Q2 2023 Upexi Inc Earnings Call
Greetings and welcome to D. You packs the ink 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.
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It is now my pleasure to introduce to your host Valter Pinto managing director at K C. S. A strategic communications.
Thank you you may begin thank you operator, good evening and welcome everyone to the U pack C 2023 fiscal second quarter financial results Conference call.
Joining today by Alan Marshall, Chief Executive Officer, and Andrew Nordstrom, Chief Financial Officer.
Before we begin I'm going to remind everyone that statements made during today's conference call maybe deemed forward looking statements within the meaning of the safe Harbor of the private Securities Litigation Reform Act.
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Actual results may differ materially.
Due to a variety of risks uncertainties and other factors for.
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 FTC.
<unk> 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 Asian 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 few patchy CEO Alan Marshall.
Thank you and welcome to our 2023 fiscal second quarter operating results conference call.
Since joining <unk> as CEO in May of 2019, the company has grown from Saddam.
From the $7 4 million in annual revenue to 44 million in 2022.
With an estimated $100 million revenue expected in 2023.
We experienced a substantial growth despite two years of the Covid pandemic and a challenging 2022, well 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 record revenues for 'twenty.
$7 1 million, an increase of 444% as compared to 4 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 stronger sales in many of our brands, including Igor tightened.
But America.
Segment online as well as strong sales from our pet product videos Lucky tails.
During the fiscal second quarter, not only do we generally record revenues, but were able to return to positive EBITDA EBITDA.
So after the sale of infusions.
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 CVD operation during that time, which represented approximately 20 of the $44 million revenue generator in 2022.
This decision has allowed us to focus our.
Acquisition strategy on high growth recession resistant cash flowing businesses.
In April <unk>.
2022, we completed our acquisition of Cigna online LLC, a well established secondary market seller on Amazon with over 1200, Skus branded OTC products and supplemental health wellness and beauty verticals.
22nd 2022, and we entered the pet vertical with the closing of Lucky tail, which has experienced double digit year over year sales growth for both its strong Amazon distribution and direct to consumer sales on <unk> Dot com.
In November 2022, we announced the closing of the core acquisition along with it.
Subsidiaries tightened products and new England technologies.
<unk> added over $40 million in trailing 12 month sales and increased our projected calendar 2023.
Revenue to $100 million.
I can tell you the toy brand and make her a populous popular in Baghdad tile and building blocks and new England technology is a national distributor for branded consumer products.
Titan has been one of the top selling toys at Sam's club since 2018.
First of all on Walmart Dot Com, a top seller on Walmart dot com during cyber week in 2022.
Additionally, the product along with featured in the 2022 Walmart Toy book.
Subsequent to the quarter end, we announced two additional significant milestones for our tiny brand with the approval to launch its first branded DTC storefront on Amazon Dot Com and.
And placement I'm, taking calls products on Walmart child went over 2000 locations nationwide.
Working with our retailers, we had developed a full assortment of new tightening our products, including magnetic cubes fort built okay.
Dino powered kit and a purchase.
Kit during 2023, we plan to launch up to four <unk>.
New products and your current retailers and on Amazon Dot Com.
Yeah, just on educational toy category remains a key focus for us both of them I talked to a few track was less than four and as we continue to build our organic growth.
We now operate in several business segments, including health wellness and beauty educational toys sales.
Sales channels, including direct to consumer Amazon direct and loves and big box retailers.
The Amazon the Amazon liquidation business operates under segment online.
Current sales in health wellness beauty Nutraceuticals. We're currently expanding this business in electronics as well as other new categories.
Our nanny central Dotcom business specializes named brand distribution.
Merchandise.
Inventories premium and premium central programs.
A major supplier to the largest deal of the day sites and brick and mortar retailers in the United States.
Our diverse business mix of non discretionary health wellness pet products.
Liquidation and wholesale direct to consumer and Amazon.
It 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 sale 2023.
Thank you.
All our teams are in taxi as well as our investors customers and partners.
I will now pass the call over to <unk> CFO , Andrew endorsed Greg to discuss our financial results in more detail.
Thank you in accordance with the rules regarding the presentation of discontinued operations the assets liabilities and activities in infusion and certain manufacturing operations have been reclassified as discontinued operations for all periods presented.
