Upexi - Q1 2023

Transcript

Operator (participant)

Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to the Upexi 2023 Fiscal First Quarter Financial Results Conference Call. Please be advised that today's call is being recorded. I will now turn the call over to Valter Pinto, Managing Director of KCSA Strategic Communications. Please go ahead.

Valter Pinto (Managing Director)

Thank you, operator. Good evening and welcome everyone to the Upexi 2023 Fiscal First Quarter Financial Results conference call. I'm joined today by Allan Marshall, Chief Executive Officer, and Andrew Norstrud, Chief Financial Officer. Before we begin, I'd like to remind everyone that statements made during today's conference call may be deemed forward-looking statements within the meaning of the safe harbor of the Private Securities Litigation Reform Act of 1995, and actual results may differ materially due to a variety of risks, uncertainties, and other factors. For a detailed discussion of some of the ongoing risks and uncertainties in the company's business, I refer you to the press release issued this evening and filed with the SEC on Form 8-K, as well as the company's reports filed periodically with the SEC.

The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless otherwise required by law. In addition, during the course of this call, we may refer to non-GAAP financial measures that are not prepared in accordance with accounting principles generally accepted in the United States and that may be different from non-GAAP financial measures used by other companies. Investors are encouraged to review Upexi's current report on Form 8-K furnished with the SEC for Upexi's reasons for including these non-GAAP financial measures in its earnings release. The reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures are contained in our earnings release issued this evening, unless otherwise noted herein. I'll now like to turn the call over to Upexi CEO, Allan Marshall.

Allan Marshall (CEO)

Thank you, and welcome to our 2023 first quarter operating results conference call. Upexi is a vertically integrated brand owner in multiple high-growth industry verticals, including health, wellness, pet, beauty, and most recently, toys. Our model is to acquire, build, and scale through direct-to-consumer and Amazon sales channels. The brands we acquire are accretive with room for margin expansion as we scale and drive operational efficiencies. Our success to date is deeply rooted in our technology and data. We implement our in-house SaaS platform ad technology into all of our brand marketing to help achieve a lower cost per acquisition. We have also amassed a significant amount of consumer data, allowing us to increase cross-selling between our growth portfolio of brands. I joined Upexi as CEO in May of 2019. That year, the company generated approximately $7.4 million in revenues.

I am proud that we have executed our model and strategy effectively to project over $100 million in revenue for calendar 2023. It's a testament to our execution, business model, and expertise as a management team. For our most recent fiscal quarter ending September 30, revenue totaled $11.6 million, an increase of 199% as compared to $3.9 million for the same period the prior year, predominantly driven by meaningful growth for our brands across most of our product categories and sales platforms. I am pleased we were able to deliver these results even while we, like many others, are still faced with macroeconomic challenges. Although we have seen average total cart value pull back with consumer discretionary income coming down and inflation continuing to rise, our direct-to-consumer sales continue to be strong.

We have successfully closed on several important acquisitions over the last 12-18 months. In April, we completed our acquisition of Cygnet Online, LLC, a well-established secondary market seller on Amazon with over 1,200 SKUs of branded OTC products and supplements in health, wellness, and beauty verticals. During the first quarter in August, we completed the asset purchase of VitaMedica Corporation, a leding online seller of supplements for surgery, recovery, skin, beauty, health, anad wellness. VitaMedica has been a leading revenue driver for our company, with triple-digit growth year-over-year, mostly led by performance on Amazon. In October, we completed our acquisition of Interactive Offers, a SaaS programmatic advertising company that has operated successfully in the fintech space for numerous years, with recent expansion into e-commerce to boost platform profits and growth.

Lastly, during the quarter, we entered the $200 billion-plus pet vertical market with the closing of Lucky Tail, a balanced business with direct to consumer on luckytail.com and Amazon distribution with double-digit year-over-year growth. Lucky Tail currently sells products domestically in the United States and internationally in Canada and Australian markets. The all-cash acquisition is a great example of our ability to acquire a great brand that will be accretive to both top line growth and EBITDA. The pet vertical fits with our focus on what we consider essential consumer goods people spend money on in all economies. Until recently, a large portion of our business was focused on our CBD segment, for which we have been exploring strategic options.

