Thank you for standing by, and welcome to the iPower Earnings Call. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions] I would now like to hand the conference over to your host, Kevin Vassily. You may begin.

Thank you, Latif. Good afternoon, everyone. With me on the call today is Lawrence Tan, our Chairman and Chief Executive Officer. By now, hopefully, everyone has had a chance to access our third fiscal quarter 2021 earnings release and Form 8-K that was issued today after the market closed. These documents are available on our website, www.meetipower.com. Before we start, bear with me, we've got to draw your attention to our safe harbor statement. Management's prepared remarks contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts are forward-looking statements, including, but not limited to, anticipated revenues from the hydroponics equipment and accessories business, the actions and initiatives of current and potential competitors, the company's ability to introduce new products, the company's ability to implement capacity expansion, market acceptance of new products, general economic and business conditions, the ability to attract and retain qualified senior management personnel, and research and development staff, and other risks detailed in the company's filings with the Securities and Exchange Commission. These forward-looking statements involve known and unknown risks and uncertainties, and are based on current expectations, assumptions, estimates and projections about the company and the industry. The company undertakes no obligation to update forward-looking statements to reflect subsequent or current events or circumstances or to changes in its expectations, except as may be required by law. Although the company believes that the expectations expressed in these forward-looking statements are reasonable, we cannot assure you that these expectations will turn out to be correct, and investors are cautioned that actual results may differ materially from anticipated results. With that over, I'd like to turn the call over now to Lawrence Tan. Lawrence?

Thank you, Kevin, and good afternoon, everyone. We are pleased to report a strong fiscal Q3 in our first earnings release as a public company. Even with the lessening shipping times and the congestion in the L.A. port, our revenue grew nearly 35% year-over-year, and income from operations grew 132%. Gross margin in the quarter was over 43%, a record high for us as a company. At the end of January, we closed a much needed $3 million convertible note financing that we were able to immediately deploy into our supply chain. As a result, we had a very strong sales month in March and one of the best sales month in company history. iPower is a data and technology driven company. Data informs all of our business decisions. This is very evident quarter in our gross margin performance, which benefited from the contribution of our in-house branded product portfolio. Extensive product and market data collection are used to drive our product design, development and merchandising efforts. We have over 2,600 in-house SKUs, which represent just over 10% of the total SKU we carry but drove over 2/3 of our revenue in the quarter. We are very good at bringing product to market, and have features and benefits for our customers and attractive margins for us. Having been an e-commerce business since the founding of the company, we have a deep understanding of how to leverage online channels. And the experience and the footprint we have online will allow us to quickly pivot to adjacent product categories when we see opportunities. We also believe our focus on data and technology positions us extremely well to serve 2 attractive end markets in the hydroponics industry, the home hobbyist market and the small commercial cultivator market. Both these segments require market-specific products…

Thanks, Lawrence. We are pleased to report our third fiscal quarter of 2021. Net revenues for the quarter were $13.1 million, which was higher than the initial projection that we laid out in our S-1 for our IPO, and that we communicated during the IPO road show. That projection was $12.25 million at the midpoint of the range that we had provided. We exited the quarter with good momentum, thanks to 2 factors. First, some of the supply chain stresses that we started seeing in December 2020, mainly on shipping times across Pacific, and congestion in the ports in Los Angeles started to ease. This allowed us to access more product from our suppliers to meet demand. Second, we completed a convertible note financing ahead of our IPO, and we were able to immediately use the proceeds of that called prime to pump with some of our key suppliers. As a result, the month of March was a very strong sales month for us in absolute dollar terms and one of the better month in our company's history. Sales growth of our in-house branded products remained strong as a percent of our total sales in the quarter. Our in-house brands made up 68% of sales, which was similar to the 2/3 of sales we saw for in-house brands in the second half of calendar year 2020. From a channel perspective, approximately 88% of sales went through our e-commerce channels, which includes our third-party channel partners as well as our own in-house captive channel, zenhydro.com. This was a little higher than what we saw in the second half of calendar year 2020, where we saw approximately 85% of our sales run through e-commerce channels. Sales mix had a favorable impact on gross margin in the quarter. Gross margins were 43.9% as…

[Operator Instructions] Our first question comes from the line of Scott Fortune of ROTH Capital Partners.

