The following Management's Discussion and Analysis should be read in conjunction
with our financial statements and the related notes thereto included elsewhere
herein. The Management's Discussion and Analysis ("MD&A") contains
forward-looking statements that involve risks and uncertainties, such as
statements of our plans, objectives, expectations and intentions. Any statements
that are not statements of historical fact are forward-looking statements. When
used, the words "believe," "plan," "intend," "anticipate," "target," "estimate,"
"expect," and the like, and/or future-tense or conditional constructions
("will," "may," "could," "should," etc.), or similar expressions, identify
certain of these forward-looking statements. These forward-looking statements
are subject to risks and uncertainties that could cause actual results or events
to differ materially from those expressed or implied by the forward-looking
statements in this form. Our actual results and the timing of events could
differ materially from those anticipated in these forward-looking statements as
a result of several factors.
Historical results may not indicate future performance. Our forward-looking
statements reflect our current views about future events, are based on
assumptions and are subject to known and unknown risks and uncertainties that
could cause actual results to differ materially from those contemplated by these
statements. We undertake no obligation to publicly update or revise any
forward-looking statements, including any changes that might result from any
facts, events, or circumstances after the date hereof that may bear upon
forward-looking statements. Furthermore, we cannot guarantee future results,
events, levels of activity, performance, or achievements.
Overview
iPower Inc. is an online hydroponic equipment supplier based in the United
States. Through the operations of our e-commerce platform, www.Zenhydro.com, and
our combined 72,000 square foot fulfillment centers in Los Angeles, California,
we believe we are one of the leading marketers, distributors and retailers of
grow-light systems, ventilation systems, activated carbon filters, nutrients,
growing media, hydroponic water-resistant grow tents, trimming machines,
pumps and accessories for hydroponic gardening, based on management's estimates.
We have a diverse customer base that includes commercial users and individuals.
Our core strategy continues to focus on expanding our geographic reach across
the United States through organic growth, both in terms of expanding customer
base as well as brand and product development.
We are actively developing and acquiring our in-house branded products, which to
date include the iPower and Simple Deluxe brands, and consist of more than 2,600
SKUs of products such as grow-light systems, ventilation systems, activated
carbon filters, nutrients, growing media, hydroponic water-resistant grow tents,
trimming machines, pumps and many more hydroponic-related items; some of which
have been designated as Amazon best seller product leaders, among others. For
the fiscal year ended June 30, 2021, our top five product categories consisted
of ventilation systems (24% of sales), nutrients (13% of total sales), air
filtration devices (8% of sales), grow light systems (7% of sales), and
gardening equipment (5% of sales). While we will continue focusing on our top
products, we are working to expand its product line to include nutrients.
35
Trends and Expectations
Product and Brand Development
We plan to increase investments in product sourcing, product and brand
development, marketing research and promotion. We actively evaluate and pursue
acquisitions of product brand names and improvements on existing products.
COVID-19 Outbreak
We are continuing to closely monitor the impact of the COVID-19 outbreak on our
business, results of operations and financial results. The situation surrounding
the COVID-19 outbreak remains fluid and the full extent of the positive or
negative impact of the COVID-19 outbreak on our business will depend on certain
developments including the length of time that the outbreak continues, the
impact on consumer activity and behaviors and the effect on our customers,
employees, suppliers, and stockholders, all of which are uncertain and cannot be
predicted. See "Risk Factors" beginning on page 11 for additional details. Our
focus remains on promoting the health, safety and financial security of our
employees and serving our customers. As a result, we have taken a number of
precautionary measures, including implementing social distancing and enhanced
cleaning measures in our facilities, suspending all non-essential travel,
transitioning certain of our employees to working-from-home arrangements,
reimbursing certain employee technology purchases, providing emergency paid time
off and targeted hourly pay increases and developing no contact delivery
methods.
In an effort to contain or slow the COVID-19 outbreak, authorities across the
world have implemented various measures, some of which have been subsequently
rescinded or modified, including travel bans, stay-at-home orders and shutdowns
of certain businesses. We anticipate that these actions and the global health
crisis caused by the COVID-19 outbreak, including any resurgences, will continue
to negatively impact global economic activity. While the COVID-19 outbreak has
not had a material adverse impact on our operations to date and we believe the
long-term opportunity that we see for shopping online remains unchanged, it is
difficult to predict all of the positive or negative impacts the COVID-19
outbreak will have on our business.
In the short term, we have continued to see increased sales and order activity
in the market since the COVID-19 outbreak. In order to keep up with the
increased orders, we have hired and are continuing to hire additional personnel.
