iPower Inc 10-Q for FY2022 Q2
iPower Inc. (IPW)
About this 10-Q
iPower Inc filed this 10-Q on February 14, 2022, covering the quarter ended December 31, 2021 (FY2022 Q2).
Headline figures
Quarter ended December 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $17.13M
- up 52.2% from $11.25M a year earlier
- Net income
- $797.86K
- up 38.6% from net income of $575.48K a year earlier
- Diluted EPS
- $0.03
- up 7.1% from $0.03 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| Quarterly Report UNDER Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarter ended
OR
| Transition Report UNDER Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from ______________ to ______________
Commission file number
(Exact name of registrant as specified in its charter)
| 5200 | ||||
| (State or other jurisdiction of | (Primary Standard Industrial | (I.R.S. Employer | ||
| incorporation or organization) | Classification Code Number) | Identification Number) |
(
(Address, including zip code, and telephone number, including area code, of the registrant’s principal executive offices)
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The |
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
| ☒ | Smaller reporting company | |||||
| Emerging growth company |
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided to Section 7(a)(2)(B) of the Securities Act.
Indicate by check mark if the registrant is a
shell company (as defined in Rule 12b-2 of the Act). Yes ☐
The number of shares outstanding of the registrant’s common stock on February 14, 2022 was .
iPower Inc.
TABLE OF CONTENTS
| 2 |
PART I. Financial Information
Item 1. Unaudited Condensed Consolidated Financial Statements
iPower Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
As of December 31, 2021 and June 30, 2021
| December 31 | June 30, | |||||||
| 2021 | 2021 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalent | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ||||||||
| Prepayments and other current assets | ||||||||
| Total current assets | ||||||||
| Non-current assets | ||||||||
| Right of use assets – non-current | ||||||||
| Property and equipment, net | ||||||||
| Non-current prepayments | ||||||||
| Other non-current assets | ||||||||
| Total non-current assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | ||||||||
| Credit cards payable | ||||||||
| Customer deposit | ||||||||
| Other payables and accrued liabilities | ||||||||
| Short-term loans payable | ||||||||
| Lease liability - current | ||||||||
| Long-term loan payable - current portion | ||||||||
| Income taxes payable | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities | ||||||||
| Long-term loan payable | ||||||||
| Long-term revolving loan payable, net | ||||||||
| Lease liability – non-current | ||||||||
| Total non-current liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingency | ||||||||
| Stockholders' Equity | ||||||||
| Preferred stock, $ par value; shares authorized; shares issued and outstanding at December 31, and June 30, 2021 | ||||||||
| Common stock, $ par value; shares authorized; and shares issued and outstanding at December 31, and June 30, 2021 | ||||||||
| Additional paid in capital | ||||||||
| Retained earnings | ||||||||
| Total equity | ||||||||
| Total liabilities and equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 3 |
iPower Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
For the Three and Six Months Ended December 31, 2021 and 2020
| For the Three Months Ended December 31, | For the Six Months Ended December 31, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| REVENUES | $ | $ | $ | $ | ||||||||||||
| TOTAL REVENUES | ||||||||||||||||
| COST OF REVENUES | ||||||||||||||||
| GROSS PROFIT | ||||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Selling and fulfillment | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| INCOME FROM OPERATIONS | ||||||||||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||
| Interest income (expenses) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other financing expenses | ( | ) | ( | ) | ( | ) | ||||||||||
| Other non-operating income (expense) | ||||||||||||||||
| Total other (expenses), net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| INCOME BEFORE INCOME TAXES | ||||||||||||||||
| PROVISION FOR INCOME TAXES | ||||||||||||||||
| NET INCOME | $ | $ | $ | $ | ||||||||||||
| WEIGHTED AVERAGE NUMBER OF COMMON STOCK | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
| EARNINGS PER SHARE | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 4 |
iPower Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity
For the Three and Six Months Ended December 31, 2021 and 2020
| Common Stock * | Class B Common Stock * | Subscription | Additional Paid in | Retained | ||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Receivable | Capital | Earnings | Total | |||||||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||
| Net income | – | – | ||||||||||||||||||||||||||||||
| Restricted stock units vested | – | – | ||||||||||||||||||||||||||||||
| Balance, September 30, 2021, unaudited | ||||||||||||||||||||||||||||||||
| Net income | – | – | ||||||||||||||||||||||||||||||
| Restricted shares issued for vested RSUs | – | ( | ) | |||||||||||||||||||||||||||||
| Restricted stock units vested | – | – | ||||||||||||||||||||||||||||||
| Balance, December 31, 2021, unaudited | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||
| Balance, June 30, 2020 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||
| Net income | – | – | ||||||||||||||||||||||||||||||
| Balance, September 30, 2020, unaudited | ( | ) | ||||||||||||||||||||||||||||||
| Net income | – | – | ||||||||||||||||||||||||||||||
| Cash for Class B common stock | – | – | ||||||||||||||||||||||||||||||
| Balance, December 31, 2020, unaudited | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||
*On November 16, 2020, the Company implemented a 2-for-1 forward split of the issued and outstanding shares of Class A Common Stock of the Company. Except shares authorized, all references to number of shares, and to per share information in the consolidated and combined financial statements have been retroactively adjusted.
*On October 20, 2020, the Company issued to its Founders 14,000,000 shares of the Company’s Class B Common Stock. The issuance was considered as a nominal issuance, in substance a recapitalization transaction, which was recorded and presented retroactively as outstanding for all reporting periods.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 5 |
iPower Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
For the Six Months Ended December 31, 2021 and 2020
| For the Six Months Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to cash used in operating activities: | ||||||||
| Depreciation expense | ||||||||
| Inventory reserve | ||||||||
| Credit loss reserve | ||||||||
| Stock-based compensation expense | ||||||||
| Amortization of debt issuance costs | ||||||||
| Non-cash operating lease expense | ( | ) | ||||||
| Preferred stock warrant expense | ||||||||
| Change in operating assets and liabilities | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ( | ) | ||||
| Prepayments and other current assets | ( | ) | ( | ) | ||||
| Non-current prepayments | ||||||||
| Other non-current assets | ( | ) | ( | ) | ||||
| Accounts payable | ||||||||
| Credit cards payable | ( | ) | ( | ) | ||||
| Customer deposit | ( | ) | ( | ) | ||||
| Other payables and accrued liabilities | ||||||||
| Income taxes payable | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from related parties | ||||||||
| Payments to related parties | ( | ) | ||||||
| Proceeds from short-term loans | ||||||||
| Payments of financing fees | ( | ) | ||||||
| Payments on short-term loans | ( | ) | ( | ) | ||||
| Payments on long-term loans | ( | ) | ||||||
| Proceeds from long-term loan | ||||||||
| Shares issued | ||||||||
| Net cash provided by financing activities | ||||||||
| CHANGES IN CASH | ( | ) | ( | ) | ||||
| CASH AND CASH EQUIVALENT, beginning of year | ||||||||
| CASH AND CASH EQUIVALENT, end of year | $ | $ | ||||||
| SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||
| Cash paid for income tax | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS: | ||||||||
| Right of use assets acquired under new operating leases | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 6 |
iPower Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
As of December 31, 2021 and June 30, 2021 and for the Three and Six Months Ended December 31, 2021 and 2020
Note 1 - Nature of business and organization
iPower Inc., formerly known as BZRTH Inc., a Nevada corporation (the “Company”), was incorporated on April 11, 2018. The Company is principally engaged in the marketing and sale of advanced indoor and greenhouse lighting, ventilation systems, nutrients, growing media, grow tents, trimming machines, pumps and accessories mainly in the North America.
