The following Management's Discussion and Analysis should be read in conjunction
with our financial statements and the related notes thereto included elsewhere
herein. This Management's Discussion and Analysis ("MD&A") contains
forward-looking statements that involve risks and uncertainties, such as
statements of our plans, objectives, expectations and intentions. Any statements
that are not statements of historical fact are forward-looking statements. When
used, the words "believe," "plan," "intend," "anticipate," "target," "estimate,"
"expect," and the like, and/or future-tense or conditional constructions
("will," "may," "could," "should," etc.), or similar expressions, identify
certain of these forward-looking statements. These forward-looking statements
are subject to risks and uncertainties that could cause actual results or events
to differ materially from those expressed or implied by the forward-looking
statements in this form. Our actual results and the timing of events could
differ materially from those anticipated in these forward-looking statements as
a result of several factors.
Historical results may not indicate future performance. Our forward-looking
statements reflect our current views about future events, are based on
assumptions and are subject to known and unknown risks and uncertainties that
could cause actual results to differ materially from those contemplated by these
statements. We undertake no obligation to publicly update or revise any forward-
looking statements, including any changes that might result from any facts,
events, or circumstances after the date hereof that may bear upon
forward-looking statements. Furthermore, we cannot guarantee future results,
events, levels of activity, performance, or achievements.
Overview
iPower Inc. is an online hydroponic home and garden equipment supplier based in
the United States. Through the operations of our e-commerce platform,
www.Zenhydro.com, our combined 121,000 square foot fulfillment centers in Los
Angeles, California, as well as our 99,000 square foot fulfillment center in
Rancho Cucamonga, California, we believe we are one of the leading marketers,
distributors and retailers of grow-light systems, ventilation systems, activated
carbon filters, nutrients, growing media, hydroponic water-resistant grow tents,
trimming machines, pumps, shelving and accessories for hydroponic gardening,
based on management's estimates. We have a diverse customer base that includes
commercial users and individuals. Our core strategy continues to focus on
expanding our geographic reach across the United States through organic growth,
both in terms of expanding customer base as well as brand and product
development.
We are actively developing and acquiring our in-house branded products, which to
date include the iPower and Simple Deluxe brands and consist of more than 4,000
SKUs of products such as home goods, grow-light systems, ventilation systems,
activated carbon filters, nutrients, growing media, hydroponic water-resistant
grow tents, trimming machines, pumps and many more hydroponic-related items;
some of which have been designated as Amazon best seller product leaders, among
others. For the quarter ended September 30, 2022, our top five product segments
accounted for 78% of total sales. While we continue to focus on our top product
categories, we are working to expand our product catalog to include new and
adjacent categories.
Recent Acquisitions and Joint Ventures
On February 15, 2022, in exchange for total consideration of $12 million, we
acquired 100% of the ordinary shares of Anivia Limited (the "Target Company"), a
corporation organized under the laws of the British Virgin Islands ("BVI"), in
accordance with the terms of a share transfer framework agreement (the "Transfer
Agreement"), dated February 15, 2022, by and between the Company, White Cherry
Limited, a BVI company ("White Cherry"), White Cherry's equity holders, Li Zanyu
and Xie Jing (together with White Cherry, the "Sellers"), the Target Company,
Fly Elephant Limited, a Hong Kong company, Dayou Renzai (Shenzhen) Technology
Company Limited, and Daheshou (Shenzhen) Information Technology Limited. The
Target Company owns 100% of the equity of Fly Elephant Limited, which in turn
owns 100% of the equity of Dayou Renzai (Shenzhen) Technology Co., Ltd., a
corporation located in the People's Republic of China ("PRC") and which is a
wholly foreign-owned enterprise ("WFOE") of Fly Elephant Limited. The WFOE
controls, through a series of contractual arrangements summarized below, the
business, revenues and profits of Daheshou (Shenzhen) Information Technology
Co., Ltd., a company organized under the Laws of the PRC (the "Operating
Company") and located in Shenzhen, China. The Operating Company is principally
engaged in selling of a wide range of products and providing logistic services
in the PRC. The Operating Company has been iPower's sole source of supplies and
logistics support for products purchased from the PRC since iPower's inception.
