Upexi, Inc.

Good day and welcome to the UPEXI Inc. Fiscal Second Quarter 2024 Financial Results Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Walter Pinto, Managing Director at KCSA Strategic Communications. Please go ahead.

Thank you, Operator. Good evening and welcome everyone to the UPEXI Fiscal Second Quarter 2024 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 Securities 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 refer you to the press release issued this evening 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 to 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 UPACC's CEO, Alan Marshall.

Thank you, Walter. Thank you and welcome to our fiscal second quarter 2024 financial results conference call. During the second half of 2023, we focused on optimizing and streamlining our operations, investing in our higher margin brand products, and generating positive adjusted EBITDA. The enhanced efficiencies across the business channels bolstered our margins and cash flow sequentially, with my expectation that this trending will continue in the quarters to come. While revenues for the most recent fiscal second quarter decreased sequentially, the operating measures we took allowed us to increase gross profit margins to 38% as compared to the prior fiscal first quarter of 31.8%. We also generated positive adjusted EBITDA, although the revenue quarter over quarter was down. The revenue decreased sequentially was predominantly related to the calculated decision to reduce the risk of purchasing excess inventory in our e-commerce business and investing in our higher margin brand business. The business is navigating challenging market conditions and being carefully managed quarter over quarter to achieve higher profitability while on emphasis on the high margin recurring revenue brand businesses. The re-commerce business will continue to perform, but overall, the enterprise value will be driven by the brand and their overall growth. With capital constraints, we are prioritizing investments in our brand products businesses. which carries a higher margin profile through subscription revenue opportunity and capturing a higher lifetime value of the consumer. Brand product sales during the second quarter increased 16.7% sequentially to 7.7 million as compared to prior quarter of 6.6 million. Branded product sales as a percentage of total revenue this quarter was 35.1% as compared to prior quarter of 24%. This growth and increase as a percentage of sales help drive gross margins higher sequentially. Last quarter, we discussed the decision to increase our ad spend on Vitamedica in health and wellness to acquire and build subscription rates and increase the overall lifetime value of the products and brands with consumers. During the fiscal second quarter and into our current quarter we're in, we have seen promising financial benefits on this strategy. While we have maintained our marketing budget as a percentage of revenue, Subscription revenue across health and wellness grew approximately 5% month over month. This strategic investment is measured carefully every month, and thus far has increased our gross margins and recurring revenue. To drive further growth, we still expect data from the ACME study soon. Successful data will help increase sales significantly in a very large, sticky, and recurring segment of health and wellness industry. We are making the same investments in our other branded products, including Titan Tiles, and Lucky Tail, particularly as these brands also launch new product offerings to the market. Before I hand the call over to Andy for further details regarding our financials, I'd like to provide an update on the consolidation of our manufacturing facilities. The consolidation of operations is expected to be complete and fully operational by the end of April. The overall impact on cost savings is expected to be $450,000 to $550,000 per quarter, or a reduction of approximately $2 million annually in G&A expenses. The consolidation will not slow the increase of our growth initiatives as we are investing in, and we anticipate this will lead to increased growth margins and overall cash flow in the coming quarters. I'd like to reiterate my confidence in our ability to drive long-term growth, innovation, and value creation. We remain committed to further expanding and enhancing our brand businesses and re-commerce segments while capitalizing on new growth opportunities and reaching higher EBITDA and cash flow positive results this year. I will now pass the call over to PECC's CFO, Andrew Nordstrom, to discuss our financial results in more detail. Andrew?

Thank you, Alan. Revenue for the fiscal second quarter of 2024 totaled $21.8 million as compared to $26.7 million for the same period in the previous year, and $27.3 million for the fiscal first quarter of 2024. The decrease in revenue was primarily due to lower e-commerce revenue through both Amazon channels and wholesale. Brand product sales during the quarter increased 16.7% sequentially to $7.7 million as compared to $6.6 million. Led by the health and beauty product category, Management will continue to focus on the development and growth of high gross margin brand product sales. Cost of revenue for the fiscal second quarter 2024 totaled $13.6 million, a decrease as compared to the $16.7 million for the same period in the previous year, and $18.6 million for the fiscal first quarter 2024. The cost of revenue decrease was primarily related to the decrease in re-commerce sales discussed above. The gross margin for the fiscal second quarter of 2024 and 2023 was approximately 38% during both periods. The gross margin during the quarter increased sequentially to 38% as compared to 31.8%. Sales and marketing expense for the fiscal second quarter of 2024 decreased 18% compared to the same period in the previous year and was approximately $160,000 lower than the first quarter ended September 30th, 2023, on higher branded product revenue. The decrease in sales and marketing expense was primarily related to management's efforts to refine sales strategies to focus on long-term recurring sales growth through subscription revenue and sales channel expansion. Management will continue to manage the sales and marketing budget strategically for direct-to-consumer sales channels as the company capitalizes on opportunities to take advantage of lower costs to estimate lifetime value of a customer. Management believes that this strategy will yield significant returns in the next 12 months. Management anticipates its advertising expense will be reduced over time as a percentage of sales in the following quarters, which will increase overall profitability. General administrative expenses for the fiscal second quarter 2024 totaled $2.3 million, a decrease of 9% as compared to $2.5 million for the same period in the previous year. Management has manage its general administrative costs and will continue to implement strategies to decrease the percentage of general administrative costs as compared to total sales. Adjusted EBITDA is approximately $29,000 as compared to an adjusted EBITDA of approximately $557,000 for the same period in the previous year and $750,000 for the fiscal first quarter 2024. The company had net loss from continued operations for fiscal second quarter 2024 of $2.4 million as compared to net income of $2.7 million for the same period in the previous year, and a net loss of $1.4 million in the first fiscal quarter 2024. As of December 31, 2023, the company had cash of $1.8 million and total stockholders' equity attributable to UPEXI shareholders of approximately $25.5 million. As of February 14, 2024, there are 20,889,384 shares of common stock outstanding. At this time, I'd like to open up the call for questions.

