Welcome to today's Fireside Chat with iPower. I'm your host, Thierry Wuilloud, and I cover emerging growth and special situations at Water Tower Research. Today I'm joined by Kevin Vassily, CFO of iPower. iPower is an e-commerce company using data analytics to design, source, and market products primarily on online channels in the U.S. and internationally. iPower sells a wide range of products, including home goods such as fans, shelving systems, and also home gardening products, so-called hydroponics, wellness products, and pet care products. iPower has achieved robust growth thanks to its ability to design, procure, and market various products, responding to unmet customer needs, and to do it effectively in various e-commerce settings. iPower has also initiated its SuperSuite line of services, which is providing all these services to other home goods companies. I should mention that iPower's safe harbor statement can be found on their website in the latest corporate presentation. Kevin, welcome, and thank you for joining us. Thank you for having me. Great. Kevin, at first glance, iPower is a consumer goods company, but the underlying factor driving all aspects of your business, I think, is really data analysis. Can you discuss how this is really embedded in your way of running your business? Sure, sure. So I think it makes some sense to even kind of give a little color on the origin of the company. So iPower got started in 2010 and founded by a couple of software engineers. They decided to invest in a business that was largely focused on hydroponics, but they wanted to change the kind of nature about how products were designed, developed, kind of brought to market, priced, et cetera. And I think that kind of tech lens that the founders brought has really kind of bled into just about everything that we do. I'll give you another example, although I'm getting a little ahead of some of this stuff, but we, in 2018, up to that point, had been using an off-the-shelf ERP system to manage the large number of SKUs that we were selling into the marketplace. But we realized that it wasn't really well suited for what we were trying to do. One, and two, it was really set up as a, as I think probably a lot of people kind of understand, a mechanism for the company that we bought this off-the-shelf solution from to sell us ongoing consulting services. So not only was it not meeting our needs, but it was expensive. So we hired and kind of added to our in-house software development team and built an ERP system from scratch. It's what we use now. We think it's got enough runway that we can be 5x the size in terms of revenue without any kind of additional investment and resources, and it's really, really served us well. That's, I think, one way that we think that we are kind of at a level of sophistication in the kind of segment that we play in that companies of our size don't really have. I think the other thing that makes sense for us to talk about is how we use data across the various parts of the value chain, the most important being kind of that upfront product design and development and ultimately market entry decision. We scrape, I should say, terabytes, but it's actually multiple terabytes of data every year across multiple product segments in the kind of consumer home goods space that allow us to look for categories and subcategories and niches where we think that we might be able to bring a product to market that can be successful across a number of categories. The areas that we look at are typically markets where there's a fair amount of fragmentation. There's not a ton of differentiation, but also markets where we can collect data from real users about what they like and what they don't like about the products that are on offer in the marketplace. So a lot of that's unstructured data. We take that unstructured data, built a pretty robust structured database that allows us to narrow in on kind of product designs that we think, and I think you use the term unmet needs. That's one that we use quite frequently kind of internally. We can design products that meet those unmet needs that eliminate the kind of features of a product that people seem not to care about or don't like and then allows us to lean into product features and benefits that people are looking for. We then take those product ideas to our co-engineering team that we have in Asia. We approach a number of contract manufacturers and ask, "Okay, if we did this type of product, could you do it for this price?" We have an idea of what we think we can sell it for in the marketplace. And if we can get the right margin, then we have got to kind of a launch decision. So all of that happens before we enter a market. And it's been really the way that the company has approached the categories that we've played in since the get-go. So it's really a kind of well-oiled engine, so to speak, in terms of how we approach, what products seem to make the most sense, and how we get into categories that we haven't been in before. I think the last comment I'd make is we're a pretty lean company. The single biggest kind of category of employees in iPower are data analysts and software developers. It's well over half of the headcount that we have. And so we think that our approach has really served us well. And I think it provides a fair amount of runway for us to continue to do what we think we do well, which is identify categories, bring products to market, and exploit interesting niches in the marketplace. Can you maybe give us an example of a specific category or product line that you started from scratch? Were you approached by a manufacturer that said, "Hey, I think we could do something there," or was it driven by your internal analysis? How does it practically work? Right, right, right. So there's not a ton of areas where