Effective on March 1, 2020, as amended and restated pursuant to an agreement dated October 26, 2020, the Company entered into an agreement with E Marketing Solution Inc. (“E Marketing”), an entity incorporated in California and owned by one of the shareholders of the Company. Pursuant to the terms of the agreement, the Company agreed to provide technical support, management services and other services on an exclusive basis in relation to E Marketing’s business during the term of the agreement. The Company also agreed to fund E Marketing for operational cash flow needs and bear the risk of E Marketing’s losses from operations and E Marketing agreed that iPower has rights to E Marketing’s net profits, if any. Under the terms of the agreement, the Company may at any time, at its option, acquire for nominal consideration 100% of either the equity of E Marketing or its assets subject to assumption of all of its liabilities. E Marketing was considered a variable interest entity (“VIE”). On May 18, 2021, the Company acquired 100% equity ownership of E Marketing. As a result, E Marketing has become the Company’s wholly owned subsidiary.
On September 4, 2020, the Company entered into
an agreement with Global Product Marketing Inc. (“GPM”), an entity incorporated in the State of Nevada on September 4, 2020.
GPM was then wholly owned by Chenlong Tan, the Chairman, CEO and President and one of the majority shareholders of the Company. Pursuant
to the terms of the agreement, the Company was to provide technical support, management services and other services on an exclusive basis
in relation to GPM’s business during the term of the Agreement. In addition, the Company agreed to fund GPM for operational cash
flow needs and bear the risk of GPM’s losses from operations and GPM agreed that the Company has the right to GPM’s net profits,
if any. Under the terms of the agreement, the Company may at any time, at its option, acquire for nominal consideration 100% of either
the equity of GPM or its assets subject to assumption of all of its liabilities. GPM was considered a VIE. On May 18, 2021, the Company
acquired
Note 2 – Basis of Presentation and Summary of significant accounting policies
Basis of presentation
The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the requirements of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These unaudited condensed consolidated financial statements have been prepared on the same basis as its annual consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for the fair statement of the Company’s financial information. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending June 30, 2022, or for any other interim period or for any other future year. All intercompany balances and transactions have been eliminated in consolidation.
| 7 |
These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Annual Report for the year ended June 30, 2021, which are included in Form 10-K filed on September 28, 2021.
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries, E Marketing Solution Inc. and Global Product Marketing Inc. All inter-company balances and transactions have been eliminated.
Reclassifications
Certain prior period expense accounts have been reclassified in conformity with current period presentation including reclassification of $1.10 million from general administrative expenses to selling and fulfillment expenses for the six months ended December 31, 2020. The reclassification had no effect to the company’s unaudited condensed consolidated statements of operations, statements of cash flow or statements of changes in stockholders’ equity.
Use of estimates and assumptions
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities reported and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results could differ from these estimates.
Cash and cash equivalents
Cash and cash equivalents consist of amounts held as cash on hand and bank deposits.
From time to time, the Company may maintain bank
balances in interest bearing accounts in excess of the $
Accounts receivable, net
During the ordinary course of business, the Company extends unsecured credit to its customers. Accounts receivable are stated at the amount the Company expects to collect from customers. Management reviews its accounts receivable balances each reporting period to determine if an allowance for credit loss is required.
In July 2020, the Company adopted ASU 2016-13, Topics 326 - Credit Loss, Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology, for its accounting standard for its trade accounts receivable.
The Company evaluates the creditworthiness of all of its customers individually before accepting them and continuously monitors the recoverability of accounts receivable. If there are any indicators that a customer may not make payment, the Company may consider making provision for non-collectability for that particular customer. At the same time, the Company may cease further sales or services to such customer. The following are some of the factors that the Company develops allowance for credit losses:
| · | the customer fails to comply with its payment schedule; |
| · | the customer is in serious financial difficulty; |
| 8 |
| · | a significant dispute with the customer has occurred regarding job progress or other matters; |
| · | the customer breaches any of its contractual obligations; |
| · | the customer appears to be financially distressed due to economic or legal factors; |
| · | the business between the customer and the Company is not active; and |
| · | other objective evidence indicates non-collectability of the accounts receivable. |
The adoption of the credit loss accounting standard has no material impact on the Company’s consolidated financial statements. Accounts receivable are recognized and carried at carrying amount less an allowance for credit losses, if any. The Company maintains an allowance for credit losses resulting from the inability of its customers to make required payments based on contractual terms. The Company reviews the collectability of its receivables on a regular and ongoing basis. The Company has also included in calculation of allowance for credit losses the potential impact of the COVID-19 pandemic on our customers’ businesses and their ability to pay their accounts receivable. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. The Company also considers external factors to the specific customer, including current conditions and forecasts of economic conditions, including the potential impact of the COVID-19 pandemic. In the event we recover amounts previously written off, we will reduce the specific allowance for credit losses.
Fair values of financial instruments
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and all other current assets and liabilities approximate fair values due to their short-term nature.
For other financial instruments to be reported at fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines the fair value of its financial instruments based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
Level 1 – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2 – Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and
Level 3 – Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.
Revenue recognition
The Company has adopted Accounting Standards Codification (“ASC”) 606 since its inception on April 11, 2018 and recognizes revenue from product sales in the United States, Canada, Europe, and other regions, 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.
| 9 |
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 delivery of goods to customers are recorded as customer deposits.
The Company periodically provides incentive offers to its customers to encourage purchases. Such offers include current discount offers, such as percentage discounts off current purchases and other similar offers. Current discount offers, when accepted by the Company’s customers, are treated as a reduction to the purchase price of the related transaction.
Sales discounts are recorded in the period in which the related sale is recognized. Sales return allowances are estimated based on historical amounts and are recorded upon recognizing the related sales. Shipping and handling costs are recorded as selling expenses.
Advertising costs
Advertising costs are expensed as incurred. Total advertising and promotional costs included in selling and fulfillment expenses for the three and six months were as following:
| Schedule of advertising costs | ||||||||||||||||
| Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Advertising and promotion | $ | $ | $ | $ | ||||||||||||
Cost of revenue
Cost of revenue mainly consists of costs for purchases of products and related inbound freight and delivery fees.
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 periodic costs and are reflected in selling and fulfillment 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 inventory and obsolescence and records allowance for obsolescence.
Segment reporting
The Company follows ASC 280, Segment Reporting. The Company’s chief operating decision maker, the Chief Executive Officer, reviews the consolidated results of operations when making decisions about allocating resources and assessing the performance of the Company as a whole and, hence, the Company has only one reportable segment. The Company does not distinguish between markets or segments for the purpose of internal reporting. For the six months ended December 31, 2021, sales through Amazon to Canada had increased to approximately 14% of the Company’s total sales. The Company’s long-lived assets are all located in California, United States, and majority of the Company’s revenues are derived from within the United States. Therefore, no geographical segments are presented.
| 10 |
Leases
On its inception date, April 11, 2018, the Company adopted ASC 842 – Leases (“ASC 842”), which requires lessees to record right-of-use (“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.
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.
Income taxes
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their perspective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded, when necessary, to reduce deferred tax assets to the amount expected to be realized.
As a result of the implementation of certain provisions of ASC 740, Income Taxes (“ASC 740”), which clarifies the accounting and disclosure for uncertainty in tax position, as defined, ASC 740 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. The Company has adopted the provisions of ASC 740 since inception, April 11, 2018, and has analyzed filing positions in each of the federal and state jurisdictions where the Company is required to file income tax returns, as well as open tax years in such jurisdictions. The Company has identified the U.S. federal jurisdiction, and the states of Nevada and California, as its “major” tax jurisdictions. However, the Company has certain tax attribute carryforwards which will remain subject to review and adjustment by the relevant tax authorities until the statute of limitations closes with respect to the year in which such attributes are utilized.