In late October 2022, we announced the sale of these select CBD assets for approximately $23.5 million to streamline our business for more focus on high-margin growth areas and dependable sales and profit visibility. The proceeds from the sale allowed us to close the acquisitions of E-Core and its subsidiaries, Tytan Products, and New England Technology. In early November, adding over $40 million in trailing twelve-month sales and increasing our projected 2023 sales to $100 million. Tytan is a children's toy brand and maker of popular magnetic tiles and building blocks. New England Technology is a national distributor for branded consumer products. Tytan is a high-quality, eco-conscious toy company that has grown 100% over the past two years.

They are continuously expanding their network of retail partners with new initiatives, offerings, and their products are currently available online through Walmart.com, samsclub.com, and in stores through leading retailers such as Walmart, Sam's Club, and BJ's Wholesale Club. New England Technology is one of the most competitively priced distributors for name brand consumer electronics in the industry, with several innovative distribution models specializing in e-commerce, business to business, and business to consumer marketplaces. We expected both transactions to close during our fiscal first quarter ending September 30. Timing affected our financial performance during the quarter. For example, these delays affected sales decisions and new product launches, as well as making investments in advertising campaigns, all of which need to be planned 30 to 60 days out. Now that we have closed, we are expecting another triple-digit growth year.

Thank you to all our teams at Upexi as well as our investors and customers and partners. I will now pass the call over to Upexi's CFO, Andrew Norstrud, to discuss our financial results in more detail.

Andrew Norstrud (CFO)

Thank you, Allan. In accordance with the rules regarding the presentation of discontinued operations, the assets, liabilities and activities of Infusionz and certain manufacturing operations have been reclassified as discontinued operations for all periods presented. Revenue for the three months ended September 30th, 2022 totaled $11.6 million, an increase of 199% as compared to $3.9 million for the same period the prior year. The revenue growth was primarily driven by the four acquisitions, including VitaMedica, Interactive Offers, Cygnet and LuckyTail. This was offset by the sale of Infusionz. The company's growth strategy will continue to focus on both acquisition and organic growth, while also expanding to international markets.

Cost of revenue during the quarter totaled $5.5 million, an increase of 334% as compared to $1.3 million for the same period the prior year. The cost of revenue increase was primarily related to the acquisitions and offset by the sale of Infusionz. Gross profit for the quarter was $6 million, an increase of $3.4 million compared to the same period in the prior year. Gross margins declined to 52% as a result of the products being sold through distributors and the increase of discounts used in our direct-to-consumer market. Operating expenses totaled $9 million, an increase of 159% as compared to $3.5 million for the same period in the prior year.

The increase in operating expenses was primarily related to an increase in sales and marketing of $1 million, an increase of distribution costs, including the use of third-party distributors of $2.4 million, an increase in general administrative costs of $900,000 to support the growth of the business, and an increase of $1.2 million in non-cash expenses, which were share-based compensation, the amortization of acquired intangible assets, and depreciation. These costs were offset by sales infusions and the classification of these expenses as part of discontinued operations. The company had net losses from continuing operations of $2.7 million, compared to net income of approximately $511,000 for the three months ended September 30th, 2022, compared to 2021.

The decrease in net income was primarily related to the reclassification of the discontinued operation and the increases in the operating expenses mentioned above. The company had cash and cash equivalents of $3.3 million and stockholders' equity of $27 million as of the end of September 2022. As of November 11th, 2022, there were 17,960,748 shares of common stock outstanding. Subsequent to the quarter, as Allan mentioned, we sold select CBD assets for $23.5 million. The transaction eliminated certain intangible assets and provided the company with $5.5 million in cash, $9.5 million in loan receivables, and $8.5 million in preferred equity in Luminos, Inc.