The three month and six month ended December 31, 2022 include the acquisitions of Signet online.
Our Amazon aggregation business Lucky tails, a pet product brand and equal or a product distribution business, which also includes Titan tiles. These.
These acquisitions, coupled with the elimination of discontinued operations from the sales of infusions and certain manufacturing operations.
Can we reduce 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 and administrative expenses as compared to sales as we continued 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 700000 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.
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 expense increased by approximately nine or $1 9 million or 100 per cent compared to the same period in the prior year.
Beyond just the increases from the acquisitions management increase the sales and marketing budget 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 $2.7 million or 335% compared to the same period in prior year. The increase in distribution cost was primarily related to the three acquisitions offset by the sale of infusions 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 cost to sales.
General and administrative expenses decreased.
Cause by approximately $100000 or 3% compared to the same period last year as the company has changed with the acquisitions and the sale of infusion management is focused on controlling the general and administrative costs.
Implement strategies to decrease the percentage of G&A when compared to sets.
The company had 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.
Prior year.
Adjusted EBITDA is used by management as an important indicator of the company's performance and improvement since noncash expenses, such as amortization of acquired intangible assets significantly decreased our reported net income.
EBITDA for the second quarter ended December 31, 2022 was approximately 119000 compared to an adjusted EBITDA loss of approximately 971000 for the first quarter ended September 32022.
Management expects the sales and marketing expenditures to return to normal levels and have identified an additional $502 million of 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 five point.
$4 5 million and stockholders equity attributed to your Pax East stockholders of $36 9 million as of December 31, 2022 as of today February 14th 2023, there were $17 million 960748 shares of common stock.
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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.
At this time I'd like to turn the call back over to Alan for closing comments.
During our fiscal second quarter ended December 31, 2022, we continue to transition the sale.
Our infusions division.
Division and started our consolidation of equal and tightened called businesses.
Our quarter was highlighted with the highest revenue quarter since company inception, driven by growth in our DTC, Amazon and tightened Todd when you acquire businesses.
Our ability to generate better overall sales 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.
Our transition this quarter from an EBITDA loss to EBITDA positive for the first step in the right direction, 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 million for calendar 2023, we in tests, we anticipate our EBITDA margin increased steadily throughout calendar 2023.
As we trend towards 8% to 12% EBITDA by the end of 2023.
Regarding the sale of our infusions assets and gain associated with this.
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 it makes sense for total return for our business and for our shareholders.
In closing management is confident in 2023 is that 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 I'd like to open the call for questions operator.
Thank you.
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One moment, please while it.
Paul for questions.
We have a first question from the line of Mike Albany's with E. F. Hutton. Please go ahead.
Yeah, Thank you and thanks.
Thanks, guys for taking my question, a really nice quarter here.
This job driving adjusted positive EBITDA and.
You know with the sale of CBD assets and.
A couple of nice acquisition, just a couple of questions for 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 some of your different brands.
Alright, as Alan Marshall Thanks for the question.
What we're seeing.
Pretty reasonable growth.
We we have pricing power so far in most of our brands, we're not seeing the the average ticket price go as high as it has in the past so I guess that's probably.
<unk> reduction that we're seeing in the overall market.
A number of orders on a couple of our brands continue to be the same at the total sales number per order or is it a little bit lower so.
Oh, I'm I'm most of our stuff again due to the kind of.
He is non discretionary.
A lot of the when I see it we're not we're not seeing as much as we had feared so.
And into year end, we really didn't see we saw the we saw increases across I think pretty much across everything over the last six months or so we're pretty comfortable.
Consumer seems to be holding up.
And for us at least better than anticipated.
Alright. Thank you Alright, and then you have 100 million dollar 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.
But pile them or help me understand a little bit what's driving that.
I think it's it's organic growth and the acquisition. So we sold $20 million worth of business, we did for a $44 million.
We added.
You know various.
And I guess percentages with with with the acquisition, but there is there is growth baked in for across all our brands probably not a we don't have any growth baked in on the acquisitions themselves. So that that would be the upside if we get you know if it will.
Who work out that way.
Understood Okay.
Got it alright, great and then.
