Good day, ladies and gentlemen, and welcome to the iPower Fiscal Q1 2022 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host, Kevin Vassily. Thank you. .

Yes. Thank you, Faye, and good afternoon, everyone. By now, everyone should have access to our fiscal first quarter 2022 earnings press release, which was issued earlier today at approximately 4:05 p.m. Eastern Time. The release should be available in the Investor Relations section of iPower's website at meetipower.com.

The call will also be available for webcast replay on our website. Following our prepared remarks, we'll open up the call for questions. .

Before I introduce Lawrence, I'd like to remind listeners that certain comments made on this conference call and webcast are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are subject to certain known and unknown risks and uncertainties as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements.

These forward-looking statements are also subject to other risks and uncertainties that are described from time to time in the company's filings with the SEC. .

Do not place undue reliance on any forward-looking statements, which are being made only as of the date of this call. Except as required by law, the company undertakes no obligation to revise or publicly release the results of any revision to forward-looking statements. .

With that, I'd like to now turn the call over to iPower's Chairman and CEO, Lawrence Tan.

Lawrence?.

Yes. Thank you, Kevin, and good afternoon, everyone. Since it has only been about 6 weeks from the last corporate update, our prepared remarks today will be relatively brief. .

The new fiscal year is off to a great start as we generated another quarter of record results. Revenue was up 16% year-over-year despite comping against our highest quarter historically. And we also backed the trend more broadly given some of the industry weakness in commercial hydroponics.

We believe our less capital-intensive e-commerce model, high-margin profile and consumer-driven end market sets us apart from other hydroponic players in the space. .

From a product perspective, our in-house ventilation line was the strongest category during the quarter. Today, it accounts for about 40% of the sales compared to roughly 30% this time last year.

And consistent growth is a reflection of our superior product design and merchandising capability as well as the work we put in to effectively manage our supply partner network. Our diversified supplier base enabled us to consistently deliver a product, be it directly to consumers or to our channel partners. .

To give us some perspective to those that are new to our story, we are one of the top sellers of hydroponic equipment on Amazon and online. So product availability is key to meeting consumer demand. .

In addition to our momentum in the ventilation systems, we have several product design initiatives underway that will incorporate smart functionality into our ventilation, filtering and lighting products, allowing for remote monitoring and operation of our products.

We also have a number of sensor-based products in development that will be key elements in growth environment optimization. This is entirely a new category for us, and we are excited about our opportunity. .

And finally, we have developed several prototype of countertop hydroponics appliance, and we are in discussion with our supply chain partner on the design and manufacturing parameters. While it's too early to know the exact timing of the launching of these products, we hope to have some of these products in market by end of our fiscal year. .

Another key development during the quarter was our first set of orders for delivery into Western Europe. We received 2 purchase orders from one of our channel partners for the U.K. and German market.

We are at the very early stage of our entrance into the European market, and we believe that this market is significant in size with very little penetration to date. Now we see Europe as a high-growth opportunity for us over the medium and long term as their consumer hydroponics market develops. .

Overall, we continue to execute on various growth objectives that were laid out during last year's IPO. And although we are very pleased with our momentum, we know that the best days for iPower remain ahead. .

I will now turn the call over to our CFO, Kevin, to take you through our financial results in more details. Kevin, please. .

Thank you, Lawrence. So we had another solid quarter of performance in our fiscal Q1. Total revenue was up 16% from the year ago period to $17.4 million, highlighted by a greater mix of our in-house product sales as well as increased sales of ventilation and nutrient products.

We continue to execute on selling more of our in-house brands, which increased 21% year-over-year to $13 million and accounted for approximately 75% of our sales compared to 72% in the year-ago quarter.

As we previously stated, gross margins for our in-house products are generally 20 to 25 percentage points higher than our third-party products that we carry. So we'll continue to invest and emphasize the in-house part of our catalog going forward. .

Overall gross margin for the quarter was up 490 basis points to 42.1%, which exceeded our expectations given the higher product input costs that we started to see over the summer as well as increased freight expenses, which has been seen not only in our industry but across all industries.

