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spk11: Good day, ladies and gentlemen, and welcome to the iPower Fiscal Q1 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. I would now like to turn the conference over to your host, Kevin Vasily. Thank you. Please go ahead.
spk04: Yeah, thank you, Fay. And good afternoon, everyone. By now, everyone should have access to our fiscal first quarter 2022 earnings press release, which was issued earlier today at approximately 4 or 5 p.m. Eastern time. The release should be available in the investor relations section of iPower's website at meetipower.com. The call will also be available for webcast replay on our website. Following our prepared remarks, we'll open up the call for questions. Before I introduce Lawrence, I'd like to remind listeners that certain comments made on this conference call and webcast are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to certain known and unknown risks and uncertainties, as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements. These forward-looking statements are also subject to other risks and uncertainties that are described from time to time in the company's filings with the SEC. Do not place undue reliance on any forward-looking statements which are being made only as of the date of this call, except as required by law, the company undertakes no obligation to revise or publicly release the results of any revision to forward-looking statements. With that, I'd like to now turn the call over to iPower's Chairman and CEO, Lawrence Pann. Lawrence.
spk03: Yeah, thank you, Kevin. And good afternoon, everyone. Since it has only been about six weeks from the last corporate update, our prepared remark today will be relatively brief. The new fiscal year is off to a great start as we generated another quarter of a record results. Revenue was up 16% year over year despite company against our highest quarter historically. And we also bucked the trend more broadly given some of the industry weakness in commercial hydroponics. We believe our less capital-intensive e-commerce model, high margin profile, and consumer-driven end market sets us apart from other hydroponic players in the space. From a product perspective, our in-house ventilation line was the strongest category during the quarter. Today, it accounts for about 40% of our sales compared to roughly 30% this time last year, and the consistent growth is a reflection of our superior product design and merchandising capability, as well as the work we put in to effectively manage our supply partner network. Our diversified supplier base enabled us to consistently deliver products, be it directly to consumers or to our channel partners. To give some perspective to those that are new to our story, we are one of the top sellers of hydroponic equipment on Amazon and online. So product availability is a key to meeting consumer needs. In addition to our momentum in the ventilation systems, we have several product design initiatives underway that will incorporate smart functionality into our ventilation, filtering, and lighting products, allowing for remote monitoring and operation of our products. We also have a number of sensor-based products in development that will be key elements in grow environment optimization. This is an entirely new category for us, and we are excited about the opportunity. Finally, we have developed several prototypes of countertop hydroponics appliance and we are in discussion with our supply chain partner on the design and the manufacturing parameters while it's too early to know the exact timing of the launching of these products we hope to have some of these products in market by end of our fiscal year another key development during the quarter was our first set of orders for delivery into western europe we received two purchase orders from one of our channel partners for the UK and German market. We are at the very early stage of our entrance into the European market and we believe that this market is significant in size with very little penetration to date. Now, we see Europe as a high growth opportunity for us over the medium and long term as their consumer counterparts market develops. Overall, we continue to execute on the various growth objectives that were laid out during last year's IPO. And although we are very pleased with our momentum, we know that the best days for iPower remain ahead. I will now turn the call over to our CFO, Kevin, to take you through our financial results in more details. Kevin, please.
