Transcript
Good afternoon, everyone, and thank you for participating in today's conference call to discuss iPower's Financial Results for its Fiscal First Quarter 2023 ended September 30, 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, operator, and good afternoon, everyone. By now, everyone should have access to our fiscal first quarter earnings press release, which was issued earlier today at approximately 04:05 PM Eastern Time. The release is available in the Investor Relations section of our 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 forward-looking statements, which are made only as of the date of this call. Except as required by law, the company undertakes no obligation to revise or publicly release the results of any revision to any forward-looking statements. With that, I'd like to now turn the call over to iPower's Chairman and CEO, Lawrence Tan. Lawrence?
Thank you, Kevin, and good afternoon, everyone. Our fiscal Q1 was a strong quarter despite lingering challenges from the supply chain environment. Although our gross margins dipped below 40% due to higher freight costs associated with older inventory, we generated approximately 50% year-over-year revenue growth as we expanded both our hydroponics and non-hydroponics businesses. Throughout the quarter, we were able to maintain concentration of our in-house product mix, which accounted for over 90% of revenue compared to around 80% in fiscal Q1 2022. We also continue to focus on diversifying our product mix with non-hydroponics household products, such as shelving supplies, home fans, and chairs, accounting for over 65% of the sales during the quarter. Looking to the future of our product catalog, we will be investing more in R&D to create even higher value and higher margin products. We believe this will allow us to better manage quality control and ensure that our customers are consistently receiving catalog-leading products. We expect to begin rolling out these new products in 2023. Heading into 2023, we will continue to leverage our extensive supplier network and supply chain expertise to tap into any and all consumer home and garden categories that can create value for our consumer base and be in business. Earlier in the year, we made the strategic decision to stockpile inventory in anticipation of both residual supply chain headwinds and our planned increase in non-hydroponics product sales. This ensured that we have consistent availability of fast-moving products for our customers and channel partners. However, it did offset gross margin as many of those products came in at higher freight rates than what we are seeing today. We continue to have an elevated inventory position and we expect to work through higher cost inventory over the next couple of quarters, which will improve both our cash flow and gross margin. As mentioned in our last quarterly update, we have been in the process of revamping our image to better showcase the core iPower business alongside our increasingly diverse product portfolio outside our traditional hydroponics vertical. We are launching our new website this weekend and expect our entire rebranding process to be completed soon, which will include a new logo, color scheme, and other marketing-related items. This new branding is an important step to unify iPower's various non-hydro-related products and services while creating a more seamless experience for our customers as we continue to scale and grow both domestically and abroad. Looking ahead, we expect utility and pricing in the supply chain to continue improving, as we are already seeing meaningful decreases in overseas shipping costs, as well as lower lead times to cross the Pacific. As a result, we expect to require less inventory going forward and plan to reduce the balance over the next few quarters. Between selling through higher cost inventory, purchasing fewer products, and eliminating short-term warehousing needs at elevated rates, we're well positioned to improve margin and cash flow. All of that said, we will continue to be vigilant in our business and in capital allocation as the macro environment evolves in fiscal 2023, and we look forward to delivering another year of strong growth and profitability. 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. Lawrence mentioned our fiscal Q1 was another period of strong top-line growth for the company. Total revenue was up 50% to $26 million, compared to $17.4 million in the year-ago period, driven by increased demand for our non-hydroponic product portfolio, which includes items like commercial fans, shelving equipment, chairs, carts, etc. Gross profit in the first fiscal quarter increased 37% to $10 million, compared to $7.3 million in the year-ago quarter. As a percentage of revenue, gross margin was 38.4% compared to 42.1% in the year-ago quarter. The decrease in gross margin was driven by a greater portion of our sales coming from inventory that incurred higher freight costs earlier in the year. Total operating expense for fiscal Q1 was $11.5 million compared to $6.0 million for the same period in fiscal 2022. As a percentage of revenue, operating expenses were 44.1% compared to 34.7% in the year-ago quarter. The increase in operating expense was primarily driven by elevated warehouse costs, which were the result of having higher inventory compared to the prior year period. As Lawrence mentioned, we expect to improve operating margins in the coming quarters as we eliminate short-term warehousing for those elevated inventory levels. Net loss in the first fiscal quarter was $4.3 million, or $0.14 per share, compared to net income of $0.9 million, or a $0.03 per share gain for the same period in 2022. The decrease in our bottom line was primarily driven by a $3.1 million goodwill impairment charge that was related to a decline in our market capitalization, as well as the aforementioned elevated warehouse and freight costs. Moving to the balance sheet, cash and cash equivalents were $4.8 million as of September 30, 2022, compared to $1.8 million at the same time at the end of our June quarter, increases primarily due to purchasing less inventory since we previously added to that product stock to ensure availability earlier in the year. As of September 30, total long-term debt stood at $16.1 million compared to $14.1 million at the end of June 30, 2021. The increase was driven in part by timing as we utilized our revolver to better manage working capital. Looking ahead to the rest of fiscal 2023, we plan to continue to drive solid top-line growth in the business while maintaining our approach to capital allocation and returning to profitability. Although the macro environment continues to present challenges, we have begun to see improvements in our supply chain costs. We think that these will continue into the next calendar year. So this concludes our prepared remarks, and we'll open it now for questions.
Thank you. Our first question comes from Scott Fortune with ROTH Capital Partners. You may proceed.
Yes, good afternoon. Thanks for the questions here. While digging into inventory, can you quantify the $26 million top-line results as far as the business segments and the growth of each of those segments? Non-hydroponics seems to be growing quicker, obviously. Then, could you share your thoughts for the longer-term mix from those segments, and also the segment gross margins for each business going forward?
