iPower Inc. Q3 FY2022 Earnings Call

Good afternoon, everyone, and thank you for participating in today's conference call to discuss iPower's Financial Results for its Fiscal Third Quarter Ended March 31, 2022. Joining us today are iPower's Chairman and CEO, Mr. Lawrence Tan; and the company's CFO, Mr. Kevin Vassily. Mr. Vassily, please go ahead.

Thank you, Charlie. Good afternoon, everyone. By now, everyone should have had access to our fiscal third quarter 2022 earnings press release, which was issued earlier today at approximately 4:15 PM Eastern time. The release is available in the Investor Relations section of iPower's website at meetipower.com. This call will also be available for webcast replay on our website. Following our prepared remarks, we'll open the call for your questions. Before I introduce Lawrence, I'd like to remind listeners that certain comments made on this conference call and webcast are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to certain known and unknown risks and uncertainties, as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements. These forward-looking statements are also subject to other risks and uncertainties that are described from time to time in the company's filings with the SEC. Do not place undue reliance on any of these forward-looking statements, which are being made only on the date of this call. Except as required by law, the company undertakes no obligation to revise or publicly release the results of any revisions to any forward-looking statements. With that, I'd like to turn the call over to iPower's Chairman and CEO, Lawrence Tan. Lawrence?

Thank you, Kevin, and good afternoon, everyone. Our fiscal third quarter was another period of exceptional growth for iPower; revenue was up 74% year over year to a record $22.9 million, driven by continuing strong demand for our products and increased sales in our largest channel. As mentioned on previous calls, the sale of in-house products is always top of mind. In our fiscal third quarter, this made up roughly 82% of revenue throughout the quarter. We continue to introduce new SKUs in each of our product categories by working diligently with our partner, including our recently acquired global co-engineering partner DHS, while also retiring SKUs that are slower moving. Over the past few months, we have seen strong order volumes from our largest channel. We believe that this consistent increase in volume speaks to our product research and development as it is directly aligned with consumer trends. Our investment into our business, specifically in R&D and merchandising, will only push this momentum further as we roll out new in-demand products in the future. We continue to effectively navigate the choppy supply chain environment during the quarter, in large part due to our extensive network of supply partners. This remains a key differentiator for iPower as our channel partners and customers know that they can rely on us to deliver products in a timely manner and avoid many of the roadblocks that others face in the global supply chain. Now I'm going to talk about initiatives over the quarter: expansion into Europe and the UK. This past January, we expanded our business into Europe and the UK with the completion of a first order delivered for consumers abroad. This order contains trimming devices, air filtration, service assistance, tents, and other accessories that service the DIY hydroponics consumer. We continue to believe that the European market is still in its infancy and presents a significant medium to long-term opportunity for us as their consumer hydroponics market develops. And then the launch of e-commerce logistics joint venture, Box Harmony. Shortly after our expansion into Europe, we partnered with strategic individuals and Titanium Plus auto parts, one of the largest sellers of collision-related auto parts on eBay and Amazon, to create a full-service e-commerce logistics company, Box Harmony. This joint venture provides us with a low-cost option to expand into eCommerce value chain services, which is a natural fit for us, given our expertise in the online hydroponic equipment market. In fact, we already signed our first client, which happens to be a furniture brand, reflecting our interest in a vertical outside hydroponics. Our joint venture will service logistics for this client at our Southern California facility for both B2B and B2C shipments. While it’s early days, this joint venture is just beginning to ramp, and we plan to carry this momentum forward. And then we have the launch of the Global Social Media joint venture. This is our second joint venture, a partnership with a social media marketing and entertainment company to form a Global Social Media – social commerce platform. This joint venture was formed to combine our partner’s social media marketing expertise with our own supply chain and eCommerce activity to create a fully end-to-end solution for brand manufacturers looking to sell their products via social channels. We plan to utilize Global Social Media for new businesses as well as our own benefit to expand our global product awareness and geographic exposure through various social media channels. We acquired the global co-engineering partner, Daheshou Shenzhen Information Technology, also known as DHS. During the COVID-19 pandemic and recent volatile supply chain environment, we relied heavily on DHS to source consistent high-quality products in a timely manner. It was for this reason that we decided to acquire a 100% interest in the company. This acquisition expands our current supply chain and e-commerce capabilities with in-house product sourcing, manufacturing network management, quality assurance processes, and R&D expertise. Not only did we bring our key supplier and logistics partner in-house to benefit our business, but we also reduce the risk of potential supplier turnover. We plan to utilize DHS in tandem with our other resources to create a new suite of offerings that will service a broader set of consumers and partners in the future. For our own brands, as we continue to grow and execute our organic and inorganic initiatives, we felt it was necessary to invest in our core image to properly showcase our business and the various components that make up our brand. As such, we are in the process of completing a company rebrand that we expect to finish later this summer. This development will enable us to optimize how we are perceived and positioned in the market, as well as how we allocate our marketing dollars. Although we are proud of our success and strong momentum in our business, there is still plenty of room to grow and improve. We plan to continue developing new in-house SKUs and also expand into additional markets while strengthening our current ones, and all while continuing to deliver value for consumers and channel partners along the way. I’ll now turn the call over to our CFO, Kevin Vassily, to take you through our financial results in more detail. Kevin?

