Q2 2024 Upexi Inc Earnings Call

Participants

Valter Pinto; Investor Relations; Upexi Inc

Allan Marshall; Chairman of the Board, Chief Executive Officer; Upexi Inc

Andrew Norstrud; Chief Financial Officer, Director; Upexi Inc

Aaron Grey; Analyst; Alliance Global Partners

Presentation

Operator

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 Valter Pinto, Managing Director, at KCSA Strategic Communications. Please go ahead.

Valter Pinto

Thank you, operator. Good evening, and welcome, everyone, to 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 8-K as well as the company's reports filed periodically with the SEC.
The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, unless otherwise required by law.
In addition, during the course of 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 CEO, Alan Marshall.

Allan Marshall

Thank you, Valter. 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 trend 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 decrease 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 an emphasis on high margin recurring revenue brand businesses. Our e-commerce business will continue to perform, but overall, the enterprise value will be driven by the brands in their overall growth.
With capital constraints, we are prioritizing investments in our brand, products, and businesses, which carries a higher margin profile through subscription revenue opportunity and capturing a higher lifetime value of the consumer brand. Brand products sold during the second quarter increased 16.7% sequentially to $7.7 million as compared to prior quarter of $6.6 million. B
randed 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 helped 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 and we are 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. The 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 acne 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 Tytan Toys and Lucky Tail, particular as these brands also to 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 from 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 expected to be 450 to 500,500, 50,000 per quarter for a reduction of approximately 2 million annually.
In G&A expenses.
The consolidation will not slow the increase for our growth initiatives as we are investing in and we anticipate this will lead to increased gross 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 recover 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 Betsy CFO, Andrew Norstan to discuss our financial results in more detail.

Andrew Norstrud

Andrew?
Thank you.
Own revenue for the fiscal second quarter 2020 for total $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 2020 for 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 the fiscal first quarter 2024. The cost of revenue decrease was primarily related to the decrease in our e-commerce sales discussed above gross margin for the fiscal second quarter 2024 and 2023 was approximately 38% during both periods. Gross margin during the quarter increased sequentially to 38% as compared to 31.8%. Sales and marketing expense for the fiscal second quarter 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 the Customer Management believes that this strategy will yield significant returns in the next 12 months. Management anticipates that advertising expense will be reduced over time as a percentage of sales in the following quarters, which will increase overall profitability.
General and administrative expenses for the fiscal second quarter 2024 totalled $2.3 million, a decrease of 9% as compared to 2.5 million for the same period in the previous year. Management has managed 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 was 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 2020 for the company had net loss from continuing 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. A net loss of 1.4 million in the first fiscal quarter of 2024. As of December 31st, 2023, the company had cash of $1.8 million and total stockholders' equity attributable to equity shareholders of approximately 25.5 million as of February 14th, 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?

Question and Answer Session

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 one 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 K.
Our first question comes from the line of Aaron Grey with Alliance Global Partners. Please proceed with your question.

Aaron Grey

Hi, good evening, and thank you for the questions here. So first question for me. Just want to talk a little bit about the retail commerce business, right? So you pointed to the softness in the quarter on certain wholesale transactions, not being completed? Was it more a matter of pricing? Was it some last-minute changes? Because certainly can understand and appreciate the focus on margin, but looks like your inventory did build again in the quarter. So what's the pricing just where it was? It would be even like potentially a sort of a margin. It wasn't appealing to you even if it might have had some cash conversion or just any color you might have in terms of the e-commerce business during the quarter and then also the inventory effect.

Allan Marshall

And I think the 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 no one of the concerns was that whole overall gross margin dropping. So we talked about this during the years. We can buy we own 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're 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 80% plus margin to be a bigger percent of our business. So the reinvestments there really were precedent to that but there's no issues that the business could 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.
So inventory did, Bill. We did we are always buying stuff. It just sometimes it doesn't get sold by the end of the quarter shutdown that may or may not come. Will it be sold in this quarter and make a difference as well.

Aaron Grey

Okay. I appreciate that. A third question is going to recover. So kind of overall, are you seeing is it that the margin hurdle is higher for you guys now are ages margins are the same?
You're seeing less opportunities out there and that's I know we've always talked about the shift Interbrand, right, but you always had kind of the e-commerce business there, potentially finding synergies within even with the brands. But I think about the e-commerce business today and that gross margin really spoke to is it that the hurdle has been raised for the deferrals, the same. It is harder to find those opportunities out. There tend to have really come and go depending on on what's out there from the manufacturers and of what they're buying product from.

Allan Marshall

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

Aaron Grey

Okay, great. Thinking shifting on a brand, can't sell it was up 16.7%. You said that it was led by health and beauty. I believe I think Andrew said that. So one times has also been that and was that also a bigger gap than more of a health and beauty side? And then as you think about growth going forward, how do you think about split between e-commerce and brick-and-mortar because obviously brick and mortar can have some of that lower margin than some of the e-commerce. But I know you've had some initiatives with Titan tails were 10,000 tons of getting increased exposure in the brick-and-mortar space?

Andrew Norstrud

Thanks.
Yes, we're going to go. We're going to continue. We're going to have data from all aspects, right? Like Titan is born out of folks first first, starting in DTC. or and then really evolved into brick and mortar. And now we're looking to bring of Disney products back to DTC. on the margin. There's great opportunities, great at some of our other brands, you know, have higher margins and our strictly this point direct to consumer with great opportunity. We've seen I'm not sure, I guess significant reinvestment in growth just in the first quarter. I think no Biomedical's, Amazon's up 30, 40% since we made those started to reinvest at the beginning of the quarter. So I think we're just going to continue on all channels blending that, that margin, but still the bulk of our business is going to be direct to consumer with the much higher margin.
Okay.

Aaron Grey

All right. Great.

Operator

Thank you very much, Naga and gentlemen, in the queue, there are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Allan Marshall

Well, I want to thank everyone for joining the call. And just to summarize, the Company has had a very good position to increase the overall profitability due to several reasons our consolidation of operations and the reduction of 2 million G&A. This will reduce our overall cost structure and not slow the growth of the brands or the growth of the profitability brand revenues should continue to be a bigger percentage of overall sales. The higher gross margin businesses and post 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 second several quarters.
So want to thank everyone for joining our call, and I hope everyone has a great evening.

Operator

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