spk04: Thank you, Lawrence. So we had another solid quarter performance in our fiscal Q1. Total revenue was up 16% from the year-ago period to $17.4 million, highlighted by a greater mix of our in-house product sales as well as increased sales of ventilation and nutrient products. We continue to execute on selling more of our in-house brands, which increased 21% year-over-year to $13 million and accounted for approximately 75% of our sales compared to 72% in the year-ago quarter. As we previously stated, gross margins for our in-house products are generally 20 to 25 percentage points higher than our third-party products that we carry. So we'll continue to invest and emphasize the in-house part of our catalog going forward. Overall gross margin for the quarter was up 490 basis points to 42.1%, which exceeded our expectations given the higher product input costs that we started to see over the summer. as well as increased freight expenses, which has been seen not only in our industry but across all industries. In addition to higher sales mix of in-house brands, the composition of product mix within our in-house brand product sales skew toward the higher end of the margin distribution. We may remain cautiously optimistic about margins going forward, even with the ongoing volatility in the supply chain. Total operating expenses for our fiscal first quarter were $6 million. compared to $4.5 million for the same period in fiscal 2020. The increase was primarily driven by our increased sales volumes, as well as increased expenses associated with being a publicly traded company, which we didn't have in the prior quarter of fiscal 2020. Despite the sequential increase in sales from the June quarter, operating expenses were down on an absolute basis, as our ad spend normalized a bit And channeled program mix resulted in less or smaller merchant fees. Net income in the quarter increased 16% year-over-year to $0.9 million, or $0.03 per diluted share, compared to net income of $0.8 million, or $0.04 per diluted share, in the same period in fiscal 2021. Moving on to the balance sheet, Cash and cash equivalents were $1.2 million as of September 30, 2021, compared to $6.7 million as of June 30, 2021. The decrease is almost entirely attributable to the timing of cash flows and receivables from our largest channel partner. So the lower balance is not an indication of any business or operating trends. We ended the quarter with approximately $24 million of working capital. Total debt as of September 30th. 2021 stood at $0.5 million compared to $0.7 million as of June 30, 2021. So looking at the balance of our fiscal year, we remain confident in our growth strategy and financial targets. From a margin and cost perspective, there have been some favorable developments in the last six weeks with regard to container costs and port congestion in Los Angeles. but it's still a little too early to tell if this is a reversal that will remain permanent. The broader supply chain does remain volatile as input costs continue to fluctuate, and COVID-19 continues to be very disruptive to the economies where we primarily source our product. As we have done since the pandemic began, we are working with our partners in China to minimize any impact. Also, as I mentioned last quarter, we do have a number of ways to push back on the supply chain volatility and input cost pressures that continue to be in place. These include trying to manage channel program mix, bulk procurement, and asking some of our supply chain partners for larger production runs. We'll also continue to emphasize greater mix of our in-house product sales and introduce new proprietary SKUs to broaden the in-house catalog. We are looking forward to another strong year for iPower in fiscal 2022. So that concludes our prepared remarks. We'll now open it up for questions.
spk11: Thank you, sir. Ladies and gentlemen, if you have a question at this time, please press the star and then the number one key on your touchstone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question comes from the line of Mike Baker from DA Davidson. Your line is open.
spk06: Okay. Hi, guys. A couple. First, real quick, you said you're on target for your financial goals here, but you haven't specifically reiterated the full year sales growth of 25% or more. I just wanted to make sure that was the right way still to be thinking of it. And if so, you know, great quarter this quarter, but up 16%. If you're looking for 25% for the year, or more than 25%, that does imply a ramp. Can you talk about, you know, how you go from 16% to 25% for the year? Thanks.
spk04: Sure, Mike. Yeah, so, yes, the financial target that we outlined of 25%, you know, kind of, at the kind of floor growth for fiscal 2022 is still intact. We only had our last call six weeks ago, so nothing's changed from that standpoint. What I would say about this quarter relative to kind of the upcoming quarters is we're comping the strongest quarter in the company's history, and we still have the balance of the year to meet that goal. So we're happy with 60% growth. We see lots of opportunity over the next several quarters to get to that goal. So I think we're in a good spot going forward and are confident that we're in as good a position as we were when we talked to you guys roughly the end of September.
spk06: Yep. Okay. Makes sense. I'll ask one more, and then I'll turn it over to someone else and come back in if need be. But could you update us, if you wouldn't mind, on your nutrients business? I think last time we talked, the idea was that that was something you were going to develop in-house and hope to be getting started with that in November. But I think you still have the possibility of even making an acquisition there. So just if you could update us on that, I'd appreciate it. Thanks.
spk04: Sure. Lawrence, you want to take that? Sure.
spk03: We actually have the nutrients under development. We're hoping to have the nutrients available for sale by the end of the calendar year, with a chance of it actually launching by the end of this month. So we'll announce it formally at that time. But, yeah, that's the timeline for now.
spk06: And is that delayed at all, or is that changed at all, that timing? Is there anything that's sort of impacting that? I seem to remember November being a time when you thought you could get it done.
spk03: This is still the target, and it's under production, actually.
spk05: Okay. I appreciate that.