Thanks, Lawrence. As Lawrence mentioned, our fiscal Q3 was another strong period of growth for iPower. Total revenue was up 74% to $22.8 million compared to $13.1 million in the year-ago period, driven by greater product sales to our largest channel partner, as well as strong demand for our ventilation products, commercial fans, and some of our new shelving products. As Lawrence mentioned, we continue to execute on prioritizing the sale of our in-house brands, which accounted for approximately 82% of revenue in the quarter. Gross profit in the fiscal third quarter increased 59% to $9.2 million compared to $5.8 million in the year-ago quarter, as a percentage of revenue, gross margin was 40.3% compared to 43.9% in the year-ago quarter. The decrease was driven by product mix as well as higher freight costs; it was also impacted by stronger orders in our direct import channel program, which carries lower gross margins but better operating margins for us. Despite experiencing record high freight costs in addition to some higher input costs, we were able to maintain gross margins above 40%, thanks to our extensive supplier network overseas. Total operating expenses for fiscal Q3 were $7.8 million compared to $5 million for the same period in fiscal 21. As a percentage of revenue, operating expense improved 360 basis points to 34.3% compared to 37.9% in the year-ago quarter. The operating leverage was primarily driven by the positive impact of the aforementioned direct import program we have with one of our large channel partners. We were able to increase operating leverage despite higher costs from new warehouse capacity coming online this quarter, as well as increased G&A costs associated with the DHS acquisition. Net income in the fiscal third quarter increased to $1.2 million or 4% per share compared to a net loss of $0.2 million or a loss of one penny per share for the same period of fiscal 2021. Moving onto the balance sheet, cash and cash equivalents were $2.6 million at March 31, 2022, compared to $6.7 million in June of 2021. The decrease was attributed to the timing of accounts receivable and was not an indication of any other business operating trend. As of March 31, 2022, total long-term debt stood at $13.4 million as compared to $0.5 million at June 30, 2021. This increase was also a function of timing as the company utilizes its revolving credit facility to manage working capital. Finally, looking forward to the final quarter of our fiscal year, we plan to continue executing on our growth strategy and close out the year on a strong note. As we've done in prior quarters, we plan to mitigate the impacts of the supply chain environment where we can by managing channel product mix, channel program mix, doing bulk procurement as well as larger production runs prudently. We look forward to touching base with many of you this summer through various investor conferences and non-deal roadshows to talk more about the company and its strategy going forward. And with that, this concludes our prepared remarks, and we'll now open it up for questions.

Your first question comes from the line of Scott Fortune with ROTH Capital Partners.