In addition to higher sales mix of in-house brands, the composition of product mix within our in-house brand product sales skewed towards the higher end of the margin distribution. We remain cautiously optimistic about margins going forward, even with the ongoing volatility in the supply chain. .

Total operating expenses for our fiscal first quarter were $6 million compared to $4.5 million for the same period in fiscal 2020. The increase was primarily driven by our increased sales volumes as well as increased expenses associated with being a publicly traded company, which we didn't have in the prior quarter of fiscal 2020.

Despite the sequential increase in sales from the June quarter, operating expenses were down on an absolute basis as our ad spend normalized a bit and channel program mix resulted in less or smaller merchant fees. .

Net income in the quarter increased 16% year-over-year to $0.9 million or $0.03 per diluted share compared to net income of $0.8 million or $0.04 per diluted share in the same period in fiscal 2021. .

Moving on to the balance sheet. Cash and cash equivalents were $1.2 million as of September 30, 2021 compared to $6.7 million as of June 30, 2021. The decrease is almost entirely attributable to the timing of cash flows and receivables from our largest channel partner. So the lower balance is not an indication of any business or operating trends.

We ended the quarter with approximately $24 million of working capital. .

Total debt as of September 30, 2021, stood at $0.5 million compared to $0.7 million as of June 30, 2021. .

So looking at the balance of our fiscal year, we remain confident in our growth strategy and financial targets.

From a margin and cost perspective, there have been some favorable developments in the last 6 weeks with regard to container costs and port congestion in Los Angeles, but it's still a little too early to tell if this is a reversal that will remain permanent.

The broader supply chain does remain volatile as input costs continue to fluctuate and COVID-19 continues to be very disruptive to the economies where we primarily source our product. As we have done since the pandemic began, we are working with our partners in China to minimize any impact. .

Also, as I mentioned last quarter, we do have a number of ways to push back on the supply chain volatility and input cost pressures that continue to be in place. These include trying to manage channel program mix, bulk procurement and asking some of our supply chain partners for larger production runs. .

We'll also continue to emphasize a greater mix of our in-house product sales and introduce new proprietary SKUs to broaden the in-house catalog. And we are looking forward to another strong year for iPower in fiscal 2022. .

So that concludes our prepared remarks. We'll now open it up for questions. .

[Operator Instructions] Your first question comes from the line of Mike Baker from D.A. Davidson. .

Okay. A couple. First, real quick, just want to make -- you said you're on target for your financial goals here, but you didn't -- you haven't specifically reiterated the full year sales growth of 25% or more. I just wanted to make sure that was the right way still to be thinking of it.

And if so, great quarter this quarter, but up 16%, if you're looking for 25% for the year, that -- more than 25%, that does imply a ramp.

Can you talk about how you go from 16% to 25% for the year?.

Sure, Mike. Yes. So yes, the financial target that we outlined of 25% kind of at the kind of floor growth for fiscal 2022 is still intact. We only had our last call 6 weeks ago. So nothing has changed from that standpoint.

What I would say about this quarter relative to kind of the upcoming quarters is we're comping the strongest quarter in the company's history. And we still have the balance of the year to meet that goal. .

So we're happy with 60% growth. We see lots of opportunities over the next several quarters to get to that goal. So I think we're in a good spot going forward and are confident that we're in as good a position as we were when we talked to you guys roughly the end of September. .

Yes. Okay. Makes sense. I'll ask one more, and then I'll turn it over to someone else and come back in if need be.

But -- the -- just could you update us, if you wouldn't mind, on your nutrients business?.

I think last time we talked, the idea was that, that was something you were going to develop in-house and hope to be getting started with that in November, but I think you still have the possibility of even making an acquisition there. So just if you could update us on that, I'd appreciate it. .

Sure.

Lawrence, do you want to take that?.

Sure. We are -- we actually have the nutrients under development. We're hoping to have the nutrient available for sale by the end of the calendar year, with a chance of it actually launching by end of this month. So we will announce it formally at that time. But yes, that's the time line for it. .

And is that delayed at all? Or has that changed to all? The economies or anything that's sort of impacting that? I seem to remember November being a time when you thought you could get it done?.

This is still the target, and it's under the production actually. .

