iPower Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2022 (the company’s fiscal first quarter of FY2023); filed November 14, 2022. Unaudited consolidated results include subsidiaries and a Chinese variable interest entity (VIE). iPower sells indoor-growing, gardening, home-goods and related products, primarily online.
Key financial results
| Metric | Quarter ended Sep. 30, 2022 | Prior-year quarter | Change / context |
|---|---|---|---|
| Revenue | $26.0 million | $17.4 million | Up 49.8% |
| Gross profit / margin | $10.0 million / 38.4% | $7.3 million / 42.1% | Gross profit up 36.5%; margin down 3.7 percentage points |
| Operating expenses | $14.6 million | $6.0 million | Up 142.0%; includes $3.06 million goodwill impairment |
| Operating income (loss) | $(4.59) million | $1.29 million | Operating margin: (17.7)% vs. 7.4% |
| Net income (loss) attributable to iPower | $(4.18) million; $(0.14) per share | $0.89 million; $0.03 per share | Turned to a loss |
| Operating cash flow | $0.38 million | $(5.21) million | Improved, with working-capital movements contributing |
| Cash and cash equivalents | $4.84 million at Sep. 30 | $1.82 million at Jun. 30, 2022 | Quarter-end cash increased $3.02 million |
Management attributed revenue growth to higher sales volume, expanded geographic reach and online demand. Cost of revenue grew faster than sales, reflecting higher import duties and freight costs. Selling and fulfillment costs rose by about $4.7 million, including advertising, storage and fulfillment workforce costs; general and administrative expense also increased. Advertising and promotional costs were $1.17 million, versus $0.63 million a year earlier.
Balance sheet, debt and liquidity
- At September 30, current assets were $57.4 million and current liabilities were $24.7 million; working capital was $32.8 million, compared with $32.3 million at June 30.
- Inventory was $30.3 million and accounts receivable, net, was $19.0 million. The filing reports about $1.9 million of inventory stored in China.
- The JPMorgan asset-based revolving facility had a $25 million commitment. Borrowings, net of debt discount, were $15.2 million at September 30, including $0.34 million of interest payable. The company reported approximately $9.0 million of unused availability at that date.
- The Anivia acquisition promissory note balance was $3.70 million, including accrued interest and premium; the company reported paying the first $875,000 installment in October. Total operating lease liabilities were $10.21 million.
- Quarterly financing cash flow was $2.76 million, primarily reflecting $2.81 million of proceeds from long-term borrowing. Investing cash outflow was $0.06 million.
- Management said existing cash, operating cash flows and revolving-credit availability were expected to fund operations for the next 12 months. This is management’s assessment, not a guarantee; subsequent credit events are noted below.
Material changes and unusual items
- In February 2022, iPower acquired Anivia and related entities, including the Chinese operating VIE, for stated purchase consideration of $10.63 million. The acquisition expanded its China-related product and logistics operations; the VIE contributed approximately $3.2 million of revenue and $0.6 million of net loss before eliminations in this quarter.
- Following a decline in the share price and the quarter’s net loss, iPower recorded a $3.06 million goodwill impairment based on revised discounted cash-flow projections that reflected higher freight and storage costs. Remaining goodwill was $3.03 million.
- Foreign-currency translation resulted in a $0.11 million comprehensive loss. The quarter’s income tax benefit was $0.45 million; management used the year-to-date actual effective tax rate because it could not reliably estimate the annual rate.
- Amazon Vendor and Seller sales represented 91% of revenue, and Amazon receivables represented 94% of accounts receivable. One supplier represented 19% of purchases during the quarter.
Outlook, risks and contingencies
- No numerical revenue or earnings guidance is provided. Management plans to invest in product and brand development, expand its catalog and pursue complementary acquisitions. It noted that freight costs had decreased since September but cautioned that the trend might not continue.
- On October 7, 2022, the JPMorgan credit agreement was amended, including a transition from LIBOR to SOFR and changes to availability-related covenants. On November 11, JPMorgan waived specified existing defaults related to failure to meet the $7.5 million minimum Excess Availability requirement and to provide an accurate certificate. The waiver addressed those defaults; investors should review the full credit documents and subsequent status.
- iPower received a Nasdaq notice on November 9, 2022, for trading below the $1.00 minimum bid price. It had until May 8, 2023 to regain compliance, subject to possible extension. The notice did not immediately affect the listing.
- A FINRA arbitration claim by former placement agent Boustead Securities seeks monetary damages; a hearing was scheduled for April and May 2023. The company said it could not reasonably estimate potential exposure. CEO Chenlong Tan agreed to reimburse certain judgments or settlements up to $3.5 million, funded only by sales of his shares; iPower also indemnified IPO underwriters.
- Management concluded disclosure controls and internal control over financial reporting were ineffective, citing insufficient accounting expertise and staffing, weak subsidiary communication procedures, and inadequately designed or implemented close-process controls. Remediation efforts include hiring accountants and consultants and implementing additional controls.
- Other identified risks include freight, supply-chain and geopolitical disruptions; COVID-19 uncertainty; changing regulation affecting end markets; customer and supplier concentration; and risks tied to China operations and the VIE structure.
Important facts for investors to verify
- Current JPMorgan borrowing availability, covenant compliance and the status or consequences of the defaults waived in November 2022.
- Whether operating cash generation can sustain inventory, fulfillment and lease needs without further borrowing, particularly given the large inventory and receivables balances.
- Whether gross margins recover as freight and import-duty costs change, and whether selling and fulfillment expenses remain elevated.
- The assumptions supporting the goodwill valuation and whether additional impairment indicators arise.
- The outcome and potential exposure from the Boustead arbitration, and progress toward Nasdaq bid-price compliance.
- Progress in remediating the disclosed material weaknesses and the reliability of future financial reporting.
- Ongoing dependence on Amazon and key suppliers, and the operating, legal and cash-flow risks associated with the Chinese VIE.