In addition, on October 19th, 2022, the company obtained a $3 million 10-year mortgage at an interest rate of 4.8% on its headquarters in Florida. The funds were used to reduce the outstanding short-term acquisition loan signed on June 28, 2022, increasing amount available for future acquisitions to $10.8 million. The main assets sold were originally acquired for approximately $6.3 million in cash and stock. Company value increased through organic growth and valued partnerships. Additionally, subsequent to the quarter end, we paid off the outstanding balance of our $15 million senior secured debt facility and terminated the registration statement covering the loan and the agreements with the lenders. The elimination of the loan is expected to reduce our annualized interest expense by approximately $900,000.

Management expects revenue to increase in the 2023 calendar year through both organic growth of the core business, acquisitions completed during 2022 fiscal year, and additional strategic acquisitions that align with management's long-term strategic strategies.

For calendar 2023, management estimates baseline annual revenue to total $100 million. At this time, I'd like to turn the call back over to Allan for closing remarks.

Allan Marshall (CEO)

Thank you, Andrew. Our fiscal second quarter ending December 31st, 2022, will be used to work through the agreed transition period needed to hand off the select CBD assets to the buyer and begin consolidating our announced purchase of E-Core and Tytan Tiles businesses. Calendar 2023 looks promising, with opportunities to grow revenue across our brands and business segments organically. Post the sale of these select CBD assets, the business is a much leaner entity with lower headcount and higher revenue run rate. We can drive sales higher with limited need to add additional employees. Our brands have good margins and we see an opportunity to grow both our direct-to-consumer and Amazon sales in the double digits through 2024. In the past, we've focused on a balanced approach of growth with major focus on control.

On cost control to maintain profitability. This plan continues to be our approach in 2023. However, we will look to invest a higher amount in marketing and brand advertising to increase the overall growth in 2023 and 2024. Our current business model is more predictable with a lean organizational structure to control costs while maintaining growth. This is not to say we will operate with losses or spend irresponsibly. We intend to remain profitable and grow the business. However, we are willing to invest more on overall brand and corporate brand awareness when it makes sense for longer-term higher growth. The business is strategically positioned for success in almost any market. Each of our businesses is scalable for growth as the market expands and adjustable to offset minor corrections in consumer spending.

The health, wellness, pet, children, toys, and liquidation businesses are all somewhat recession-resistant, and the consumer prioritizes these products even when overall consumer spending contracts. The company's acquisition opportunities are improving, and we are seeing valuation coming in line with our strategic guidelines. We remain disciplined with acquisitions and look for attractive opportunities at a valuation that makes sense for overall shareholder growth. In closing, we have made significant strides over the last two years, and the company today is best positioned for growth and profitability it has ever been. As announced, we are projecting over $100 million in sales in calendar 2023, even after the sale of select CBD and manufacturing assets, which contributed approximately $20 million in 2022.

The overall opportunity for 2023 and 2024 causes us to believe that we are just getting started and looking forward to continued growth in the future. I would now like to open the call for questions. Operator?

Operator (participant)

If you would like to ask a question, please press star one on your telephone keypad now. You'll be placed into the queue in the order received. Please be prepared to ask your question when prompted. Once again, to ask a question, please press star one on your phone now. Our first question comes from Ben Piggott from EF Hutton. Please state your question.

Ben Piggott (Managing Director)

Hey, Allan. Congrats on all the portfolio shuffling you guys have done. Just a quick question. The company historically has bought back stock as well in terms of kind of the capital allocation philosophy. Just, you know, attractiveness of the stock relative to the acquisition opportunities that you're seeing out there, just given the balance sheets in a better shape with the divestiture of the CBD assets. Thanks.

Allan Marshall (CEO)

Hello?

Ben Piggott (Managing Director)

Did you guys get my question?

Allan Marshall (CEO)

Yeah, you went blank there for a minute, I think.

Andrew Norstrud (CFO)

We lost the last, missed the last part, Ben.

