Upexi, Inc. — Form 10-Q Summary
Reporting period: Unaudited quarter and six months ended December 31, 2023 (the second quarter of fiscal 2024), compared with the corresponding 2022 periods. Upexi owns brands in health, wellness, pet, beauty and other markets and also distributes new and used products through its recommerce business. Its two reported segments are Branded Products and Recommerce.
Financial results and liquidity
| Metric | Three months ended Dec. 31, 2023 | Three months ended Dec. 31, 2022 | Six months ended Dec. 31, 2023 | Six months ended Dec. 31, 2022 |
|---|---|---|---|---|
| Revenue | $21.83 million | $26.74 million | $49.18 million | $37.96 million |
| Gross profit | $8.27 million | $10.09 million | $16.98 million | $15.90 million |
| Gross margin | 37.9% | 37.7% | 34.5% | 41.9% |
| Operating loss | $(1.79) million | $(1.70) million | $(2.93) million | $(4.08) million |
| Net income (loss) attributable to Upexi | $(2.44) million | $2.67 million | $(3.79) million | $0.07 million |
| Operating cash flow, continuing operations | Not separately presented for the quarter | $(2.12) million | $3.85 million |
- Quarter: Revenue fell 18% year over year, primarily because of lower Recommerce sales through Amazon and wholesale. Gross profit declined by about $1.8 million; gross margin was slightly higher than in the prior-year quarter. Interest and other expense was $1.08 million.
- Six months: Revenue rose 30%, largely reflecting the E-Core acquisition and a longer period of acquired-business contributions than in the prior-year comparison. Gross profit increased by about $1.1 million, but gross margin contracted to 34.5%. Net loss was $3.79 million.
- Cash and working capital: Cash was $1.84 million at December 31, down $2.65 million from June 30, 2023. Current assets of $22.58 million were below current liabilities of $24.26 million, leaving a $1.67 million working-capital deficit.
- Debt and leases: The debt note reports $23.97 million of convertible, acquisition, other and related-party notes, net of discounts; the balance sheet separately reports a $4.17 million line of credit. Current maturities and acquisition obligations are significant. Operating lease liabilities totaled $1.99 million.
Material changes and management commentary
- Quarterly Recommerce revenue declined amid lower Amazon and wholesale sales; management said some wholesale transactions did not close by period-end, contributing to lower sales and increased inventory. Inventory rose to $14.66 million from $11.56 million at June 30.
- For the six-month comparison, E-Core revenue was $29.40 million, compared with $13.65 million in the prior-year period, which included only part of the post-acquisition period. Upexi completed its purchase of the remaining 45% of Cygnet in September 2023 for cash, shares and a deferred payment.
- Upexi sold Interactive Offers in August 2023 for a stated purchase price of $1.25 million, subject to adjustment, plus a 2.5% share of certain advertising revenue for two years. Infusionz and related manufacturing operations had been sold in 2022; the reported prior-year comparison includes a $7.56 million gain on that sale.
- Management aims to grow higher-gross-margin branded products, refine direct-to-consumer marketing, and improve margins by consolidating operations and streamlining distribution. It expects advertising expenses to decline as a percentage of sales over time. These are expectations, not quantified guidance; the filing gives no specific revenue or earnings forecast.
Risks, contingencies and unusual items
- The company was not in compliance with the debt-service ratio covenant on its Clearwater mortgage at December 31, 2023. The lender granted forbearance through June 30, 2024, allowing time to return to a 1.25-to-1 ratio; the interest rate increased from 4.8% to 10% during the forbearance period.
- Management stated that it expected sufficient working capital to fund operations and meet debt obligations for the twelve months following issuance of the statements. This assessment should be considered alongside the working-capital deficit, low cash balance and substantial current debt maturities.
- Disclosure controls and procedures were deemed ineffective due to material weaknesses in segregation of duties and supervisory review. Management planned remediation, subject to available resources, by the end of fiscal 2024; the filing also says no remediation had yet been achieved during the quarter.
- Management identified regulatory uncertainty around hemp-derived products and cannabinoids, including potential federal and state restrictions. Other disclosed business risks include possible COVID-related effects; management said future impact on customers and revenue could not be determined.
- The company recorded a $289,968 impairment related to consolidating its Delray Beach facility and a $61,138 gain on a California lease settlement. It reported no pending legal proceeding expected to have a material adverse effect.
Important facts for investors to verify
- Reconcile the MD&A’s prior-year quarterly net-income figure of $2,699,679 with the financial statements’ $2,669,679.
- Track cash generation, inventory conversion and whether delayed wholesale sales occur; operating cash flow from continuing operations was negative for the six-month period.
- Review the covenant cure progress and the timing and funding of debt maturities, including the filing’s scheduled $13.42 million of note payments for fiscal 2024.
- Assess the effectiveness and completion of internal-control remediation and whether subsequent filings report any changes.
- Consider dilution and capital structure: 20,889,384 common shares were outstanding as of February 13, 2024; a January 2024 conversion of $500,000 of debt issued 501,605 shares. The CEO also holds preferred stock with enhanced voting rights and a related-party note.