The Company believes that our income tax filing positions and deductions will be sustained upon audit and do not anticipate any adjustments that will result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740. The Company’s policy for recording interest and penalties associated with income-based tax audits is to record such items as a component of income taxes.
| 11 |
Commitments and contingencies
In the ordinary course of business, the Company is subject to certain contingencies, including legal proceedings and claims arising out of the business that relate to a wide range of matters, such as government investigations and tax matters. The Company recognizes a liability for such contingency if it determines it is probable that a loss has occurred and a reasonable estimate of the loss can be made. The Company may consider many factors in making these assessments including historical and specific facts and circumstances of each matter.
Basic earnings per share are computed by dividing net income attributable to holders of common stock by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share reflect the potential dilution that could occur if securities to issue common stock were exercised.
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 amends the guidance for the derivatives scope exception for contracts in an entity’s own equity for purposes of reducing 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 financial position, statements of operations and cash flows.
Subsequent events
The Company evaluated subsequent events and transactions that occurred after the balance sheet date through the date that the consolidated financial statements are available to be issued. Material subsequent events that required recognition or additional disclosure in the consolidated financial statements are presented.
Note 3 - Accounts receivable, net
Accounts receivable, net for the Company consisted of the following as of the dates indicated below:
| Schedule of accounts receivable | ||||||||
December 31, 2021 | June 30, 2021 | |||||||
| Accounts receivable | $ | $ | ||||||
| Less: allowance for credit losses | ( | ) | ||||||
| Total accounts receivable, net | $ | $ | ||||||
There was $
| 12 |
Note 4 – Inventories, net
As of December 31, 2021 and June 30, 2021, inventories
consisted of finished goods ready for sale, net of allowance for obsolescence, amounted to $
As of December 31, 2021 and June 30, 2021, allowance
for obsolescence was $
Note 5 – Prepayments and other current assets
As of December 31, 2021 and June 30, 2021, prepayments and other current assets consisted of the following:
| Schedule of prepayments and other current assets | ||||||||
December 31, 2021 | June 30, 2021 | |||||||
| Advance to suppliers | $ | $ | ||||||
| Prepaid expenses and other receivables | ||||||||
| Total | $ | $ | ||||||
Other receivables consisted of delivery fees of
$
Note 6 – Non-current prepayments
Non-current prepayments included $
Note 7 – Loans payable
Short-term loans
Revolving credit facility
On May 3, 2019, the Company entered into an agreement
with WFC Fund LLC (“WFC") for a revolving loan of up to $2,000,000. The revolving loan bore interest equal to the prime rate
plus 4.25% per annum on the outstanding amount. On May 26, 2020, the Loan and Security Agreement was amended and restated as a Receivable
Purchase Agreement (the “Original RPA”). On November 16, 2020, the Original RPA was further amended and restated (the “Restated
RPA”) to increase the credit limit of the revolving credit facility from $2,000,000 to $3,000,000. The Restated RPA bears a
| 13 |
During the three months ended September 30, 2021, the Company terminated the Restated RPA and paid off the balance due to WFC.
As of December 31, 2021 and June 30, 2021, the outstanding balance due under the RPA was $ and $, respectively.
Long-term loan
SBA loan payable
On April 18, 2020, the Company entered into an
agreement with the U.S. Small Business Administration (“SBA”) for a loan of $500,000 under Section 7(b) of the Small Business
Act pursuant to which we issued a promissory note (the “SBA Note”) to the SBA. The SBA Note bears interest at the rate of
3.75% per annum and matures 30 years from the date of the SBA Note. Monthly installment payments, including principal and interest, will
begin twelve months from the date of the SBA Note. As of December 31, 2021 and June 30, 2021, the outstanding balance of the SBA Note
was $
Asset-based revolving loan
On November 12, 2021, the Company entered to a Credit Agreement with
JPMorgan Chase Bank, N.A., as administrative agent, issuing bank and swingline lender, for an asset-based revolving loan (“ABL”)
of up to $
| · | Borrowing base equal to the sum of |
| Ø | Up to 90% of eligible credit card receivables |
| Ø | Up to 85% of eligible trade accounts receivable |
| Ø | Up to the lesser of (i) 65% of cost of eligible inventory or (ii) 85% of net orderly liquidation value of eligible inventory | |||
| · | Interest rates of between LIBOR plus 2% and LIBOR plus 2.25% depending on utilization | |||
| · | Undrawn fee of between 0.25% and 0.375% depending on utilization | |||
| · | Maturity Date of | |||
In addition, the ABL includes an accordion
feature that allows the Company to borrow up to an additional $25 million. To secure complete payment and performance of the secured
obligations, the Company granted a security interest in all of its right, title and interest in, to and under all of the
Company’s assets as collateral to the ABL.
Note 8 – Related party transactions
On December 1, 2018, the Company acquired certain
assets and assumed liabilities from BizRight, LLC, an entity owned and managed by the founders and officers of the Company and the purchase
price was recorded as payable due to related parties. During the six months ended December 31, 2020, the Company recorded proceeds
of $
| 14 |
Note 9 – Income taxes
On December 22, 2017, the President of the United States signed into law H.R.1, formerly known as the Tax Cuts and Jobs Act (the “Tax Legislation”). The Tax Legislation significantly revised the U.S. tax code by (i) lowering the U.S. federal statutory income tax rate from 35% to 21%, (ii) implementing a territorial tax system, (iii) imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries, (iv) requiring a current inclusion of global intangible low taxed income of certain earnings of controlled foreign corporations in U.S. federal taxable income, (v) creating the base erosion anti-abuse tax regime, (vi) implementing bonus depreciation that will allow for full expensing of qualified property, and (vii) limiting deductibility of interest and executive compensation expense, among other changes. The Company has computed its tax expenses using the new statutory rate effective on January 1, 2018 of 21%.
Other provisions of the new legislation include, but are not limited to, limiting deductibility of interest and executive compensation expense. These additional items have been considered in the income tax provision for the six months ended December 31, 2021 and 2020 and the impact was not material to the overall financial statements.
