iPower Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management’s Discussion and Analysis should be read in conjunction with our financial statements and the related notes thereto included elsewhere herein. This Management’s Discussion and Analysis (“MD&A”) contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,” and the like, and/or future-tense or conditional constructions (“will,” “may,” “could,” “should,” etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements in this form. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors. Historical results may not indicate future performance. Our forward-looking statements reflect our current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those contemplated by these statements. We undertake no obligation to publicly update or revise any forward- looking statements, including any changes that might result from any facts, events, or circumstances after the date hereof that may bear upon forward-looking statements. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements. Overview iPower Inc. is a U.S.-based online retailer and supplier of consumer home, garden and pet products. Through the operations of our e-commerce platform, www.simpledeluxe.com and www.Zenhydro.com, our combined 121,000 square foot fulfillment centers in Los Angeles, California, as well as our 99,000 square foot fulfillment center in Rancho Cucamonga, California, we believe we are one of the leading marketers, distributors and retailers of home fans, shelving, gaming chairs, grow-light systems, ventilation systems, activated carbon filters, nutrients, hydroponic water-resistant grow tents, trimming machines, pumps, accessories for hydroponic gardening and certain pet products, based on management’s estimates. We have a diverse customer base that includes commercial users and individuals. Our core strategy continues to focus on expanding our geographic reach across the United States through organic growth, both in terms of expanding customer base as well as brand and product development. We are actively developing and acquiring our in-house branded products, which to date include the iPower, Simple Deluxe and other brands and consist of products such as home goods, fans, pet products, grow-light systems, ventilation systems, activated carbon filters, nutrients, hydroponic water-resistant grow tents, trimming machines, pumps and many more hydroponic-related items; some of which have been designated as Amazon best seller product leaders, among others. For the six months ended December 31, 2022, our top five product segments accounted for 78% of total sales. While we continue to focus on our top product categories, we are working to expand our product catalog to include new and adjacent categories. Trends and Expectations Product and Brand Development We plan to increase our investments in product and brand development. We actively evaluate potential acquisition opportunities of companies and product brand names that can complement our product catalog and improve on existing products and supply chain efficiencies. 36 Global Economic Disruption While at present the majority of our products are sourced either in the United States or Mainland China, the military conflict between Russia and Ukraine may nonetheless increase the likelihood of supply chain disruptions or otherwise hinder our ability to find the materials we need to make our products. In addition, supply chain disruptions may make it harder for us to find favorable pricing and reliable sources for the materials we need, putting upward pressure on our costs and increasing the risk that we may be unable to acquire the materials and services we need to continue to make certain products. Ongoing COVID-19 Epidemic and Related Disruptions We are continuing to closely monitor the impact of the ongoing COVID-19 epidemic on our business, results of operations and financial results. The situation surrounding the COVID-19 epidemic remains fluid and the full extent of the positive or negative impact of the COVID-19 outbreak on our business will depend on certain developments including the length of time that the epidemic continues, the impact on consumer activity and behaviors and the effect on our customers, employees, suppliers and stockholders, all of which are uncertain and cannot be predicted. Our focus remains on promoting the health, safety and financial security of our employees and serving our customers. As a result, we have taken a number of precautionary measures, including implementing social distancing and enhanced cleaning measures in our facilities, providing emergency paid time off and targeted hourly pay increases as well as developing no contact delivery methods. In an effort to contain or slow the COVID-19 epidemic, authorities across the world have implemented various measures, some of which have been subsequently rescinded or modified, including travel bans, stay-at-home orders and shutdowns of certain businesses. We anticipate that these actions and the global health crisis caused by the COVID-19 epidemic, including any resurgences, will continue to negatively impact global economic activity. While the COVID-19 epidemic has not had a material adverse impact on our operations to date and we believe the long-term opportunity that we see for shopping online remains unchanged, it is difficult to predict all of the positive or negative impacts the COVID-19 outbreak will have on our business. In the short term, we have continued to see increased sales and order activity in the market since the COVID-19 outbreak. In order to keep up with the increased orders, we have hired and are continuing to hire additional personnel. However, much is unknown and, accordingly, the situation remains dynamic and subject to rapid and possibly material change. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, local or foreign authorities, or that we determine are in the best interests of our customers, employees, suppliers, stockholders and communities. Regulatory Environment We sell hydroponic gardening products to end users that may use such products in new and emerging industries or segments, including the growing of cannabis. The demand for hydroponic gardening products depends on the uncertain growth of these industries or segments due to varying, inconsistent and rapidly changing laws, regulations, administrative practices, enforcement approaches, judicial interpretations and consumer perceptions. For example, certain countries and a total of 44 U.S. states plus the District of Columbia have adopted frameworks that authorize, regulate and tax the cultivation, processing, sale and use of cannabis for medicinal and/or non-medicinal use, including legalization of hemp and CBD, while the U.S. Controlled Substances Act and the laws of certain U.S. states prohibit growing cannabis. Demand for our products could be impacted by changes in the regulatory environment with respect to such industries and segments. 37 RESULTS OF OPERATIONS For the three months ended December 31, 2022 and 2021 The following table presents certain unaudited condensed consolidated statement of operations information and presentation of that data as a percentage of change from period to period. Three Months Ended December 31, 2022 Three Months Ended December 31, 2021 Variance Revenues $ 19,254,590 $ 17,125,663 12.43% Cost of goods sold 11,285,064 9,568,051 17.95% Gross profit 7,969,526 7,557,612 5.45% Operating expenses 12,052,092 6,422,327 87.66% Operating (loss) income (4,082,566 ) 1,135,285 (459.61% ) Other (expenses) (258,457 ) (14,709 ) 1,657.13% (Loss) Income before income taxes (4,341,023 ) 1,120,576 (487.39% ) Income tax (benefit) expense (1,047,749 ) 322,715 (424.67% ) Net (loss) income (3,293,274 ) 797,861 (512.76% ) Non-controlling interest (2,835 ) – Net (loss) income attributable to iPower Inc. (3,290,439 ) 797,861 (512.41% ) Other comprehensive loss 47,149 – Comprehensive (loss) income attributable to iPower Inc. $ (3,243,290 ) $ 797,861 (506.50% ) Gross profit % of revenues 41.39% 44.13% Operating (loss) income % of revenues (21.20% ) 6.63% Net (loss) income % of revenues (17.10% ) 4.66% Revenues Revenues for the three months ended December 31, 2022 increased 12.43% to $19,254,590 as compared to $17,125,663 for the three months ended December 31, 2021. While pricing remained stable, the increased revenue mainly resulted from an increase in sales volume and expansion of sales to other regions, such as Canada, Europe and Asia. In addition to our organic growth and diversified product mix, which we achieved as a result of improved products and more effective online marketing and merchandising efforts, the increase in sales was attributable to more people shopping online and pursuing gardening and growing projects during the COVID-19 pandemic. Costs of Goods Sold Costs of goods sold for the three months ended December 31, 2022 increased 17.95% to $11,285,064 as compared to $9,568,051 for the three months ended December 31, 2021. The increase was due to an increase in sales, which resulted in increased accompanying costs. See discussions on gross profit below. We have seen decreasing freight charges since September 2022 but cannot be assured that this trend will continue. 38 Gross Profit Gross profit was $7,969,526 for the three months ended December 31, 2022 as compared to $7,557,612 for the three months ended December 31, 2021. The gross profit ratio decreased to 41.39% for the three months ended December 31, 2022 from 44.13% for the three months ended December 31, 2021. The decrease in the gross profit ratio was mainly driven by the increase in cost of goods sold as a result of increased freight charges as well as channel and product category mix. Operating Expenses Operating expenses for the three months ended December 31, 2022 increased 87.66% to $12,052,092 as compared to $6,422,327 for the three months ended December 31, 2021. The increase was mainly due to the combination of an increase in selling and fulfillment expenses of $5.7 million as a result of increased costs related to advertising, merchant fees, and delivery fees, and a decrease in general and administrative expenses of $0.07 million, which included payroll expenses, stock-based compensation expense, insurance expenses and other operating expenses including expenses associated with being a publicly traded company. (Loss) Income from Operations (Loss) Income from operations was ($4,082,566) for the three months ended December 31, 2022 as compared to $1,135,285 for the three ended December 31, 2021. The decrease in income was resulted from the increase in operating expenses being greater than the increase in gross profit received, as discussed above. Other Expenses Other expenses for the three months ended December 31, 2022 was $258,457 as compared to $14,709 for the three months ended December 31, 2021. The increase in other expenses was mainly