Congrats on the quarter. I want to follow up really quickly on providing the strength from the different sales channels and the focus on a kind of moving the shift into the small commercial customers and adopting the online direct zenhydro channel, your own channel there, versus the mix shift to Amazon over time. It looked like the Amazon channel was higher. Third-party channels were higher in the quarter, but a kind of your sense of the movement of your zenhydro.com channel becoming an overall higher percentage of revenues. And then the percentage of private label at 68%, kind of fair to say that that's -- with that you grow that 100 to 200 basis points on a quarterly basis and you're maintaining 45% gross margins on that private business?

Right. So let me -- I'll take the first one and then maybe Lawrence can take the second one as it pertains to mix of products over time. So I think what we've said in the conversations we had around the IPO is that we focused on our third-party channels because -- and in particular, in Amazon because they are the strongest and most powerful marketing channel that exists in the world at this point. However, we do think that moving more of our sales to our own captive site, both our direct-to-consumer sales, but also over time, some of that small commercial cultivator business that we do off-line and wholesale to that site makes sense. I think, ideally, our target is somewhere around 15% of our total sales. We would like to go through our zenhydro platform. The time line for that, I think, is still TBD. But we do have a lot of headway or headroom to get there over time. But I think that is -- I think the way I characterize it is that's our first goal for zenhydro to get to 15. And once we get there, we'll have a better sense of what that entails. Now when I say 15, that's 15% of our direct-to-consumer. We're still in the process of creating a kind of the -- what I would call the wholesale aspect of our captive site where we can service those small cultivators using an e-commerce solution. We do a little bit of that now. But we have some work to do to build that into a more robust solutions for that part of the market. Does that answer the question you were asking?

Yes, that's great. Yes. And then maybe Tan on the private label side a kind of initiatives to continue to move that percentage up and the gross margin by cadence as we go out on for?

Yes. So for private label, like what we previously mentioned during the investor calls during IPO, which is not too far -- too long ago. Our strategy, which we have been working on, and is actually in progress right now is to increase and expedite more in-house product pipeline to get more product coming out and invest more into R&D to create better product for the market. That's remained one of our focus for now and for the future. So in terms of -- we're definitely going to see accelerated in-house product coming out. And in terms of gross margin, I would say it will not drop for our in-house branded product. It's not our goal to drop it but to increase it. So better product, better value, better perceived by the market. That's our goal.

And then a follow-up to that. We have seen the hydroponic industry push into consolidating the nutrient side and the grow [indiscernible] Categories with competitors rapidly acquiring in that fertilizer nutrient segment. Can you provide color on the opportunity to develop or acquire more in-house nutrient brands in that recurring revenue business and a kind of targeted percentage mix. I think on the quarter were around 17% and then nutrients a kind of the longer-term sales mix you see for that category?

Yes. The in-house brand -- we have 2 strategy plans, right? So we have been actively talking to people about -- like some new trends, brands, and we're getting in touch. That's the one side for acquisitions. Now for the other side, our in-house branded nutrients also is an ongoing process as a second part of the plan. So either -- if the acquisition works out, that will be fantastic. Otherwise, we have our own in-house branded new trends under...

Development.

Development, yes.

Is there a timing kind of again looking at coming onboard a little bit quicker in the second half of the calendar year from that side of the category?

