Upexi, Inc.: Form 10-Q for the period ended Dec 31, 2023

General Overview

As used in this quarterly report and unless otherwise indicated, the terms “we”, “us” and “our” mean Upexi, Inc.

For the three and six months ended December 31, 2022 the condensed consolidated financial statements of Upexi, Inc. include the accounts of the Company and its wholly-owned subsidiaries; Trunano Labs, Inc., a Nevada corporation, Steam Distribution, LLC, a California limited liability company; One Hit Wonder, Inc., a California corporation; HAVZ, LLC, d/b/a Steam Wholesale, a California limited liability company, One Hit Wonder Holdings, LLC a California corporation; SWCH LLC, a Delaware limited liability company; Cresco Management LLC, a California limited liability company; VitaMedica, Inc., a Nevada corporation, Cygnet Online, LLC a Delaware limited liability corporation; Upexi Pet Products, LLC (“LuckyTail”), a Delaware limited liability corporation as of August 12, 2022; and E-Core Technology, Inc. (“E-core”) a Florida Corporation as of October 21, 2022

For the six months ended December 31, 2023, the condensed consolidated financial statements of Upexi, Inc. include all of the subsidiary accounts included in the condensed consolidated financial statements for the three and six months ended December 31, 2023.

All intercompany accounts and transactions have been eliminated as a result of the consolidation.

Operating Segments

The Company’s financial reporting is organized into two segments: Our Branded Product segment and our Recommerce segment. Our Branded Product segment is focused on the development, growth, and distribution of the branded products that we own. Our Recommerce segment is focused on the purchase and sale of new and used products through channels such as Amazon and wholesale distributors. Other sources of revenue and related costs are aggregated and viewed by management as immaterial or have similar economic characteristics, product production, distribution processes and regulatory environment as the other product sales.

For the three months ended December 31, 2023 and December 31, 2022, the share-based compensation of $330,548 and $1,052,847, respectively was allocated to the Branded Product segment. For the six months ended December 31, 2023 and December 31, 2022, the share-based compensation of $752,471 and 1,980,173, respectively was allocated to the Branded Product segment.

All indirect corporate and public company general and administrative expenses are allocated to the Branded Product Segment.

Segment Information

The Company provides the following segments: (a) branded products segment and (b) recommerce segment.

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For the three months ended December 31, 2023:

For the three months ended December 31, 2022:

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For the six months ended December 31, 2023:

For the six months ended December 31, 2022:

Results of Operations

The following summary of the Company’s operations should be read in conjunction with its unaudited condensed consolidated financial statements for the three months ended December 31, 2023, and 2022, which are included herein.

Three Months Ended December 31, 2023, Compared to Three Months Ended December 31, 2022

Revenues decreased by $4,913,735 or 18% to $21,827,827 compared with revenue of $26,741,562 in the same period last year. The revenue decline was primarily the result of lower recommerce revenue through both Amazon channels and wholesale. There were certain wholesale deals not completed at the end of the period that resulted in both a buildup of inventory and lower sales for the period ended December 31, 2023. Branded Product sales increased in the health and beauty product categories with a slight decline in both the pet care and children’s toy product categories, primarily from lower than expected sales in the Amazon sales channel. Management will continue to focus on the development and growth of the high gross margin Branded Product sales.

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Cost of revenue decreased by $3,098,543 or 19% to $13,556,574 compared with cost of revenue of $16,655,117 in the same period last year. The cost of revenue decline was primarily related to the lower recommerce revenue. Gross profit decreased by approximately $1.8 million compared to the same period in the previous year. Management will seek to improve the gross profit and the overall gross margin in the next 12 months as we are able to leverage the significant increase in our purchasing requirements and continue to consolidate our operations.

Sales and marketing expenses decreased by $605,776 or 18% compared with the same period in the prior year. The decreased in sales and marketing expenses 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 strategically increase the sales and marketing budget for our direct to consumer sales channels as the Company seeks to capitalize on an opportunity to take advantage of lower costs to estimated lifetime value of the customer. Management believes that this strategy will yield significant returns in the next 12 months. We anticipate our advertising expenses will be reduced over time as a percentage of sales in the following quarters, which will increase our overall profitability.

Distribution costs decreased $327,991 or 9% compared with the same period in the prior year. The decrease in distribution costs was related to the decreased revenue and management’s efforts to consolidate and streamline our distribution network. In addition, there continued to be slight increases in transportation costs and third-party provider rates and management has a strategy that it expects will start to decrease the overall percentage of distribution costs to sales.

General and administrative expenses decreased by $214,431 or 9% compared with the same period in the prior year. As the Company has consolidated the acquisitions and adjusted for the sale of Infusionz and Interactive Offers, management has managed the general and administrative costs and will continue to implement strategies to decrease the percentage of general and administrative costs when compared to total sales.

