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Item 7. Management’s Discussion and Analysis

2022-09-28 compared with 2021-09-28 · 54 added, 85 removed, 134 unchanged (51% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following in conjunction with the sections of this annual report entitled “Cautionary Note Regarding Forward-Looking Statements,” “Risk Factors,” “Summary Historical Consolidated Financial Data,” and “Description of Business,” and the historical consolidated financial statements and the related notes thereto included elsewhere in this annual report.

This discussion contains forward-looking statements reflecting current expectations that involve risks and uncertainties.

Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitled “Risk Factors” and elsewhere in this annual report.

The Company’s consolidated financial statements are prepared in accordance with GAAP.

The following discussion and analysis of our financial condition, results of operations and cash flows should be read in conjunction with the consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K.

The last day of our fiscal year is June 30.

Our fiscal quarters end on September 30, December 31, March 31 and June 30.

This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties.

Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” or in other parts of this Annual Report on Form 10-K.

See also “Cautionary Note Regarding Forward-Looking Statements” above.

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).

The consolidated financial statements include the accounts of all subsidiaries in which the Company holds a controlling financial interest as of the financial statement date.

The consolidated financial statements for the year ended June 30, 2020 include the accounts of the Company, Trunano Labs, Inc., a Nevada corporation (for which the Company owns 79.4%), and its wholly-owned subsidiaries;

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 limited liability company, SWCH LLC a Delaware limited liability company;

and Cresco Management, LLC, a California limited liability company.

All intercompany accounts and transactions have been eliminated in consolidation.

As of the date of this report, Trunano Labs, Inc.

had no operations.

For the year ended June 30, 2021 the consolidated financial statements of Grove, Inc.

For the year ended June 30, 2021 the 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;

Trunano Labs, Inc., a Nevada corporation, Infusionz, Inc.

a Nevada corporation, Steam Distribution, LLC, a California limited liability company;

One Hit Wonder, Inc., a California corporation;

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Cresco Management LLC, a California limited liability company, and Infusionz LLC, a Colorado limited liability company.

For the year ended June 30, 2022, the consolidated financial statements of Upexi, Inc.

include all of the subsidiary accounts included in the consolidated financial statements for the year ended June 30, 2021, and include the subsidiaries in which the Company holds a controlling financial interest as of June 30, 2022, which include Grove Acquisition Subsidiary, Inc.

d/b/a/ VitaMedica a Nevada corporation as of August 1, 2021, Interactive Offers, LLC a Delaware limited liability corporation as of October 1, 2021 and Cygnet Online, LLC a Delaware limited liability corporation, as of April 1, 2022.

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

As of the date of this report, Trunano Labs, Inc.

had no operations.

On July 1, 2020, the Company purchased Infusionz LLC, a Colorado limited liability company.

On July 1, 2020, the noncontrolling shareholders of the Company’s subsidiary, Trunano Labs, Inc., converted 1,761,261 shares of Trunano Labs, Inc., stock, representing all the outstanding stock by minority interest holders, into 1,277,778 shares of the Company’s Common Stock.

As of July 1, 2020, Trunano Labs, Inc.

is a wholly owned subsidiary of Grove Inc.

Operating Segments

The Company’s financial reporting is organized into two segments:

products and trade shows for revenue and cost of revenue.

The Company’s financial reporting is organized into only one segment, product sales.

The Company’s internal reporting for product sales is organized into three channels of distribution:

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These product sales are aggregated and viewed by management as one reportable segment due to their similar economic characteristics, products, production, distribution processes and regulatory environment.

Key Factors Affecting Operating Results

Cyclicality and Seasonality

The business does not have seasonality;

however, the Company currently only has one trade show, CBD.io, which is held in November each year.

Because event revenue is recognized when a particular event is held, the Company experiences fluctuations in quarterly revenue based on the completion of the trade show event.

The Company held the November 2019 trade show, however, due to the COVID-19 virus, the November 2020 CBD.io trade show was canceled and our growth strategy in this area has been delayed.