we've just started from scratch. A lot of them are either extensions of things we've worked on or related to categories. And so there is some connection to kind of our origins, kind of initial product sides. But I can give you one example. So when we were first in kind of largely the hydroponics space, we were selling hydroponics kits that included things like shelving, the kind of maybe not the traditional things that you would think about with regard to hydroponics, but if you were building kind of a hydroponic kind of grow project, there are a number of things besides lights and grow media and fans that you might need. And so we were selling some fairly, what I would call kind of pedestrian third-party shelving. Then some people were doing larger grow projects and were kind of moving stuff around the project using a cart. When we saw this, because we could see kind of information about what people were also buying in conjunction with our products, we started looking at that garden cart segment. We kind of applied the same template that I described earlier. We looked at what was available in the marketplace, what people were paying for it, what they liked, and came up with some design elements, including kind of a foldable cart that could be stored in the corner. There was something of a unique hinge on it that allowed you to take whatever you had in the cart, hinge the platform, and allow you to kind of more easily remove what it is that you had in the cart for use in the garden or in a project. And then from there, design some kind of extension products such that you could use it not only in a garden, but on a camping trip, taking to the beach, taking your pets around the neighborhood. And that has turned out to be a pretty good product for us. It's one of the products that is now an Amazon Choice product. It gets sufficiently good reviews that people keep coming back to it. And I think we've talked about this in the past. When we're selling on places like Amazon, that virtuous cycle of good product reviews, people being happy about the price and the value for getting the value for what they paid and leaving reviews leads to not only more organic traffic and more purchases, but ultimately gets the attention of our channel partner, Amazon. It ends up getting featured as an Amazon Choice. Once it's kind of reached that status, it then gets additional traffic. It's the virtuous cycle that we really, really like to see. That really came out of a fairly commonplace and, at the time, not so well thought out part of a kind of larger purchase from some of our consumers. So that's one example that we're really happy with the outcome. Yeah. So you mentioned Amazon, and obviously, a key element of your business is your relation with Amazon. And we've talked about it in the past, but for new investors or for prospective investors, can you describe and discuss the Amazon relationship? Sure. Yeah. So I think there's still some misunderstanding about how people kind of engage with and sell on Amazon. So there's two different ways you can do it. A lot of smaller independent companies typically sell on their kind of Amazon marketplace. So that's a third-party relationship. It's akin to, if you were in the brick-and-mortar world, opening a store inside a large mall. You've got a place that you can sell your product. You hope traffic comes by. You're taking advantage of people coming there for other reasons and discovering you and your products. I think there are benefits to that. I think one of the challenges is that in a virtual mall, so to speak, that mall has no kind of constraints. So while walking through a mall, you might be able to walk by every particular storefront. In a virtual mall, it's almost impossible. So getting your products and your company discovered there is harder and can be expensive. There's another way you can sell on Amazon, and that's on their Vendor Central platform, which is a first-party platform. So another way to think about that is that when you're selling on Vendor Central, you have a wholesale relationship with Amazon. So you're selling product to them, and they resell it. So for us, that is the bulk of what we do with Amazon. And so to us, there are a lot of advantages there. One, it's their product. Once they've made the purchase, they end up managing that inventory once they have it. They are only going to be buying products on Vendor Central that they have real belief can sell. And so when you have that relationship, it opens up a fair amount of doors. We've got general managers inside of Amazon who run programs that are working essentially for us to move product. So to us, it's a real benefit. There are also challenges associated with it. They set the price. For us, that's not such a big deal. I think there's a lot of companies that are concerned about pricing in the marketplace. If you're trying to sell the same products direct on your own and Amazon's selling at a lower price, you lose traffic. But we don't sell very much direct-to-consumer through our own channel. So it's less of an issue for us. I think the other challenge is, and I think this is where our relationship with them is really beneficial, is that you have to meet certain criteria to be part of that Vendor Central program. You need to have certain amounts of inventory available. When they place a purchase order, they are typically wanting minimum quantities. You need to be able to integrate with their inventory system such that if for whatever reason they're stocked out and you have inventory in your warehouse, they can route an order directly to you and have it boxed up in an Amazon box with an Amazon label printed on it such that you as the consumer wouldn't know that it came from our warehouse, but it looked like it came from Amazon. And in that circumstance, it