Yes. So I think what we've said during the IPO process is that we were looking at a kind of the second half of calendar year 2020 as the time frame to both bring our in-house development to market and/or identify and potentially bring onboard a third-party brand. I think right now, within the next few months, the work that we've done on our in-house development will be coming to market. So I think it's probably likelier that, that will be out the door first than any type of acquisition. I think M&A, for a lot of reasons, takes a little bit longer. And I think the other thing that we also talked about during that IPO process was there are multiple avenues of acquisition that we're looking at, right? There are other product categories. There are potential sales channels outside the U.S. and there are -- the potential to add additional off-line servicers and distributors to the small commercial cultivator market, which could give us some scale to more quickly ramp them over the e-commerce or zenhydro wholesale approach. So as we evaluate all those, it's hard to give you a sense of the cadence and a kind of little take precedence, but it's going to be a function of what's presented to us and what makes the most sense at the time that we see it. I think Lawrence's point earlier, I think, still holds though, which is there's -- it's a fairly fragmented market. There are lots of good brands, product categories, potential sales channels, and certainly lots of off-line distributors that will have the opportunity to engage with. And like I said, I think we're going to look at everyone a kind of on its kind of own merits and could make decisions that way. I think the last thing I want to say, too, is that we -- oh, wait, sorry. We just did a pretty big overhaul of our zenhydro.com site. And it's in preparation for, one, bringing more of our B2C business on our own captive site, but also in preparation for kind of the servicing of the small commercial cultivators. And so...

Yes. Like to add a few points. So we haven't announced this publicly, but if you go to zenhydro.com, you may have noticed, it's completely different than what you saw like the last month. So this is the first step of getting the site ready to post us -- to service the 2 markets like Kevin just mentioned, the better like hobbyists and small commercial, and also in prepare for like a new features to be added later on. So this is completely redo, and we have been working on this for a few months. And now it's released and we're getting this ready to getting more -- this is like a cornerstone of the future of zenhydro. So check it out, it looks completely different, and we're going to have more features adding on to it, later on, which is make the new site live, I think earlier this week.

Scott, you had one other question as it pertains to kind of what percentage over time do we think nutrients could be. So right now, it's still our biggest category, even though we don't have our own in-house branded product in the market. I think there's no question that over time, it will be the largest category for us as we bring our in-house developed product and potentially bring a third-party brand in-house. I don't know if we've got a near-term target as to what it could be. But I think it's very clear that it won't ever be...

It will be one of the major product categories.

Yes.

I appreciate the color. If I could get one more quick one in here. A great robust demand in the hydroponic industry. You're seeing gardening trends continued strength, as Lawrence mentioned. Do you see from your data a pickup and then do the do-it-yourself hobbyist activity in states that convert over to recreational or even medical, legal status and kind of the time line of sales that occur on your website for those states? Or does that remain consistent? Do you see that pickup?

We don't track like state-to-state data that closely for the hobbyist market, because historically, my experience is that hobbyist doesn't seem to like have as much impact on the commercial cultivator side of when the legalization happens, but does pick up like over the time. So it's not like -- the commercial market definitely had a much, much big and immediate effect when the states get open. But the residential seems to be like take time and grow this, over time will catch up. So that's what I see. So we don't track like a state-to-state data in start because so we don't see an immediate pickup or like increase based on our experience, but I don't have a solid data on that.

And our next question comes from the line of Scott Fortune with ROTH Capital.

One kind of -- another follow-up question. There are certain segments or categories within the states that are outperforming here. And then it seems like can you address the seasonality aspect of the business from the pickup in the different quarters? Have you kind of seen a different seasonality timing that's been occurring now since post-COVID, other things?

Okay. So before COVID usually the lighting stuff will -- tends to sell better during the winter season and the ventilation stuff sell better during the summer season when weather is hot. When COVID hits, everybody -- everything starts to sell. So we are still like kind of still at the era of COVID getting in the way. So it's a kind of very hard for us to see like post-COVID seasonality at this moment, but I would expect this to go back to what pre-COVID behavior. So with like summer time for ventilation, winter, like colder time for lighting and other stuff. So I think it's a pretty balanced step for us. So Kevin, do you want to add some more on that?