Help me understand I guess, the the drivers in terms of improving EBITDA margins throughout the year right I think 8% to 12% kind of target by the end of the year. I mean is this all coming from from Opex really you mentioned and I and I apologize if I got this wrong I think 500 to a million is that just purely advertising was that across all opex you know G&A.
It creates a little bit I guess help me help me understand what's what are your expectations are.
From Opex standpoint, if that's really what's driving EBITDA margins or if there's a you're kind of forecasting and improvement to gross margin as well.
<unk>.
Both so we've been able to put it but it doesn't last quarter we spent.
We got about a million Bucks, we know we can cut out without without hurting.
Yes, the sales of the company at all.
We probably pulled forward some sales with.
Upping, our advertising spend per customer, even though it's still a positive that should come back to us over the next couple of quarters. So that can be normalized we were able to get more traffic than normal on the AD spend so we spent it even though if we normally would on a certain product we have $40 cost per acquisition, we moved that up to 50 or 60. So.
We did give away a little bit of the lifetime value unless we're able to sell that customer more value over the over time, which is what we're betting on.
So we see we yes, we've seen all of those and then last week, we were able to get price increases.
On several of our products and we think we can push through a few more.
And then you know G&A like general administrative expenses. There is some more room to decrease there we've already made adjustments in this quarter.
And still kind of you know when we sold that the CBD side, we still have employees that are stuck in I guess you'd call. It you know purgatory of figuring out figuring out where they fit in the company or whether or not they're just Germany cut so I think all of those things combined.
Make us pretty confident that.
We can at least reach the bottom end of that number.
By year end.
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 do you you paid off all your debt.
Yeah, we had we had.
We paid off yeah, we paid all of that from a corn off and that that's really with all of the proceeds from the beginning the first payment from the.
The sale of the sale of the asset so we really use that cash to pay off that debt.
Okay great.
Awesome Alright, that's that's really it for me thanks, guys.
Thank you.
Thank you we take next question from the line up Aaron Grey with Alliance Global Partners. Please go ahead.
Hi, good evening, Thank you for the questions and nice quarter, an inflection to profitability.
So first question for me just wanted to kind of turn back to our the revenue and the implied guidance. So I just want to be curious in terms of you know was there a decent amount of seasonality you know in the quarter I noticed for the holiday maybe with the toys cause you hit 27 million you only had equal or 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 hundred for the fiscal year 'twenty 'twenty. Three you know let alone the calendar. So I know you gave some guidance towards you know flat for some of the newly acquired and growth for you know some of the legacy business and the newly acquired ones are sitting that an equal level up to make the majority of the revenue, but just wanted to go back to in terms of you know what you are expecting.
In terms of that growth because it does look like you're well on your way to potentially be able to hit the $100 million target for fiscal year, unless there was some seasonality in that quarter there. Thanks.
I get Alan Marshall I think theirs.
We were it was it was the quarter was it was a little more robust than we thought so tightened tiles. Scott you know that drove significant revenue.
Core drove.
More revenue than anticipated at each of the brands drove a little bit more than anticipated. So I don't I don't think you know on my math because of the discontinued operations I don't think we could get we could hit 100.
By June and but I mean, we'd do that would be great for everyone.
So.
I think what we're really you know we did pull some revenue probably 40 to that quarter, we anticipate somewhere around 20.
'twenty one to 'twenty three so.
I think throughout the year it should tier up as it goes Q1, Q2, Q3 Q4 of them.
Not not a lot of seasonality I don't think you'll see.
In the coming years.
Okay, Great that's helpful.
Question for me you mentioned in terms of Amazon liquidation business right now a lot of electronics are looking to expand out I believe you said potentially into wellness correct me, if I'm wrong, but I just wanted to know it is kind of the wellness kind of liquidation how would that kind of differ versus you know electronics a lot more discretionary I'm, just kind of shifting into a different type of category.
Can you talk about how synergistic that might be and then does that also provides a platform for you to expand each other CPG categories. I know you mentioned, you know educational toys and otherwise thanks.
So there's two parts of that like Cig, that's really focused on as an Amazon reseller liquidator and they they do sell a lot of third party and.
Liquidated products. Their main focus has always been kind of that health <unk> wellness nutraceuticals, even though they spread across other categories because they do a 1200 skus.
And then on the on the equal or they they do.
You know much larger kind of liquidation.
