iPower Inc. and Subsidiaries
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
iPower Inc. and Subsidiaries
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
iPower Inc. and Subsidiaries
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements
iPower Inc. and Subsidiaries
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
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 a U.S.-based online seller and supplier of
consumer home, garden and pet products.
Effective on March 1, 2020, as amended and restated
pursuant to an agreement dated October 26, 2020, the Company entered into an agreement with E Marketing Solution Inc. (“E Marketing”),
an entity incorporated in California and owned by one of the shareholders of the Company. Pursuant to the terms of the agreement, the
Company agreed to provide technical support, management services and other services on an exclusive basis in relation to E Marketing’s
business during the term of the agreement. The Company also agreed to fund E Marketing for operational cash flow needs and bear the risk
of E Marketing’s losses from operations and E Marketing agreed that iPower has rights to E Marketing’s net profits, if any.
Under the terms of the agreement, the Company may at any time, at its option, acquire for nominal consideration 100% of either the equity
of E Marketing or its assets subject to the Company’s assumption of all of E Marketing’s liabilities. E Marketing was considered
a variable interest entity (“VIE”). On May 18, 2021, the Company acquired 100% of the equity ownership of E Marketing. As
a result, E Marketing has become the Company’s wholly owned subsidiary.
On September 4, 2020, the Company entered into
an agreement with Global Product Marketing Inc. (“GPM”), an entity incorporated in the State of Nevada on September 4, 2020.
At that time, GPM was then wholly owned by Chenlong Tan, the Chairman, CEO and President and one of the majority shareholders of the Company.
Pursuant to the terms of the agreement with GPM, the Company was to provide technical support, management services and other services
on an exclusive basis, to GPM during the term of the Agreement. In addition, the Company agreed to fund GPM’s operational cash flow
needs and bear the risk of GPM’s losses from operations and GPM agreed that the Company has the right to GPM’s net profits,
if any. Under the terms of the agreement, the Company may at any time, at its option, acquire for nominal consideration 100% of either
the equity of GPM or its assets subject to the Company’s assumption of all of GPM’s liabilities. GPM was considered a variable
interest entity (“VIE”). On May 18, 2021, the Company acquired 100% of the equity ownership of GPM. As a result, GPM has become
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 or 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 or otherwise control of Box Harmony. See details on 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 providing a social media platform, with contents 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 in 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” or “VIE”)
and located in Shenzhen, China. See details in Note 4 below.
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 its 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, 2023, 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 Company’s Annual Report on Form10-K for the year ended June 30, 2022, filed with the SEC on September 28, 2022.
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.
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 actual results could differ significantly from those estimates.
Foreign currency translation and transactions
The reporting and functional currency of iPower
and 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 March 31, 2023, were translated at 6.8691 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 nine months ended March
31, 2023 was 6.933442 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 $250,000, which is currently the maximum amount insured by the Federal Deposit
Insurance Corporation for interest bearing accounts (there is currently no insurance limit for deposits in noninterest bearing accounts).
To date, the Company has not experienced any losses with respect to cash. Management believes the 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.
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:
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the customer fails to comply with its payment schedule; |
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the customer is in serious financial difficulty; |
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a significant dispute with the customer has occurred regarding job progress or other matters; |
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the customer breaches any of its contractual obligations; |
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the customer appears to be financially distressed due to economic or legal factors; |
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the business between the customer and the Company is not active; and |
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other objective evidence indicates non-collectability of the accounts receivable. |
Accounts receivable are recognized and carried at 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.
Variable interest entities
On February 15, 2022, the Company acquired 100%
of the ordinary shares of Anivia Limited (“Anivia”) and its subsidiaries, including DHS. Pursuant to the terms of the Agreements
for the Company’s acquisition of Anivia and its subsidiaries, including DHS, 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 on 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. Due to the decrease in the Company’s
share price subsequent to the filing of the 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 current interim quarter. The Company also considered the Market Capital Method,
which is an alternative market approach, suggested the Company’s goodwill is partially impaired.
During the three months ended March 31, 2023,
the Company performed a qualitative goodwill impairment analysis following the steps laid out in ASC 350-20-35-3C and noted no goodwill
impairment. As of March 31, 2023, the remaining goodwill balance amounted to $3,034,110.
Intangible Assets, net
Finite life intangible assets at March 31, 2023
included a covenant not to compete, supplier relationships, and software recognized as part of the acquisition of Anivia Limited. Intangible
assets are recorded at the estimated fair value of these items at the date of acquisition, February 15, 2022. Intangible assets are amortized
on a straight-line basis over their estimated useful life as followings:
Schedule of estimated useful life |
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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 on asset group level 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 March 31, 2023, there were no indicators of impairment.