spk04: Yes, and then as it pertains to potential acquisition, yeah, we're obviously still – Looking, we think a faster kind of ramp would be to bring in a developed brand that fits the criterion that we think makes sense for our business model. It needs to be a brand that is established but could accelerate with the use of an e-commerce channel and is suited for e-commerce distribution, so that could be packaging and sizes that are appropriate for our model. And so, you know, we're still in that, you know, search and identify and engage phase. We just haven't found one that, you know, I think meets all the criteria that we think is also a good product. So, you know, this is the in-house development is probably one leg of the stool, so to speak, as it pertains to how we further penetrate nutrients. But we're excited about kind of the opportunity there, and as we move further through the year, an acquisition of a brand that made sense for us is still absolutely under contemplation. Okay, thank you.
spk11: Your next question is from Scott Fortune from Road Capital Partner. Your line is open.
spk10: Yeah, good afternoon. Thanks for taking the question. You mentioned we've seen the hydroponic industry kind of on the commercial side has been very tough quarter to quarter from that standpoint. But can you provide – you guys seem to be a little bit immune to that because of your online positioning. But can you provide – color on the customer spin trends going forward into 4Q, and is there seasonality from a historical standpoint as we look into the 4Q, 1Q opportunities here? Just a little bit around your consumers and the spin going on there.
spk04: Sure, Mark, you might want to take that one, and I can kind of chime in after your answer.
spk03: Sounds good. Yeah, sure. So the commercial market is a very small portion of our portfolio. It consists of less than 10% for the quarter we are reporting. So like you said, we are largely an online retailer. And that part doesn't seem to have the same huge up and down compared to the commercial market. So we haven't noticed any significant change in the consumer behavior. So I don't have any suggestions that it will change from what we saw historically.
spk04: Yeah, and then on the seasonality. So, you know, I think if we broke our catalog into some of the different product types and categories, they tend to have some different seasonality. But I think we've said this in the past, and I think we've talked to you about this, Scott, a little bit. COVID really kind of disturbed a lot of those historical patterns that we see or have seen. And so it is a little bit harder for us to predict seasonality at this point. You have our you know, our performance from the prior fiscal year. But we're not convinced that that's normal, but we're not sure yet that it's abnormal. So, you know, I think we're focused really on trying to kind of continue to get product in hand and making sure it's available for, you know, our channel partners.
spk10: Great. I appreciate the color on that. And then just shifting, can you provide a little more color on the traffic to your websites in Hydro, initiatives to drive and support more customers to your own website to transact more direct with your consumer base? Kind of step us through kind of any metrics that you're seeing around your advertising and site visits to your own website and the initiatives there.
spk03: We are, that's right. We are doing a lot of work behind the scenes, identifying new ways to attract more customers to our own website. We are developing a newer version of the site that's about to be published soon, and we'll let people know about that. and a coupling with new ways to get more traffic for the website. But, yeah, we have a lot of work actually being developed. You'll hear from us in the next couple weeks, I guess.
spk10: Okay. And then just one last question. Kind of on the inventory levels, you know, with the supply chain challenges that are out there, Have you pulled for more inventory or kind of how you look at your inventory to meet demand or are you seeing issues that are impacting kind of the business from that side? How should we kind of evaluate that?
spk03: We have our inventory position for September is about the same as June. And because we fixed, you know, with the proceed from IPO, we increased our sales. We increased quite a bit of inventory into our pipeline. And I think we are very comfortable with the level of inventories. And also, we are very comfortable with the auto stock rate. And supplier network management is always one of our strengths and one of our core strengths. I am very happy with the status it is now as I think we are very sufficient on inventory and we are very agile and we'd be able to deal with any kind of problems that we encounter so far. I think we're doing much better than the rest of the industry, but we're doing pretty good from my own opinion. And going forward, Our focus is more like the new products, you know, rolling out and strategics like push out like websites and new lines or products. Those will be our focuses. In terms of a base, I don't think we have any problem right now.
spk10: Great. Thanks for that, Keller. And I will jump back in the queue.
spk11: You have a follow-up question from Mike Baker of DA Davidson. Your line is open.
spk06: I'll take, real quick here, a couple more, if I could. Big beat on gross margin. Can you talk about where that beat came from, and is it sustainable, particularly within the context of container costs coming down? Right. And then I'll ask that, and then I'll have one on SG&A.
