Upexi, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2023 (fiscal first quarter), compared with the three months ended September 30, 2022. The interim consolidated financial statements are unaudited. The filing was signed November 20, 2023.
Business context and period comparability
Upexi owns and distributes consumer brands in health, wellness, pet, beauty and other markets. It reports Branded Products and Recommerce segments. Results include E-Core for the full current quarter, but not the prior-year comparable quarter; therefore, much of the reported growth reflects acquisitions rather than solely organic performance. The company also acquired the remaining 45% of Cygnet on September 1, 2023, and sold Interactive Offers on August 31, 2023, which is presented as discontinued operations.
Financial performance and liquidity
- Revenue: $27.35 million, up $16.13 million, or 144%, year over year. Branded Products generated $6.56 million versus $3.97 million; Recommerce generated $20.79 million versus $7.25 million. E-Core contributed $17.09 million of current-quarter revenue. Management attributed growth to E-Core and stronger brand sales, partly offset by slower Amazon Recommerce sales.
- Gross profit and margin: Gross profit was $8.71 million versus $5.82 million. Gross margin was approximately 31.8%, down from 51.9%, reflecting the larger contribution from lower-margin Recommerce sales. Cost of revenue rose 245%, faster than revenue.
- Operating results and earnings: Operating loss was $1.14 million, improved from $2.38 million. Interest expense was $874,185, versus $433,478 in the statement of operations. Consolidated net loss was $1.36 million versus $2.75 million; reported total loss per share was $0.07 versus $0.16.
- Cash flow: Operating cash use was $2.34 million, including $2.12 million from continuing operations. Investing activities used $649,000, including $500,000 paid toward the Cygnet acquisition. Financing activities used $1.08 million. Cash declined by $4.08 million to $417,108.
- Working capital and liquidity: Current assets were $24.92 million and current liabilities $20.04 million, giving working capital of $4.88 million, down from $5.85 million at June 30, 2023. Current assets included $13.79 million of inventory and $9.76 million of receivables.
- Debt and obligations: The balance sheet reports $25.95 million of notes, acquisition notes, convertible notes and related-party debt, plus a $118,001 line-of-credit balance. Operating lease liabilities totaled $2.12 million. The $10 million receivables-and-inventory line had $6.22 million available at September 30. Two subsequent debt matters are described below.
Material changes versus the prior-year quarter
- Revenue increased substantially, but the comparison is affected by acquisitions, particularly E-Core; acquisition-related revenue disclosed was $22.56 million in the current quarter versus $8.07 million in the prior-year quarter.
- Gross profit increased, but the gross margin contracted materially as Recommerce became a larger share of sales.
- Operating loss narrowed, while interest expense increased, including acquisition-related imputed interest.
- Cash use from continuing operations improved year over year, but cash on hand fell sharply during the quarter as receivables and inventory grew. Management attributed the working-capital outflow to wholesale sales and inventory purchases ahead of expected sales.
- Upexi completed the purchase of Cygnet’s remaining 45% for $500,000 cash, 90,909 shares and a $300,000 payment due in September 2024. It sold Interactive Offers for a stated purchase price of $1.25 million, subject to adjustments, and may also receive 2.5% of certain advertising revenues for two years.
Outlook, risks and unusual items
- Management outlook: Management estimated that working capital would be sufficient for operations and debt obligations over the next 12 months. It expected receivables and inventory to normalize and release cash in January 2024, and expected initial distribution-cost reduction initiatives to be completed by March 2024. These are management expectations, not formal financial guidance.
- Debt developments after quarter-end: On November 2, 2023, Upexi paid $2.0 million on an E-Core acquisition note. The filing says $3.75 million of principal and $230,000 of accrued interest remained; the rate on the outstanding balance increased to 12%, with monthly payments expected to begin in December 2023. Separately, after acquiring the remaining Cygnet interest, Upexi was notified it could not refinance Cygnet’s SBA loan and received a demand for $3.84 million of principal and interest. The company said it was working with the lender on options; the loan is classified as current.
- Amended loans and potential dilution: In November 2023, the CEO’s $1.5 million related-party note and two investor notes of $560,000 and $2.15 million were amended to provide for 18 months of interest-only payments at 12%, followed by amortization. Warrants were also issued in connection with these amendments. The filing gives differing warrant exercise prices in different sections, which should be checked.
- Customer concentration: One customer accounted for 12.56% of quarterly revenue and 22.79% of accounts receivable at September 30, 2023.
- Other risks and controls: The company cited uncertainty in regulation of hemp-derived products and uncertainty over possible future business effects of COVID-19. Management concluded disclosure controls were not effective because of material weaknesses in segregation of duties and supervisory review; remediation was planned, but the weaknesses had not been remediated during the quarter.
- Unusual reporting inconsistency: The statements report a $1.14 million operating loss and a $1.36 million consolidated net loss. The MD&A also gives different amounts for continuing-operations loss, including $1.83 million in its narrative and $1.14 million in its comparison table. The filing text does not provide a clear reconciliation of these figures.
Most important facts for investors to verify
- Whether the company can resolve the $3.84 million SBA demand and meet the E-Core note payments, including the higher interest and payment schedule.
- Whether cash conversion improves as receivables and inventory normalize, given cash of only $417,108 at quarter-end and substantial working-capital investment.
- How much of the reported revenue growth and future profitability is attributable to acquisitions versus organic growth, and whether Recommerce margins can improve.
- The reconciled continuing-operations loss and the correct warrant exercise prices and terms in the November debt amendments.
- Whether the customer concentration, material control weaknesses and hemp-regulatory uncertainty change materially in subsequent filings.