Upexi, Inc.

Good day, and welcome to the UPIXIE, Inc. 2024 Fiscal First Quarter Earnings Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Valter Pinto, Managing Director at KCSA Strategic Communications. Please go ahead.

Thank you, Operator. Hello and welcome, everyone, to the UPACC 2024 Fiscal First Quarter Financial Results Conference Call. I'm joined 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 may be deemed forward-looking statements within the meaning of the safe harbor of the Private Security Litigation Reform Act of 1995. 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'll refer you to the press release issued today and filed with the SEC on Form 8K. 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 the 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 they may be different from non-GAAP financial measures used by other companies. The reconciliation of non-GAAP financial measures of the most directly comparable GAAP financial measures are contained in our earnings release issued this evening, unless otherwise noted. I'd now like to turn the call over to UPEX's CEO, Alan Marshall.

Thank you, and welcome to our fiscal 2024 first quarter financial results conference call. As we have navigated through a dynamic economic landscape in 2023, it is crucial to recognize the robust undercurrents that position our company for a promising future. There are things we can control and those we cannot. Our share price, which as a larger shareholder I share frustration with, is a phenomenon not within our control given the broader market sentiments. What we can control is our operational core, which has never been stronger. We have successfully enhanced efficiencies across several business channels, which is a testament to our team's relentless pursuit of operational excellence and innovation. The ongoing streamlining of operations is projected to significantly bolster our margins, reflecting a healthier balance sheet in upcoming quarters. Moreover, growth in key sectors has been a bright spot, demonstrating the efficacy of our strategic pivots and the resonance of our offerings in high potential markets. Our revenue for fiscal Q1 of 2024 grew 140% year over year and 53.5% sequentially. During the quarter, we invested significantly in our brands, which impacted our EBITDA margins in the short term. However, this is an investment in the future sales growth and EBITDA, not in our view a negative. Our children's educational toy brand, Titan Tiles, is a great example of this return on investment. During the quarter, We invested significantly around the Disney Frozen launch and new product launches. Just one month into the launch of this product on Amazon, we are a run rate of over 115 units per day. We have moved our rank on Amazon from 20,000 to 4,000. On Friday, Titan Tiles had its largest day since launch, reaching number three in toy magnetic building sets. This is an incredible accomplishment in less than a month for any product launch on Amazon and very promising for the future Disney launches. Our pet products brand, Lumpy Tail, had launched its pet chews on Amazon and direct-to-consumer. This category is not only a value add to our current nail grinder, but the chews are an item we can push on a subscription basis, building a recurring revenue model for the brand. We spent approximately $250,000 of advertising on this launch and other product launch initiatives. Obviously, this did not convert to immediate revenue, but it is necessary to build a more diverse product line focused on subscription and recurring revenue opportunities for the future. On Vitamedica, earlier this year, we increased our ad spend to acquire and build Vitamedica subscription rates, subsequently decreasing the spend to try to increase profits, which we did in the short term. However, we realized that by doing so, we actually hurt our longer-term subscription growth and profits. We've concluded that a larger upfront ad spend will lead to overall higher lifetime values of the product and brand, and as a result, we started to implement this strategy in fiscal Q1. We expect growth to further accelerate for Vitamedica as we launch complementary products like acne treatments. We expect data from the acne study of this product sometime in January. I've invested a quarter of a million dollars on this study, and successful data will help to increase sales significantly in a very large, sticky, and recurring segment of the health and wellness industry. The overall growth of our brands will be critical to increasing overall margins as we launch more subscription-based product lines We anticipate this model will drive higher margin and profitability. Re-commerce revenue for fiscal Q1 was 76% of total revenue, an increase of 187% year-over-year. Signet Online, our high-volume re-commerce provider of branded OTC products, increased revenue sequentially by approximately $1.5 million, with gross profit margins increasing from 44% to 48%. This was accomplished by purchasing products in higher volumes at lower prices and implementing certain price controls. The business positives trends is expected to continue with increased contribution to profit margins in the coming quarter. During the quarter and into the current quarter, we consolidated Cygnus Warehouse into our 3PL warehousing, resulting in approximately a half a million dollars reduction in operating expense and increased efficiencies for the future. The business's positive trend should continue with increased contribution margin in the coming quarters. NETI, our e-commerce provider of overstocked and discontinued merchandise for hundreds of retailers, increased revenues sequentially during the quarter by approximately $6.3 million. Average gross profit, however, declined from 17% to 10%. This is primarily related to liquidation of excess inventory and inventory management. Given a slowing trend in consumer purchasing, we made the strategic decision to sell off excess inventories heading into an uncertain economic environment. Importantly, I wanted to highlight the cost-cutting measures we have implemented over the previous quarters that are now beginning to be reflected in our financial performance. For fiscal Q1, general and administrative expenses as a percentage of revenue decreased to 8.2% as compared to 19% for the same period in the prior year. Additionally, operating expenses as a percentage of revenue also decreased 29% as compared to 56.5% for the same period in the prior year. We remain committed to our previously announced guidance of generating $100 million in revenue for calendar 2023, and more importantly, to completing our cost cutting and increasing overall profitability. Lastly, before I turn the call over to Andy for details regarding our financials, I would like to take a moment to comment on our balance sheet and seller note due on October 31st. We have restructured this note and other debt, paying down a portion and extending the remainder. None of this debt will have a material impact on the future of our business. Our company stands at a pivotal inflection point for growth, underscored by a clear vision and steadfast commitment to our core values. These strategic advances are not mere coincidence, but the result of deliberate plan to future proof our business As stewards of this organization, we have collectively laid down a solid groundwork for sustained profitability and innovation. The trust placed in us by our shareholders and customers fuels our drive to excel, and I am confident that the initiatives we have set in motion will materialize into tangible success. Together, we are navigating towards a horizon rich with opportunity, and I am confident we will prove out the value of this model over the coming quarters to our stakeholders. I will now pass this call over to UPEXI CFO Andrew Nordstrom to discuss our financial results in more detail. Andrew.

