The following Management's Discussion and Analysis should be read in conjunction
with our financial statements and the related notes thereto included elsewhere
herein. The 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 equipment supplier based in the United
States. Through the operations of our e-commerce platform, www.Zenhydro.com, our
99,000 square foot fulfillment center in Rancho Cucamonga, California, and our
combined 121,000 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
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 fiscal year ended June 30, 2022, our top five product categories accounted
for 70% of our total sales. While we will continue focusing on our top products,
we are working to expand its product line to include nutrients.
Recent Acquisitions and Joint Ventures
On February 15, 2022, in exchange for total consideration with a fair value of
$10.6 million, we acquired 100% of the ordinary shares of Anivia Limited (the
"Target Company"), a corporation organized under the laws of the British Virgin
Islands ("BVI"), in accordance with the terms of a share transfer framework
agreement (the "Transfer Agreement"), dated February 15, 2022, by and between
the Company, White Cherry Limited, a BVI company ("White Cherry"), White
Cherry's equity holders, Li Zanyu and Xie Jing (together with White Cherry, the
"Sellers"), the Target Company, Fly Elephant Limited, a Hong Kong company,
Dayourenzai (Shenzhen) Technology Co., Ltd., and Daheshou (Shenzhen) Information
Technology Co., Ltd. The Target Company owns 100% of the equity of Fly Elephant
Limited, which in turn owns 100% of the equity of Dayourenzai (Shenzhen)
Technology Co., Ltd., a corporation located in the People's Republic of China
("PRC") and which is a wholly foreign-owned enterprise ("WFOE") of Fly Elephant
Limited. The WFOE controls, through a series of contractual arrangements
summarized below, the business, revenues and profits of Daheshou (Shenzhen)
Information Technology Co., Ltd., a company organized under the Laws of the PRC
(the "Operating Company") and located in Shenzhen, China. The Operating Company
is principally engaged in selling of a wide range of products and providing
logistic services in the PRC.
34
On February 10, 2022, we entered into a joint venture agreement with Bro Angel,
LLC, Ji Shin and Bing Luo (the "GSM Joint Venture Agreement"). Pursuant to the
terms of the GSM Joint Venture Agreement, 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 will contribute $100,000 to the capital of GSM and Bro
Angel granted GSM, pursuant to the terms of an intellectual property licensing
agreement, dated February 10, 2022 (the "IP License Agreement"), 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 will
grant to GSM the right to have access to and use of 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.
On January 13, 2020 we entered into a joint venture agreement with Titanium Plus
Autoparts, Inc. ("TPA"), Tony Chiu, and Bin Xiao (the "TPA Joint Venture
Agreement"). Pursuant to the terms of the TPA 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 TPA 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) we 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 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 Xiao received
2,400 Equity Units in exchange for $2,400 and his agreement to manage the day to
day operations of Box Harmony. We also entered into services agreement with Box
Harmony pursuant to which we provide a portion of our fulfillment center
infrastructure to Box Harmony in exchange for their payment.
Under the terms of the Box Harmony limited liability operating agreement, TPA
and Bin Xiao each granted to us an unconditional and irrevocable right and
option to purchase from Bin 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 up to $550 per Class A voting unit, for a total exercise price of up to
$660,000. If such option is fully exercised, we would own 3,600 Equity Units or
60% of the total outstanding Equity Units. The Box Harmony LLC Agreement
prohibits the issuance of additional Equity Units and certain other actions
unless approved in advance by us.
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.
35
Global Economic Disruption
While at present the majority of our products are sourced either in the United
States or China, the military conflict between Russia and Ukraine may
nonetheless increase the likelihood of supply chain interruptions and hinder our
ability to find the materials we need to make our products. Thus far, as a
result of the general global economic disruption, we have experienced a decrease
in the speed with which we are able to purchase new inventory, as well as an
increase in costs due to delays in shipping, resulting increase in time with
which products remain in our warehouse facilities, thus resulting in reduced
profits. In addition, supply chain disruptions may make it harder for us to find
favorable pricing and reliable sources for the materials we need, putting upward
pressure on our costs and increasing the risk that we may be unable to acquire
the materials and services we need to continue to make certain products.
Ongoing COVID-19 Outbreak and Related Disruptions
We are continuing to closely monitor the impact of the ongoing 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.
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.
