Upexi, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2022, the first quarter of Upexi’s fiscal year ending June 30, 2023. The financial statements are unaudited. Unless otherwise stated, comparisons are with the three months ended September 30, 2021.
Business context and results
Upexi describes itself as a consumer brand owner focused on health, wellness, pet, beauty and related markets, selling through direct-to-consumer, Amazon and other channels. It reports one operating segment. The quarter included results from acquisitions of VitaMedica, Interactive Offers, Cygnet and LuckyTail; the prior-year comparison did not include all these businesses for the full period. Infusionz and related manufacturing operations were presented as discontinued operations.
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Revenue from continuing operations | $11.56 million | $3.87 million |
| Gross profit | $6.04 million | $2.60 million |
| Gross margin | Approximately 52% | Approximately 67% |
| Operating loss | $2.97 million | $0.88 million |
| Net income (loss) from continuing operations | $(2.75) million | $0.51 million |
| Net income (loss) attributable to Upexi | $(2.60) million | $0.51 million |
| Basic and diluted earnings (loss) per share | $(0.16) | $0.03 |
Revenue grew 199%, which management attributed primarily to acquisitions, partly offset by the Infusionz divestiture. Gross profit increased, but margin fell as lower-margin distributor sales and third-party fulfillment of direct-to-consumer sales expanded. Operating costs also rose, including distribution costs, marketing and general and administrative expenses; acquired-intangible amortization was $0.88 million and share-based compensation was $0.93 million. Net interest expense was $0.44 million, versus $0.02 million a year earlier, reflecting debt incurred in 2022.
Cash flow, liquidity and debt
- Cash was $3.30 million at September 30, down from $7.15 million at June 30, 2022.
- Working capital was $7.07 million, down from $11.18 million at June 30. Current assets were $18.80 million and current liabilities were $11.73 million.
- Cash used in operating activities was $2.22 million for continuing operations and $2.51 million including discontinued operations. Investing activities used $2.65 million, mainly for LuckyTail and a final VitaMedica acquisition payment. Financing activities provided $1.31 million, primarily from a related-party loan, net of debt repayments.
- Notes payable totaled $15.17 million at quarter-end, including $5.42 million current and $9.74 million long-term; operating lease liabilities totaled $0.86 million. The CEO’s related-party loan had an outstanding balance of $1.39 million.
- Management stated it expected sufficient working capital to fund operations and meet debt obligations for the 12 months after issuance of the statements.
Significant changes, outlook and risks
- Infusionz sale: On October 26, 2022, Upexi agreed to sell all of Infusionz and certain related assets for stated consideration of $23.5 million, subject to adjustment. The package includes $5.5 million cash, a $5.0 million secured subordinated convertible note, $8.5 million stated value of preferred stock, a debenture with a $4.5 million subscription amount, and a warrant. Much of the stated consideration is not cash; the filing does not establish its ultimate realizable value. Management said the divestiture supports a shift toward product sales and distribution.
- Debt transactions after quarter-end: Upexi obtained a $3.0 million mortgage loan on its principal office on October 19 and used proceeds to pay down $2.78 million of its Acorn Capital facility. On October 31, it paid $5.15 million to settle and terminate its June 2022 senior secured convertible note agreement, including principal, accrued interest, a put-option settlement and fees.
- E-Core acquisition: On October 31, Upexi entered into an agreement to acquire E-Core for $24.1 million, subject to adjustments, using cash, common shares and promissory and convertible notes. The filing also reports issuance of 1,247,403 shares valued at $6.0 million for the acquisition.
- Control weakness: Management concluded disclosure controls were ineffective due to material weaknesses involving inadequate segregation of duties and insufficient levels of supervision and review. Remediation was planned by the end of fiscal 2023, subject to available resources; the weaknesses had not been remediated during the quarter.
- Other risks and guidance: The filing cites regulatory uncertainty for hemp and cannabinoid products and uncertainty about future COVID-19 effects. It provides no specific revenue or earnings guidance. No material pending legal proceedings were reported.
Important facts for investors to verify
- How much of reported revenue growth is sustainable or organic, given the impact of acquisitions and the Infusionz sale.
- The cash conversion, margins and fulfillment costs of the acquired and continuing businesses, especially following the decline in gross margin.
- The collectability, security, conversion terms and eventual value of the noncash consideration received for Infusionz.
- Post-quarter debt balances, repayment schedules, covenants and liquidity after the mortgage, senior-debt payoff and E-Core financing.
- Progress in remediating the disclosed material weaknesses and whether subsequent filings report effective controls.
- The results of purchase-price and working-capital adjustments, earn-outs and options relating to acquisitions, including Cygnet and E-Core.