In 2021, iPower purchased more than 60% of its products and supplies from or
through the Operating Company.
34
On February 10, 2022, we entered into a joint venture agreement with Bro Angel,
LLC, Ji Shin and Bing Luo (the "GSM Joint Venture Agreement"). Pursuant to the
terms of the GSM Joint Venture Agreement, the parties formed a Nevada limited
liability company, Global Social Media, LLC ("GSM"), for the principal purpose
of providing a social media platform, contents and services to assist
businesses, including the Company and other businesses, in the marketing of
their products. Following entry into the JSM Joint Venture Agreement, GSM issued
10,000 certificated units of membership interest (the "GSM Equity Units"), of
which the Company was issued 6,000 GSM Equity Units and Bro Angel was issued
4,000 GSM Equity Units. Messrs. Shin and Luo are the owners of 100% of the
equity of Bro Angel.
Under the terms of the GSM limited liability operating agreement (the "GSM LLC
Agreement"), the Company contributed $100,000 to the capital of GSM and Bro
Angel granted GSM, pursuant to the terms of an intellectual property licensing
agreement, dated February 10, 2022 (the "IP License Agreement"), an exclusive
worldwide paid up right and license to use all intellectual property of Bro
Angel and its members for the purpose of furthering the proposed business of
GSM. The LLC Agreement prohibits the issuance of additional GSM Equity Units and
certain other actions unless approved in advance by the Company.
Pursuant to the GSM Joint Venture Agreement, the Company and GSM also intend to
enter into an occupancy management agreement pursuant to which the Company will
grant to GSM the right to have access to and use of up to approximately 4,000
square feet of office space along with internet access at the Company's facility
located at 2399 Bateman Avenue, Irwindale, CA 91010. It is contemplated that
only approximately 300-400 square feet will be initially used by GSM.
On January 13, 2020 we entered into a joint venture agreement with Titanium Plus
Autoparts, Inc. ("TPA"), Tony Chiu, and Bin Xiao (the "TPA Joint Venture
Agreement"). Pursuant to the terms of the TPA Joint Venture Agreement, the
parties formed a Nevada limited liability company, Box Harmony, LLC ("Box
Harmony"), for the principal purpose of providing logistic services primarily
for foreign-based manufacturers or distributors who desire to sell their
products online in the United States with such logistic services to include,
without limitation, receiving, storing, and transporting such products.
Following entry into the TPA Joint Venture Agreement, Box Harmony issued a total
of 6,000 certificated units of membership interest, designated as Class A voting
units ("Equity Units"), as follows: (i) we agreed to contribute $50,000 in cash
and agreed to provide Box Harmony with the use and access to certain warehouse
facilities leased by the Company in exchange for 2,400 Equity Units in Box
Harmony, and (ii) TPA received 1,200 Equity Units in exchange for (a) $1,200 and
contributing the TPA IP License referred to below, (b) its existing and future
customer contracts, and (c) granting Box Harmony the use of shipping accounts
(Fedex and UPS) and all other TPA carrier contracts, and (iii) Bin Xiao received
2,400 Equity Units in exchange for $2,400 and his agreement to manage the day to
day operations of Box Harmony. We also entered into a sublease with Box Harmony
pursuant to which we sublease a portion of our leased warehouse space in Los
Angeles to Box Harmony in exchange for their payment of a pro rata portion of
our rental expenses related to such facility.
Under the terms of the Box Harmony limited liability operating agreement, TPA
and Bin Xiao each granted to us an unconditional and irrevocable right and
option to purchase from Bin Xiao and TPA at any time within the first 18 months
following January 13, 2022, up to 1,200 Class A voting units, at an exercise
price of $550 per Class A voting unit, for a total exercise price of up to
$660,000. If such option is fully exercised, we would own 3,600 Equity Units or
60% of the total outstanding Equity Units. The Box Harmony LLC Agreement
prohibits the issuance of additional Equity Units and certain other actions
unless approved in advance by us.
Trends and Expectations
Product and Brand Development
We plan to increase our investments in product and brand development. We
actively evaluate potential acquisition opportunities of companies and product
brand names that can complement our product catalog and improve on existing
products and supply chain efficiencies.
