Upexi - Q3 2023

Transcript

Operator (participant)

Good day. Welcome to the Upexi, Inc 2023 fiscal third quarter financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Valter Pinto, Managing Director at KCSA Strategic Communications. Please go ahead.

Valter Pinto (Managing Director)

Thank you, operator. Good evening and welcome everyone to the Upexi 2023 fiscal third 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'm going 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. 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'll 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 the 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. 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. I'd now like to turn the call over to Upexi CEO, Allan Marshall.

Allan Marshall (CEO)

Thank you, welcome to our 2023 fiscal third quarter financial results conference call. Revenue for the quarter was $24.2 million, an increase of 447% year-over-year as compared to $4.4 million for the same period in the prior year. Revenue growth was predominantly driven by strong sales across our health and wellness brands, VitaMedica, Children's Educational Toy Brand, Tytan Tiles. Our pet category, brand LuckyTail, E-Core and Cygnet continue to perform and remain poised to drive growth across our liquidation business segment. Gross profit during the quarter totaled $9.6 million, an increase of 52% year-over-year, yielding approximately 40% margins. Our business continues to expand as the organic growth of our core brands drives up storage calendar year 2023 projections of $100 million in sales.

With $24 million in revenue this quarter and taking into account the natural seasonality of many of our brands, we see calendar Q4 to calendar Q1. We remain confident in our ability to meet or exceed this goal. Additionally, our focus on cost cuts, improved efficiencies, and optimization has allowed us to achieve $671,000 in positive adjusted EBITDA. It's substantial improvement over -$877,000 negative adjusted EBITDA for the same period last year. We anticipate adjusted EBITDA to grow for the remainder of the calendar, trending towards our target of 8%-12% margin at the end of calendar 2023. We see both continued organic top-line growth and additional benefits from our cost-cutting and efficiencies efforts to support this trend without taking into account further M&A.

During and subsequent to the fiscal third quarter, we have made significant progress across each of our brands and operationally. A diverse business mix of non-discretionary health, wellness, and pet products and liquidation and wholesale. Direct-to-consumer and Amazon gives us a well-rounded revenue stream that provides opportunity in most economic environments. Highlighting some of our high-performing brands, VitaMedica, our health and wellness brand, was purchased in late 2021 and has seen 88% organic growth since the acquisition. VitaMedica revenues for the third quarter were $1.96 million as compared to $1.16 million for the same period in 2022, an approximately 800% or 69% improvement.

In 2022, it had a growth rate of 50%, and we look forward to additional growth with the launch of new complementary products like acne treatments later in 2023. This is a perfect example of execution of our model. With VitaMedica, we have successfully taken an already growing brand in a key non-discretionary vertical, optimized their sales through our performance and expanded margins year-over-year. LuckyTail, our pet category brand with both Amazon and direct-to-consumer platforms, saw 50% organic growth in 2022. LuckyTail revenues for the fiscal third quarter were $1.36 million. We anticipate additional growth in 2023 with the launch of a pet supplement to its significant existing customer base.

Tytan Tiles, our children's STEM toy brand, had led the pack with 100% organic growth in 2022. We expect 50%+ organic growth in 2023 with the launch of four new products. Tytan Tiles revenue for the fiscal third quarter was $1.25 million as compared to $165,000 for the same period in 2022, an approximate 656% improvement. Some milestones for Tytan Tiles. January Walmart launch in 1,900 stores. An additional order was placed in February due to accelerated sales to double that order. A full 3,911 Walmart store launch for the second half of 2023 as a result of the launch success. Subsequently, we announced the Disney licensing agreement for top-tier franchises. We will be developing and launching new branded products under this agreement.

The products will be launched on Amazon, direct-to-consumer, and into Upexi's big box retail channels, with initial launch planned for 2023 holiday season. In April, we announced an agreement to acquire the remaining 45% interest in Cygnet Online one year ahead of schedule. The deal solidifies our Upexi Amazon reseller strategy for the future, reduces the overall cost and structure for the business. Closing the deal early offers significant G&A savings and the opportunity to purchase Cygnet at a discount to next year's overall anticipated costs. Regarding M&A, we continue to be in a buyer's market. Internally, we don't feel any urgency to do M&A, therefore, we continue to be strategic and patient in our strategy. We have a very specific mandate in terms of industry, verticals, growth rates, profitability, and structure that we will hold firm on.

We continue to focus on high growth, recession-resistant, cash-flowing businesses that are accretive to our future. The profile of the non-binding letter of intent to acquire a wellness and nutrition brand we signed in April falls within that category. The brand has generated trailing 12 months revenues of $15 million and positive EBITDA. The acquisition falls squarely in line with our strategy to acquire founder-owned and operated high margin profitable brands. We see tremendous cost synergies and value in high margin data-rich brands in our non-discretionary product category. Lastly, before I turn the call over to Andy, our teams remain keenly focused on growth, management of costs, and efficiencies to maximize margins. We were able to achieve higher adjusted EBITDA on lower revenue base this quarter as compared to last sequential quarter by implementing aggressive cost savings and growth in our high margin brands.