However, much is unknown and accordingly the situation remains dynamic and
subject to rapid and possibly material change. We will continue to actively
monitor the situation and may take further actions that alter our business
operations as may be required by federal, state, local or foreign authorities,
or that we determine are in the best interests of our customers, employees,
suppliers, stockholders and communities.
Regulatory Environment
We sell hydroponic gardening products to end users that may use such products in
new and emerging industries or segments, including the growing of cannabis. The
demand for hydroponic gardening products depends on the uncertain growth of
these industries or segments due to varying, inconsistent, and rapidly changing
laws, regulations, administrative practices, enforcement approaches, judicial
interpretations and consumer perceptions. For example, certain countries and a
total of 44 U.S. states plus the District of Columbia have adopted frameworks
that authorize, regulate and tax the cultivation, processing, sale and use of
cannabis for medicinal and/or non-medicinal use, including legalization of hemp
and CBD, while the U.S. Controlled Substances Act and the laws of U.S. states
prohibit growing cannabis. Demand for our products could be impacted by changes
in the regulatory environment with respect to such industries and segments.
36
RESULTS OF OPERATIONS
For the years ended June, 2021 and 2020
The following table presents certain consolidated statement of operations
information and presentation of that data as a percentage of change from period
to period.
Year Ended Year Ended
June 30, 2021 June 30, 2020 Variance
Revenues $ 54,075,922 $ 39,938,472 35.40%
Cost of goods sold $ 31,257,358 $ 24,810,907 25.98%
Gross profit $ 22,818,564 $ 15,127,565 50.84%
Selling, fulfillment, general and
administrative expenses $ 19,858,000 $ 12,219,616 62.51%
Operating income $ 2,960,564 $ 2,907,949 1.81%
Other (expenses) $ (2,969,551 ) $ (147,549 ) 1,912.59%
(Loss) Income before income taxes $ (8,987 ) $ 2,760,400 (100.33% )
Income tax expenses $ 766,762 $ 773,438 (0.86% )
Net (loss) income $ (775,749 ) $ 1,986,962 (139.04% )
Gross profit % of revenues 42.20% 37.88%
Net (loss) income % of revenues (1.43% ) 4.98%
Revenues
Revenues for the year ended June 30, 2021 increased 35.40% to $54,075,922 as
compared to $39,938,472 for the year ended June 30, 2020. While pricing remained
stable, the increased revenue mainly resulted from an increase in sales volume.
In addition to our organic growth, which we achieved as a result of improved
products and more effective online marketing efforts, the increase in sales was
attributable to more people shopping online and pursuing gardening and growing
projects during the COVID-19 pandemic. However, we cannot assure that this trend
will continue, and our business may be adversely affected by poor overall
economic conditions caused by the ongoing COVID-19 pandemic.
Costs of Goods Sold
Costs of goods sold for the year ended June 30, 2021 increased 25.98% to
$31,257,358 as compared to $24,810,907 for the year ended June 30, 2020. The
increase was due to an increase in sales as discussed above. In addition, we
experienced a decrease of cost of goods sold as a percentage of revenue as a
result of selling more products under in-house brands as opposed to third party
brands. See discussions on gross profit below.
37
Gross Profit
Gross profit was $22,818,564 for the year ended June 30, 2021 as compared to
$15,127,565 for the year ended June 30, 2020. The gross profit ratio also
increased to 42.20% for the year ended June 30, 2021 from 37.88% for the year
ended June 30, 2020. The increase was due to a combination of an increase in
sales as discussed above and a decrease in cost of goods sold resulting from
selling more products under in-house brands as opposed to third party brands.
The gross margin for in-house branded products is, on average, approximately 20%
higher than our gross margin for third party brands.
Selling, Fulfillment, General and Administrative Expenses
Selling, fulfillment, general and administrative expenses for the year ended
June 30, 2021 increased 62.51% to $19,858,000 as compared to $12,219,616 for the
year ended June 30, 2020. The increase was mainly due to an increase in selling
and fulfillment expenses of $4.5 million and general and administrative expenses
of $3.1 million, which included payroll expenses, IPO-related indirect expenses,
stock-based compensation expense, and other operating expenses.
Other (Expense)
Other (expenses) consists of interest expense, financing fees and other
non-operating income (expenses). Other expenses for the year ended June 30, 2021
was $(2,969,551) as compared to $(147,549) for the year ended June 30, 2020. The
increase in other expenses was mainly due to an increase in financing fees of
$148,139, amortization of debt discount of $1.5 million, and change in fair
value of conversion feature and warrant liabilities of $1.4 million resulted
from the issuance of our Series A Convertible Preferred Stock, convertible notes
and warrants during the year ended June 30, 2021.