35
Global Economic Disruption
While at present the majority of our products are sourced either in the United
States or China, the military conflict between Russia and Ukraine may
nonetheless increase the likelihood of supply chain disruptions or otherwise
hinder our ability to find the materials we need to make our products. In
addition, supply chain disruptions may make it harder for us to find favorable
pricing and reliable sources for the materials we need, putting upward pressure
on our costs and increasing the risk that we may be unable to acquire the
materials and services we need to continue to make certain products.
Ongoing COVID-19 Outbreak and Related Disruptions
We are continuing to closely monitor the impact of the ongoing COVID-19 outbreak
on our business, results of operations and financial results. The situation
surrounding the COVID-19 outbreak remains fluid and the full extent of the
positive or negative impact of the COVID-19 outbreak on our business will depend
on certain developments including the length of time that the outbreak
continues, the impact on consumer activity and behaviors and the effect on our
customers, employees, suppliers and stockholders, all of which are uncertain and
cannot be predicted. Our focus remains on promoting the health, safety and
financial security of our employees and serving our customers. As a result, we
have taken a number of precautionary measures, including implementing social
distancing and enhanced cleaning measures in our facilities, providing emergency
paid time off and targeted hourly pay increases as well as developing no contact
delivery methods.
In an effort to contain or slow the COVID-19 outbreak, authorities across the
world have implemented various measures, some of which have been subsequently
rescinded or modified, including travel bans, stay-at-home orders and shutdowns
of certain businesses. We anticipate that these actions and the global health
crisis caused by the COVID-19 outbreak, including any resurgences, will continue
to negatively impact global economic activity. While the COVID-19 outbreak has
not had a material adverse impact on our operations to date and we believe the
long-term opportunity that we see for shopping online remains unchanged, it is
difficult to predict all of the positive or negative impacts the COVID-19
outbreak will have on our business.
In the short term, we have continued to see increased sales and order activity
in the market since the COVID-19 outbreak. In order to keep up with the
increased orders, we have hired and are continuing to hire additional personnel.
However, much is unknown and, accordingly, the situation remains dynamic and
subject to rapid and possibly material change. We will continue to actively
monitor the situation and may take further actions that alter our business
operations as may be required by federal, state, local or foreign authorities,
or that we determine are in the best interests of our customers, employees,
suppliers, stockholders and communities.
Regulatory Environment
We sell hydroponic gardening products to end users that may use such products in
new and emerging industries or segments, including the growing of cannabis. The
demand for hydroponic gardening products depends on the uncertain growth of
these industries or segments due to varying, inconsistent and rapidly changing
laws, regulations, administrative practices, enforcement approaches, judicial
interpretations and consumer perceptions. For example, certain countries and a
total of 44 U.S. states plus the District of Columbia have adopted frameworks
that authorize, regulate and tax the cultivation, processing, sale and use of
cannabis for medicinal and/or non-medicinal use, including legalization of hemp
and CBD, while the U.S. Controlled Substances Act and the laws of U.S. states
prohibit growing cannabis. Demand for our products could be impacted by changes
in the regulatory environment with respect to such industries and segments.
36
RESULTS OF OPERATIONS
For the three months ended September 30, 2022 and 2021
The following table presents certain unaudited condensed consolidated statement
of operations information and presentation of that data as a percentage of
change from period to period.