Operator? Thank you.

Ladies and gentlemen, at this time, we'll be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Aaron Gray with Alliance Global Partners. Please proceed with your question.

Hi, good evening, and thank you for the questions here.

So first question for me, I just want to talk a little bit about the re-commerce business, right? You pointed to the softness in the quarter, certain wholesale transactions not being completed. Was it more a matter of pricing? Was it some last-minute changes? Because I certainly can understand and appreciate the focus on margin, but it looks like inventory did build again in the quarter. So was the pricing just where it would be even like potentially so low of a margin it wasn't appealing to you, even if it might have had some cash converters, just any color you might have in terms of the re-commerce business during the quarter and then also the inventory.

Thanks.

Hey, Aaron.

You know, I think some of it's timing when it comes in and when it goes out. Some of it was what we talked about at the end of the last quarter, just kind of making sure, you know, one of the concerns was that whole overall gross margin dropping. So we talked about this during the years. We can buy any amount of inventory that's available, but are they meeting our margin profile? So I think that this quarter, we just didn't see the opportunities that would have met the margin we were looking for. And also, the capital constraints still kind of lead to just us pushing for higher margin on those deals. And the reinvestment in the brands is really where it's going to drive overall growth. I mean, we've talked about this over and over. We need that brand revenue with that 80% plus margin to be a bigger percentage of our business. So the reinvestments there really took precedent to that. But there's no issues with the business. We could do a quarter with $20, $30 million in e-commerce revenue, which is not what we chose to do at this point in time. Yeah. Inventory did build. We are always buying stuff. Sometimes it doesn't get sold by the end of the quarter or shipped out. That may or may not be sold in this quarter and make a difference as well.

Okay. I appreciate that, Kyler.

Second question is getting on the re-commerce. Overall, is it that the margin hurdle is higher for you guys now or are you just margin hurdle is the same and you're just seeing less opportunities out there? I know we've always talked about the shift. to brand, right? But, you know, you always had kind of the re-commerce business there potentially finding, you know, synergies, you know, within even with the brands. But the thing about the re-commerce business today and that gross margin hurdle you spoke to, is it that the hurdle's been raised or the hurdle's the same and it's just harder to find those opportunities out there? Because I know it can really come and go depending on what's out there from the manufacturers and otherwise they're buying products from. Thanks.

I mean, we've seen good opportunities on much, you know, even large deals. We just have really decided to focus more on this brand business today. The margins available, maybe not as much as it had been throughout the prior year, but I expect that after the holidays here, we're going to see that opportunity again. The margins usually increase again whenever we want to get stuck with that overstocked inventory situation. But we're seeing plenty of deals. Just trying to manage the business and not lose focus on, you know, the overall value of investing in the higher brand, you know, the higher, you know, gross margin business. Like our gross margin increase this quarter, you know, is just the start of what we think trends over the next couple quarters.

Okay, great. Thanks. And yeah, shifting over to brands then. So, That was up 16.7%. You said that it was led by health and beauty, I believe. I think Andrew said that. So was Titan Tiles also within that? And was that also a bigger drive? Was it more the health and beauty side? And then as you think about growth going forward, how do you think about the split between e-commerce and brick-and-mortar? Because obviously brick-and-mortar is going to have some of that lower margin than some of the e-commerce. But I know you've had some initiatives with Titan Tiles in terms of getting increased exposure in the brick-and-mortar space. Thanks.

Yeah, we're going to go better from all aspects, right? Titan is born out of first starting in DTC and then really evolved into brick and mortar, and now we're looking to bring those Disney products back to DTC. The margin there is great. The opportunity is great. But our other brands have higher margins. and are strictly, at this point, direct to consumer with great opportunity. We've seen, you know, I'm not sure, I guess, significant reinvestment and growth just in the first quarter. I think, you know, Vitamedica's Amazon is up 30%, 40%, you know, since we started to reinvest just at the beginning of the quarter. So I think we're just going to continue on all channels. blending that margin, but still the bulk of our business is going to be direct-to-consumer with the much higher margins.

Okay, all right, great.

Thank you very much, and I'll go ahead and jump right into the queue. There are no further questions in the queue.

I'd like to hand the call back to management for closing remarks.

All right, well, I want to thank everyone for joining the call and just summarize. The company's in a very good position to increase the overall profitability due to several reasons. Our consolidation of operations, the reduction of 2 million GNA. This will reduce our overall cost structure and not slow the growth of the brands or the growth of the profitability. Brand revenue should continue to be a bigger percentage of overall sales. The higher gross margin, businesses will push our gross margins even higher this year. And regardless of market conditions or external factors, myself and our team intend to reach those higher EBITDA and cash flow positive results in the next several quarters. So I want to thank everyone for joining our call, and I hope everyone has a great evening.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.