10-Q 1 ipower_i10q-123123.htm FORM 10-Q FOR DEC 2023
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Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2023

 

OR

 

  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______________ to ______________

 

Commission File Number 001-40391

 

iPower Inc.

(Exact name of registrant as specified in its charter)

 

Nevada   82-5144171
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

8798 9th Street

Rancho Cucamonga, CA 91730

(Address of principal executive offices) (Zip Code)

 

(626) 863-7344

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock   IPW   The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer   Accelerated filer  
  Non-accelerated filer   Smaller reporting company  
        Emerging growth company  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

 

The number of shares outstanding of the registrant’s common stock on February 14, 2024 was 29,818,286.

 

 

 

   

 

 

iPower Inc.

 

TABLE OF CONTENTS

 

      Page No.
       
  PART I. Financial Information    
       
Item 1. Unaudited Condensed Consolidated Financial Statements.   3
       
  Unaudited Condensed Consolidated Balance Sheets as of December 31, 2023 and June 30, 2023   3
       
  Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended December 31, 2023 and 2022   4
       
  Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended December 31, 2023 and 2022   5
       
  Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2023 and 2022   6
       
  Notes to Unaudited Condensed Consolidated Financial Statements   7
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   38
       
Item 3. Quantitative and Qualitative Disclosures About Market Risk   49
       
Item 4. Controls and Procedures   49
       
  PART II. Other Information    
       
Item 1. Legal Proceedings   50
       
Item 1A. Risk Factors   50
       
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds   51
       
Item 3. Defaults Upon Senior Securities   51
       
Item 4. Mine Safety Disclosures   51
       
Item 5. Other Information   51
       
Item 6. Exhibits   52
       
  Signatures   53

 

 

 

 2 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

iPower Inc. and Subsidiaries

Unaudited Condensed Consolidated Balance Sheets

As of December 31, 2023 and June 30, 2023

         
   December 31,   June 30, 
   2023   2023 
    (Unaudited)      
ASSETS          
Current assets          
Cash and cash equivalents  $1,488,027   $3,735,642 
Accounts receivable, net   11,765,833    14,071,543 
Inventories, net   15,782,322    20,593,889 
Prepayments and other current assets   1,483,209    2,858,196 
Total current assets   30,519,391    41,259,270 
           
Non-current assets          
Right of use - non-current   7,141,633    7,837,345 
Property and equipment, net   456,006    536,418 
Deferred tax assets   3,122,363    2,155,250 
Non-current prepayments   390,612    531,456 
Goodwill   3,034,110    3,034,110 
Investment in joint venture   31,287    33,113 
Intangible assets, net   3,955,385    4,280,071 
Other non-current assets   419,289    427,254 
Total non-current assets   18,550,685    18,835,017 
           
Total assets  $49,070,076   $60,094,287 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities          
Accounts payable  $13,931,800   $13,244,957 
Credit cards payable   340,912    366,781 
Customer deposit   340,876    350,595 
Other payables and accrued liabilities   3,715,996    4,831,067 
Advance from shareholders   87,305    85,200 
Lease liability - current   2,065,177    2,159,173 
Short-term loan payable - related party   1,032,189     
Long-term promissory note payable - current portion   1,150,508    2,017,852 
Revolving loan payable, net   2,862,857     
Income taxes payable   283,519    276,683 
Total current liabilities   25,811,139    23,332,308 
           
Non-current liabilities          
Long-term revolving loan payable, net       9,791,191 
Lease liability - non-current   5,503,365    6,106,047 
Total non-current liabilities   5,503,365    15,897,238 
           
Total liabilities   31,314,504    39,229,546 
           
Commitments and contingency        
           
Stockholders' Equity          
Preferred stock, $0.001 par value; 20,000,000 shares authorized; 0 shares issued and outstanding at December 31, 2023 and June 30, 2023        
Common stock, $0.001 par value; 180,000,000 shares authorized; 29,710,939 and 29,710,939 shares issued and outstanding at December 31, 2023 and June 30, 2023   29,712    29,712 
Additional paid in capital   29,883,647    29,624,520 
Accumulated deficits   (11,903,785)   (8,702,442)
Non-controlling interest   (30,906)   (24,915)
Accumulated other comprehensive loss   (223,096)   (62,134)
Total stockholders’ equity   17,755,572    20,864,741 
           
Total liabilities and stockholders’ equity  $49,070,076   $60,094,287 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 3 

 

 

iPower Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Operations

For the Three and Six Months Ended December 31, 2023 and 2022

 

                             
  

For the Three Months Ended

December 31,

  

For the Six Months Ended

December 31,

 
   2023   2022   2023   2022 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
                 
REVENUES  $16,800,122   $19,254,590   $43,308,496   $45,277,263 
                     
TOTAL REVENUES   16,800,122    19,254,590    43,308,496    45,277,263 
                     
COST OF REVENUES   9,481,882    11,285,064    24,231,411    27,322,021 
                     
GROSS PROFIT   7,318,240    7,969,526    19,077,085    17,955,242 
                     
OPERATING EXPENSES:                    
Selling and fulfillment   6,936,980    9,338,737    17,000,451    17,757,549 
General and administrative   2,933,607    2,713,355    5,897,658    5,813,531 
Impairment loss - goodwill               3,060,034 
Total operating expenses   9,870,587    12,052,092    22,898,109    26,631,114 
                     
LOSS FROM OPERATIONS   (2,552,347)   (4,082,566)   (3,821,024)   (8,675,872)
                     
OTHER INCOME (EXPENSE)                    
Interest expenses   (182,612)   (314,119)   (410,977)   (562,160)
Loss on equity method investment   (801)   (3,938)   (1,826)   (7,328)
Other non-operating income   128,838    59,600    61,672    271,360 
Total other expenses, net   (54,575)   (258,457)   (351,131)   (298,128)
                     
LOSS BEFORE INCOME TAXES   (2,606,922)   (4,341,023)   (4,172,155)   (8,974,000)
                     
PROVISION FOR INCOME TAX BENEFIT   (688,939)   (1,047,749)   (964,821)   (1,495,545)
NET LOSS   (1,917,983)   (3,293,274)   (3,207,334)   (7,478,455)
                     
Non-controlling interest   (3,155)   (2,835)   (5,991)   (5,640)
                     
NET LOSS ATTRIBUTABLE TO IPOWER INC.  $(1,914,828)  $(3,290,439)  $(3,201,343)  $(7,472,815)
                     
OTHER COMPREHENSIVE LOSS                    
Foreign currency translation adjustments   (160,255)   47,149    (160,962)   (64,326)
                     
COMPREHENSIVE LOSS ATTRIBUTABLE TO IPOWER INC.  $(2,075,083)  $(3,243,290)  $(3,362,305)  $(7,537,141)
                     
WEIGHTED AVERAGE NUMBER OF COMMON STOCK                    
Basic   29,790,242    29,742,620    29,777,378    29,687,878 
                     
Diluted   29,790,242    29,742,620    29,777,378    29,687,878 
                     
LOSSES PER SHARE                    
Basic  $(0.06)  $(0.11)  $(0.11)  $(0.25)
                     
Diluted  $(0.06)  $(0.11)  $(0.11)  $(0.25)

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 4 

 

 

iPower Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity

For the Three and Six Months Ended December 31, 2023 and 2022

 

                             
   Common Stock   Additional  

Retained Earnings

(Accumulated

   Non-controlling  

Accumulated other

Comprehensive

     
   Shares   Amount   Paid in Capital   Deficit)   interest   income (loss)   Total 
Balance, June 30, 2023   29,710,939   $29,712   $29,624,520   $(8,702,442)  $(24,915)  $(62,134)  $20,864,741 
Net loss               (1,286,515)   (2,836)       (1,289,351)
Stock-based compensation           117,882                117,882 
Foreign currency translation adjustments                       (707)   (707)
Balance, September 30, 2023, unaudited   29,710,939   $29,712   $29,742,402   $(9,988,957)  $(27,751)  $(62,841)  $19,692,565 
Net loss               (1,914,828)   (3,155)       (1,917,983)
Stock-based compensation           141,245                141,245 
Foreign currency translation adjustments                       (160,255)   (160,255)
Balance, December 31, 2023, unaudited   29,710,939   $29,712   $29,883,647   $(11,903,785)  $(30,906)  $(223,096)  $17,755,572 
                                    
                                    
                                    
                                    
Balance, June 30, 2022   29,572,382   $29,573   $29,111,863   $3,262,948   $(13,232)  $5,678   $32,396,830 
Net loss               (4,182,376)   (2,805)       (4,185,181)
Stock-based compensation           137,882                137,882 
Foreign currency translation adjustments                       (111,475)   (111,475)
Balance, September 30, 2022, unaudited   29,572,382   $29,573   $29,249,745   $(919,428)  $(16,037)  $(105,797)  $28,238,056 
Net loss               (3,290,439)   (2,835)       (3,293,274)
Stock-based compensation           132,266                132,266 
Foreign currency translation adjustments                       47,149    47,149 
Balance, December 31, 2022, unaudited   29,572,382   $29,573   $29,382,011   $(4,209,867)  $(18,872)  $(58,648)  $25,124,197 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

 

 5 

 

iPower Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

For the Six Months Ended December 31, 2023 and 2022

 

           
   For the Six Months Ended December 31, 
   2023   2022 
   (Unaudited)   (Unaudited) 
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(3,207,334)  $(7,478,455)
Adjustments to reconcile net loss to cash provided by operating activities:          
Depreciation and amortization expense   402,342    393,168 
Inventory reserve   222,755    74,998 
Loss on equity method investment   1,826    7,328 
Impairment loss - goodwill       3,060,034 
Stock-based compensation expense   259,127    270,148 
Non-cash operating lease expense   (966)   30,023 
Amortization of debt premium / discount and non-cash financing costs   107,452    107,349 
Change in operating assets and liabilities          
Accounts receivable   2,305,710    5,785,530 
Inventories   4,588,812    7,100,607 
Deferred tax assets / liabilities   (967,113)   (1,788,694)
Prepayments and other current assets   1,278,027    1,729,990 
Non-current prepayments   140,844    215,834 
Other non-current assets   7,965    5,420 
Accounts payable   686,843    2,607,691 
Credit cards payable   (25,869)   (584,648)
Customer deposit   (9,719)   95,260 
Other payables and accrued liabilities   (848,767)   (3,844,758)
Income taxes payable   103,796    (8,617)
Net cash provided by operating activities   5,045,731    7,778,208 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of equipment       (127,367)
Net cash used in investing activities       (127,367)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from related parties       94,409 
Payments to related parties       (82,500)
Proceeds from short-term loans - related party   2,000,000    31,385 
Payment on investment payable       (1,500,000)
Payments on short-term loans - related party   (1,000,000)    
Payments on short-term loans   (875,000)   (906,385)
Proceeds from long-term loans       3,022,655 
Payments on long-term loans   (7,300,000)   (6,200,000)
Net cash used in financing activities   (7,175,000)   (5,540,436)
           
EFFECT OF EXCHANGE RATE ON CASH   (118,346)   64,773 
           
CHANGES IN CASH   (2,247,615)   2,175,178 
           
CASH AND CASH EQUIVALENT, beginning of period   3,735,642    1,821,947 
           
CASH AND CASH EQUIVALENT, end of period  $1,488,027   $3,997,125 
           
SUPPLEMENTAL CASH FLOW INFORMATION:          
Cash paid for income tax  $   $55,000 
Cash paid for interest  $   $ 
           
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING TRANSACTIONS:          
Right of use assets acquired under new operating leases  $632,732   $ 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 6 

 

 

iPower Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

As of December 31, 2023 and June 30, 2023 and for the Three and Six Months Ended December 31, 2023 and 2022

 

 

Note 1 - Nature of business and organization

 

iPower Inc., formerly known as BZRTH Inc., a Nevada corporation (the “Company”), was incorporated on April 11, 2018. The Company is principally engaged in the marketing and sale of consumer home, garden and other products and accessories mainly in the North America.

 

On May 18, 2021, the Company acquired 100% of the equity ownership of its variable interest entity, E Marketing Solution Inc. (“E Marketing”), an entity incorporated in California and owned by one of the minority shareholders of the Company. As a result, E Marketing became the Company’s wholly owned subsidiary.