Three Months Three Months
Ended Ended
September 30, September 30,
2022 2021
Variance
Revenues $ 26,022,673 $ 17,366,765 49.8%
Cost of goods sold 16,036,957 10,053,063 59.5%
Gross profit 9,985,716 7,313,702 36.5%
Operating expenses 14,579,022 6,023,387 142.0%
Operating (loss) income (4,593,306 ) 1,290,315 (456.0% )
Other (expenses) (39,671 ) (59,812 ) (33.7% )
(Loss) Income before income taxes (4,632,977 ) 1,230,503 (476.5% )
Income tax (benefit) expense (447,796 ) 342,975 (230.6% )
Net (loss) income (4,185,181 ) 887,528
Non-controlling interest (2,805 ) -
Net (loss) income attributable to iPower Inc. $ (4,182,376 ) $ 887,528 (571.2% )
Other comprehensive loss
(111,475 ) -
Comprehensive (loss) income attributable to
iPower Inc. (4,293,851 ) 887,528 (583.8% )
Gross profit % of revenues 38.4% 42.1%
Operating (loss) income % of revenues (17.7% ) 7.4%
Net (loss) income % of revenues (16.1% ) 5.1%
Revenues
Revenues for the three months ended September 30, 2022 increased 49.8% to
$26,022,673 as compared to $17,366,765 for the three months ended September 30,
2021. While pricing remained stable, the increased revenue mainly resulted from
an increase in sales volume and expansion of sales to other regions, such as
Canada, Europe and Asia. In addition to our organic growth, which we achieved as
a result of improved products and more effective online marketing and
merchandising efforts, the increase in sales was attributable to more people
shopping online and pursuing gardening and growing projects during the COVID-19
pandemic. However, while the revenues for the current quarter remained
consistent with last quarter of the fiscal year ended June 30, 2022, we cannot
assure that this trend will continue, and our business may be adversely affected
by poor overall economic conditions and shipping delays caused by the ongoing
COVID-19 pandemic.
Costs of Goods Sold
Costs of goods sold for the three months ended September 30, 2022 increased
59.5% to $16,036,957 as compared to $10,053,063 for the three months ended
September 30, 2021. The increase was due to an increase in sales, as discussed
above. In addition, we experienced an increase in cost of goods sold as a
percentage of revenue as a result of an increase in import duty and freight
charges. See discussions on gross profit below. We have seen decreasing freight
charges since September 2022 but could not assure that this trend will continue.
Gross Profit
Gross profit was $9,985,716 for the three months ended September 30, 2022 as
compared to $7,313,702 for the three months ended September 30, 2021. The gross
profit ratio decreased to 38.4% for the three months ended September 30, 2022
from 42.1% for the three months ended September 30, 2021. The decrease in gross
profit ratio was mainly due to a combination of an increase in sales, as
discussed above, and an increase of cost of goods sold resulting from increase
in import duties and freight charges.
37
Operating Expenses
Operating expenses for the three months ended September 30, 2022 increased
142.0% to $14,579,022 as compared to $6,023,387 for the three months ended
September 30, 2021. The increase was mainly due to an increase in selling and
fulfillment expenses of $4.7 million resulted from increase in advertising,
storage costs and fulfillment workforce, general and administrative expenses of
$0.7 million, which included payroll expenses, stock-based compensation expense,
insurance expenses and other operating expenses including expenses associated
with being a publicly traded company, and $3.1 million of impairment loss on
goodwill triggered by the decrease in the Company's share price and the net loss
incurred during the quarter ended September 30, 2022.
(Loss) Income from Operations
(Loss) Income from operations was ($4,593,306) for the three months ended
September 30, 2022 as compared to $1,290,315 for the three ended September 30,
2021. The decrease was due to a combination of an increase in sales, costs of
goods sold and operating expenses as discussed above.
Other Expense
Other expenses for the three months ended September 30, 2022 was $39,671 as
compared to $59,812 for the three months ended September 30, 2021. The slight
decrease in other expenses was a combined result of an increase in other
non-operating income of $212,572, an increase in interest, including
amortization of debt discount on the revolving loan, and financing expenses of
$189,041 during the period ended September 30, 2022, and an increase in loss on
investment of $3,390.
Net (Loss) Income Attributable to iPower Inc.
Net loss attributable to iPower Inc. for the three months ended September 30,
2022 was $4,182,376 as compared to net income of $887,528 for the three months
ended September 30, 2021, representing a decrease of $5,069,904. The decrease
was primarily due to the increase in operating expenses as discussed above.
Comprehensive (Loss) Income Attributable to iPower Inc.
