Transcript
Thank you for standing by, and welcome to the iPower Earnings Call. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your host, Kevin Vassily. You may begin.
Thank you, Latif. Good afternoon, everyone. With me on the call today is Lawrence Tan, our Chairman and Chief Executive Officer. By now, hopefully, everyone has had a chance to access our third fiscal quarter 2021 earnings release and Form 8-K that was issued today after the market closed. These documents are available on our website. Before we start, bear with me, we've got to draw your attention to our safe harbor statement. Management's prepared remarks contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts are forward-looking statements, including, but not limited to, anticipated revenues from the hydroponics equipment and accessories business, the actions and initiatives of current and potential competitors, the company's ability to introduce new products, the company's ability to implement capacity expansion, market acceptance of new products, general economic and business conditions, the ability to attract and retain qualified senior management personnel, and research and development staff, and other risks detailed in the company's filings with the Securities and Exchange Commission. These forward-looking statements involve known and unknown risks and uncertainties, and are based on current expectations, assumptions, estimates and projections about the company and the industry. The company undertakes no obligation to update forward-looking statements to reflect subsequent or current events or circumstances or to changes in its expectations, except as may be required by law. Although the company believes that the expectations expressed in these forward-looking statements are reasonable, we cannot assure you that these expectations will turn out to be correct, and investors are cautioned that actual results may differ materially from anticipated results. With that over, I'd like to turn the call over now to Lawrence Tan. Lawrence?
Thank you, Kevin, and good afternoon, everyone. We are pleased to report a strong fiscal Q3 in our first earnings release as a public company. Even with the lessening shipping times and the congestion in the L.A. port, our revenue grew nearly 35% year-over-year, and income from operations grew 132%. Gross margin in the quarter was over 43%, a record high for us as a company. At the end of January, we closed a much-needed $3 million convertible note financing that we were able to immediately deploy into our supply chain. As a result, we had a very strong sales month in March and one of the best sales months in company history. iPower is a data and technology-driven company. Data informs all of our business decisions. This is very evident this quarter in our gross margin performance, which benefited from the contribution of our in-house branded product portfolio. Extensive product and market data collection are used to drive our product design, development, and merchandising efforts. We have over 2,600 in-house SKUs, which represent just over 10% of the total SKUs we carry but drove over 2/3 of our revenue in the quarter. We are very good at bringing product to market, and we have features and benefits for our customers and attractive margins for us. Having been an e-commerce business since the founding of the company, we have a deep understanding of how to leverage online channels. The experience and footprint we have online will allow us to quickly pivot to adjacent product categories when we see opportunities. We also believe our focus on data and technology positions us extremely well to serve 2 attractive end markets in the hydroponics industry, the home hobbyist market and the small commercial cultivator market. Both these segments require market-specific products and can be effectively and more efficiently served through the e-commerce solution. Our IPO completed in May was the first meaningful growth financing as a company. iPower now has the capital needed to both drive organic growth as well as to pursue strategic acquisitions. Historically, without any meaningful outside capital, iPower was able to grow organically between 25% to 35% annually. With the capital in hand, we are planning to invest more in R&D to accelerate new product introductions, to expand our already robust supply base, to amplify our brand awareness through marketing, and to broaden our sales channels with additional partners. For acquisitions, we plan to target products and brands that complement our in-house portfolio, that are good fits for our e-commerce model, and can bring talented people into the organization. The good news for us is that this is a larger fragmented market with a lot of great companies and brands. We are confident that there will be a number of firms that will be a great fit for the iPower model. Finally, I want to say that iPower has a number of tailwinds that make us excited about the future. E-commerce adoption accelerated over the last year. The regulatory environment continues to evolve more favorably, and consumer interest in hydroponics and gardening continues to increase. These tailwinds play to our strength as a company, and we plan to take advantage of that.