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
for the acquisition of Anivia Limited, the Company issued a two-year unsecured 6% subordinated promissory note, payable in equal semi-annual
installments commencing August 15, 2022 (the “Purchase Note”). The principal amount of the Purchase Note was $3.5
million. On February 15, 2022, the Company evaluated the fair value of the Purchase Note to be $3.6
million using the following inputs:
Schedule of assumptions for financial instruments |
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Corporate bond yield |
3.1% |
Risk-free rate |
1.6% |
Liquidity premium |
0.4% |
Discount rate |
3.5% |
As of March 31, 2023,
the outstanding balance of the Purchase Note was $2,004,181, including a premium of $ 44,181 and $ 210,000 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 $0 and $3.1 million during the three and nine months ended March
31, 2023, as follows:
Schedule of fair value on nonrecurring basis | |
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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 nine months ended March 31, 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.
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 nine months ended March 31, 2023 and
2022 were as following.
Schedule of advertising costs | |
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Three Months Ended March 31, | | |
Nine Months Ended March 31, | |
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2023 | | |
2022 | | |
2023 | | |
2022 | |
Advertising and promotion | |
$ | 1,304,662 | | |
$ | 733,241 | | |
$ | 3,777,122 | | |
$ | 1,945,222 | |
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.
Inventory
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 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 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 nine months ended
March 31, 2023, sales through Amazon to Canada and other foreign countries were approximately 12.8% of the Company’s total sales.
Sales of hydroponic products, including ventilation and grow light systems, were approximately 46% of the Company’s total sales
and the remaining 54% consisted of general gardening, home goods and other products and accessories. As of March 31, 2023, there were
approximately $2.3 million of inventory stored in China. The Company’s majority of long-lived assets are located in California,
United States, and majority of the Company’s revenues are derived from within the United States. Therefore, no geographical segments
are presented.
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.
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 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 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. Deferred income tax assets are recognized only to the extent that management determines
that it is more-likely-than-not that the deferred income tax assets will be realized. 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 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.
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.
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 to issue common stock were exercised.
Recently issued accounting pronouncements
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 the consolidated financial statements.
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. 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 the consolidated financial
statements.
In January 2020, the FASB issued ASU 2020-01,
“Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging
(Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” This ASU among other things clarifies that
a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting
under Topic 323, Investments—Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance
with Topic 321 immediately before applying or upon discontinuing the equity method. The new ASU clarifies that, when determining the accounting
for certain forward contracts and purchased options a company should not consider, whether upon settlement or exercise, if the underlying
securities would be accounted for under the equity method or fair value option. ASU 2020-01 is effective for public business entities
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. An entity should apply ASU 2020-01
prospectively at the beginning of the interim period that includes the adoption date. The Company adopted ASU 2020-01 on July 1, 2022.
The adoption of ASU 2020-01 did not have material impact on the Company's consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12,
Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes. The update is intended to simplify the current rules regarding
the accounting for income taxes and addresses several technical topics including accounting for franchise taxes, allocating income taxes
between a loss in continuing operations and in other categories such as discontinued operations, reporting income taxes for legal entities
that are not subject to income taxes, and interim accounting for enacted changes in tax laws. The new standard is effective for fiscal
years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022; however, early adoption
is permitted. The Company adopted ASU 2019-12 on July 1, 2022. The adoption of this standard did not have material impact on the consolidated
financial statements.
In January 2017, the FASB issued ASU 2017-04,
“Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which eliminates step two
from the goodwill impairment test. Under ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying
amount of a reporting unit exceeds its fair value up to the amount of goodwill allocated to that reporting unit. 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 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 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.
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, (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.
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 the operations. Based on ASU 2015-02, the Company consolidate GSM due to its majority
equity ownership and control over operations. For the three and nine months ended March 31, 2023 and 2022, the impact of GSM’s activities
were immaterial to the Company’s unaudited condensed consolidated financial statements.
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) shall consist of a management fee and a fee for services provided, which
shall be 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 logistic 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 (subject to a lock-up period
of 180 days and insider trading rules), and (iii) owed 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 Limited, 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 Limited, an exempted company incorporated under the laws of the British Virgin Islands (“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” shall 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 shall
have 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.
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 has been 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 such 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 relationships 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 shall 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 was 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:
Schedule of allocation of acquisition price | |
| | |
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 relationships | |
| 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, had been fully paid off.
The results of operations
of Anivia since February 16, 2022 have been included in the Company's consolidated financial statements.
Pro Forma Financial Information
The following pro forma
information presents a summary of the Company’s combined operating results for the nine months ended March 31, 2022 for comparative
purposes, as if the acquisition had occurred on July 1, 2021 The following pro forma financial information is not necessarily indicative
of the Company’s operating results as they would have been had the acquisition been effected on the assumed date, nor is it necessarily
an indication of trends in future results for a number of reasons, including, but not limited to, differences between the assumptions
used to prepare the pro forma information, basic shares outstanding and dilutive equivalents, cost savings from operating efficiencies,
potential synergies, and the impact of incremental costs incurred in integrating the businesses.