due to an increase in interest, including amortization of debt discount on the revolving loan of $239,007 during the period ended December 31, 2022. Net (Loss) Income Attributable to iPower Inc. Net loss attributable to iPower Inc. for the three months ended December 31, 2022 was ($3,290,439) as compared to net income of $797,861 for the three months ended December 31, 2021, representing a decrease of $4,088,300. The decrease was primarily due to the increase in operating expenses as discussed above. Comprehensive (Loss) Income Attributable to iPower Inc. Comprehensive loss attributable to iPower Inc. for the three months ended December 31, 2022 was ($3,243,290) as compared to comprehensive income of $797,861 for the three months ended December 31, 2021, representing a decrease of $4,041,151. The decrease was due to the reasons discussed above, along with the other comprehensive income of $47,149 as a result of foreign currency translation adjustments resulting from the translation of RMB, the functional currency of our VIE in PRC, to USD, the reporting currency of the Company. 39 For the six months ended December 31, 2022 and 2021 The following table presents certain unaudited condensed consolidated statement of operations information and presentation of that data as a percentage of change from period to period. Six Months Ended December 31, 2022 Six Months Ended December 31, 2021 Variance Revenues $ 45,277,263 $ 34,492,428 31.27% Cost of goods sold 27,322,021 19,621,114 39.25% Gross profit 17,955,242 14,871,314 20.74% Operating expenses 26,631,114 12,445,714 113.98% Operating (loss) income (8,675,872 ) 2,425,600 (457.68% ) Other (expenses) (298,128 ) (74,521 ) 300.06% (Loss) Income before income taxes (8,974,000 ) 2,351,079 (481.7% ) Income tax (benefit) expense (1,495,545 ) 665,690 (324.66% ) Net (loss) income (7,478,455 ) 1,685,389 (543.72% ) Non-controlling interest (5,640 ) – Net (loss) income attributable to iPower Inc. (7,472,815 ) 1,685,389 (543.72% ) Other comprehensive loss (64,326 ) – Comprehensive (loss) income attributable to iPower Inc. $ (7,537,141 ) $ 1,685,389 (547.20% ) Gross profit % of revenues 39.66% 43.11% Operating (loss) income % of revenues (19.16% ) 7.03% Net (loss) income % of revenues (16.52% ) 4.89% Revenues Revenues for the six months ended December 31, 2022 increased 31.27% to $45,277,263 as compared to $34,492,428 for the six months ended December 31, 2021. While pricing remained stable, the increased revenue mainly resulted from an increase in sales volume and expansion of sales to other regions, such as Canada, Europe and Asia. In addition to our organic growth and diversified product mix, which we achieved as a result of improved products and more effective online marketing and merchandising efforts, the increase in sales was attributable to more people shopping online and pursuing gardening and growing projects during the COVID-19 pandemic. Costs of Goods Sold Costs of goods sold for the six months ended December 31, 2022 increased 39.25% to $27,322,021 as compared to $19,621,114 for the six months ended December 31, 2021. The increase was due to an increase in sales, as discussed above. In addition, we experienced an increase in costs of goods sold as a percentage of revenue as a result of the increased freight charges during the six months ended December 31, 2022. However, the freight costs have been decreasing since September 2022, causing the increase in costs of goods sold for the six months was more significant comparing to the increase in the three months ended December 31, 2022. See discussions on gross profit below. We have seen decreasing freight charges since September 2022 but could not be assured that this trend will continue. 40 Gross Profit Gross profit was $17,955,242 for the six months ended December 31, 2022 as compared to $14,871,314 for the six months ended December 31, 2021. The gross profit ratio slightly decreased to 39.66% for the six months ended December 31, 2022 from 43.11% for the six months ended December 31, 2021. The decrease in gross profit ratio was mainly driven by an increase in freight charges during the six months ended December 31, 2022 as well as channel and product category mix. Operating Expenses Operating expenses for the six months ended December 31, 2022 increased 113.98% to $26,631,114 as compared to $12,445,714 for the six months ended December 31, 2021. The increase was mainly due to the combination of an increase in selling and fulfillment expenses of $10.4 million as a result of increased advertising, merchant fees, delivery fees, storage costs and fulfillment workforce, general and administrative expenses of $0.7 million, which included payroll expenses, stock-based compensation expense, insurance expenses and other operating expenses including expenses associated with being a publicly traded company, and $3.1 million of impairment loss on goodwill triggered by a decrease in the Company’s share price of its common stock and the net loss incurred during the quarter ended September 30, 2022. (Loss) Income from Operations (Loss) Income from operations was ($8,675,872) for the six months ended December 31, 2022 as compared to $2,425,600 for the six months ended December 31, 2021. The decrease was due to the increase in operating expenses was greater than the increase in gross profit as discussed above. Other Expenses Other expenses for the six months ended December 31, 2022 was $298,128 as compared to $74,521 