is a seamless transition or, sorry, transaction for a customer, but you have to be able to do that essentially on demand. And if you can't meet those requirements, then they prefer not to work with you. So your level of sophistication has to be pretty strong. And I think, frankly, we don't see a ton of companies of our size who are participating kind of on that Vendor Central platform. And so it's our belief that as we continue to grow, that relationship will strengthen. As you might imagine, Amazon's also not kind of in the business of running a charity either. So we have very robust discussions with them about pricing all the time. But I think the good news for us is that we've been able to maintain prices in a way. And I think, Thierry, you've mentioned this in the past, that show up on our gross margins. So I think our bottom line is that our relationship there is strong and is continuing to get stronger on a number of fronts. And we may touch on those, I think, on some other questions you have. But it's a pretty unique relationship for a company of our size. Right. So about a year ago, I remember discussing with you and Lawrence the idea of providing some services to similar companies who are trying to sell on the online market. And that's become SuperSuite. So fast forward, not even 12 months. And I think in the last quarter, you mentioned that SuperSuite was 10% of your revenue, which was really a nice growth in a short amount of time. What is the hook you feel in terms of what part of the value creation chain that you can provide to other companies is the most attractive? Is it procurement? Is it logistics? Is it your access to or your expertise on online markets? Right, right. So we like to think that it's all of the above because I think the reason we got into this business is that we believe that across the value chain that you would see of a product coming to market and ultimately being kind of sold, we do things pretty well. It's because of that that we decided to turn this into not a standalone business, but another kind of revenue stream for the company. What I will say, though, is that the easiest way to attract partners off the bat is through the access they would get to our channel partners, primarily Amazon, but some of the emerging partners that we have as well. A lot of companies who've got good products, and I mentioned this earlier, because of their size, because in some cases of a lack of sophistication of their own in-house systems, don't really have the opportunity to be able to find their way onto Amazon's Vendor Central platform. So by striking a kind of sales agent or channel relationship with some of these third-party brands, we can allow them to take advantage of the relationship we have. Now, we have to make sure that we are being a bit judicious about who we partner with and which brands and products and companies that we try to choose to move through that because we can't bring companies onto the platform where we can't execute on the minimum kind of standards that Amazon is expecting. But nonetheless, if we see opportunities in companies where we know it'd be pretty easy for us to place an order for 100,000 pieces of something and get it in a couple of days and then make it available to Amazon, that we could temporarily kind of store it in our warehouse and hold some inventory such that if Amazon stocked out of it, we could ship that same product out of our warehouse and meet those kind of minimum standard delivery requirements. We got to make sure that that's the case. But getting access to our channel relationships is the easiest initial hook for a potential partner. But from there, there's a whole host of other things we can do. We can help them identify other contract manufacturing partners to help them take cost out of their cost of goods sold. We can help them with merchandising listings. A lot of these companies already have third-party or trying to sell third-party on e-commerce sites but don't have the merchandising expertise that we do. We can help them with that. We can help them access emerging social commerce channels, TikTok Shop, which is a bit of a controversial subject at this point, given that there is some uncertainty about their life in the U.S. But that as a sales engine is of interest to a number of brands who really don't understand how to make that work. We were one of the first companies in the consumer kind of product space that was invited into the TikTok Shop beta in the U.S. in early 2023. We've had a lot of success so far selling on that marketplace. And it's allowed us to branch out into other consumer goods, namely food and beverage, that we wouldn't have otherwise kind of gotten into on our own. So it not only provides us a nice learning experience, it's opening other kind of product segments that we think make sense. So we think the initial hook is the sales channel, but there are a whole host of things along the value chain that we intend to make available to our partners. This is 10% of your revenue in the last quarters. I think you have not really staffed up for SuperSuite, but do you think that might change if you continue to grow that side of your business? You mean adding. I mean, would you need to add an infrastructure layer to really build up SuperSuite, or? I don't think so. I don't think so. A lot of what we do is fairly automated. I mean, you already know. You've been to visit us. We're running kind of we ran, what, almost $90 million in revenue in our last fiscal year with an overhead of roughly 25 people. We've got the kind of system dialed in. We have got sufficient warehouse space. We've got partners that we're working with. I think just last week, we announced a partnership with a logistics company called Western Post. Largely for us, it gives us access to their customers, but