The income tax provision for the three and six months ended December 31, 2021 and 2020 consisted of the following:
| Schedule of provision for income tax expense | ||||||||||||||||
| Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Current: | ||||||||||||||||
| Federal | $ | $ | $ | $ | ||||||||||||
| States | ||||||||||||||||
| Total current income tax provision | ||||||||||||||||
| Deferred: | ||||||||||||||||
| Federal | ||||||||||||||||
| States | ||||||||||||||||
| Total deferred taxes | ||||||||||||||||
| Total provision for income taxes | $ | $ | $ | $ | ||||||||||||
The Company is subject to U.S. federal income tax as well as state income tax in certain jurisdictions. The tax years 2018 to 2020 remain open to examination by the major taxing jurisdictions to which the Company is subject. The following is a reconciliation of income tax expenses at the effective rate to income tax at the calculated statutory rates:
| Schedule of reconciliation of effective income tax rate | ||||||||||||||||
| Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Statutory tax rate | ||||||||||||||||
| Federal | ||||||||||||||||
| State | ||||||||||||||||
| Net effect of state income tax deduction and other permanent differences | ( | ( | ( | ( | ||||||||||||
| Effective tax rate | ||||||||||||||||
As of December 31, 2021 and June 30, 2021, the
income taxes payable was $
| 15 |
The following table sets forth the computation of basic and diluted earnings per share for the periods presented:
| Schedule of computation of earnings per share | ||||||||||||||||
| Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net Income | $ | $ | $ | $ | ||||||||||||
| Denominator: | ||||||||||||||||
| Weighted-average shares used in computing basic and diluted earnings per share* | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
| Earnings per share: | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
| * | On November 16, 2020, the Company implemented a 2-for-1 forward split of the issued and outstanding shares of Class A Common Stock of the Company. The computation of basic and diluted EPS was retroactively adjusted for all periods presented. |
| * | The computation of basic and diluted EPS did not include the Class B Common Stock as the holders of Class B Common Stock have no dividend or liquidation right until such time as their shares of Class B Common Stock have been converted into Class A Common Stock. |
| * | The computation of diluted EPS did not include the underlying shares of warrants calculated using treasury method for the three and six months ended December 31, 2021 as the exercise price was greater than the market price of the shares. |
| * | For the three and six months ended December 31, 2021, the vested shares of restricted stock units under the Amended and Restated 2020 Equity Incentive Plan (as discussed in Note 11) are considered issued shares and therefore are included in the computation of basic earnings (loss) per share as of grant date when the shares are fully vested. Impact of nonvested RSU is immaterial to the EPS. |
Note 11 – Equity
Common Stock
The Company was incorporated in Nevada on April 11, 2018. As of September 30, 2021, the total authorized shares of capital stock were 200,000,000 shares consisting of 180,000,000 shares of Common Stock (“Common Stock”) and 20,000,000 shares of preferred stock (the “Preferred Stock”), each with a par value of $0.001 per share.
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On November 16, 2020, the Company filed an amended
and restated articles of incorporation in Nevada to consummate a
The holders of Class A Common Stock shall be entitled to one vote per share in voting or consenting to the election of directors and for all other corporate purposes. The Company issued 20,000,000 shares to its founders at inception.
On January 15, 2020, pursuant to a rescission
and mutual release agreement with an unrelated company, the Company issued shares of its Class A Common Stock as settlement for
a payment of $
On October 20, 2020, the Company entered into
stock purchase agreements with Chenlong Tan and Allan Huang (the “Founders”) pursuant to which each of the Founders received
shares of the Company’s Class B Common Stock, for a purchase price of $ per share in cash. Based on the fact that
other than the total consideration of $
The Class B Common Stock was entitled to ten (10) votes per share in voting or consenting to the election of directors and for all other corporate purposes. In accordance with the Company’s amended and restated articles of incorporation, the Class B Common Stock was eligible to convert into shares of Class A Common Stock, on a ten-for-one basis, at any time following twelve (12) months after the Company’s completion of the initial public offering of its Class A Common Stock. Holders of Class B Common Stock had no dividend or liquidation rights until such time as their shares of Class B Common Stock were converted into shares of Class A Common Stock. As of June 30, 2020, the outstanding shares of Class B Common Stock were retroactively stated as 14,000,000 and 14,000,000, respectively.
Effective April 14, 2021, the Company amended its articles of incorporation to allow conversion of its Class B Common Stock at any time after issuance. On that same date, the Class B Common stockholders, Chenlong Tan and Allan Huang, elected to convert all of their 14,000,000 outstanding shares of the Company’s Class B Common Stock into 1,400,000 shares of Class A Common Stock. On April 23, 2021, the Company further amended and restated its articles of incorporation to eliminate the Class A and Class B Common Stock designations and authorize for issuance a total of 180,000,000 shares which are solely designated as Common Stock.
On May 14, 2020, the Company closed its initial
public offering (“IPO”) under a registration statement effective May 11, 2021, in which it issued and sold shares
of its Common Stock at a purchase price of $5.00 per share. On May 21, 2021, the Company closed on the IPO’s overallotment option,
selling an additional shares of Common Stock to the IPO’s underwriters at the public offering price of $5.00 per share.
The Company received net proceeds of approximately $
On May 14, 2021, upon closing on the Company’s IPO, the Series A convertible preferred stock and Convertible Notes were converted into an aggregate of shares of the Company’s Common Stock.
On May 14, 2021, the Company issued
During the quarter ended December 31, 2021, the
Company issued to
As of December 31, 2021 and June 30, 2021, there were and shares of Common Stock issued and outstanding, respectively.
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Preferred Stock
The Preferred Stock was authorized as “blank check” series of Preferred Stock, providing that the Board of Directors is expressly authorized, subject to limitations prescribed by law, by resolution or resolutions and by filing a certificate pursuant to the applicable law of the State of Nevada, to provide, out of the authorized but unissued shares of Preferred Stock, for series of Preferred Stock, and to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. As of December 31, 2021 and June 30, 2021, there were no shares of Preferred Stock was issued and outstanding.
Equity Incentive Plan
On May 5, 2021, the Company’s Board adopted, and its stockholders approved and ratified, the iPower Inc. Amended and Restated 2020 Equity Incentive Plan (the “Plan”). The Plan allows for the issuance of up to shares of Common Stock, whether in the form of options, restricted stock, restricted stock units, stock appreciation rights, performance units, performance shares and other stock or cash awards. The general purpose of the Plan is to provide an incentive to the Company’s directors, officers, employees, consultants and advisors by enabling them to share in the future growth of the Company’s business.
Following completion of the IPO on May 11, 2021, pursuant to their letter agreements, the Company awarded restricted stock units (“RSUs”) under the Plan to its independent directors, Chief Financial Officer, and certain other employees and consultants, all of which are subject to certain vesting conditions in the next 12 months and restrictions until filing of a Form S-8 for registration of the shares. The fair value of the RSUs was determined to be based on $5.00 per share, the initial listing price of the Company’s common stock on the grant date. During the three months ended September 30, 2021, the Company granted an additional shares of RSUs to three employees. These RSUs were valued at market price at grant date. On December 23, 2021, The Company granted $30,000, RSUs at market price of $2.27 per share. As of December 31, 2021, the Company had granted a total of RSUs, of which were fully vested, was forfeited and remained subject to certain vesting conditions. For the three and six months ended December 31, 2021, the Company recorded $ and $ of stock-based compensation expense. There was 4,000 RSUs forfeited during the three months ended December 31, 2021 as a result of resignation of a director and an employee. As of December 31, 2021, the unvested number of RSUs was 16,602 and the unamortized expense was $.
Information relating to RSU grants is summarized as follows:
| Schedule of RSU activity | ||||||||
| Total RSUs Issued | Total Fair Market Value of RSUs Issued as Compensation (1) | |||||||
| RSU's granted, but not vested, at June 30, 2021 | ||||||||
| RSUs granted | $ | |||||||
| RSUs forfeited | ( | ) | ||||||
| RSUs vested | ( | ) | ||||||
| RSUs granted, but not vested, at December 31, 2021 | ||||||||
_____________________
| (1) |
As of December 31, 2021, of the 28,768 vested RSUs,
Note 12 – Warrants
On January 27, 2021, the Company completed a private
placement offering pursuant to which the Company sold to two accredited investors an aggregate of $
| 18 |
In connection with the Convertible Note offering, the Company also issued placement agent warrants to purchase 7.0% of the shares of Common Stock underlying the Convertible Notes exercisable at the conversion price of the Convertible Note (the “Conversion Price”). The placement agent warrants had an exercise period of five years from the issuance date.
On May 14, 2021, upon closing of its IPO, the Company remeasured the warrants to fair value using the Modified Black Scholes Option Pricing Model, based on the expected fair value of the underlying stock with the following assumptions:
| Schedule of assumptions for warrant liabilities | |
| As of May 14, 2021 | |
| Expected term | |
| Expected volatility | |
| Risk-free interest rate | |
| Expected dividend rate | |
| Probability |
As of May 14, 2021, the fair value of the warrant
liabilities was $
Upon closing the IPO on May 14, 2021, the Placement
Agent exercised its warrants in full to purchase a total of
Note 13 - Concentration of risk
Credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable.