Yes. No, I think it's still probably early for us to determine because it's -- I think the demand patterns really do look like they did last spring. And so I think we still have a little ways to go before we emerge out of this kind of post or emerge into a post-COVID kind of normality. So I think the message is kind of stay tuned and we'll provide -- as that seasonality starts to unveil itself, we'll provide the appropriate amount of color around that. But right now, it seems -- yes, seems very much like it did last year.

The good news is that we now have the capital to [ properly inventory ], so I'm pretty happy on that side.

Okay. For me, Scott, you had a question about product categories. Is that right? Like...

Yes. Like call out certain product categories that are not only are maybe growing a little bit faster, but you guys are looking to do new product innovation or development segments from a margin expansion side. Can you call out certain categories that you're seeing strengthen?

Yes. Our ventilation, we introduced in a ventilation product line that expanded it quite a while over the last couple of years. That -- we expect that part to grow this summer. We're excited about that. Also, the nutrient, like we mentioned, is under development. So when it comes out, that will be a major category for our in-house portfolio. And also, we're looking, like doing research into adjacent categories, but that's too early to give some like information out. But that's -- the lighting stuff we are working on some LED related stuff. But mostly, I think in this coming summer, I will have some good expectation on our ventilation category.

Got it. And then one, I'm not sure if others are on at all, but one question. Can you provide any of the online metrics as far as kind of retention of customers. That's one of the biggest concern investors have is retaining the customer base. It sounds like they're coming back to purchase equipment quicker than 18 to 24 months from that standpoint. And then just any metrics from the online business as far as that's concerned.

The repeat -- is this a question regarding to repeat customer, I think we mentioned that, that historically is, I think, 13%.

17%.

17%, yes, something around there. Now that's an area we haven't focused on, and that's something that we have on our work list. Zenhydro.com is one of the efforts that we are trying to get in more to retain customer. Nutrient product is another angle. We're also building our in-house business analytics product to -- not only just for this purpose, but this is definitely something that we will look at and focus on the future. It takes a little bit time on this front. But it's a multi-angle task, and we're working or attacking it from different -- multiple different angles.

Your next question comes from the line of Mike Baker with D.A. Davidson.

Yes, I have no idea what happened in the call there. I seem to have gotten cut off. But okay, here we go. I wanted to ask a couple of questions. One, you talked about continued momentum. I'm not sure if you can comment on this, but I think I'll ask in a couple of ways. One, for whatever it's worth, the consensus numbers have the fourth quarter down year-over-year. So to me, that doesn't sound like momentum. Unless you're talking about it on a 2-year basis, you're up against an 86% number from a year ago, which is a significantly higher compare than the March quarter was against. So could you just flesh that out a little bit more what you mean by continued strength in near-term momentum, particularly as it relates to the consensus number?

Well, so I'm going to refrain from making any kind of specific comments on the number, particularly as it kind of might compare against consensus. The -- what I can say is that there was a pretty nice lift in kind of order momentum from February to March. And what we've seen in the first 2 months is that order momentum is -- hasn't waned. And we think it reflects a couple of things that happened at the end of that first -- at the end of the first quarter which was, there was some easing of the supply chain constraint that we saw, which means we can get more product and we could build a little bit more inventory. The second piece of that was we actually had capital to put in the supply chain to get that product. And so those kind of tailwinds to the kind of sales engine, so to speak, started in March. And the first 2 months of the quarter were -- the tailwind was still there. So I know what you're trying to get at in terms of the consensus number, and does momentum mean up or down. I think it's just too early for me to talk about that. We've talked a little bit about kind of revenue recognition and making sure that how we deal with some of our third-party vendors, is reflective of the actual sales performance. I think it's important to point out that we're -- in this June quarter, we're lapping one of the best quarters in the company's history. And so we're -- I think we're tracking in a way that we're comfortable with for the June quarter. But I want to refrain from getting too close to any kind of numbers. Let's just say we're happy where we are.

