iPower Inc. (NASDAQ:IPW) Q1 2023 Earnings Conference Call November 14, 2022 4:30 PM ET
Company Participants
Kevin Vassily – CFO
Lawrence Tan – Chairman and CEO
Conference Call Participants
Scott Fortune – ROTH Capital Partners
Michael Baker – D.A. Davidson
Operator
Good afternoon, everyone and thank you for participating in today’s conference call to discuss iPower’s Financial Results for its Fiscal First Quarter 2023 ended September 30, 2022.
Joining us today are iPower’s Chairman and CEO, Mr. Lawrence Tan; and the company’s CFO Mr. Kevin Vassily.
Mr. Vassily, please go ahead.
Kevin Vassily
Thank you, operator and good afternoon everyone. By now everyone should have access to our fiscal first quarter earnings press release, which was issued earlier today at approximately 04:05 PM Eastern Time. The release is available in the Investor Relations section of our website at meetipower.com. This call will also be available for webcast replay on our website. Following our prepared remarks, we’ll open the call for your questions.
Before I introduce Lawrence, I’d like to remind listeners that certain comments made on this conference call and webcast are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to certain known and unknown risks and uncertainties, as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements.
These forward-looking statements are also subject to other risks and uncertainties that are described from time-to-time in the company’s filings with the SEC. Do not place undue reliance on any forward-looking statements which are being only as of the date of this call, except as required by law, the company undertakes no obligation to revise or publicly released the results of any revision to any forward-looking statements.
With that, I’d like to now turn the call over to iPower’s Chairman and CEO, Lawrence Tan. Lawrence?
Lawrence Tan
Thank you Kevin, and good afternoon everyone.
Our fiscal Q1 was a strong quarter despite lingering challenges from the supply chain environment. Although our gross margins dipped below 40% due to higher freight costs associated with older inventory. We generated approximately 50% year-over-year with revenue growth as we expanded both our hydroponics and non-hydroponics businesses.
Throughout the quarter, we were able to maintain concentration of our in-house product mix, which accounted for over 90% revenue compared to around 80% in fiscal Q1, 2022. We also continue to focus on diversifying our product mix with non-hydroponics household products, such as shelving supplies, home fans and chairs, accounting for over 65% of the sales during the quarter.
Looking to the future of our product catalog, we will be investing more in R&D to create even higher value and higher margin product. We believe this will allow us to better manage quantity control and ensure that our customers are consistently receiving catalog leading products. We expect to begin rolling out these new products in 2023.
We’re heading into Canada 2023. We will continue to leverage our extensive supplier network and supply chain expertise to tap any and all consumer home and garden categories that can create value for our consumer base and be in business.
Earlier in the year, we made the strategical decision to stockpile inventory in anticipation of both residual supply chain headwinds and are planned increase in non-hydroponics product sales. This ensured that we have consistent availability of fast moving products for our customers and channel partners. However, it did offset gross margin as many of those products came in at higher freight rates than what we are seeing today.
We continue to have an elevated inventory position and we expect to work with higher cost inventory down over the next couple of quarters, which will improve both our cash flow and gross margin. As mentioned on our last quarterly update, we have been in the process of revamping our image to better showcase the core iPower business alongside our increasingly diverse product portfolio outside our traditional hydroponics vertical.
We are launching our new website, this weekend and expect our entire rebranding process to be completed soon, which will include a new logo, color scheme, and other marketing related items. This new branding is an important step and unify iPower’s, various non-hydro related products and services while creating a more seamless experience for our customers as we continue to scale and grow both domestically and abroad.
Looking ahead, we expect to voluntary [ph] utility and pricing in the supply chain to continue improving, as we are already seeing meaningful decreases in overseas shipping cost, as well as lower leading time to cross the Pacific. As a result, we expect to require less, inventory on going forward and plan to reduce the balance over the next few quarters.
Between selling through higher cost inventory, purchasing less products and eliminating short-term warehousing need at elevated rates we’re well positioned to improve margin and cash flow. All of that said, we will continue to be vigilant in our business and in capital allocation as the macro environment evolves in fiscal 2023 and we look forward to delivering another year of strong growth and profitability.
I’ll now turn the call over to our CFO, Kevin Vassily to take you through our financial results in more details. Kevin?
Kevin Vassily
Thanks, Lawrence.
Lawrence mentioned our fiscal Q1 was another period of strong top line growth for the company. Total revenue was up 50% to $26 million, compared to $17.4 million in the year ago period, driven by increased demand for our non-hydroponic product portfolio, which includes items like commercial fans, shelving equipment, chairs, cards, et cetera.
Gross profit in the – first fiscal quarter increased 37% to $10 million, compared to $7.3 million in the year ago quarter. As a percentage of revenue gross margin was 38.4% – compared to 42.1% in the year ago quarter. The decrease in gross margin driven by a great portion of our sales coming from inventory that incurred higher freight costs earlier in the year.