As of December 31, 2021 and June 30, 2021, $
Accounts receivable are typically unsecured and derived from revenue earned from customers, thereby exposing the Company to credit risk. The risk is mitigated by the Company’s assessment of its customers’ creditworthiness and its ongoing monitoring of outstanding balances. The Company maintains reserves for estimated credit losses, and such losses have generally been within expectations.
Customer and vendor concentration risk
For the six months ended December 31, 2021 and
2020, Amazon Vendor and Amazon Seller customers accounted for
| 19 |
For the six months ended December 31, 2021 and
2020, two suppliers accounted for
Note 14 - Commitments and contingencies
Lease commitment
The Company has adopted ASC842 since its inception date, April 11, 2018. The Company has entered into a lease agreement for office and warehouse space with a lease period from December 1, 2018 until December 31, 2020. On August 24, 2020, the Company negotiated for new terms to extend the lease. As a result, the lease term was amended and extended through December 31, 2023.
On September 1, 2020, in addition to the primary fulfillment center, the Company leased a second fulfillment center in City of Industry, California. The base rental fee is $27,921 to $29,910 per month through October 31, 2023.
Total commitment for the full term of these leases
is $
Three Months Ended December 31, 2021 and 2020:
| Schedule of lease cost and other information | ||||||||
| Lease cost | 12/31/2021 | 12/31/2020 | ||||||
| Operating lease cost (included in selling and fulfillment expenses in the Company's statement of operations) | $ | $ | ||||||
| Other information | ||||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | $ | ||||||
| Remaining term in years | ||||||||
| Average discount rate - operating leases | ||||||||
Six Months Ended December 31, 2021 and 2020:
| Lease cost | 12/31/2021 | 12/31/2020 | ||||||
| Operating lease cost (included in selling and fulfillment expenses in the Company's statement of operations) | $ | $ | ||||||
| Other information | ||||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | $ | ||||||
| Remaining term in years | ||||||||
| Average discount rate - operating leases | ||||||||
The supplemental balance sheet information related to leases for the period is as follows:
| Supplemental balance sheet information related to leases | ||||||||
| Operating leases | 12/31/2021 | 6/30/2021 | ||||||
| Right of use asset - non-current | $ | $ | ||||||
| Lease Liability - current | ||||||||
| Lease Liability - non-current | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
| 20 |
Maturities of the Company’s lease liabilities are as follows:
| Schedule of maturities of lease liabilities | ||||
| Operating | ||||
| Lease | ||||
| For years ending June 30: | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| Less: Imputed interest/present value discount | ( | ) | ||
| Present value of lease liabilities | $ | |||
On July 28, 2021, the Company entered into a Lease agreement (the “Lease Agreement”) with 9th & Vineyard, LLC, a Delaware limited liability company (the “Landlord”), to lease from the Landlord approximately 99,347 square feet of space located at 8798 9th Street, Rancho Cucamonga, California (the “Premises”). The Company expects to use the Premises for the storage and distribution of hydroponic equipment, lighting and garden accessories, home products, pet products, other consumer products and other ancillary uses. The term of the Lease Agreement is for 62 months, commencing on the date on which the Landlord completes certain proscribed improvements on the property (the “Rent Commencement Date”). The Lease Agreement does not provide for an option to renew.
Under the terms of the
Lease Agreement, the Company paid an initial security deposit of $
| Schedule of rent commencement | ||
| Months | Price Per Square Foot of the Premises Per Month | Monthly Base Rent |
| 1-12 | $ |
$ |
| 13-24 | $ |
$ |
| 25-36 | $ |
$ |
| 37-48 | $ |
$ |
| 49-60 | $ |
$ |
| 61-62 | $ |
$ |
In addition, the Company will be responsible for its pro rata share of certain costs, including utility costs, insurance and common area costs, as further detailed in the Lease Agreement. Following the Rent Commencement Date, the first two months of the Base Rent will be abated.
During the six months
ended December 31, 2021, the Company had
Contingencies
Except as disclosed below, the Company is not currently a party to any material legal proceedings, investigation or claims. However, the Company may, from time to time, be involved in legal matters arising in the ordinary course of its business. While the Company is not presently subject to any material legal proceedings, other than the proceeding detailed below, there can be no assurance that such matters will not arise in the future or that any such matters in which the Company is involved, or which may arise in the ordinary course of the Company’s business, will not at some point proceed to litigation or that such litigation will not have a material adverse effect on the business, financial condition or results of operations of the Company.
| 21 |
Pursuant to an engagement agreement, dated and effective August 31, 2020 (the “Engagement Agreement”), with Boustead Securities LLC (“Boustead”), the Company engaged Boustead to act as its exclusive placement agent for private placements of its securities and as a potential underwriter for its initial public offering. On February 28, 2021, the Company informed Boustead that it was terminating the Engagement Agreement and any continuing obligations the Company may have had under its terms. On April 15, 2021, the Company provided formal written notice to Boustead of its termination of the Engagement Agreement and all obligations thereunder, effective immediately. On April 30, 2021, Boustead filed a statement of claim with the Financial Institute Regulatory Authority, or FINRA, demanding to arbitrate the dispute, and is seeking, among other things, monetary damages against the Company and D.A. Davidson & Co. (who acted as underwriter in the Company’s IPO). The FINRA arbitration has been scheduled for June 20, 2022. The Company has agreed to indemnify D.A. Davidson & Co. and the other underwriters against any liability or expense they may incur or be subject to arising out of the Boustead dispute. Additionally, Chenlong Tan, the Company’s Chairman, President and Chief Executive Officer and a beneficial owner more than 5% of the Company’s Common Stock, has agreed to reimburse the Company for any judgments, fines and amounts paid or actually incurred by the Company or an indemnitee in connection with such legal action or in connection with any settlement agreement entered into by the Company or an indemnitee up to a maximum of $3.5 million in the aggregate, with the sole source of funding of such reimbursement to come from sales of shares then owned by Mr. Tan.
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. The Company anticipates 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 the Company’s operations to date, it is difficult to predict all of the positive or negative impacts the COVID-19 outbreak will have on the Company’s business.
Note 15 - Subsequent events
On January 14, 2022, the board of directors (the “Board”) of iPower, Inc., a Nevada corporation (the “Company”), approved the Company’s entry into a joint venture agreement, dated January 13, 2022 (the “Box Harmony Joint Venture Agreement”), with Titanium Plus Autoparts, Inc., a California corporation (“TPA”), Tony Chiu (“Chiu”) and Bin Xiao (“Xiao”). Pursuant to the terms of the Box Harmony 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 Box Harmony 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) the Company 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 (see below) 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 received 2,400 Equity Units in exchange for $2,400 and his agreement to manage the day to day operations of Box Harmony.
Under the terms of the Box Harmony limited liability operating agreement (the “LLC Agreement”), TPA and Xiao each granted to the Company an unconditional and irrevocable right and option to purchase from 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 $550 per Class A voting unit, for a total exercise price of up to $660,000. If such option is fully exercised, the Company would own 3,600 Equity Units or 60% of the total outstanding Equity Units. The LLC Agreement prohibits the issuance of additional Equity Units and certain other actions unless approved in advance by the Company.
| 22 |
Pursuant to the Box Harmony Joint Venture Agreement, on January 13, 2022, the Company and Box Harmony entered into a facility and use access sublease agreement (the “Facility and Use Access Agreement”), pursuant to which the Company will sublease to Box Harmony a portion of its leased warehouses located in California. Under such Facility and Use Access Agreement, Box Harmony would pay the Company a pro-rata portion of all rent and other charges based on the amount of square feet of rentable space sublet to and used by Box Harmony. Further pursuant to the terms of the Box Harmony Joint Venture Agreement, on January 13, 2022, Box Harmony, TPA and Xiao entered into a consulting agreement (“Consulting Agreement”), pursuant to which Xiao and TPA will provide management consulting services to assist Box Harmony in conducting its business. Additionally, on January 13, 2022, TPA, Xiao and Chiu entered into a license agreement (“License Agreement”) pursuant to which TPA licensed certain intellectual property rights to Box Harmony.