Calendar 2023 is off to a tremendous start. Incremental improvement should continue with very strong growth potential for the second half of the year. Each of our brands have significant opportunity to outperform our expectations with Disney for Tytan Tiles, new product categories for LuckyTail, and new product launches for VitaMedica. I will now pass the call over to Upexi CFO, Andrew Norstrud, to discuss our financial results in more detail. Andrew.

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. The three months ended March 31st, 2023 include 3 acquisitions completed after March 31st, 2022. These acquisitions were Cygnet Online, LLC, our Amazon aggregation business, LuckyTail, our initial brand in the pet industry with products and sales channels both domestically and internationally, and our most recent one, E-Core, our product distribution business, which also includes Tytan Tiles, a children's toy brand. These acquisitions, coupled with the elimination of the discontinued operations from the sale of Infusionz and certain manufacturing operations, has significantly reduced the value of direct comparisons of the prior year to the current year operations.

Revenue for the three months ended March 31st, 2023 totaled $24.2 million, an increase of 447% as compared to $4.4 million for the same period the prior year. The revenue growth was primarily the result of these three acquisitions and the offset of the sale of Infusionz. Management believes that there is a significant opportunity in the next 12 months for organic growth within the newly acquired businesses and will focus the acquisition targets on the business that will enhance our current products or allow the business to accelerate growth. Cost of revenue during the quarter totaled $14.6 million, compared to $1.1 million for the same period the prior year. The cost of revenue growth was primarily related to the acquisition of three companies and the offset with the sale of Infusionz.

Gross profit for the quarter was $9.6 million, an increase of 190% as compared to $3.3 million for the same period the prior year. Management will seek to improve the gross profit and overall gross margin in the next 12 months as we are able to leverage a significant increase in our purchasing requirements and continue to consolidate operations. Sales and marketing expense were approximately $3.5 million, an increase of $2.4 million or 220% compared to the same period last year. The increase in sales and marketing expense was primarily related to the acquisitions. However, management has aligned the marketing expenditures with our expected quarterly growth strategy to decrease the overall percentage of sales and marketing cost sales.

We anticipate our advertising expense will continue to fluctuate in the following quarters as we fully implement our overall brand marketing strategy. Distribution costs were $3.5 million, an increase of $2 million or 326% compared to the same period last year. The increase in distribution cost was primarily related to the three acquisitions, offset by the sale of Infusionz and the classification of these expenses as part of discontinued operations. There continued to be increases in transportation costs and third-party provider rates, which management has implemented a strategy to change promotions, increase prices, and adjust packaging to decrease the overall % of distribution costs to sales. General administrative expenses were $2.5 million, an increase of $900,000 or 46% with the same period last year.

As the company has changed with the acquisitions and the sale of Infusionz, management has managed the general and administrative expenses and will continue to implement strategies to decrease the percentage of G&A costs compared to the total sales. The company had a loss from continued operations of $2.1 million for the three months ended March 31, 2023, compared to a net loss of $200,000 for the same period in the prior year. As of March 31, 2023, the company had cash of approximately $1.2 million, a line of credit with $4.9 million available, and stockholders equity attributed to Upexi stockholders of $36.7 million.

On May 12th, 2023, the company announced a registered direct offering of common stock for gross proceeds of approximately $7 million before deducting placement agent fees and other offering expenses. The closing of the offering is expected to occur on or about May 16th, subject to customary closing conditions. At this time, I'd like to open up the call for any questions. Operator?

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Again, it is star then one to ask a question. At this time, we will pause momentarily to assemble our roster. The first question comes from Aaron Grey with Alliance Global Partners. Please go ahead.

Aaron Grey (Managing Director and Head of Consumer Research)

Good evening, and thank you for the questions. Nice to see the EBIT improvement sequentially despite the seasonally lower quarter. Just on that, on the EBIT margin, as we look for the remainder of the year, you're looking for EBIT and margin improvement to continue just based off your guys' slide deck. You do caution somewhat on various marketing spend. You kind of mentioned it within your prepared remarks, Andrew. Just want to get some color. You know, as we look at it today, how do you think about potentially pulling that lever on marketing to drive top line growth versus letting it drop down to the bottom line, potentially at the forsake of higher growth sales? Thanks.

Allan Marshall (CEO)

Andrew, you want me to grab that or you?

Andrew Norstrud (CFO)

You can go ahead or I can. Either way. Go ahead. I'll comment on it as well. Go ahead. I mean, basically when they're looking at the marketing, they're looking at the cost per acquisition of the customer. What you saw in the second quarter ending December was that the marketing department decided to take advantage of some things and spend a little bit extra money. We saw some very good results of that in this quarter and will continue.

There are times that management and the marketing department's gonna decide to spend, that it has an opportunity to capitalize on that cost per the customer acquired, and we spend more in the beginning, which causes that to take up the EBIT to the bottom line. That's basically what I'm letting you know is that it's not gonna be a perfect situation where it's always going to be an EBIT growth because they decide to spend more in one quarter than the other. It's kind of Aaron, just to close, just to follow that, it's kind of how we made higher EBIT this quarter on a lower base. You know, last quarter we talked about that, how we spent extra money going into the end of the year.