Net (Loss) Income
Net loss for the year ended June 30, 2021 was $775,749 as compared to net income
of $1,986,962 for the year ended June 30, 2020, representing a decrease of
$2,762,711. While gross profit as a percentage of revenues increased to 42.20%
in the year ended June 30, 2021 as compared to 37.88% for the year ended June
30, 2020, the decrease in net income for the year ended June 30, 2021 was
primarily due to the increase in operating and non-operating expenses discussed
above.
38
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity
During the years ended June 30, 2021 and 2020, we primarily funded our
operations with cash and cash equivalents generated from operations, as well as
through completion of two private placements in 2020 and 2021, completion of our
initial public offering in May of 2021, and borrowing under our credit facility
and loans from the Small Business Administration. We had cash and cash
equivalents of $6,651,705 as of June 30, 2021, representing a $5,674,070
increase from $977,635 of cash as of June 30, 2020. The cash increase was
primarily the result of the closing of the 2020 and 2021 private placements and
the IPO. The loans and lines of credit consisted of the following: (i) a PPP
Loan, dated April 13, 2020 (the "PPP Loan"), with Royal Business Bank, pursuant
to which we received a $175,500 loan, with a two year term and bearing an
interest rate of 1% per annum, which PPP Loan was fully forgiven on March 22,
2021; (ii) a Small Business Administration Loan, dated April 18, 2020 (the "SBA
Loan"), pursuant to which we received $500,0000 in exchange for issuing a
30-year, $500,000 note bearing an interest rate of 3.75% per annum, with
repayment of $2,437 per month to commence on the one year anniversary date of
the SBA Loan; and (iii) a Loan and Security Agreement with WFC Fund, LLC
("WFC"), dated May 3, 2019 (the "Loan and Security Agreement"), pursuant to
which WFC provided us a $2,000,000 revolving loan facility with a one year
maturity date, which had an interest rate equal to the prime rate plus 4.25% per
annum. The Company's obligations under the Loan and Security Agreement were
secured by all of the Company's assets and guaranteed by Allan Huang, a former
director and executive officer and one of our major shareholders and founders.
On May 26, 2020, the Loan and Security Agreement was amended and restated as a
Receivables Purchase Agreement (the "Original RPA"), pursuant to which WFC may,
but is not obligated to, purchase accounts receivable from the Company from time
to time. The credit limit of the revolving facility under the Original RPA was
$2,000,000, which had a discount rate equal to the prime rate plus 4.25% per
annum on the outstanding amount. This revolving credit facility is secured by
all of the Company's assets and guaranteed by Mr. Huang. Pursuant to the
Original RPA, the purchases of accounts receivable were made with full recourse
to the Company, and the Company was obligated to collect the accounts
receivables and to repurchase or pay back the amount drawn if the accounts
receivable were not collected. On November 16, 2020, the Original RPA was
further amended and restated (the "Restated RPA") to increase the credit limit
of the revolving facility from $2,000,000 to $3,000,000, which bears a discount
rate of 3.05555%, subject to a rebate of 0.0277% per day. This revolving credit
facility is secured by all of the Company's assets and guaranteed by Chenlong
Tan, our CEO, President and one of our major shareholders and founders. Pursuant
to the agreement, all purchases of accounts receivables are without recourse to
the Company, and WFC assumes 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 ("Credit Risk") but not the risk of non-payment of the
accounts receivable for any other reason. The Company is obligated to collect
the accounts receivables and to repurchase or pay back the amount drawn if the
accounts receivable are not collected for any reason other than Credit Risk. The
Restated RPA has an initial term of 12 months and automatically renews for
successive 12-month periods on each anniversary of the Restated RPA, unless
either party notifies the other party prior to the renewal date (or, in the case
of WFC, at any time a default is continuing under the Restated RPA) that such
notifying party is terminating the Restated RPA. If the Restated RPA is
terminated six months or more prior to its then-scheduled termination date, the
Company is obligated to pay WFC a termination fee equal to 1% of the facility
limit. We do not believe that the terms of the Restated RPA will materially
change our ability to access funds, other than by providing us with an
additional $1,000,000 in potential cash availability through the revolving
credit facility. The loans and revolving credit facility are discussed in
greater detail in Note 8 to our financial statements for the years ended June
30, 2021 and June 30, 2020.