it also allows us to kind of partner with them to offer potential warehouse space and other kind of logistics services that we're not currently offering. So for us, I think we've got the infrastructure to support a much larger revenue stream that we really wouldn't have to staff up all that much to support. Okay. And then just in terms of SuperSuite, how do you get compensated at this point for that service? Right. So the bulk of what we're doing right now is on a sales agent basis. We are actually taking possession and then selling that product. The kind of nice piece to this for us is that we're only taking possession of the product when we know there's a firm PO from one of our channel partners. So it actually is a kind of a sale relationship. We own the product for a short period of time and then make that sale on a wholesale basis to our channel partners. So that actually is a kind of that's kind of a full gross merchandise value sale on our part, one. For other parts of the supply chain or value chain that we contemplate in kind of the SuperSuite, we will either take a fee for service or some percentage of revenue. So if we do a product redesign for someone, that would likely be either kind of a fee to do that and/or some percentage of the increase in revenues that we would expect. All of that largely would drop to the bottom line. But right now, the bulk of what we're doing is kind of a resale of products through our infrastructure. You had a nice turnaround in your last quarter in terms of the bottom line. I think that was helped by the strong growth on the top line, but also you kind of cycled through the supply chain disruption of, I think, 2022 and what that implied in terms of higher cost inventory and so on. Can you maybe, for some investors, recap or just tell us what happened in 2022, how that affected your business throughout 2023 and where you stand today? Yeah, yeah, yeah. So it was a very interesting time for us. About halfway through the calendar year 2022, we were getting significantly strong demand forecasts from our channel partners, partly because we were on the verge of some fairly large new product introductions. So with those two things in mind, we built quite a bit of inventory. And then, as I'm sure most people who were on this call would remember, the Fed started getting quite concerned about inflation and the rate hike cycle began. What ended up happening kind of throughout the supply chain was that the ebullience of what people were calling the roaring '20s really turned kind of into a lot of caution around a potential recession. And that kind of changed the dynamic throughout the supply chain. Now, I don't think we were alone in building inventory ahead of what people were thinking there were to be a really robust demand environment. The other challenge for us when we built that inventory was that container costs at the time were at all-time highs. I mean, and when I say all-time highs, well in excess of prior all-time highs. I think the average container cost was running in kind of normal times pre-COVID at around $2,000-$2,500 a container to get product across the Pacific. At the time we were ordering product, we were paying closer to $18,000-$20,000 per container. So we built inventory. We had robust forecasts. We had fairly high-priced inventory, but thought we could move volume. We also didn't have enough warehouse space, but we also thought this was going to move fairly fast based on those forecasts. So when I think the pivot towards caution across the supply chain changed, and that was including our own channel partners, we had to, we're sitting on a lot of inventory that we're paying kind of temporary warehouse space for, and channel partners were moving into a stance to liquidate their own inventory. So we had to find ways to move that inventory quickly, which included pretty heavy promotion. And it took us the bulk of the rest of that year and quite a bit of 2023 to get through all of that. So what I would say now is that most of that, as you said, is in the rearview mirror. We don't have temporary warehouse space anymore. Almost all of the inventory that we're carrying, those really, really high freight costs are out of our inventory. Inventories have normalized across our channel partners, and we're not having to promote anything remotely close to what we had to do to move that inventory in the prior year. So we feel we're back to a more normal environment. And while it's impossible to predict the future, I think there is not a high likelihood that we'd see a repeat of that kind of situation, partly because we're not going to be building inventory like we did at that point. And frankly, we don't see kind of the same kind of forecasts from our channel partners that led us to believe that building that inventory would be kind of the right thing to do. So I think we feel like we're back to normal and don't really see a repeat of that history. I mean, have you learned something from that experience? I mean, I'm sure you have, but if you're faced with a very optimistic forecast again, can you handle it in a different way, or how would things be different? Well, so there is a couple of ways. One, historically, we ran the business on really, really high inventory turns in the 6.5-7 times per year level. That is not easy to do. And I think in our history, probably left some sales opportunities on the table. We're back to being able to do that now. And I think knowing that we still can do that will allow us to run the business on a kind of lower level of inventory, even in more robust kind of forecast environments. One. Two, the kind of addition of the SuperSuite business for us should help alleviate some of that risk. Even though on the kind of initial kind of partnership side, we are doing kind of a resale engagement