36
RESULTS OF OPERATIONS
For the years ended June, 2022 and 2021
The following table presents certain consolidated statement of operations
information and presentation of that data as a percentage of change from period
to period.
Year Ended Year Ended
June 30, 2022 June 30, 2021 Variance
Revenues $ 79,418,473 $ 54,075,922 46.9%
Cost of goods sold 46,218,580 31,257,358 47.9%
Gross profit 33,199,893 22,818,564 45.5%
Selling, fulfillment, general and
administrative expenses 30,887,856 19,858,000 55.5%
Operating income 2,312,037 2,960,564 (21.9% )
Other (expenses) (248,419 ) (2,969,551 ) (91.6% )
Income (Loss) before income taxes 2,063,618 (8,987 ) 23,062.3%
Income tax expenses 558,975 766,762 (27.1% )
Net income (loss) 1,504,643 (775,749 )
Non-controlling interest (13,232 ) -
Net income (loss) attributable to
iPower Inc. 1,517,875 (775,749 ) 295.7%
Other comprehensive income 5,678 -
Comprehensive income (loss)
attributable to iPower Inc. $ 1,523,553 $ (775,749 ) 296.4%
Gross profit % of revenues 41.80% 42.20%
Operating income % of revenues 2.91% 5.47%
Net income (loss) attributable to
iPower Inc. % of revenues 1.91% (1.43% )
Revenues
Revenues for the year ended June 30, 2022 increased 46.9% to $79,418,473 as
compared to $54,075,922 for the year ended June 30, 2021. 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 and Asia. 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 positively impacted by people continuing to shop online
and pursuing gardening and growing projects during the COVID-19 pandemic.
However, while the revenues for the current year improved over last year, 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 year ended June 30, 2022 increased 47.9% to
$46,218,580 as compared to $31,257,358 for the year ended June 30, 2021. The
increase was due to an increase in sales as discussed above. In addition, we
experienced a slight increase of cost of goods sold as a percentage of revenue
resulting from a combination of an increase of import duty and freight charges
and selling more products under in-house brands as opposed to third party
brands. See discussions on gross profit below.
37
Gross Profit
Gross profit was $33,199,893 for the year ended June 30, 2022 as compared to
$22,818,564 for the year ended June 30, 2021. The gross profit ratio was
slightly decreased to 41.80% for the year ended June 30, 2022 from 42.20% for
the year ended June 30, 2021. The slight decrease was mainly due to an increase
of import duty and freight charges, which was partially offset by an increase in
sales, as discussed above, and 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, general and administrative expenses for the year ended
June 30, 2022 increased 55.5% to $30,887,856 as compared to $19,858,000 for the
year ended June 30, 2021. The increase was mainly due to an increase in selling
and fulfillment expenses of $5.7 million and general and administrative expenses
of $5.3 million, which included payroll expenses, warehouse and storage fees,
stock-based compensation expense, legal and professional fees in connection with
the acquisition and joint ventures, insurance expenses, and other operating
expenses including expenses associated with being a publicly traded company. We
have recorded a net loss for the three months ended June 30, 2022 comparing to
last quarter due to the increase in the operating expenses.
Other (Expense)
Other (expenses) consist of interest expense, financing fees and other
non-operating income (expenses). Other expenses for the year ended June 30, 2022
were $(248,419) as compared to $(2,969,551) for the year ended June 30, 2021.
The decrease in other expenses was mainly due to a decrease of amortization of
debt discount of $1.5 million, and change in fair value of conversion feature
and warrant liabilities of $1.4 million resulted from the issuance of our Series
A Convertible Preferred Stock, convertible notes and warrants during the year
ended June 30, 2021.
Net Income (Loss) Attributable to iPower Inc.
Net income (loss) attributable to iPower Inc. for the year ended June 30, 2022
was $1,517,875 as compared to net loss of $775,749 for the year ended June 30,
2021, representing an increase of $2,293,624. The increase in net income as
percentage of revenues for the year ended June 30, 2022 was primarily due to the
changes in operating and non-operating income and expenses discussed above and
the slight decrease in income tax resulting from decrease in taxable income from
operations, the deferred taxes and revision of income tax provision based on
actual income taxes paid for the year ended June 30, 2021.
Comprehensive Income (loss) Attributable to iPower Inc.
Comprehensive income (loss) attributable to iPower Inc. for the year ended June
30, 2022 was $1,523,553 as compared to comprehensive loss of ($775,749) for the
year ended June 30, 2021, representing an increase of $2,299,302. The increase
was due to the reasons discussed above and the other comprehensive income of
$5,678, which was the foreign currency translation adjustments resulting from
the translation of RMB, the functional currency of our VIE in PRC, to USD, the
reporting currency of the Company.
38
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity
During year ended June 30, 2022 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 $1,821,947 as of June 30, 2022, representing a $4,829,758
decrease from $6,651,705 in cash as of June 30, 2021. The cash decrease was
primarily the result of the increase in net cash used in 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 during the next 12 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 12 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 $12.0 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.
Working Capital
As of June 30, 2022 and 2021, our working capital was $32,300,646 and
$23,281,891, 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 years ended June 30, 2022 and 2021
was $16,603,005 and $12,756,949, respectively. The increase in use of cash in
operating activities 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 years ended June 30, 2022 and 2021, net cash used in investing
activities was $139,386 and $61,498, respectively, The increase in use of cash
in investing activities was mainly related to the purchase of office equipment
and investment in joint venture, which was partially offset by cash acquired
from acquisition of Anivia in February 2022.
39
Financing Activities
Net cash provided by financing activities was $11,911,916 and $18,492,517,
respectively, for the years ended June 30, 2022 and 2021. The main reason the
Company experienced a decrease in net cash provided by financing activities was
primarily due to receiving $12.4 million in proceeds from the draw-down of a $25
million asset-based revolving loan facility with JPMorgan Chase Bank comparing
to net proceeds of $16.6 million from our IPO, our revolving facility with WFC
and the closing of our private placements of an aggregate of $345,000 in Series
A convertible preferred stock and $3,000,000 in convertible notes in the fiscal
year ended June 30, 2021.
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 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 financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated 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 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 financial statements.
Revenue recognition
The Company has adopted Accounting Standards Codification ("ASC") 606 since its
inception on April 11, 2018 and 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 delivery of goods to customers are recorded as
customer deposits.
40
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.
Inventory, net
Inventory consists of finished goods ready for sale and is stated at the lower
of cost or market. The Company value 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 and fulfillment expenses. The Company
regularly review inventory and consider 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.
Equity method investment
The Company accounts for its ownership interest in Box Harmony, a 40% owned
joint venture, following the equity method of accounting, in accordance with ASC
323, Investments - Equity Method and Joint Ventures. Under this method, the
carrying cost is initially recorded at cost and then increased or decreased by
recording its percentage of gain or loss in its statement of operations and a
corresponding charge or credit to the carrying value of the asset.
Business Combination
On February 15, 2022, the Company acquired 100% of the ordinary shares of Anivia
Limited ("Anivia") and its subsidiaries, including the VIE. The Company applies
the acquisition method of accounting for business combinations. Under the
acquisition method, the acquiring entity in a business combination recognizes
100% of the assets acquired and liabilities assumed at their acquisition date
fair values. Management utilizes valuation techniques appropriate for the asset
or liability being measured in determining these fair values. Any excess of the
purchase price over amounts allocated to assets acquired, including identifiable
intangible assets, and liabilities assumed is recorded as goodwill. Where
amounts allocated to assets acquired and liabilities assumed is greater than the
purchase price, a bargain purchase gain is recognized. Acquisition-related costs
are expensed as incurred. See Note 4 for details on acquisition.
Variable interest entities
On February 15, 2022, the Company acquired 100% of the ordinary shares of Anivia
Limited ("Anivia") and its subsidiaries, including Daheshou (Shenzhen)
Information Technology Co., Ltd., a company organized under the Laws of the PRC
("DHS"). Pursuant to the terms of the Agreements, the Company does not have
direct ownership in DHS but is actively involved in DHS's operations as the sole
manager to direct the activities and significantly impact DHS's economic
performance. DHS's operational funding is provided by the Company after February
15, 2022. During the term of the agreements, the Company bears all the risk of
loss and has the right to receive all of the benefits from DHS. As such, based
on the determination that the Company is the primary beneficiary of DHS, in
accordance with ASC 810-10-25-38A through 25-38J, DHS is considered a variable
interest entity ("VIE") of the Company and the financial statements of DHS have
been consolidated from the date such control existed, February 15, 2022. See
Note 4 and Note 5 for details on acquisition.
41
Goodwill
Goodwill represents the excess of the purchase price over the fair value of
assets acquired and liabilities assumed. The Company accounts for goodwill under
ASC Topic 350, Intangibles-Goodwill and Other.
Goodwill is not amortized but is reviewed for potential impairment on an annual
basis, or if events or circumstances indicate a potential impairment, at the
reporting unit level. The Company's review for impairment includes an assessment
of qualitative factors to determine whether it is more likely than not that the
fair value of a reporting unit is less than its carrying value, including
goodwill. If it is determined that it is more likely than not that the fair
value of a reporting unit is less than its carrying value, including goodwill, a
quantitative goodwill impairment test is performed, which compares the fair
value of the reporting unit with its carrying amounts, including goodwill. If
the fair value of the reporting unit exceeds its carrying amount, goodwill of
the reporting unit is considered not impaired. However, if the carrying amount
of the reporting unit exceeds its fair value, additional procedures must be
performed. That additional procedure compares the implied fair value of the
reporting unit's goodwill with the carrying amount of that goodwill. An
impairment loss is recorded to the extent that the carrying amount of goodwill
exceeds its implied fair value.
Intangible Assets, net
Finite life intangible assets at June 30, 2022 include covenant not to compete,
supplier relationship, and software recognized as part of the acquisition of
Anivia Limited. Intangible assets are recorded at the estimated fair value of
these items at the date of acquisition, February 15, 2022. Intangible assets are
amortized on a straight-line basis over their estimated useful life as
followings:
Useful Life
Covenant Not to Compete 10 years
Supplier relationship 6 years
Software 5 years
The Company reviews the recoverability of long-lived assets, including the
intangible assets, when events or changes in circumstances occur that indicate
the carrying value of the asset may not be recoverable. The assessment of
possible impairment is based on the ability to recover the carrying value of the
asset from the expected future pretax cash flows (undiscounted and without
interest charges) of the related operations. If these cash flows are less than
the carrying value of such asset, an impairment loss is recognized for the
difference between estimated fair value and carrying value. The measurement of
impairment requires management to make estimates of these cash flows related to
long-lived assets, as well as other fair value determinations. As of June 30,
2022, there were no indicators of impairment.
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. In addition to the requisite service period, the Company also evaluates
the performance condition and market condition under ASC 718-10-20. For an award
that contains both a performance and a market condition, and where both
conditions must be satisfied in order for the award to vest, the market
condition is incorporated into the fair value of the award, and that fair value
is recognized over the employee's requisite service period or nonemployee's
vesting period if it is probable that the performance condition will be met. If
the performance condition is ultimately not met, compensation cost related to
the award should not be recognized (or should be reversed) because the vesting
condition in the award has not been satisfied.
The Company will recognize forfeitures of such equity-based compensation as they
occur.
42
Recently issued accounting pronouncements
In June 2022, FASB issued ASU 2022-03, Fair Value Measurement (Topic 82): Fair
Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.
The amendments in this ASU clarify the guidance in ASC 820 on the fair value
measurement of an equity security that is subject to a contractual sale
restriction and require specific disclosures related to such an equity security.
This standard is effective for fiscal years beginning after December 15, 2024.
The Company does not expect the adoption of this standard to have a material
impact on the consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic
805), Accounting for Contract Assets and Contract Liabilities from Contracts
with Customers. This ASU clarifies that an acquirer of a business should
recognize and measure contract assets and contract liabilities in a business
combination in accordance with ASU 2014-09, Revenue from Contracts with
Customers (Topic 606) as if the entity had originated the contracts. The
guidance is effective for fiscal years beginning after December 15, 2023, with
early application permitted. The Company does not expect the adoption of this
standard to have a material impact on the consolidated financial statements.
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 is effective for the Company on July 1, 2024,
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 to have a material impact
on the consolidated financial statements.
In January 2020, the FASB issued ASU 2020-01, "Investments - Equity Securities
(Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and
Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic
321, Topic 323, and Topic 815." This ASU among other things clarifies that a
company should consider observable transactions that require a company to either
apply or discontinue the equity method of accounting under Topic 323,
Investments-Equity Method and Joint Ventures, for the purposes of applying the
measurement alternative in accordance with Topic 321 immediately before applying
or upon discontinuing the equity method. The new ASU clarifies that, when
determining the accounting for certain forward contracts and purchased options a
company should not consider, whether upon settlement or exercise, if the
underlying securities would be accounted for under the equity method or fair
value option. ASU 2020-01 is effective. For public business entities for fiscal
years, and interim periods within those fiscal years, beginning after December
15, 2021. An entity should apply ASU 2020-01 prospectively at the beginning of
the interim period that includes the adoption date. The adoption of ASU 2020-01
is not expected to have material impact on the Company's 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, 2021; however, early adoption is permitted. The Company does not
expect the adoption of this standard have a material impact on the consolidated
financial statements.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other
(Topic 350): Simplifying the Test for Goodwill Impairment," which eliminates
step two from the goodwill impairment test. Under ASU 2017-04, an entity should
recognize an impairment charge for the amount by which the carrying amount of a
reporting unit exceeds its fair value up to the amount of goodwill allocated to
that reporting unit. All other entities, including not-for-profit entities, that
are adopting the amendments in this Update should do so for their annual or any
interim goodwill impairment tests in fiscal years beginning after December 15,
2021. The adoption of ASU 2017-04 is not expected to have material impact on the
Company's 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.
43
Recent Financings
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 $25 million with key terms
listed as follows:
· 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 November 12, 2024
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. Upon closing of the ABL, the Company paid
$796,035 financing fees including 2% of $25.0 million or $500,000 paid to its
financial advisor. The financing fees are recorded as debt discount and to be
amortized over three years as financing expenses, the term of the ABL. For the
year ended June 30, 2022, the Company recorded in interest expense - $176,812 of
amortization of debt discount and $182,543 of interest expense and credit
utilization fees. As of June 30, 2022, the outstanding amount of the long-term
revolving loan payable, net of debt discount, was $12,314,627, including
interest payable of $182,543.
Promissory note payable and Investment Payable
On February 15, 2022, as part of the consideration for acquisition of Anivia
Limited, the Company issued a two-year unsecured 6% subordinated promissory
note, payable in equal semi-annual installments commencing August 15, 2022 (the
"Purchase Note"). The principal amount of the Purchase Note was $3.5 million
with a fair value of $3.6 million as of February 15, 2022. For the year ended
June 30, 2022, the Company recorded accrued interest of $78,750 and amortization
of note premium of $18,609. As of June 30, 2022, the outstanding balance of the
Purchase Note was $3,660,770, including $78,750 of accrued interest and $82,020
of unamortized premium.
In addition, $1,500,000 in cash was to be paid after closing. However, as of the
date of this report, the $1.5 million cash portion of the consideration, which
was presented as an investment payable, had not yet been paid as the seller's
bank account was still not opened due to delays in accessing the bank resulting
from COVID-19 conditions and restrictions in place in Hong Kong and China.
44
Initial Public Offering
On May 11, 2021, the Company entered into an underwriting agreement (the
"Underwriting Agreement") with D.A. Davidson & Co., a Delaware limited liability
company ("D.A. Davidson"), pursuant to which D.A. Davidson agreed to act as the
lead underwriter in our initial public offering (the "IPO") of up to 3,864,000
shares of the Company's common stock, at an initial public offering price of
$5.00 per share (the "IPO Purchase Price"). The IPO closed on May 14, 2021, with
the sale of 3,360,000 shares of the Company's Common Stock for gross proceeds of
$16.80 million, and on May 21, 2021, the Company closed on a $2.52 million
overallotment option through the sale of an additional 504,000 shares at the IPO
Purchase Price.
Private Placement of Convertible Notes and Warrants
On January 27, 2021, the Company completed a private placement offering pursuant
to which we sold to two accredited investors an aggregate of $3,000,000 of our
6% convertible notes due six months from the date of issuance, subject to
extension as provided below (the "Convertible Notes"), and warrants (the
"Warrants") pursuant to an exemption from registration under Rule 506(b) of
Regulation D of the Securities Act of 1933, as amended. Boustead Securities, LLC
acted as placement agent in the Convertible Note and Warrant offering and
received commissions and non-accountable reimbursements of 8% of the gross
proceeds received, of which one-half of such fees and expenses were payable upon
the conversion of the Convertible Notes. In connection with the Convertible Note
and Warrant offering, we issued placement agent warrants to purchase 7% of the
shares of Common Stock underlying the Convertible Notes exercisable at the
conversion price of the Convertible Note (the "Conversion Price"), of which
Boustead Securities, LLC received 80% of the placement agent warrants, which
were cashlessly exercised for a total of 21,378 shares of Common Stock on May
14, 2021.
Upon completion of our IPO, the Convertible Notes automatically converted into
857,144 shares of common stock in accordance with the terms of the Convertible
Notes. In addition to the Convertible Notes, the purchasers of the Convertible
Notes received three-year warrants entitling the holders to purchase a total of
685,714 shares of Common Stock which equals 80% of the number of shares of
Common Stock issuable upon conversion of the Convertible Notes. In the event the
Convertible Notes are repaid in cash by the Company, the warrants will expire
and have no further value.
This description of Convertible Notes and Warrants is intended to be a useful
overview of the material provisions of the Convertible Notes and Warrants.
However, you should read the Form of Convertible Note and Warrant for a complete
description of the obligations of the Company.
Private Placement of Series A Convertible Preferred Stock
On December 30, 2020, the Company sold in a private placement to approximately
three accredited investors under Rule 506(b) promulgated under the Securities
Act of 1933, as amended, an aggregate of 34,500 shares of the Company's Series A
convertible preferred stock (the "Series A Preferred Stock") and received gross
proceeds of $345,000. Boustead Securities, LLC acted as placement agent in such
private placement and received commissions of $24,150 or 7% of the gross
proceeds received, a non-accountable expense allowance of 1% of such gross
proceeds and warrants to purchase 2,415 shares of Series A Preferred Stock at an
exercise price equal to $10 per share, the offering price of the Series A
Preferred Stock, which warrants were cashlessly exercised for a total of 3,073
shares of common stock on May 14, 2021. Upon completion of our IPO, the Series A
Preferred Stock automatically converted into a total of 98,572 shares of our
common stock.
45
Terms of the Series A Convertible Preferred Stock
Pursuant to the certificate of designations of rights, privileges and
limitations, the Series A Preferred Stock, prior to conversion:
· pays a dividend of nine percent (9%) per annum (the "Dividend"), which
Dividend shall be cumulative and payable in cash only in the event of
Redemption of the Series A Preferred Stock. In the event that the
Series A Preferred Stock is converted into shares of Common Stock, no
Dividend shall accrue or be payable;
· has one vote per share; however, shall have no right to vote as a
separate class on any matter submitted to vote by the stockholders of
the Corporation, excluding any proposed amendment that would adversely
alter or change any preference or any relative or other right given to
the Series A Preferred Stock, in which event the Series A Preferred
Stock may vote as a separate class with respect to such amendment;
· on a sale or liquidation of the Company the Series A Preferred Stock
has a $10.00 per share preference over the Company Common Stock;
· by its terms, upon consummation of this offering, all of the issued and
outstanding shares of Series A Preferred Stock will automatically
convert into shares of the Common Stock (the "Conversion Shares") at a
conversion price equal to 70% of the initial price per share of the
Common Stock upon closing of the IPO);
· if the IPO has not been completed by December 31, 2021, the Company
shall redeem and repurchase for cash all of the outstanding shares of
Series A Preferred Stock for a purchase price equal to (a) the product
of multiplying the $10.00 Stated Value of each outstanding share of
Series A Preferred Stock by the total number of outstanding shares of
Series A Preferred Stock, plus (b) all accrued and unpaid Dividends
owed thereon.
Emerging Growth Company
We are an "emerging growth company," as defined in the Jumpstart Our Business
Startups Act of 2012, or the JOBS Act. Accordingly, certain specified reporting
and other regulatory requirements for public companies are reduced for
businesses that meet the qualifications for emerging growth companies.
These provisions include:
(1) an exemption from the auditor attestation requirement in the assessment of
our internal controls over financial reporting required by Section 404 of the
Sarbanes-Oxley Act of 2002;
(2) an exemption from the adoption of new or revised financial accounting
standards until they would apply to private companies;
(3) an exemption from compliance with any new requirements adopted by the Public
Company Accounting Oversight Board, or the PCAOB, requiring mandatory audit
firm rotation or a supplement to the auditor's report in which the auditor
would be required to provide additional information about our audit and our
financial statements; and
(4) reduced disclosure about our executive compensation arrangements.
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