Hello everyone, and welcome to today's Fireside Chat with iPower. I'm your host, Terry Diehl. I'm the Analyst at Water Tower Research, for special situations and emerging growth companies. Today I'm joined by Kevin Vassily, CFO of iPower. iPower is an e-commerce company that uses 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 wellness products and pet care products. And also through its SuperSuite line of business, iPower also sells furniture and electronics, among other things. iPower has achieved robust growth over the last few years thanks to its ability to design, proprietary product, source, and market a range of products that meet unmet customer needs. I should mention that iPower Safe Harbor statements can be found on their website in the latest corporate presentation. Kevin, welcome, and thank you for joining us today. Thanks, Terry, and thanks for having me. Great. Kevin, we've seen some nice progress on the margin side of your business over the last few quarters, but the revenue side has been uneven. I think there's been maybe three reasons for that. One being the inventory reduction. You had some excess inventory, a year or two ago. We've seen maybe a switch in production, and then we've seen a de-emphasis of the Hydroponics Line of Business. I'm kind of wondering if you can give us some color around those three factors and kind of give us a sense of what's really been affecting the top line revenue. Right. Yeah. So, I'll address them kind of one at a time. So, correct on inventory reduction. You know, we've talked about this, I think, before, but leaving the calendar year 2022 and into 2023, I mean, we built quite a bit of inventory, you know, a lot of which was, you know, based on forecasts that we were getting from our supply chain channel partners, you know, about, you know, really, really robust demand that they were expecting. And, you know, we then entered into a different interest rate regime, which really kind of changed the footing for a lot of the people we were supplying to, namely our largest channel partner. And so, you know, most of the second half of 2023 into the, you know, first quarter of 2024, there was quite a bit of work that we were doing to bring down inventory. A lot of promotion, a lot of not so much discounting, but you know, incentives to move product, and to actually get our channel partners to take product. And so that led to some you know, what I would say better than seasonal kind of performance in certain quarters, which then made for some tough comps as we entered into that next fiscal year, which you know, ended in June of this year and then into our first fiscal quarter of 2025. So we think that's mostly behind us. We don't you know, our inventory levels are below $10 million at this point, and you know, we're back to being in a inventory turn position that we were you know, prior to actually us going public, where we could turn inventory you know, somewhere between seven to eight times a year with little trouble. So at any rate, that, that's kind of behind us. But, you know, there were some quarters that looked, you know, more robust, you know, creating some difficult comps for us on a quarter-over-quarter basis. The on the production side, I wouldn't call them production issues as much as I would call them supplier rationalization and/or kind of supplier changes. Part of what we have to do, particularly in kind of in light of the new administration with the potential for some changes in tariffs, is to, you know, constantly upgrade our manufacturing partners. And, you know, part of that is, you know, not only quality, but, you know, you know, a big, big part of that is price. You know, we need to make sure that we're getting good product at a as cost-effective kind of level as we possibly can. And we made some decisions kind of over the summer and into the fall about switching out some of our production partners so that we could continue to bring costs down, not only to keep our margins, you know, expanding, but also to be on the right kind of footing if, in fact, you know, we're facing, you know, potential tariffs in the upcoming, you know, two to three years. And so, there wasn't really an issue as with, you know, them not, you know, being able to make the product. It was, you know, a proactive decision on our part to find, and actually maybe the best way to say it is we kind of promoted kind of the second source in a couple of our product lines to be in first position, because we'd like the price and the quality was, you know, similar, if not better. And then finally on hydroponics side, we I don't think it's any secret that the suppliers of equipment into the kind of world that takes hydroponics, you know, durable goods, have seen a really, really kind of dire demand environment. Now, we're a little different than most of the people that we got compared to in that line of business. We were very much focused on the home consumer, the home hobbyist as it pertained to, you know, the use of this type of equipment, whereas, you know, I think the people that, or the companies that people are most familiar with are largely supplying the commercial side, and the commercial