with some of these partners, we're not holding inventory in a way that we would have to take a ton of risk. And it's all on firm POs from channel partners. So as that business grows, we don't think our inventory risk grows in the same way, even if there's robust kind of demand from the channel one two, when you look at the other elements of the services business, which are largely a fee for service and/or kind of percentage of revenue business model, those aren't going to require any inventory on our part. So when we have that level of contribution coming from some of the other kind of elements of SuperSuite, we think that'll allow us to kind of keep growing the business without having the big inventory risk that we took on in 2022. Great. Hey, we're getting close to the end, but a quick, maybe a last question. Let's talk a little bit about tariffs. We hear occasionally noises about raising, increasing some of those tariffs. At the same time, inflation is a concern for everyone. So I don't know how real that would be, but how did your business react when the first tariffs were put on goods coming from China? How badly of an impact on your business, or how did you manage that? Right, right. So we largely absorbed those costs. So if you go back to the description of how we bring products to market and what that algorithm looks like across all kind of aspects of a product in a niche that we're interested in, one of them, one of the more important ones that kind of drives our decision is price, right? It needs to have features and benefits in a price that is attractive to a consumer. It doesn't have to be the absolute lowest price, but price as an element or a kind of variable in our algorithm is an important one. So we didn't feel like, even though those tariffs were coming, that it was going to work for us to raise price. So we largely had to absorb that. I think the good news for us is that we had sufficiently good margins such that we had some room to do that. We did raise some prices with some of our wholesale channel partners, but it was fairly selective because I think we were a bit worried about how it would throw off kind of our prediction about the success of a company. There are other things you can do, though. I mean, there are multiple channels. And going back to the Amazon model, I mentioned that we do most of our work on the Vendor Central platform. We do have some products that do sell in the third-party marketplace. They can't really be in both. The same product can't be in both. But where we felt like there was going to be real distress from a financial perspective, we pulled a few products out of Vendor Central, which allowed us to then sell at a slightly higher kind of direct-to-consumer price in the third-party marketplace. So that's a long way of saying it's a little bit of an art versus a science. But the science part of our approach to product and market entry said the best result for us, particularly since we were getting good enough margins in a lot of our products, was to just absorb those tariff costs. Okay. Great. I mean, maybe I'll ask one last question. I know you don't provide guidance, but can you tell us if there are any specific profitability metrics that you're striving to achieve long-term? Well, so kind of I think pre the supply chain volatility that started in 2022, the company was achieving roughly 7% net income margins on a gross margin line that was in the lowish to mid-40s, so call it 42%-43%. In our last quarter, we printed 47% gross margin. There were a lot of factors that contributed to that, but we want to keep pushing to the extent we can our gross margin up, particularly on our in-house products, and we feel like there's some ways to do that because we want to bring our net income margins above that 10% line. So we think, one, as we grow SuperSuite on the non-sales agent side, we'll have an opportunity to do that. I will say, though, that if we found channel partners (I'm sorry, SuperSuite partners) on the kind of sales side where there were kind of potential unit volumes in order of magnitude kind of larger than we're getting on our kind of current partnerships, we'd be willing to live with lower gross margins because with that level of volume and that level of kind of revenue contribution, the leverage kind of that we could get on our kind of G&A would start to come into play. So it's going to be a little bit of a balance on managing that. I would say, though, that we want to keep focusing on finding ways to push kind of our kind of current business gross margins up because that'll pull up our net income margins. Our goal is to keep moving up from kind of not only where we were pre-supply chain disruption, but also kind of above what we were able to print the last quarter. Great. Kevin, I want to thank you for your time. I also want to thank our audience, both our live and recorded audience. We'll have a transcript of this conversation in two or three days on our website, watertowerresearch.com, which is open to all investors. I read the company forward disclosure at the beginning of the session. I would now like to remind you that the views expressed in this fireside chat may not necessarily reflect the views of Water Tower Research, and I provide it for informational purposes. This fireside chat may not be distributed or reproduced without the written consent of Water Tower Research and should not be considered a recommendation. Water Tower Research provides research-driven communication and investor engagement. It's not a licensed broker, broker- dealer, market maker, investment bank, underwriter, or investment advisor. Additional disclaimers can be found at Water Tower Research. Kevin, thanks again for your time. Thank you all for your time. Have a good day. This concludes our session. Goodbye. Thank you.