 

On May 18, 2021, the Company acquired 100% of the equity ownership of its variable interest entity, Global Product Marketing Inc. (“GPM”), an entity which was incorporated in the State of Nevada on September 4, 2020, and was owned by Chenlong Tan, the Company’s Chairman, CEO and President, and one of the majority shareholders of the Company. As a result, GPM became the Company’s wholly owned subsidiary.

 

On January 13, 2022, the Company entered into a joint venture agreement and formed a Nevada limited liability company, Box Harmony, LLC (“Box Harmony”), for the principal purpose of providing logistics services primarily for foreign-based manufacturers and distributors who desire to sell their products online in the United States, with such logistics services to include, without limitation, receiving, storing and transporting such products. The Company owns 40% of the equity interest in Box Harmony, retaining significant influence, but does not own a majority equity interest in or otherwise control Box Harmony. See details at Note 3 below.

 

On February 10, 2022, the Company entered into another joint venture agreement and formed a Nevada limited liability company, Global Social Media, LLC (“GSM”), for the principal purpose of creating a social media platform in order to provide content and services to assist businesses, including the Company and other businesses, in marketing their products. The Company owns 60% of the equity interest in GSM and controls its operations. See details at Note 3 below.

 

On February 15, 2022, the Company acquired 100% of the ordinary shares of Anivia Limited (“Anivia”), 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”), Anivia, Fly Elephant Limited, a Hong Kong company, Dayourenzai (Shenzhen) Technology Co., Ltd., and Daheshou (Shenzhen) Information Technology Co., Ltd. Anivia 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 contractual arrangements summarized in Note 4 below, the business, revenues and profits of Daheshou (Shenzhen) Information Technology Co., Ltd., a company organized under the Laws of the PRC (“DHS”) and located in Shenzhen, China. See details on Note 4 below.

 

 

 

 7 

 

 

Note 2 – Basis of Presentation and Summary of significant accounting policies

 

Basis of presentation

 

The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries and VIE and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the requirements of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These unaudited condensed consolidated financial statements have been prepared on the same basis as the Company’s annual consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for the fair statement of the Company’s financial information. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending June 30, 2024, or for any other interim period or for any other future year. All intercompany balances and transactions have been eliminated in consolidation.

 

These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Annual Report for the year ended June 30, 2023, which are included in Form 10-K filed with the SEC on September 14, 2023.

 

Principles of Consolidation

 

The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries, E Marketing Solution Inc., Global Product Marketing Inc., Global Social Media, LLC, and Anivia Limited and its subsidiaries and VIE, including Fly Elephant Limited, Dayourenzai (Shenzhen) Technology Co., Ltd. and Daheshou (Shenzhen) Information Technology Co., Ltd. All inter-company balances and transactions have been eliminated.

 

Emerging Growth Company Status

 

The company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012, (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

 

Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the company’s financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of utilizing the emerging growth company reduced reporting requirements difficult.

 

 

 

 8 

 

 

Use of estimates and assumptions

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities reported and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the Company’s actual results could differ significantly from those estimates.

 

Foreign currency translation and transactions

 

The reporting and functional currency of iPower and its subsidiaries is the U.S. dollar (USD). iPower’s WFOE and VIE in China uses the local currency, Renminbi (“RMB”), as its functional currency. Assets and liabilities of the VIE are translated at the current exchange rate as quoted by the People’s Bank of China (the “PBOC”) at the end of the period. Income and expense accounts are translated at the average translation rates and the equity accounts are translated at historical rates. Translation adjustments resulting from this process are included in accumulated other comprehensive income (loss) in the statement of changes in stockholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

 

The balance sheet amounts of the VIE, with the exception of equity, on December 31, 2023, were translated at 7.0786 RMB to $1.00. The equity accounts were stated at their historical rates. The average translation rates applied to statements of operations and comprehensive income (loss) accounts for the six months ended December 31, 2023 was 7.2201 RMB to $1.00. Cash flows were also translated at average translation rates for the period and, therefore, amounts reported on the statement of cash flows would not necessarily agree with changes in the corresponding balances on the unaudited condensed consolidated balance sheet.

 

Cash and cash equivalents

 

Cash and cash equivalents consist of amounts held as cash on hand and bank deposits.

 

From time to time, the Company may maintain bank balances in interest bearing accounts in excess of the $250,000, which is currently the maximum amount insured by the FDIC for interest bearing accounts (there is currently no insurance limit for deposits in noninterest bearing accounts). The Company has not experienced any losses with respect to cash. Management believes our Company is not exposed to any significant credit risk with respect to its cash.

 

Accounts receivable, net

 

During the ordinary course of business, the Company extends unsecured credit to its customers. Accounts receivable are stated at the amount the Company expects to collect from customers. Management reviews its accounts receivable balances each reporting period to determine if an allowance for credit loss is required.

 

 

 

 9 

 

 

The Company evaluates the creditworthiness of all of its customers individually before accepting them and continuously monitors the recoverability of accounts receivable. If there are any indicators that a customer may not make payment, the Company may consider making provision for non-collectability for that particular customer. At the same time, the Company may cease further sales or services to such customer. The following are some of the factors that the Company develops allowance for credit losses:

 

  · the customer fails to comply with its payment schedule;
     
  · the customer is in serious financial difficulty;
     
  · a significant dispute with the customer has occurred regarding job progress or other matters;
     
  · the customer breaches any of its contractual obligations;
     
  · the customer appears to be financially distressed due to economic or legal factors;
     
  · the business between the customer and the Company is not active; or
     
  · other objective evidence indicates non-collectability of the accounts receivable.

 

Accounts receivable are recognized and carried at the carrying amount less an allowance for credit losses, if any. The Company maintains an allowance for credit losses resulting from the inability of its customers to make required payments based on contractual terms. The Company reviews the collectability of its receivables on a regular and ongoing basis. The Company has also included in calculation of allowance for credit losses the potential impact of the COVID-19 pandemic on our customers’ businesses and their ability to pay their accounts receivable. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. The Company also considers external factors to the specific customer, including current conditions and forecasts of economic conditions, including the potential impact of the COVID-19 pandemic. In the event we recover amounts previously written off, we will reduce the specific allowance for credit losses.

 

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 Box Harmony’s 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 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 regarding the acquisition.

 

 

 

 10 

 

 

Variable interest entities

 

On February 15, 2022, the Company acquired 100% of the ordinary shares of 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 has been provided by the Company following the February 15, 2022 acquisition. 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 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 regarding the acquisition.

 

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, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The Company engaged an independent third-party valuation firm in August 2022 to conduct an evaluation of goodwill impairment for the Company as a whole at the consolidated reporting unit level as of June 30, 2022, which evaluation was conducted prior to the Company’s filing of its Annual Report on Form 10-K for the period ended June 30, 2022. Due to the decrease in the Company’s share price subsequent to the filing of the June 30, 2022 Form 10-K and the net loss incurred during the quarter ended September 30, 2022, the Company engaged the same valuation firm to review goodwill for impairment. Based on this review, the Company concluded an impairment loss of $3,060,034 as of September 30, 2022 was required. The impairment amount was determined based on the discounted cash flows with the revised projections reflecting the increase in freight and storage costs in the quarter ended September 30, 2022. The Company also considered the Market Capital Method, an alternative market approach, which suggested the Company’s goodwill is partially impaired.

 

During the period ended December 31, 2023, in addition to a qualitative goodwill impairment analysis following the steps laid out in ASC 350-20-35-3C, the Company also performed a quantitative analysis using the Discounted Cash Flow and Market Capital Method and noted no goodwill impairment. As of December 31, 2023 and 2022, the goodwill balance amounted to $3,034,110 and $3,034,110, respectively.

 

Intangible Assets, net

 

Finite life intangible assets at December 31, 2023 include a covenant not to compete, supplier relationships and software recognized as part of the acquisition of Anivia. 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 relationships  6 years
Software  5 years

 

The Company reviews the recoverability of long-lived assets, including 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 December 31, 2023 and 2022, there were no indicators of impairment.

 

 

 

 11 

 

 

Fair values of financial instruments

 

ASC 825, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of fair value information about financial instruments. ASC 820, “Fair Value Measurements” defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.

 

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and all other current assets and liabilities approximate fair values due to their short-term nature.

 

On February 15, 2022, as part of the consideration paid for the acquisition of Anivia, 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. On February 15, 2022, the Company evaluated the fair value of the Purchase Note to be $3.6 million using the following inputs:

    
Corporate bond yield   3.1% 
Risk-free rate   1.6% 
Liquidity premium   0.4% 
Discount rate   3.5% 

 

As of December 31, 2023, the outstanding balance of the Purchase Note was $1,150,508, including principal due of $875,000, a premium of $6,445, and $269,063 of accrued interest.

 

For other financial instruments to be reported at fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines the fair value of its financial instruments based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

 

Level 1 – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

 

Level 2 – Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

 

Level 3 – Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

 

The Company does not have any assets or liabilities measured at fair value on a recurring basis. We measure certain non-financial assets on a non-recurring basis, including goodwill. As a result of those measurements, we recognized an impairment charge of $3.1 million during the year ended June 30, 2023 as follows:

                    
   Total Fair
Value
   Level 1   Level 2   Level 3   Total
Impairment
Loss
 
Goodwill  $3,034,110   $   $   $3,034,110   $3,060,034 
Total  $3,034,110   $   $   $3,034,110   $3,060,034 

 

Goodwill, with a total carrying value of $6.1 million, was written down to its fair value of $3.0 million, resulting in an impairment charge of $3,060,034, which was recorded in earnings for the year ended June 30, 2023. The fair value of goodwill was determined based on the discounted cash flow method, which is an income approach, which required the use of inputs that were unobservable in the marketplace (Level 3), including a discount rate that would be used by a market participant, projections of revenues and cash flows with the revised projections reflecting the increase in freight and storage costs in the current interim quarter, among others.

 

 

 

 12 

 

 

Revenue recognition

 

The Company recognizes revenue from product sales revenues, net of promotional discounts and return allowances, when the following revenue recognition criteria are met: a contract has been identified, separate performance obligations are identified, the transaction price is determined, the transaction price is allocated to separate performance obligations and revenue is recognized upon satisfying each performance obligation. The Company transfers the risk of loss or damage upon shipment, therefore, revenue from product sales is recognized when it is shipped to the customer. Return allowances, which reduce product revenue by the Company’s best estimate of expected product returns, are estimated using historical experience.

  

The Company evaluates the criteria of ASC 606 - Revenue Recognition Principal Agent Considerations in determining whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions. Generally, when the Company is primarily responsible for fulfilling the promise to provide a specified good or service, the Company is subject to inventory risk before the good or service has been transferred to a customer and the Company has discretion in establishing the price, revenue is recorded at gross.

 

Payments received prior to the delivery of goods to customers are recorded as customer deposits.

 

The Company periodically provides incentive offers to its customers to encourage purchases. Such offers include current discount offers, such as percentage discounts off current purchases and other similar offers. Current discount offers, when accepted by the Company’s customers, are treated as a reduction to the purchase price of the related transaction.

 

Sales discounts are recorded in the period in which the related sale is recognized. Sales return allowances are estimated based on historical amounts and are recorded upon recognizing the related sales. Shipping and handling costs are recorded as selling expenses.

 

Advertising costs

 

Advertising costs are expensed as incurred.

 

Total advertising and promotional costs included in selling and fulfillment expenses for the three and six months ended December 31, 2023 and 2022 were as following:

                
   Three Months Ended December 31,   Six Months Ended December 31, 
    2023    2022    2023    2022 
Advertising and promotion  $1,139,239   $1,306,112   $2,709,981   $2,472,461 

 

Cost of revenue

 

Cost of revenue mainly consists of costs for purchases of products and related inbound freight and delivery fees.

 

Operating expenses

 

Operating expenses, which consist of selling and fulfillment and general and administrative expenses, are expensed as incurred.

 

 

 

 13 

 

 

Inventory, net

 

Inventory consists of finished goods ready for sale and is stated at the lower of cost or market. The Company values its inventory using the weighted average costing method. The Company’s policy is to include as a part of inventory and cost of goods sold any freight incurred to ship the product from its vendors to warehouses. Outbound freight costs related to shipping costs to customers are considered periodic costs and are reflected in selling and fulfillment expenses. The Company regularly reviews inventory and considers forecasts of future demand, market conditions and product obsolescence.

 

If the estimated realizable value of the inventory is less than cost, the Company makes provisions in order to reduce its carrying value to its estimated market value. The Company also reviews inventory for slow moving inventory and obsolescence and records allowance for obsolescence.