Yes. And then as it pertains to potential acquisition, yes, we're obviously still looking. We think a faster kind of ramp would be to bring in a developed brand that fits the criteria that we think makes sense for our business model.

It needs to be a brand that is established but could accelerate with the use of an e-commerce channel and is suited for e-commerce distribution. So that could be packaging and sizes that are appropriate for our model. .

And so we're still in that search and identify and engage phase. We just haven't found one that I think meets all the criteria that we think is also a good product. So this is -- the in-house development is one leg of the stool, so to speak, as it pertains to how we further penetrate nutrients. But we're excited about kind of the opportunity there.

And as we move further through the year, an acquisition of a brand that made sense for us is still absolutely in -- under contemplation. So. .

Your next question is from Scott Fortune from ROTH Capital Partner. .

You mentioned we've seen the hydroponic industry kind of on the commercial side, it's been very tough quarter-to-quarter from that standpoint.

But can you provide -- you guys that seem to be a little bit immune to that because of your online positioning, but can you provide color on the customer spend trends going forward into 4Q? And is there seasonality from a historical standpoint as we look into the 4Q, 1Q opportunities here? Just a little bit around your consumers and the spend going on there.

.

Sure. Lawrence, you might want to take that one and I can kind of chime in after your answer. .

Sounds good. Yes, sure. So the commercial market is a very small portion of our portfolio. It consists of less than 10% for the quarter we are reporting. .

So like you said, we are largely an online retailer. And that part doesn't seems to have the same huge up and a down compared to the commercial market. So we haven't noticed any significant change in the consumer behavior. So I don't have any suggestions that they would change from what we saw historically. .

Yes. And then on the seasonality. So I think, if we broke our catalog into some of the different product types and categories, they tend to have some different seasonality.

But I think, we've said this in the past, and I think we've talked to you about this, Scott, a little bit, COVID really kind of disturbed a lot of those historical patterns that we see or have seen. And so it is a little bit harder for us to predict seasonality at this point.

I mean you have our performance from the prior fiscal year, we're not convinced that that's normal, but we're not sure yet that it's abnormal. So I think we're focused really on trying to kind of continue to get product in hand and making sure it's available for our channel partners. .

Great. And I appreciate the color on that.

And then just shifting, can you provide a little more color on the traffic to websites in hydro, initiatives to drive and support more customers to your own website to transact more direct with your consumer base? Kind of step us through kind of any metrics that you're seeing around your advertising and site visits to your own website and the initiatives there.

.

We are -- that's right. We are doing a lot of work behind the scenes, identify new ways to attract more customers to our own website. We are developing a newer version of the site that's about to be published soon, and we'll let people know about that and coupling with new ways to get more traffic for our website.

But yes, we have a lot of work as being developed, and you'll hear from us in the next couple of weeks, I guess. .

Okay. And then just one last question.

Kind of on the inventory levels with the supply chain challenges that are out there, have you pulled for more inventory or kind of how you look at your inventory to meet demand? Or are you seeing issues that are impacting kind of the business from that side? How should we kind of evaluate that?.

We have -- our inventory position for September is about the same as June. And because we fixed -- with the proceed from IPO, we increased our sales. We increased quite a bit of inventory into our pipeline. And I think we are very comfortable with the level of inventories. And also, we are very comfortable with the auto stock rate.

And the supplier network management is always one of our strengths and one of our core strengths. I am very happy with the status is now as I think we have very sufficient inventory, and we are very agile, and we'll be able to deal with any kind of problems that we encounter so far.

I think we're doing much better than the rest of -- I can't say rest of the industry, but we're doing pretty good from my own opinion..

And going forward, we'll -- our focus is more like the new products, rolling out and strategics like pushout like websites and new lines of products, and those will be our focuses. In terms of a base, I don't think we have any problem right now. .

You have a follow-up question from Mike Baker of D.A. Davidson. .

I'll take real quick here a couple more, if I could. Big beat on gross margin. Can you talk about where that beat came from? And is it sustainable, particularly within the context of container costs coming down? And then I'll ask that, and then I'll have one on SG&A. .

Right. So obviously, for us, the more of our in-house brands that we can push through the sales channels, the better for us. But it's -- and we've talked about the gross margin delta between our in-house versus the third-party products that we carry. It is a little bit more complicated than that. The -- or the kind of equation is multi-variant. .