Business and in larger quantities, so bigger orders.
Smaller overall margins, but still a good margin in there and the overall expense on those margins you know on the G&A side a lot less so.
What we are we do intend to do is the core business and it will really in the past they've sold the Solta Amazon liquidators for where some of the overstock as well and so now they just have another asset available for for liquidating.
I'm part of the larger orders if they gets you know small small lots left.
And that should overall drive a.
Higher margins for those two businesses going forward.
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, you know obviously down sequentially. There and you mentioned some other things in your prepared remarks, Andrew but just if you could maybe how about in terms of how much of that was driven by you know equal what seems like a structurally lower gross margin.
Just due to be you know electronics, a liquidation business. So how much of the sequential decline in gross margin was just driven by the acquisition versus the legacy business.
Andrew Andrew you can grab them.
Yeah absolutely.
The the margin I mean, its significantly impact as we move towards the.
Not necessarily liquidation, but as we move to selling to the bigger boxes and everything that's done on.
With nettie are with equal or and with Cigna those margins are going to be impacted that's the most significant part of it are our branded products are still in that you know.
70% to 80% gross margin from what the product cost to what the product sales or that is different when we don't know when that brand. So I mean, I can get the exact breakdowns, but most of that decline is from actually that part of the business not from our actual products because our products were still maintaining the high margins.
Okay, Great really helpful color and then I'll jump back in the queue.
Yeah.
Thank you for take next question from the line of Matt Koranda with Roth Capital Partners. Please go ahead.
Yeah.
Hey, guys, it's Mike <unk> on for Matt.
Wanted to start with the progress that tightened tiles.
No I know, it's early and we just started hitting shelves in January but I guess first how are we tracking so far and second any way to quantify the benefit or just quality qualitatively speak to how the sales lift we expect to see probably the physical store sales at Walmart it's into the revenue outlook for 2023.
Yeah.
So we don't have anything public about about that those sales yet we.
We did have strong sales in our brand on Walmart Dot com, which normally you know on our cyber weeks doesn't normally bodes well for the future.
And with more launches into that category hopefully hopefully we can secure the new launches into the same supply chain that would be great to think that every time you want something you could get that kind of contract with Walmart camping world or.
Or wherever else, we have a distributor so so we'll see on that but nothing anything public out there yet it will you know what kind of update everyone.
You know when we get closer to the end of the quarter at the end of the quarter on that.
But it is it is nice to have another let's say like another lever to pull for.
We're also another avenue each of these things make incremental differences in the business.
And even on the last question what are the reason our margin. So you know what that gross.
Margin can be.
They grow over time.
If we add more of the high margin business is a direct to consumer and Amazon that would skew that gross margin number back up again so.
We are excited about the category.
Got it.
It's not a tariff that answered it but if you need to keep it there.
It didn't just speak and maybe Andrew can just up into yeah.
That that works out I get it nothing nothing public out there, we'll wait for an update but next question on on the M&A front, maybe if you could just speak to the acquisition pipeline just how big is the pipeline in terms of companies.
What does total potential acquisition revenue for the pipeline look like and.
Further just what our valuation multiples looking like in the current environment anything to call out in terms of changes since last quarter.
No valuations continue.
Continue to.
I guess normalize on acquisitions.
Right now, we're really we're really comfortable with where we're at and we're really focused on.
I think the next couple of quarters, it really won't try and squeeze that business.
And produce the kind of margins that we.
We can to give everybody.
Now a look at how you know what we think is the potential.
We're sticking to that three and a half to five times multiple on a on a business that makes sense for us obviously, if the business was superb.
Accretive in a in an area that we wanted to grow we may consider some sort of structure do you have a you know we're very fiscally conscious of you know how difficult. It is to bring in an acquisition and squeeze all that margin how long it takes so the.
The pipeline is good.
We see that but we have a lot of opportunities.
Like I said, we were kind of just cruising here and let it let us see how much we can get out of what we call them unless something is just so so.
Advertising for us to take out take a bite up now, but I really double up in here in the next next quarter or so.
Yep, Okay makes sense thanks, guys.
Thanks.
Okay.
Yeah.
Thank you again, if you wish to ask a question. Please press star one on your Touchtone phone now we have next question from the line up Nuc richness and invest time. Please go ahead.