Comprehensive loss attributable to iPower Inc. for the three months ended
September 30, 2022 was $4,293,851 as compared to comprehensive income of
$887,528 for the three months ended September 30, 2021, representing a decrease
of $5,181,379. The decrease was due to the reasons discussed above and the other
comprehensive loss of $111,475, in relation to the foreign currency translation
adjustments resulting from the translation of RMB, the functional currency of
our VIE in PRC, to USD, the reporting currency of the Company.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity
During the nine months ended September 30, 2022 we primarily funded our
operations with cash and cash equivalents generated from operations, as well as
through completion of two private placements in 2020 and 2021, completion of our
initial public offering in May of 2021, and borrowing under our credit facility
and loans from the Small Business Administration and JPMorgan Chase Bank. We had
cash and cash equivalents of $4,842,146 as of September 30, 2022, representing a
$3.0 million increase from $1,821,947 of cash as of June 30, 2022. The cash
increase was primarily the result of the increase in net cash provided by
operating activities and proceeds from the long term revolving line.
Based on our current operating plan, and despite the current uncertainty
resulting from the ongoing COVID-19 pandemic, we believe that our existing cash
and cash equivalents and cash flows from operations will be sufficient to
finance our operations during the next 12 months.
Our cash requirements consist primarily of day-to-day operating expenses and
obligations with respect to warehouse leases. We lease all our office and
warehouse facilities. We expect to make future payments on existing leases from
cash generated from operations. We have credit terms in place with our major
suppliers, however as we bring on new suppliers, we are often required to prepay
our inventory purchases from them. This is consistent with our historical
operating model which allowed us to operate using only cash generated by the
business. Beyond the next 12 months we believe that our cash flow from
operations should improve as supply chains begin to return to normal and new
suppliers we are bringing online transition to credit terms more favorable to
us. In addition, we plan to increase the size of our in-house product catalog,
which will have a net beneficial impact to our margin profile and ability to
generate cash. In addition, we have approximately $9.0 million unused credit
under the revolving line with JPM as of September 30, 2022. Given our current
working capital position an available funding from our revolving credit line, we
believe we will be able to manage through the current challenges by managing
payment terms with customers and vendors.
38
Working Capital
As of September 30, 2022 and June 30, 2022, our working capital was $32.8
million and $32.3 million, respectively. The historical seasonality in our
business during the year can cause cash and cash equivalents, inventory and
accounts payable to fluctuate, resulting in changes in our working capital. We
anticipate that past historical trends will remain in place through the balance
of the fiscal year with working capital remaining near this level for the
foreseeable future.
Cash Flows
Operating Activities
Net cash provided by (used in) operating activities for the three months ended
September 30, 2022 and September 30, 2021 was $379,025 and $(5,209,185),
respectively. The increase in cash provided by operating activities was mainly
resulted from decreased prepayments and other current assets and increased
accounts payable.
Investing Activities
For the three months ended September 30, 2022 and September 30, 2021, net cash
used in investing activities was $57,989 and $50,423, respectively. The slight
increase in cash used in investing activities was because the Company made
additional purchase of equipment during the quarter ended September 30, 2022.
Financing Activities
Net cash provided by (used in) financing activities was $2,760,614 and
($172,517), respectively, for the three months ended September 30, 2022 and
September 30, 2021. The main reason the Company experienced an increase in net
cash provided by financing activities was primarily due to receiving $2.8
million in proceeds from the draw-down of a $25 million asset-based revolving
loan facility with JPMorgan Chase Bank.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements (as that term is defined in
Item 303 of Regulation S-K) that are reasonably likely to have a current or
future material effect on our financial condition, revenue or expenses, results
of operations, liquidity, capital expenditures or capital resources.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States, or GAAP and pursuant to the
rules and regulations of the Securities Exchange Commission ("SEC"). The
preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates. In some cases, changes in the
accounting estimates are reasonably likely to occur from period to period.
Accordingly, actual results could differ materially from our estimates. To the
extent that there are material differences between these estimates and actual
results, our financial condition and results of operations will be affected. We
base our estimates on experience and other assumptions that we believe are
reasonable under the circumstances, and we evaluate these estimates on an
ongoing basis. We refer to accounting estimates of this type as critical
accounting policies, which we discuss further below. While our significant
accounting policies are more fully described in Note 2 to our audited
consolidated financial statements, we believe that the following accounting
policies are critical to the process of making significant judgments and
estimates in the preparation of our audited consolidated financial statements.
