iPower Inc. (NASDAQ:IPW) Q4 2021 Earnings Conference Call September 27, 2021 4:30 PM ET Company Participants Chenlong Tan - Co-Founder, Chairman, Chief Executive Officer and President Kevin Vassily - CFO Conference Call Participants Michael Baker - D.A. Davidson Companies Scott Fortune - ROTH Capital Partners Operator Thank you for standing by and welcome to the iPower Q4 2021 Earnings Conference Call. [Operator Instructions] As a reminder, today’s conference call maybe recorded. I would now like to turn th ...

[PART I. Financial Information](index=4&type=section&id=PART%20I.%20Financial%20Information) This section covers the company's financial statements, management's analysis, market risk, and internal controls [Unaudited Condensed Consolidated Financial Statements](index=4&type=section&id=Item%201.%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) This section presents iPower Inc.'s unaudited condensed consolidated financial statements, including balance sheets, income statements, equity changes, cash flows, and notes on accounting policies and key transactions [Unaudited Condensed Consolidated Balance Sheets](index=4&type=section&id=Unaudited%20Condensed%20Consolidated%20Balance%20Sheets) The balance sheet shows a significant increase in total assets to $23.7 million as of March 31, 2021, from $13.7 million as of June 30, 2020, driven by higher inventories and accounts receivable Consolidated Balance Sheet Highlights (Unaudited) | Balance Sheet Item | March 31, 2021 | June 30, 2020 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalent | $474,322 | $977,635 | | Inventories, net | $10,015,923 | $5,743,181 | | Total current assets | $21,506,604 | $13,404,246 | | **Total assets** | **$23,705,665** | **$13,673,373** | | **Liabilities & Equity** | | | | Accounts payable | $6,985,438 | $4,220,347 | | Convertible notes payable, net | $2,729,747 | $– | | Total current liabilities | $16,895,430 | $10,242,857 | | **Total liabilities** | **$19,630,500** | **$10,742,857** | | **Total equity** | **$4,075,165** | **$2,930,516** | [Unaudited Condensed Consolidated Statements of Operations](index=6&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Operations) For the nine months ended March 31, 2021, revenues grew 55.7% year-over-year to $39.3 million, and net income increased to $1.13 million from $0.80 million Statement of Operations Summary (Unaudited) | Period | Revenues | Gross Profit | Net (Loss) Income | EPS (Basic & Diluted) | | :--- | :--- | :--- | :--- | :--- | | **Nine Months Ended Mar 31, 2021** | $39,348,154 | $16,275,154 | $1,130,649 | $0.056 | | **Nine Months Ended Mar 31, 2020** | $25,278,339 | $8,567,386 | $797,946 | $0.040 | | **Three Months Ended Mar 31, 2021** | $13,133,902 | $5,764,775 | ($206,823) | ($0.010) | | **Three Months Ended Mar 31, 2020** | $9,772,108 | $3,159,512 | $220,724 | $0.011 | [Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity](index=7&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Changes%20in%20Stockholders%27%20Equity) Total stockholders' equity increased from $2.93 million at June 30, 2020, to $4.08 million at March 31, 2021, primarily driven by net income for the nine-month period - Total equity grew to **$4,075,165** as of March 31, 2021, from **$2,930,516** as of June 30, 2020, mainly due to net income[19](index=19&type=chunk) - A 2-for-1 forward split of Class A Common Stock was implemented on November 16, 2020, with all share and per-share data retroactively adjusted[19](index=19&type=chunk) - On October 20, 2020, **14,000,000** shares of Class B Common Stock were issued to Founders, treated as a nominal issuance and recapitalization, and presented retroactively[20](index=20&type=chunk) [Unaudited Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) For the nine months ended March 31, 2021, the company experienced a net cash outflow from operating activities of **($4.8 million)**, a significant shift from a **$0.78 million** inflow in the prior year, mainly due to increased investment in inventories and accounts receivable Cash Flow Summary (Unaudited, For the Nine Months Ended March 31) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash (used in) / provided by operating activities | ($4,786,077) | $775,907 | | Net cash used in investing activities | ($61,498) | ($6,252) | | Net cash provided by / (used in) financing activities | $4,344,262 | ($363,957) | | **Change in Cash** | **($503,313)** | **$405,698** | | **Cash at end of period** | **$474,322** | **$877,156** | [Notes to Unaudited Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) The