Real quick, can you provide a little more color on the new sales channel initiatives? I know you were looking at progress with potential big box retailers and going down those channels. Is there any update or opportunities as we look into this coming quarter or into next fiscal year for those big box retailers coming onboard here?

Yeah, I'll take that one. We are actively working on it. But as you all understand, the big box retailers typically move a lot slower than the online channels. But we are actively working on it, and we are making pretty good progress. But I don't know if we're going to see large purchase orders before the end of the fiscal year. So it's a work in progress, but we’re making good progress.

Got it. I appreciate the color there. And then really quickly, we've seen big headwinds and challenges on the consumer side of things and also on the commercial hydroponic industry with oversupply and significant slowdown from that industry. But it seems like your business remains very robust here. Can you unpack what was really driving the growth from a product standpoint and the pick-up in specific channels? You mentioned your large channel partner, but how much is coming from the new initiatives in Europe and the JVs and M&A side? Is that more of a next quarter and the next fiscal year going forward for those new initiatives?

Sure. I'll answer those questions in two parts. From the fundamental standpoint, our company continues to grow because we noticed an increasing share of our in-house products. We also have an extensive supply network and we've been able to navigate the supply chain issues better than others, which all helped. We also noticed the ventilation category continue to increase. So fundamentally, our business model, our ability to use data analytics allows us to operate efficiently through our in-house ERP systems. We’ve managed the workflow pretty well, and that has fueled our growth. Now as for the joint ventures, Box Harmony and Global Social Media, these are longer-term strategic initiatives, and that will enable us to grow at a faster pace without bottlenecks. The Social Media play, I would say we’ll probably start to see something later this calendar year or beginning next year. We anticipate growth, and these are moves being made ahead of time. We'll start to see some revenue from Box Harmony, but I'm just trying to say that these two are strategically placed so that we can grow in a more rapid pace without hitting potential bottlenecks.

I think we're hoping to see some follow-up orders and deliveries this quarter, but we haven't seen them yet. I believe most of our growth in Europe will begin in the next fiscal year.

And I'm showing no further question at this time. I will now turn the call back over to Mr. Kevin Vassily for final remarks.

Do you want to ask Scott if he had a follow-up question? I think he said he was going to jump back in the queue.

We have a follow-up question from Mr. Scott Fortune from ROTH Capital Partners.

Lastly, regarding the cash level at $2.6 million, your inventory has increased to about $22.4 million. Can you address those needs? I understand there are timing issues with accounts receivable, but could you discuss your requirements for flexibility and any additional initiatives for the business moving forward? It would be great if you could touch on those points.

Yeah, so inventory, a big portion of what we were doing in the quarter was bringing as much product as we could ahead of the Chinese New Year, which was earlier in the quarter. We wanted to make sure although we didn't have real insight into the state of some of the COVID lockdowns that were impacting China, that we were cautious through some of the sell-through information we got from our channel partners and that we had sufficient inventory on hand to meet demand. So that was part of the strategy there. From a flexibility standpoint, we still have a fair amount of room within our revolving line of credit to tap if need be, but most of what we're tapping now is on the AR side. As you know, we feel good about where we have our accounts receivable; it's probably one of the best credit risks out there. So, I think we're comfortable that we've got sufficient capital and flexibility to meet our needs over the next several quarters, including providing some resources, if necessary, to the joint ventures that we undertook earlier in the quarter. Does that help?

Yeah, I appreciate that. Congrats again on differentiating yourself in a challenging hydroponic industry that has been a challenge for that space, but congrats again. And that's it. I appreciate the detail.

There are no further questions. At this time, I will now turn the call back over to you, Mr. Kevin Vassily, for final remarks.

Okay. Well, we wanted to thank everyone for joining; we appreciate your support and look forward to chatting with you on our next earnings call, which will probably be sometime late August or September. Thanks again. Bye-bye.

This concludes today's conference call. Thank you for participating. You may now disconnect.