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 72,000 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 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 March 31, 2022, our top five product segments accounted for
63.3% 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 with a fair value of
$10.6 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.
30
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 GSM 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 services agreement with Box
Harmony pursuant to which we provide a portion of our fulfillment center
infrastructure to Box Harmony in exchange for their payment.
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 up to $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 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.
31
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 interruptions and 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, 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.
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.
32
RESULTS OF OPERATIONS
For the three months ended March 31, 2022 and 2021
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
March 31, March 31,
2022 2021 Variance
Revenues $ 22,808,214 $ 13,133,902 73.7%
Cost of goods sold 13,598,563 7,369,127 84.5%
Gross profit 9,209,651 5,764,775 59.8%
Selling, fulfillment, general and
administrative expenses 7,832,662 4,976,041 57.4%
Operating income 1,376,989 788,734 74.6%
Other (expenses) (159,447 ) (757,744 ) (79.0% )
Income before income taxes 1,217,542 30,990 3,828.8%
Income tax expenses 39,855 237,813 (83.2% )
Net income (loss) attributable to
iPower Inc. 1,181,757 (206,823 ) 671.4%
Comprehensive (loss) attributable to
iPower Inc. $ 1,178,531 $ (206,823 ) 669.8%
Gross profit % of revenues 40.4% 43.9%
Operating income % of revenues 6.0% 6.0%
Net income (loss) % of revenues 5.2% (1.6% )
Revenues
Revenues for the three months ended March 31, 2022 increased 73.7% to
$22,808,214 as compared to $13,133,902 for the three months ended March 31,
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 positively impacted by people
continuing to shop online and pursuing gardening and growing projects during the
COVID-19 pandemic. However, while the revenues for the current quarter improved
from 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, particularly in China.
Costs of Goods Sold
Costs of goods sold for the three months ended March 31, 2022 increased 84.5% to
$13,598,563 as compared to $7,369,127 for the three months ended March 31, 2021.
The increase was due to an increase in sales, as discussed above. However, 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.
Gross Profit
Gross profit was $9,209,651 for the three months ended March 31, 2022 as
compared to $5,764,775 for the three months ended March 31, 2021. The gross
profit ratio decreased to 40.4% for the three months ended March 31, 2022 from
43.9% for the three months ended March 31, 2021. The decrease was mainly due to
a combination of an increase in sales, as discussed above, and an increase of
cost of goods sold resulting from increasing import duties and freight charges.
33
Selling, Fulfillment, General and Administrative Expenses
Selling, fulfillment, and general and administrative expenses for the three
months ended March 31, 2022 increased 57.4% to $7,832,662 as compared to
$4,976,041 for the three months ended March 31, 2021. The increase was mainly
due to an increase in selling and fulfillment expenses of $1.9 million and
general and administrative expenses of $0.9 million, which included payroll
expenses, stock-based compensation expense, legal and professional fees in
connection with the acquisition and joint ventures, insurance expenses and other
operating expenses including expenses associated with being a publicly traded
company.
Income from Operations
Income from operations was $1,376,989 for the three months ended March 31, 2022
as compared to $788,734 for the three ended March 31, 2021. The income from
operations ratio was 6.0% for the three months ended March 31, 2022, which was
consistent with the 6.0% for the three months ended March 31, 2021. The result
was due to a combination of an increase in sales and selling, fulfillment,
general and administrative expenses as discussed above.
Other Income/(Expense)
Other expenses for the three months ended March 31, 2022 was ($159,447) as
compared to ($757,744) for the three months ended March 31, 2021. The decrease
in other expenses was a combined result of a decrease in other income of
$175,500, an increase in interest, including amortization of debt discount on
the revolving loan, and financing expenses of $102,230 during the period ended
March 31, 2022, an increase in loss on investment of $12,289, and a decrease of
other non-operating expenses of $888,316 due to expenses resulting from issuance
of our Series A Convertible Preferred Stock, convertible notes and warrants
during the period ended March 31, 2021.
Net Income (Loss) Attributable to iPower Inc.
Net income (loss) attributable to iPower Inc. for the three months ended March
31, 2022 was $1,181,757 as compared to net loss of $(206,823) for the three
months ended March 31, 2021, representing an increase of $1,388,580. The
increase in net income as percentage of revenues for the three months ended
March 31, 2022 was primarily due to a combination of the increase in operating
income and a decrease in non-operating expenses discussed above and the decrease
in income tax resulting from the deferred taxes and revision of income tax
provision based on actual income taxes paid for the year ended June 30, 2021.
Comprehensive Income (Loss) Attributable to iPower Inc.
Comprehensive income (loss) attributable to iPower Inc. for the three months
ended March 31, 2022 was $1,178,531 as compared to comprehensive loss of
$(206,823) for the three months ended March 31, 2021, representing an increase
of $1,385,354. The increase was due to the reasons discussed above and the other
comprehensive loss of $3,226, which was 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.
34
For the nine months ended March 31, 2022 and March 31, 2021
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.
Nine Months Nine Months
Ended Ended
March 31, March 31,
2022 2021 Variance
Revenues $ 57,300,642 $ 39,348,154 45.6%
Cost of goods sold 33,219,677 23,073,000 44.0%
Gross profit 24,080,965 16,275,154 48.0%
Selling, fulfillment, general and
administrative expenses 20,278,376 13,556,941 49.6%
Operating income 3,802,589 2,718,213 39.9%
Other (expenses) (233,968 ) (826,877 ) (71.7% )
Income before income taxes 3,568,621 1,891,336 88.7%
Income tax expenses 705,545 760,687 (7.2% )
Net income attributable to iPower Inc. 2,867,146 1,130,649 153.6%
Comprehensive income attributable to
iPower Inc. $ 2,863,920 $ 1,130,649 153.3%
Gross profit % of revenues 42.0% 41.4%
Operating income % of revenues 6.6% 6.9%
Net income % of revenues 5.0% 2.9%
Revenues
Revenues for the nine months ended March 31, 2022 increased 45.6% to $57,300,642
as compared to $39,348,154 for the nine months ended March 31, 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 positively impacted by people continuing to shop
online and pursuing gardening and growing projects during the COVID-19 pandemic.
However, while the revenues for the current nine months ended March 31, 2022
improved over the same period last year, 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 nine months ended March 31, 2022 increased 44.0% to
$33,219,677 as compared to $23,073,000 for the nine months ended March 31, 2021.
The increase was due to an increase in sales, as discussed above. In addition,
we experienced a slight decrease in cost of goods sold as a percentage of
revenue resulting from a combination of an increase of import duty and freight
charges and selling more products under in-house brands as opposed to third
party brands. See discussions on gross profit below.
35
Gross Profit
Gross profit was $24,080,965 for the nine months ended March 31, 2022 as
compared to $16,275,154 for the nine months ended March 31, 2021. The gross
profit ratio slightly increased to 42.0% for the nine months ended March 31,
2022 from 41.4% for the nine months ended March 31, 2021. The slight increase
was mainly due to a combination of an increase in sales, as discussed above, an
increase of import duty and freight charges, and a decrease of cost of goods
sold as a percentage of revenue 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 nine months
ended March 31, 2022 increased 49.6% to $20,278,376 as compared to $13,556,941
for the nine months ended March 31, 2021. The increase was mainly due to an
increase in selling and fulfillment expenses of $3.3 million and general and
administrative expenses of $3.4 million, which included payroll expenses,
stock-based compensation expense, legal and professional fees in connection with
the acquisition and joint ventures, insurance expenses, and other operating
expenses including expenses associated with being a publicly traded company.
Income from Operations
Income from operations was $3,802,589 for the nine months ended March 31, 2022
as compared to $2,718,213 for the nine months ended March 31, 2021. The income
from operations ratio decreased to 6.6% for the nine months ended March 31, 2022
from 6.9% for the nine months ended March 31, 2021. The decrease was due to a
combination of an increase in sales as discussed above, a decrease of cost of
goods sold as a percentage of revenue resulting from selling more in house
branded products as opposed to third party brands, and an increase of selling,
fulfillment, general and administrative expenses.
Other Income/(Expense)
Other (expenses) consists of interest expense, financing fees and other
non-operating income (expenses). Other expenses for the nine months ended March
31, 2022 was ($233,968) as compared to ($826,877) for the nine months ended
March 31, 2021. The decrease in other expenses was a combined result of a
decrease in other income of $175,500, an increase in interest, including
amortization of debt discount on the revolving loan, and financing expenses of
$99,357 during the period ended March 31, 2022, an increase in loss on
investment of $12,289, and a decrease of other non-operating expenses of
$880,055 due to expenses resulting from issuance of our Series A Convertible
Preferred Stock, convertible notes and warrants during the period ended March
31, 2021.
