IPOWER INC.
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. OverviewiPower Inc. is an online hydroponic, home and garden equipment supplier based inthe United States . Through the operations of our e-commerce platform, www.Zenhydro.com, and our combined 72,000 square foot fulfillment centers inLos Angeles, 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 acrossthe 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 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 endedDecember 31, 2021 , our top five product segments accounted for 64.4% 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. Trends and Expectations Product andBrand Development We plan to increase 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. COVID-19 Outbreak
We are continuing to closely monitor the impact of the 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, suspending all non-essential travel, transitioning certain of our employees to working-from-home arrangements, reimbursing certain employee technology purchases, providing emergency paid time off and targeted hourly pay increases and developing no
contact delivery methods. 24 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 theDistrict 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 theU.S. Controlled Substances Act and the laws ofU.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.
RESULTS OF OPERATIONS
For the three months ended
The following table presents certain unaudited condensed consolidated and combined statement of operations information and presentation of that data as a percentage of change from period to period.
Three Months Three Months
Ended Ended
December 31, December 31,
2021 2020 Variance
Revenues $ 17,125,663 $ 11,254,317 52.17%
Cost of goods sold 9,568,051 6,306,726 51.71%
Gross profit 7,557,612 4,947,591 52.75%
Selling, fulfillment, general and
administrative expenses 6,422,327 4,094,485 56.85%
Operating income 1,135,285 853,106 33.08%
Other (expenses) (14,709 ) (50,700 ) (70.99% )
Income before income taxes 1,120,576 802,406 39.65%
Income tax expenses 322,715 226,930 42.21%
Net income $ 797,861 $ 575,476 38.64%
Gross profit % of revenues 44.13% 43.96%
Net income % of revenues 4.66% 5.11%
25
Revenues
Revenues for the three months ended December 31, 2021 increased 52.17% to
$17,125,663 as compared to $11,254,317 for the three months ended December 31,
2020 . 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 , Asia , etc. 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, 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 endedDecember 31, 2021 increased 51.71% to$9,568,051 as compared to$6,306,726 for the three months endedDecember 31, 2020 . The increase was due to an increase in sales, as discussed above. In addition, we experienced a decrease in cost of goods sold as a percentage of revenue as a result of selling more products under in-house brands as opposed to third party brands. See discussions on gross profit below. Gross Profit
Gross profit was$7,557,612 for the three months endedDecember 31, 2021 as compared to$4,947,591 for the three months endedDecember 31, 2020 . The gross profit ratio slightly increased to 44.13% for the three months endedDecember 31, 2021 from 43.96% for the three months endedDecember 31, 2020 . The increase was mainly due to a combination of an increase in sales, as discussed above, and a decrease of cost of goods sold resulting from selling more products under in-house brands as opposed to third party brands. The gross margin for in-house branded products is, on average, 20% higher than our gross margin for third party brands.
Selling, Fulfillment, General and Administrative Expenses
Selling, fulfillment, and general and administrative expenses for the three months endedDecember 31, 2021 increased 56.85% to$6,422,327 as compared to$4,094,485 for the three months endedDecember 31, 2020 . The increase was mainly due to an increase in selling and fulfillment expenses of$0.86 million and general and administrative expenses of$1.47 million , which included payroll expenses, stock-based compensation expense, insurance expenses, and other operating expenses including expenses associated with being a publicly traded company. Other (Expenses) Other (expenses) consists of interest expense, financing fees and other non-operating income (expenses). Other expenses for the three months endedDecember 31, 2021 was ($14,709 ) as compared to ($50,700 ) for the three months endedDecember 31, 2020 . The decrease in other expenses was a combined result of an increase in other income of$49,948 and an increase in interest, including amortization of debt discount on the revolving loan, and financing expenses of 13,957 during the period endedDecember 31, 2021 . Net Income Net income for the three months endedDecember 31, 2021 was$797,861 as compared to net income of$575,476 for the three months endedDecember 31, 2020 , representing an increase of$222,385 . The decrease in net income as percentage of revenues for the three months endedDecember 31, 2021 was primarily due to the increase in operating and non-operating expenses discussed above. 26
For the six months ended
The following table presents certain unaudited condensed consolidated and combined statement of operations information and presentation of that data as a percentage of change from period to period.