spk04: Right. So... Obviously, for us, the more of our in-house brands that we can push through the sales channels, the better for us. We've talked about the gross margin delta between our in-house versus the third-party products that we carry. It is a little bit more complicated than that. The equation is multivariate. For this quarter, we had a really nice skew. If you think about our catalog in terms of a distribution, the skew was definitely towards the higher margin portion of that distribution. That clearly helped. One of the things that helped in the quarter as well is that we've got channel programs with some of our partners that deliver product in different ways. We did a decent amount of what I would call direct import business, meaning our channel partner would take ownership of that overseas. And because of their size and their purchasing power, they get really good container cost rates for bringing product across And so when we engage that program, they're responsible for the freight costs. So that definitely helped as well. So is it sustainable? It's always hard for us to kind of predict in any given quarter how much we can push one channel program over another. As you guys know, our strategy is to really feature and push our products versus third-party products with our partners. As such, the more of that we do, the better. I think the other thing we could say, too, is that back in the prior quarter and in the period leading up to the end of the prior quarter, we had a fair amount of new SKUs that were added to the catalog. And given the broader selection, we have an opportunity for our customers to choose us more than they might choose a third-party product. So that also helps. And any time we introduce a redesign of a SKU, we do it with the intention of having a better margin profile for that product if we can. It's a longer way of saying that we're cautiously optimistic that we can keep margins at a really, really healthy level and potentially expand them over the next several quarters. But just to be fair in the way we think about it, that mix of distribution can, from quarter to quarter, sometimes skew to the lower end of our margin distribution of in-house products. I think the longer-term trend is good, and I think one of the things we talked about in prior periods, too, is that we expect over a longer trend period to be able to increase margins several percentage points from here over the next several years.
spk06: Yeah, that all makes sense. Sorry, if I could ask one follow-up, though. That program you're referring to in terms of your partner importing the product themselves, I believe, I think in a prior conversation, what I understood that to mean is that, sure, you don't pay the shipping costs, but you get a lower product margin on that, but also lower merchant fees. Is that right? But I guess what you're saying is, sure, you get a lower merchandise margin, but the fact that you don't have to pay for shipping actually makes it a better all-in gross margin. Is that the right interpretation?
spk15: No.
spk03: So here's what's going on for us. So we work with our partner, and we also brought containers in ourselves. So if the container is a price job, the freight job, it will help us in the positive way. If the... And the biggest driver, I just want to add on to your previous question, the biggest driver for the margin, the gross margin, is to continuously pushing out better product, better product that we can price, you know, to the market and get more consumer to realize the value. So the R&Ds into these products and with either ourselves or with our partner manufacturers, That will drive our long-term gross margin upwards. That's the key. So continuously introducing better products to the market, beat the competition, that's the key for long-term. Now, for freight, if the price drops, it will make our gross margin lower.
spk14: bigger, for sure.
spk03: Because like what Kevin mentioned, for the parts we don't pay freight, we don't pay anyway. For the parts we pay, you know, cheaper freight is better for us.
spk05: Yeah. Okay. Okay. I think I understand. All right.
spk04: Thank you. Yeah, no, Mike, let me just add to that just because I want to make sure you have kind of the right understanding as well. So, yeah, so there is some, you know, price tradeoff for that handoff. But, again, it's not just as simple as saying, oh, you know, we use this program. Gross margins are, you know, offset in a couple directions, but it's better operating margin. It depends on the mix of product, too, right? So we have the benefit this quarter of, you know, being skewed to the higher end of the distribution of the margin distribution. So all things in, it was better. But it's not a kind of stationary margin for all of our in-house products versus our third-party products. So the equation's a little more complicated than just better gross margin, no shipping costs, but slightly lower price, but better operating margin. It And we can talk through that, too, when we kind of reconnect. But what I want to communicate is that between quarters, that product mix can have an impact, but it doesn't mean that the trend is going in one direction or another. We like the longer-term trend of where margins are going, and we expected them to go up. over the next two to three years in a way that's very helpful for our bottom line.
spk06: Yep, yep. It all makes sense. Mix is obviously very important. Okay, great. I appreciate the color.
spk11: Sure. There are no further questions at this time. Presenters, please continue.
spk04: Great. Well, I just want to thank everyone for joining us on this call, and we look forward to the next earnings release and conference call, and we'll see you all then. Thank you. Thank you.
spk11: Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day. You may all disconnect. Thank you. Thank you. Thank you. Thank you. Hello. Music. music music
spk08: Thank you.