As of the date of this filing, there was no activities conducted by Box Harmony yet.
On February 4, 2022, the board of directors (the “Board”) of the Company approved the Company’s entry into a joint venture agreement with Bro Angel, LLC, Jie Shan and Bing Luo (the “GSM Joint Venture Agreement”). Pursuant to the terms of the GSM Joint Venture Agreement, dated February 10, 2022, 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 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 shall agree to grant to GSM the right to have access to and use 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.
As of the date of this filing, there was no activities conducted by GSM yet.
| 23 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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, and our combined 72,000 square foot fulfillment centers in Los Angeles, California, we believe we are one of the leading marketers, distributors and retailers of grow-light systems, ventilation systems, activated carbon filters, nutrients, growing media, hydroponic water-resistant grow tents, trimming machines, pumps, shelving and accessories for hydroponic gardening, based on management’s estimates. We have a diverse customer base that includes commercial users and individuals. Our core strategy continues to focus on expanding our geographic reach 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 December 31, 2021, our top five product segments accounted for 64.4% of total sales. While we continue to focus on our top product categories, we are working to expand our product catalog to include new and adjacent categories.
Trends and Expectations
Product 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.
COVID-19 Outbreak
We are continuing to closely monitor the impact of the COVID-19 outbreak on our business, results of operations and financial results. The situation surrounding the COVID-19 outbreak remains fluid and the full extent of the positive or negative impact of the COVID-19 outbreak on our business will depend on certain developments including the length of time that the outbreak continues, the impact on consumer activity and behaviors and the effect on our customers, employees, suppliers, and stockholders, all of which are uncertain and cannot be predicted. Our focus remains on promoting the health, safety and financial security of our employees and serving our customers. As a result, we have taken a number of precautionary measures, including implementing social distancing and enhanced cleaning measures in our facilities, suspending all non-essential travel, transitioning certain of our employees to working-from-home arrangements, reimbursing certain employee technology purchases, providing emergency paid time off and targeted hourly pay increases and developing no contact delivery methods.
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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.
RESULTS OF OPERATIONS
For the three months ended December 31, 2021 and 2020
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 Ended December 31, 2021 | Three Months Ended December 31, 2020 | Variance | ||||||||||
| Revenues | $ | 17,125,663 | $ | 11,254,317 | 52.17% | |||||||
| Cost of goods sold | 9,568,051 | 6,306,726 | 51.71% | |||||||||
| Gross profit | 7,557,612 | 4,947,591 | 52.75% | |||||||||
| Selling, fulfillment, general and administrative expenses | 6,422,327 | 4,094,485 | 56.85% | |||||||||
| Operating income | 1,135,285 | 853,106 | 33.08% | |||||||||
| Other (expenses) | (14,709 | ) | (50,700 | ) | (70.99% | ) | ||||||
| Income before income taxes | 1,120,576 | 802,406 | 39.65% | |||||||||
| Income tax expenses | 322,715 | 226,930 | 42.21% | |||||||||
| Net income | $ | 797,861 | $ | 575,476 | 38.64% | |||||||
| Gross profit % of revenues | 44.13% | 43.96% | ||||||||||
| Net income % of revenues | 4.66% | 5.11% | ||||||||||
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Revenues
Revenues for the three months ended December 31, 2021 increased 52.17% to $17,125,663 as compared to $11,254,317 for the three months ended December 31, 2020. While pricing remained stable, the increased revenue mainly resulted from an increase in sales volume and expansion of sales to other regions, such as Canada, Europe, Asia, etc. In addition to our organic growth, which we achieved as a result of improved products and more effective online marketing and merchandising efforts, the increase in sales was attributable to more people shopping online and pursuing gardening and growing projects during the COVID-19 pandemic. However, while the revenues for the current quarter remained consistent with last quarter, we cannot assure that this trend will continue, and our business may be adversely affected by poor overall economic conditions and shipping delays caused by the ongoing COVID-19 pandemic.
Costs of Goods Sold
Costs of goods sold for the three months ended December 31, 2021 increased 51.71% to $9,568,051 as compared to $6,306,726 for the three months ended December 31, 2020. The increase was due to an increase in sales, as discussed above. In addition, we experienced a decrease in cost of goods sold as a percentage of revenue as a result of selling more products under in-house brands as opposed to third party brands. See discussions on gross profit below.
Gross Profit
Gross profit was $7,557,612 for the three months ended December 31, 2021 as compared to $4,947,591 for the three months ended December 31, 2020. The gross profit ratio slightly increased to 44.13% for the three months ended December 31, 2021 from 43.96% for the three months ended December 31, 2020. The increase was mainly due to a combination of an increase in sales, as discussed above, and a decrease of cost of goods sold resulting from selling more products under in-house brands as opposed to third party brands. The gross margin for in-house branded products is, on average, 20% higher than our gross margin for third party brands.
Selling, Fulfillment, General and Administrative Expenses
Selling, fulfillment, and general and administrative expenses for the three months ended December 31, 2021 increased 56.85% to $6,422,327 as compared to $4,094,485 for the three months ended December 31, 2020. The increase was mainly due to an increase in selling and fulfillment expenses of $0.86 million and general and administrative expenses of $1.47 million, which included payroll expenses, stock-based compensation expense, insurance expenses, and other operating expenses including expenses associated with being a publicly traded company.
Other (Expenses)
Other (expenses) consists of interest expense, financing fees and other non-operating income (expenses). Other expenses for the three months ended December 31, 2021 was ($14,709) as compared to ($50,700) for the three months ended December 31, 2020. The decrease in other expenses was a combined result of an increase in other income of $49,948 and an increase in interest, including amortization of debt discount on the revolving loan, and financing expenses of 13,957 during the period ended December 31, 2021.
Net Income
Net income for the three months ended December 31, 2021 was $797,861 as compared to net income of $575,476 for the three months ended December 31, 2020, representing an increase of $222,385. The decrease in net income as percentage of revenues for the three months ended December 31, 2021 was primarily due to the increase in operating and non-operating expenses discussed above.
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For the six months ended December 31, 2021 and 2020
The following table presents certain unaudited condensed consolidated and combined statement of operations information and presentation of that data as a percentage of change from period to period.