Six Months Ended Six Months Ended
December 31, December 31,
2021 2020 Variance
Revenues $ 34,492,428 $ 26,214,252 31.58%
Cost of goods sold 19,621,114 15,703,873 24.94%
Gross profit 14,871,314 10,510,379 41.49%
Selling, fulfillment, general and
administrative expenses 12,445,714 8,580,900 45.04%
Operating income 2,425,600 1,929,479 25.71%
Other (expenses) (74,521 ) (69,133 ) 7.79%
Income before income taxes 2,351,079 1,860,346 26.38%
Income tax expenses 665,690 522,874 27.31%
Net income $ 1,685,389 $ 1,337,472 26.01%
Gross profit % of revenues 43.11% 40.09% Net income % of revenues 4.89% 5.1% Revenues Revenues for the six months endedDecember 31, 2021 increased 31.58% to$34,492,428 as compared to$26,214,252 for the six months endedDecember 31, 2020 . While pricing remained stable, the increased revenue mainly resulted from an increase in sales volume and expansion of sales to other regions, such asCanada ,Europe ,Asia , etc. 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, 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 six months endedDecember 31, 2021 increased 24.94% to$19,621,114 as compared to$15,703,873 for the six months endedDecember 31, 2020 . The increase was due to an increase in sales as discussed above. In addition, we experienced a decrease of cost of goods sold as a percentage of revenue as a result of selling more products under in-house brands as opposed to third party brands. See discussions on gross profit below. Gross Profit
Gross profit was$14,871,314 for the six months endedDecember 31, 2021 as compared to$10,510,379 for the six months endedDecember 31, 2020 . The gross profit ratio also increased to 43.11% for the six months endedDecember 31, 2021 from 40.09% for the six months endedDecember 31, 2020 . The increase was due to a combination of an increase in sales as discussed above and a decrease of cost of goods sold resulting from selling more products under in-house brands as opposed to third party brands. The gross margin for in-house branded products is, on average, 20% higher than our gross margin for third party brands. 27
Selling, Fulfillment, General and Administrative Expenses
Selling, fulfillment, general and administrative expenses for the six months endedDecember 31, 2021 increased 45.04% to$12,445,714 as compared to$8,580,900 for the six months endedDecember 31, 2020 . The increase was mainly due to an increase in selling and fulfillment expenses of$1.31 million and general and administrative expenses of$2.56 million , which included payroll expenses, stock-based compensation expense, insurance expenses, and other operating expenses including expenses associated with being a publicly traded company. Other (Expenses) Other (expenses) consists of interest expense, financing fees and other non-operating income (expenses). Other expenses for the six months endedDecember 31, 2021 was ($74,521 ) as compared to ($69,133 ) for the six months endedDecember 31, 2020 . The slight increase in other expenses was mainly due to an increase in interest expenses, including amortization of debt discount on the revolving loan, during the period endedDecember 31, 2021 . Net Income Net income for the six months endedDecember 31, 2021 was$1,685,389 as compared to net income of$1,337,472 for the six months endedDecember 31, 2020 , representing an increase of$347,917 . While the gross profit as percentage of revenues increased to 43.11% in the six months endedDecember 31, 2021 as compared to 40.09% for the same period in 2020, the slight decrease in net income as percentage of revenues for the six months endedDecember 31, 2021 was primarily due to the increase in operating expenses discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity During the six months endedDecember 31, 2021 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 theSmall Business Administration andJPMorgan Chase Bank . We had cash and cash equivalents of$1,091,758 as ofDecember 31, 2021 , representing a$5.56 million decrease from$6,651,705 of cash as ofJune 30, 2021 . The cash decrease was primarily the result of the decrease in net cash provided by operating activities, including increased investment in inventory to support our increasing sales, payment of income taxes, and the increase in accounts receivable from Amazon resulting from increased sales.
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 the next twelve 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 twelve 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$8 million unused credit under the revolving line with JPM. 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. 28 Working Capital As ofDecember 31, 2021 andJune 30, 2021 , our working capital was$31.96 million and$23.28 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 to 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 (used in) operating activities for the six months endedDecember 31, 2021 andDecember 31, 2020 was$12,243,043 and$1,467,067 , respectively. The increase in use of cash in operating activities was resulted from an increased purchase of products in order to maintain the higher inventory levels required to meet our increasing sales volumes, payment of income taxes, and the increase in accounts receivable resulted from increased sales. Investing Activities
For the six months endedDecember 31, 2021 andDecember 31, 2020 , net cash used in investing activities was the result of additions to property and equipment of$56,424 and$55,751 , respectively, which were mainly related to the purchase of warehouse fixtures and office equipment. Financing Activities Net cash provided by financing activities was$6,739,520 and$1,089,256 , respectively, for the six months endedDecember 31, 2021 andDecember 31, 2020 . The main reason for the increase in net cash provided was primarily a result of proceeds from the asset-based revolving loan withJPMorgan Chase Bank . 29 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 and combined financial statements in accordance with accounting principles generally accepted inthe United States , or GAAP and pursuant to the rules and regulations of theSecurities Exchange Commission ("SEC"). The preparation of consolidated and combined financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated and combined 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 and combined 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 and combined financial statements. 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. 30 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, 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.
Leases Since inception onApril 11, 2018 , the Company adopted ASC 842 - Leases ("ASC 842"), which requires lessees to record right-of-use, or ROU, assets and related lease obligations on the balance sheet, as well as disclose key information regarding leasing arrangements. ROU assets represent our right to use an underlying asset for the lease terms and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the Company's leases do not provide an implicit rate, the Company generally uses its incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term. 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.
The Company will recognize forfeitures of such equity-based compensation as they occur.
Commitments and Contingencies
In the normal course of business, the Company is subject to certain contingencies, including legal proceedings and claims arising out of the business that relate to a wide range of matters, such as government investigations and tax matters. The Company recognizes a liability for such contingency if it determines it is probable that a loss has occurred and a reasonable estimate of the loss can be made. The Company may consider many factors in making these assessments including historical and specific facts and circumstances of each matter.
Earnings per share Basic earnings per share are computed by dividing net income attributable to holders of common stock by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share reflect the potential dilution that could occur if securities to issue common stock were exercised. 31
Recently issued accounting pronouncements
InAugust 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 becomes effective for the Company onJuly 1, 2022 , 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 have a material impact on the consolidated financial statements. InDecember 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 afterDecember 15, 2020 ; however, early adoption is permitted. Adoption of this standard did not have a material impact on the consolidated financial statements. 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 and combined financial position, statements of operations and cash flows.
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