Upexi, Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended March 31, 2023 (fiscal 2023 third quarter). The filing was signed May 15, 2023. The request metadata labels this “2022 Q3,” but the filing itself reports fiscal 2023 Q3.
Business context
Upexi describes itself as a multi-brand consumer products company focused on health, wellness, pet, beauty, toys and distribution. It reports one segment: product sales. Results reflect acquisitions of Cygnet, LuckyTail and E-Core, and the October 2022 sale of Infusionz and certain manufacturing operations, classified as discontinued operations. These changes make comparisons with the prior year less representative of the current business.
Key financial results
| Metric | Three months ended March 31, 2023 | Three months ended March 31, 2022 | Nine months ended March 31, 2023 | Nine months ended March 31, 2022 |
|---|---|---|---|---|
| Revenue | $24.22 million | $4.43 million | $62.86 million | $13.28 million |
| Gross profit | $9.60 million | $3.33 million | $25.96 million | $10.20 million |
| Gross margin | 39.7% | 75.2% | 41.3% | 76.8% |
| Operating loss | $2.40 million | $1.54 million | $7.51 million | $4.95 million |
| Net result attributable to Upexi | Loss of $1.64 million | Loss of $52,667 | Loss of $1.57 million | Income of $523,877 |
| Operating cash flow, continuing operations | Not separately presented for the quarter | Not separately presented for the quarter | $3.52 million | $4.80 million |
Revenue grew 447% in the quarter and 373% for the nine-month period, primarily from acquired businesses. Gross margin fell substantially; management attributed the changing results to the acquisition mix and said it aims to improve margins through greater purchasing scale and operational consolidation. Interest expense for the nine months was $2.38 million, compared with $61,699 a year earlier. The nine-month results also included a $7.56 million gain on the Infusionz sale; despite that gain, Upexi reported a net loss attributable to the company.
Liquidity, cash flow and debt
- Cash was $1.18 million at March 31, 2023, down from $7.15 million at June 30, 2022.
- Working capital was $2.41 million, compared with $11.46 million at June 30, 2022. Current assets were $20.10 million and current liabilities were $17.68 million.
- For the nine months, continuing operations generated $3.52 million of operating cash flow; investing activities used $2.65 million and financing activities used $6.84 million. Cash declined by $5.97 million.
- Total notes payable were $28.12 million, including $9.16 million classified as current and $18.95 million long term. Debt includes acquisition-related notes, an SBA loan, a mortgage, and other borrowings. The filing lists $374,741 outstanding on a $10 million inventory and receivables line, with $4.94 million available.
- Management stated it expects working capital to be sufficient for operations and debt obligations for the 12 months following issuance of the statements.
Material developments, outlook and risks
- Acquisitions and divestiture: The company acquired LuckyTail and E-Core and consolidated Cygnet during the period. E-Core consideration included $11.5 million in subordinated notes, a $3.5 million convertible note and $6 million in stock. Infusionz was sold to Bloomios; consideration included cash, debt and securities. Upexi recorded an $8.5 million reserve against Bloomios debt and equity instruments. It also reported a $1.62 million receivable due from Bloomios at March 31, 2023.
- Post-period financing: On May 12, 2023, Upexi agreed to sell 2,121,213 common shares for approximately $7 million gross, with expected net proceeds of approximately $6.06 million, and issued warrants for approximately 169,000 additional shares at $4.774 per share.
- Further Cygnet purchase: On April 12, 2023, Upexi agreed to acquire the remaining 45% interest for $1.95 million in structured cash payments over 12 months; the filing said closing was expected the week of May 15, 2023.
- Management commentary: Management expects opportunities for organic growth in acquired businesses, while seeking to improve gross margin and reduce general and administrative expense as a percentage of sales. Advertising costs may fluctuate, and distribution expenses face transportation and third-party provider cost pressures. No specific numerical earnings or revenue guidance is provided.
- Financing and related-party exposure: In February 2023, the company issued a $2.15 million note bearing 18.11% interest payable in shares to a relative of the CEO, and a separate $560,000 note bearing 10% cash interest. The CEO also has a $1.5 million loan outstanding with cash and payment-in-kind interest provisions.
- Controls: Management concluded disclosure controls were not effective because of material weaknesses involving inadequate segregation of duties and insufficient levels of supervision and review. The company said these weaknesses had not been remediated by the reporting date and planned remediation efforts as resources allowed.
- Other risks and contingencies: The filing notes regulatory uncertainty concerning hemp-derived cannabinoids and possible effects on product markets. It reports no pending legal proceeding expected to have a material adverse effect and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the May 2023 share sale closed as expected, the net cash received, and the resulting dilution from shares and warrants.
- Whether the Cygnet 45% acquisition closed, its payment schedule, and the company’s resulting ownership and cash commitments.
- Bloomios’ payment performance and the recoverability and valuation of Upexi’s Bloomios investments and receivable, including the $8.5 million reserve.
- Near-term debt maturities, covenant or repayment terms, and the company’s ability to meet obligations given $1.18 million of reported cash and reduced working capital.
- Progress in remediating the disclosed material weaknesses in internal controls.
- Whether acquired businesses can sustain growth and improve gross margins, given the significant year-over-year margin decline and limited comparability of the reported periods.