side has been in really, really dire straits. It's had some impact, though, on us in that, you know, there is the ability for that commercial, or at least a portion of that commercial, product to be repurposed or used in a, you know, home consumer, setting, and so that's bleeding over into people selling into the consumer line. You know, while I think that the demand environment that we've seen has certainly slowed, it's not nearly as dire as what you see in the commercial side, but it has had an impact. I think as we look back to our decision, even right, you know, it actually predated our public offering in 2021 to make sure that we had a diversified set of products for home consumers. You know, I think, you know, that decision has served us well because, you know, those businesses have been growing nicely while, you know, there has been a slowing and flattening of that hydroponics line. You know, those combined over the last, let's call it 18-24 months have had some impact on the kind of steadiness of the demand environment. But again, I think that as we're kind of moving into this current fiscal year and as we look out over the next 18 months, those impacts should lessen over time because I think we're now at a right kind of right size and at a steady state for what we want to do into the future. With your current product mix, and you mentioned seasonality earlier, should we expect seasonality in the business or more or less? Yeah. Even type of quarters? No, no, no. There's always definitely going to be seasonality. I mean, when you know, hydroponics was over 50% of the revenue contribution, you know, the seasonality there was you know, quite strong. You know, the strong year or the strong part of the season kind of started in late December and into early summer, but with our current mix of products, summer is very much the strong part of the year for us and you know, largely driven by the contribution of our fan product line to the overall revenue. So you know, that then kind of turns this seasonality, which used to be stronger in the kind of winter time, to be the exact opposite. Summer should be the strongest and will always be the strongest in the December quarter, tends to be, and you know, until we start bringing on additional products from kind of our SuperSuite efforts, it's going to continue to be the weakest quarter of the year. In terms of product mix, if you look at your two lines of business, the goods you manufacture and sell versus SuperSuite, have those two businesses have different growth traits or growth trajectories in your mind? Yes, I think it's, you know, it's still pretty early for us on the SuperSuite side, but we think that there's, you know, absolutely going to be kind of higher growth potential, because we're still at a, you know, kind of smaller contribution from a revenue standpoint. Currently, revenue's coming from, you know, our efforts in SuperSuite, which includes, you know, kind of both acting as a sales agent and then getting fee for service for other things, is roughly 10% of revenues right now at current run rates, so you know, we've talked about this in the past. We would like the SuperSuite business, you know, over the next, you know, let's call it three and a half to four years to ultimately be the same size as our product business. And so, you know, the growth rates there are going to be well in excess of the kind of in-house product line if we're going to make that happen. I mean, there's the math is fairly simple there. Okay, so we've seen some unevenness on the revenue line and. Yep. You know, we just discussed that. At the same time, there seemed to have been a pretty steady progression on the margin side. In particular, your, your gross margin seemed to have been around 40% plus or minus, and it seems you've lifted that to. Yeah. 45 or the mid-forties. Has it been product mix? Has it been something structural that happened that you've managed to do that? Can you comment on that? Yeah. So the biggest piece is the work we've done with our manufacturing partners and suppliers to bring costs down. You know, when we were in that kind of excess inventory position, you know, we realized a couple things. You know, one, not only the product mix, but kind of the number of partners or, you know, manufacturers that we were working with required us to be even more diligent on taking costs out. We also know that, you know, given that we're playing in categories, you know, and these are categories of our choosing because we think, you know, we have the algorithm set to kind of thread the needle and take a little market share in some of these categories. They're categories that are not necessarily thought of as being well differentiated, and they're very fragmented. And so, you know, one of the big variables in that, you know, algorithm that we have in terms of bringing product to market was we needed to have a price that was compelling, combined with the kind of features and benefits that our data was telling us, you know, people were asking for, to get people to pay attention. And so, the more room we had on the pricing side to reflect that kind of in our pricing strategies with our channel