For this quarter, we had a really nice skew. I mean if you think about our catalog in terms of the distribution, the skew is definitely towards the higher margin portion of that distribution. So that clearly helped. .

One of the things that helped in the quarter as well is that we've got channel programs with some of our partners that deliver product in different ways. We did a decent amount of, what I would call, direct import business, meaning our channel partner would take ownership of that overseas.

And because of their size and their purchasing power, they get really good container kind of cost rates for bringing products across to the U.S. And so when we engage that program, they're responsible for the freight costs. So that definitely helped as well. .

So is it sustainable? It's always hard for us to kind of predict in any given quarter how much we can push one channel program over another. However, as you guys know, our strategy is to really feature and push our products versus third-party products with our partners. And as such, the more that we do, the better. .

I think the other thing that we could say too is that back in the prior quarter and in the period leading up to the end of the prior quarter, we had a fair amount of new SKUs that were added to the catalog. And given the broader selection, we have an opportunity for our customers to choose us more than they might choose a third-party product.

So that also helps. And any time we introduce a redesign of a SKU, we do it with the intention of having a better margin profile for that product if we can. And so it's a longer way of saying that we're cautiously optimistic that we can keep margins at a really, really healthy level and potentially to expand them over the next several quarters. .

But just to be, I think, fair in the way we think about it, the -- that mix of distribution can, from quarter-to-quarter, sometimes skew to the lower end of our margin distribution of in-house products. So I think the longer-term trend is good.

And I think one of the things we talked about in prior periods, too, is that we expect over a longer trend period to be able to increase margins several percentage points from here over the next several years. .

Yes, that all makes sense. Sorry, if I can ask one follow-up though.

That program you're referring to in terms of your partner importing the product themselves, I believe -- I think in a prior conversation, what I understood that to mean is that, sure, you don't pay the shipping costs, but you get a lower product margin on that, but also lower merchant fees.

Is that right? But I guess what you're saying is, sure, you get a lower merchandise margin, but the fact that you don't have to pay for shipping actually makes it a better all-in gross margin.

Is that the right interpretation?.

No. .

No. Yes. So here's what's going on with for us. So we work with our partner, and we also brought containers ourselves. So if the containers price drop, the freight drop, it will help us in a positive way.

If the -- and the biggest driver -- I just want to add on to your previous question, the biggest driver for the margin, the gross margin, is to continuously pushing out better product, better product that we can price to the market and get more consumer to realize the value.

So that the R&D into these products and with either ourselves or with our partner manufacturers that will turn -- drive our long-term gross margin upwards. That's the key. So continuously introducing better products to the market, beat the competition, that's the key for long-term. .

Now for freight, if it price drops, it will make our gross margin bigger for sure because like what Kevin mentioned, for the ports we don't pay freight, we don't pay anyway. For the ports we pay, cheaper freight is better for us. .

Mike, let me just add to that just because I want to make sure you have kind of the right understanding as well. Because -- so yes, so there is some price trade-off for that handoff. But again, it's not just as simple as saying, "Oh, we use this program.

Gross margins are offset in a couple of directions and -- but it's better operating margins." It depends on the mix of product, too, right?.

So we had the benefit this quarter of being skewed to the higher end of the distribution of the margin distribution. So all things in, it was better. But it's not a kind of stationary margin for all of our in-house products versus our third-party products.

So the equation is a little more complicated than just better gross margin, no shipping costs and slightly lower price, but better operating margin. .

We can talk through that, too, when we kind of reconnect. But I don't -- what I want to communicate is that between quarters, that product mix could have an impact, but it doesn't mean that the trend is going in one direction or another.

We like the longer-term trend of where margins are going, and we expect it to go up over the next 2 to 3 years in a way that's very helpful for our bottom line. .

Yes. Yes. It all makes sense. Mix is obviously very important. Okay. Great. .

And there are no further questions at this time. Presenters, please continue. .

Great. Well, I just want to thank everyone for joining us on this call, and we look forward to the next earnings release and conference call, and we'll see you all then. Thank you. . .

Thank you. .

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day. You may all disconnect..