Thank you, Alan. Revenue increased by approximately $16 million or 144% compared to the prior year. The company had strong growth in its branded product segment and its re-commerce segment with the acquisition of NETI. Cost of revenue increased by approximately $13.2 million or 245% compared to the same period last year. The cost of revenue increase is primarily related to the acquisition of NETI, the e-commerce business. Gross profit increased by approximately $2.9 million compared to the prior year, with approximately $2.1 million of the gross profit growth being directly related to the branded product's revenue growth. Sales and marketing expense increased by $1.1 million, or 65% compared to the same period last year. The increase in sales and marketing expense was primarily related to the focus on the brand segment revenue growth and strategic marketing to maximize the return on long-term recurring customer growth. Distribution costs increased by approximately 700,000, or 34%, compared to the same period last year. The increase in distribution costs was primarily related to the overall growth of revenue. However, management has implemented several consolidation, repackaging, and pricing strategies to continue to reduce the overall distribution costs of all our product sales. Management expects the implementation of these initial strategies to be completed by March of 2024. General administrative expenses increased by approximately $100,000 or 6% compared to the same period last year. Management continues to operate the company efficiently to enable sales growth without significantly increasing general administrative expenses. Management continues to manage its working capital through the use of its operating cash flow and its line of credit. Subsequent to September 30th, the company made a $2 million payment on the acquisition notes payable and made arrangements to pay the remaining amount due over a 12-month period for the terms of the agreement. At this time, I'd like to open up the call for any questions. Operator?

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. Our first question comes from Aaron Gray with Alliance Global Partners. Please go ahead.

Hi. Good evening, Aaron. Thank you very much for the questions here. So first question for me, nice to see the growth sequentially in the sales, you know, coming slightly above the guidance. But in terms of the gross margin, you know, a couple of puts and takes there. So certainly can understand in terms of, you know, the netty, you know, some one-offs in terms of some lower margins there. But you also seem to, you know, imply on the brand side maybe a decision to, you know, turn back, focus a little bit more towards growth, right? You made some comments on Vitamedica and some other branded investments as well versus some near-term profitability. So maybe you should give like a holistic view of terms of how you're looking at, you know, growth versus profitability now, both in terms of the distribution side on the NetEase Signet businesses and also then on the brand side in terms of like investing for growth versus trying to achieve the near-term profitability. Thank you.