spk11: Good day, ladies and gentlemen, and welcome to the iPower Fiscal Q1 2022 Earnings Conference Call. At this time, all participants are in the listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. I would now like to turn the conference over to your host, Kevin Vasily. Thank you. Please go ahead.
spk04: Yeah, thank you, Fay. And good afternoon, everyone. By now, everyone should have access to our fiscal first quarter 2022 earnings press release, which was issued earlier today at approximately 4 or 5 p.m. Eastern time. The release should be available in the investor relations section of iPower's website at meetipower.com. The call will also be available for webcast replay on our website. Following our prepared remarks, we'll open up the call for questions. Before I introduce Lawrence, I'd like to remind listeners that certain comments made on this conference call and webcast are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to certain known and unknown risks and uncertainties, as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements. These forward-looking statements are also subject to other risks and uncertainties that are described from time to time in the company's filings with the SEC. Do not place undue reliance on any forward-looking statements which are being made only as of the date of this call, except as required by law, the company takes no obligation to revise or publicly release the results of any revision to forward-looking statements. With that, I'd like to now turn the call over to iPower's Chairman and CEO, Moritz Pan.
spk03: Yeah, thank you, Kevin. And good afternoon, everyone. Since it has only been about six weeks from the last corporate update, our prepared remark today will be relatively brief. The new fiscal year is off to a great start as we generated another quarter of a record results. Revenue was up 16% year over year despite company against our highest quarter historically. And we also bucked the trend more broadly given some of the industry weakness in commercial hydroponics. We believe our less capital-intensive e-commerce model, high margin profile, and consumer-driven end market sets us apart from other hydroponic players in the space. From a product perspective, our in-house ventilation line was the strongest category during the quarter. Today, it accounts for about 40% of our sales compared to roughly 30% this time last year, and the consistent growth is a reflection of our superior product design and merchandising capability, as well as the work we put in to effectively manage our supply partner network. Our diversified supplier base enabled us to consistently deliver products, be it directly to consumers or to our channel partners. To give some perspective to those that are new to our story, we are one of the top sellers of hydroponic equipment on Amazon and online. So product availability is key to meeting consumer needs. In addition to our momentum in the ventilation systems, we have several product design initiatives underway that will incorporate smart functionality into our ventilation, filtering, and lighting products, allowing for remote monitoring and operation of our products. We also have a number of sensor-based products in development that will be key elements in grow environment optimization. This is an entirely new category for us, and we are excited about the opportunity. Finally, we have developed several prototypes of countertop hydroponics appliance and we are in discussion with our supply chain partner on the design and the manufacturing parameters. While it's too early to know the exact timing of the launching of these products, we hope to have some of these products in market by end of our fiscal year. Another key development during the quarter was our first set of orders for delivery into Western Europe. We received two purchase orders from one of our channel partners for the UK and German market. We are at a very early stage of our entrance into the European market and we believe that this market is significant in size with very little penetration to date. Now, we see Europe as a high growth opportunity for us over the medium and long term as their consumer counter products market develops. Overall, we continue to execute on the various growth objectives that were laid out during last year's IPO. And although we are very pleased with our momentum, we know that the best days for iPower remain ahead. I will now turn the call over to our CFO, Kevin, to take you through our financial results in more details. Kevin, please.