Now I'll turn it over to our CFO, Kevin, to discuss the third quarter financial results in detail and provide some color for our full year fiscal 2021. Kevin? Thanks, Lawrence. We are pleased to report our third fiscal quarter of 2021. Net revenues for the quarter were $13.1 million, which was higher than the initial projection that we laid out in our S-1 for our IPO, and that we communicated during the IPO roadshow. That projection was $12.25 million at the midpoint of the range that we had provided. We exited the quarter with good momentum, thanks to 2 factors. First, some of the supply chain stresses that we started seeing in December 2020, mainly on shipping times across the Pacific and congestion in the ports in Los Angeles, started to ease. This allowed us to access more product from our suppliers to meet demand. Second, we completed a convertible note financing ahead of our IPO, and we were able to immediately use the proceeds of that to help work with some of our key suppliers. As a result, the month of March was a very strong sales month for us in absolute dollar terms and one of the better months in our company's history. Sales growth of our in-house branded products remained strong as a percent of our total sales in the quarter. Our in-house brands made up 68% of sales, which was similar to the 2/3 of sales we saw for in-house brands in the second half of calendar year 2020. From a channel perspective, approximately 88% of sales went through our e-commerce channels, which includes our third-party channel partners as well as our own in-house captive channel, zenhydro.com. This was a little higher than what we saw in the second half of calendar year 2020, where we saw approximately 85% of our sales run through e-commerce channels. Sales mix had a favorable impact on gross margin in the quarter. Gross margins were 43.9% as compared to 32.3% in the same quarter last year. While sales mix between in-house brands and third-party products that we sell is the largest variable in our gross margin, there are other factors that can move the needle as well. This quarter, our ability to push larger manufacturing runs with some of our suppliers and to ship in larger quantities helped us. Input costs can also be a factor, and I imagine we'll get some questions about this later. But in this quarter, completed March 31, input costs did not materially impact margins. And then finally, the mix of products sold within our in-house brand category can have an impact. So product type, product age, volumes, in-stock availability, all these things have impact. In this quarter, these factors all aligned favorably. Selling, general and administrative expense increased to $4.97 million in the quarter compared to $2.82 million in the same quarter last year. The increase was primarily due to an increase in sales volume, increases in cost in preparation to go public and investments in staff and programs, including marketing programs to support our longer-term growth strategy. This includes work on overhauling our captive e-commerce platforms at zenhydro.com. The biggest increase was in G&A, which increased to 19.5% of net sales from 11.8% of net sales in the prior quarter. Over time, the G&A line will be the expense line where we expect to be able to generate some operating leverage. Given our third-party e-commerce channel strategy, selling costs are going to scale more or less linearly with sales volumes over the next couple of years until we can bring more of our volumes up on our captive channel. Income from operations increased to approximately $788,000 from approximately $340,000 in the same quarter last year, with an increase of 131%. This was above the initial estimate of income from operations growth that we provided in our S-1, and on our IPO road show, of an increase between 87% and 125% over the prior year quarter. The increase was driven by increased sales volume, and the increase over our initial estimate was driven by higher-than-forecasted sales volume. As a percent of net sales, income from operations was 6% in the quarter. As a note, we do not provide non-GAAP results or financials for comparison purposes. In particular, we don't provide an adjusted EBITDA metric that some others in our peer group provide. We do think that income from operations is an okay approximation for that metric, at least for now, largely because, historically, we've had very little debt in the traditional sense and have not historically had many noncash or one-time charges. However, in this quarter, we do have some noncash charges, and I'll walk you through some of those that show up in our other income and expense line. Other net expense in the quarter was made up of interest expense, financing fees, and other non-operating income expenses that totaled $718,000 in the quarter. That was up from $33,000 in the same quarter last year. There are 2 one-time noncash items of note in this quarter: first, a net gain of $175,000 in non-operating income from the forgiveness of a PPP loan that we secured during the pandemic; second, a non-operating expense of $812,434 pertaining to our convertible note offering that we did in January of 2021. It consists of