Business context and reporting period
Upexi, Inc. (NASDAQ: UPXI) filed this Form 10-K for the fiscal year ended June 30, 2022, with fiscal 2021 as the comparable period. Although the request metadata says “2021 Q4,” the filing covers the full fiscal year ended June 30, 2022. Upexi owns and operates consumer brands and businesses in health, wellness, pet, beauty, e-commerce, product distribution and programmatic advertising. It reports one operating segment.
During fiscal 2022, Upexi acquired VitaMedica, Interactive Offers and a 55% interest in Cygnet Online. Subsequent to year-end, the company changed its name from Grove, Inc. to Upexi, Inc. (August 17, 2022) and acquired assets for the Lucky Tail brand (August 12, 2022).
Financial performance and position
| Metric | FY2022 | FY2021 | Change / context |
|---|---|---|---|
| Revenue | $44.585 million | $24.095 million | Up 85% |
| Gross profit | $25.189 million | $11.899 million | Gross margin reported at 56%, versus 49% |
| Operating expenses | $27.841 million | $10.472 million | Up 166% |
| Operating income (loss) | $(2.652) million | $1.427 million | Moved to operating loss |
| Net income (loss) | $(2.046) million | $2.979 million | Moved to net loss; parent-attributable loss was $2.101 million |
| Adjusted EBITDA, non-GAAP | $3.413 million | $3.196 million | Company-defined measure; not a substitute for GAAP results |
| Cash from operating activities | $0.522 million | $2.939 million | Lower by $2.417 million |
| Cash from investing activities | $(11.606) million | $(1.281) million | Primarily acquisitions and property/equipment |
| Cash from financing activities | $3.700 million | $11.988 million | Included convertible-note proceeds and stock repurchases |
| Cash at year-end | $7.150 million | $14.534 million | Down $7.384 million |
| Working capital | $6.934 million | $12.474 million | Current assets $17.062 million; current liabilities $10.128 million |
| Notes payable | $14.301 million | — | $5.425 million current and $8.876 million long-term |
Revenue growth included $14.951 million attributed by management to the three fiscal-2022 acquisitions. The filing also attributes growth to manufacturing and direct-to-consumer sales in the existing business, but prints that core-growth amount as “$5,539.052”; the text does not provide a clear value. Core-business gross margin was reported as 58%, up from 49%.
Inventory increased to $6.454 million from $2.095 million, and Upexi recorded $1.045 million of inventory write-offs, compared with $0.375 million in FY2021. Total assets were $48.491 million, versus $27.255 million a year earlier. The balance sheet showed stockholders’ equity of $28.787 million, including noncontrolling interest.
Material changes, outlook and unusual items
- Management attributed the net-income decline primarily to a $4.424 million increase in non-cash expenses and a $0.745 million change in income-tax benefit. Share-based compensation was $3.332 million, and depreciation and amortization totaled $2.733 million.
- Investing outflows included $5.458 million for acquisitions, $4.516 million for a Clearwater building and remodeling, and $1.639 million for equipment, according to MD&A. Cash-flow statements report total property and equipment purchases of $6.154 million.
- Management expected revenue to increase in FY2023 through organic growth, the full-year contribution of FY2022 acquisitions, and further strategic acquisitions. It also expected continued gross-margin improvement through integration and cost control. No quantified earnings or revenue guidance was provided.
- In June 2022, Upexi received $6.679 million net under a financing arrangement for notes with $7.500 million original principal, and could draw up to a further $7.500 million subject to conditions. The notes are secured and carry 8.5% cash interest plus 3.5% payment-in-kind interest. A separate $1.5 million CEO note was received July 31, 2022, after year-end; it bears 8.5% cash interest plus 3.5% PIK interest. The filing also lists a $1.050 million Cygnet convertible note due April 2023.
- Risks include evolving FDA and state rules for hemp and CBD products, product-claim and labeling enforcement, acquisition integration and financing risks, competition, supply and input-cost disruptions, consumer demand changes, and cybersecurity. The company reported no material pending litigation and no significant customers in FY2022; two customers represented 12% and 15% of FY2021 revenue.
- The filing reports no goodwill impairment in FY2022. It contains conflicting disclosure-controls conclusions: one passage says disclosure controls were not effective, while another says they were effective. Management separately concluded internal control over financial reporting was effective. This inconsistency warrants clarification.
- The FY2022 acquisitions included related-party involvement: CEO Allan Marshall controlled an entity that held a 20% interest in Interactive Offers, which Upexi acquired. Upexi also reported that its CEO would provide a related-party loan after year-end.
Important facts for investors to verify
- Confirm the correct reporting period: this is a fiscal-year 2022 10-K, not a fiscal 2021 Q4 report.
- Reconcile management’s acquisition-versus-core revenue-growth attribution, including the unclear printed core-growth figure, and assess acquired businesses’ standalone results and contribution to cash generation.
- Review debt terms, collateral, maturity schedule, financing covenants, potential additional borrowing, and the cash needs associated with current maturities and Cygnet’s remaining ownership interests.
- Assess inventory quality and saleability given the increase in inventory and $1.045 million of write-offs; compare operating cash flow with reported adjusted EBITDA.
- Seek clarification of the contradictory disclosure-controls statements and examine any subsequent remediation or control findings.
- Evaluate the regulatory exposure of hemp/CBD products, acquisition-related intangible-asset amortization, and the terms and accounting for the post-year-end Lucky Tail acquisition.