partners, kind of the better off we were going to be. So we pushed hard with the entirety of our manufacturing base to take cost out. And I think that's what's showing up now. Product mix from, let's say, the fourth quarter or sorry, the September quarter of last year up till this year hadn't really had that much of a contribution. I think, you know, there was probably a little bit of contribution, though, the leftover, kind of high cost inventory that had been burdened by the really, really high, shipping costs coming across the, you know, container costs coming across the Pacific was, was starting to kind of trickle out. But the, the biggest, the biggest impact on that move in gross margins, was through, the work we were doing with our, manufacturing partners to take cost out and, you know, but it's starting to show up on a more consistent basis now. Do you do that work, when you have a SuperSuite client or you kind of remove from the interaction with the manufacturers in those cases? The current set of SuperSuite partners that we're working with were a bit removed. I mean, I shouldn't say a bit. We are removed. You know, those relationships are theirs. However, you know, one of the things that we will make available to partners over time is the ability to tap our kind of manufacturing base and optimize, if so desired, their cost structure. Not everyone has well optimized kind of manufacturing partners. You know, we think we can, you know, as part of the overall suite of services, introduce them to people that we trust to help them continue to take cost out of their kind of production, but as of now, we haven't done that with any of our kind of current partners. Because, I mean, again, in terms of margins, I think it's another aspect we should keep in mind is that as SuperSuite grows, the margin structure is a bit different, if I recall, maybe a lower gross margin and. Yeah. Then you catch that up at the operating margin line. Yeah, that's right. That's right. You know, in the SuperSuite relationships that we have, you can in some ways think of us as, you know, a distributor. You could also think of us as a sales agent. We're getting better than kind of traditional distribution margins for sure. It is in some ways more akin to us buying product from our manufacturing partners than it is a pure distribution model. But the margins, the gross margins are lower. But you know, for us, it's a much easier thing to kind of plug and play into a system that's already working for our in-house product lines. And so, yeah, on the whole, the operating margin should be similar, and net income margin should be similar, if not better over time with our SuperSuite partners, partly because we'll also be able to offer them, you know, kind of ancillary or adjacent services to just acting as a distributor. We, as you mentioned, we could, you know, help optimize their cost structures with their manufacturers by moving them to some of the people that we work with. And we'll, you know, get a cut of that savings. One, we can help them with, you know, listing and merchandising work where, you know, a lot of companies kind of, you know, could really improve the visibility of their products by using the team that we use in-house. You know, we've, we have shown that we can do that with a bunch of products that, you know, most people would think, you know, would be hard to differentiate in a very competitive marketplace. We can help them with 3PL logistics. You know, we have warehouse space. We have an ERP system they can access. We've got data that we can provide to them. All of that can be fee for service. And those are, you know, kind of revenue streams that fall disproportionately to the bottom line. So over time, you know, it becomes a really compelling financial proposition for us if we can wrap around additional services beyond the distribution slash sales agent work that we're currently doing. Okay. You know, if we think of operating margin, I'm wondering if there's a number that's kind of your optimal number in terms of you could think of a high number, but then your top line is going to be affected because it's harder to grow it, if you have such a high hurdle in terms of your goal. Is there a number where, hey, I think we can do this kind of operating margin and maintain a good top line growth for the business? I'm wondering if you have a target like that in mind. Yeah. We haven't talked about, I mean, part of that is because it's a little early for us. And we're also, we don't give, you know, at this point, formal guidance. Yeah. So yeah, we haven't put anything out kind of publicly. I think the way maybe that I can answer that though is that, you know, prior to the IPO, actually prior to the kind of inventory build and kind of the challenges that we had to kind of work through to get there, we were, you know, in the, let's call it, 8%-10% kind of net income margin, you know, so let's call it, you know, 10%-12% operating margin level. I think the way to think about operating margin for us is we need to get back there, one. And then from there, as the business develops on the SuperSuite side, we'll have a better sense of kind of what that