spk04: Thank you, Lawrence. So we had another solid quarter performance in our fiscal Q1. Total revenue was up 16% from the year-ago period to $17.4 million, highlighted by a greater mix of our in-house product sales as well as increased sales of ventilation and nutrient products. We continue to execute on selling more of our in-house brands, which increased 21% year-over-year to $13 million and accounted for approximately 75% of our sales compared to 72% in the year-ago quarter. As we previously stated, gross margins for our in-house products are generally 20 to 25 percentage points higher than our third-party products that we carry. So we'll continue to invest and emphasize the in-house part of our catalog going forward. Overall gross margin for the quarter was up 490 basis points to 42.1%, which exceeded our expectations given the higher product input costs that we started to see over the summer. as well as increased freight expenses, which has been seen not only in our industry but across all industries. In addition to higher sales mix of in-house brands, the composition of product mix within our in-house brand product sales skew toward the higher end of the margin distribution. We remain cautiously optimistic about margins going forward, even with the ongoing volatility in the supply chain. Total operating expenses for our fiscal first quarter were $6 million. compared to $4.5 million for the same period in fiscal 2020. The increase was primarily driven by our increased sales volumes, as well as increased expenses associated with being a publicly traded company, which we didn't have in the prior quarter of fiscal 2020. Despite the sequential increase in sales from the June quarter, operating expenses were down on an absolute basis, as our ad spend normalized a bit And channeled program mix resulted in less or smaller merchant fees. Net income in the quarter increased 16% year-over-year to $0.9 million, or $0.03 per diluted share, compared to net income of $0.8 million, or $0.04 per diluted share in the same period in fiscal 2021. Moving on to the balance sheet, Cash and cash equivalents were $1.2 million as of September 30, 2021, compared to $6.7 million as of June 30, 2021. The decrease is almost entirely attributable to the timing of cash flows and receivables from our largest channel partner. So the lower balance is not an indication of any business or operating trends. We ended the quarter with approximately $24 million of working capital. Total debt as of September 30th. 2021 stood at $0.5 million compared to $0.7 million as of June 30, 2021. So looking at the balance of our fiscal year, we remain confident in our growth strategy and financial targets. From a margin and cost perspective, there have been some favorable developments in the last six weeks with regard to container costs and port congestion in Los Angeles. but it's still a little too early to tell if this is a reversal that will remain permanent. The broader supply chain does remain volatile as input costs continue to fluctuate, and COVID-19 continues to be very disruptive to the economies where we primarily source our product. As we have done since the pandemic began, we are working with our partners in China to minimize any impact, Also, as I mentioned last quarter, we do have a number of ways to push back on the supply chain volatility and input cost pressures that continue to be in place. These include trying to manage channel program mix, bulk procurement, and asking some of our supply chain partners for larger production runs. We'll also continue to emphasize greater mix of our in-house product sales, and introduce new proprietary SKUs to broaden the in-house catalog. And we are looking forward to another strong year for iPower in fiscal 2022. So that concludes our prepared remarks. We'll now open it up for questions.
spk11: Thank you, sir. Ladies and gentlemen, if you have a question at this time, please press the star and then the number one key on your touchstone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question comes from the line of Mike Baker from DA Davidson. Your line is open.
spk06: Okay. Hi, guys. A couple. First, real quick, you said you're on target for your financial goals here, but you haven't specifically reiterated the full year sales growth of 25% or more. I just wanted to make sure that was the right way still to be thinking of it. And if so, you know, great quarter this quarter, but up 16%. If you're looking for 25% for the year, or more than 25%, that does imply a ramp. Can you talk about, you know, how you go from 16% to 25% for the year? Thanks.
spk04: Sure. Sure, Mike. Yeah, so, yes, the financial target that we outlined of 25%, you know, kind of, at the kind of floor growth for fiscal 2022 is still intact. We only had our last call six weeks ago, so nothing's changed from that standpoint. What I would say about this quarter relative to kind of the upcoming quarters is we're comping the strongest quarter in the company's history, and we still have the balance of the year to meet that goal. So, you know, we're happy with, uh, you know, 60% growth. We see, you know, lots of opportunity, uh, uh, over the next several quarters to, to, to get to that goal. So I think we're in a good, good spot, uh, going forward and, you know, you know, are confident that we're in, you know, as good a position as we were when we talked to you guys, you know, roughly the end of September.
spk06: Yep. Okay. Makes sense. Uh, I'll ask one more, and then I'll turn it over to someone else and come back in if need be. But could you update us, if you wouldn't mind, on your nutrients business? I think last time we talked, the idea was that that was something you were going to develop in-house and hope to be getting started with that in November. But I think you still have the possibility of even making an acquisition there. So just if you could update us on that, I'd appreciate it. Thanks.
spk04: Sure. Lawrence, you want to take that?
spk03: Sure. We actually have the nutrients under development. We're hoping to have the nutrients available for sale by the end of the calendar year, with a chance of it actually launching by the end of this month. So we'll announce it formally at that time. But, yeah, that's the timeline for now.
spk06: And is that delayed at all, or is that changed at all, that timing? Is there anything that's sort of impacting that? I seem to remember November being a time when you thought you could get it done.
spk03: This is still the target, and it's under production, actually.
spk05: Okay. I appreciate that.