Schedule of Pro Forma information | |
Nine months ended | |
| |
March 31, | |
| |
2022 | |
Total Revenues | |
$ | 57,300,642 | |
Income from Operations | |
$ | 4,623,664 | |
Basic and diluted income per share | |
$ | 0.12 | |
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 March 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 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:
Carrying amount of VIE assets and liabilities | |
| | | |
| | |
| |
March 31, 2023 | | |
June 30, 2022 | |
Cash in bank | |
$ | 364,314 | | |
$ | 271,164 | |
Prepayments and other receivables | |
$ | 634,323 | | |
$ | 1,374,698 | |
Rent deposit | |
$ | 49,653 | | |
$ | 50,036 | |
Office equipment, net | |
$ | 40,950 | | |
$ | 57,730 | |
Right of use – noncurrent | |
$ | 42,538 | | |
$ | 153,064 | |
Deferred tax asset | |
$ | 245,671 | | |
$ | – | |
Advance from shareholders | |
$ | 89,968 | | |
$ | 92,246 | |
Accounts payable | |
$ | 102,506 | | |
$ | 121,073 | |
Lease liability | |
$ | 34,932 | | |
$ | 154,418 | |
Income tax payable | |
$ | 292,166 | | |
$ | 299,563 | |
Other payables and accrued liabilities | |
$ | 291,243 | | |
$ | 188,066 | |
The operating results of the VIE were as follows
for the three and nine months ended March 31, 2023:
Operating results of the VIE | |
| | | |
| | |
| |
Three Months | | |
Nine Months | |
Revenue | |
$ | – | | |
$ | – | |
Net loss after elimination of intercompany transactions | |
$ | 389,995 | | |
$ | 1,301,559 | |
For the three months ended March 31, 2023, the
VIE contributed approximately $0.7 million of revenue and $0.1 million of net loss before elimination. For the nine months ended March
31, 2023, the VIE contributed approximately $5.0 million of revenue and $0.7 million of net loss before elimination.
Note 6 – Accounts receivable, net
Accounts receivable for the Company consisted
of the following as of the dates indicated below:
Schedule of accounts receivable | |
| | | |
| | |
| |
March 31, 2023 | | |
June 30, 2022 | |
Accounts receivable | |
$ | 15,774,882 | | |
$ | 17,502,287 | |
Less: allowance for credit losses | |
| (70,000 | ) | |
| (70,000 | ) |
Total accounts receivable | |
$ | 15,704,882 | | |
$ | 17,432,287 | |
Note 7 – Inventories, net
As of March 31, 2023 and June 30, 2022, inventories
consisted of finished goods ready for sale, net of allowance for obsolescence, amounted to $19,646,934 and $30,433,766, respectively.
As of March 31, 2023 and June 30, 2022, allowance
for obsolescence was $558,899 and $320,000, respectively.
Note 8 – Prepayments and other current assets
As of March 31, 2023 and June 30, 2022, prepayments and other current
assets consisted of the following:
Schedule of prepayments and other current assets | |
| | | |
| | |
| |
March 31, 2023 | | |
June 30, 2022 | |
Advance to suppliers | |
$ | 1,650,804 | | |
$ | 3,938,881 | |
Prepaid income taxes | |
| 152,040 | | |
| 375,087 | |
Prepaid expenses and other receivables | |
| 1,667,323 | | |
| 1,130,495 | |
| |
| | | |
| | |
Total | |
$ | 3,470,167 | | |
$ | 5,444,463 | |
Other receivables consisted of delivery fees of
$146,840 and $56,884 from two unrelated parties for their use of the Company’s courier accounts at March 31, 2023 and June 30, 2022.
As of the date of this report, the amount had been fully collected.
Note 9 – Non-current prepayments
Non-current prepayments included payments
made 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 down payment on a four-year car lease. As of March 31, 2023 and June 30,
2022, total non-current prepayments were $601,873 and
$925,624, respectively. For the three and nine months ended
March 31, 2023, the Company recorded $107,917 and
$323,751 amortization of
prepayments in the operating expenses, respectively. For the three and nine months ended March 31, 2022, the Company recorded $107,917 and
$323,751 amortization of
prepayments in the operating expenses, respectively.
Note 10 – Intangible assets, net
As of March 31, 2023 and June 30, 2022,
intangible assets, net, consisted of the following:
Schedule of intangible assets | |
| | |
|
|
|
|
| |
March
31, 2023 | |
|
June 30, 2022 |
|
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 | |
| (730,543 | ) |
|
|
(243,515 |
) |
Total | |
$ | 4,442,414 | |
|
$ |
4,929,442 |
|
The intangible assets were acquired on February
15, 2022 through the acquisition of Anivia. The weighted average remaining life for finite-lived intangible assets at March 31, 2023 was
approximately 7.45 years. The amortization expense for the three and nine months ended March 31, 2023 was $162,343 and $487,028, respectively.