39
Revenue recognition
The Company recognizes revenue from product sales revenues, net of promotional
discounts and return allowances, when the following revenue recognition criteria
are met: a contract has been identified, separate performance obligations are
identified, the transaction price is determined, the transaction price is
allocated to separate performance obligations and revenue is recognized upon
satisfying each performance obligation. The Company transfers the risk of loss
or damage upon shipment, therefore, revenue from product sales is recognized
when it is shipped to the customer. Return allowances, which reduce product
revenue by the Company's best estimate of expected product returns, are
estimated using historical experience.
The Company evaluates the criteria of ASC 606 - Revenue Recognition Principal
Agent Considerations in determining whether it is appropriate to record the
gross amount of product sales and related costs or the net amount earned as
commissions. Generally, when the Company is primarily responsible for fulfilling
the promise to provide a specified good or service, the Company is subject to
inventory risk before the good or service has been transferred to a customer and
the Company has discretion in establishing the price, revenue is recorded at
gross.
Payments received prior to the shipment of goods to customers are recorded as
customer deposits.
The Company periodically provides incentive offers to its customers to encourage
purchases. Such offers include current discount offers, such as percentage
discounts off current purchases and other similar offers. Current discount
offers, when accepted by the Company's customers, are treated as a reduction to
the purchase price of the related transaction.
Sales discounts are recorded in the period in which the related sale is
recognized. Sales return allowances are estimated based on historical amounts
and are recorded upon recognizing the related sales. Shipping and handling costs
are recorded as selling expenses.
Inventory, net
Inventory consists of finished goods ready for sale and is stated at the lower
of cost or market. The Company values its inventory using the weighted average
costing method. The Company's policy is to include as a part of cost of goods
sold any freight incurred to ship the product from its vendors to warehouses.
Outbound freight costs related to shipping costs to customers are considered
period costs and reflected in selling, fulfillment, general and administrative
expenses. The Company regularly reviews inventory and considers forecasts of
future demand, market conditions and product obsolescence.
If the estimated realizable value of the inventory is less than cost, the
Company makes provisions in order to reduce its carrying value to its estimated
market value. The Company also reviews inventory for slow moving and
obsolescence and records allowance for obsolescence.
Business Combination
On February 15, 2022, the Company acquired 100% of the ordinary shares of Anivia
Limited ("Anivia") and its subsidiaries, including its variable interest entity
("VIE"), Daheshou (Shenzhen) Information Technology Co., Ltd., a company
organized under the laws of the People's Republic of China ("DHS"). The Company
applies the acquisition method of accounting for business combinations. Under
the acquisition method, the acquiring entity in a business combination
recognizes 100% of the assets acquired and liabilities assumed at their
acquisition date fair values. Management utilizes valuation techniques
appropriate for the asset or liability being measured in determining these fair
values. Any excess of the purchase price paid over amounts allocated to assets
acquired, including identifiable intangible assets and liabilities assumed is
recorded as goodwill. Where amounts allocated to assets acquired and liabilities
assumed is greater than the purchase price, a bargain purchase gain is
recognized. Acquisition-related costs are expensed as incurred. See Note 4 for
details on acquisition.
40
Variable interest entities
On February 15, 2022, the Company acquired 100% of the ordinary shares of Anivia
Limited ("Anivia") and its subsidiaries, including DHS. Pursuant to the terms of
the Agreements, the Company does not have direct ownership in DHS but is
actively involved in DHS's operations as the sole manager to direct the
activities and significantly impact DHS's economic performance. DHS's
operational funding has been provided by the Company following the February 15,
2022 acquisition. During the term of the Agreements, the Company bears all the
risk of loss and has the right to receive all of the benefits from DHS. As such,
based on the determination that the Company is the primary beneficiary of DHS,
in accordance with ASC 810-10-25-38A through 25-38J, DHS is considered a VIE of
the Company and the financial statements of DHS have been consolidated from the
date such control existed, February 15, 2022. See Note 4 and Note 5 for details
on acquisition.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of
assets acquired and liabilities assumed. The Company accounts for goodwill under
ASC Topic 350, Intangibles-Goodwill and Other.