debt discount amortization and a charge, sorry, a change in fair value of the conversion feature and warrant liabilities associated with this convertible offering. Without these 2 items, other net expense would have been approximately $97,000 in the quarter, which was made up of interest expense and financing charges. Income before taxes was $30,990. Provision for income taxes was $237,813. And the net loss for the quarter was $206,823 for a fully diluted loss of $0.01 per share. If you back out the one-time noncash items, our income before taxes would have been approximately $691,000. Net income would have been $502,774 for a fully diluted EPS of $0.02 per share. This compares to EPS of $0.01 per share in the same quarter last year. Moving on to the balance sheet. As of March 31, we had net cash and equivalents of $474,000, approximately $4.6 million in net working capital. We only have $470,000 of long-term debt on the balance sheet in the form of an SBA loan. From a cash flow perspective, we used approximately $500,000 in cash in the quarter to fund investment into our supply chain. After the end of the quarter, we completed our IPO and received $16.5 million in net proceeds. And we've also begun a process to secure a revolving credit facility. So we are now operating in a significantly improved liquidity position. And then finally, before we take questions, I want to provide at least some commentary on how we plan to provide guidance on a go-forward basis. Our plan as a company, at least for the foreseeable future, is to provide annual targets at the beginning of our fiscal year. So we'll start that process with our fiscal year 2022, which will begin after June 30 of this year, and we'll provide those targets when we report our fiscal Q4 2021 results. We're an e-commerce company. We're still small. We have a significant amount of business that is conducted business-to-consumer. And sometimes that does make near-term visibility somewhat difficult. However, I would like to provide at least some color around the full year 2021, given that we are most of the way through the year at this point. What we are comfortable saying is that the order momentum we saw in March carried over to the months of April and May, and this was without the benefit of any incremental investment of our IPO proceeds into our supply chain. We are only now beginning to see that impact take hold. We believe the overall environment remains quite robust for hydroponics, and the tailwinds that Lawrence referenced earlier in his prepared remarks remain in place. We're quite happy with where the business stands right now as we approach the end of the fiscal year. So that concludes our prepared remarks, and we are now happy to answer any questions that you might have. So operator, please open the line for any questions.
Our first question comes from Scott Fortune of ROTH Capital Partners.
Congrats on the quarter. I want to follow up really quickly on providing the strength from the different sales channels and the focus on moving the shift into the small commercial customers and adopting the online direct zenhydro channel versus the mix shift to Amazon over time. It looked like the Amazon channel was higher. Third-party channels were higher in the quarter, but what is your sense of the movement of your zenhydro.com channel becoming an overall higher percentage of revenues? And then the percentage of private label at 68%, is it fair to say that you can grow that by 100 to 200 basis points on a quarterly basis and you're maintaining 45% gross margins on that private business?
Sure, I will address the first question, and then perhaps Lawrence can cover the second one regarding the product mix over time. I think what we've said in the conversations we had around the IPO is that we focused on our third-party channels, particularly in Amazon, because they are the strongest and most powerful marketing channel that exists in the world at this point. However, we do think that moving more of our sales to our own captive site, both our direct-to-consumer sales, but also over time, some of that small commercial cultivator business that we do off-line and wholesale to that site makes sense. I think, ideally, our target is somewhere around 15% of our total sales. We would like to go through our zenhydro platform. The time line for that, I think, is still TBD. But we do have a lot of headway or headroom to get there over time. But, I think, the way I characterize it is that's our first goal for zenhydro to get to 15. And once we get there, we'll have a better sense of what that entails. Now when I say 15, that's 15% of our direct-to-consumer sales. We're still in the process of creating the wholesale aspect of our captive site where we can service those small cultivators using an e-commerce solution. We do a little bit of that now, but we have some work to do to build that into a more robust solution for that part of the market. Does that answer the question you were asking?
Yes, that's great. Yes. And maybe Tan on the private label side, what kind of initiatives are in place to continue to move that percentage up and the gross margin by cadence as we go further out?
