iPower Inc. — Form 10-Q Summary
Business context and period. This unaudited quarterly report covers the quarter and six months ended December 31, 2021, iPower’s fiscal second quarter. The company sells indoor gardening, hydroponic and related products, primarily online, and reports one operating segment. Comparative results are for the periods ended December 31, 2020.
Financial results and liquidity
| Metric | Three months ended Dec. 31, 2021 | Change year over year | Six months ended Dec. 31, 2021 | Change year over year |
|---|---|---|---|---|
| Revenue | $17.13 million | +52.2% | $34.49 million | +31.6% |
| Gross profit / margin | $7.56 million / 44.13% | Margin: 43.96% prior year | $14.87 million / 43.11% | Margin: 40.09% prior year |
| Operating income | $1.14 million | +33.1% | $2.43 million | +25.7% |
| Net income / net margin | $0.80 million / 4.66% | Net income +38.6%; margin was 5.11% | $1.69 million / 4.89% | Net income +26.0%; margin was 5.1% |
| Basic and diluted EPS | $0.030 | Prior year: $0.028 | $0.064 | Prior year: $0.066 |
| Operating cash flow | Not presented separately for the quarter | $(12.24) million | Prior year: $(1.47) million |
For the six-month period, investing cash flow was $(0.06) million and financing cash flow was $6.74 million. Cash declined $5.56 million from June 30, 2021 to $1.09 million at December 31, 2021. Management attributed the operating cash outflow principally to increased accounts receivable and inventory, supplier prepayments and income tax payments.
At December 31, 2021, current assets were $43.36 million and current liabilities were $11.39 million, with working capital of $31.96 million. Accounts receivable, net, was $15.55 million and inventory was $19.91 million. Total liabilities were $19.58 million. Borrowings included $6.96 million of the JPMorgan revolving loan, net of debt discount, and $0.47 million under the SBA loan; operating lease liabilities totaled $1.54 million. The JPMorgan facility has a stated commitment of up to $25 million, subject to its borrowing-base terms; management reported approximately $8 million of unused credit.
Material changes versus prior period
- Revenue growth reflected higher sales volumes, geographic expansion and online demand. Management said pricing remained stable.
- Gross margin improved, which management attributed partly to a greater proportion of in-house branded products; it said those products have gross margins averaging 20% higher than third-party brands.
- Operating expenses rose faster than revenue: 56.9% year over year for the quarter and 45.0% for the six-month period. Higher selling and fulfillment costs and general and administrative costs, including payroll, stock compensation, insurance and public-company expenses, contributed.
- Six-month net margin declined to 4.89% from 5.1%, despite higher gross margin, reflecting increased operating expenses. Six-month EPS fell to $0.064 from $0.066.
- Receivables and inventory increased substantially from June 30, 2021, to $15.55 million and $19.91 million, respectively. Cash fell, while the company added JPMorgan asset-based revolving debt. It terminated and repaid its prior WFC receivables facility during the quarter.
Outlook, risks and unusual items
- Management expects existing cash, operating cash flows and available revolving credit to fund operations for the next 12 months. It expects working capital to remain near its current level, while noting that this is subject to business seasonality and uncertain conditions. The filing gives no numerical revenue or earnings guidance.
- Management cited supply-chain disruption, shipping delays, economic conditions and uncertainty around COVID-19 as risks. It said COVID-19 had not materially adversely affected operations to date, while demand had benefited from online shopping and gardening activity. It expects global economic activity to remain affected by the pandemic and acknowledges uncertainty over future effects.
- Amazon Vendor and Seller sales represented 89% of six-month revenue, up from 77% a year earlier; Amazon-related receivables were 98% of total receivables at both balance-sheet dates. Two suppliers represented 29% of six-month purchases. These concentrations create customer, collection and supply risks.
- The company identified ineffective internal controls over financial reporting as a material weakness, citing insufficient accounting/reporting expertise, communication deficiencies and weaknesses in the financial close process. It is hiring accountants and consultants and implementing remediation. It also reported sales and expense misstatements during an accounting-system transition and out-of-period adjustments that it said did not materially affect previously issued financial statements.
- A FINRA arbitration brought by former placement agent Boustead was scheduled for June 20, 2022. The company says it believes it has meritorious defenses and does not expect a material adverse effect. CEO Chenlong Tan agreed to reimburse specified judgments, fines and expenses up to $3.5 million, funded solely from sales of his shares; the company also agreed to indemnify IPO underwriters.
- After quarter-end, iPower formed Box Harmony, a logistics joint venture, and Global Social Media, a marketing-related joint venture. Neither had begun operations as of the filing. iPower committed $50,000 to Box Harmony and $100,000 to Global Social Media. A Box Harmony option could increase iPower’s ownership to 60% for up to $660,000. The company also signed a lease for approximately 99,347 square feet, with delivery expected by February 28, 2022 and initial monthly base rent of approximately $114,249 after commencement, subject to the lease terms.
- The company leases existing office and warehouse facilities through 2023. Its new warehouse lease, future JV activity and related-party service prepayments are additional items to monitor. Approximately $1.06 million of non-current prepayments related to services from entities owned by an employee/minority shareholder and relatives of a minority shareholder.
Most important facts for investors to verify
- Whether receivables and inventory convert to cash as expected, given the $12.24 million six-month operating cash outflow and significant growth in both balances.
- Actual borrowing-base availability under the JPMorgan facility, borrowing costs and debt levels; the facility commitment is not the same as immediately available liquidity.
- The sustainability of sales growth and improved gross margin, including dependence on Amazon, in-house brands, pandemic-related demand and concentrated suppliers.
- Progress and independent validation of internal-control remediation, and whether future filings require corrections.
- The outcome and potential cost of the Boustead arbitration, including the practical collectability and limits of the CEO reimbursement undertaking.
- Costs, occupancy commitments, ownership and operating performance of the new warehouse lease and post-period joint ventures.