Goodwill is not amortized but is reviewed for potential impairment on an annual
basis, or if events or circumstances indicate a potential impairment, at the
reporting unit level. The Company's review for impairment includes an assessment
of qualitative factors to determine whether it is more likely than not that the
fair value of a reporting unit is less than its carrying value, including
goodwill. If it is determined that it is more likely than not that the fair
value of a reporting unit is less than its carrying value, including goodwill, a
quantitative goodwill impairment test is performed, which compares the fair
value of the reporting unit with its carrying amounts, including goodwill. If
the fair value of the reporting unit exceeds its carrying amount, goodwill of
the reporting unit is considered not impaired. However, if the carrying amount
of the reporting unit exceeds its fair value, an impairment loss shall be
recognized in an amount equal to that excess, limited to the total amount of
goodwill allocated to that reporting unit The Company engaged an independent
third-party valuation firm in August 2022 to conduct an evaluation of goodwill
impairment for the Company as a whole at the consolidated reporting unit level
as of June 30, 2022, which evaluation was conducted prior to the Company's
filing of its Annual Report on Form 10-K. Due to the decrease in the Company's
share price subsequent to the filing of the Form 10-K and the net loss incurred
during the quarter ended September 30, 2022, the Company engaged the same
valuation firm to review goodwill for impairment. Based on this review , the
Company concluded an impairment loss of $3,060,034 as of September 30, 2022 was
required. The impairment amount was determined based on the discounted cash
flows with the revised projections reflecting the increase in freight and
storage costs in the current interim quarter. The Company also considered the
Market Capital Method, which is an alternative market approach, suggested the
Company's goodwill is partially impaired.. As of September 30, 2022, the
remaining goodwill balance amounted to $3,034,110.
Intangible Assets, net
Finite life intangible assets at June 30, 2022 include a covenant not to
compete, supplier relationship, and software recognized as part of the
acquisition of Anivia Limited. Intangible assets are recorded at the estimated
fair value of these items at the date of acquisition, February 15, 2022.
Intangible assets are amortized on a straight-line basis over their estimated
useful life as followings:
Useful Life
Covenant Not to Compete 10 years
Supplier relationships 6 years
Software 5 years
The Company reviews the recoverability of long-lived assets, including
intangible assets, when events or changes in circumstances occur that indicate
the carrying value of the asset may not be recoverable. The assessment of
possible impairment is based on the ability to recover the carrying value of the
asset from the expected future pretax cash flows (undiscounted and without
interest charges) of the related operations. If these cash flows are less than
the carrying value of such asset, an impairment loss is recognized for the
difference between estimated fair value and carrying value. The measurement of
impairment requires management to make estimates of these cash flows related to
long-lived assets, as well as other fair value determinations. As of June 30,
2022, there were no indicators of impairment.
41
Stock-based Compensation
The Company applies ASC No. 718, "Compensation-Stock Compensation," which
requires that share-based payment transactions with employees and nonemployees
upon adoption of ASU 2018-07, be measured based on the grant date fair value of
the equity instrument and recognized as compensation expense over the requisite
service period, with a corresponding addition to equity. Under this method,
compensation cost related to employee share options or similar equity
instruments is measured at the grant date based on the fair value of the award
and is recognized over the period during which an employee is required to
provide service in exchange for the award, which generally is the vesting
period. In addition to the requisite service period, the Company also evaluates
the performance condition and market condition under ASC 718-10-20. For an award
that contains both a performance and a market condition, and where both
conditions must be satisfied in order for the award to vest, the market
condition is incorporated into the fair value of the award, and that fair value
is recognized over the employee's requisite service period or nonemployee's
vesting period if it is probable that the performance condition will be met. If
the performance condition is ultimately not met, compensation cost related to
the award should not be recognized (or should be reversed) because the vesting
condition in the award has not been satisfied.
The Company will recognize forfeitures of such equity-based compensation as they
occur.
Recently issued accounting pronouncements
In June 2022, FASB issued ASU 2022-03, Fair Value Measurement (Topic 82): Fair
Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.
The amendments in this ASU clarify the guidance in ASC 820 on the fair value
measurement of an equity security that is subject to a contractual sale
restriction and require specific disclosures related to such an equity security.