spk04: Yes, and then as it pertains to potential acquisition, yeah, we're obviously still – Looking, we think a faster kind of ramp would be to bring in a developed brand that fits the criterion that we think makes sense for our business model. It needs to be a brand that is established but could accelerate with the use of an e-commerce channel and is suited for e-commerce distribution, so that could be packaging and sizes that are appropriate for our model. And so, you know, we're still in that, you know, search and identify and engage phase. We just haven't found one that, you know, I think meets all the criterion that we think is also a good product. So, you know, this is the in-house development is probably one leg of the stool, so to speak, as it pertains to how we further penetrate nutrients. But we're excited about kind of the opportunity there, and as we move further through the year, an acquisition of a brand that made sense for us is still absolutely under contemplation.
spk00: Okay, thank you.
spk11: Your next question is from Scott Fortune from Road Capital Partner. Your line is open.
spk10: Yeah, good afternoon. Thanks for taking the question. You mentioned we've seen the hydroponic industry kind of on the commercial side has been very tough quarter to quarter from that standpoint. But can you provide – you guys seem to be a little bit immune to that because of your online positioning. But can you provide – color on the customer spend trends going forward into 4Q and is there seasonality from a historical standpoint as we look into the 4Q, 1Q opportunities here? Just a little bit around your consumers and the spend going on there.
spk04: Sure, Mark, you might want to take that one and I can kind of chime in after your answer.
spk03: Sounds good. Yeah, sure. So the commercial market is a very small portion of our portfolio. It consists of less than 10% for the quarter we are reporting. So like you said, we are largely an online retailer. And that part doesn't seem to have the same huge up and down compared to the commercial market. So we haven't noticed any significant change in the consumer behavior. So I don't have any suggestions that it will change from what we saw historically.
spk04: Yeah, and then on the seasonality. So I think if we broke our catalog into some of the different product types and categories, they tend to have some different seasonality. But I think we've said this in the past, and I think we've talked to you about this, Scott, a little bit. COVID really kind of disturbed a lot of those historical patterns that we see or have seen, and so it is a little bit harder for us to predict seasonality at this point. You have our you know, our performance from the prior fiscal year. But we're not convinced that that's normal, but we're not sure yet that it's abnormal. So, you know, I think we're focused really on trying to kind of continue to get product in hand and making sure it's available for, you know, our channel partners.
spk10: Great. I appreciate the color on that. And then just shifting, can you provide a little more color on the traffic to your websites in Hydro, initiatives to drive and support more customers to your own website to transact more direct with your consumer base? Kind of step us through kind of any metrics that you're seeing around your advertising and site visits to your own website and the initiatives there.
spk03: We are – that's right. We are doing a lot of work behind the scenes, identifying new ways to attract more customers to our own website. We are developing a newer version of the site that's about to be published soon, and we'll let people know about that. and a coupling with new ways to get more traffic for the website. But, yeah, we have a lot of work actually being developed. You'll hear from us in the next couple weeks, I guess.
spk10: Okay. And then just one last question. Kind of on the inventory levels, you know, with the supply chain challenges that are out there, Have you pulled forward more inventory or kind of how you look at your inventory to meet demand or are you seeing issues that are impacting kind of the business from that side? How should we kind of evaluate that?
spk03: We have our inventory position for September is about the same as June. And because we fixed, you know, with the proceeds from IPO, we increased our sales. We increased quite a bit of inventory into our pipeline. And I think we are very comfortable with the level of inventories. And also, we are very comfortable with the auto stock rate. And supplier network management is always one of our strengths and one of our core strengths. I am very happy with the status it is now as I think we are very sufficient on inventory and we are very agile and we'd be able to deal with any kind of problems that we encounter so far. I think we're doing much better than the rest of the industry, but we're doing pretty good from my own opinion. And going forward, our focus is more like the new products, you know, rolling out and strategic push out like websites and new lines or products. Those will be our focuses. In terms of a base, I don't think we have any problem right now.
spk10: Great. Thanks for that, Keller. And I will jump back in the queue.
spk11: You have a follow-up question from Mike Baker of DA Davidson. Your line is open.
spk06: I'll take, real quick here, a couple more, if I could. Big beat on gross margin. Can you talk about where that beat came from, and is it sustainable, particularly within the context of container costs coming down? Right. And then I'll ask that, and then I'll have one on SG&A.
