Earnings Call Transcript - UPXI Q2 2023

Operator, Operator

Greetings and welcome to the Upexi, Inc. 2023 Fiscal Second Quarter Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Valter Pinto, Managing Director at KCSA Strategic Communications. Thank you. You may begin.

Valter Pinto, Managing Director

Thank you, operator. Good evening and welcome everyone to Upexi 2023 fiscal second quarter financial results conference call. I'm joined today by Allan Marshall, Chief Executive Officer and Andrew Norstrud, Chief Financial Officer. Before we begin, I'm going to remind everyone that statements made during today's conference call may be deemed forward-looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995, and actual results may differ materially due to a variety of risks, uncertainties and other factors. For a detailed discussion of some of the ongoing risks and uncertainties in the company's business, I refer you to the press release issued this evening and filed with the SEC on Form 8-K as well as the company's reports filed periodically with the SEC. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless otherwise required by law. In addition, during the course of this call, we may refer to non-GAAP financial measures that are not prepared in accordance with accounting principles generally accepted in the United States and that may be different from non-GAAP financial measures used by other companies. The reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures are contained in our earnings release issued this evening unless otherwise noted. I would now like to turn the call over to Upexi's CEO, Allan Marshall.

Allan Marshall, CEO

Thank you, and welcome to our 2023 fiscal second quarter operating results conference call. Since joining Upexi as CEO in May of 2019, the company has grown from approximately $7.4 million in annual revenue to $44 million in 2022, with an estimate of $100 million in revenue expected in 2023. We experienced substantial growth despite two years of COVID pandemic and a challenging 2022, when for many macroeconomic reasons, consumer companies in the market struggled to find growth. For our most recent fiscal second quarter ending December 31, 2022, we exceeded internal expectations by generating record revenues of $27.1 million, an increase of 444% as compared to $4.9 million for the same adjusted period the prior year, and an increase of 134% as compared to $11.6 million sequentially. Revenue growth was predominantly driven by strong year-end sales in many of our brands, including E-Core, Tytan Tiles, Vitamedica and Cygnet Online, as well as strong sales from our pet product business, LuckyTail. During this fiscal second quarter, not only did we generate record revenues but were able to return to positive EBITDA after the sale of Infusionz. The last nine months have been very productive for the company. During that period, we successfully closed on several important acquisitions. We divested our select CBD operations during that time, which represented approximately $20 million of the $44 million revenue we generated in 2022. This decision has allowed us to focus our acquisition strategy on high-growth, recession-resistant, cash-flowing businesses. On April 1, 2022, we completed our acquisition of Cygnet Online LLC, a well-established secondary market seller on Amazon, with over 1,200 SKUs, branded OTC products and supplements in health, wellness and beauty verticals. On August 22, 2022, we entered the pet vertical with the closing of LuckyTail, which has experienced double-digit year-over-year sales growth through both strong Amazon distribution and direct-to-consumer sales on lt.com. On November 2, 2022, we announced the closing of the E-Core acquisition along with its subsidiaries, Tytan Tiles and New England Technology. The transaction added over $40 million in trailing 12 months sales and increased our projected calendar 2023 revenue to $100 million. Tytan Tiles is a toy brand and maker of popular magnetic tiles and building blocks. New England Technology is the national distributor for branded consumer products. Tytan has been one of the top-selling toys at Sam's Club since 2018, a bestseller on Walmart.com and a top seller on Walmart.com during Cyber Week in 2022. Additionally, the product lines were featured in the 2022 Walmart Toy Book. Subsequent to the quarter end, we announced two additional significant milestones for our brand, with the launch of its first branded DTC store on amazon.com and placement of Tytan Tiles products on Walmart shelves in over 2,000 locations nationwide. Working with our retailers, we have developed a full assortment of new Tytan Tiles products including magnetic cubes, a fort builder kit, a Donald Tiles kit, and a princess tiles kit. During 2023, we plan to launch up to four of these new products in current retailers and on amazon.com. The educational toy category remains a key focus for us, both to protect our future acquisitions and as we continue to build our organic growth. We now operate in several business segments including health, wellness, pet, beauty, and educational toys, with sales channels including direct-to-consumer, Amazon Direct, and large box retailers. The Amazon liquidation business operates under Cygnet Online with current sales in health, wellness, beauty, and nutraceuticals. We are currently expanding this business into electronics, as well as other new categories. Our netessential.com business specializing in name brand distribution of inline merchandise, excess inventories, premium and premium center programs is a major supplier to the largest Deal of the Day sites and brick-and-mortar retailers in the United States. A diverse business mix of non-discretionary health, wellness pet products, and liquidation and wholesale, direct-to-consumer and Amazon gives us a well-rounded revenue stream that provides opportunity in most economic environments. We intend to build on this substantial growth as we look toward reaching $100 million in sales in 2023. Thank you to all our teams at Upexi, as well as our investors, customers, and partners. I will now pass the call over to Upexi CFO, Andrew Norstrud, to discuss our financial results in more detail.

