terms improve and in-house product sales expand. These are management expectations, not guaranteed results; the filing provides no numerical revenue or earnings guidance.
- Management cited freight and import-duty inflation, supply-chain disruption and shipping delays, including COVID-related disruption in China, as risks to costs and sales. The filing said the Russia-Ukraine conflict had not materially affected results or liquidity through March 31, 2022, but could disrupt global supply chains and raise costs.
- The company depends heavily on Amazon and a concentrated supplier base. Its business is also exposed to changes in regulation affecting hydroponic products and emerging end markets, including cannabis-related cultivation.
- The Anivia operating business is in China and is consolidated through contractual VIE arrangements rather than direct ownership of the operating entity. The filing notes regulatory, legal-enforcement and economic uncertainties in China.
- A FINRA arbitration brought by former placement agent Boustead Securities was tentatively scheduled for late October 2022. iPower said it believed it had meritorious defenses; it agreed to indemnify IPO underwriters, and the CEO agreed to reimburse covered amounts up to $3.5 million, funded only from sales of his shares.
- Management concluded disclosure controls and internal control over financial reporting were not effective at March 31, 2022, citing insufficient accounting expertise, communication deficiencies and weaknesses in the financial-close process. The company described remediation efforts, including additional accounting resources and revised reconciliation and transaction controls.
- After quarter-end, iPower said it might have miscalculated the significance of the acquired DHS subsidiary under SEC rules. If DHS exceeds the 20% threshold, additional audited and interim subsidiary financial statements may be required; the company was evaluating the requirements.
Important facts for investors to verify
- Whether operating cash use moderates as receivables and inventory convert to cash, and whether Amazon concentration or supplier terms change.
- Actual borrowing availability and covenant compliance under the JPMorgan facility, including the status of the May 2022 waiver and required cures.
- Whether the unpaid $1.50 million acquisition cash consideration was paid, and the acquired China business’s contribution and performance after consolidation.
- The outcome and potential exposure of the Boustead arbitration, including the scope and practical collectability of the CEO’s reimbursement undertaking.
- Progress on remediating material weaknesses and the outcome of the DHS SEC-significance review.
- The dilution and vesting implications of acquisition shares, outstanding warrants and the subsequent executive option grants.