Total operating expense for fiscal Q1 was $11.5 million compared to $6.0 million for the same period in fiscal 2022. As a percentage of revenue operating expenses were 44.1% compared to 34.7% in the year ago quarter. The increase in operating expense was primarily driven by elevated warehouse costs. These costs were for temporary warehouse space. This was a result of having that higher inventory, compared to the prior year period.
As Lawrence mentioned, we expect to improve operating margins in the next coming quarters. As we eliminate short-term warehousing for those elevated inventory levels. Net loss in the first fiscal quarter was $4.3 million or $0.14 per share, compared to net income of $0.9 million or a $0.03 per share gain for the same period in 2022. The decrease in our bottom line was primarily driven by a $3.1 million goodwill impairment charge that was related to a decline in our market capitalization, as well as the aforementioned elevated warehouse and freight costs.
Moving to the balance sheet, cash and cash equivalents were $4.8 million as of September 30, 2022, compared to $1.8 million at the same time at the end of our June quarter, increases primarily due to purchasing less, inventory as we previously added to that product stock to ensure availability earlier in the year. As of September 30, total long-term debt stood at $16.1 million compared to $14.1 million at the end of June 30, 2021.
The increase was driven in part by timing as we utilized our revolver to better manage working capital. And then looking ahead to the rest of fiscal 2023, we plan to continue to drive solid top line growth in the business while maintaining our approach to capital allocation and returning the business profitability.
Although the macro environment continues to present challenges, Lawrence may touch on this a little bit in the Q&A period. He’s actually in China right now. We’ve begun to see improvements in our supply chain costs. And we think that these will continue into the next calendar year.
So this concludes our prepared remarks, and we’ll open it now for questions. Operator?
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from Scott Fortune with ROTH Capital Partners. You may proceed.
Scott Fortune
Yes, good afternoon. Thanks for the questions here. While digging to inventory but first here, can you quantify Canada 26 million top line results here as far as the business segments and the growth of each of those segments, non-cannabis seems to be growing quicker, obviously. Then kind of your thoughts for longer term mix from those segments, and then also the segments, gross margins for each business and – around each of the business for that for the quarter and kind of going forward from the standpoint?
Kevin Vassily
Sure, Scott, so I’ll take a few of those. So first as – the breakout between our kind of hydro product line and our non-hydro product line. Let’s call it roughly 50% each. It was lower last year. So the hydro sorry, non-hydro was lower last year. So that’s obviously growing a little faster than the 50% clip that reported on the aggregate basis. Lawrence maybe you would comment on kind of margins for the different segments?
Lawrence Tan
Yes, sure. The non-hydro and the hydro business in terms of the in-house product, gross margin, they are relatively the same. But we have always been seeing the non-hydro parts that have been growing faster than the hydro side, which now contributes to for last quarter over half of our total revenue. But in terms of gross margin for in-house parts, which are – contributes the most of our shelves, which is about 90%. For September quarter, then there they’re relatively the same.
Scott Fortune
And then – I got you – no quick follow-up on that. Because Lawrence, you said you have a lot of R&D for new product growth going forward. At times [ph] it gets back to the question often mix, how should we look at that, with new products coming on board, or the mix kind of moving forward away from the cannabis side and more on cannabis going forward here?
Lawrence Tan
We’ll – actually be doing on both the R&D will be put in both the hydroponics and non-hydroponics business as a way to make our products smarter and better value for our consumer. No, we’re not limited by either the hydroponics or non-hydroponics business is basically a type of like the way we put more R&D into the existing product line or some new product line related so that we can provide a better product to the market.
Kevin Vassily
And Scott, one other kind of advantage for more kind of in-house R&D is that – a lot of the products that we bring to market are done or co-engineered with a partner, either a third-party worked directly with some of our suppliers. So by bringing some of the R&D in-house, we obviously own, a bit more of the IP associated with that, but there is a little bit and I’m not going to try to quantify it too precisely.
But there’s a little bit of a margin bump we get because we’re not paying kind of co-engineering service fee. So it’s a in an attempt to keep you know, trying to push those gross margins upward. We think this is an important thing to do over the next couple years.
Scott Fortune
Got it. And then my follow-on question obviously, the inventory levels. It sounds like this should clear over couple quarters just kind of step us through as we look at SG&A in the costs they are going forward and the key to getting back to profitability from this level. And I take it that your partner Amazon did not boost holding more inventory [indiscernible] just kind of step through how inventory and the bridge came back to profitability plays out on SG&A side yes?
Kevin Vassily
So the biggest – incremental cost associated with holding this inventory is all of the temporary warehouse space that, we needed to procure to store that inventory. And as such, as you might imagine the short-term leads significantly, for a short-term kind of service fees significantly more expensive than the long-term warehouse lease. Our challenge was, over the summer, someone’s still worried about the supply chain.