Hey, Alan Congrats on a fantastic quarter.
Most of my questions have been answered already I did have one question from your prepared remarks, I forget your exact wording.
But you had mentioned something about being willing to divest assets. If you feel as if the market isn't properly valuing them is.
Is that something you guys are actively pursuing or how how are you going about that is it sort of you know if you approached or you know if you could talk a little bit about that that'd be great.
I mean I think.
You know CBD for us made sense to move on from it even though he was.
A decently high margin business, you just lack a lot of growth for us and the value that we're hoping to get from it.
It made sense for the overall shareholders right I think our our balance sheet got stronger. This thing we're able to pay off a little that we're able to streamline the business.
So we do evaluate the value that we think each business.
The overall value of each visit inside their portfolio as compared to.
You know our market cap or the overall perception by the market. It's something we would consider right like we have a we are a tech asset in the interactive offers.
And in a different environment and programmatic advertising with the patents and how it could it could be way more valuable than them and we.
Then it is on our books, but you know so when we talk about those things internally.
You know as a risk.
Possible.
CEO and CFO and board.
We look at every opportunity to return the most amount of money for the shareholders if not our business, but we certainly would look at it.
Gotcha. Okay. Thank you that's it for me everything else was answered I appreciate it.
Thanks Luke.
Thank you we take next question from the lineup John I'll call. It with Paulson. Please go ahead.
Hey, guys nice quarter.
Good.
Uh huh.
Andrew.
Interest expense for the quarter end.
How much is DNA.
Do you have left after getting rid of the CBD business.
The as far as the.
Are you talking about the interest expense that we had a one point.
7 million that we that we incurred because of getting rid of Acorn.
No.
Oh, Okay, I'm, sorry, the acquisition interest costs, which I know are.
Three or 4%, but what was that number if he could do you know what.
The ugly acquisitions.
Yeah. The interest you pay the yeah, yeah, it's the acquisitions that haven't fully you havent fully paid for yet and so here in the quarter. It's it was less than $35000 that we havent fully paid for but that's because that the one acquisition. We don't have any accurate on the lucky tail. We don't have any interest expense on it and with the.
New England, one we only had the interest expense related to <unk>.
Two months.
Got it and depreciation and amortization, how much what was that number.
Depreciation and amortization for the quarter was about 1.2 million.
The most significant thing is going to continue to be the amortization of the intangible assets because as we continue to acquire these entities. It just going to continue to grow.
Thank you. That's good. So last question is you know it looks like a there's some no you're developing kind of a.
A lot of data given your customer information, what's the marketing budget look like have you changed your idea about how to cross sell and go after the clients that you've garnered through.
Organic growth and acquisition.
Down Marshall No no no we havent really changed.
Our.
Perspective on that we really don't want to chase too.
Too much additional spend on advertising right now like I said, our focus our focus really here is.
Yeah, we've got a really I think a really great set of assets with with with high potential for growth both internally and organically.
We can add an acquisition would make sense.
But when we did spend extra last quarter, our idea as we know what the lifetime value of our current customers.
Is on our current brands can we sell them someone else and can we increase the lifetime value.
And again, it's not and it's not it's not you don't always get an opportunity.
To get more data for.
Or a marginal additional amount of money usually to get more data when it's very competitive and advertising it.
The larger.
Increased which sometimes make it not not economical so really just it was a test for US and then we'll we'll track those customers that come in we look at when the next time they order it and what the return is on that spend.
Works out really well for us over this quarter than we probably would put you know a little more into it again.
Hum.
It's a it's a defined it's fine tuning advertising marketing and customer acquisition is just constant fine tuning of your spending or.
Being conscious of how to do that properly.
Thanks, and congratulations again.
Thanks, John .
Okay.
Thank you ladies and gentlemen, we have reached the end of the question and answer session.
I'd like to turn the floor back over to Alan Marshall CEO for closing comments over to you Sir.
Well I just want to close the call with thanking everyone for joining us today I appreciate the questions I appreciate the.
The company and all its employees appreciate the support.
We look forward to the third quarter call and that ends our call for today. Thank you.
Thank you ladies and gentlemen. This concludes today's teleconference. You may disconnect your lines at this time.
You for your participation.
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