level is. I think the other thing that we've said is that we, you know, there isn't anything in the business currently that's going to prevent us from getting back to that, let's call it, you know, starting sixth and seventh and eighth to 10% net income margin. Nothing structural as the business is construed today to get there, so it's going to be a function of, it's going to be a function of sales levels as an example. You know, we've got, you know, a bit of a hurdle to get over just in terms of, you know, the fixed costs of the overall business, but you know, other than sales levels, there isn't anything structural that should prevent us from getting there. And then beyond that, it'll be a function of what wraparound SuperSuite services we can provide to our, well, you know, we call them partners, but, you know, they're essentially customers of ours, to keep driving that operating margin and then ultimately net income margin up from there. So hopefully that gives you some sense of where we're trying to go. That's helpful. Yeah. That's helpful. Quick update on SuperSuite. Can you tell us where you are in terms of how many partners, if there's any trials going on or where you're at? Yeah. So, right now we're working with seven different partners. You know, we call them partners. Let me say it again. They're customers. Three of those are in trial, and we're pretty pleased right now. Actually, one of the, you know, I'll share an anecdote because I think it's useful to show the kind of things that we can do. So, you know, we recently engaged with a company that's in the home goods space. I don't want to give the exact type of product, but they wanted to trial a single SKU with us, and we were at it for about two months and actually reached the sales level of around $15,000 of sales per day in two months. The ramp was so strong that this partner went out of stock of that product very quickly. They were surprised and delighted at how quickly we were able to kind of show progress with them. And this is a company that does already roughly $400 million a year in the U.S. So they're not a small company. And so, you know, we're in the process of getting them kind of restocked, one, or, or I should say they're in the process of getting restocked for what they can provide to us as a channel. And then two, we're discussing, you know, several other SKUs with us. They, you know, not in a million years thought we'd get that level of success that quickly. And so, you know, our goal is to, you know, again, find, you know, companies and brands, products, product categories where we could repeat that level of success. But that's, you know, an example of someone who, you know, came in a very limited set of products that, you know, in fact, very limited one, one product in particular, and I think with very modest expectations that we exceeded, and we're, you know, we're happy of, of where we're going with that, so, you know, that's one. There's a couple other things I think it's worth kind of talking about though too. You know, we've talked in the past about, you know, the, the what I would call true partners, you know, people that are helping provide us with, you know, access and capabilities with adjacent services. You know, we have, we've got a 3PL partner. We recently engaged with the, you know, a, you know, a payments company. You know, the idea there is those companies, you know, over time can provide, you know, ancillary services that we can, you know, resell on behalf of those partners. They bring a set of customers who can ultimately end up being SuperSuite customers over time. They act as sales funnels for us. We're currently in discussion with a data partner. You know, we've talked about kind of how important data is to our business, how it drives our decisions about what categories make sense, what types of SuperSuite partners make sense. Adding data to our current kind of data repository is, I think, going to be super helpful for us. Importantly, just like the 3PL partner we have, the payments partner, we can get access to their customers. You know, this is a, you know, we're in discussions with a company and, you know, we haven't inked anything yet, but I'm pretty optimistic that we'll get there. You know, they've got a, you know, they're a data company that works with, you know, e-commerce companies to help them optimize, you know, using sales data and other kind of categories a little bit like us. And they've got, you know, 20 salespeople of their own, and they are eager to, not only kind of, augment their data with ours, but also provide us access to the companies that, you know, they work with in the e-commerce space. So we're building a bigger and bigger funnel, you know, every quarter. And I, you know, I think that's going to serve us well as we, you know, keep building the number of customers we work with. And then the other thing is, we announced this several weeks back. I want to say it was in late October before our earnings announcement. You know, we went live with our customer portal for SuperSuite. So, you know, this is a way for our SuperSuite customers to kind of manage the, you know, and take ownership of the