On December 30, 2020, we closed on a private placement offering pursuant to
which we sold to three accredited investors an aggregate of $345,000 in Series A
convertible preferred stock, at a purchase price of $10.00 per share, which
stock automatically converted into Common Stock upon completion of our IPO at a
discount of 30% to the IPO per share purchase price. The offering was completed
pursuant to an exemption from registration under Rule 506(b) of the Securities
Act of 1933, as amended.
On January 27, 2021, we completed a private placement offering pursuant to which
we sold to two accredited investors an aggregate of $3,000,000 of our 6%
convertible notes due six months from the date of issuance, subject to extension
as provided below (the "Convertible Notes"). Upon completion of our IPO, the
Convertible Notes will automatically converted into 857,144 shares of Common
Stock using a conversion price equal to $3.50 per share, representing a 30%
discount to the public offering price per share of the Common Stock in our IPO.
Boustead Securities LLC acted as placement agent in both the December 30, 2020
and the January 27, 2021 private placements.
39
In addition to the Convertible Notes, the purchasers of the Convertible Notes
received three-year warrants entitling the holders to purchase 685,714 shares of
Common Stock which equals 80% of the number of shares of Common Stock issuable
upon conversion of the Convertible Notes.
Prior to the completion of our IPO, on April 14, 2021, we amended and restated
our articles of incorporation to eliminate the Class A Common Stock and Class B
Common Stock designations. And on May 14, 2020, the Company closed its IPO under
a registration statement, effective May 11, 2021, in which we issued and sold
3,360,000 shares of Common Stock at a purchase price of $5.00 per share (the
"Public Offering Price"). On May 21, 2021, the Company closed on the IPO's
overallotment option, selling an additional 504,000 shares of Common Stock to
the IPO's underwriters at the Public Offering Price. The Company received net
proceeds of approximately $16.5 million from the IPO after deducting
underwriting discounts and offering expenses.
Following completion of the IPO, on May 14, 2021, the Series A convertible
preferred stock and Convertible Notes were converted into an aggregate of
955,716 shares of the Common Stock. The Company also issued 24,451 shares of
Common Stock upon the cashless exercise of warrants held by Boustead Securities
LLC, the placement agent of the Company's private placement offerings completed
in December 2020 and January 2021.
As of the date of this report, we had cash and cash equivalents of approximately
$1.5 million. The decrease in cash was due to an increase in purchasing
additional inventory and investing in product sourcing and marketing promotions.
Working Capital
As of June 30, 2021 and 2020, our working capital was $23,281,891 and
$3,161,389, respectively. The historical seasonality in our business during the
year can cause cash and cash equivalents, inventory, and accounts payable to
fluctuate, resulting in changes in our working capital.
Cash Flows
Operating Activities
Net cash (used in) / provided by operating activities for the years ended June
30, 2021 and 2020 was ($12,756,949) and $1,109,043, respectively. The increase
in use of cash in operating activities was resulted from an increased purchase
of products in order to maintain the higher inventory levels required to meet
our increasing sales volumes and prepayments for product sourcing and marketing
promotions.
Investing Activities
For the years ended June 30, 2021 and 2020, net cash used in investing
activities was the result of additions to property and equipment of $61,498 and
$6,252, respectively, which are mainly related to the purchase of office
equipment.
Financing Activities
Net cash provided by / (used in) financing activities was $18,492,517 and
($596,614), respectively, for the years ended June 30, 2021 and 2020. The main
reason for the increase in net cash provided was primarily a result of proceeds
from our IPO, our revolving facility with WFC and the closing of our private
placements of an aggregate of $345,000 in Series A convertible preferred stock
and $3,000,000 in convertible notes.
40
October 2019 Share Exchange Agreement and Rescission
In October 2019, we entered into a share exchange agreement (the "Share Exchange
Agreement") with Sugarmade, Inc., a Delaware corporation ("Sugarmade"), pursuant
to which, among other things, the Company and its stockholders agreed to sell
100% of the issued and outstanding capital stock of the Company to Sugarmade in
exchange for $870,000 in cash, $7,130,000 under a promissory note, up to 650,000
shares of Sugarmade's common stock, and up to 3,500,000 shares of Sugarmade's
Series B preferred stock.
Due to certain disputes that arose between the parties with respect to certain
terms and conditions contained in the Share Exchange Agreement, the parties
entered into a Rescission and Mutual Release Agreement on January 15, 2020 (the
"Rescission Agreement"). Pursuant to the terms of the Rescission Agreement, the
Company and its stockholders returned the shares of Sugarmade common stock and
preferred stock and issued to Sugarmade 102,248 (204,496 post-forward split)
shares of the Company's Common Stock then valued at $427,010.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements (as that term is defined in
Item 303 of Regulation S-K) that are reasonably likely to have a current or
future material effect on our financial condition, revenue or expenses, results
of operations, liquidity, capital expenditures or capital resources.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States, or GAAP and pursuant to the
rules and regulations of the Securities Exchange Commission ("SEC"). The
preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates. In some cases, changes in the
accounting estimates are reasonably likely to occur from period to period.