Okay. And let me ask one more, and then I'll move on to another topic. Are you happier now than you were a couple of months ago during the IPO process? Are things getting better, worse, same?

Better.

Yes, things are better. Yes. I mean the other thing I'd say, too, is that the impact of us using some of the IPO proceeds in the supply chain is just starting to show up. So we've had really no meaningful impact yet to our results, from being able to prime the pump with additional proceeds. Yes, the -- everything feels better. So again, the -- I think the best way to say is that we're very happy with the kind of the order momentum, and we just want to be cautious around how we talk about revenue, particularly until we get to the next fiscal year. So let's leave it at that.

Absolutely. Fair enough. Let me ask one more bigger question -- bigger picture question, a question I get. Is there a concern or how do you think about crowding out with big commercial enterprises getting more and more into the space? In other words, why do I need to grow this myself in my basement, if I can just walk down the street and go to the store that's selling the end product? How do you think about that?

There are 2 angles to look at it. First, economically, at, like, say, $10 or $15 or $20 per gram, it still costs like $5,000 to $8,000 or sometimes $10,000 per pound, in order to buy. But it costs you like a few hundred dollars per month to grow other than the initial setup, which is cost -- costs about like $1,000, $2,000 to grow. So and each like -- can yield like 2 to 3 pounds, like 2 and something average right now. So economically, it actually makes sense for people to grow their own. And secondly, hobbyist [ it's price equal to own ] garnering or across their own beer, a lot of times, people have interest on growing their -- the string of their choice across a certain way and try to achieve this to the best they can. It's a hobby work that you can consume. That's the 2 sides of that, that I can try to expand from this side. And...

Yes. And like the other thing I would add, too, is that we've done a little bit of work on kind of the size of some of these other hobbyist markets like let's use craft beer, as an example, or home brew it. I've seen numbers anywhere between 1.5 million to 2 million just in the U.S. alone to do this. There is no economic arbitrage associated with growing your own or brewing your own beer, yet it's still really a large market. We think the home hobbyist and the kind of not only the setup of the recurring revenue opportunity, given that same type of kind of mentality, plus the fact that the economic arbitrage is enormous right now, means that this is going to be a robust market. I think the other thing I would say, too, is I'm pretty sure one of the other companies in our -- I guess, in our peer group or what we're being kind of grouped together with has talked about the strength that's being driven by the kind of home hobbyist, and they called it out as one of the reasons that their business has been so good. Now they sell into other distribution markets. But I think there's no question that, that is a strong and growing market and people recognize it.

Fair enough. Real quick in the interest of time, can you comment on input costs, as you alluded to during the prepared comments?

Like materials cost, right, like of our...

Correct.

Of our side, yes? Do you want to take that?

Yes. Yes. Material costs, we had saw some increase like last year, like across the end of the last year, not fiscal year but calendar year. And we -- if this situation is still like this, we anticipate some more increase into the second half of the calendar year. But again, like we have a very strong supplier network and supply chain, so that makes us better than our competitors. In general, things like increase the cost, et cetera. But there is a limit that everyone can bear. And sooner or later, if this doesn't get eased off, which I think that the governments around the globe is trying to address this. But if it doesn't then it become a problem for everyone. And then at a certain point, we will have to pass this to consumer. We already started to raise the price for certain things over the last 6 months. But we look at a market and we adjust it as the market goes. But like I said, it's not my problem only, but we're doing better than the competition. That's why we see a growth in sales and will we see a growth in gross margin. I think that's a problem for everyone, but it's also opportunity for us as well.

And I'm showing no further questions.

Okay. Great. Well, thank you much for joining us. And we look forward to talking to you again when we report our June quarter results. Thanks, everyone.

Thank you.

This concludes today's conference call. Thank you for participating, and you may now disconnect.