for the six months ended December 31, 2021. The increase in other expenses was mainly due to a combined result of an increase in other non-operating income of $261,770, and an increase in interest, including amortization of debt discount on the revolving loan of $487,048 during the period ended December 31, 2022. Net (Loss) Income Attributable to iPower Inc. Net loss attributable to iPower Inc. for the six months ended December 31, 2022 was ($7,472,815) as compared to net income of $1,685,389 for the six months ended December 31, 2021, representing a decrease of $9,158,204. The decrease was primarily due to the increase in operating expenses as discussed above. Comprehensive (Loss) Income Attributable to iPower Inc. Comprehensive loss attributable to iPower Inc. for the six months ended December 31, 2022 was ($7,537,141) as compared to comprehensive income of $1,685,389 for the six months ended December 31, 2021, representing a decrease of $9,222,530. The decrease was due to the reasons discussed above, along with other comprehensive loss of $64,326 as a result of foreign currency translation adjustments resulting from the translation of RMB, the functional currency of our VIE in PRC, to USD, the reporting currency of the Company. 41 LIQUIDITY AND CAPITAL RESOURCES Sources of Liquidity During the six months ended December 31, 2022 we primarily funded our operations with cash and cash equivalents generated from operations, as well as through the completion of two private placements in 2020 and 2021, completion of our initial public offering in May of 2021, and borrowing under our credit facility and loans from the Small Business Administration and JPMorgan Chase Bank ("JPM”). We had cash and cash equivalents of $3,997,125 as of December 31, 2022, representing a $2.2 million increase from $1,821,947 of cash as of June 30, 2022. The cash increase was primarily the result of the increase in net cash provided by operating activities. Based on our current operating plan, and despite the current uncertainty resulting from the ongoing COVID-19 pandemic, we believe that our existing cash and cash equivalents and cash flows from operations will be sufficient to finance our operations during the next 12 months. Our cash requirements consist primarily of day-to-day operating expenses and obligations with respect to warehouse leases. We lease all our office and warehouse facilities. We expect to make future payments on existing leases from cash generated from operations. We have credit terms in place with our major suppliers, however, as we bring on new suppliers, we are often required to prepay our inventory purchases from them. This is consistent with our historical operating model which allowed us to operate using only cash generated by the business. Beyond the next 12 months we believe that our cash flows from operations should improve as supply chains begin to return to normal and new suppliers that we bring online transition to credit terms more favorable to us. In addition, we plan to increase the size of our in-house product catalog, which will have a net beneficial impact to our margin profile and ability to generate cash. In addition, we have approximately $9.0 million in unused credit under our revolving line of credit with JPM as of December 31, 2022. Given our current working capital position and available funding from our revolving credit line, we believe we will be able to manage through the current challenges by managing payment terms with our customers and vendors. Working Capital As of December 31, 2022 and June 30, 2022, our working capital was $22.96 million and $32.3 million, respectively. The historical seasonality in our business during the year can cause cash and cash equivalents, inventory and accounts payable to fluctuate, resulting in changes in our working capital. We anticipate that past historical trends will remain in place through the balance of the fiscal year with working capital remaining near this level for the foreseeable future. Cash Flows Operating Activities Net cash provided by (used in) operating activities for the six months ended December 31, 2022 and December 31, 2021 was $7,778,208 and ($12,243,043), respectively. The increase in cash provided by operating activities mainly resulted from decreased accounts receivable, inventories, prepayments and other current assets and increased accounts payable. Investing Activities For the six months ended December 31, 2022 and December 31, 2021, net cash used in investing activities was $127,367 and $56,424, respectively. The increase in cash used in investing activities was because the Company made additional purchase of equipment during the six months ended December 31, 2022. Financing Activities Net cash (used in) provided by financing activities was ($5,540,436) and $6,739,520, respectively, for the six months ended December 31, 2022 and December 31, 2021. The main reason the Company experienced a decrease in net cash provided by financing activities was primarily due to our payment of $8.6 million for: 1) $1.5 million to pay off investment payable; 2) $0.88 million to pay down note payable; and 3) $6.2 million to pay down the outstanding balance of the asset-based revolving loan facility with JPMorgan Chase Bank. 42 OFF-BALANCE SHEET ARRANGEMENTS We do not have any off-balance sheet arrangements (as that term is defined in Item 303 of Regulation S-K) that are reasonably likely to have a current or future material effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources. CRITICAL ACCOUNTING POLICIES AND ESTIMATES We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States, or GAAP and pursuant to the rules and regulations of the Securities Exchange Commission (“SEC”). The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition and results of operations will be affected. We base our estimates on experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies, which we discuss further below. While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements, we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our audited consolidated financial statements. Revenue reco g nition The Company recognizes revenue from product sales revenues, net of promotional discounts and return allowances, when the following revenue recognition criteria are met: a contract has been identified, separate performance obligations are identified, the transaction price is determined, the transaction price is allocated to separate performance obligations and revenue is recognized upon satisfying each performance obligation. The Company transfers the risk of loss or damage upon shipment, therefore, revenue from product sales is recognized when it is shipped to the customer. Return allowances, which reduce product revenue by the Company’s best estimate of expected product returns, are estimated using historical experience. The Company evaluates the criteria of ASC 606 - Revenue Recognition Principal Agent Considerations in determining whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions. Generally, when the Company is primarily responsible for fulfilling the promise to provide a specified good or service, the Company is subject to inventory risk before the good or service has been transferred to a customer and the Company has discretion in establishing the price, revenue is recorded at gross. Payments received prior to the shipment of goods to customers are recorded as customer deposits. The Company periodically provides incentive offers to its customers to encourage purchases. Such offers include current discount offers, such as percentage discounts off current purchases and other similar offers. Current discount offers, when accepted by the Company’s customers, are treated as a reduction to the purchase price of the related transaction. Sales discounts are recorded in the period in which the related sale is recognized. Sales return allowances are estimated based on historical amounts and are recorded upon recognizing the related sales. Shipping and handling costs are recorded as selling expenses. Inventory, net Inventory consists of finished goods ready for sale and is stated at the lower of cost or market. The Company values its inventory using the weighted average costing method. The Company’s policy is to include as a part of inventory and costs of goods sold any freight incurred to ship the product from its vendors to warehouses. Outbound freight costs related to shipping costs to customers are considered period costs and reflected in selling, fulfillment, general and administrative expenses. The Company regularly reviews inventory and considers forecasts of future demand, market conditions and product obsolescence. If the estimated realizable value of the inventory is less than cost, the Company makes provisions in order to reduce its carrying value to its estimated market value. The Company also reviews inventory for slow moving and obsolescence and records allowance for obsolescence. 43 Business Combination On February 15, 2022, the Company acquired 100% of the ordinary shares of Anivia Limited (“Anivia”) and its subsidiaries, including its variable interest entity (“VIE”), Daheshou (Shenzhen) Information Technology Co., Ltd., a company organized under the laws of the People’s Republic of China (“DHS”). The Company applies the acquisition method of accounting for business combinations. Under the acquisition method, the acquiring entity in a business combination recognizes 100% of the assets acquired and liabilities assumed at their acquisition date fair values. Management utilizes valuation techniques appropriate for the asset or liability being measured in determining these fair values. Any excess of the purchase price paid over amounts allocated to assets acquired, including identifiable intangible assets and liabilities assumed is recorded as goodwill. Where amounts allocated to assets acquired and liabilities assumed is greater than the purchase price, a bargain purchase gain is recognized. Acquisition-related costs are expensed as incurred. See Note 4 for details on acquisition. Variable interest entities On February 15, 2022, the Company acquired 100% of the ordinary shares of Anivia Limited (“Anivia”) and its subsidiaries, including DHS. Pursuant to the terms of the Agreements, the Company does not have direct ownership in DHS but is actively involved in DHS’s operations as the sole manager to direct the activities and significantly impact DHS’s economic performance. DHS’s operational funding has been provided by the Company following the February 15, 2022 acquisition. During the term of the Agreements, the Company bears all the risk of loss and has the right to receive all of the benefits from DHS. As such, based on the determination that the Company is the primary beneficiary of DHS, in accordance with ASC 810-10-25-38A through 25-38J, DHS is considered a VIE of the Company and the financial statements of DHS have been consolidated from the date such control existed, February 15, 2022. See Note 4 and Note 5 for details on acquisition. Goodwill Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed. The Company accounts for goodwill under ASC Topic 350, Intangibles-Goodwill and Other . Goodwill is not amortized but is reviewed for potential impairment on an annual basis, or if events or circumstances indicate a potential impairment, at the reporting unit level. The Company’s review for impairment includes an assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value, including goodwill. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, including goodwill, a quantitative goodwill impairment test is performed, which compares the fair value of the reporting unit with its carrying amounts, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. However, if the carrying amount of the reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit The Company engaged an independent third-party valuation firm in August 2022 to conduct an evaluation of goodwill impairment for the Company as a whole at the consolidated reporting unit level as of June 30, 2022, which evaluation was conducted prior to the Company’s filing of its Annual Report on Form 10-K. Due to the decrease in the Company’s share price subsequent to the filing of the Form 10-K and the net loss incurred during the quarter ended September 30, 2022, the Company engaged the same valuation firm to review goodwill for impairment. Based on this review, the Company concluded an impairment loss of $3,060,034 as of September 30, 2022 was required. The impairment amount was determined based on the discounted cash flows with the revised projections reflecting the increase in freight and storage costs in the current interim quarter. The Company also considered the Market Capital Method, which is an alternative market approach, suggested the Company’s goodwill is partially impaired. During the three months ended December 31, 2022, the Company performed a qualitative goodwill impairment analysis following the steps laid out in ASC 350-20-35-3C and noted no goodwill impairment. As of December 31, 2022, the remaining goodwill balance amounted to $3,034,110. 44 Intangible Assets, net Finite life intangible assets at June 30, 2022 include a covenant not to compete, supplier relationship, and software recognized as part of the acquisition of Anivia Limited. Intangible assets are recorded at the estimated fair value of these items at the date of acquisition, February 15, 2022. Intangible assets are amortized on a straight-line basis over their estimated useful life as followings: Useful Life Covenant Not to Compete 10 years Supplier relationships 6 years Software 5 years The Company reviews the recoverability of long-lived assets, including intangible assets, when events or changes in circumstances occur that indicate the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on the ability to recover the carrying value of the asset from the expected future pretax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. The measurement of impairment requires management to make estimates of these cash flows related to long-lived assets, as well as other fair value determinations. As of December 31, 2022, there were no indicators of impairment. Stock-based Compensation The Company applies ASC No. 718, “Compensation-Stock Compensation,” which requires that share-based payment transactions with employees and nonemployees upon adoption of ASU 2018-07, be measured based on the grant date fair value of the equity instrument and recognized as compensation expense over the requisite service period, with a corresponding addition to equity. Under this method, compensation cost related to employee share options or similar equity instruments is measured at the grant date based on the fair value of the award and is recognized over the period during which an employee is required to provide service in exchange for the award, which generally is the vesting period. In addition to the requisite service period, the Company also evaluates the performance condition and market condition under ASC 718-10-20. For an award that contains both a performance and a market condition, and where both conditions must be satisfied in order for the award to vest, the market condition is incorporated into the fair value of the award, and that fair value is recognized over the employee’s requisite service period or nonemployee’s vesting period if it is probable that the performance condition will be met. If the performance condition is ultimately not met, compensation cost related to the award should not be recognized (or should be reversed) because the vesting condition in the award has not been satisfied. The Company will recognize forfeitures of such equity-based compensation as they occur. Income taxes The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their perspective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax assets are recognized only to the extent that management determines that it is more-likely-than-not that the deferred income tax assets will be realized. Valuation allowances are recorded, when necessary, to reduce deferred tax assets to the amount expected to be realized. 