Accordingly, actual results could differ materially from our estimates. To the
extent that there are material differences between these estimates and actual
results, our financial condition and results of operations will be affected. We
base our estimates on experience and other assumptions that we believe are
reasonable under the circumstances, and we evaluate these estimates on an
ongoing basis. We refer to accounting estimates of this type as critical
accounting policies, which we discuss further below. While our significant
accounting policies are more fully described in Note 2 to our audited
consolidated financial statements, we believe that the following accounting
policies are critical to the process of making significant judgments and
estimates in the preparation of our audited consolidated financial statements.
Variable interest entity
The Company entered into an agreement with E Marketing Solution Inc. ("E
Marketing"), an entity incorporated in California and owned by Shanshan Huang,
one of the shareholders of the Company. The Company also entered into an
agreement with Global Product Marketing Inc. ("GPM"), an entity incorporated in
the State of Nevada on September 4, 2020. GPM is owned by Chenlong Tan, the
Chairman, CEO, President and one of the majority shareholders of the Company.
The Company does not have direct ownership in E Marketing and GPM but has been
actively involved in their operations and has the power to direct the activities
and significantly impact E Marketing's and GPM's economic performance. The
Company also bears all the risk of losses and has the right to receive all of
the benefits from E Marketing and GPM. As such, in accordance with ASC
810-10-25-38A through 25-38J, E Marketing and GPM are considered variable
interest entities ("VIEs") of the Company and the financial statements of E
Marketing and GPM were consolidated from the date of control existed.
On May 18, 2021, the Company entered into equity purchase agreements ("Equity
Purchase Agreements") with the shareholders of each of our variable interest
entities, E Marketing Solution Inc. ("E Marketing") and Global Product Marketing
Inc. ("GPM"), pursuant to which we acquired 100% of the equity interests of each
of E Marketing and GPM. The Company paid nominal consideration of $10.00 for the
acquisition of each of E Marketing and GPM, which then became the Company's
wholly owned subsidiaries.
41
Revenue recognition
The Company has adopted Accounting Standards Codification ("ASC") 606 since its
inception on April 11, 2018 and recognizes revenue from product sales revenues,
net of promotional discounts and return allowances, when the following revenue
recognition criteria are met: a contract has been identified, separate
performance obligations are identified, the transaction price is determined, the
transaction price is allocated to separate performance obligations and revenue
is recognized upon satisfying each performance obligation. The Company transfers
the risk of loss or damage upon shipment, therefore, revenue from product sales
is recognized when it is shipped to the customer. Return allowances, which
reduce product revenue by the Company's best estimate of expected product
returns, are estimated using historical experience.
The Company evaluates the criteria of ASC 606 - Revenue Recognition Principal
Agent Considerations in determining whether it is appropriate to record the
gross amount of product sales and related costs or the net amount earned as
commissions. Generally, when the Company is primarily responsible for fulfilling
the promise to provide a specified good or service, the Company is subject to
inventory risk before the good or service has been transferred to a customer and
the Company has discretion in establishing the price, revenue is recorded at
gross.
Payments received prior to the delivery of goods to customers are recorded as
customer deposits.
The Company periodically provides incentive offers to its customers to encourage
purchases. Such offers include current discount offers, such as percentage
discounts off current purchases and other similar offers. Current discount
offers, when accepted by the Company's customers, are treated as a reduction to
the purchase price of the related transaction.
Sales discounts are recorded in the period in which the related sale is
recognized. Sales return allowances are estimated based on historical amounts
and are recorded upon recognizing the related sales. Shipping and handling costs
are recorded as selling expenses.
Inventory
Inventory consists of finished goods ready for sale and is stated at the lower
of cost or market. The Company value its inventory using the weighted average
costing method. The Company's policy is to include as a part of cost of goods
sold any freight incurred to ship the product from its vendors to warehouses.
Outbound freight costs related to shipping costs to customers are considered
period costs and reflected in selling and fulfillment expenses. The Company
regularly review inventory and consider forecasts of future demand, market
conditions and product obsolescence.
If the estimated realizable value of the inventory is less than cost, the
Company makes provisions in order to reduce its carrying value to its estimated
market value. The Company also reviews inventory for slow moving and
obsolescence and records allowance for obsolescence.