Allan Marshall (CEO)

I'll repeat it.

Ben Piggott (Managing Director)

Okay. Yeah, I'll repeat it. I mean, the question was you guys have a history of doing smart M&A as well as buying back stock. It's really just a kind of a capital allocation question at this point, where you look at where the shares are at relative to the M&A opportunities that you're seeing and understanding that those are getting better as the market is softening. Just kinda talk to us about capital allocation priorities, especially in light of having a much stronger balance sheet with the divestiture of the CBD assets.

Allan Marshall (CEO)

Yeah, we, you know, we kind of are talking about that internally on, you know, as some of these notes come due and they pay down, you know, they pay down the debt for what we sold. We definitely have a lot of opportunity to reinvest in the business. Like in the past, acquisitions were super expensive, and it didn't make a lot of sense to, you know, go pay, you know, 70, whatever multiples that are out there. Today, I would say the multiples much more attractive and more accretive than it's ever been. We're not in a hurry to do something, but we're definitely seeing opportunities that would make sense to, you know, even on the, I guess, the overall value for the company.

Acquisitions, you know, probably make a little more sense than buying stock today. If that changes, you know, as the debt gets paid off and as we build up, you know, cash and profitability, we're definitely open to making sure our investors and, you know, recognize the best value they can. I hope that answers that question for you, Ben.

Ben Piggott (Managing Director)

It's helpful. Thank you.

Operator (participant)

Our next question comes from Luke Rickner from a Private Investor. Please state your question.

Luke Rickner (Shareholder)

Hey, Allan. Congrats on another great quarter. Just kinda piggybacking off what Ben was mentioning also. I was just wondering how you see the competition right now in the brand aggregator space. I would assume you guys, given your strong balance sheet, are in a pretty good position of strength compared to others based on what I've been reading. Are you seeing kind of a lesser competitive landscape out there right now?

Allan Marshall (CEO)

Yeah, it's definitely for the people who've had to use, like, this high-priced debt, that market has completely dried up for them. If they can't raise equity, they're not gonna be able to do acquisitions. I'm not sure they can raise equity with, you know, the amount of debt they have on the books today. Seeing a lot more opportunity, you know, where before you were getting, you know, multiples that just didn't make any sense, now we see. I see them coming down every day. I get different offers with different multiples. Before they weren't willing to talk. Like, "Hey, listen, it's, you know, it's $30 million cash, or, you know, we'll sell to someone else." We definitely don't see the need to chase anything.

It's everything's coming back into line, where historically you can still do an acquisition and it'd be, you know, profitable for the company overall. Most of the other players we're talking to, the other aggregators who we still talk to, are struggling with, you know, high debt loads and, you know, high interest payments.

Luke Rickner (Shareholder)

Gotcha. Thanks. That makes sense. I just had one more question on my end. The guidance that you give for calendar 2023, the $100 million in revenue, is there potential for that to be even greater if there's some acquisitions down the line? You know, what does that number kind of include?

Allan Marshall (CEO)

That kind of includes from what we own today, after kind of spending this next month and a half, you know, transitioning out the rest of the CBD business and growing each of the individual business we have. I say individual businesses, but they're all combined together. We're all working together. That's kind of what we feel like we have in our pocket today. If we see the right opportunity, acquisition, that would be accretive to that number. Again, that would be additional, and we would let you know if we did that.

Luke Rickner (Shareholder)

Gotcha. Thank you.

Operator (participant)

Once again, if you would like to ask a question, please press star one on your phone now. At this time, we have no further questions. Would you like to give some closing remarks?

Allan Marshall (CEO)

Sure. I wanna thank everyone for joining the call. Thanks to all our shareholders for the support they've given us and our team. We look forward to the next quarter and next year, and we hope to see everyone back on the next call.

Operator (participant)

This concludes.

Allan Marshall (CEO)

Thank you very much.

Operator (participant)

Today's conference call. Thank you for attending.

The host has ended this call. Goodbye.