45 As a result of the implementation of certain provisions of ASC 740, Income Taxes (“ASC 740”), which clarifies the accounting and disclosure for uncertainty in tax position, as defined, ASC 740 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. The Company has adopted the provisions of ASC 740 since inception, April 11, 2018, and has analyzed filing positions in each of the federal and state jurisdictions where the Company is required to file income tax returns, as well as open tax years in such jurisdictions. The Company has identified the U.S. federal jurisdiction, and the states of Nevada and California, as its “major” tax jurisdictions. However, the Company has certain tax attribute carryforwards which will remain subject to review and adjustment by the relevant tax authorities until the statute of limitations closes with respect to the year in which such attributes are utilized. The Company believes that our income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740. The Company’s policy for recording interest and penalties associated with income-based tax audits is to record such items as a component of income taxes. Recently issued accounting pronouncements In June 2022, FASB issued ASU 2022-03, Fair Value Measurement (Topic 82): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The amendments in this ASU clarify the guidance in ASC 820 on the fair value measurement of an equity security that is subject to a contractual sale restriction and require specific disclosures related to such an equity security. This standard is effective for fiscal years beginning after December 15, 2024. The Company does not expect the adoption of this standard to have a material impact on the consolidated financial statements. In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606) as if the entity had originated the contracts. The guidance is effective for fiscal years beginning after December 15, 2023, with early application permitted. The Company does not expect the adoption of this standard to have a material impact on the consolidated financial statements. In March 2020 and January 2021, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting and ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope, respectively (collectively, "Topic 848”). Topic 848 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by Topic 848 are effective for all entities as of March 12, 2020 through December 31, 2022. The Company does not expect the adoption of this standard to have a material impact on the Company's consolidated financial statements. In August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40).” This ASU reduces the number of accounting models for convertible debt instruments and convertible preferred stock, as well as amend the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. In addition, this ASU improves and amends the related EPS guidance. This standard is effective for the Company on July 1, 2024, including interim periods within those fiscal years. Adoption is either a modified retrospective method or a fully retrospective method of transition. The Company does not expect the adoption of this standard to have a material impact on the consolidated financial statements. In January 2020, the FASB issued ASU 2020-01, “Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” This ASU among other things clarifies that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323, Investments—Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The new ASU clarifies that, when determining the accounting for certain forward contracts and purchased options a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option. ASU 2020-01 is effective. For public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. An entity should apply ASU 2020-01 prospectively at the beginning of the interim period that includes the adoption date. The adoption of ASU 2020-01 did not have material impact on the Company's Consolidated Financial Statements. 46 In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes. The update is intended to simplify the current rules regarding the accounting for income taxes and addresses several technical topics including accounting for franchise taxes, allocating income taxes between a loss in continuing operations and in other categories such as discontinued operations, reporting income taxes for legal entities that are not subject to income taxes, and interim accounting for enacted changes in tax laws. The new standard is effective for fiscal years beginning after December 15, 2021; however, early adoption is permitted. The adoption of this standard did not have material impact on the consolidated financial statements. In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which eliminates step two from the goodwill impairment test. Under ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value up to the amount of goodwill allocated to that reporting unit. ASU 2017-04 became effective for accelerated filing companies for annual periods or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. All other entities, including not-for-profit entities, that are adopting the amendments in this Update should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2022. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has adopted ASU 2017-04. See disclosures above on Goodwill for further details. The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the consolidated financial position, statements of operations and cash flows. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a “smaller reporting company,” we are not required to provide the information required by this Item.