Andrew Norstrud, CFO

Thank you, Allan. In accordance with the rules regarding the presentation of discontinued operations, the assets, liabilities, and activities of Infusionz and certain manufacturing operations have been reclassified as discontinued operations for all periods presented. The three months and six months ended December 31, 2022, include the acquisitions of Cygnet Online, our Amazon aggregation business, LuckyTail, our pet product brand, and E-Core, our product distribution business, which also includes Tytan Tiles. These acquisitions coupled with the elimination of discontinued operations from the sales of Infusionz and certain manufacturing operations, have significantly reduced the value of comparing our current operation to the operation a year ago. Management believes that the current operations are more indicative of the future and we will continue to improve gross profit while reducing general administrative expenses as compared to sales as we continue to consolidate operations and implement our growth strategies. Revenue for the three months ended December 31, 2022, totaled $27.1 million, an increase of 444% as compared to the $4.9 million for the same period in the prior year. Cost of revenue during the quarter totaled $16.8 million compared to only $700,000 for the same period in the prior year. Gross profit for the quarter was $10.3 million, an increase of 141% as compared to the $4.3 million for the same period of the prior year. Operating expenses totaled $12.5 million, an increase of 83% as compared to $6.8 million for the same period in the prior year. Sales and marketing expenses increased by approximately $1.9 million or 100% compared to the same period in the prior year. Beyond just the increases from the acquisitions, management increased the sales and marketing budgets for the quarter to capitalize on an opportunity to increase sales at lower costs to estimated value through an aggressive sales strategy. While most companies are cutting back, we saw this as an opportunity to increase the investment yield for customer acquisition and accelerate consumer growth. We anticipate our advertising expenses will be reduced in the following quarters, which will increase our overall profitability. Distribution costs increased by $2.7 million or 335% compared to the same period in the prior year. The increase in distribution costs was primarily related to the three acquisitions, offset by the sale of Infusionz and the classification of these expenses as part of discontinued operations. In addition to these changes, there were slight increases in transportation costs and third-party provider rates, which are expected to be short-term and management has a strategy that will start to decrease the overall percentage of distribution costs to sales. General and administrative expenses decreased by approximately $100,000 or 3% compared to the same period last year. As the company has changed with the acquisitions and the sale of Infusionz, management has focused on controlling the general and administrative costs and will continue to implement strategies to decrease the percentage of G&A when compared to sales. The company had a net loss from operations of $2.1 million for the three months ended December 31, 2022, representing a 16% improvement compared to the $2.5 million loss for the same period the prior year. Adjusted EBITDA is used by management as an important indicator of the company's performance and improvement. Since non-cash expenses such as amortization of acquired intangible assets significantly decreased the reported net income, the adjusted EBITDA for the second quarter ended December 31, 2022, was approximately $119,000, compared to an adjusted EBITDA loss of approximately $971,000 for the first quarter ended September 30, 2022. Management expects the sales and marketing expenses to return to normal levels and have identified an additional $502 million in cost reductions in the third and fourth quarter fiscal year 2023, resulting in an adjusted EBITDA improvement of $1.5 million to $2 million over the next two quarters. The company had cash of $4.5 million and stockholders equity attributed to Upexi stockholders of $36.9 million as of December 31, 2022. As of today, February 14, 2023, there were 17,960,748 shares of common stock outstanding. Management expects revenues to continue to increase in calendar 2023, both organically, acquisitions completed during the 2022 fiscal year, as well as additional strategic acquisitions that align with management's long-term growth strategies. For calendar 2023, management continues to estimate annual revenue to be in excess of $100 million.