There’s still fairly elevated shipping times and not wanting to miss kind of the demand window that still feel felt like it was going to be there. And I think, you know, the top line results we saw this quarter kind of supported that view. But as you know, we’ve seen shipping costs or times come down, you know, we believe our ability to run the business on a lower level of inventory, meaning higher returns.
We’ll return so that’s one. And with that, you know, the money we’re spending to hold inventory in the short-term facilities, will start to disappear. I don’t have an exact timetable because it’s obviously a function of sell through. But it’s related as that inventory comes down we won’t need to be holding it in what’s very, very high cost storage. So, I think that’s the way to kind of think about getting us back to a more normalized operating expense environment.
Scott Fortune
Got it, I appreciate the color. And I’ll jump back in the queue.
Kevin Vassily
Thanks Scott.
Operator
Thank you [Operator Instructions] Our next question comes from Michael Baker with D.A. Davidson. You may proceed.
Michael Baker
Okay, thanks. So a couple follow-ups and other questions so first, just to be clear, so you’re still paying the temporary warehouse space that hasn’t fully gone away. You expect it to go away in the coming quarters, but we don’t know exactly when, is that right?
Kevin Vassily
That’s correct.
Michael Baker
Do we think fiscal 2023?
Kevin Vassily
Do we think – that there’ll – we won’t be paying it?
Michael Baker
Yes at some point this year?
Kevin Vassily
Through our fiscal year, yes I mean, you know, assuming…
Michael Baker
Will there be a quarter this year where you will be back to profitability I guess that’s the question?
Kevin Vassily
Well, I don’t want to give specific guidance. But we expect that we will not have to be paying that elevated warehouse space cost at some point during this fiscal year so yes.
Michael Baker
Got it, okay. And then the R&D well, is there an incremental cost to that is that like another sort of SG&A line item that’s going to pop up?
Kevin Vassily
Well, I think the way that’s going to roll out is, you know, any incremental spending initially is going to be pretty small. So it may fall under kind of the G&A line. But the way to think about it, though, is a, initially a bit of a one-for-one kind of trade out of gross margin and into and R&D line. And then as that scales over time, you will have a little bit of leverage on that gross margin line, because we won’t be again, embedding co-engineering costs in the – cost of goods sold.
But the early R&D spend, and if we decide to break it out, if it’s big enough, will essentially be kind of a one-to-one kind of pull out of – kind of what we’re spending on cost of goods sold. That’s hopefully that makes sense.
Michael Baker
Yes, I think it does okay. And now more I guess, I guess bigger picture, strategic type question the, so who – is your customer base, which is I guess primarily Amazon, but you do have other customers is your customer base different for the non-hydroponic versus hydroponic products?
And as part of that answer, can you update us on your customer base? Have you diversified away from Amazon at all I know, that’s something you have been working on, both in terms of customers, but also geographically as well. Can you update us on your international business?
Kevin Vassily
Let’s do it at [ph] him. Lawrence do you want to take that?
Lawrence Tan
Yes sure, in terms of, like the sales channels, for United States, the hydroponics and non-hydroponics, they do not differ very much. We utilize the same channels for both business lines. Now, in terms of a geographical area for the end consumers that who by and uses our product. We do not have, I don’t have that data in front of me. And that shows differences between these two segments. I don’t have that data in front of me right now.
Now, in terms of international business, we – I think right now, the European mostly have the hydroponics sales, we are we are working on bringing non-hydroponics sales into European. Now in terms of Canada, I think the – it’s mostly that as well. So like in that regard, the non-hydroponics business expansion to the rest of the world out of the United States – is still a little bit high in their hydroponics business.
Michael Baker
Okay and domestically, any diversification in the customer base. In other words, I know you had been sort of talking to some bigger box retailers and trying to diversify away from Amazon. Any update there?
Lawrence Tan
Yes, we are making slow bad solid progress there. So, but it’s a work in progress.
Kevin Vassily
Yes and Mike, given that you work with a lot of big box retailers that we are developing relationships, the windows, particularly to sell bricks and mortar, don’t have [ph] open kind of every week. And so, we are going through the process of getting to be a qualified vendor and the process of being invited in should happen, hopefully over the next couple of quarters.
And we’ll keep you guys posted, but these are companies that you I’m sure you’re familiar with, so that you understand kind of the windows that we get to, to provide product and we’re optimistic given the progress we’ve made so far.
Michael Baker
Yes okay, fair enough. Thank you.
Kevin Vassily
Thanks, Mike.
Operator
Thank you and I’m not showing any further questions. At this time, I would now like to turn the call back over to Kevin Vassily for any further remarks.
Kevin Vassily
So just want to thank everyone for dialing in today. We will be talking again to you as we complete our fiscal Q2 and hold a conference call probably sometime in early to mid February. Thanks everyone again, and we’ll talk again soon.
Operator
Thank you, this concludes today’s conference call. Thank you for participating. You may now disconnect.
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