Six Months Ended December 31, 2021 | Six Months Ended December 31, 2020 | Variance | ||||||||||
| Revenues | $ | 34,492,428 | $ | 26,214,252 | 31.58% | |||||||
| Cost of goods sold | 19,621,114 | 15,703,873 | 24.94% | |||||||||
| Gross profit | 14,871,314 | 10,510,379 | 41.49% | |||||||||
| Selling, fulfillment, general and administrative expenses | 12,445,714 | 8,580,900 | 45.04% | |||||||||
| Operating income | 2,425,600 | 1,929,479 | 25.71% | |||||||||
| Other (expenses) | (74,521 | ) | (69,133 | ) | 7.79% | |||||||
| Income before income taxes | 2,351,079 | 1,860,346 | 26.38% | |||||||||
| Income tax expenses | 665,690 | 522,874 | 27.31% | |||||||||
| Net income | $ | 1,685,389 | $ | 1,337,472 | 26.01% | |||||||
| Gross profit % of revenues | 43.11% | 40.09% | ||||||||||
| Net income % of revenues | 4.89% | 5.1% | ||||||||||
Revenues
Revenues for the six months ended December 31, 2021 increased 31.58% to $34,492,428 as compared to $26,214,252 for the six months ended December 31, 2020. While pricing remained stable, the increased revenue mainly resulted from an increase in sales volume and expansion of sales to other regions, such as Canada, Europe, Asia, etc. In addition to our organic growth, which we achieved as a result of improved products and more effective online marketing and merchandising efforts, the increase in sales was attributable to more people shopping online and pursuing gardening and growing projects during the COVID-19 pandemic. However, we cannot assure that this trend will continue, and our business may be adversely affected by poor overall economic conditions and shipping delays caused by the ongoing COVID-19 pandemic.
Costs of Goods Sold
Costs of goods sold for the six months ended December 31, 2021 increased 24.94% to $19,621,114 as compared to $15,703,873 for the six months ended December 31, 2020. The increase was due to an increase in sales as discussed above. In addition, we experienced a decrease of cost of goods sold as a percentage of revenue as a result of selling more products under in-house brands as opposed to third party brands. See discussions on gross profit below.
Gross Profit
Gross profit was $14,871,314 for the six months ended December 31, 2021 as compared to $10,510,379 for the six months ended December 31, 2020. The gross profit ratio also increased to 43.11% for the six months ended December 31, 2021 from 40.09% for the six months ended December 31, 2020. The increase was due to a combination of an increase in sales as discussed above and a decrease of cost of goods sold resulting from selling more products under in-house brands as opposed to third party brands. The gross margin for in-house branded products is, on average, 20% higher than our gross margin for third party brands.
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Selling, Fulfillment, General and Administrative Expenses
Selling, fulfillment, general and administrative expenses for the six months ended December 31, 2021 increased 45.04% to $12,445,714 as compared to $8,580,900 for the six months ended December 31, 2020. The increase was mainly due to an increase in selling and fulfillment expenses of $1.31 million and general and administrative expenses of $2.56 million, which included payroll expenses, stock-based compensation expense, insurance expenses, and other operating expenses including expenses associated with being a publicly traded company.
Other (Expenses)
Other (expenses) consists of interest expense, financing fees and other non-operating income (expenses). Other expenses for the six months ended December 31, 2021 was ($74,521) as compared to ($69,133) for the six months ended December 31, 2020. The slight increase in other expenses was mainly due to an increase in interest expenses, including amortization of debt discount on the revolving loan, during the period ended December 31, 2021.
Net Income
Net income for the six months ended December 31, 2021 was $1,685,389 as compared to net income of $1,337,472 for the six months ended December 31, 2020, representing an increase of $347,917. While the gross profit as percentage of revenues increased to 43.11% in the six months ended December 31, 2021 as compared to 40.09% for the same period in 2020, the slight decrease in net income as percentage of revenues for the six months ended December 31, 2021 was primarily due to the increase in operating expenses discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity
During the six months ended December 31, 2021 we primarily funded our operations with cash and cash equivalents generated from operations, as well as through completion of two private placements in 2020 and 2021, completion of our initial public offering in May of 2021, and borrowing under our credit facility and loans from the Small Business Administration and JPMorgan Chase Bank. We had cash and cash equivalents of $1,091,758 as of December 31, 2021, representing a $5.56 million decrease from $6,651,705 of 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 the next twelve months.
Our cash requirements consist primarily of day-to-day operating expenses and obligations with respect to warehouse leases. We lease all our office and warehouse facilities. We expect to make future payments on existing leases from cash generated from operations. We have credit terms in place with our major suppliers, however as we bring on new suppliers, we are often required to prepay our inventory purchases from them. This is consistent with our historical operating model which allowed us to operate using only cash generated by the business. Beyond the next twelve months we believe that our cash flow from operations should improve as supply chains begin to return to normal and new suppliers we are bringing online transition to credit terms more favorable to us. In addition, we plan to increase the size of our in-house product catalog, which will have a net beneficial impact to our margin profile and ability to generate cash. In addition, we have approximately $8 million unused credit under the revolving line with JPM. Given our current working capital position an available funding from our revolving credit line, we believe we will be able to manage through the current challenges by managing payment terms with customers and vendors.
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Working Capital
As of December 31, 2021 and June 30, 2021, our working capital was $31.96 million and $23.28 million, respectively. The historical seasonality in our business during the year can cause cash and cash equivalents, inventory and accounts payable to fluctuate, resulting in changes in our working capital. We anticipate that past historical trends to remain in place through the balance of the fiscal year with working capital remaining near this level for the foreseeable future.
Cash Flows
Operating Activities
Net cash (used in) operating activities for the six months ended December 31, 2021 and December 31, 2020 was $12,243,043 and $1,467,067, respectively. The increase in use of cash in operating activities was resulted from an increased purchase of products in order to maintain the higher inventory levels required to meet our increasing sales volumes, payment of income taxes, and the increase in accounts receivable resulted from increased sales.
Investing Activities
For the six months ended December 31, 2021 and December 31, 2020, net cash used in investing activities was the result of additions to property and equipment of $56,424 and $55,751, respectively, which were mainly related to the purchase of warehouse fixtures and office equipment.
Financing Activities
Net cash provided by financing activities was $6,739,520 and $1,089,256, respectively, for the six months ended December 31, 2021 and December 31, 2020. The main reason for the increase in net cash provided was primarily a result of proceeds from the asset-based revolving loan with JPMorgan Chase Bank.
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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.
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.
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Inventory, net
Inventory consists of finished goods ready for sale and is stated at the lower of cost or market. The Company values its inventory using the weighted average costing method. The Company’s policy is to include as a part of cost of goods sold any freight incurred to ship the product from its vendors to warehouses. Outbound freight costs related to shipping costs to customers are considered period costs and reflected in selling, general and administrative expenses. The Company regularly reviews inventory and considers forecasts of future demand, market conditions and product obsolescence.
If the estimated realizable value of the inventory is less than cost, the Company makes provisions in order to reduce its carrying value to its estimated market value. The Company also reviews inventory for slow moving and obsolescence and records allowance for obsolescence.
Leases
Since inception 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.
Commitments and Contingencies
In the normal course of business, the Company is subject to certain contingencies, including legal proceedings and claims arising out of the business that relate to a wide range of matters, such as government investigations and tax matters. The Company recognizes a liability for such contingency if it determines it is probable that a loss has occurred and a reasonable estimate of the loss can be made. The Company may consider many factors in making these assessments including historical and specific facts and circumstances of each matter.
Earnings per share
Basic earnings per share are computed by dividing net income attributable to holders of common stock by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share reflect the potential dilution that could occur if securities to issue common stock were exercised.
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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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a “smaller reporting company,” we are not required to provide the information required by this Item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosure.
As of December 31, 2021, our management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our management concluded that our internal controls over financial reporting were not effective because, among other things, (i) we did not maintain a sufficient complement of personnel with an appropriate degree of technical knowledge commensurate with the Company’s accounting and reporting requirements, (ii) lack of effective communication procedures, (iii) our controls related to the financial statements closing process were not adequately designed or appropriately implemented to identify material misstatements in our financial reporting on a timely basis.
Management has evaluated remediation plans to address these deficiencies and is implementing changes to address the material weakness identified, including hiring additional accountants and consultants and implementing controls and procedures over the financial reporting process.