interactions with us. It helps us because, you know, it reduces the headcount cost associated with managing this. If there's a self-service, if that's the way to think of it, aspect of kind of managing the relationship. We're onboarding kind of the first SuperSuite partner next week. And then ultimately the goal is to bring any SuperSuite customer we bring on then has access to this and, you know, allows them to tap into the data that we have to optimize their products. You know, again, that will end up being a fee for service piece that'll kind of feed the revenue stream. And then finally, and I think we've referenced this in concept and we're still, you know, a little ways out on this, but we're working on making our kind of custom-built ERP system accessible as a SaaS app for third-party brands. And so, you know, a subscription to using kind of this system to kind of manage, you know, the value chain associated with inventory levels, ordering from suppliers, managing payments to channel partners, managing payments to suppliers to them. You know, it's been a really valuable tool for us and one that we built specifically for e-commerce and for kind of smaller companies and brands, and we think that this, you know, has quite a bit of promise and is going to be a, you know, big part of our plans for SuperSuite over the next three to f our years. Great. Maybe last questions. Obviously some uncertainty about tariffs. Yeah. I don't know. Is there anything, anything you do to prepare, or curious what you're? I'm sure you must be thinking about that, that whole issue. Yeah. Well, so, you know, part of the, I think I mentioned this earlier, part of our, you know, thought process around, you know, constantly working with our manufacturing base to lower costs is, was in preparation for, you know, one potential outcome of the, you know, most recent election, which, you know, would bring tariffs back to the forefront. I mean, frankly though, we, you know, had been dealing with tariffs since, you know, the first Trump administration and there was no real reversal of those tariffs during the Biden administration. So, you know, I think we were always in a stance that we had to make sure that we were doing as much as we could to take costs out of, you know, out of our kind of manufacturing base. As you know, we have moved a portion of our production to Vietnam in one of our kind of higher running lines. You know, our first orders from that production line shipped in October. And so far, so good. I mean, there's you know, like any transition, there'll be some bumps along the way. You know, obviously we had bumps in our current manufacturing base over the summer as we were migrating from a kind of first shift to second shift to optimize you know, some of our products. So, you know, we're certainly not out of the woods yet with that move to Vietnam. But we're happy with where we are now. And I you know, we believe that we can continue to move more there and we're looking for partners outside of Vietnam as well. You know, prior to the pandemic, you know, we had been contemplating places like Thailand and Malaysia to do some of this, and so those, you know, are going to be back on the, they're going to be back on the, on the stage for us at some point, but we're in the process of, you know, right now focusing on making sure we get Vietnam up and running, and you know, I think the other thing that's worth kind of considering too is that there's nothing that could, will stop us from considering kind of onshore, onshore, partners and suppliers. You know, we just have to be able to find, you know, cost-effective partners, you know, in categories where we think we can apply our, you know, template, which is, like we've said before, fragmented markets, not obvious differentiation, but something that our data tells us, you know, would allow us to kind of go and capture a little bit of share. Yeah. With the playbook that we run. So, you know, this will be a constantly evolving issue for us. Hopefully we're not going to have to deal with anything dramatic. But, you know, when that time comes, we'll, you know, we'll address it then. Great. Well, when it's hot, people will need fans and people with pets will still need pads and things like that. So, great, Kevin. That was great. Thank you for your time. Yeah, my pleasure. This will kind of conclude our conversation. I just have to remind all of you that the views expressed in this Fireside Chat may not necessarily reflect the views of Water Tower Research and are provided for informational purposes only. This fireside chat may not be distributed or reproduced without the written consent of Water Tower Research and should not be considered research or recommendation. Water Tower provides research-driven communication and investor engagement. It is not a licensed broker, broker dealer, market maker, investment bank, underwriter, or investment advisor. Additional disclaimers can be found at watertowerresearch.com. We will have a transcript of this conversation on our site in the next two or three days. Thank you again, all. I wish you a good rest of your day. Goodbye. Goodbye, Kevin. Thanks, everyone. Bye. Bye.