Thanks, Aaron.

It's Alan Marshall. I'll go over the decision on Vitamedica, for instance. If we look back over the quarters, the brand had some significant jumps. I don't know if we broke it out before, but in the January, November through February, it was trending a little bit lower on revenue than And we invested, you know, kind of a lot of money into the upfront costs. So for instance, if we know the lifetime values, $420, you know, we were investing up to up to 150 or 200. And then subsequent to that sometime in March, we dropped that down. Um, whatever the percentage was. So it's $120, which was great because March, April, and may for the business were, um, some of the most profitable as far as like net profitable for, for us as a company. But in June, we saw that subscription revenue start to fall off. So those clients we had brought in, we were losing more than we were gaining. So what we did during the quarter was we just started to increase and try to slowly increase those budgets, trying to put more people in the top of the funnel. Because at the end of the day, the Vitamedica brand, we wanted to be a $10 million brand, a $15 million brand. So we really invested. Maybe we're investing $170 instead of $120 over this quarter. But over the next couple of months, we'll start to build that funnel and have more people in our overall sales channel. And it was the same with Titan Tiles. As you're developing a new project, you're putting a lot of money to work, a lot of dev, a lot of teams, a lot of just everything. Even launching on Amazon, we're running at a loss. for the first several days, and then that starts to clean itself up. And into the weekend, we saw significant growth on both the number of units being sold and on the decreasing cost of revenue. I mean, Amazon's a pretty weird animal because you're losing money sometimes on all the sales for the first weeks or two or months. But then as your branded revenue starts to come back around, you're picking up more and more non-paid recognition. So you'll float higher up on the pages. So that's really what we're working on. And over time and over several months, it's really starting to pay off. We were lucky enough with the Disney launch, it turned really quickly here, at least coming into Black Friday. So pretty hopeful each of those initiatives I could go through the same thing, but that's the main thinking on it. We need to invest a little bit up front to build the funnels, get that recurring revenue going on each of those brands so that every month we're starting with a good base and then continue to fill the top side of that funnel as long as it makes overall financial sense over the lifetime of each customer.

Thanks, Matt. I appreciate that detail there. In looking at that, you previously had some you know, implied guidance in your presentation deck in terms of, you know, profitability. I know you reiterated your calendar sales guide today of 100 million. So is it fair to say now that, you know, it's going to be more so of that, more so investment in some of those brands and maybe in the near term it might not have as much as the even margins that you had previously been anticipating in the near term?

I mean, I don't think – I think this one's a little bit different because we did it all – you know, with launches of new products, it drew down extra. And then, truthfully, even on our, you know, our eCornetti business, we were 300,000 or 400,000 short on that. And, you know, maybe we could have taken a risk. I don't think – this is not a standard margin where we're at now. I definitely think it's going to continue to increase. And – I don't know if we'll get to, I don't think, I don't, I don't think we can get up to the top end of that range until we build the funnels a little bigger. But I can say if each of the brands grows, you know, back to where we want it to get to that 20, 30% over the next quarter or two, we can definitely get way closer to the top end of that range. On top of that, really on top of that, we're really cutting. significant amount of expenses. I know we've been working on it all year. It just takes a long time to close warehouses, negotiate all that stuff out. Consolidating into Tampa here is going to be a really strategic move for us. As we close, I don't want to lay out each thing we're closing. I don't want employees and everything to worry because we're going to do it strategically, but As we consolidate the other side of the business, the other warehouses into either smaller strategic ones in those locations or into a single location, we've still got another million and a half to $2 million. So I think combined with there, I definitely believe the margin's coming back. I'm going to come up to that range we want to be in, that five to eight range. Not sure how quickly we get to the top end of that range, but I'm pretty confident we'll get to the bottom end of that range pretty quickly. Okay.