Key Components of Results of Operations

Results of Operations

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$ (2,046,030 )

$ (5,024,978 )

Revenues increased by $20,489,971 or 85% for the fiscal year ended June 30, 2022, compared with the fiscal year ended June 30, 2021.

$4,134,464 was related to the acquisition of Infusionz LLC on July 1, 2020 and the remaining increase was related to CBD sales in the form of gummies, which has experienced significant growth in the recent months.

Included in this growth has been the Company’s own branded products being sold.

Infusionz LLC has a similar CBD product line and customer base as the Grove, Inc.

This was offset by $1,253,847 decrease in trade show revenue since the show has been canceled during the 2021 fiscal year due to Covid 19.

Management expects revenue to increase in the 2021 fiscal year, however, does not expect to have revenue from the annual CBD.io trade show as it has been postponed and management is uncertain when the trade show will be scheduled.

Cost of revenue increased by $7,353,226 or 152% compared with the prior fiscal year.

$2,423,755 was related to the acquisition of Infusionz LLC on July 1, 2020, and the remaining amount was related to the increase in revenue.

The gross margin improved by approximately 18.9% compared to the prior fiscal year.

The primary reason for the gross margin improvement was the overall increase in revenue and the Company’s ability to purchase larger quantities of raw materials at lower prices.

$14,950,919 or 73% of the increase was related to the acquisition of VitaMedica, Interactive and Cygnet and $5,539.052 or 23% was related to the core business compared to the prior year period.

The core business increase was related to increased manufacturing and the Company’s own brands increased direct to consumer sales.

Management expects revenue to increase in the 2023 fiscal year through both organic growth of the core business, acquisitions completed during the 2022 fiscal year and additional strategic acquisitions that align with managements long-term growth strategies.

Cost of revenue increased by $7,200,000 or 59% compared with the prior year.

$6,827,937 was related to the acquisition of VitaMedica, Interactive and Cygnet and $372,063 was related to the core business.

The gross profit margin improved 7% to 56%, compared to the prior year gross profit margin of 49%.

The gross profit of the core business improved 9% to 58% compared to the prior year.

The gross margin improvement for the core business was primarily related to the consolidation of manufacturing, additional equipment purchased during the year, efficiency improvement in the manufacturing process and an increase in direct-to-consumer sales.

Management expects to continue to improve gross margins as the Company consolidates acquisitions and control direct costs.

Operating expenses increased by $17,369,038 or 166% compared with the prior fiscal year.

$1,457,373 was related to the acquisition of Infusionz LLC on July 1, 2020.

The additional increase was attributed to the significant growth in revenue and the requirement to add additional resources to support the current and future growth of the Company.

$7,834,649 was related to the sales, marketing and general administrative expenses of the acquisition of VitaMedica, Interactive and Cygnet.

The core business sales and marketing increased by $2,269,751 due to the increased spending on marketing of direct-to-consumer products and the growth of the sales and marketing team to support the current and expected future sales and product growth.

The core business general and administrative expenses increased $2,841,050 due to increased infrastructure, acquisition costs and employee related costs.

The core business, non-cash expenses of share-based compensation, amortization and depreciation, increased $4,423,588.

The Company’s management is continuing to control operating expenses while also implementing management growth strategies.

Other expense (income), net increased by $181,494 or 67% compared with the prior fiscal year.

During the year ended June 30, 2021, $403,277 was related to the gain on the SBA PPP loan extinguishment and $307,860 was related to the gain on the settlement of lease cancellation.

The increases in other income were net of the increase in interest expense of $392,043, which was primarily attributable to the amortization of the beneficial conversion feature on the convertible notes of $342,813.

The Company had net income of $2,978,948 and incurred a net loss of $5,384,872 for the fiscal years ended June 30, 2021 and 2020, respectively.

The decrease in the net loss is primarily related to the items noted above and a gain on the change in valuation allowance on deferred tax assets of $1,282,815.

Segment Information

The Company provides the following segments:

(a) product segment and (b) trade show segment.