Net Income Attributable to iPower Inc.
Net income attributable to iPower Inc. for the nine months ended March 31, 2022
was $2,867,146 as compared to net income of $1,130,649 for the nine months ended
March 31, 2021, representing an increase of $1,736,497. The increase in net
income as percentage of revenues for the nine months ended March 31, 2022 was
primarily due to the changes in operating and non-operating income and expenses
discussed above and the decrease in income tax resulting from the deferred taxes
and revision of income tax provision based on actual income taxes paid for the
year ended June 30, 2021.
Comprehensive Income Attributable to iPower Inc.
Comprehensive income attributable to iPower Inc. for the nine months ended March
31, 2022 was $2,863,920 as compared to comprehensive income of $1,130,649 for
the nine months ended March 31, 2021, representing an increase of $1,733,271.
The increase was due to the reasons discussed above and the other comprehensive
loss of $3,226, which was 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.
36
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity
During the nine months ended March 31, 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 $2,641,584 as of March 31, 2022, representing a
$4,010,121 decrease from $6,651,705 in cash as of June 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 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 $13.0 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.
Working Capital
As of March 31, 2022 and June 30, 2021, our working capital was $33.67 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 nine months ended March 31, 2022
and March 31, 2021 was $14,760,269 and $4,786,077, respectively. The increase in
use of cash in operating activities 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.
37
Investing Activities
For the nine months ended March 31, 2022 and March 31, 2021, net cash provided
by (used in) investing activities was $177,408 and ($61,498), respectively. The
increase in cash provided by the investing activities was mainly resulting from
a combination of the increase in purchase of additional equipment, investment in
joint ventures, and cash acquired on acquisition of Anivia.
Financing Activities
Net cash provided by financing activities was $10,598,447 and $4,344,262,
respectively, for the nine months ended March 31, 2022 and March 31, 2021. The
main reason the Company experienced an increase in net cash provided by
financing activities was primarily due to receiving $11.6 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 and combined 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 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.
38
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.
Equity method investment
The Company accounts for its ownership interest in Box Harmony, a 40% owned
joint venture following the equity method of accounting, in accordance with ASC
323, Investments -Equity Method and Joint Ventures. Under this method, the
carrying cost is initially recorded at cost and then increased or decreased by
recording its percentage of gain or loss in its statement of operations and a
corresponding charge or credit to the carrying value of the asset.
Business Combination
On February 15, 2022, the Company acquired 100% of the ordinary shares of Anivia
Limited ("Anivia") and its subsidiaries, including its VIE. 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 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.
Variable interest entities
On February 15, 2022, the Company acquired 100% of the ordinary shares of Anivia
and its subsidiaries, including its operating entity, Daheshou (Shenzhen)
Information Technology Co., Ltd., a company organized under the Laws of the PRC
("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 is provided by the Company. During the
term of the agreements, the Company bore all the risk of loss and had 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 variable interest entity
("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. We have recently determined that we may
have miscalculated the significance test, in which case DHS would be just over
the 20% threshold, which would require us to provide one year of audited
financial statements along with unaudited financial statements for any interim
period. We are presently evaluating the requirements for any additional
disclosure that would be required.
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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. The Company tests goodwill for
impairment annually, or more frequently whenever events or circumstances
indicate impairment may exist. Goodwill is stated at cost less accumulated
impairment losses, if any. The Company recognized goodwill of $6,094,144 during
the quarter ended March 31, 2022 as part of the acquisition of Anivia Limited.
The Company does not have any other indefinite-lived intangible assets.
The impairment test for goodwill uses a two-step approach. Step one compares the
estimated fair value of a reporting unit with goodwill to its carrying value. If
the carrying value exceeds the estimated fair value, step two must be performed.
Step two compares the carrying value of the reporting unit to the fair value of
all of the assets and liabilities of the reporting unit (including any
unrecognized intangibles) as if the reporting unit was acquired in a business
combination. If the carrying amount of a reporting unit's goodwill exceeds the
implied fair value of its goodwill, an impairment loss is recognized in an
amount equal to the excess.
Intangible Assets, net
Definite life intangible assets at March 31, 2022 include 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 relationship 6 years
Software 5 years
Leases
Since inception on April 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.
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Recently issued accounting pronouncements
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 becomes effective for the Company on July 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.
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, 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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