The amortization expense for the three and nine months ended March 31, 2022 was $81,171 and $81,171, respectively. At March 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:
Schedule of future amortization | |
| | |
Year Ending June 30, | |
Amount | |
2023 | |
$ | 162,343 | |
2024 | |
| 649,371 | |
2025 | |
| 649,371 | |
2026 | |
| 649,371 | |
2027 | |
| 649,371 | |
Thereafter | |
| 1,682,587 | |
Intangible assets, net | |
$ | 4,442,414 | |
Note 11 – Other payables and accrued liabilities
As of March 31, 2023 and June 30, 2022, other payables and accrued
liabilities consisted of the following:
Schedule of accounts payable and accrued liabilities | |
| | | |
| | |
| |
March 31, 2023 | | |
June 30, 2022 | |
Accrued payables for inventory in transit | |
$ | 968,026 | | |
$ | 4,217,941 | |
Accrued Amazon fees | |
| 653,666 | | |
| 640,467 | |
Sales taxes payable | |
| 479,431 | | |
| 307,152 | |
Payroll liabilities | |
| 137,034 | | |
| 239,248 | |
Other accrued liabilities and payables | |
| 203,948 | | |
| 510,412 | |
| |
| | | |
| | |
Total | |
$ | 2,442,105 | | |
$ | 5,915,220 | |
The Company’s controlled VIE, DHS, facilitates
the Company in the process of inventory procurement. Through this process, the Company purchased a total of $31,385 in inventories from
a supplier which had a payment term of 90 days with a 2% premium on the purchase price. As of March 31, 2023, the outstanding balance
was paid off.
Note 12 – Loans payable
Revolving credit facility
On May 3, 2019, the Company entered into an agreement
with WFC Fund LLC (“WFC”) for a revolving loan of up to $2,000,000. The revolving loan bore interest equal to the prime rate
plus 4.25% per annum on the outstanding amount. On May 26, 2020, the Loan and Security Agreement was amended and restated as a Receivable
Purchase Agreement (the “Original RPA”). On November 16, 2020, the Original RPA was further amended and restated (the “Restated
RPA”) to increase the credit limit of the revolving credit facility from $2,000,000 to $3,000,000. The Restated RPA bore a discount
rate of 3.055555%, subject to a rebate of 0.0277% per day. This revolving credit facility was secured by all of the Company’s assets
and guaranteed by Chenlong Tan, the CEO and one of the Company’s major shareholders and founders. Pursuant to the terms of the agreement,
all purchases of accounts receivable were without recourse to the Company, and WFC assumed the risk of nonpayment of the accounts receivable
due to a customer’s financial inability to pay the accounts receivable or the customer’s insolvency but not the risk of non-payment
of the accounts receivable for any other reason. The Company was obligated to collect the accounts receivable and to repurchase or pay
back the amount drawn down if the accounts receivable were not collected.
During the three months ended September 30, 2021,
the Company terminated the Restated RPA and paid off the balance due to WFC.
As of March 31, 2023 and June 30, 2022, the outstanding
balance due under the RPA was $0 and $0, respectively.
Long-term loan
SBA loan payable
On April 18, 2020, the Company entered into an
agreement with the U.S. Small Business Administration (“SBA”) for a loan of $500,000 under Section 7(b) of the Small Business
Act pursuant to which we issued a promissory note (the “SBA Note”) to the SBA. The SBA Note bears interest at the rate of
3.75% per annum and matures 30 years from the date of the SBA Note. Monthly installment payments, including principal and interest, will
begin twelve months from the date of the SBA Note. During the quarter ended June 30, 2022, the Company paid off the SBA Note, including
accrued interest expense of $39,237. As of March 31, 2023 and June 30, 2022, the outstanding balance of the SBA Note was $0 and $0, respectively.
Asset-based revolving loan
On November 12, 2021, the Company entered into
a Credit Agreement with JPMorgan Chase Bank, N.A., as administrative agent, issuing bank and swingline lender, for an asset-based revolving
loan (“ABL”) of up to $25 million with key terms listed as follows:
|
· |
Borrowing base equal to the sum of |
|
Ø |
Up to 90% of eligible credit card receivables |
|
Ø |
Up to 85% of eligible trade accounts receivable |
|
Ø |
Up to the lesser of (i) 65% of cost of eligible inventory or (ii) 85% of net orderly liquidation value of eligible inventory |
|
· |
Interest rates of between LIBOR plus 2% and LIBOR plus 2.25% depending on utilization |
|
· |
Undrawn fee of between 0.25% and 0.375% depending on utilization |
|
· |
Maturity Date of November 12, 2024 |
In addition, the ABL includes an accordion feature
that allows the Company to borrow up to an additional $25.0 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 three years as financing
expenses, the term of the ABL.
Below is a summary of the interest expense recorded
for the three and nine months ended March 31, 2023 and 2022:
Schedule of interest on loans payable | |
| | | |
| | | |
| | | |
| | |
| |
Three Months Ended March 31, | | |
Nine Months Ended March 31, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Accrued interest | |
$ | 136,570 | | |
$ | 50,419 | | |
$ | 500,117 | | |
$ | 81,328 | |
Credit utilization fees | |
| 15,679 | | |
| – | | |
| 29,265 | | |
| – | |
Amortization of debt discount | |
| 66,305 | | |
| 68,813 | | |
| 198,914 | | |
| 113,016 | |
Total | |
$ | 218,554 | | |
$ | 119,232 | | |
$ | 728,296 | | |
$ | 194,344 | |
As of March 31, 2023, the outstanding amount
of the revolving loan payable, net of debt discount and including interest payable of $529,382,
was $7,653,372.