notes provide detailed explanations of the company's accounting policies and significant events, including VIE consolidation, financing activities, customer concentration, and subsequent IPO - The company consolidates two Variable Interest Entities (VIEs), E Marketing Solution Inc. and Global Product Marketing Inc., as it is deemed the primary beneficiary[33](index=33&type=chunk)[74](index=74&type=chunk) - For the nine months ended March 31, 2021, Amazon Vendor and Amazon Seller customers accounted for **78%** of the company's total revenues and **91%** of total accounts receivable[128](index=128&type=chunk) - In January 2021, the company issued **$3,000,000** in convertible notes and related warrants, which are accounted for as derivative liabilities[60](index=60&type=chunk)[90](index=90&type=chunk) - Subsequent to the quarter end, on May 14, 2021, the company closed its IPO, receiving net proceeds of approximately **$16.5 million**[139](index=139&type=chunk) - A legal dispute with former placement agent Boustead Securities LLC is ongoing, with the company indemnifying its new underwriters and its CEO agreeing to reimburse the company for related costs up to **$3.5 million**[138](index=138&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=31&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's performance, highlighting a **55.7%** revenue increase for the nine months ended March 31, 2021, driven by organic growth and improved gross margin due to a better product mix [Overview](index=31&type=section&id=Overview) iPower is an online supplier of hydroponic equipment in the US, operating through its e-commerce platform Zenhydro.com and focusing on expanding its in-house brands for organic growth - Operates the e-commerce platform www.Zenhydro.com and has **72,000** square feet of fulfillment centers in Los Angeles, California[146](index=146&type=chunk) - Actively develops in-house brands, iPower and Simple Deluxe, which include over **2,600** SKUs[147](index=147&type=chunk) - For the second half of 2020, top product segments by sales were nutrients (**17%**), ventilation systems (**16%**), and grow light systems (**9%**)[147](index=147&type=chunk) [Results of Operations](index=32&type=section&id=Results%20of%20Operations) For the nine months ended March 31, 2021, revenue grew **55.7%** to **$39.3 million**, and operating income increased **137.5%** to **$2.7 million**, with gross profit margin expanding to **41.4%** Performance for Nine Months Ended March 31, 2021 vs 2020 | Metric | 2021 | 2020 | Variance | | :--- | :--- | :--- | :--- | | Revenues | $39,348,154 | $25,278,339 | 55.7% | | Gross Profit | $16,275,154 | $8,567,386 | 90.0% | | Operating Income | $2,718,213 | $1,144,390 | 137.5% | | Net Income | $1,130,649 | $797,946 | 41.7% | | Gross Profit % | 41.4% | 33.9% | | - The increase in gross profit margin was due to a shift towards selling more in-house branded products, which have an average gross margin **20%** higher than third-party brands[157](index=157&type=chunk) - For the three months ended March 31, 2021, the company reported a net loss of **($206,823)** compared to a net income of **$220,724** in the prior year, primarily due to a **$757,744** other expense charge related to financing activities[164](index=164&type=chunk)[170](index=170&type=chunk)[171](index=171&type=chunk) [Liquidity and Capital Resources](index=36&type=section&id=Liquidity%20and%20Capital%20Resources) As of March 31, 2021, the company had **$0.47 million** in cash, with operations funded by a credit facility and proceeds from convertible preferred stock and notes, significantly improved by a subsequent IPO - Cash and cash equivalents stood at **$474,322** as of March 31, 2021[172](index=172&type=chunk) - Net cash used in operating activities was **($4.8 million)** for the nine months ended March 31, 2021, primarily due to increased inventory purchases to meet rising sales demand[180](index=180&type=chunk) - The company raised capital through a **$345,000** Series A convertible preferred stock offering in December 2020 and a **$3,000,000** convertible note offering in January 2021[173](index=173&type=chunk)[174](index=174&type=chunk) - Subsequent to the quarter, the company closed its IPO on May 14, 2021, receiving net proceeds of approximately **$16.5 million**[177](index=177&type=chunk) [Critical Accounting Policies and Estimates](index=37&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) This section outlines key accounting policies requiring significant management judgment, including