Leases
On its inception date, April 11, 2018, the Company adopted ASC 842 - Leases
("ASC 842"), which requires lessees to record right-of-use, or ROU, assets and
related lease obligations on the balance sheet, as well as disclose key
information regarding leasing arrangements.
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.
42
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.
On October 15, 2020, the Company's Board adopted, and its stockholders approved
and ratified, the iPower Inc. 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.
Following completion of the IPO, 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. The fair value of the RSUs was determined to be based on $5.0 per
share, the initial listing price of the Company's common stock on the grant
date. As of June 30, 2021, the Company had granted total of 46,546 RSUs, of
which 22,137 were vested and 24,409 were unvested. For the year ended June 30,
2021, the Company recorded $110,683 of stock-based compensation expense.
The Company will recognize forfeitures as they occur.
Commitments and Contingencies
In the normal 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 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.
43
Convertible notes and warrants
On January 27, 2021, the Company completed a private placement offering pursuant
to which the Company sold to two accredited investors an aggregate of $3,000,000
in convertible notes with a 6% interest per annum (the "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 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. The
Convertible Notes shall be automatically converted into the Company's Class A
Common Stock upon a qualified IPO (the "Mandatory Conversion") or repayable in
cash at the option of the holders of the Convertible Notes with repayment to
commence six months after January 27, 2021. The Convertible Notes convert at a
price equal to the lesser of (a) a price representing a 30% discount to the
public offering price per share of the Class A Common Stock in this Offering, or
(b) a price representing a 30% discount to the price per share equal to dividing
$200 million by the total number of (x) outstanding shares of Class A Common
Stock immediately prior to the IPO, (y) the number of Class A Common Stock
issuable upon conversion of the 34,500 shares of Series A Preferred Stock, and
(z) the number of Class A Common Stock issuable upon conversion of all
outstanding Convertible Notes. In the event the Company does not receive a
minimum of $15,000,000 of gross proceeds in the Offering or otherwise close on
the Offering, the Convertible Notes will bear interest at a rate of 6% per annum
which shall accrue from January 27, 2021 and be repayable in six equal monthly
installments between July 27, 2021 and January 27, 2022. Alternatively, the
Convertible Notes may be converted at the conversion price into shares of Class
A Common Stock at the option of the holder prior to the maturity date (the
"Conversion Option"). If the notes are converted, either on a Mandatory
Conversion basis or through each holder's exercise of the Conversion Option, any
interest accrued on the Convertible Note shall be waived.
In connection with the Convertible Note offering, the Company issued placement
agent warrants to purchase 7.0% of the shares of Class A Common Stock underlying
the Convertible Notes exercisable at the conversion price of the Convertible
Note (the "Conversion Price"). The placement agent warrants shall be exercisable
for a period of five years from the issuance date and are treated as a debt
issuance cost.
The conversion feature included in the terms of the Convertible Notes creates an
obligation to the Company requiring it to repay the notes for cash in January
2022, if an IPO does not occur. Upon an IPO, the Conversion Option is settleable
with a variable number of the Company's shares resulting in a fixed monetary
amount known at inception in accordance with ASC 480-10-25-14a. As such, the
conversion feature was determined to be a derivative liability, which represent
an embedded derivative predominately based on fixed monetary amount. The
Convertible Note warrants and placement agent warrants were determined to be
derivative liabilities, which represent free-standing derivative instruments.
The Company measured the derivative liabilities at fair value at the issuance
date of the convertible notes, convertible note warrants and placement agent
warrants based on a Modified Black Scholes option-pricing model. The derivative
liabilities were recorded with a corresponding debit to debt discount that will
be amortized over the life of the notes using effective interest rate method. At
time of issuance, the convertible notes and warrant liabilities were recorded on
the balance sheet as liabilities. Debt issuance costs resulting from placement
agent warrants are allocated to derivative liabilities based on its fair value
at issuance to total proceeds received. Debt issuance costs associated with
warrant liabilities are expensed immediately and the debt issuance cost
associated with the debt host are amortized over the life of the notes.
Upon conversion on May 14, 2021, the Company measured the conversion liability
and placement agent warrant liability to fair value using the Modified Black
Scholes Option Pricing Model, a level 3 valuation method, based on the expected
fair value of the underlying stock. Change in fair value was recorded in
other-operating expenses.
On May 14, 2021, the fair value of the outstanding warrants held by the
Convertible Note investors were also remeasured with change in fair value
recorded in other-operating expenses. Then the fair value was reclassed to
additional paid in capital as the terms became fixed upon closing of the IPO.