It did drive sales, but it takes a little longer for that, the back end of that to pay off. For us, we really look at it as success in this quarter being able to drive that knowing that $3 million, you know, more of sales in another quarter could drive a significant, you know, more margin to us. We're right at that point where everything... We have the opportunity to let everything flow above this number and maybe even a little bit lower, to increase that margin, you know, throughout the year.

Aaron Grey (Managing Director and Head of Consumer Research)

No, appreciate that detail. That's helpful. The second, just dive into one second with the Tytan Tiles. You know, nice to see full Walmart launch coming in, and you got Disney on there as well. You know, how do you look at, you know, potential additional partnerships for the remainder of the year? Are there anything we should think about in terms of, like, inventory, you know, as you look to, you know, bring on and get ready for full Walmart or the Disney inventory as well? Thanks.

Allan Marshall (CEO)

Yeah. Inventory has really been a hindrance in this quarter and still continues to be. On our call today, we talked about just being sold out. We're really low volumes. Amazon's sold out. We never, you know, I guess, We never really intended to see this amount of success this quickly, but it's being cured. Everything's being shipped. We're rushing all the shipments. We should see incremental improvements, both currently with what's going on now and then even especially into the second half of the year. We'll be more prudent on ordering additional inventory, especially for a launch with Disney and those opportunities. I believe that we're launching all four new products.

Coming sometime midsummer as well. We won't let it happen again, but it's a good problem to have to be, you know, demand outsource. Obviously we'd like to be selling it all right now.

Aaron Grey (Managing Director and Head of Consumer Research)

Yep. Certainly high quality problem, but want to get remedied. Glad to hear that you got that coming. Last question for me, and I'll jump back in the queue. You got some M&A that you announced. You talked about, you know, potential other M&A. This newest one was wellness. You had done Tytan and Toys, you know, in December. Just as you look at the M&A pipeline, you know, what type of business lines do you think about kinda going forward between, you know, the more discretionary and staples? How do you think about, you know, now the bar for M&A as you're looking to absorb some of the recent acquisitions that you've done and versus maybe, you know, doing too much and trying to integrate the ones you've already accomplished versus adding new ones to the plate?

Thanks.

Allan Marshall (CEO)

I think the bar would be pretty high for us right now, to add another acquisition. I mean, just the Disney launch could be as big as an acquisition. All of the things we have going across really each of our brands. We talked about Tytan, but each of the brands has initiatives that could be, you know, super accretive to us. Our, our pet brand is gonna be launching our pet supplement brand. We're launching new products into that category, designing a, you know, the whole new platform to increase sales. Same across VitaMedica, entering new categories. Really, we've become the leader in certain categories, and now we're starting to spread that out. I think, you know, just to sum it up, the bar would be very high right now.

We've got a lot to do here and a lot of opportunities we're gonna try to really put the pedal down on till the end of the year.

Aaron Grey (Managing Director and Head of Consumer Research)

Okay, great. Makes sense. Thanks for the call. I'll jump back in the queue.

Operator (participant)

The next question comes from John McCullough with Paulson Investments. Please go ahead.

John McCullough (Managing Director)

Thanks. Hey, Andy. Hey, Alan. How are you doing? Congratulations.

Allan Marshall (CEO)

Great, John.

John McCullough (Managing Director)

Question for you, kind of related to the first question, is now that you're getting more and more data, how is your ability to manage it and even use AI perhaps to keep costs low but still be able to manage and enhance the products that you introduce into your channels? Thanks.

Allan Marshall (CEO)

Yeah, John. While a lot of people are kind of, you know, reducing count, head count and stuff, we've added 2 key employees this quarter, really looking at all of those opportunities, putting together even a more robust team. Like I said, our problem right now is selling all the products, not selling all the products we have, but trying to get enough product to sell, and entering each new category. Data is becoming more and more important. We are integrating a new ERP in this quarter, which is, you know, obviously a lot of work and very cumbersome for our team, but each of the steps we're taking right now is really to maximize the opportunities that we currently have.

That's why our projections seem to, you know, progress and go up for EBITDA and revenue throughout the year. Takes a little time to do those things, but we're making great progress. I think, you know, throughout the year and especially by the time we get to the end of the year, leaving and going into next year, we should be set for even stronger, you know, opportunities next year.

John McCullough (Managing Director)

Great. Thank you.

Operator (participant)

Again, if you have a question, please press star then one on a touch tone phone. Again, star then one if you wish to ask a question. This concludes our question and answer session. I would like to turn the conference back over to Allan Marshall for any closing remarks.

Allan Marshall (CEO)

Thanks, operator. Upexi continues to execute our strategy and our growth continues to meet or exceed our expectations. We have multiple opportunities across our brands and business that should help drive overall growth in 2023 and even into 2024. I wanna take a minute to thank our team. Our team deserves a lot of credit for all the work and effort that's gone into the current success and for all the initiatives they have coming to drive our future growth. I want to summarize everything by thanking our investors and thanking everyone for joining the call. We look forward to more calls in the future and really appreciate everyone's time. Have a great evening, and everyone at Upexi thanks you.

Operator (participant)

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.