As of June 30, 2022, the outstanding amount of the long-term revolving loan payable, net of debt discount, was $12,314,627,
including interest payable of $182,543.
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 Chase Bank, N.A., as administrative agent and lender (“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.
Promissory note payable
On February 15, 2022, as part of the consideration
for acquisition of Anivia Limited, the Company issued a two-year unsecured 6% subordinated promissory note, payable in equal semi-annual
installments commencing August 15, 2022 (the “Purchase Note”). The principal amount of the Purchase Note was $3.5 million
with a fair value of $3.6 million as of February 15, 2022. 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. For the three months ended March 31, 2023, the Company recorded accrued
interest of $32,813 and amortization of note premium of $12,579. For the nine months ended March 31, 2023, the Company recorded accrued
interest of $131,250 and amortization of note premium of $37,839. As of March 31, 2023, including $210,000 of accrued interest and $44,181
of unamortized premium, the total outstanding balance of the Purchase Note was $2,004,181, which is presented on the consolidated balance
sheet as a current portion of $2,004,181 and a non-current portion of $0.
Note 13 - Related party transactions
Starting March 1, 2022, the Company subleases
up to 50,000 square feet of its warehouse space to Box Harmony, LLC, which is a 40% owned joint venture of the Company as disclosed on
Note 1 and Note 2 above. For the three and nine months ended March 31, 2023, the Company recorded a sublease fee of $0 and $387,750 as
other non-operating income. As of March 31, 2023 and June 30, 2022, other receivables due from Box Harmony was $39,853 and $51,762, respectively.
On February 15, 2022, the Company assumed $92,246
(RMB618,000) of advance from shareholders of DHS through the acquisition of Anivia. This amount was for capital injection pending capital
inspection by the local government in accordance with the PRC rules. As of March 31, 2023 and June 30, 2022, the balance of advance from
shareholders was $89,968 and $92,246, respectively.
Note 14 – Income taxes
For the three and nine months ended March 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.
The income tax provision for the three and nine
months ended March 31, 2023 and 2022 consisted of the following:
Schedule of provision for income tax expense | |
| | | |
| | | |
| | | |
| | |
| |
Three Months Ended March 31, | | |
Nine Months Ended March 31, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Current: | |
| | | |
| | | |
| | | |
| | |
Federal | |
$ | 105,492 | | |
$ | 402,373 | | |
$ | 386,273 | | |
$ | 859,341 | |
States | |
| 1,797 | | |
| 67,642 | | |
| 11,596 | | |
| 276,364 | |
Foreign | |
| – | | |
| 122,623 | | |
| – | | |
| 122,623 | |
Total current income tax provision | |
| 107,289 | | |
| 592,638 | | |
| 397,869 | | |
| 1,258,328 | |
| |
| | | |
| | | |
| | | |
| | |
Deferred: | |
| | | |
| | | |
| | | |
| | |
Federal | |
| (558,437 | ) | |
| (432,290 | ) | |
| (1,818,222 | ) | |
| (432,290 | ) |
States | |
| (114,675 | ) | |
| (120,493 | ) | |
| (421,382 | ) | |
| (120,493 | ) |
Foreign | |
| (23,758 | ) | |
| – | | |
| (243,391 | ) | |
| – | |
Total deferred taxes | |
| (696,870 | ) | |
| (552,783 | ) | |
| (2,482,995 | ) | |
| (552,783 | ) |
| |
| | | |
| | | |
| | | |
| | |
Total provision for income taxes | |
$ | (589,581 | ) | |
$ | 39,855 | | |
$ | (2,085,126 | ) | |
$ | 705,545 | |
The Company is subject to U.S. federal income
tax as well as state income tax in certain jurisdictions. The tax years 2018 to 2021 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:
Schedule of reconciliation of effective income tax rate | |
| | | |
| | | |
| | | |
| | |
| |
Three Months Ended March 31, | | |
Nine Months Ended March 31, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Statutory tax rate | |
| | | |
| | | |
| | | |
| | |
Federal | |
| 21.00% | | |
| 21.00% | | |
| 21.00% | | |
| 21.00% | |
State | |
| 5.82% | | |
| 5.45% | | |
| 5.82% | | |
| 5.71% | |
Foreign tax rate difference | |
| 0.33% | | |
| (1.59% | ) | |
| 2.19% | | |
| (0.54% | ) |
Impairment loss on goodwill -permanent difference | |
| – | | |
| – | | |
| (7.40% | ) | |
| – | |
Net effect of state income tax deduction and other permanent differences | |
| 0.62% | | |
| (21.59% | ) | |
| (2.82% | ) | |
| (6.40% | ) |
| |
| | | |
| | | |
| | | |
| | |
Effective tax rate | |
| 27.77% | | |
| 3.27% | | |
| 18.79% | | |
| 19.77% | |
As of March 31, 2023, prepaid income taxes to
US tax authorities and income tax payable to Chinese tax authorities was $ 44,218 and $292,166, respectively. As of June 30, 2022, prepaid
income taxes to US tax authorities and income tax payable to Chinese tax authorities was $375,087 and $299,563, respectively.