spk04: Right. So... Obviously, for us, the more of our in-house brands that we can push through the sales channels, the better for us. We've talked about the gross margin delta between our in-house versus the third-party products that we carry. It is a little bit more complicated than that. The kind of equation is multivariate. For this quarter, we had a really nice skew. If you think about our catalog in terms of a distribution, the skew was definitely towards the higher margin portion of that distribution. That clearly helped. One of the things that helped in the quarter as well is that we've got channel programs with some of our partners that deliver product in different ways. We did a decent amount of what I would call direct import business, meaning our channel partner would take ownership of that overseas. And because of their size and their purchasing power, they get really good container cost rates for bringing product across to the U.S. And so when we engage that program, they're responsible for the freight costs. So that definitely helped as well. So is it sustainable? It's always hard for us to kind of predict in any given quarter how much we can push one channel program over another. As you guys know, our strategy is to really feature and push our products versus third-party products with our partners. And as such, the more of that we do, the better. I think the other thing we could say, too, is that back in the prior quarter and in the period leading up to the end of the prior quarter, we had a fair amount of new SKUs that were added to the catalog. Given the broader selection, we have an opportunity for our customers to choose us more than they might choose a third-party product. That also helps. Anytime we introduce a redesign of a SKU, we do it with the intention of having a better margin profile for that product if we can. It's a longer way of saying that we're cautiously optimistic that we can keep margins at a really, really healthy level and potentially expand them over the next several quarters. But just to be fair in the way we think about it, that mix of distribution can, from quarter to quarter, sometimes skew to the lower end of our margin distribution of in-house products. I think the longer-term trend is good, and I think one of the things we talked about in prior periods, too, is that we expect over a longer trend period to be able to increase margins several percentage points from here over the next several years.
spk06: Yeah, that all makes sense. Sorry, if I could ask one follow-up, though. That program you're referring to in terms of your partner importing the product themselves, I believe, I think in a prior conversation, what I understood that to mean is that, sure, you don't pay the shipping costs, but you get a lower product margin on that, but also lower merchant fees. Is that right? But I guess what you're saying is, sure, you get a lower merchandise margin, but the fact that you don't have to pay for shipping actually makes it a better all-in gross margin. Is that the right interpretation?
spk15: No.
spk03: So here's what's going on for us. So we work without partners, and we also brought containers in ourselves. So if the container is a price job, the freight job, it will help us in the positive way. If the... And the biggest driver, I just want to add on to your previous question, the biggest driver for the margin, the gross margin, is to continuously pushing out better product, better product that we can price, you know, to the market and get more consumer to realize the value. So the R&Ds into these products and with either ourselves or with our partner manufacturers, That will drive our long-term gross margin upwards. That's the key. So continuously introducing better products to the market, beat the competition, that's the key for long-term. Now, for freight, if the price drops, it will make our gross margin lower.
spk14: bigger, for sure.
spk03: Because like what Kevin mentioned, for the parts we don't pay freight, we don't pay anyway. For the parts we pay, you know, cheaper freight is better for us.
spk05: Yeah. Okay. Okay. I think I understand. All right.
spk04: Thank you. Yeah, no, Mike, let me just add to that just because I want to make sure you have kind of the right understanding as well. So, yeah, so there is some, you know, price trade-off for that handoff. But, again, it's not just as simple as saying, oh, you know, we use this program. Gross margins are, you know, offset in a couple directions, but it's better operating margin. It depends on the mix of product, too, right? So we have the benefit this quarter of, you know, being skewed to the higher end of the distribution of the margin distribution. So all things in, it was better. But it's not a kind of stationary margin for all of our in-house products versus our third-party products. So the equation's a little more complicated than just better gross margin, no shipping costs, but slightly lower price, but better operating margin. And we can talk through that too when we kind of reconnect. But what I want to communicate is that between quarters, that product mix can have an impact, but it doesn't mean that the trend is going in one direction or another. We like the longer-term trend of where margins are going, and we expected them to go up. over the next two to three years in a way that's very helpful for our bottom line.
spk06: Yep, yep. It all makes sense. Mix is obviously very important. Okay, great. I appreciate the color.
spk11: Sure. There are no further questions at this time. Presenters, please continue.
spk04: Great. Well, I just want to thank everyone for joining us on this call, and we look forward to the next earnings release and conference call, and we'll see you all then. Thank you. Thank you.
spk11: Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day. You may all disconnect.
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