VIE consolidation, revenue recognition, inventory valuation, lease accounting, and the treatment of complex financial instruments - Consolidates two VIEs (E Marketing and GPM) as the company is the primary beneficiary and has the power to direct their activities[190](index=190&type=chunk) - Recognizes revenue from product sales upon shipment to the customer, net of promotional discounts and return allowances[192](index=192&type=chunk) - Accounts for convertible notes, warrants, and redeemable preferred stock as derivative liabilities measured at fair value due to complex conversion and redemption features tied to the IPO[205](index=205&type=chunk)[207](index=207&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=43&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company states that as a "smaller reporting company," it is not required to provide the information for this item - As a "smaller reporting company," iPower is not required to provide disclosures about market risk[212](index=212&type=chunk) [Controls & Procedures](index=43&type=section&id=Item%204.%20Controls%20%26%20Procedures) Management concluded that as of March 31, 2021, the company's disclosure controls and internal controls over financial reporting were not effective due to identified material weaknesses - Management concluded that internal controls over financial reporting were not effective as of March 31, 2021[214](index=214&type=chunk) - Material weaknesses identified include: (i) insufficient personnel with appropriate technical knowledge, (ii) inadequate financial closing process controls, and (iii) lack of review and approval procedures for related party transactions[214](index=214&type=chunk) - Remediation plans are underway, including hiring additional accountants and consultants and implementing new controls and procedures[215](index=215&type=chunk) [PART II. Other Information](index=44&type=section&id=PART%20II.%20Other%20Information) This section covers legal proceedings, risk factors, unregistered sales of equity, defaults on senior securities, mine safety, and other disclosures [Legal Proceedings](index=44&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in a legal dispute with its former placement agent, Boustead Securities LLC, which filed a FINRA arbitration claim seeking monetary damages - The company is in a legal dispute with former placement agent Boustead Securities LLC, which filed a statement of claim with FINRA on April 30, 2021, demanding arbitration[219](index=219&type=chunk) - The company has agreed to indemnify its underwriter, D.A. Davidson & Co., against any liability arising from the Boustead dispute[219](index=219&type=chunk) - CEO Chenlong Tan has agreed to reimburse the company for judgments, fines, and settlement amounts related to the dispute, up to a maximum of **$3.5 million**[219](index=219&type=chunk) [Risk Factors](index=44&type=section&id=Item%201A.%20Risk%20Factors) The company reports "None" for this item, indicating no new or materially changed risk factors from those previously disclosed - The company states "None," indicating no new or materially changed risk factors are being reported in this 10-Q[221](index=221&type=chunk) [Unregistered Sale of Equity Securities and Use of Proceeds](index=44&type=section&id=Item%202.%20Unregistered%20Sale%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reports "None" for this item, indicating no unregistered sales of equity securities during the period not previously reported - The company reports "None" for this item[222](index=222&type=chunk) [Defaults Upon Senior Securities](index=44&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reports "None" for this item, indicating no defaults on its senior securities - The company reports "None" for this item[223](index=223&type=chunk) [Mine Safety Disclosures](index=44&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) The company reports "Not Applicable" for this item - The company reports "Not Applicable" for this item[224](index=224&type=chunk) [Other Information](index=44&type=section&id=Item%205.%20Other%20Information) The company reports "None" for this item, indicating no other material information to disclose - The company reports "None" for this item[225](index=225&type=chunk) [Exhibits](index=45&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the 10-Q report, which include CEO and CFO certifications and XBRL data files - Lists filed exhibits, including CEO/CFO certifications under Sarbanes-Oxley Sections 302 and 906, and XBRL data files[227](index=227&type=chunk)