The tax effects of temporary differences which give rise to significant
portions of the deferred taxes are summarized as follows:
Schedule of deferred taxes | |
| | | |
| | |
| |
March 31, 2023 | | |
June 30, 2022 | |
Deferred tax assets | |
| | | |
| | |
263A calculation | |
$ | 228,145 | | |
$ | 123,884 | |
Inventory reserve | |
| 149,907 | | |
| 71,026 | |
State taxes | |
| 2,435 | | |
| 45,234 | |
Accrued expenses | |
| 196,492 | | |
| 69,172 | |
ROU assets / liabilities | |
| 115,501 | | |
| 83,738 | |
Stock-based compensation | |
| 174,179 | | |
| 70,266 | |
Net operating loss | |
| 1,965,531 | | |
| – | |
Others | |
| 18,775 | | |
| 7,539 | |
Total deferred tax assets | |
| 2,850,965 | | |
| 470,859 | |
| |
| | | |
| | |
Deferred tax liabilities | |
| | | |
| | |
Depreciation | |
| (111,714 | ) | |
| (86,254 | ) |
Intangible assets acquired | |
| (1,193,092 | ) | |
| (1,323,720 | ) |
Total deferred tax liabilities | |
| (1,304,806 | ) | |
| (1,409,974 | ) |
| |
| | | |
| | |
Net deferred tax assets (liabilities) | |
$ | 1,546,159 | | |
$ | (939,115 | ) |
Note 15 – (Losses) Earnings per share
The following table sets forth the computation of basic and diluted
(losses) earnings per share for the periods presented:
Schedule of computation of earnings per share | |
| | | |
| | | |
| | | |
| | |
| |
Three Months Ended March 31, | | |
Nine Months Ended March 31, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Numerator: | |
| | | |
| | | |
| | | |
| | |
Net (Loss) Income
Attributable to iPower, Inc. | |
$ | (1,530,534 | ) | |
$ | 1,181,757 | | |
$ | (9,003,349 | ) | |
$ | 2,867,146 | |
| |
| | | |
| | | |
| | | |
| | |
Denominator: | |
| | | |
| | | |
| | | |
| | |
Weighted-average shares used in computing basic and diluted earnings per share* | |
| | | |
| | | |
| | | |
| | |
Basic | |
| 29,730,914 | | |
| 28,045,130 | | |
| 29,702,014 | | |
| 26,999,342 | |
Diluted | |
| 29,730,914 | | |
| 28,045,130 | | |
| 29,702,014 | | |
| 26,999,342 | |
| |
| | | |
| | | |
| | | |
| | |
(Losses) Earnings per share: | |
| | | |
| | | |
| | | |
| | |
Basic | |
$ | (0.051 | ) | |
$ | 0.042 | | |
$ | (0.303 | ) | |
$ | 0.106 | |
Diluted | |
$ | (0.051 | ) | |
$ | 0.042 | | |
$ | (0.303 | ) | |
$ | 0.106 | |
* |
Due to the ani-dilutive effect, the computation of basic and diluted EPS did not include the shares underlying the exercise of warrants as the Company had a net loss for the three and nine months ended March 31, 2023. |
|
|
* |
The computation of diluted EPS did not include the underlying shares of warrants calculated using treasury method for the three and nine months ended March 31, 2022 as the exercise price was greater than the market price of the shares. |
|
|
* |
The computation of diluted EPS did not include the underlying shares
of the stock options granted in May 2022 for the three and nine months ended March 31, 2023 as none of the options were vested as of March
31, 2023. |
|
|
* |
For the three and nine months ended March 31, 2023, 166,661 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. |
|
|
* |
For the three and nine
months ended March 31, 2022, 107,625 vested but unissued shares of restricted stock units under the Amended and Restated 2020 Equity
Incentive Plan are considered issued shares and therefore are included in the computation of basic earnings (losses) per share as of
grant date when the shares are fully vested. Impact of nonvested RSU is immaterial to the EPS. |
Note 16 – Equity
Common Stock
During the year ended June 30, 2022, the Company
issued 40,019 shares of restricted common stock for RSUs vested in the quarter ended September 30, 2021.
On February 15, 2022, as part of the consideration
for the acquisition of Anivia and subsidiaries, 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
have 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 is determined using the Black Scholes Model.
As of March 31, 2023 and June 30, 2022, there
were 29,572,382 and 29,572,382 shares of Common Stock issued and outstanding, respectively.
Preferred Stock
The Company’s 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 March 31, 2023 and June 30, 2022, 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 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.