Allan Marshall, CEO

At this time, I'd like to turn the call back over to Allan for closing comments. During our fiscal second quarter ending December 31, 2022, we continued to transition the sale of our Infusionz division and started our consolidation of E-Core and Tytan Tiles businesses. Our quarter was highlighted with the highest revenue quarter since the company's inception, driven by growth in our DTC, Amazon, Tytan Tiles and E-Core businesses. Our ability to generate better overall sales than anticipated in a very challenging retail environment is a testament to our ability to efficiently operate our business and execute. In the past, we have always focused on growth with a balanced approach for spending for long-term growth and profitability. Our transition this quarter from an EBITDA loss to EBITDA positive was the first step in the right direction of creating efficiencies and driving margin increases in the coming quarters. We have ample runway for further efficiencies throughout the remainder of the calendar year. Additionally, many of the adjustments made during this economic downturn will prove to be beneficial for us as the economy normalizes. The business is well-positioned to meet our projected revenue goal of $100 million for calendar 2023. We anticipate our EBITDA margin to increase steadily throughout calendar 2023 as we trend towards 8% to 12% EBITDA by the end of 2023. Regarding the sale of our Infusionz assets and gain associated with this. While it is not our business to buy and sell businesses, we could consider the sale of other assets as they mature, especially if the value is not represented in our overall valuation and makes sense for total return for our business and for our shareholders. In closing, management is confident 2023 is set for our largest revenue year reported as well as calendar 2023 meeting our projected $100 million. We also feel confident in continued strong growth into 2024 as we continue to evaluate possible acquisitions and push for organic growth across the company. Now let's open the call for questions.

Operator, Operator

Thank you. We will now be conducting our question-and-answer session. Our first question comes from Mike Albanese with EF Hutton. Please go ahead.

Michael Albanese, Analyst

Yeah, thank you. And thanks guys for taking my question. Really nice quarter here. Nice job driving adjusted positive EBITDA and with the sale of CBD assets and a couple of nice acquisitions. Just a couple of questions from me. I think first, just kind of from a macro perspective, I'd love to get some more color around what you're seeing across some of your different brands.

Allan Marshall, CEO

This is Allan Marshall. Thanks for the question. We're seeing reasonable growth. We have pricing power so far in most of our brands. We're not seeing the average ticket price go as high as it has in the past. So I guess that's probably the slight reduction that we're seeing on the overall market. Our number of orders on a couple of our brands continue to be the same as the total sales number per order is a little bit lower. So most of our stuff, again, due to the kind of non-discretionary, we're not seeing as much as we had feared. And into the year-end, we really didn't see — we saw increases across, I think pretty much across everything over the last six months. So we're pretty comfortable. The consumer seems to be holding up for us at least better than anticipated.

Michael Albanese, Analyst

Great. Thank you. All right, and then your $100 million guidance for the year, I mean, is there organic growth baked into this? Or is that just kind of run rate given the acquisitions that you've piled in? Or help me understand a little bit what's driving that?

Allan Marshall, CEO

I think it's organic growth and the acquisition. So we sold $20 million worth of business. We did $44 million. We added various percentages with the acquisitions, but there is growth baked in across all our brands. Probably not; we don't have any growth baked in on the acquisitions themselves. So that would be the upside if it worked out that way.

Michael Albanese, Analyst

Understood. Can you help me understand the factors that will improve EBITDA margins throughout the year? You're targeting an 8% to 12% increase by the end of the year. Is this primarily driven by operating expenses? You mentioned an amount between $500,000 and $1 million; is that solely for advertising, or does it cover all operating expenses? I noticed a slight decrease in general and administrative expenses. What are your expectations regarding operating expenses, and are they the main factor behind the improvement in EBITDA margins, or do you foresee an increase in gross margin as well?

Allan Marshall, CEO

We've been able to identify about $1 million in costs that we can eliminate without affecting our sales. Additionally, we likely accelerated some sales by increasing our advertising spend per customer, which should benefit us in the coming quarters. We experienced higher traffic from our ad spending, raising our customer acquisition cost from $40 to between $50 and $60, which reduced lifetime value slightly, but allows us to deliver more value to customers over time. We've also implemented price increases on several products and believe we can implement a few more. There are opportunities to further reduce general administrative expenses, and we’ve already made some adjustments this quarter. After selling the CBD segment, we still have employees navigating their roles within the company, which adds complexity. Overall, we're confident we can meet at least the low end of our projected target by year-end.