 

Debt Issuance Costs

 

Costs incurred in connection with the issuance of debt are deferred and amortized as interest expense over the term of the related debt using the effective interest method. To the extent that the debt is outstanding, these amounts are reflected in the unaudited condensed consolidated balance sheets as direct deductions from the carrying amount of the outstanding borrowings.

 

Segment reporting

 

The Company follows ASC 280, Segment Reporting. The Company’s chief operating decision maker, the Chief Executive Officer, reviews the consolidated results of operations when making decisions about allocating resources and assessing the performance of the Company as a whole and, hence, the Company has only one reportable segment. The Company does not distinguish between markets or segments for the purpose of internal reporting. For the six months ended December 31, 2023 and 2022, sales through Amazon to Canada and other foreign countries were approximately 9.8% and 13.5% of the Company’s total sales. During the six months ended December 31, 2023, sales of hydroponic products, including ventilation and grow light systems, was approximately 19.3% of the Company’s total sales and the remaining 80.7% consisted of general gardening, home goods, and other products and accessories. During the six months ended December 31, 2022, sales of hydroponic products, including ventilation and grow light systems, were approximately 47% of the Company’s total sales and the remaining 53% consisted of general gardening, home goods and other products and accessories. As of December 31, 2023 and June 30, 2023, the Company had approximately $2.1 million and $1.6 million of inventory stored in China, respectively. The Company’s majority of long-lived assets are located in California, United States, a majority of the deferred tax assets are U.S. related, and a majority of the Company’s revenues are derived from within the U.S.

 

Leases

 

The Company records right-of-use (“ROU”) assets and related lease obligations on the balance sheet.

  

ROU assets represent our right to use an underlying asset for the lease terms and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company generally uses its incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

 

 

 

 14 

 

 

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 costs 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 which contains both a performance and a market condition, and where both conditions must be satisfied 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 the performance condition will be met. If the performance condition is ultimately not met, compensation costs 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.

 

Income taxes

 

The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their perspective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded, when necessary, to reduce deferred tax assets to the amount expected to be realized.

 

The Company has analyzed filing positions in each of the federal and state jurisdictions where the Company is required to file income tax returns, as well as open tax years in such jurisdictions. The Company has identified the U.S. federal jurisdiction, and the states of Nevada and California, as its “major” tax jurisdictions. However, the Company has certain tax attribute carryforwards which will remain subject to review and adjustment by the relevant tax authorities until the statute of limitations closes with respect to the year in which such attributes are utilized.

 

The Company believes that our income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740, Income Taxes. The Company’s policy for recording interest and penalties associated with income-based tax audits is to record such items as a component of income taxes.

  

Commitments and contingencies

 

In the ordinary course of business, the Company is subject to certain contingencies, including legal proceedings and claims arising out of the business that relate to a wide range of matters, such as government investigations and tax matters. The Company recognizes a liability for such contingency if it determines it is probable that a loss has occurred and a reasonable estimate of the loss can be made. The Company may consider many factors in making these assessments including historical and specific facts and circumstances of each matter.

 

 

 

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Earnings per share

 

Basic earnings per share are computed by dividing net income attributable to holders of common stock by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share reflect the potential dilution that could occur if securities convertible or exercisable into common stock were issued upon conversion or exercise.

 

Recently issued accounting pronouncements

 

In December 2023, The FASB issued ASU 2023-09, Improvements to Income Tax Disclosures. Under this ASU, public business entities must annually “(1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than 5 percent of the amount computed by multiplying pretax income [or loss] by the applicable statutory income tax rate).” This ASU’s amendments are effective for public business entities for annual periods beginning after December 15, 2024. For entities other than public business entities, the amendments are effective for annual periods beginning after December 15, 2025. Entities are permitted to early adopt the standard “for annual financial statements that have not yet been issued or made available for issuance.” The amendments should be applied on a prospective basis. Retrospective application is permitted. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.

 

In November 2023, The FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The amendments apply to all public entities that are required to report segment information in accordance with Topic 280, Segment Reporting. The amendments in this ASU are intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. The key amendments: 1. Require that a public entity disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker (CODM) and included within each reported measure of segment profit or loss. 2. Require that a public entity disclose, on an annual and interim basis, an amount for other segment items by reportable segment and a description of its composition. The other segment items category is the difference between segment revenue less the significant expenses disclosed and each reported measure of segment profit or loss. 3. Require that a public entity provide all annual disclosures about a reportable segment’s profit or loss and assets currently required by FASB Accounting Standards Codification® Topic 280, Segment Reporting, in interim periods. 4. Clarify that if the CODM uses more than one measure of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources, a public entity may report one or more of those additional measures of segment profit. However, at least one of the reported segment profit or loss measures (or the single reported measure, if only one is disclosed) should be the measure that is most consistent with the measurement principles used in measuring the corresponding amounts in the public entity’s consolidated financial statements. 5. Require that a public entity disclose the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources. 6. Require that a public entity that has a single reportable segment provide all the disclosures required by the amendments in the ASU and all existing segment disclosures in Topic 280. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. A public entity should apply the amendments retrospectively to all prior periods presented in the financial statements. Upon transition, the segment expense categories and amounts disclosed in the prior periods should be based on the significant segment expense categories identified and disclosed in the period of adoption. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.

 

 

 

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In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiative. This ASU incorporates certain U.S. Securities and Exchange Commission (SEC) disclosure requirements into the FASB Accounting Standards Codification™ (“Codification”). The amendments in the ASU are expected to clarify or improve disclosure and presentation requirements of a variety of Codification Topics, allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the Codification with the SEC’s regulations. In SEC Release No. 33-10532, Disclosure Update and Simplification, issued August 17, 2018, the SEC referred certain of its disclosure requirements that overlap with, but require incremental information to, generally accepted accounting principles to the FASB for potential incorporation into the Codification. The ASU incorporates into the Codification 14 of the 27 disclosures referred by the SEC. They modify the disclosure or presentation requirements of a variety of Topics in the Codification. The requirements are relatively narrow in nature. Some of the amendments represent clarifications to, or technical corrections of, the current requirements. Because of the variety of Topics amended, a broad range of entities may be affected by one or more of those amendments. For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC removes that related disclosure from its rules. For all other entities, the amendments will be effective two years later. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and not become effective for any entity. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.

 

In September 2022, FASB issued ASU 2022-04, Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations. The amendments in this ASU require that a company that uses a supplier finance program in connection with the purchase of goods or services disclose sufficient information about the program to allow a user of financial statements to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude. ASU 2022-04 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2022, except for the rollforward of the supplier finance program obligations, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. An entity should apply ASU No. 2022-04 retrospectively to all periods in which a balance sheet is presented, except for the obligation rollforward, which should be applied prospectively. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

 

In June 2022, FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): 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 its 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 its consolidated financial statements.

 

 

 

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In March 2020 and January 2021, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting and ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope, respectively (collectively, “Topic 848”). Topic 848 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by Topic 848 are effective for all entities as of March 12, 2020 through December 31, 2022. In December 2022, the FASB issued ASU 2022-06, Reference Rate reform (Topic 848): Deferral of the Sunset Date of Topic 848, which deferred the sunset date of Topic 848, Reference Rate Reform to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The Company does not expect the adoption of this standard to have a material impact on the Company's 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 its 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. ASU 2017-04 became effective for accelerated filing companies for annual periods or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. 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, 2022. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has adopted ASU 2017-04. See the disclosures above on Goodwill for further details.

 

The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the consolidated financial position, statements of operations and cash flows.

 

Subsequent events

 

The Company evaluated subsequent events and transactions that occurred after the balance sheet date through the date that the consolidated financial statements are available to be issued. Material subsequent events that required recognition or additional disclosure in the unaudited condensed consolidated financial statements are presented.

 

Note 3 - Joint Ventures

 

Box Harmony, LLC

 

On January 13, 2022, the Company entered into a joint venture agreement (the “Joint Venture Agreement”) with Titanium Plus Autoparts, Inc., a California corporation (“TPA”), Tony Chiu (“Chiu”) and Bin Xiao (“Xiao”). Pursuant to the terms of the 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.

 

 

 

 18 

 

 

Following entry into the Joint Venture Agreement, Box Harmony issued a total of 6,000 certificated units of membership interest, designated as Class A voting units (“Equity Units”), as follows: (i) the Company agreed to contribute $50,000 in cash in exchange for 2,400 Equity Units in Box Harmony and agreed to provide Box Harmony with the use and access to certain warehouse facilities leased by the Company (see below), 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) Xiao received 2,400 Equity Units in exchange for $2,400 and his agreement to manage the day to day operations of Box Harmony.

 

Under the terms of the Box Harmony limited liability operating agreement (the “LLC Agreement”), TPA and Xiao each granted to the Company an unconditional and irrevocable right and option to purchase from Xiao and TPA at any time within the first 18 months following January 13, 2022, up to 1,200 Class A voting units, at an exercise price of $550 per Class A voting unit, for a total exercise price of up to $660,000. If such option is fully exercised, the Company would own 3,600 Equity Units or 60% of the total outstanding Equity Units. As of the date of this report, the Company had not exercised the option to purchase additional voting units from Xiao and TPA. The LLC Agreement prohibits the issuance of additional Equity Units and certain other actions unless approved in advance by the Company, that a noncontrolling right that would not be substantive to overcome the majority voting interests held by TPA and Xiao. In January 2023, TPA and Xiao transferred their 60% equity units to a third party without consideration as the LLC was still in development stage and did not have significant operations. The transfer of equity did not have any impact on the LLC’s financial statements.

 

As a result, the Company owns 40% of the equity interest in Box Harmony with significant influence but does not own a majority equity interest or otherwise control of Box Harmony. The Company accounts for its ownership interest in Box Harmony 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.

 

Global Social Media, LLC

 

On February 10, 2022, the Company 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 marketing 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. The LLC Agreement prohibits the issuance of additional Equity Units and certain other actions unless approved in advance by Bro Angel, creating a noncontrolling right that would not be substantive to overcome the majority voting interests held by the Company.

 

As of the date of this report, the members had not completed the capital contributions and no receivables were recorded.

 

Pursuant to the terms of the Agreements, the Company owns 60% of the equity interest in GSM and control of GSM’s operations. Based on ASU 2015-02, the Company consolidates GSM into its financial statements due to its majority equity ownership and control over operations. For the three and six months ended December 31, 2023 and 2022, the impact of GSM’s activities were immaterial to the Company’s unaudited condensed consolidated financial statements.

 

 

 

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Note 4 - Acquisition of Anivia Limited and Subsidiaries and Variable Interest Entity

 

On February 15, 2022, the Company acquired 100% of the ordinary shares of Anivia Limited (“Anivia”), 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”), Anivia, Fly Elephant Limited, a Hong Kong company, Dayourenzai (Shenzhen) Technology Co., Ltd. and Daheshou (Shenzhen) Information Technology Co., Ltd. Anivia 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 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 (“DHS”) and located in Shenzhen, China.

 

The contractual arrangements between the WFOE and DHS are established through a variable interest operating entity structure, which is reflected in (i) an exclusive business cooperation agreement, dated December 15, 2021, between the WFOE and DHS, (ii) an exclusive equity interest pledge agreement, dated December 15, 2021, between the WFOE and DHS in which the equity of DHS was pledged to the WFOE, (iii) an exclusive option agreement, dated December 15, 2021, between the WFOE, DHS and its equity holders, Li Zanyu and Xie Jing (the “Equity Holders), pursuant to which the Equity Holders give the WFOE the irrevocable and exclusive right to purchase the equity interests in DHS, and (iii) a power of attorney, dated December 15, 2021, pursuant to which Li Zanyu and Xie Jing, the holders of 100% of the equity interest of DHS, granted the WFOE all voting and other rights to their equity interest in DHS. According to the exclusive business cooperation agreement, in consideration for the services provided by the WFOE, DHS shall pay a service fee to the WFOE on annual basis (or at any time agreed by the Parties). The service fees for each year (or for any other period agreed to by the Parties) consist of a management fee and a fee for services provided, as reasonably determined by the WFOE based on the nature, complexity, time, and other market and operation factors. The WFOE may provide a separate confirmation letter and/or invoice to DHS to indicate the amount of service fees due for each service period; or the amount of services fees may be as set forth in the relevant contracts separately executed by the Parties. DHS is principally engaged in selling a wide range of products and providing logistics services in the PRC.