Sure, Scott. So I'll take a few of those. The breakout between our hydro product line and our non-hydro product line is roughly 50% each. The non-hydro was lower last year, so that's obviously growing a little faster than the 50% clip that we reported on the aggregate basis. Lawrence, maybe you can comment on kind of margins for the different segments?
Yes, sure. The non-hydro and the hydro business in terms of the in-house product gross margin is relatively the same. However, we have always been seeing the non-hydro parts that have been growing faster than the hydro side, which now contributes to over half of our total revenue for last quarter. But in terms of gross margin for in-house parts, which mostly contribute to our shelves, which is about 90%, they are relatively the same for the September quarter.
And I got you. No quick follow-up on that. Because Lawrence, you said you have a lot of R&D for new product growth going forward. At times, it gets back to the question of the mix. How should we look at that with new products coming on board? Or is the mix kind of moving forward away from the cannabis side and more on non-cannabis going forward here?
We will actually be doing R&D for both the hydroponics and non-hydroponics business as a way to create smarter products and provide better value for our consumers. We're not limited by either the hydroponics or non-hydroponics business; it's basically the type of way we could enhance existing product lines or introduce new product lines that are related, so we can provide a better product to the market.
And Scott, one other kind of advantage for more in-house R&D is that a lot of the products we bring to market are co-engineered with a partner, either a third-party or directly with some of our suppliers. By bringing some of the R&D in-house, we obviously own a bit more of the IP associated with that. There's also a little bit—I'm not going to try to quantify it too precisely—but there's a slight margin bump that we get because we're not paying a co-engineering service fee. So, it's an attempt to keep pushing those gross margins upward. We think this is an important initiative to take over the next couple of years.
Got it. And then my follow-on question, obviously, the inventory levels. It sounds like this should clear over the next couple of quarters. Can you step us through how we should look at SG&A and the costs going forward as key to getting back to profitability from this level? I take it that your partner Amazon did not boost holding more inventory?
The biggest incremental cost associated with holding this inventory is all of the temporary warehouse space that we needed to procure to store that inventory. As you might imagine, short-term service fees are significantly more expensive than long-term warehouse leases. Our challenge was that over the summer, we were still concerned about the supply chain and there were elevated shipping times, not wanting to miss the demand window that we still felt would be there. The top-line results we saw this quarter supported that view. We believe our ability to run the business on a lower level of inventory, meaning higher returns, will improve margins. As inventory comes down, we won't need to be holding it in high-cost storage. That's how to think about returning to a more normalized operating expense environment.
Got it, I appreciate the color. And I'll jump back in the queue.
Thanks, Scott.
Thank you. Our next question comes from Michael Baker with D.A. Davidson. You may proceed.
Okay, thanks. So a couple of follow-ups and other questions. So first, just to be clear, you're still paying for temporary warehouse space that hasn't fully gone away. You expect it to go away in the coming quarters, but we don't know exactly when, is that right?
That's correct.
Do we think fiscal 2023?
Do we think that there will be a quarter this year where we will be back to profitability? I guess that's the question? I don’t want to give specific guidance, but we expect that we will not have to be paying that elevated warehouse cost at some point during this fiscal year.
Got it, okay. And then the R&D well, is there an incremental cost to that? Is that like another sort of SG&A line item that's going to pop up?
I think the way that will roll out is that any incremental spending initially will be pretty small, so it may fall under the G&A line. The way to think about it is, initially, there's a bit of a trade-out from gross margin into the R&D line. Over time, there may be some leverage on that gross margin line because we won't be embedding those co-engineering costs in the cost of goods sold. The early R&D spend, and if we decide to break it out, will essentially offset some of what we spend on cost of goods sold. Hopefully, that makes sense.
Yes, I think it does. okay. And now, more I guess, bigger picture, strategic-type question: Who is your customer base? Which is, I guess, primarily Amazon, but do you have other customers? Is your customer base different for the non-hydroponic versus hydroponic products? And as part of that answer, can you update us on your customer base? Have you diversified away from Amazon at all? I know that's something you have been working on, both in terms of customers and also geographically as well. Can you update us on your international business?
Lawrence, do you want to take that?
Yes, sure. In terms of the sales channels, for the United States, the hydroponics and non-hydroponics do not differ very much. We utilize the same channels for both business lines. Now, in terms of geographical areas for the end consumers that buy and use our products, I don't have that data in front of me that shows differences between these two segments. In terms of international business, we mainly have hydroponics sales in Europe, and we are working on bringing non-hydroponics sales to Europe as well. In Canada, it’s mostly the same.
Okay, and domestically, any diversification in the customer base? In other words, I know you had been talking to some bigger box retailers and trying to diversify away from Amazon. Any update there?
Yes, we are making steady, albeit slow, solid progress there. But it's a work in progress.
Yes, and Mike, given that you work with a lot of big box retailers that we are developing relationships with, the opportunities, particularly to sell in bricks and mortar, don't open every week. We are going through the process of becoming a qualified vendor, and the process of being invited in should happen hopefully over the next couple of quarters. We'll keep you all posted, but these are companies that you are probably familiar with, so we're optimistic given the progress we've made so far.
Yes, okay, fair enough. Thank you.
Thanks, Mike.
Thank you, and I'm not showing any further questions. At this time, I would now like to turn the call back over to Kevin Vassily for any further remarks.
I just want to thank everyone for dialing in today. We will be talking again as we complete our fiscal Q2 and hold a conference call probably sometime in early to mid-February. Thanks again, everyone, and we'll talk again soon.
Thank you, this concludes today's conference call. Thank you for participating. You may now disconnect.