Yes. So for private label, like what we previously mentioned during the investor calls during the IPO, our strategy, which we have been working on, is actually in progress right now to increase and expedite more in-house product pipeline to get more products coming out and invest more into R&D to create better products for the market. That remains one of our focuses for now and the future. In terms of gross margin, I would say it will not drop for our in-house branded product. It's not our goal to drop it but to increase it. Better products, better value, and better perceived by the market, that's our goal.
And then a follow-up to that. We have seen the hydroponic industry push into consolidating the nutrient side and grow categories with competitors rapidly acquiring in that fertilizer nutrient segment. Can you provide color on the opportunity to develop or acquire more in-house nutrient brands in that recurring revenue business and a targeted percentage mix? I think on the quarter we were around 17% and then nutrients as a longer-term sales mix you see for that category?
Yes. We have two strategic plans for our in-house brand. We are actively engaging with potential new brands for acquisitions, which is one aspect of our strategy. On the other hand, we are also continuously developing our in-house branded nutrients as a part of our overall plan. If the acquisition is successful, that will be excellent. If not, we still have our own in-house branded nutrients in the works.
Yes. So I think what we've said during the IPO process is that we were looking at kind of the second half of calendar year 2020 as the time frame to both bring our in-house development to market and/or identify and potentially bring onboard a third-party brand. I think right now, within the next few months, the work that we've done on our in-house development will be coming to market. So I think it's probably likelier that that will be out the door first than any type of acquisition. I think M&A, for a lot of reasons, takes a little bit longer. And I think the other thing that we also talked about during the IPO process was there are multiple avenues of acquisition that we're looking at, right? There are other product categories, potential sales channels outside the U.S., and the potential to add additional offline servicers and distributors to the small commercial cultivator market, which could give us some scale to more quickly ramp them over the e-commerce or zenhydro wholesale approach. So as we evaluate all those, it's hard to give you a sense of cadence, and what will take precedence, but it's going to be a function of what's presented to us and what makes the most sense at the time that we see it. I think Lawrence's point earlier still holds, that it's a fairly fragmented market. There are lots of good brands, product categories, and potential sales channels, and certainly lots of offline distributors that we will have the opportunity to engage with. And like I said, I think we're going to look at everything on its own merits and could make decisions that way. I think the last thing I want to say is that we just did a pretty big overhaul of our zenhydro.com site.
Yes. I would like to add a few points. So we haven't announced this publicly, but if you go to zenhydro.com, you may have noticed it's completely different than what you saw like the last month. So this is the first step of getting the site ready to service the 2 markets like Kevin just mentioned, the better hobbyists and small commercial cultivators, and also in preparation for new features to be added later on. This is a complete redo, and we have been working on this for a few months. And now it's released, and we're getting this ready to become more of a cornerstone for the future of zenhydro.
Scott, you had one other question as it pertains to kind of what percentage over time do we think nutrients could be. So right now, it's still our biggest category, even though we don't have our own in-house branded product in the market. I think there's no question that over time, it will be the largest category for us as we bring our in-house developed product and potentially bring a third-party brand in-house. I don't know if we've got a near-term target as to what it could be. But I think it's very clear that it won't ever be... it will be one of the major product categories.
I appreciate the color. If I could get one more quick one in here. A great robust demand in the hydroponic industry. You're seeing gardening trends continue to strengthen, as Lawrence mentioned. Do you see from your data a pickup in the do-it-yourself hobbyist activity in states that convert over to recreational or even medical legal status and the timeline of sales that occur on your website for those states? Or does that remain consistent? Do you see that pickup?
We don't track state-to-state data that closely for the hobbyist market, because historically, my experience is that hobbyists don't seem to have as much impact on the commercial cultivator side of when legalization happens, but does pick up over time. So it's not like the commercial market definitely has a much, much bigger and immediate effect when the states get open. But the residential side seems to take time and grows over time. It will catch up. So that's what I see. So we don't track like a state-to-state data in start because we don't see an immediate pickup or increase based on our experience, but I don't have solid data on that.