This standard is effective for fiscal years beginning after December 15, 2024.
The Company does not expect the adoption of this standard to have a material
impact on the consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805),
Accounting for Contract Assets and Contract Liabilities from Contracts with
Customers. This ASU clarifies that an acquirer of a business should recognize
and measure contract assets and contract liabilities in a business combination
in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic
606) as if the entity had originated the contracts. The guidance is effective
for fiscal years beginning after December 15, 2023, with early application
permitted. The Company does not expect the adoption of this standard to have a
material impact on the consolidated financial statements.
In March 2020 and January 2021, the FASB issued ASU No. 2020-04, Reference Rate
Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on
Financial Reporting and ASU No. 2021-01, Reference Rate Reform (Topic 848):
Scope, respectively (collectively, "Topic 848"). Topic 848 provides optional
expedients and exceptions for applying GAAP to contracts, hedging relationships
and other transactions that reference the London Interbank Offered Rate
("LIBOR") or another reference rate expected to be discontinued because of
reference rate reform. The expedients and exceptions provided by Topic 848 are
effective for all entities as of March 12, 2020 through December 31, 2022. The
Company does not expect the adoption of this standard to have a material impact
on the Company's consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, "Debt - Debt with Conversion and
Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in
Entity's Own Equity (Subtopic 815-40)." This ASU reduces the number of
accounting models for convertible debt instruments and convertible preferred
stock, as well as amend the guidance for the derivatives scope exception for
contracts in an entity's own equity to reduce form-over-substance-based
accounting conclusions. In addition, this ASU improves and amends the related
EPS guidance. This standard is effective for the Company on July 1, 2024,
including interim periods within those fiscal years. Adoption is either a
modified retrospective method or a fully retrospective method of transition. The
Company does not expect the adoption of this standard to have a material impact
on the consolidated financial statements.
42
In January 2020, the FASB issued ASU 2020-01, "Investments - Equity Securities
(Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and
Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic
321, Topic 323, and Topic 815." This ASU among other things clarifies that a
company should consider observable transactions that require a company to either
apply or discontinue the equity method of accounting under Topic 323,
Investments-Equity Method and Joint Ventures, for the purposes of applying the
measurement alternative in accordance with Topic 321 immediately before applying
or upon discontinuing the equity method. The new ASU clarifies that, when
determining the accounting for certain forward contracts and purchased options a
company should not consider, whether upon settlement or exercise, if the
underlying securities would be accounted for under the equity method or fair
value option. ASU 2020-01 is effective. For public business entities for fiscal
years, and interim periods within those fiscal years, beginning after December
15, 2021. An entity should apply ASU 2020-01 prospectively at the beginning of
the interim period that includes the adoption date. The adoption of ASU 2020-01
did not have material impact on the Company's Consolidated Financial Statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) -
Simplifying the Accounting for Income Taxes. The update is intended to simplify
the current rules regarding the accounting for income taxes and addresses
several technical topics including accounting for franchise taxes, allocating
income taxes between a loss in continuing operations and in other categories
such as discontinued operations, reporting income taxes for legal entities that
are not subject to income taxes, and interim accounting for enacted changes in
tax laws. The new standard is effective for fiscal years beginning after
December 15, 2021; however, early adoption is permitted. The adoption of this
standard did not have material impact on the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other
(Topic 350): Simplifying the Test for Goodwill Impairment," which eliminates
step two from the goodwill impairment test. Under ASU 2017-04, an entity should
recognize an impairment charge for the amount by which the carrying amount of a
reporting unit exceeds its fair value up to the amount of goodwill allocated to
that reporting unit. All other entities, including not-for-profit entities, that
are adopting the amendments in this Update should do so for their annual or any
interim goodwill impairment tests in fiscal years beginning after December 15,
2021. The Company has adopted ASU 2017-04. See disclosures above on Goodwill for
further details.
The Company does not believe other recently issued but not yet effective
accounting standards, if currently adopted, would have a material effect on the
consolidated financial position, statements of operations and cash flows.
43
© Edgar Online, source Glimpses
IPOWER INC. 