Other operating expenses decreased by $580,329 or 24% compared with the same period in the prior year. These expenses are primarily non-cash and decreased based on the decreased amortization of stock compensation and offset by slight increases in intangible assets amortization and depreciation.

During the three months ended December 31, 2023, the Company had other expense of $1,077,084 compared to expense of $1,792,839 during the three months ended December 31, 2022. The decrease was primarily related to the termination interest expense with the early repayment of the senior secured convertible note payable.

In addition, during the three months ended December 31, 2023, the Company recognized a loss on the sale of Interactive offers, and an impairment on the Delray Beach facility, that was consolidated into the Tampa facility. These were offset by the gain on the lease settlement for the California facility and an income tax benefit. During the three months ended December 31, 2022, the Company recognized a gain on the sale of Infusionz and select assets, which was later adjusted for lack of payment from the buyer and an income tax expense.

Other income was related to the gain recognized from the sale of Infusionz and select manufacturing business and offset with interest expenses incurred from the refinancing and early termination of debt obtained in June of 2022.

The Company had a net loss of $2,437,919 compared to net income of $2,669,679 in the same period in the prior year. The decrease in net income is primarily related to the items mentioned above.

We will continue to improve the gross profit, while reducing the general and administrative expenses as compared to the sales as the Company continues to focus on sales growth while continuing to improve net income through the consolidation of operations.

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Six Months Ended December 31, 2023, Compared to Six Months Ended December 31, 2022

Revenues increased by $11,215,108 or 30% to $49,175,469 compared with revenue of $37,960,361 in the same period in the prior year. The revenue growth was primarily the result of the acquisition of E-core and was offset by the sale of Infusionz and Interactive Offers. The six months ended December 31, 2022 only included two and a half months of revenue from E-Core, as the acquisition was effective October 21, 2022 and did not include a complete six months of revenue from LuckyTail. In addition, revenue declined in the recommerce segment in both Amazon channels and wholesale. There were certain wholesale deals not completed at the end of the period that resulted in both a buildup of inventory and lower sales for the period ended December 31, 2023. Brand Product sales increased in the health and beauty products and the children’s toy products category with a decline in the pet care product category, primarily from lower than expected sales in the Amazon sales channel. Management will continue to focus on the development and growth of the high gross margin Brand Product sales.

Cost of revenue increased by $10,139,934 or 46% to $32,196,367 compared with cost of revenue of $22,056,433 in the same period in the prior year. The cost of revenue growth was primarily related to the increase in sales during the period. Gross profit increased by over $1 million compared to the same period in the previous year. Management will seek to improve the gross profit and the overall gross margin in the next 12 months as we are able to leverage the significant increase in our purchasing requirements and continue to consolidate our operations.

Sales and marketing expenses increased by $515,422 or 10% compared with the same period in the previous year. The increase in sales and marketing expenses was primarily related to the increase in the Branded Products segment. Management will continue to increase the sales and marketing budget for our direct to consumer sales channels as the Company seeks to capitalize on an opportunity to take advantage of lower costs to estimated lifetime value of the customer. Management believes that this strategy will yield significant returns in the next 12 months. We anticipate our advertising expenses will be reduced over time as a percentage of sales in the following quarters, which will increase our overall profitability.

Distribution costs increased $34,791 or 1% compared with the same period in the previous year. Although the distribution costs increased during the period compared to the same period in the previous year, as a percentage of overall revenue, the distribution costs decreased over 3.5%. Management will continue its efforts to consolidate and streamline our distribution network and decrease the costs as a percentage of revenue.

General and administrative expenses decreased by $86,349 or 2% compared with the same period in the previous year. As the Company has consolidated the acquisitions and adjusted for the sale of Infusionz and Interactive Offers, management has controlled the general and administrative costs and will continue to implement strategies to decrease the percentage of general and administrative costs when compared to total sales.

Other operating expenses decreased by $537,269 or 12% compared with the same period in the previous year. These expenses are primarily non-cash and decreased based on the lower amortization of stock compensation offset by increases in intangible assets amortization and depreciation.

During the six months ended December 31, 2023, the Company had other expense of $1,951,269 compared to expense of $2,224,547 during the six months ended December 31, 2022. The decrease was primarily related to the termination interest expense with the early repayment of the senior secured convertible note payable obtained in June of 2022 and the $726,800 of non-cash amortization of imputed interest on acquisition notes payable.

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In addition, during the six months ended December 31, 2023, the Company recognized a gain on the sale of Interactive Offers, and an impairment on the Delray Beach facility, that was consolidated into the Tampa facility. These were offset by the gain on the lease settlement for the California facility and an income tax benefit. During the six months ended December 31, 2022, the Company recognized a gain on the sale of Infusionz and select assets, which was later adjusted for lack of payment from the buyer and an income tax expense.