And our next question comes from the line of Scott Fortune with ROTH Capital.
There is another question. Can you discuss the segments within the states that are performing well? Additionally, can you address the seasonality aspect of the business regarding the fluctuations in different quarters? Have you noticed any changes in seasonality patterns since post-COVID?
Okay. So before COVID usually the lighting stuff tends to sell better during the winter season and the ventilation stuff sells better during the summer season when the weather is hot. When COVID hits, everything starts to sell. So we are still kind of at the era of COVID getting in the way. So it's very hard for us to see post-COVID seasonality at this moment, but I would expect this to go back to what pre-COVID behavior. So with summertime for ventilation, winter for lighting and other stuff. I think it's a pretty balanced step for us. So Kevin, do you want to add some more on that?
Yes. No, I think it's still probably early for us to determine because I think the demand patterns really do look like they did last spring. And so I think we still have a little ways to go before we emerge out of this kind of post or emerge into a post-COVID kind of normality. So I think the message is to stay tuned, and we'll provide – as that seasonality starts to unveil itself, we'll provide appropriate amounts of color around that. But right now, it seems very much like it did last year.
The good news is that we now have the capital to properly manage inventory, so I'm pretty happy on that side.
Okay. For me, Scott, you had a question about product categories, is that right?
Yes. Can you call out certain product categories that are not only growing a little bit faster but you guys are looking to do new product innovation or development segments from a margin expansion side? Can you call out certain categories that you're seeing strengthen?
Yes. Our ventilation, we introduced a new ventilation product line that expanded quite a while over the last couple of years. We expect that part to grow this summer. We're excited about that. Also, the nutrient, like we mentioned, is under development. So when it comes out, that will be a major category for our in-house portfolio. And also, we're looking into research into adjacent categories, but that's too early to give some information out. But mostly, I think in this coming summer, I will have some good expectations on our ventilation category.
Got it. And then, I'm not sure if others are on at all, but one question. Can you provide any of the online metrics as far as kind of retention of customers? That's one of the biggest concerns investors have, is retaining the customer base. It sounds like they're coming back to purchase equipment quicker than 18 to 24 months from that standpoint. And then just any metrics from the online business as far as that's concerned.
The repeat, is this a question regarding repeat customers? I think we mentioned that, historically, it's 17%. Now that's an area we haven't focused on, and that's something that we have on our work list. Zenhydro.com is one of the efforts that we are trying to get in to retain customers. Nutrient products are another angle. We're also developing our in-house business analytics product, not just for this purpose, but it's definitely an area we will focus on in the future. It requires some time, but it's a complex task, and we're addressing it from multiple perspectives.
Your next question comes from the line of Mike Baker with D.A. Davidson.
Yes, I have no idea what happened in the call there. I seemed to have gotten cut off. But okay, here we go. I wanted to ask a couple of questions. One, you talked about continued momentum. I'm not sure if you can comment on this, but I think I'll ask in a couple of ways. One, for whatever it's worth, the consensus numbers have the fourth quarter down year-over-year. So to me, that doesn't sound like momentum, unless you're talking about it on a 2-year basis. You're up against an 86% number from a year ago, which is a significantly higher compare than the March quarter was against. So could you just flesh that out a little bit more what you mean by continued strength in near-term momentum, particularly as it relates to the consensus number?
Well, so I'm going to refrain from making any kind of specific comments on the number, particularly as it might compare against consensus. What I can say is that there was a pretty nice lift in kind of order momentum from February to March. And what we've seen in the first 2 months is that order momentum hasn't waned. We think it reflects a couple of things that happened at the end of that first quarter, which was there was some easing of the supply chain constraint we saw, which means we can get more product and we could build a little bit more inventory. The second piece of that was we actually had capital to put in the supply chain to get that product. And so those kind of tailwinds to the sales engine, so to speak, started in March. The first 2 months of the quarter, the tailwind was still there. I know what you're trying to get at in terms of the consensus number, and does momentum mean up or down. I think it's just too early for me to talk about that. We've talked a little bit about kind of revenue recognition and making sure that how we deal with some of our third-party vendors is reflective of the actual sales performance. I think it's important to point out that we're lapping one of the best quarters in the company's history, and so I think we're tracking in a way that we're comfortable with for the June quarter. But I want to refrain from getting too close to any kind of numbers. Let's just say we're happy where we are.