Series A Convertible Preferred Stock
On December 30, 2020, the Company issued a total of 34,500 shares of Series A
Convertible Preferred Stock, par value $0.001 per share. Pursuant to the
certificate of designations, the Series A Convertible Preferred Stock
automatically converted into shares of the Common Stock (the "Conversion
Shares") at a conversion price equal to 70% of the per share purchase price of
the Common Stock in our IPO. If the IPO failed to occur by December 31, 2021,
the Company would have been obligated to redeem and repurchase for cash all of
the outstanding shares of Series A Convertible Preferred Stock for a purchase
price equal to (a) the product of multiplying the $10.00 Stated Value of each
outstanding share of Series A Convertible Preferred Stock by the total number of
outstanding shares of Series A Convertible Preferred Stock, plus (b) all accrued
and unpaid Dividends at 9% per annum (the "Redemption Feature"). In the event
that the Series A Convertible Preferred Stock converted into Conversion Shares,
no Dividend shall accrue or be payable.
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The Redemption Feature creates an obligation to the Company requiring it to
redeem the Preferred Shares for cash on December 31, 2021, if an IPO has not yet
occurred. Upon completion of an IPO, the Conversion Option is settleable with a
variable number of the Company's shares resulting in a fixed monetary amount
known at inception in accordance with ASC 480-10-25-14a. The Series A
convertible preferred stock are mandatorily redeemable and should be classified
as a liability in accordance with ASC 480-10 and the Company has elected to
record the Series A Convertible Preferred Stock at fair value with changes in
fair value recorded through earnings under the ASC 825-10-15-4 fair value option
("FVO") election.
Upon conversion on May 14, 2021, the fair value of the Series A Convertible
Preferred Stock was measured based on the fixed monetary amount of the
convertible share upon IPO. The change in fair value was recorded as other
non-operating expense.
Series A Preferred Stock Warrant
In connection with the private placement of Series A Preferred Stock the Company
issued warrants to the placement agent to purchase shares of Series A
Convertible Preferred Stock. The exercise price of the warrants is $10 per
share. The Company accounts for its redeemable convertible preferred stock
warrants as a liability, and they are recorded at their estimated fair value,
because the warrants may conditionally obligate the Company to transfer assets
at some point in the future. At the end of each reporting period, changes in the
estimated fair value during the period are recorded in other income (expense),
net in the statement of operations. The Company will continue to adjust the
liability for changes in estimated fair value until the earlier of the
expiration of the warrants, exercise of the warrants, or conversion of the
redeemable convertible preferred stock warrants into common stock warrants upon
the completion of a liquidation event, including the completion of an IPO.
On May 14, 2021, the fair value of the outstanding Series A Preferred Stock
warrant held by the placement agent were remeasured with change in fair value
recorded in other-operating expenses.
Recently issued accounting pronouncements
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, 2022,
including interim periods within those fiscal years. Adoption is either a
modified retrospective method or a fully retrospective method of transition. The
Company is currently assessing the impact the new guidance will have on our
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, 2020; however, early adoption is permitted. The Company does not
expect the adoption of this standard have a material impact on the consolidated
financial statements.
The Company does not believe other recently issued but not yet effective
accounting standards, if currently adopted, would have a material effect on the
consolidated financial position, statements of operations and cash flows.
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Recent Financing
Initial Public Offering
On May 11, 2021, the Company entered into an underwriting agreement (the
"Underwriting Agreement") with D.A. Davidson & Co., a Delaware limited liability
company ("D.A. Davidson"), pursuant to which D.A. Davidson agreed to act as the
lead underwriter in our initial public offering (the "IPO") of up to 3,864,000
shares of the Company's common stock, at an initial public offering price of
$5.00 per share (the "IPO Purchase Price"). The IPO closed on May 14, 2021, with
the sale of 3,360,000 shares of the Company's Common Stock for gross proceeds of
$16.80 million, and on May 21, 2021, the Company closed on a $2.52 million
overallotment option through the sale of an additional 504,000 shares at the IPO
Purchase Price.
