Business context and reporting period
iPower Inc. sells hydroponic and indoor-growing equipment, including its iPower and Simple Deluxe brands, primarily through e-commerce. This unaudited Form 10-Q covers the three and nine months ended March 31, 2021, compared with the same periods in 2020; the balance sheet is compared with June 30, 2020. Although the request metadata says “2020 Q3,” the filing is for fiscal 2021’s third quarter.
Financial results and liquidity
| Metric | Three months ended March 31, 2021 | Nine months ended March 31, 2021 |
|---|---|---|
| Revenue | $13.13 million (+34.4%) | $39.35 million (+55.7%) |
| Gross profit / margin | $5.76 million / 43.9% | $16.28 million / 41.4% |
| Operating income / margin | $0.79 million / 6.0% | $2.72 million / 6.9% |
| Net income (loss) | $(0.21) million | $1.13 million |
| Cash from operating activities | $(4.79) million for the nine months, versus $0.78 million provided in 2020 |
At March 31, 2021, cash was $474,322, current assets were $21.51 million, current liabilities were $16.90 million, and working capital was $4.61 million. The current ratio was approximately 1.27. Inventory was $10.02 million, up from $5.74 million at June 30, 2020; accounts receivable, net, was $8.09 million, up from $6.07 million.
Reported liabilities included $1.88 million in short-term loans, a $500,000 SBA loan, $2.73 million in convertible notes net of discount, and $2.07 million in operating lease liabilities. The $3 million convertible-note face amount and Series A preferred stock were subject to conversion or cash repayment/redemption terms described below. The filing reports no off-balance-sheet arrangements.
Material changes versus the prior comparable periods
- For the first nine months, revenue rose 55.7%; gross profit rose 90.0%, and operating income rose 137.5%. Gross margin improved from 33.9% to 41.4%, which management attributed partly to a higher mix of in-house brands, whose gross margin it says averages about 20% above third-party brands.
- Nine-month SG&A increased 82.6% to $13.56 million. Net income increased 41.7% to $1.13 million, but net margin declined from 3.2% to 2.9% as non-operating expenses increased.
- In the March quarter, revenue grew 34.4% and gross margin rose to 43.9% from 32.3%, but the company recorded a $206,823 net loss versus $220,724 net income a year earlier. Higher financing and fair-value-related expenses drove the reversal; quarterly income-tax expense of $237,813 also exceeded pretax income of $30,990.
- Operating cash use increased to $4.79 million from $0.78 million provided in the prior-year nine-month period, primarily reflecting increased inventory purchases and working-capital investment.
Outlook, risks, contingencies and unusual items
- Management said cash, operating cash flows and available credit were expected to fund operations for at least the next 12 months, while noting uncertainty related to COVID-19. No quantified revenue or earnings guidance is provided.
- Management attributed recent sales growth partly to increased online shopping and gardening activity during the pandemic, and cautioned that the trend might not continue. The company also cited regulatory uncertainty affecting industries that use hydroponic products, including cannabis-related markets.
- Amazon Vendor and Seller customers represented 78% of nine-month revenue and 91% of receivables at March 31, 2021. Two suppliers represented 28% of nine-month purchases. These concentrations expose the company to customer and supplier risk.
- Operating cash flow was pressured by inventory growth; inventory obsolescence and customer credit losses are relevant estimates. The company recorded a $189,206 allowance for credit losses during the nine months.
- The company consolidated E Marketing and Global Product Marketing as variable interest entities despite lacking direct ownership at quarter-end. It funded their operating needs and bore their losses while holding rights to their net profits. They reported combined revenue of $1.45 million and net income of $448,848 for the nine months. The company acquired both entities in May 2021 for nominal consideration.
- The company identified ineffective internal controls over financial reporting, citing insufficient accounting expertise, deficiencies in the financial close process, and inadequate review and approval of related-party transactions. It reported hiring additional accountants and consultants and implementing remediation measures.
- Boustead Securities filed a FINRA arbitration claim on April 30, 2021 concerning termination of its engagement, seeking monetary damages against the company and D.A. Davidson. The company said it believes it has meritorious defenses; it agreed to indemnify D.A. Davidson and other underwriters. CEO Chenlong Tan agreed to reimburse covered amounts up to $3.5 million, funded solely from sales of his shares.
- After quarter-end, the company completed its IPO in May 2021, selling 3,864,000 shares in total at $5.00 per share, including the overallotment, and reporting approximately $16.5 million net proceeds. The Series A preferred stock and convertible notes converted into 955,716 common shares. These subsequent events are not reflected in the March 31 balance sheet.
Most important facts for investors to verify
- Whether improved sales and gross margins persist after pandemic-related demand changes, and whether in-house brands continue to support margins.
- How inventory, receivables and operating cash flow develop, including collection risk given Amazon concentration and the recorded credit-loss allowance.
- Post-IPO cash, debt and share counts, including the impact of preferred-stock, note and warrant conversions and any further dilution.
- Progress in remediating the disclosed internal-control weaknesses and the adequacy of related-party transaction oversight.
- Developments and potential financial exposure in the Boustead arbitration, including the scope and practical collectability of the CEO’s reimbursement commitment.
- The filing contains an apparent date inconsistency in its IPO discussion; investors should confirm the transaction dates and reported proceeds against the IPO filings.