For the year ended June 30, 2021:

Income from operations

Other (income) expense

Depreciation expense

Income tax expense

Segment assets:

Additions to property, plant, and equipment

For the year ended June 30, 2020:

Loss from operations

$ (5,083,154 )

$ (4,838,330 )

Other expense

Depreciation expense

Income tax expense

Segment assets:

Additions to property, plant and equipment

There was a decrease in interest expense of approximately $315,149 which was offset by a decrease of $102,282 related to the gain on the forgiveness of the SBA PPP loan and the gain on the settlement of a canceled lease for the year ended June 30, 2021.

The Company had net loss of $2,046,030 compared to net income of $2,978,948 for the prior year.

The change in net income primarily related to the $745,042 change of income tax benefit compared to the prior year and a $4,423,588 increase in non-cash expenses.

Liquidity and Capital Resources

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Years Ended June 30,

Cash flows provided by (used in) operating activities

$ (4,164,746 )

Cash flows provided by operating activities

Cash flows used in investing activities

(11,606,021 )

Cash flows provided by financing activities

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$ (7,384,405 )

At June 30, 2021, the Company had cash of $14,534,211 or an increase of $13,646,694 from June 30, 2020.

The increase of cash used in operating activities is primarily related to the net income and the sale of the Company common stock.

On June 30, 2022, the Company had cash of $7,149,806 or a decrease of $7,384,405 from June 30, 2021.

The decrease in cash was primarily used for investing in acquisition of new entities and the purchase of property and equipment.

The Company financed some of the investment through financing activities.

The net cash provided by operating activities of $521,872 was primarily from the $2,046,030 net loss, the $2,447,038 increase in inventory, $629,153 increase to deferred revenue and offset by $5,874,087 of non-cash expenses and $229,994 of other net changes in assets and liabilities.

Net cash used in investing activities for the years ended June 30, 2022, and 2021 was $11,606,021 and $1,281,007, respectively.

For the year ended June 30, 2020 the use of cash was primarily due to the net acquisition and sale of equipment.

For the year ended June 30, 2022, the use of cash was primarily related to the investment of $5,457,545 in three acquisitions, $4,515,735 for the purchase of a building in Clearwater Florida and the related remodel of the acquired building and the $1,638,741 acquisition of equipment.

For the year ended June 30, 2021, cash of $62,122 was provided from the acquisition of Infusionz, Inc., $1,422,129 was used to purchase equipment and $79,000 from the sale of property and equipment.

Net cash flows provided by financing activities for the year ended June 30, 2022, was $3,699,744 compared to $11,988,395 for the year ended June 30, 2021.

Proceeds from the sale of common stock and sale of the non-controlling interest during the year ended June 30, 2020 for $768,801 and the increase in issuance of notes payable of $2,048,945 compared to proceeds of $1,000,080 from the issuance of convertible notes payable and the proceeds from the issuance of common stock of $10,950,315, net of expenses and the issuance of preferred stock during the year ended June 30, 2021 were the primary reasons for the decrease.

The Company had proceeds of $6,678,506 from a convertible note and used $1,975,888 for the repurchase of the Company’s common stock and $1,002,874 in the repayment of debt.

During October of 2019, the Company entered into convertible promissory notes (the “October 2019 Notes”) for total proceeds of $1,500,000.

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On May 13, 2020, Infusionz entered a Paycheck Protection Program loan for $297,100 in connection with COVID-19.

The is classified as a current liability on the balance sheet on June 30, 2021.

The loan is classified as a current liability on the balance sheet on June 30, 2021.

The loan and accrued interest amounted to $300,995 and was forgiven on August 30, 2021.

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As of June 30, 2021, all of these notes have been converted to common stock.

During June 2022, the Company entered into a Securities Purchase Agreement with two accredited investors pursuant to which the Company could receive up to $15,000,000 during the following twelve months of the agreement.

The Company received $6,678,506 for a Convertible Notes in the original principal amount of $7,500,000 (the “Convertible Notes”), representing the original purchase amount, less fees, costs and a $500,000 holdback by the investors.

In addition to the Convertible Notes, the investors received Common Stock Purchase Warrants (the “Warrants”) to acquire an aggregate of 56,250 shares of common stock.