 

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. 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.

 

Total fair value of the consideration for the transaction was $10,629,000, which was paid to White Cherry as follows: at closing, the Company (i) paid $3,500,000 in the form of a two-year unsecured 6% subordinated promissory note, payable in equal semi-annual installments commencing August 15, 2022 (the “Purchase Note”), (ii) issued 3,083,700 restricted shares of the Company’s common stock, which shares were subject to a lock-up period of 180 days and remain subject to insider trading rules, and (iii) an additional $1,500,000 in cash which was to be paid after closing.

 

JP Morgan Chase Bank, the Company’s senior secured lender (“JPM”), consented to the transaction. In conjunction with obtaining JPM’s consent, the Company delivered an amendment to the pledge and security agreement with JPM, pursuant to which the Company pledged to JPM 65% of the equity interest of Anivia, Fly Elephant Limited and the WFOE.

 

On October 7, 2022, in conjunction with the Company’s entry into the Second Amendment to the Credit Agreement, the Company’s promissory note holder, White Cherry, entered into an amendment (the “Amendment”) to the subordination agreement, originally dated March 9, 2022 (the “Subordination Agreement”). The Amendment to the Subordination Agreement was amended solely for purposes of adjusting the definition of payment conditions under Section 2 of the Subordination Agreement such that “payment conditions” thereafter were to be deemed satisfied in connection with a permitted payment if (a) no event of default has occurred under the credit agreement and is continuing and (b) the Company has Excess Availability in the 30 days prior to the payment (as defined in the Second Amendment to the Credit Agreement) of no less than $7,500,000.

 

 

 

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In addition, in conjunction with the closing of the transaction, the WFOE entered into an employment agreement with Li Zanyu, dated February 15, 2022 (the “Employment Agreement”), pursuant to which Mr. Li was appointed to serve as general manager of the WFOE for a term of 10 years (through February 14, 2032), with annual base compensation of up to 500,000 RMB plus bonus as may be determined by the WFOE from time to time, in its sole discretion, based on Mr. Li’s performance. During his term of employment, Mr. Li may not engage in other employment without the consent of the WFOE.

  

The acquisition of Anivia was accounted for as a business combination under ASC 805. As the acquirer for accounting purposes, the Company has estimated the fair value of Anivia and its subsidiaries’ assets acquired and conformed the accounting policies of Anivia to its own accounting policies. The Company applied the income approach and cost approach in determining the fair value of the intangible assets, which intangible assets consisted of a covenant not to compete, supplier relationship and software. The fair value of the remaining assets acquired and liabilities assumed were not significantly different from their carrying values at the acquisition date. In addition, pursuant to the Transfer Agreement, the Sellers made certain representations and warranties, including that other than the items presented on the balance sheet on February 15, 2022, DHS, the operating VIE, was not subject to any loans, debts, liabilities, guarantees or other contingent liabilities at the Closing date. In the event of any breach of any of the representations and warranties, the sellers will bear joint and several liability for any direct or indirect losses suffered by the Company as a result thereof. The Company recognized approximately $6.1 million of goodwill in the transaction, which is primarily due to the subsumed assembled workforce intangible assets. Goodwill is not deductible for income tax purposes. The Company expensed with the acquisition certain legal and accounting costs of $54,702 as general and administration expenses and $50,000 paid to JPM as financing fees.

 

The following information summarizes the purchase consideration and allocation of the fair values assigned to the assets at the purchase date, February 15, 2022:

    
Fair Value of Purchase Price:    
Cash  $1,500,000 
Promissory note issued   3,600,627 
Common stock issued   5,528,373 
Total purchase consideration  $10,629,000 
      
Purchase Price Allocation:     
Covenant not to compete  $3,459,120 
Supplier relationship   1,179,246 
Software   534,591 
Current assets   1,784,113 
Property and equipment   46,548 
Rent deposit   52,707 
ROU asset   234,578 
Goodwill   6,094,144 
Deferred tax liabilities   (1,389,113)
Current liabilities   (1,143,076)
Lease liability   (223,858)
Total purchase consideration  $10,629,000 

  

In October 2022, the $1.5 million cash portion of the consideration, which was presented as investment payable, was fully paid off.

 

The results of operations of Anivia since February 16, 2022 have been included in the Company's consolidated financial statements.

 

 

 

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Note 5 – Variable interest entity

 

Effective February 15, 2022, upon acquisition of Anivia, the Company assumed the contractual arrangements between the WFOE and DHS through a variable interest operating entity structure. See Note 4 for details.

 

The Company did not provide financial or other support to the VIE for the periods presented where the Company was not otherwise contractually required to provide such support.

 

As of December 31, 2023 and 2022, there was no pledge or collateralization of the VIE assets that would be used to settle obligations of the VIE.

 

The carrying amounts of the assets, liabilities and the results of operations of the VIE included in the Company’s unaudited condensed consolidated balance sheets and statements of operations and comprehensive income after the elimination of intercompany balances and transactions with the VIE are as follows:

 

The carrying amount of the VIE’s assets and liabilities were as follows for the periods indicated:

        
   December 31, 2023   June 30, 2023 
Cash in bank  $397,027   $341,774 
Prepayments and other receivables  $327,931   $664,886 
Rent deposit  $74,209   $81,624 
Office equipment, net  $21,422   $33,774 
Right of use – noncurrent  $543,307   $6,104 
Deferred tax assets  $   $64,510 
Advance from shareholders  $87,305   $85,200 
Accounts payable  $256,944   $6,278 
Lease liability  $545,219   $4,758 
Income tax payable  $283,519   $276,683 
Other payables and accrued liabilities  $526,727   $344,735 

 

The operating results of the VIE were as follows for the three and six months ended December 31, 2023:

        
   Three Months   Six Months 
Revenue  $   $ 
Net income (loss) after elimination of intercompany transactions  $27,461   $(391,882)

 

The operating results of the VIE were as follows for the three and six months ended December 31, 2022:

         
   Three Months   Six Months 
Revenue  $   $ 
Net income (loss) after elimination of intercompany transactions  $(177,947)  $(911,564)

 

For the three and six months ended December 31, 2023, the VIE contributed approximately $1.8 million and $3.9 million of revenue and $0.15 million and $0.2 million of net loss before elimination, respectively. For the three and six months ended December 31, 2022, the VIE contributed approximately $1.1 million and $4.3 million of revenue and $0.1 million and $0.6 million of net loss before elimination, respectively.

 

 

 

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Note 6 – Accounts receivable, net

 

Accounts receivable for the Company consisted of the following as of the dates indicated below:

        
   December 31, 2023   June 30, 2023 
Accounts receivable  $11,835,833   $14,141,543 
Less: allowance for credit losses   (70,000)   (70,000)
Total accounts receivable  $11,765,833   $14,071,543 

 

The changes in allowance for credit losses on accounts receivable are summarized below:

       
    Allowance for
Credit Losses
 
Balance at June 30, 2022  $ 70,000  
Allowance recorded during the three months ended September 30, 2022     
Balance at September 30, 2022  $ 70,000  
Allowance recorded during the three months ended December 31, 2022     
Balance at December 31, 2022  $ 70,000  
         
Balance at June 30, 2023  $ 70,000  
Allowance recorded during the three months ended September 30, 2023     
Balance at September 30, 2023  $ 70,000  
Allowance recorded during the three months ended December 31, 2023     
Balance at December 31, 2023  $ 70,000  

 

Note 7 – Inventories, net

 

As of December 31, 2023 and June 30, 2023, inventories consisted of finished goods ready for sale, net of allowance for obsolescence, amounted to $15,782,322 and $20,593,889, respectively.

 

For the three and six months ended December 31, 2023, the Company recorded inventory reserve expense of $117,563 and $222,755, respectively. For the three and six months ended December 31, 2022, the Company recorded inventory reserve expense of $74,998 and $74,998, respectively. As of December 31, 2023 and June 30, 2023, allowance for obsolescence was $781,655 and $558,899, respectively.

 

 

 

 23 

 

 

Note 8 – Prepayments and other current assets, net

 

As of December 31, 2023 and June 30, 2023, prepayments and other current assets consisted of the following:

        
   December 31, 2023   June 30, 2023 
Advance to suppliers  $750,973   $1,668,173 
Prepaid income taxes   41,987    45,718 
Prepaid expenses and other receivables   939,377    1,393,433 
Less: Allowance for credit losses   (249,128)   (249,128)
           
Total  $1,483,209   $2,858,196 

 

Other receivables consisted of delivery fees of $64,831 and $165,962 and receivables from one and two unrelated parties for their use of the Company’s courier accounts at December 31, 2023 and June 30, 2023.

 

The changes in allowance for credit losses on other receivables are summarized below:

       
   

Allowance for

Credit Losses

 
Balance at June 30, 2022  $  
Allowance recorded during the three months ended September 30, 2022     
Balance at September 30, 2022  $  
Allowance recorded during the three months ended December 31, 2022     
Balance at December 31, 2022  $  
         
Balance at June 30, 2023  $ 249,128  
Allowance recorded during the three months ended September 30, 2023     
Balance at September 30, 2023  $ 249,128  
Allowance recorded during the three months ended December 31, 2023     
Balance at December 31, 2023  $ 249,128  

 

 

 

 24 

 

 

Note 9 – Non-current prepayments

 

Non-current prepayments included $356,241 for product sourcing, marketing research and promotion, and other management advisory and consulting services to companies owned by an employee and minority shareholder and by relatives of a minority shareholder of the Company. The terms of these services are from two years to five years. In addition, there was a $34,371 down payment on a four-year car lease. As of December 31, 2023 and June 30, 2023, total non-current prepayments were $390,612 and $531,456, respectively. For the three and six months ended December 31, 2023, the Company recorded $70,422 and $140,844 amortization of prepayments in the operating expenses, respectively. For the three and six months ended December 31, 2022, the Company recorded $107,917 and $215,834 amortization of prepayments in the operating expenses, respectively.

 

Note 10 – Intangible assets, net

 

As of December 31, 2023 and June 30, 2023, intangible assets, net, consisted of the following:

        
   December 31, 2023   June 30, 2023 
Covenant not to compete  $3,459,120   $3,459,120 
Supplier relationships   1,179,246    1,179,246 
Software   534,591    534,591 
Accumulated amortization   (1,217,572)   (892,886)
Total  $3,955,385   $4,280,071 

 

The intangible assets were acquired on February 15, 2022 through acquisition of Anivia. The weighted average remaining life for finite-lived intangible assets at December 31, 2023 was approximately 6.7 years. The amortization expense for the three and six months ended December 31, 2023 and 2022 was $162,343 and $324,686, respectively. The amortization expense for the three and six months ended December 31, 2022 was $162,343 and $324,686, respectively. At December 31, 2023, finite-lived intangible assets are expected to be amortized over their estimated useful lives, which ranges from a period of five to 10 years, and the estimated remaining amortization expense for each of the five succeeding years thereafter is as follows:

    
Year Ending June 30,  Amount 
2024  $324,686 
2025   649,371 
2026   649,371 
2027   609,277 
2028   468,750 
Thereafter   1,253,930 
Intangible assets, net  $3,955,385 

 

 

 

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Note 11 – Other payables and accrued liabilities

 

As of December 31, 2023 and June 30, 2023, other payables and accrued liabilities consisted of the following:

        
   December 31, 2023   June 30, 2023 
Accrued payables for inventory in transit  $1,818,236   $2,948,551 
Accrued Amazon fees   851,888    915,319 
Sales taxes payable   382,715    448,433 
Payroll liabilities   226,182    222,962 
Other accrued liabilities and payables   436,975    295,802 
           
Total  $3,715,996   $4,831,067 

  

The Company’s controlled VIE, DHS, facilitates the Company in the process of inventory procurement. During the six months ended December 31, 2023 and 2022, the Company purchased a total of $0 and $31,385, respectively, in inventories from a supplier which had a payment term of 90 days with a 2% premium on the purchase price, which was presented as financing cash flows from short term loans on the statement of cash flows. As of December 31, 2023 and June 30, 2023, the outstanding balance included in other payables to this supplier was $0 and $0.

 

Note 12 – Loans payable

 

Long-term loan

 

Asset-based revolving loan

 

On November 12, 2021, the Company entered into a Credit Agreement with JPMorgan Chase Bank, N.A. (“JPMorgan”), 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

 

 

 

 26 

 

 

In addition, the ABL includes an accordion feature that allows the Company to borrow up to an additional $25.0 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 in 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 are to be amortized over the three year term of the ABL as interest expense.

 

Below is a summary of the interest expense recorded for the three and six months ended December 31, 2023 and 2022:

                
   Three Months Ended December 31,   Six Months Ended December 31, 
   2023   2022   2023   2022 
Accrued interest  $67,689   $207,292   $201,304   $363,547 
Credit utilization fees   20,539    6,824    36,065    13,586 
Amortization of debt discount   66,305    66,304    132,609    132,610 
Total  $154,533   $280,420   $369,978   $509,743 

 

As of December 31, 2023 and June 30, 2023, the outstanding amount of the revolving loan payable, net of debt discount and including interest payable was $2,862,857 and $9,791,191, respectively.

 

On October 7, 2022, the Company entered into a second amendment to the credit agreement and consent (the “Second Amendment to the Credit Agreement”), originally dated November 12, 2021, as amended, with JPMorgan. The Company entered into the Second Amendment to the Credit Agreement primarily for the purpose of changing the interest rate repayment calculations from LIBOR to the Secured Overnight Financing Rate, or SOFR, which adjustment had originally been anticipated under the terms of the original Credit Agreement. In addition, two of the negative covenants set forth in the original Credit Agreement were amended in order to (i) adjust the definition of “Covenant Testing Trigger Period” to increase the required cash availability from $3,000,000 to $4,000,000, or 10% of the aggregate revolving commitment for the preceding 30 days, and (ii) require that the Company will not and will not permit any of its subsidiaries, after reasonable due diligence and due inquiry, to knowingly sell their products, inventory or services directly to any commercial businesses that grow or cultivate cannabis; it being acknowledged, however, that the Company does not generally conduct due diligence on its individual retail customers.

 

On November 11, 2022, the Company and JPMorgan entered into a default waiver and consent agreement (the “Waiver Letter”) pursuant to which the parties recognized that the Company was in default on its failure to satisfy the minimum Excess Availability requirement of $7,500,000, as defined in the Credit Agreement, and deliver a certificate to JPMorgan accurately reflecting the Excess Availability (together, the “Existing Defaults”). Under the terms of the Waiver Letter, JPMorgan agreed to waive the right to enforce an event of default based on the aforementioned Existing Defaults. As of December 31, 2023, the Company was in compliance with the ABL covenants.

 

Promissory note payable

 

On February 15, 2022, as part of the consideration for the acquisition of Anivia, 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. In October 2022, the Company paid the first installment of $875,000. And in February 2023, the Company paid the second installment of $875,000. In August 2023, the Company paid the third installment of $875,000. For the three months ended December 31, 2023, the Company recorded accrued interest of $13,125 and amortization of note premium of $12,579. For the six months ended December 31, 2023, the Company recorded accrued interest of $32,813 and amortization of note premium of $25,157. As of December 31, 2023, including $269,063 of accrued interest and $6,445 of unamortized premium, the total outstanding balance of the Purchase Note was $1,150,508, which is presented on the unaudited condensed consolidated balance sheet as a current portion of $1,150,508 and a non-current portion of $0. As of June 30, 2023, including $236,250 of accrued interest and $31,602 of unamortized premium, the total outstanding balance of the Purchase Note was $2,017,852, which is presented on the consolidated balance sheet as a current portion of $2,017,852 and a non-current portion of $0.

 

 

 

 27 

 

 

Short-term loan payable

 

On July 8, 2023, the Company entered into an agreement with White Cherry Limited (“White Cherry”), a BVI company owned by the former owner of DHS, for an on-demand, unsecured and subordinated loan (“On-demand Loan”). Pursuant to the agreement, White Cherry agreed to loan the Company the amount requested. The On-demand Loan bears interest at the rate of the Secured Overnight Financing Rate, or SOFR, plus 1% per annum. The On-demand Loan is due in 30 days upon receipt of White Cherry’s notice of repayment. On July 16, 2023, the Company borrowed $2,000,000 from White Cherry and repaid $1 million on July 31, 2023. For the three and six months ended December 31, 2023, the Company recorded accrued interest of $26,128 and $32,189, respectively. As of December 31, 2023, including the accrued interest, the outstanding balance of the On-demand Loan was $1,032,189.

 

Note 13 - Related party transactions

 

Starting from March 2022 to January 2023, the Company subleased 50,000 square feet of its warehouse space to Box Harmony, LLC, which is a 40% owned joint venture of the Company as disclosed in Note 1 and Note 2 above. For the three and six months ended December 31, 2023, the Company received and recorded sublease fee of $0 and $0 as other non-operating income, respectively. For the three and six months ended December 31, 2022, the Company recorded a sublease fee of $140,000 and $387,750 as other non-operating income.

 

During the period ended December 31, 2023, the Company started selling products through MII Strategy Inc. (“MII”), a company owned by the Company’s CEO, Mr. Chenlong Tan. As of December 31, 2023, the total amount due from MII was $47,566.

 

On February 15, 2022, the Company assumed $92,246 of advance from shareholders of DHS through acquisition of Anivia. This amount was for capital injection pending capital inspection by the local government in accordance with the PRC rules. As of December 31, 2023 and June 30, 2023, the balance of advance from shareholders was $87,305 and $85,200, respectively.

 

On July 8, 2023, the Company entered into an agreement with White Cherry for an on-demand loan. See Note 12 above for details.

 

Note 14 – Income taxes

 

In addition to corporate income taxes in the United States, upon completion of the acquisition of Anivia in February 2022, the Company is subject to corporate income taxes in PRC. Anivia and its subsidiaries are subject to BVI or Hong Kong income taxes but did not have any operations for the six months ended December 31, 2023 and 2022. DHS, the operating VIE of Anivia, is considered a Controlled Foreign Corporation (CFC) defined under IRC Sec. 957(a) since the Company indirectly owns more than 50% voting control of DHS as a result of the Transfer Agreement. Therefore, DHS is subject to the Global Intangible Low-Taxed Income (or GILTI) Tax. DHS is subject to 5% tax rate in PRC. The Company made an election to apply the GILTI high-tax exclusion for DHS under the Final Regulations (T.D. 9902). As the result of the election, no GILTI tax was recorded as of December 31, 2023 and 2022. In addition, as a result of the acquisition, the Company booked a $6,094,144 of goodwill. Since the acquisition was a stock acquisition, the Goodwill is not deductible for tax purposes.

 

For the three and six months ended December 31, 2023, as a result of the Company’s inability to establish a reliable estimate for annual effective tax rate, the Company calculated income tax expense using the actual effective tax rate year to date, as opposed to the estimated annual effective tax rate, as provided in Accounting Standards Codification (ASC) 740-270-30-18.

 

 

 

 28 

 

 

The income tax provision for the three and six months ended December 31, 2023 and 2022 consisted of the following:

                
   Three Months Ended December 31,   Six Months Ended December 31, 
   2023   2022   2023   2022 
Current:                
Federal  $1,705   $280,781   $   $280,781 
States   (904)   (123)   11,566    9,799 
Foreign                
Total current income tax provision   801    280,658    11,566    290,580 
                     
Deferred:                    
Federal   (555,981)   (1,090,318)   (840,629)   (1,259,785)
States   (133,943)   (203,562)   (200,567)   (306,707)
Foreign   184    (34,527)   64,809    (219,633)
Total deferred taxes   (689,740)   (1,328,407)   (976,387)   (1,786,125)
                     
Total provision for income taxes  $(688,939)  $(1,047,749)  $(964,821)  $(1,495,545)

 

The Company is subject to U.S. federal income tax as well as state income tax in certain jurisdictions. The tax years 2018 to 2022 remain open to examination by the major taxing jurisdictions to which the Company is subject. The following is a reconciliation of income tax expenses at the effective rate to income tax at the calculated statutory rates:

                
   Three Months Ended December 31,   Six Months Ended December 31, 
   2023   2022   2023   2022 
Statutory tax rate                    
Federal   21.00%    21.00%    21.00%    21.00% 
State   5.82%    5.85%    5.82%    5.85% 
Foreign tax rate difference   0.35%    (0.33%)   0.20%    1.86% 
Impairment loss on goodwill -permanent difference               (9.32%)
Net effect of state income tax deduction and other permanent differences   (0.74%)   (2.38%)   (3.89%)   (2.72%)
                     
Effective tax rate   26.43%    24.14%    23.13%    16.67% 

 

As of December 31, 2023, prepaid income taxes to US tax authorities and income tax payable to Chinese tax authorities was $41,987 and $283,519, respectively. As of June 30, 2023, prepaid income taxes to US tax authorities and income tax payable to Chinese tax authorities was $45,718 and $276,683, respectively.

 

 

 

 29 

 

 

The tax effects of temporary differences which give rise to significant portions of the deferred taxes are summarized as follows:

        
   December 31, 2023   June 30, 2023 
Deferred tax assets          
263A calculation  $183,268   $239,142 
Inventory reserve   209,655    149,907 
State taxes   2,619    2,435 
Accrued expenses   253,589    273,589 
ROU assets / liabilities   113,992    115,125 
Net Operation loss   3,002,627    2,173,221 
Disallowed interest expense   214,299    163,381 
Stock-based compensation   277,228    207,726 
Valuation allowance   (66,104)    
Others   85,596    85,596 
Total deferred tax assets   4,276,769    3,410,122 
           
Deferred tax liabilities          
Depreciation   (91,944)   (105,323)
Intangible assets acquired   (1,062,462)   (1,149,549)
Total deferred tax liabilities   (1,154,406)   (1,254,872)
           
Net deferred tax assets  $3,122,363   $2,155,250 

 

For the six months ended December 31, 2023, the Company recorded $66,104 of valuation allowance to reduce deferred tax assets for the losses incurred by DHS.

 

Note 15 – Earnings per share

 

The following table sets forth the computation of basic and diluted earnings per share for the periods presented:

                
   Three Months Ended December 31,   Six Months Ended December 31, 
   2023   2022   2023   2022 
Numerator:                
Net loss attributable to iPower Inc.  $(1,914,828)  $(3,290,439)  $(3,201,343)  $(7,472,815)
                     
Denominator:                    
Weighted-average shares used in computing basic and diluted earnings per share*  $29,790,242   $29,742,620   $29,777,378   $29,687,878 
Losses per share of ordinary shares - basic and diluted  $(0.06)  $(0.11)  $(0.11)  $(0.25)

 

* Due to the anti-dilutive effect, the computation of basic and diluted EPS did not include the shares underlying the exercise of warrants and unvested RSUs as the Company had a net loss for the three and six months ended December 31, 2023 and 2022.
   
* The computation of diluted EPS did not include the shares underlying the exercise of options granted as none of the options were vested as December 31, 2023 and 2022.
   
*

For the three and six months ended December 31, 2023, 40,981 and 107,347 vested but unissued shares of restricted stock units under the 2020 Equity Incentive Plan (as discussed in Note 16) are considered issued shares and therefore are included in the computation of basic losses per share when the shares are fully vested.

   
*

For the three and six months ended December 31, 2022, 154,261 vested but unissued shares of restricted stock units under the 2020 Equity Incentive Plan (as discussed in Note 16) are considered issued shares and therefore are included in the computation of basic earnings (losses) per share when the shares are fully vested.

 

 

 

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Note 16 – Equity

 

Common Stock

 

As of December 31, 2023, the total authorized shares of capital stock were 200,000,000 shares consisting of 180,000,000 shares of Common Stock (“Common Stock”) and 20,000,000 shares of preferred stock (the “Preferred Stock”), each with a par value of $0.001 per share.

 

The holders of Common Stock shall be entitled to one vote per share in voting to the election of directors and all other corporate purposes. Subject to the express terms of any outstanding series of Preferred Stock, dividends may be paid in cash or otherwise with respect to the holders of Common Stock out of the assets of the Company legally available therefor, upon the terms, and subject to the limitations, as the Board of Directors of the Company (the “Board of Directors”) may determine. In the event of a liquidation or dissolution of the Company, subject to the express terms of any outstanding series of Preferred Stock, the holders of Common Stock shall be entitled to share in the distribution of any remaining assets available for distribution to the holders of Common Stock ratably in proportion to the total number of shares of Common Stock then issued and outstanding.

 

During the year ended June 30, 2023, the Company issued 138,557 shares of restricted Common Stock for RSUs vested.

 

On February 15, 2022, as part of the consideration for the acquisition of Anivia and subsidiaries, as further described in Note 4, the Company issued 3,083,700 restricted shares of the Company’s common stock, valued at $2.27 per share, which was the closing price of the Company’s Common Stock as traded on Nasdaq on February 15, 2022. These shares had a lock-up period of 180 days and are subject to insider trading restrictions. The fair value of the shares was $5,528,373, calculated with a discount of lack of marketability of 21%, which was determined using the Black Scholes Model.

 

As of December 31, 2023 and June 30, 2023, there were 29,710,939 and 29,710,939 shares of Common Stock issued and outstanding, respectively.

 

Preferred Stock

 

The Preferred Stock was authorized as “blank check” series of Preferred Stock, providing that the Board of Directors is expressly authorized, subject to limitations prescribed by law, by resolution or resolutions, and by filing a certificate pursuant to the applicable law of the State of Nevada, to provide, out of the authorized but unissued shares of Preferred Stock, for series of Preferred Stock, and to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. As of December 31, 2023 and June 30, 2023, respectively, there were no shares of Preferred Stock issued and outstanding.

 

Equity Incentive Plan

 

On May 5, 2021, the Company’s Board of Directors adopted, and its stockholders approved and ratified, the iPower Inc. Amended and Restated 2020 Equity Incentive Plan (the “Plan”). The Plan allows for the issuance of up to 5,000,000 shares of Common Stock, whether in the form of stock options, restricted stock, restricted stock units, stock appreciation rights, performance units, performance shares and other stock or cash awards. The general purpose of the Plan is to provide an incentive to the Company’s directors, officers, employees, consultants and advisors by enabling them to share in the future growth of the Company’s business. On November 16, 2021 and December 6, 2022, the Company filed a registration statement on Form S-8 registering all shares issuable under the Plan, which Form S-8 was subsequently amended on December 6, 2022, September 15, 2023 and November 22, 2023.

 

 

 

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Restricted Stock Unit

 

Following completion of the Company’s IPO on May 11, 2021, pursuant to their letter agreements, the Company awarded 46,546 restricted stock units (“RSUs”) under the Plan to its independent directors, its Chief Financial Officer, and certain other employees and consultants, all of which vested over 12 months following the grant date and were subject to other restrictions until the filing of a Registration Statement on Form S-8 registering the shares. The fair value of the RSUs was determined based on $5.00 per share, the initial listing price of the Company’s Common Stock on the grant date. During the six months ended December 31, 2023, the Company granted an additional 62,600 shares of RSUs. For the three and six months ended December 31, 2023, the Company recorded $30,863 and $38,363 of stock-based compensation expense. There was no forfeiture of RSUs occurred during the six months ended December 31, 2023 and 2022. As of December 31, 2023 and June 30, 2023, the unvested number of RSUs was 47,481 and 38,793 and the unamortized expense was $34,439 and $22,500, respectively.

 

Information relating to RSU grants is summarized as follows:

        
   Total RSUs Issued   Total Fair Market Value of RSUs Issued as Compensation (1) 
RSUs granted, but not vested, at June 30, 2023   38,793      
RSUs granted   62,600   $50,302 
RSUs forfeited         
RSUs vested   (53,912)     
RSUs granted, but not vested, at December 31, 2023   47,481      

 _____________________

(1) The total fair value was based on the current stock price on the grant date.

 

As of December 31, 2023, of the 285,923 vested RSUs, 178,576 shares of Common Stock were issued, and 107,347 shares were to be issued in the near future.

 

Stock Option

 

On May 12, 2022, the Compensation Committee of the Board of Directors approved an incentive plan for the Company’s executive officers consisting of a cash performance bonus of $60,000 to be awarded to Kevin Vassily, CFO of the Company, and grants of stock option (the “Option Grants”) exercisable to purchase (i) 3,000,000 shares of Common Stock to Chenlong Tan, CEO and (ii) 330,000 shares of Common Stock to Mr. Vassily. The Option Grants, which were issued on May 13, 2022, have an exercise price of $1.12 per share, a contractual term of 10 years, and consist of six vesting tranches with a vesting schedule based entirely on the attainment of both operational milestones (performance conditions) and market conditions, assuming continued employment of the recipients through each vesting date. Each of the six vesting tranches of the Option Grants will vest when both (i) the market capitalization milestone for such tranche, which begins at $150 million for the first tranche and increases by increments of $50 million through the fourth tranche and $100 million thereafter (based on achieving such market capitalization for five consecutive trading days) has been achieved, and (ii) any one of the following six operational milestones focused on revenue or any one of the six operational milestones focused on operating income have been achieved during a given fiscal year.

 

 

 

 32 

 

 

The estimated achievement status of the operational milestones as of December 31, 2023 was as follows:

              
 Revenue in Fiscal Year    Operating Income in Fiscal Year 
 

Milestone

(in Millions)

    

Achievement

Status

    

Milestone

(in Millions)

    

Achievement

Status

 
                  
$90    Probable   $6    Probable 
$100    Probable   $8    Probable 
$125    Probable   $10    Probable 
$150    Probable   $12    Probable 
$200    Probable   $16     
$250       $20     

 

The Company evaluated the performance condition and market condition under ASC 718-10-20. The Option Grants are considered an award containing a performance and a market condition and both conditions (in this case at least one of the performance conditions) must be satisfied 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 longer of the implied service period or requisite service period if it is probable that one of the performance conditions will be met. In relation to the five awards deemed probable to vest, the recognition period ranges from 2.93 years to 9.64 years. If the performance condition is ultimately not met, compensation cost related to the award should not be recognized (or should be reversed to the extent any expense has been recognized related to such tranche) because the vesting condition in the award would not have been satisfied.

 

On the grant date, a Monte Carlo simulation was used to determine for each tranche (i) a fixed amount of expense for such tranche and (ii) the future time when the market capitalization milestone for such tranche was expected to be achieved. Separately, based on a subjective assessment of our future financial performance, each quarter we determine whether it is probable that the Company will achieve each operational milestone that has not previously been achieved or deemed probable of achievement and, if so, the future time when the Company expects to achieve that operational milestone. The Monte Carlo simulation utilized the following inputs:

 

  · Stock Price - $1.12
  · Volatility – 95.65%
  · Term –10 years
  · Risk Free Rate of Return – 2.93%
  · Dividend Yield – 0%

 

The total fair value of the Option Grants was $3.2 million of which, at December 31, 2023, $2.3 million is deemed probable of vesting. As of December 31, 2023, none of the options had vested. For the three and six months ended December 31, 2023, the Company recorded $110,382 and $220,764 of stock-based compensation expense related to the Option Grants. For the three and six months ended December 31, 2022, the Company recorded $110,382 and $220,764 of stock-based compensation expense related to the Option Grants. As of December 31, 2023, unrecognized compensation cost related to tranches probable of vesting is approximately $1.5 million and will be recognized over two years to nine years, depending on the tranche.

 

 

 

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Note 17 – Warrants

 

On January 27, 2021, the Company completed a private placement offering pursuant to which the Company sold to two accredited investors an aggregate of $3,000,000 in Convertible Notes and warrants to purchase shares of Class A Common Stock equaling 80% of the number of shares of Class A Common Stock issuable upon conversion of the Convertible Notes. The convertible note warrants are exercisable for a period of three years from the IPO completion date at a per share exercise price equal to the IPO. In accordance with the terms of the warrants, in the event the Convertible Notes are repaid in cash by the Company, the warrants issued in conjunction with the Convertible Notes will expire and have no further value.

  

The outstanding warrants held by the Convertible Note investors were reclassified to additional paid in capital as the terms became fixed upon closing of the IPO. Through December 31, 2023, none of the private placement investors exercised any of their warrants. As such, as of December 31, 2023 and June 30, 2023, the number of shares issuable under the outstanding warrants was 685,715, with an average exercise price of $5.00 per share.

 

Note 18 - Concentration of risk

 

Credit risk

 

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable.

 

As of December 31, 2023 and June 30, 2023, $1,488,027 and $3,735,642, respectively, were deposited with various major financial institutions in the United States and PRC. Accounts at each institution in the United States are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000. The Company had approximately $0.2 million and $2.7 million, respectively, in excess of the FDIC insurance limit, as of December 31, 2023 and June 30, 2023.

 

Accounts receivable are typically unsecured and derived from revenue earned from customers, thereby exposing the Company to credit risk. The risk is mitigated by the Company’s assessment of its customers’ creditworthiness and its ongoing monitoring of outstanding balances. The Company maintains reserves for estimated credit losses, and such losses have generally been within expectations.

 

The business of DHS, the Company’s VIE, may be impacted by Chinese economic conditions, changes in regulations and laws, and other uncertainties.

 

Customer and vendor concentration risk

 

For the six months ended December 31, 2023 and 2022, Amazon Vendor and Amazon Seller customers accounted for 95% and 91% of the Company's total revenues, respectively. As of December 31, 2023 and June 30, 2023, accounts receivable from Amazon Vendor and Amazon Seller accounted for 93% and 95% of the Company’s total accounts receivable.

 

For the six months ended December 31, 2023 and 2022, two suppliers accounted for 20% (11% and 9%) and 41% (31% and 10%) of the Company's total purchases, respectively. As of December 31, 2023 and June 30, 2023, accounts payable to two suppliers accounted for 54% (42% and 12%) and 55% (49% and 6%) of the Company’s total accounts payable.

  

 

 

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Note 19 - Commitments and contingencies

 

Lease commitments

 

The Company has entered into a lease agreement for office and warehouse space with a lease period from December 1, 2018 until December 31, 2020. On August 24, 2020, the Company negotiated for new terms to extend the lease through December 21, 2023 at the rate of approximately $42,000 per month. On December 21, 2023, the lease expired without renewal.

 

On September 1, 2020, in addition to the primary fulfillment center, the Company leased a second fulfillment center in City of Industry, California. The base rental fee was $27,921 to $29,910 per month through October 31, 2023. On October 31, 2023, the lease expired without renewal.

 

On February 15, 2022, upon completion of the acquisition of Anivia Limited, the Company assumed an operating lease for offices located in the PRC. In July 2023, the Company renewed the lease contract for its existing office plus additional office space. The lease term is for three years expiring on July 14, 2026. The total base rental fee for these offices is approximately $19,406 per month.

 

On July 28, 2021, the Company entered into a Lease agreement (the “Lease Agreement”) with 9th & Vineyard, LLC, a Delaware limited liability company (the “Landlord”), to lease from the Landlord approximately 99,347 square feet of space located at 8798 9th Street, Rancho Cucamonga, California (the “Premises”). The term of the Lease Agreement is for 62 months, commencing on the date on which the Landlord completes certain prescribed improvements on the property (the “Rent Commencement Date”). The Lease Agreement does not provide for an option to renew. Under the Lease Agreement, the Company is responsible for its pro rata share of certain costs, including utility costs, insurance and common area costs, as further detailed in the Lease Agreement. In addition, following the Rent Commencement Date, the first two months of the Base Rent were abated.

 

The lease was not started under the original agreement as the construction was not completed. On February 23, 2022, the Company entered into an amended agreement to extend the lease term to 74 months. Under the amended agreement, the lease commenced on February 10, 2022, with rent payments commencing May 11, 2022 and the lease expiring on May 31, 2028. The base rental fee is $114,249, increasing gradually over time to $140,079 per month through the expiration date of May 31, 2028.

 

On May 1, 2022, the Company leased another fulfillment center in Duarte, California. The base rental fee for the Duarte fulfillment center is $56,000 to $59,410 per month through April 30, 2025.

 

The Company’s total commitment for the full term of these leases is $12,649,053. The financial statements reflected $7,141,633 and $7,837,345, respectively, of operating lease right-of-use assets, and $7,568,542 and $8,265,220, respectively, of operating lease liabilities as of December 31, 2023 and June 30, 2023.

 

 

 

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Three months Ended December 31, 2023 and 2022:

        
Lease cost  12/31/2023   12/31/2022 
Operating lease cost (included in G&A in the Company's statement of operations)  $739,557   $775,494 
           
Other information          
Cash paid for amounts included in the measurement of lease liabilities  $742,427   $755,643 
Remaining term in years   1.33 – 4.42    0.58 – 5.42 
Average discount rate - operating leases   5 - 8%    5 - 8% 

 

Six Months Ended December 31, 2022 and 2021:

         
Lease cost  12/31/2023   12/31/2022 
Operating lease cost (included in selling and fulfillment in the Company's statement of operations)  $1,532,546   $1,554,727 
           
Other information          
Cash paid for amounts included in the measurement of lease liabilities  $1,529,857   $1,524,704 
Remaining term in years   1.33 – 4.42    0.58 – 5.42 
Average discount rate - operating leases   5 - 8%    5 - 8% 

 

The supplemental balance sheet information related to leases for the period is as follows:

        
Operating leases  12/31/2023   6/30/2023 
Right of use asset - non-current  $7,141,633   $7,837,345 
           
Lease Liability – current   2,065,177    2,159,173 
Lease Liability - non-current   5,503,365    6,106,047 
Total operating lease liabilities  $7,568,542   $8,265,220 

 

Maturities of the Company’s lease liabilities are as follows:

    
   Operating 
   Lease 
For Year ending June 30:     
2024  $1,187,861 
2025   2,320,324 
2026   1,773,910 
2027   1,596,573 
2028   1,459,408 
Less: Imputed interest/present value discount   (769,534)
Present value of lease liabilities  $7,568,542 

 

 

 

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Contingencies

 

Except as disclosed below, the Company is not currently a party to any material legal proceedings, investigation or claims. As the Company may, from time to time, be involved in legal matters arising in the ordinary course of its business, there can be no assurance that such matters will not arise in the future or that any such matters in which the Company is involved, or which may arise in the ordinary course of the Company’s business, will not at some point proceed to litigation or that such litigation will not have a material adverse effect on the business, financial condition or results of operations of the Company.

 

Pursuant to an engagement agreement, dated and effective August 31, 2020 (the “Engagement Agreement”), with Boustead Securities LLC (“Boustead”), the Company engaged Boustead to act as its exclusive placement agent for private placements of its securities and as a potential underwriter for its initial public offering. On February 28, 2021, the Company informed Boustead that it was terminating the Engagement Agreement and any continuing obligations the Company may have had under its terms. On April 15, 2021, the Company provided formal written notice to Boustead of its termination of the Engagement Agreement and all obligations thereunder, effective immediately. On April 30, 2021, Boustead filed a statement of claim with the Financial Institute Regulatory Authority, or FINRA, demanding to arbitrate the dispute, and seeking, among other things, monetary damages against the Company and D.A. Davidson & Co. (who acted as underwriter in the Company’s IPO). This matter is presently scheduled to hold its evidentiary hearing before a FINRA arbitration panel during the first two weeks of March 2024. The Company has agreed to indemnify D.A. Davidson & Co. and the other underwriters against any liability or expense they may incur or be subject to arising out of the Boustead dispute. Additionally, Chenlong Tan, the Company’s Chairman, President and Chief Executive Officer and a beneficial owner more than 5% of the Company’s Common Stock, has agreed to reimburse the Company for any judgments, fines and amounts paid or actually incurred by the Company or an indemnitee in connection with such legal action or in connection with any settlement agreement entered into by the Company or an indemnitee up to a maximum of $3.5 million in the aggregate, with the sole source of funding of such reimbursement to come from sales of shares then owned by Mr. Tan. The Company cannot reasonably estimate the amount of potential exposure as of the date of this report.

 

In an effort to contain or slow the COVID-19 outbreak, authorities across the world implemented various measures, including travel bans, stay-at-home orders and shutdowns of certain businesses. While most of these measures have since been rescinded or modified and much of the effects related to COVID-19 have dissipated as COVID-19 has become endemic, the Company nonetheless anticipates that these actions and the global health crisis caused by the COVID-19 outbreak, including any resurgences, may continue to negatively impact global economic activity.

 

In addition, in February 2022, the Russian Federation began conducting military operations against Ukraine, and in October 2023, an armed conflict between Hamas-led Palestinian militant groups and Israeli military forces began, both of which have since escalated into prolonged wars. While we do not do business in those regions, the military conflicts in Ukraine and in Israel have resulted in global economic uncertainty and increased the cost of various commodities. In response to these types of events, should they directly impact our supply chain or other operations, we may experience or be exposed to supply chain disruptions which could cause us to seek alternate sources for product supply or suffer consequences that are unexpected and difficult to mitigate. Any of these risks might have a materially adverse impact on our business operations and our financial position or results of operations. Although, it is difficult to predict the impact that these factors may have on our business in the future, we have experienced a delay in, as well as an increase in costs in shipping, and the resulting inventory level increase in our warehouse facilities, thus resulting in reduced profits. In addition, supply chain disruptions may put upward pressure on our costs and increase the risk that we may be unable to acquire the materials and services we need to continue to make certain products.

 

On April 13, 2020, the Company entered into an agreement with Royal Business Bank (the “Lender”) for a total amount of $175,500, pursuant to which the Company issued a promissory note to the Lender (the “PPP Note”). The loan was made pursuant to the Payroll Protection Program established as part of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). On March 22, 2021, the $175,500 PPP Note due to Royal Business Bank was fully forgiven by the SBA.

 

The Company is required to retain PPP loan documentation through 2026 and permit authorized representatives of the SBA to access such files upon request. Should the SBA conduct such a review and reject all or some of the Company’s judgments pertaining to satisfying PPP loan eligibility or forgiveness conditions, the Company may be required to adjust previously reported amounts and disclosures in its consolidated financial statements.

 

Note 20 - Subsequent events

  

The Company evaluated subsequent events and transactions that occurred after the balance sheet date through the date that the unaudited condensed consolidated financial statements were available to be issued. The Company did not have any material subsequent events that required recognition or additional disclosure in the unaudited condensed consolidated financial statements presented.

 

 

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”) should be read in conjunction with our unaudited financial statements and the related notes thereto included elsewhere herein. This 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 report. 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

 

Driven by technology and data, iPower Inc. (“iPower,” “we,” “us,” or “the Company”) is an online supplier of consumer goods, including consumer home goods, hydroponics equipment, general gardening, furniture and pet supplies. Through the operations of our e-commerce platforms and channel partners, our fulfillment centers in Rancho Cucamonga and Duarte, California, we believe we are one of the leading marketers, distributors and retailers in the consumer gardening and home goods categories, based on management’s estimates. Our core strategy continues to focus on expanding our geographic reach across the United States and internationally through organic growth, both in terms of expanding our customer base as well as brand and product development. iPower has developed a set of methodologies driven by proprietary data formulas to effectively bring products to market and increase sales.

 

We are actively developing and acquiring our in-house branded products, which to date include the iPower and Simple Deluxe brands and more, with some of our products achieving Amazon best seller product leaders and Amazon Choice products designations, among others.

 

Acquisitions and Joint Ventures

 

On February 15, 2022, in exchange for total consideration of $10.6 million, we acquired 100% of the ordinary shares of Anivia Limited (“Anivia”), 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”), Anivia, Fly Elephant Limited, a Hong Kong company, Dayourenzai (Shenzhen) Technology Co., Ltd., and Daheshou (Shenzhen) Information Technology Co., Ltd. Anivia 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 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 People’s Republic of China, or the PRC (the “Operating Company”) and located in Shenzhen, China. The Operating Company is principally engaged in selling a wide range of products and providing logistic services in the PRC.

 

 

 

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On February 10, 2022, we entered into a joint venture agreement with Bro Angel, LLC ("Bro Angel”), 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, content 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 GSM 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 intended to enter into an occupancy management agreement pursuant to which the Company would 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, Duarte, CA 91010. It was contemplated that only approximately 300-400 square feet would initially be used by GSM. However, since the space was never utilized by GSM, iPower resumed using the contemplated space during the fiscal year ended June 30, 2023.

 

Trends and Expectations

 

Product and Brand Development

 

We plan to increase our investments in product and brand development. We actively evaluate potential acquisition opportunities of companies and product brand names that can complement and enhance our product catalog and improve on existing products and supply chain efficiencies.

 

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 and the Israel-Hamas war may nonetheless increase the likelihood of supply chain disruptions 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 delay in, as well as an increase in, costs in shipping, resulting in in increased inventory levels in our warehouse facilities, thus resulting in reduced profits. In addition, supply chain disruptions may put upward pressure on our costs and increase the risk that we may be unable to acquire the materials and services we need to continue to make certain products.

 

Ongoing COVID-19 Pandemic and Related Disruptions

 

While the worst of the COVID-19 pandemic has seemingly passed and we believe that the pandemic is unlikely to significantly impact our business going forward, we continue to closely monitor its impact on our business, results of operations and financial results. The situation surrounding the pandemic remains fluid and the full extent of the positive or negative impact of the COVID-19 pandemic on our business will depend on certain developments including the length of time of any regional outbreaks, 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. While the COVID-19 pandemic 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 that COVID-19 may have on our business over time. 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.

 

 

 

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Regulatory Environment

 

In additional to general consumer goods, we sell hydroponic gardening products to end users that may use such products in new and emerging industries or segments, including for purposes of 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 46 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 certain U.S. states prohibit growing cannabis. Demand for our products could be impacted by changes in the regulatory environment with respect to such industries and segments.

 

RESULTS OF OPERATIONS

 

For the three months ended December 31, 2023 and 2022

 

The following table presents certain unaudited condensed consolidated statement of operations information and presentation of that data as a percentage of change from period to period.

 

  

Three Months Ended

December 31, 2023

  

Three Months Ended

December 31, 2022

   Variance 
Revenues  $16,800,122   $19,254,590    (12.75%)
Cost of goods sold   9,481,882    11,285,064    (15.98%)
Gross profit   7,318,240    7,969,526    (8.17%)
Operating expenses   9,870,587    12,052,092    (18.10%)
Operating loss   (2,552,347)   (4,082,566)   (37.48%)
Other expenses   54,575    258,457    (78.88%)
Loss before income taxes   (2,606,922)   (4,341,023)   (39.95%)
Income tax benefit   (688,939)   (1,047,749)   (34.25%)
Net loss   (1,917,983)   (3,293,274)   (41.76%)
Non-controlling interest   (3,155)   (2,835)   11.29% 
Net loss attributable to iPower Inc.   (1,914,828)   (3,290,439)   (41.81%)
Other comprehensive (loss) income   (160,255)   47,149    (439.89%)
Comprehensive loss attributable to iPower Inc.  $(2,075,083)  $(3,243,290)   (36.02%)
                
Gross profit % of revenues   43.56%    41.39%      
Operating loss % of revenues   (15.19%)   (21.20%)     
Net loss % of revenues   (11.42%)   (17.10%)     

 

 

 

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Revenues

 

Revenues for the three months ended December 31, 2023 decreased 12.75% to $16,800,122 as compared to $19,254,590 for the three months ended December 31, 2022. While pricing remained stable, the decreased revenue mainly resulted from a decrease in sales volume during the three months ended December 31, 2023 as the Company offered less promotions and clearance activities due to lower inventory level as compared to the three months ended December 31, 2022. This was partially offset by growth in the Company’s SuperSuite supply chain offerings.

 

Costs of Goods Sold

 

Costs of goods sold for the three months ended December 31, 2023 decreased 15.98% to $9,481,882 as compared to $11,285,064 for the three months ended December 31, 2022. The decrease was primarily due to a decrease in sales and freight costs. See discussions on gross profit below.

 

Gross Profit

 

Gross profit was $7,318,240 for the three months ended December 31, 2023 as compared to $7,969,526 for the three months ended December 31, 2022. The gross profit ratio increased to 43.56% for the three months ended December 31, 2023 from 41.39% for the three months ended December 31, 2022. The increase in the gross profit ratio was mainly driven by the decrease in costs of goods sold as a result of decreased freight charges during the current period. However, we cannot be assured that this trend will continue.

 

Operating Expenses

 

Operating expenses for the three months ended December 31, 2023 decreased 18.10% to $9,870,587 as compared to $12,052,092 for the three months ended December 31, 2022. The decrease was mainly due to the combination of a decrease in selling and fulfillment expenses of $2.4 million as a result of decreased costs related to advertising, merchant fees, rental expenses, and delivery fees, and an increase in general and administrative expenses of $0.2 million, which included payroll expenses, stock-based compensation expense, insurance expenses and other operating expenses.

 

Loss from Operations

 

Loss from operations was $2,552,347 for the three months ended December 31, 2023 as compared to $4,082,566 for the three months ended December 31, 2022. The decrease in loss was resulted from the decrease in operating expenses and the increase in gross profit ratio, as discussed above.

 

Other Expenses

 

Other expenses for the three months ended December 31, 2023 was $54,575 as compared to $258,457 for the three months ended December 31, 2022. The decrease in other expenses was mainly due to a decrease in interest, including amortization of debt discount on the revolving loan of $131,507 and an increase in other non-operating income of $69,238.

 

Net Loss Attributable to iPower Inc.

 

Net loss attributable to iPower Inc. for the three months ended December 31, 2023 was $1,914,828 as compared to $3,290,439 for the three months ended December 31, 2022, representing a decrease of net loss of $1,375,611. The decrease was primarily due to the increase in gross profit and decrease in operating expenses as discussed above.

 

 

 

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Comprehensive Loss Attributable to iPower Inc.

 

Comprehensive loss attributable to iPower Inc. for the three months ended December 31, 2023 was $2,075,083 as compared to $3,243,290 for the three months ended December 31, 2022, representing a decrease of comprehensive loss of $1,168,207. The decrease was due to the reasons discussed above, along with an increase in other comprehensive loss of $207,404 as a result of foreign currency translation adjustments resulting from the translation of RMB, the functional currency of our VIE in the PRC, to USD, the reporting currency of the Company.

 

For the six months ended December 31, 2023 and 2022

 

The following table presents certain unaudited condensed consolidated statement of operations information and presentation of that data as a percentage of change from period to period.

 

  

Six Months Ended

December 31, 2023

  

Six Months Ended

December 31, 2022

   Variance 
Revenues  $43,308,496   $45,277,263    (4.35%)
Cost of goods sold   24,231,411    27,322,021    (11.31%)
Gross profit   19,077,085    17,955,242    6.25% 
Operating expenses   22,898,109    26,631,114    (14.02%)
Operating loss   (3,821,024)   (8,675,872)   (55.96%)
Other expenses   351,131    298,128    17.78% 
Loss before income taxes   (4,172,155)   (8,974,000)   (53.51%)
Income tax benefit   (964,821)   (1,495,545)   (35.49%)
Net loss   (3,207,334)   (7,478,455)   (57.11%)
Non-controlling interest   (5,991)   (5,640)   6.22% 
Net loss attributable to iPower Inc.   (3,201,343)   (7,472,815)   (57.16%)
Other comprehensive (loss) income   (160,962)   (64,326)   150.23% 
Comprehensive loss attributable to iPower Inc.  $(3,362,305)  $(7,537,141)   (55.39%)
                
Gross profit % of revenues   44.05%    39.66%      
Operating loss % of revenues   (8.82%)   (19.16%)     
Net loss % of revenues   (7.41%)   (16.52%)     

 

Revenues

 

Revenues for the six months ended December 31, 2023 decreased 4.35% to $43,308,496 as compared to $45,277,263 for the six months ended December 31, 2022. While pricing remained stable, the decreased revenue mainly resulted from a decrease in sales volume during the six months ended December 31, 2023 as the Company offered less promotions and clearance activities due to lower inventory level as compared to the six months ended December 31, 2022. This was partially offset by growth in the Company’s SuperSuite supply chain offerings.

 

 

 

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Costs of Goods Sold

 

Costs of goods sold for the six months ended December 31, 2023 decreased 11.31% to $24,231,411 as compared to $27,322,021 for the six months ended December 31, 2022. The decrease was primarily due to a decrease in sales and freight costs. See discussions on gross profit below.

 

Gross Profit

 

Gross profit was $19,077,085 for the six months ended December 31, 2023 as compared to $17,955,242 for the six months ended December 31, 2022. The gross profit ratio increased to 44.05% for the six months ended December 31, 2023 from 39.66% for the six months ended December 31, 2022. The increase in the gross profit ratio was mainly driven by the decrease in costs of goods sold as a result of decreased freight charges during the current period. However, we cannot be assured that this trend will continue.

 

Operating Expenses

 

Operating expenses for the six months ended December 31, 2023 decreased 14.02% to $22,898,109 as compared to $26,631,114 for the six months ended December 31, 2022. The decrease was mainly due to the combination of a decrease in selling and fulfillment expenses of $0.8 million as a result of decreased costs related to advertising, merchant fees, rental expenses and delivery fees, and a decrease of $3.1 million of impairment loss on goodwill triggered by a decrease in the Company’s share price of its common stock and the net loss incurred during the six months ended December 31, 2022.

 

Loss from Operations

 

Loss from operations was $3,821,024 for the six months ended December 31, 2023 as compared to $8,675,872 for the six months ended December 31, 2022. The decrease in loss was resulted from the decrease in operating expenses and the increase in gross profit, as discussed above.

 

Other Expenses

 

Other expenses for the six months ended December 31, 2023 was $351,131 as compared to $298,128 for the six months ended December 31, 2022. The increase in other expenses was mainly due to a combination of a decrease in interest expenses and a decrease in other non-operating income of $209,688 resulted from termination of sublease in January 2023.

 

Net Loss Attributable to iPower Inc.

 

Net loss attributable to iPower Inc. for the six months ended December 31, 2023 was $3,201,343 as compared to $7,472,815 for the six months ended December 31, 2022, representing a decrease of net loss of $4,271,472. The decrease was primarily due to the increase in gross profit and decrease in operating expenses as discussed above.

 

 

 

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Comprehensive Loss Attributable to iPower Inc.

 

Comprehensive loss attributable to iPower Inc. for the six months ended December 31, 2023 was $3,362,305 as compared to $7,537,141 for the six months ended December 31, 2022, representing a decrease of comprehensive loss of $4,174,836. The decrease was due to the reasons discussed above, along with an increase in other comprehensive loss of $96,636 as a result of foreign currency translation adjustments resulting from the translation of RMB, the functional currency of our VIE in the PRC, to USD, the reporting currency of the Company.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Sources of Liquidity

 

We primarily funded our operations with cash and cash equivalents generated from operations, including delaying payments to vendors, as well as through borrowing under our credit facility from JPMorgan Chase Bank ("JPM”). We had cash and cash equivalents of $1,488,027 as of December 31, 2023, representing a $2.2 million decrease from $3,735,642 as of June 30, 2023. The cash decrease was due to an increase in net cash used in financing activities, partially offset by net cash provided by operating activities.

 

Based on our current operating plan, and despite the current uncertainty resulting from the ongoing Ukraine-Russia and Israel-Hamas military conflicts, and the effects of COVID-19, 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 of 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 on our margin profile and ability to generate cash. Currently, we have approximately $10 million in unused credit available under the revolving line with JPM. Given our current working capital position and 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 December 31, 2023 and June 30, 2023, our working capital was $4.7 million and $17.9 million, respectively. The historical seasonality in our business during the year can cause cash and cash equivalents, inventory and accounts payable to fluctuate, resulting in changes in our working capital.

 

 

 

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Cash Flows

 

Operating Activities

 

Net cash provided by operating activities for the six months ended December 31, 2023 and 2022 was $5,045,730 and $7,778,208, respectively. The decrease in cash provided by operating activities mainly resulted from the decrease of changes in accounts payable, accounts receivable, inventories, prepayments and other current assets, partially offset by a decrease of changes in other payable and accrued liabilities.

 

Investing Activities

 

For the six months ended December 31, 2023 and 2022, net cash used in investing activities was $0 and $127,367, respectively. The decrease in cash used in investing activities was because the Company did not have additional purchase of equipment during the six months ended December 31, 2023.

 

Financing Activities

 

Net cash used in financing activities was $7,175,000 and $5,540,436, respectively, for the six months ended December 31, 2023 and 2022. The main reason the Company experienced an increase in net cash used in financing activities was primarily due to our payment of $9.2 million for: (1) $1.9 million to pay down the note payable to White Cherry; and (2) $7.3 million to pay down the outstanding balance of the asset-based revolving loan facility with JPM.

 

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 unaudited condensed 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 unaudited condensed consolidated financial statements.

 

 

 

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Revenue recognition

 

The Company recognizes revenue from product sales revenues, net of promotional discounts and return allowances, when the following revenue recognition criteria are met: a contract has been identified, separate performance obligations are identified, the transaction price is determined, the transaction price is allocated to separate performance obligations and revenue is recognized upon satisfying each performance obligation. The Company transfers the risk of loss or damage upon shipment, therefore, revenue from product sales is recognized when it is shipped to the customer. Return allowances, which reduce product revenue by the Company’s best estimate of expected product returns, are estimated using historical experience.

 

The Company evaluates the criteria of ASC 606 - Revenue Recognition Principal Agent Considerations in determining whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions. Generally, when the Company is primarily responsible for fulfilling the promise to provide a specified good or service, the Company is subject to inventory risk before the good or service has been transferred to a customer and the Company has discretion in establishing the price, revenue is recorded at gross.

 

Payments received prior to the shipment of goods to customers are recorded as customer deposits.

 

The Company periodically provides incentive offers to its customers to encourage purchases. Such offers include current discount offers, such as percentage discounts off current purchases and other similar offers. Current discount offers, when accepted by the Company’s customers, are treated as a reduction to the purchase price of the related transaction.

 

Sales discounts are recorded in the period in which the related sale is recognized. Sales return allowances are estimated based on historical amounts and are recorded upon recognizing the related sales. Shipping and handling costs are recorded as selling expenses.

 

Inventory, net

 

Inventory consists of finished goods ready for sale and is stated at the lower of cost or market. The Company values its inventory using the weighted average costing method. The Company’s policy is to include as a part of inventory and costs 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, fulfillment, general and administrative expenses. The Company regularly reviews inventory and considers forecasts of future demand, market conditions and product obsolescence.

 

If the estimated realizable value of the inventory is less than cost, the Company makes provisions in order to reduce its carrying value to its estimated market value. The Company also reviews inventory for slow moving and obsolescence and records allowance for obsolescence.

 

Variable interest entities

 

On February 15, 2022, the Company acquired 100% of the ordinary shares of 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, which run for a term of 10 years from February 2022 to February 2032, the Company bears all 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.

 

 

 

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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, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The Company engaged an independent third-party valuation firm in August 2022 to conduct an evaluation of goodwill impairment for the Company as a whole at the consolidated reporting unit level as of June 30, 2022, which evaluation was conducted prior to the Company’s filing of its Annual Report on Form 10-K for the period ended June 30, 2022. Due to the decrease in the Company’s share price subsequent to the filing of the June 30, 2022 Form 10-K and the net loss incurred during the quarter ended September 30, 2022, the Company engaged the same valuation firm to review goodwill for impairment. Based on this review, the Company concluded an impairment loss of $3,060,034 as of September 30, 2022 was required. The impairment amount was determined based on the discounted cash flows with the revised projections reflecting the increase in freight and storage costs in the quarter ended September 30, 2022. The Company also considered the Market Capital Method, which is an alternative market approach, suggested the Company’s goodwill is partially impaired.

 

During the six months ended December 31, 2023, in addition to a qualitative goodwill impairment analysis following the steps laid out in ASC 350-20-35-3C, the Company also performed a quantitative analysis using the Discounted Cash Flow and Market Capital Method and noted no goodwill impairment. As of December 31, 2023 and 2022, the remaining goodwill balance amounted to $3,034,110.

 

Intangible Assets, net

 

Finite life intangible assets at December 31, 2023 include a covenant not to compete, supplier relationship and software recognized as part of the acquisition of Anivia. 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 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 December 31, 2023, there were no indicators of impairment.

 

 

 

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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.

 

Income taxes

 

The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their perspective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded, when necessary, to reduce deferred tax assets to the amount expected to be realized. As of December 31, 2023, the Company expected that the deferred tax assets are fully realizable so did not record any valuation allowance.

 

As a result of the implementation of certain provisions of ASC 740, Income Taxes (“ASC 740”), which clarifies the accounting and disclosure for uncertainty in tax position, as defined, ASC 740 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. The Company has adopted the provisions of ASC 740 since its inception on April 11, 2018, and has subsequently analyzed filing positions in each of the federal and state jurisdictions where the Company is required to file income tax returns, as well as open tax years in such jurisdictions. The Company has identified the U.S. federal jurisdiction and the states of Nevada and California as its “major” tax jurisdictions. However, the Company has certain tax attribute carryforwards which will remain subject to review and adjustment by the relevant tax authorities until the statute of limitations closes with respect to the year in which such attributes are utilized.

 

The Company believes that our income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740. The Company’s policy for recording interest and penalties associated with income-based tax audits is to record such items as a component of income taxes.

 

Recently issued accounting pronouncements

 

Other than as set forth under Note 2 to the unaudited condensed consolidated financial statements under “Recently issued accounting pronouncements,” 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.

 

 

 

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