Changes in Internal Controls
During the quarter ended December 31, 2021, we identified misstatement of sales and related expenses during the reconciliation process for transitioning our accounting system and recorded out-of-period adjustments with no material impact to our previously issued annual and interim consolidated financial statements. Furthermore, we determined that correcting the errors in the current period would not materially misstate our annual or interim consolidated financial statements.
It is important to note that a deficiency does not have to result in a material misstatement in order for it to be considered a material weakness. Instead, our evaluation considered the likelihood that the identified deficiency could have resulted in a material misstatement. In order to improve controls and prevent misstatements in the future, the Company had taken remedial actions to correct the system error and implemented the following procedures:
| · | Performed extensive search and reconciliations with data from third party portals to ensure accuracy and completeness of information | |
| · | Improved and upgraded operation system and automated synchronization with a new accounting system with more extensive details | |
| · | Conducted training sessions with all departments for information handling, file keeping and safeguarding | |
| · | Enhanced and extended reconciliation procedures to all internal and external sources | |
| · | Enhanced control procedures for communications and approvals of new transactions/agreements | |
| · | provided trainings and instructions to accounting team on how to account for a new contract or a new transaction | |
| · | Setup monthly routine communication and inquiry with all related departments for new transaction types and business and review if additional setup is required for either BOP, NetSuite, or other procedures to correctly capture and record the transactions. |
UHY LLP, our independent registered public accounting firm, is not required to and has not provided an assessment over the design or effectiveness of our internal controls over financial reporting.
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Our former placement agent, Boustead Securities LLC, brought a legal action against us following our communication to Boustead to unilaterally terminate an engagement agreement under which we and Boustead had originally intended for Boustead to be engaged to act as an exclusive underwriter in our initial public offering (“IPO”). To date, we have been unable to reach a settlement with Boustead. On April 30, 2021, Boustead filed a statement of claim with FINRA demanding to arbitrate the dispute, and is seeking, among other things, monetary damages against the Company and D.A. Davidson & Co., who acted as underwriter in our May 2020 IPO. On August 30, 2021, we had a preliminary hearing before FINRA Dispute Resolution Services and the matter has been scheduled to be heard in front of a three-judge panel of FINRA arbitrators on June 20, 2022. We believe that we have meritorious defenses to any claims that Boustead may assert, and we do not believe that such claims will have a material adverse effect on our business, financial condition or operating results. We have agreed to indemnify D.A. Davidson & Co. and the other underwriters who participated in our IPO against any liability or expense they may incur or be subject to arising out of the Boustead dispute. Additionally, Chenlong Tan, our Chairman, President and Chief Executive Officer and a beneficial owner more than 5% of our common stock, has agreed to reimburse us for any judgments, fines and amounts paid or actually incurred by us or an indemnitee in connection with such legal action or in connection with any settlement agreement entered into by us or an indemnitee up to a maximum of $3.5 million in the aggregate, with the sole source of funding of such reimbursement to come from sales of shares then owned by Mr. Tan. For further information, see “Risk Factors – Prior to our initial public offering we unilaterally terminated an engagement agreement with Boustead Securities LLC and may be subject to litigation in the event we are not able to come to agreement on the amounts Boustead deems itself to be owed under such agreement” and “Certain Relationships and Related Transactions” in our Annual Report on Form 10-K filed with the SEC on September 28, 2021.
We are not presently party to any pending or other threatened legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results, although from time to time, we may become involved in legal proceedings in the ordinary course of business.
ITEM 1A. RISK FACTORS
None.
ITEM 2. RECENT SALES OF UNREGISTERED EQUITY SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
| Exhibit No. | Description of Exhibit | ||
| 10.1 | Joint Venture Agreement, dated January 14, 2022, between iPower Inc., Titanium Plus Autoparts, Inc., Tony Chiu and Bin Xiao (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed January 20, 2022). | ||
| 10.2 | Box Harmony LLC Agreement, dated January 14, 2022, between iPower Inc., Titanium Plus Autoparts, Inc. and Bin Xiao (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed January 20, 2022). | ||
| 10.3 | Facility and Use Access Agreement, dated January 13, 2022, between iPower Inc. and Box Harmony LLC (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed January 20, 2022). | ||
| 10.4 | Consulting Agreement, dated January 13, 2022, between Box Harmony LLC, Titantium Plus Autoparts, Inc. and Bin Xiao (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed January 20, 2022). | ||
| 10.5 | License Agreement, dated January 13, 2022, between Box Harmony, LLC, Titanium Plus Autoparts, Inc., Tony Chiu and Bin Xiao (incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K filed January 20, 2022). | ||
| 10.6 | Director Offer Letter, dated December 23, 2021, between iPower Inc. and Hanxi Li (incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K filed January 20, 2022). | ||
| 10.7 | Joint Venture Agreement, dated February 10, 2022, between iPower Inc., Bro Angel LLC, Jie Shan and Bing Luo (incorporated by reference to Exhibit 10.1 to Form 8-K filed February 14, 2022). | ||
| 10.8 | Amended & Restated Limited Liability Company Operating Agreement of Global Social Media LLC, dated February 10, 2022, between Global Social Media LLC, iPower Inc. and Bro Angel LLC (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed February 14, 2022). | ||
| 10.9 | Intellectual Property License Agreement, dated February 10, 2022, between Bro Angel LLC and Global Social Media LLC (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed February 14, 2022). | ||
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
| 32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
| 101.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. | ||
| 101.SCH | Inline XBRL Taxonomy Schema Document | ||
| 101.CAL | Inline XBRL Taxonomy Calculation Linkbase Document | ||
| 101.DEF | Inline XBRL Taxonomy Definition Linkbase Document | ||
| 101.LAB | Inline XBRL Taxonomy Label Linkbase Document | ||
| 101.PRE | Inline XBRL Taxonomy Presentation Linkbase Document | ||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | ||
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| iPower Inc. | ||
| February 14, 2022 | By: | /s/ Chenlong Tan |
| Chenlong Tan | ||
| Chief Executive Officer | ||
| February 14, 2022 | By: | /s/ Kevin Vassily |
| Kevin Vassily | ||
| Chief Financial Officer |
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Exhibit 31.1
CERTIFICATION
I, Chenlong Tan, certify that:
1. I have reviewed this quarterly Report on Form 10-Q Pursuant to Rule 15d-2 under the Securities Exchange Act of 1934 for the period ended December 31, 2021 of iPower Inc. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: February 14, 2022 | /s/ Chenlong Tan |
| Chenlong Tan | |
|
Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION
I, Kevin Vassily, certify that:
1. I have reviewed this quarterly Report on Form 10-Q Pursuant to Rule 15d-2 under the Securities Exchange Act of 1934 for the period ended December 31, 2021 of iPower Inc. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: February 14, 2022 | /s/ Kevin Vassily |
| Kevin Vassily | |
|
Chief Financial Officer (Principal Financial and Accounting Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of iPower Inc. (the “Company”) on Form 10-Q pursuant to Rule 15d-2 Under the Securities Exchange Act of 1934 for the period ended December 31, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Chenlong Tan, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: February 14, 2022
| /s/ Chenlong Tan | |
| Chenlong Tan | |
|
Chief Executive Officer (Principal Executive Officer) |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of iPower Inc. (the “Company”) on Form 10-Q pursuant to Rule 15d-2 Under the Securities Exchange Act of 1934 for the period ended December 31, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kevin Vassily, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: February 14, 2022
| /s/ Kevin Vassily | |
| Kevin Vassily | |
|
Chief Financial Officer (Principal Financial and Accounting Officer) |