Good afternoon, everyone and thank you for participating in today’s conference call to discuss iPower’s Financial Results for its Fiscal Second Quarter 2023 ended Decelerating 31, 2022. Joining us today are iPower’s Chairman and CEO, Mr. Lawrence Tan; and the company’s CFO Mr. Kevin Vassily. Mr. Vassily, you may begin..

Thank you, operator and good afternoon everyone. By now everyone should have access to our fiscal second quarter earnings press release, which was issued earlier today at approximately 04:05 PM Eastern Time. The release is available in the Investor Relations section of our website at meetipower.com.

This call will also be available for webcast replay on our website. Following our prepared remarks, we will open the call for your questions.

Before I introduce Lawrence, I would 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 only as of the date of this call, except as required by law, the company undertakes no obligation to revise or publicly release the results of any revision to any forward-looking statements.

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

Thank you, Kevin, and good afternoon, everyone. We generated a double-digit revenue growth during our fiscal second quarter, as we strategically leaned into sales and marketing to offload excess inventory buildup over recent quarters.

The top-line growth was led by our in-house product, which demonstrates the consistent, strong demand for iPower’s extensive and evolving product portfolio. Throughout the quarter, we continued to grow and diversify our product portfolio with non-hydroponics offerings.

A few of our most notable products were within the shelving, office and PET categories, which continue to receive strong customer feedback. Although hydroponics is becoming a smaller portion of our business today, it remains important category and we will continue to invest appropriate as the market evolves.

The growth and diversification of our product catalog has stemmed from our investment in R&D. Moving forward, we will continue to invest in the development of new innovative product to create high value offerings for both our customers and channel partners.

This consist the growth of our portfolio, we will ensure our customers receive industry leading products that they can trust, and we expect to continue rolling out new products throughout calendar 2023.

Earlier in 2022, we made the strategic decision to stockpile inventory in anticipation of both residual supply chain headwinds and increased demand for our in-house products. This ensured that we have consistent availability of our fast moving products for both our customers and channel partners.

As a result, we accumulated a heavy inventory position and had to pick up additional short-term warehousing space, which impacted our margins.

As we closed out the calendar year, we begun to experience a shift in the supply chain environment as freight and shipping costs begun to stabilize returning to pre COVID levels with a improved supply chain, we no longer need to carry these higher level of inventory, and prudently leaned into sales and marketing to offload access inventory.

This decision enabled us to improve our working capital and eliminate the extra warehousing space and the higher cost associated with it. We expect these actions coupled with our continued revenue growth to drive improvements to our bottom line in the quarters ahead.

In calendar 2022, we begun the process of revamping our image to better showcase the core iPower business alongside our increasingly diverse product portfolio outside the transitional hydroponics.

I’m happy to report that we officially completed this strategic initiative last month, which included a new company logo, website, color scheme and other marketing related items. Together, these new design elements will help instill a new brand to position and guide our company’s image moving forward.

In addition, it will unify our various non-hydro related products and services to create a more seamless experience for our customers as we scale both domestically and internationally.

As we look to the back half our fiscal 2023, we expect to continue benefiting from the improved supply chain environment and elimination of elevated short-term warehousing expenses.

With freight and shipping costs back to pre-COVID levels, we plan to more efficiently allocate capital towards inventory purchases, while mindfully managing our operating expenses. Between these tailwinds and the continuous strong demand for iPower product, we are well positioned to deliver another period of strong growth and profitability in 2023.

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

Thanks, Lawrence. Fiscal Q2 was another period of solid growth for iPower. Total revenue was up 12% to 19.3 million, compared to 17.1 million in the year-ago period, driven by strong demand for our in-house product portfolio, including shelving, office, and pet products, as well as hydroponics.

Gross profit in the fiscal second quarter increased 5% to $8 million compared with $7.6 million in the year ago quarter, as a percentage of revenue gross margin was 41.4% compared to 44.1% in the year ago quarter. The decrease in gross margin primarily driven by increased freight charges as well as channel and product category mix.

Total operating expense for fiscal Q2 was $12.1 million compared to $6.1 million for the same period in fiscal 2022. As Lawrence mentioned, the increase in operating expense was primarily driven by higher selling fulfillment and marketing costs related to the sale of the inventory bill that we saw.

We still have some excess inventory to offload in fiscal Q3, however, we expect operating costs to normalize thereafter, along with improved working capital as we no longer to have to carry higher loads of inventory, and the incremental warehouse expenses.

Net loss attributed to pull to iPower in the fiscal second quarter with 3.3 million or $0.11 per share compared to net income of 0.8 million or $0.03 per share for the same period in fiscal 2022. The decrease in our bottom line was primarily driven by the afore mentioned higher selling, fulfillment and marketing costs.