Okay. And let me ask one more, and then I'll move on to another topic. Are you happier now than you were a couple of months ago during the IPO process? Are things getting better, worse, same?
Better.
Yes, things are better. Yes. I mean the other thing I'd say too is that the impact of us using some of the IPO proceeds in the supply chain is just starting to show up. So we've had really no meaningful impact yet to our results from being able to prime the pump with additional proceeds. Yes, everything feels better. So again, the best way to say is that we're very happy with the kind of order momentum, and we just want to be cautious around how we talk about revenue, particularly until we get to the next fiscal year. So let's leave it at that.
Absolutely, let me ask one more important question that I've been hearing. Is there a concern about large commercial enterprises entering the market? In other words, why should I grow this myself at home when I can simply go to a nearby store that sells the final product? How do you view this situation?
There are 2 angles to look at it. First, economically, at like, say, $10 or $15 or $20 per gram, it still costs like $5,000 to $8,000 or sometimes $10,000 per pound, in order to buy. But it costs you like a few hundred dollars per month to grow, other than the initial setup, which costs about like $1,000 to $2,000 to grow. So each can yield like 2 to 3 pounds, like 2 something average right now. So economically, it actually makes sense for people to grow their own. Secondly, for hobbyists, it's about growing their own strain of their choice across a certain way and trying to achieve this to the best they can. It's a hobby that you can consume. Those are the 2 sides of that I can try to expand from this side.
Yes. And like the other thing I would add is that we've done a little bit of work on kind of the size of some of these other hobbyist markets like let's use craft beer, as an example, or home brewing. I've seen numbers anywhere between 1.5 million to 2 million just in the U.S. alone for doing this. There is no economic arbitrage associated with growing your own or brewing your own beer, yet it's still really a large market. We think the home hobbyist and the kind of not only the setup of the recurring revenue opportunity, given that same type of mentality, plus the fact that the economic arbitrage is enormous right now, means that this is going to be a robust market. I think the other thing I would say is I'm pretty sure one of the other companies in our peer group or what we're being kind of grouped together with has talked about the strength that's being driven by the kind of home hobbyist, and they called it out as one of the reasons that their business has been so good. Now they sell into other distribution markets, but I think there's no question that this is a strong and growing market and people recognize it.
Fair enough. Real quick in the interest of time, can you comment on input costs, as you alluded to during the prepared comments?
Like materials cost, right? Like on our side, yes? Do you want to take that?
Yes. Yes. Material costs, we saw some increase last year, like across the end of the last year, not fiscal year but calendar year. If this situation is still the same, we anticipate some more increases in the second half of the calendar year. But again, we have a very strong supplier network and supply chain, so that makes us better than our competitors. In general, things like increase in cost, etc., but there is a limit that everyone can bear. So sooner or later, if this doesn't get eased off, which I think that the governments around the globe are trying to address this. But if it doesn't, then it becomes a problem for everyone. At a certain point, we will have to pass this onto customers. We already started to raise the price for certain things over the last 6 months. But we look at a market, and we adjust it as the market goes. But like I said, it's not my problem only, but we're doing better than the competition. That's why we see growth in sales, and we will see a growth in gross margin. I think that's a problem for everyone, but it's also an opportunity for us as well.
And I'm showing no further questions.
Okay. Great. Well, thank you very much for joining us. And we look forward to talking to you again when we report our June quarter results. Thanks, everyone.
Thank you.
This concludes today's conference call. Thank you for participating, and you may now disconnect.