Private Placement of Convertible Notes and Warrants
On January 27, 2021, the Company completed a private placement offering pursuant
to which we sold to two accredited investors an aggregate of $3,000,000 of our
6% convertible notes due six months from the date of issuance, subject to
extension as provided below (the "Convertible Notes"), and warrants (the
"Warrants") pursuant to an exemption from registration under Rule 506(b) of
Regulation D of the Securities Act of 1933, as amended. Boustead Securities, LLC
acted as placement agent in the Convertible Note and Warrant offering and
received commissions and non-accountable reimbursements of 8% of the gross
proceeds received, of which one-half of such fees and expenses were payable upon
the conversion of the Convertible Notes. In connection with the Convertible Note
and Warrant offering, we issued placement agent warrants to purchase 7% of the
shares of Common Stock underlying the Convertible Notes exercisable at the
conversion price of the Convertible Note (the "Conversion Price"), of which
Boustead Securities, LLC received 80% of the placement agent warrants, which
were cashlessly exercised for a total of 21,378 shares of Common Stock on May
14, 2021.
Upon completion of our IPO, the Convertible Notes automatically converted into
857,144 shares of common stock in accordance with the terms of the Convertible
Notes. In addition to the Convertible Notes, the purchasers of the Convertible
Notes received three-year warrants entitling the holders to purchase a total of
685,714 shares of Common Stock which equals 80% of the number of shares of
Common Stock issuable upon conversion of the Convertible Notes. In the event the
Convertible Notes are repaid in cash by the Company, the warrants will expire
and have no further value.
This description of Convertible Notes and Warrants is intended to be a useful
overview of the material provisions of the Convertible Notes and Warrants.
However, you should read the Form of Convertible Note and Warrant for a complete
description of the obligations of the Company.
Private Placement of Series A Convertible Preferred Stock
On December 30, 2020, the Company sold in a private placement to approximately
three accredited investors under Rule 506(b) promulgated under the Securities
Act of 1933, as amended, an aggregate of 34,500 shares of the Company's Series A
convertible preferred stock (the "Series A Preferred Stock") and received gross
proceeds of $345,000. Boustead Securities, LLC acted as placement agent in such
private placement and received commissions of $24,150 or 7% of the gross
proceeds received, a non-accountable expense allowance of 1% of such gross
proceeds and warrants to purchase 2,415 shares of Series A Preferred Stock at an
exercise price equal to $10 per share, the offering price of the Series A
Preferred Stock, which warrants were cashlessly exercised for a total of 3,073
shares of common stock on May 14, 2021. Upon completion of our IPO, the Series A
Preferred Stock automatically converted into a total of 98,572 shares of our
common stock.
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Terms of the Series A Convertible Preferred Stock
Pursuant to the certificate of designations of rights, privileges and
limitations, the Series A Preferred Stock, prior to conversion:
· pays a dividend of nine percent (9%) per annum (the "Dividend"), which
Dividend shall be cumulative and payable in cash only in the event of
Redemption of the Series A Preferred Stock. In the event that the
Series A Preferred Stock is converted into shares of Common Stock, no
Dividend shall accrue or be payable;
· has one vote per share; however, shall have no right to vote as a
separate class on any matter submitted to vote by the stockholders of
the Corporation, excluding any proposed amendment that would adversely
alter or change any preference or any relative or other right given to
the Series A Preferred Stock, in which event the Series A Preferred
Stock may vote as a separate class with respect to such amendment;
· on a sale or liquidation of the Company the Series A Preferred Stock
has a $10.00 per share preference over the Company Common Stock;
· by its terms, upon consummation of this offering, all of the issued and
outstanding shares of Series A Preferred Stock will automatically
convert into shares of the Common Stock (the "Conversion Shares") at a
conversion price equal to 70% of the initial price per share of the
Common Stock upon closing of the IPO);
· if the IPO has not been completed by December 31, 2021, the Company
shall redeem and repurchase for cash all of the outstanding shares of
Series A Preferred Stock for a purchase price equal to (a) the product
of multiplying the $10.00 Stated Value of each outstanding share of
Series A Preferred Stock by the total number of outstanding shares of
Series A Preferred Stock, plus (b) all accrued and unpaid Dividends
owed thereon.
Emerging Growth Company
We are an "emerging growth company," as defined in the Jumpstart Our Business
Startups Act of 2012, or the JOBS Act. Accordingly, certain specified reporting
and other regulatory requirements for public companies are reduced for
businesses that meet the qualifications for emerging growth companies.
These provisions include:
(1) an exemption from the auditor attestation requirement in the assessment of
our internal controls over financial reporting required by Section 404 of the
Sarbanes-Oxley Act of 2002;
(2) an exemption from the adoption of new or revised financial accounting
standards until they would apply to private companies;
(3) an exemption from compliance with any new requirements adopted by the Public
Company Accounting Oversight Board, or the PCAOB, requiring mandatory audit
firm rotation or a supplement to the auditor's report in which the auditor
would be required to provide additional information about our audit and our
financial statements; and
(4) reduced disclosure about our executive compensation arrangements.
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