Looking at our cash flow, we generated more than $7.7 million of cash from operations during the quarter, compared to a $7 million cash burn in the year ago period, reflecting the improvements we have made to our working capital.

Moving to the balance sheet, cash, and cash equivalence for four million at December 31, 2022, compared to 1.8 million on June 30, 2022. As of December 31, 2022, total debt stood at12.2 million, compared to 16 million as of June 30, 2022.

The decrease was driven by our decision to pay down a significant portion of debt given the freed up working capital related to inventory. As a result, our net debt position was reduced 42% to 8.2 million compared to 14.2 million at June 30, 2022.

As Lawrence mentioned earlier, with the normalization of the supply chain, we have seen freight and shipping costs, return to pre-COVID levels as well as shipping times, when coupled with lower inventory levels and the elimination of our excess warehousing costs, we expect to significantly reduce operating expenses as we as exit our fiscal year.

Looking ahead, we continue to plan on improving our working capital position, focused on driving growth and improving profitability as we provide our customers with a diverse range of high quality home and garden products. With that, we conclude our prepared remarks and we will now open it up for questions. Operator..

Thank you. [Operator Instructions] Our first question comes from the line of Scott Fortune of ROTH. Your line is open..

Thank you for the questions. Good afternoon. A real quick focus is on top-line a little bit here.

Can you provide a little more color on the top-line growth? I know it is up year-over-year 12% and down on a quarterly basis, can you help us understand the seasonality or the slowdown in high growth and non-high growth segments kind of what drives the growth or where is this front growth quarter-over-quarter come? And then just a follow-up on that, are you seeing consumer weakness a little bit here across the board and can you provide additional color from your commercial hydro business side and ongoing weakness and potential turn on the hydro side, anywhere is time near here as far as tend to inflection for the hydro side growth to turn positively from that standpoint? Sorry, I’m not sure.

A little bit more on the top-line growth and where you are seeing the growth in the weakness per say?.

Right. So I will start and Laurence you can you can jump in at any point. I think we have talked a little bit in the past about the typical seasonality in the business in the years leading up to calendar year 2021. the December quarter and then the beginning of the March quarter represented low season for us, that was the seasonal pattern.

I think what we saw last year seemed to defy seasonality a bit. So I think from the standpoint of how our revenues has historically tracked quarter-to-quarter versus quarter-over-quarter. The December quarter is, a bit of it was a little confusing for us. So in that context, I don’t think what we saw in December was that surprising.

We will say though that our channel partners have slowed their ordering a little bit and I think they like a lot of people, who were kind of in the broader home and garden categories are finding ways to kind of work through inventory and so there was some slowing for some of our wholesale ordering.

But I think from a kind of seasonal pattern standpoint, I don’t think, what we saw was kind of out of the ordinary. From the standpoint of kind of consumer weakness, Laurence, maybe you can chime in here. I don’t think we have seen anything meaningfully weak.

I think the general tenors is one of supply chains finding way to deal with higher levels of inventory. But there still seems to be reasonable consumer demand out there. Laurence, I don’t know if you have anything else to add there..

Yes, the consumers - they don’t stop buying even though there is a slow down the economy, I think our products are mostly known as like valued, uh, products and these are more kind of like utility hotline products where people needed it. They do need it.

So, it is actually somewhat beneficial to these kind of mid-tier products as they provide the best value to data for consumers. So I don’t see that slowdown there. As for hydroponics, we maintained our position, I need to look at the data, but I think we get more market share now on the hydroponics side online. So, that part is growing, but slowly.

Most of the growth are contributed by other products, so yes..

And then I think, Scott, you asked about commercial. Well, I think it is hard for us to see from our online orders whether or not a purchaser is really commercial or not.

Our offline commercial business is a very small part of our business right now, and I don’t think the demand environment there has changed in any meaningful way, it is still limping along. I mean, I think good news for us is that it has become such a small part of our business that it is not having a really meaningful impact..

Yes, that is correct. That is correct..

I appreciate the color there, thanks for in-depth there. And then just no mentions of follow-up on the progress. I know it is slow progress adding potentially a big box partner here. You are looking to potentially do it by the end of the fiscal year here.

Can you provide any updates or color on around timing of that opportunity? Kind of in the near-term for big box partners moving forward?.

We got into some of the channels we started there are progress there and we start to make sales on some of the online platform. But that is just the first step to get the product into stores. But we made some progress there. So things are moving they just take some time..

Got it, okay, I will jump back in the queue. Thanks..

Thanks Scott..

Thank you. [Operator Instructions] Our next question comes from the line of Michael Baker of D.A. Davidson. Michael Baker your line is open..

Okay, thanks.

Yes, I just wanted to ask about what should we expect in the next few quarters? First of all, Lawrence, I think you said 2023 will be profitable, so you weren’t profitable this quarter, but did I understand that right? Do you plan on being profitable on the net income line for fiscal 2023 and then maybe to help us get there, gross margins down close to 300 basis points.

How much of that was from supply chain, which seems like it is getting better and how much was from mix? And then on the SG&A up $6 million, how much of that was this incremental marketing that is going to away? So in other words, help us understand what the margins might look like in the next couple quarters.

How much of what happened this quarter was because of things that aren’t going to occur or at least they are partially behind us for the next few quarters. Thanks..

Right. Let me take a few of those and Lawrence again. I will have you kind of jump in first. I don’t think that we said, full-year fiscal 2023 would be profitable..

Sales and profits in 2023 is what I heard, sales growth and profits in 2023, but maybe I heard one..

Well, I think maybe the better way to kind of characterize that is that we expect that we can return to profitability in fiscal 2023. So the trajectory will get us there, we hope by the end of the -..

So run rate of profitability by the end of 2023, but not profitable for the year..

Correct. I mean, without giving specific guidance, I think, the math would make the full-year extraordinarily hard..

That is what I thought. That is why I asked..

Yes. I’m glad you did. So from a gross margin perspective, it was a combination. I think, we have talked about this in the past, given that we have a catalog of in excess of 20,000 SKUs, our in-house products, we have got 6,000 SKUs. There is a distribution of gross margins in that in product. They are not uniform across every product.

And so what products sell at any given quarter influences that a big piece of the incremental 300 basis point decline over was the shipping costs.

So the inventory that we purchased over the summer, in anticipation not only of a pretty important product ramp with Amazon, but because of what felt like really dislocated and in some ways panicked, supply chains and container availability is still flowing through the income statement in this December quarter.

That stuff is starting to work through and in fact, one of the kind of strategic initiatives we took was to push as much of that out the door as possible in this quarter.

So that inventory that we hold now carries the much, much lower freight cost, and we are talking, new container costs that are four to five times lower than they were in the March to June timeframe of last year. So, that is going to ease for us, which should improve gross margins. On the sales of marketing side. Go ahead -..

Well. Let me just say, Kevin, that was all clear from the remarks. I guess what I’m asking you is, can you help us with quantification of that, of the 270 basis points or whatever it was, you said a significant portion.

So is it half was mixed and half was the supply chain stuff that will get better or Is it more than half? Is it most and any - so I’m asking four projection, I’m just asking in the second quarter, how much was from everything you described about the supply chain, and then we can make our judgment as to what that will look like going forward..

Yes. I think, I would say that at least 75% of it came from the shipping in container costs and the other 25 was mixed. Yes..

Okay.

And then same question on the SG&A, of that $6 million increase, how much was from what sounded like incremental marketing to push the product, which presumably is most behind you now?.

Yes. I would say, almost all of that increase was that - there is some impact on sales and marketing from channel. But our channel mix being different programs with our primary channel partner fluctuate quarter-to-quarter anyways and it is - where we get demand is pretty hard to forecast.

But the big chunk of that, at least 80% of that incremental came from intentional sales and marketing promotion that we did to push that higher cost inventory out the door..

Understood and am I correct in saying that, a lot of that now that the inventory is coming down is behind you?.

Lawrence, it is maybe you have a better sense of how much more we need to do on that front, but we have done a significant amount of it..

By December, we reduced - we accomplished 50% of our goal. So we are on the way there..

So you are 50% through. So still have some to go..

Yes, we still have -..

I’m still going to assume that all that incremental $6 million will go away because you are you still have some that you are working through..

The promotions cost won’t be as much for the remaining half of the inventory that we want to get out of the door. But it will not all go away, but most part of the $6 million will not be there. We do not - we no longer plan to play as aggressive as what we did when we are facing a higher total inventory pressure.

But now even though we only - we did like halfway through that inventory, but our pressure is a lot lower now. So we won’t run as aggressive campaigns as what we did before..

Very clear. I appreciate the color. Thanks..

Thank you. That does conclude the Q&A portion. I would like to turn the call back over to Kevin Vassily for any closing remarks..

Okay. Thank you, Operator. I want to thank everyone for joining us today and we look forward to speaking with you again a little bit later this spring. Thanks so much..

Thank you. Ladies and gentlemen, this does conclude today’s conference. Thank you all participating. You may now disconnect. Have a great day..