The Company had a net loss of $3,794,307 compared to net income of $72,164 in the same period in the previous year. The decrease in net income is primarily related to the items mentioned above.

We will continue to improve the gross profit, while reducing the general and administrative expenses as compared to the sales as the Company continues to focus on sales growth while continuing to improve net income through the consolidation of operations.

Liquidity and Capital Resources

Working Capital

Cash Flows

On December 31, 2023, the Company had cash of $1,844,420, a decrease of $2,647,871 from June 30, 2023.

Net cash from operating activities benefited from non-cash expenses of $3,813,681 and decreased accounts receivable of $1,943,520, which were offset by increased inventory and paydown of accounts payable and accrued liabilities.

Net cash used in investing activities for the six months ended December 31, 2023 was $902,864 and was primarily related to the $500,000 paid for the remaining 45% of Cygnet Online LLC and the acquisition of property and equipment. The acquisition of property and equipment primarily related to equipment and leasehold improvement for the final phase of our consolidation strategy.

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Net cash provided by financing activities for the six months ended December 31, 2023, was $599,027 compared to the use of $9,464,945 during the six months ended December 31, 2022. The cash used in financing activities during the six months ended December 31, 2023 related to the repayment of notes payable and acquisition notes payable and was offset by the Company’s line of credit.

For the six months ended December 31, 2022 used by financing activities was the repayment of $7,201,079 to the line of credit, the repayment and termination of the senior convertible note and the installment payments of several other notes. The Company obtained a note from a related party and a mortgage on the building purchased in the prior year. The funds obtained were used for investing activities and the repayment of the senior convertible note.

On October 19, 2022, the Company and its indirect wholly owned subsidiary, Upexi 17129 Florida, LLC entered into a loan agreement with Professional Bank, a Florida state-chartered bank, providing for a mortgage on the Company’s principal office in N. Clearwater, Florida. The company received $3,000,000 in connection with the transaction. The principal is to be paid back to Professional Bank over a term of ten years. The proceeds of the loan were utilized by the Company to pay down its loan facility with Acorn Capital, LLC in the amount of $2,780,200, net of fees and other expenses.

On October 31, 2022, Upexi, Inc. (the “Company”), paid $4,275,071 in principal, $613,466 in accrued interest, $250,000 for settlement of a put option and $7,900 in miscellaneous fees for a total of $5,146,437 to the holders of the $15 million senior secured convertible notes entered into on June 28, 2022. The payment terminated the agreement with the noteholders. The Company also terminated the registration statement covering the senior secured notes payable.

We estimate that we will have sufficient working capital to fund our operations over the twelve months following the date of the issuance of these condensed consolidated financial statements and meet all our debt obligations.

Off-Balance Sheet Arrangements

There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our senior management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of December 31, 2023 (the “Evaluation Date”). Based on this evaluation, our principal executive officer and principal financial and accounting officer concluded as of the Evaluation Date that our disclosure controls and procedures were not effective such that the information relating to us required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our principal executive officer and principal financial and accounting officer, as appropriate to allow timely decisions regarding required disclosure. This conclusion is based on findings that constituted material weaknesses. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s interim financial statements will not be prevented or detected on a timely basis.

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In performing the above-referenced assessment, our management identified the following material weaknesses:

(i) inadequate segregation of duties consistent with control objectives; and

(ii) lack of multiple levels of supervision and review.

We believe the weaknesses and their related risks are not uncommon in a company of our size because of the limitations in the size and number of staff. Due to our size and nature, segregation of all conflicting duties has not always been possible and may not be economically feasible. However, we plan to take steps to enhance and improve the design of our internal control over financial reporting. During the period covered by this quarterly report on Form 10-Q, we have not been able to remediate the material weaknesses identified above. To remediate such weaknesses, we plan to implement the appointment of additional qualified personnel to address inadequate segregation of duties and implement modifications to our financial controls to address such inadequacies, by the end of our 2024 fiscal year as resources allow.

We are currently reviewing our disclosure controls and procedures related to these material weaknesses and expect to implement changes in the current fiscal year, including identifying specific areas within our governance, accounting, and financial reporting processes to add adequate resources to potentially mitigate these material weaknesses.

Our management will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal controls over financial reporting on an ongoing basis and is committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.

Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal controls over financial reporting (as defined in Rules 12a-15(f) and 15d-15(f) under Exchange Act) that occurred during the quarter ended December 31, 2023, that have materially or are reasonably likely to materially affect, our internal controls over financial reporting. The Company has added significant qualified resources to ensure proper segregation of duties and proper review of the financial reporting policies and procedures.

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