Restricted Stock Unit
Following completion of the IPO on May 11,
2021, pursuant to their letter agreements, the Company awarded a total of 46,546
restricted stock units (“RSUs”) under the Plan to its independent directors, Chief Financial Officer, and certain other
employees and consultants, all of which are subject to certain vesting conditions in the next 12 months and restrictions until
filing of a Form S-8 for registration of the shares. On November 16, 2021, we filed a registration statement on Form S-8 registering
all shares issuable under the Plan. The fair value of the RSUs was determined to be based on $5.00 per share, the initial listing
price of the Company’s common stock on the grant date. The fair value of RSUs issued subsequent to the IPO date was based on
the stock price on each grant date. During the nine months ended March 31, 2022, the Company granted an additional 79,406
shares of RSUs. For the three and nine months ended March 31, 2023, the Company recorded $7,192
and $56,576
of stock-based compensation expense. For the three and nine months ended March 31, 2022, the Company recorded $149,299
and $306,788
of stock-based compensation expense. As of March 31, 2023 and June 30, 2022, the unvested number of RSUs was 12,400
and 6,608
and the unamortized expense was $7,192
and $15,000,
respectively.
Information relating to RSU grants is summarized
as follows:
Schedule of RSU activity | |
| | | |
| | |
| |
Total RSUs Issued | | |
Total Fair Market Value of RSUs Issued as Compensation (1) | |
RSUs granted, but not vested, at June 30, 2022 | |
| 6,608 | | |
| | |
RSUs granted | |
| 79,406 | | |
$ | 48,768 | |
RSUs forfeited | |
| – | | |
| | |
RSUs vested | |
| (73,614 | ) | |
| | |
RSUs granted, but not vested, at March 31, 2023 | |
| 12,400 | | |
| | |
_____________________
(1) |
The total fair value was based on the stock price on the grant date. |
As of March 31, 2023, of the 206,680 vested RSUs,
40,019 shares of Common Stock were issued, and 166,661 shares were to be issued upon setup of the plan administration account.
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 stock option grants (the “Option Grants”) in the amount of
(i) 3,000,000 shares to Chenlong Tan, CEO and (ii) 330,000 shares 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 designated operational milestones (performance conditions) and market conditions (together, the
“Designated Milestones”), assuming continued employment of the recipients through the date on which such Designated Milestones
are achieved. Each of the six vesting tranches for 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.
The achievement status of the operational
milestones as of March 31, 2023 was as follows:
Revenue in Fiscal Year | |
Operating Income in Fiscal Year |
Milestone | | |
| |
Milestone | | |
|
(in Millions) | | |
Achievement Status | |
(in Millions) | | |
Achievement Status |
| | |
| |
| | |
|
$ | 90 | | |
Probable | |
$ | 6 | | |
Probable |
$ | 100 | | |
Probable | |
$ | 8 | | |
Probable |
$ | 125 | | |
Probable | |
$ | 10 | | |
Probable |
$ | 150 | | |
Probable | |
$ | 12 | | |
– |
$ | 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 we will achieve each operational milestone that has not previously been achieved
or deemed probable of achievement and if so, the future time when we expect 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 June 30, 2022, $2.3 million is deemed probable of vesting. As of March 31, 2023, none of the options had vested.
For the three and nine months ended March 31, 2023, the Company recorded $110,382 and $331,146 of stock-based compensation expense related
to the Option Grants. For the three and nine months ended March 31, 2022, the Company did not record any stock-based compensation expense
related to the Option Grants. Unrecognized compensation cost related to tranches probable of vesting is approximately $1.9 million and
will be recognized over 2.25 years to 9.25 years, depending on the tranche.
Note
17 – Warrant liabilities
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 shall be 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 reclassed to additional paid in capital as the terms became fixed upon closing of the IPO. Through March 31, 2023,
none of the private placement investors exercised any of their warrants. As such, as of March 31, 2023 and June 30, 2022, 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 March 31, 2023 and June 30, 2022, $1,419,495
and $1,821,947, 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
$0.4 million and $0.5 million, respectively, in excess of the FDIC insurance limit, as of March 31, 2023 and June 30, 2022.
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 nine months ended March 31, 2023 and 2022,
Amazon Vendor and Amazon Seller customers accounted for 91% and 89% of the Company's total revenues, respectively. As of March 31, 2023
and June 30, 2022, accounts receivable from Amazon Vendor and Amazon Seller accounted for 94% and 94% of the Company’s total accounts
receivable.
For the nine months ended March 31, 2023 and 2022,
two suppliers accounted for 39% (28% and 11%) and 27% (17% and 11%) of the Company's total purchases, respectively. As of March 31, 2023,
accounts payable to two suppliers accounted for 59% (53% and 6%) of the Company’s total accounts payable. As of June 30, 2022, accounts
payable to two suppliers accounted for 44% (34% and 10%) of the Company’s total accounts payable.