Okay, great to hear you plan to return to that March expansion there. In terms of some of the top line initiatives, right, so the Disney one looks off to a good start, just looking at some of the frozen reviews online and implied product sales that you mentioned are also implied online. You talked about some other product lines being launched. Can you speak to the timing of those additional product launches coming and when we might expect them?

No. In 2024.

I mean, these take a long time. Yeah, I mean, it's a long process to go through. Like, it was actually, like, I never thought we could make it for, never mind Thanksgiving, Christmas, never mind Thanksgiving, to have it done, you know, from design to, you know, approvals to manufacture it in store in such a short time is pretty amazing. You know, so the Titan team really, everyone, you know... surpass my expectations there we are we are a design and development of of a lot of other ones but there's not a huge issue because if you think about like even even large retailers as we try to expand the channel on on those products into in the big box if it's possible uh you know they're they're placing orders now for second half third third quarter next year or so I mean, ideally, we would be able to launch a couple here in the first half of the year. That's the goal. I think it's doable, but I don't have an exact timeline on each one yet. We really wanted to see how this launch did and how much pull the partnership with Disney had, and it was better than expected.

Okay, great. Yeah, thanks for calling. Yeah, it looks like it's off to a good start there. I want to ask a holistic question. a balance sheet question here, right? So you had the cash balance of 417 as of 930. You mentioned you changed up the terms on the debt that was due end of October. I think you paid down two and you'll pay down the remainder in the next 12 months. You have a $6 million credit facility available. And it also sounds like you're building up some inventory for these launches that you're going to have for frozen Titan tiles and potentially the other ones in 2024. So Just provide us with your comfort with the credit facility to meet the needs, working capital needs, and otherwise, just balance your position. Thank you.

We're comfortable with all of it at this point. We'll work through any problems that come up. We have resources. Also, with new interest rates, in previous quarters at 0, 1, 2%, we were more comfortable leaving the cash in the bank and not paying down the line. With interest rates now on the line somewhere over 8%, we move cash and we get it in to pay down that line as quickly as possible. Every day of interest, we don't have to pay it another day. You may see that line go to zero and cash go to zero, and then you may see cash go up to two or three million, and then we pay it back down. We're really going to try to minimize that, but as far as the overall debt of the company, I've said this all along, I feel very comfortable. Our sellers, they're seller notes. If people take a good look at the note, they'll see that if for some reason we need to extend it, it's already in there. The interest rate does go up, but there's no material, there's no crazy default or anything that's going to happen. I feel comfortable the company is going to be able to work its way through this, and even at some point restructure into a little longer-term debt that gives us more time to pay it and leave more cash available to grow the business, and that without having to raise equity, for sure.

Okay, great. Great to hear that. Last question for me, just an update on Blumio's assets. Any updates on the operations there, plans to be able to consolidate it, or anything you can provide on that? Thanks.

It's business as usual for us there.

We are going to continue to use it to produce our products at lower cost when available. And we're definitely evaluating what to do with that business. It's not a drag on us. It's a positive. So not material to us really, but definitely not going to be anything that drags us down. If anything, it will just contribute more to us in the future.

Okay, great. Thanks very much for the answer. I'll turn back into the queue.

Again, if you have a question, please press star and then one.

At this time, we are showing no more questions. This concludes our question and answer session. I would like to turn the conference over to Alan Marshall for any closing remarks.

Thank you everybody for joining the call again. Just really say thank you to all our shareholders, our team, our investors. We feel like the company's in a great spot for the future. Obviously, we all wish it would be on the market side, be in a better position, but The company from here put up a clean number here this quarter, no sale of assets. So I think as we put the next couple behind us and we continue to grow the business, you know, we feel really confident this thing will pay us the way, you know, continue to grow and hopefully, you know, pay for everybody's patience on that. And I appreciate everybody sticking with us and look forward to our next conference call. Everybody have a great holiday Thanksgiving week and appreciate everyone's time again.

Thank you very much. The conference is now concluded.

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