Michael Albanese, Analyst

Got it. Thank you for that context. It's very helpful. And then I guess just my last one, I just want to make sure you paid off all your debt?

Andrew Norstrud, CFO

We had — we paid off — yeah, we paid all the debt from E-Core off. And that's really what all the proceeds from the beginning, the first payment from the sale of the assets. So we really used that cash to pay off that debt.

Michael Albanese, Analyst

Okay, great. Awesome. All right. That's really it for me. Thanks, guys.

Allan Marshall, CEO

Thank you.

Operator, Operator

Thank you. We take next question from the line of Aaron Gray with Alliance Global Partners. Please go ahead.

Aaron Gray, Analyst

Hi, good evening. Thank you for the questions and nice quarter and inflection to profitability. So first question from me, just I want to kind of turn back to the revenue and the implied guidance. So just wanted to be curious, in terms of was there a decent amount of seasonality in the quarter? I know, just for the holiday, maybe with the toys, because you hit $27 million. You had E-Core for two months. So if you assume a full quarter for that, on a pro forma basis, it looks like you could almost hit the $100 million for the fiscal year 2023, let alone the calendar. So I know you gave some guidance towards flat for some of the newly acquired and growth for some of the legacy business, and the newly acquired ones of Cygnet and E-Core to make the majority of the revenue. But just want to go back to in terms of what you're expecting in terms of that growth? Because it does look like you're well on your way to potentially hit that $100 million target for fiscal year, unless there's some seasonality in that quarter there? Thanks.

Allan Marshall, CEO

Again, Allan Marshall. I believe the quarter was stronger than we expected. Tytan Tiles generated significant revenue, and E-Core exceeded our revenue expectations. Each of the brands contributed more than we had predicted. Based on my calculations, due to the discontinued operations, I don’t think we can reach 100 by the end of June. However, it would be great if we did. I think we pulled some revenue forward into that quarter. We anticipated around $20 million to $23 million. I expect that revenue will increase throughout the year across Q1, Q2, Q3, and Q4, but I don't anticipate much seasonality in the upcoming year.

Aaron Gray, Analyst

Okay, great, that's helpful. I have a second question. You mentioned that the Amazon liquidation business is currently focused more on electronics and is looking to expand, possibly into wellness. If I'm mistaken, please correct me, but I would like to understand how wellness liquidation would differ from the current offerings. It seems more discretionary and shifts into a different category. Can you discuss the potential synergies there and whether this could provide an opportunity for you to branch into other consumer packaged goods categories? I recall you mentioning educational toys and similar items. Thank you.

Allan Marshall, CEO

There are two main aspects to consider. Cygnet primarily operates as an Amazon reseller and liquidator, specializing in a wide range of products, with a strong emphasis on health, wellness, and nutraceuticals among their 1,200 SKUs. In contrast, the E-Core business focuses on larger liquidation operations, handling bigger orders that yield lower margins but remain profitable. On the general and administrative side, costs are significantly lower. Moving forward, E-Core will provide an additional resource for liquidating large orders, especially when there are smaller leftover lots. This strategy is expected to enhance margins for both businesses in the future.

Aaron Gray, Analyst

Okay, great. Thanks. That's really helpful. And then last question from me. You kind of touched on it there. Just on the gross margin front, obviously down sequentially there. And you mentioned some other things in your prepared remarks, Andrew. But just if you could maybe help out in terms of how much that was driven by equal what seems like a structurally lower gross margin business, just due to the electronics liquidation business. So how much of the sequential decline in gross margin was just driven by the acquisition versus the legacy business? Thanks.

Allan Marshall, CEO

Andrew, you got that?

Andrew Norstrud, CFO

The margin has been significantly affected as we transition towards selling to larger retailers and through E-Core and Cygnet. This will impact those margins the most. Our branded products continue to achieve a gross margin of 70% to 80% based on the cost versus sales. However, this is different when we do not own the brand. I can provide more detailed breakdowns, but the decline primarily stems from that portion of the business rather than from our actual products, which are still maintaining high margins.

Aaron Gray, Analyst

Okay, great. Really helpful color there. I'll jump back in the queue.

Operator, Operator

Thank you. We take the next question from the line of Matt Koranda with ROTH Capital Partners. Please go ahead.