The Warrants are exercisable for five years at an exercise price of $4.44 per share, provide for customary anti-dilution protection, and an investor put right to require the Company to redeem the Warrants for a total of $250,000.

The Company has the option until June 28, 2023, to draw down up to an additional $7,500,000 of Convertible Notes under the Securities Purchase Agreement to provide financing for acquisitions, pursuant to certain underwriting conditions set forth in the Securities Purchase Agreement.

The Company is subject to customary covenants, financial and otherwise, under the Securities Purchase Agreement.

In December 2019, a novel strain of coronavirus (COVID-19) surfaced.

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and international markets.

There is significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the U.S.

and international economies and, as such, the Company has transition to a combination of work from home and social distancing operations and there has been minimal impact to our internal operations from the transition.

There is significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the US and international economies and, as such, the Company has transition to a combination of work from home and social distancing operations and there has been minimal impact to our internal operations from the transition.

The Company is unable to determine if there will be a material future impact to its customers’ operations and ultimately an impact to the Company’s overall revenues.

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The excess of (i) the total costs of acquisition over (ii) the fair value of the identifiable net assets of the acquiree is recorded as identifiable intangible assets and goodwill.

Goodwill - The Company evaluates its goodwill for possible impairment as prescribed by ASC 350-20-35, Intangibles — Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment at least annually and when one or more triggering events or circumstances indicate that the goodwill might be impaired.

Goodwill - The Company evaluates its goodwill for possible impairment, simplifying the test for goodwill Impairment at least annually and when one or more triggering events or circumstances indicate that the goodwill might be impaired.

Under this guidance, annual or interim goodwill impairment testing is performed by comparing the estimated fair value of a reporting unit with its carrying amount.

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No impairment charge was identified in connection with the annual goodwill impairment test

Revenue Recognition - The Company has adopted the new revenue recognition guidelines in accordance with ASC 606, Revenue from Contracts with Customers (ASC 606), commencing from the period under this report.

The Company analyzes its contracts to assess that they are within the scope and in accordance with ASC 606.

Revenue Recognition - The Company analyzes its contracts and purchase orders to assess that revenue is properly recognized.

In determining the appropriate amount of revenue to be recognized as the Company fulfills its obligations under each of its agreements, whether for goods and services or licensing, the Company performs the following steps:

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The Company acts as a principal in its revenue transactions as the Company is the primary obligor in the transactions.

Generally, the Company recognizes revenue for its products upon shipment to customers, provided no significant obligations remain and collection is probable.

Generally, the Company recognizes revenue for its products when ownership is transferred to the customer, provided no significant obligations remain and collection is probable.

Product Revenue - Most of the Company’s revenue contracts are from domestic sales and represent a single performance obligation related to the fulfillment of customer orders for the purchase of its products.

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Taxes collected from customers that are remitted to governmental agencies are accounted for on a net basis and not included as revenue.

The Company does not accept sales returns from wholesale customers unless the sales return was pre-approved prior to production and shipment.

The Company does not accept sales returns from wholesale customers, as the products are pre-approved prior to production and shipment.

E-Commerce product returns must be completed within 45 days of the date of purchase.

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Shipping and handling fees associated with freight are generally included in cost of revenue.

Trade Show Revenue - A significant portion of the Company’s annual revenue is generated from the production of a single trade show.

The revenue includes booth space sales, registration fees and sponsorship fees.

The Company recognizes revenue upon completion of the CBD.IO trade show.

Amounts invoiced prior to the completion of the trade show are recorded as deferred revenue in the consolidated Balance Sheets until the completion of the event.

As of June 30, 2021, and 2020, the Company had no deferred revenue related to trade show business.

Impairment of Long-lived Assets - Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable.

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Stock compensation

Impairment of lease cancellation

Stock issued for services

Change in derivative liability

Gain on lease settlement

Gain on SBA PPP loan extinguishment

Gain on SBA PPP loan f orgiveness

Gain on sale of asset

Non-GAAP adjusted EBITDA

$ (3,853,015 )

Use of Non-GAAP Financial Measures

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis