Business context and reporting period
iPower Inc. sells hydroponic and indoor-gardening products, primarily through e-commerce. This Form 10-Q covers the three months ended September 30, 2021, iPower’s fiscal 2022 first quarter, compared with the three months ended September 30, 2020. The company consolidated E Marketing Solution and Global Product Marketing after acquiring both in May 2021.
Financial performance and liquidity
| Metric | Quarter ended Sep. 30, 2021 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $17.37 million | $14.96 million | +16.1% |
| Gross profit | $7.31 million | $5.56 million | +31.5% |
| Gross margin | 42.11% | 37.18% | +4.93 percentage points |
| Operating income | $1.29 million | $1.08 million | +19.9% |
| Net income | $887,528 | $761,996 | +16.5% |
| Net margin | 5.11% | 5.09% | +0.02 percentage points |
| Diluted EPS | $0.03 | $0.04 | Down |
Revenue growth was attributed mainly to higher sales volume. Management said increased sales of in-house brands supported lower cost of goods sold as a share of revenue; it reported that in-house-brand gross margins average 20% higher than those for third-party brands. Operating expenses rose 34.3% to $6.02 million, including higher selling and fulfillment costs and $1.08 million more in general and administrative expenses. Other expenses included $59,000 in financing fees.
Operating cash flow was negative $5.21 million, versus negative $731,948 a year earlier. The company attributed the cash use primarily to higher accounts receivable and inventory, supplier prepayments, and income tax payments. Investing cash flow was negative $50,423; financing cash flow was negative $172,517. Cash fell to $1.22 million from $6.65 million at June 30, 2021. Working capital was $24.07 million, compared with $23.28 million at June 30.
At September 30, total liabilities were $12.49 million. The SBA loan balance was $478,067, including $29,244 current; the WFC receivables facility had been terminated and repaid during the quarter. Operating lease liabilities totaled $1.73 million. Current assets were $35.14 million and current liabilities were $11.07 million.
Material changes, outlook, and risks
- Management outlook: Management said cash and expected operating cash flows should fund operations for the next 12 months. It expected working capital to remain near the reported level and anticipated potential cash-flow improvement as supply chains normalize and new suppliers move to more favorable credit terms. No specific revenue or earnings guidance was provided.
- Subsequent financing: On November 12, 2021, after quarter-end, iPower entered into a JPMorgan Chase asset-based revolving credit agreement of up to $25 million, maturing November 12, 2024, with an accordion allowing up to an additional $25 million. Borrowing availability depends on eligible receivables and inventory; the company paid $500,000 in financing fees. Management also reported approximately $1.0 million of cash as of the report date.
- Customer and supplier concentration: Amazon Vendor and Seller customers accounted for 89% of quarterly revenue and 98% of accounts receivable. Two suppliers accounted for 47% of purchases.
- Legal contingency: Former placement agent Boustead Securities is pursuing FINRA arbitration seeking monetary damages; the hearing was scheduled for June 20, 2022. The company said it believes it has meritorious defenses. It agreed to indemnify IPO underwriters, and CEO Chenlong Tan agreed to reimburse certain judgments or costs up to $3.5 million, funded solely from sales of his shares.
- Expansion and commitments: A July 2021 lease for approximately 99,347 square feet in Rancho Cucamonga provides for initial monthly base rent of about $114,249 once the premises are delivered, with rent increases over the 62-month term. Delivery was to occur by January 15, 2022, subject to improvements and lease terms.
- Controls: Management concluded internal control over financial reporting was ineffective, citing insufficient accounting/reporting expertise and deficiencies in financial-close controls. Remediation includes hiring accountants and consultants and implementing additional controls.
- Other risks: Management noted uncertainty around COVID-19 effects, including possible shipping delays and demand changes, and regulatory uncertainty in end markets that may include cannabis-related uses. It said COVID-19 had not materially adversely affected operations to date.
Important facts for investors to verify
- Whether higher receivables and inventory convert to cash as sales grow, and whether the new credit facility provides sufficient usable borrowing capacity.
- Amazon dependence, customer collections, and supplier concentration, including any changes since quarter-end.
- Progress and costs associated with the new warehouse lease and the company’s planned product and brand expansion.
- Developments in the Boustead arbitration, potential company or indemnification exposure, and the practical availability of the CEO’s reimbursement commitment.
- Remediation of the disclosed material weaknesses and whether subsequent filings report effective controls.
- Whether gross-margin improvement and management’s 12-month liquidity assessment are sustained; interim results are not necessarily indicative of full-year performance.