Note 19 - Commitments and contingencies
Lease commitments
The Company has entered into a lease agreement to rent 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 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 ranges from $27,921
to $29,910 per month through October 31, 2023.
On February 15, 2022, upon completion of the acquisition
of Anivia Limited, the Company assumed an operating lease for offices located in the People’s Republic of China.
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 was 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.
In addition, the Company
will be responsible for its pro rata share of certain costs, including utility costs, insurance and common area costs, as further detailed
in the Lease Agreement. Following the Rent Commencement Date, the first two months of the Base Rent were to be abated.
The lease was not started under the original Lease
Agreement as completion of the construction was not timely completed. On February 23, 2022, as a result of the delay in completion of
the construction, the Company entered into an amended agreement to extend the lease term to 74 months. The lease commencement date is
February 10, 2022, with rent payments commencing May 11, 2022 and the lease expiring on May 31, 2028. The base rental fee ranges from
$114,249 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 ranges from $56,000 to $59,410 per month through April 30, 2025.
Total commitment for the full term of these leases
is $12,440,869. The financial statements reflected $8,504,929 and $10,453,282, respectively, of operating lease right-of-use assets, and
$8,927,949 and $10,848,544, respectively, of operating lease liabilities as of March 31, 2023 and June 30, 2022.
Three Months Ended March 31, 2023 and 2022:
Schedule of lease cost and other information | |
| | | |
| | |
| |
3/31/2023 | | |
3/31/2022 | |
Lease cost | |
| | | |
| | |
Operating lease cost (included in selling and fulfillment in the Company's statement of operations) | |
$ | 776,878 | | |
$ | 427,692 | |
| |
| | | |
| | |
Other information | |
| | | |
| | |
Cash paid for amounts included in the measurement of lease liabilities | |
$ | 778,843 | | |
$ | 234,504 | |
Remaining term in years | |
| 0.33 – 5.17 | | |
| 1.33 – 6.17 | |
Average discount rate - operating leases | |
| 5 - 8% | | |
| 5% – 8% | |
Nine Months Ended March 31, 2023 and 2022:
| |
3/31/2023 | | |
3/31/2022 | |
Lease cost | |
| | | |
| | |
Operating lease cost (included in selling and fulfillment in the Company's statement of operations) | |
$ | 2,331,542 | | |
$ | 838,726 | |
| |
| | | |
| | |
Other information | |
| | | |
| | |
Cash paid for amounts included in the measurement of lease liabilities | |
$ | 2,303,668 | | |
$ | 656,961 | |
Remaining term in years | |
| 0.33 – 5.17 | | |
| 1.33 – 6.17 | |
Average discount rate - operating leases | |
| 5 - 8% | | |
| 5% – 8% | |
The supplemental balance sheet information related to leases for the
period is as follows:
Supplemental balance sheet information related to leases | |
| | | |
| | |
| |
3/31/2023 | | |
6/30/2022 | |
Operating leases | |
| | | |
| | |
Right of use asset - non-current | |
$ | 8,504,929 | | |
$ | 10,453,282 | |
Lease Liability – current | |
| 2,356,545 | | |
| 2,582,933 | |
Lease Liability – non-current | |
| 6,571,404 | | |
| 8,265,611 | |
Total operating lease liabilities | |
$ | 8,927,949 | | |
$ | 10,848,544 | |
Maturities of the Company’s lease liabilities
are as follows:
Schedule of maturities of lease liabilities | |
| | |
| |
Operating | |
| |
Lease | |
For Year ending June 30: | |
| | |
2023 | |
$ | 771,954 | |
2024 | |
| 2,510,815 | |
2025 | |
| 2,080,331 | |
2026 | |
| 1,533,918 | |
2027 | |
| 1,586,572 | |
2028 and after | |
| 1,459,407 | |
Less: Imputed interest/present value discount | |
| (1,015,068 | ) |
Present value of lease liabilities | |
$ | 8,927,949 | |
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 is seeking, among other things, monetary damages against the Company and D.A. Davidson &
Co. (who acted as underwriter in the Company’s IPO). Presently, the matter is scheduled to be heard before a FINRA arbitration
panel during the week beginning May 22, 2023. 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 of 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 have implemented various measures, some of which have been subsequently rescinded or modified, including
travel bans, stay-at-home orders and shutdowns of certain businesses. The Company anticipates that these actions and the global health
crisis caused by the COVID-19 outbreak, including any resurgences, will continue to negatively impact global economic activity. While
the COVID-19 outbreak has not had a material adverse impact on the Company’s operations to date, it is difficult to predict all
of the positive or negative impacts the COVID-19 outbreak may have on the Company’s business in the future.
In
February 2022, the Russian Federation began conducting military operations against Ukraine, which have been ongoing ever
since, resulting in global economic uncertainty and increased 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 disruption 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, they did not
have a material effect on our results of operations, financial condition, or liquidity for the three and nine months ended March 31,
2023.
Note 20 - 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. The
Company noted no material subsequent events that required recognition or additional disclosure in the consolidated financial statements
presented herein.