What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-10-03 compared with 2022-09-28 · 143 added, 74 removed, 114 unchanged (66% of the section changed)

10 unchanged sentences

include the accounts of the Company and its wholly-owned subsidiaries;

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

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;

MW Products Inc.

a Nevada corporation, One Hit Wonder, Inc., a California corporation;

One Hit Wonder Holdings, LLC a California corporation;

SWCH LLC, a Delaware limited liability company;

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

Cresco Management LLC, a California limited liability company;

VitaMedica d/b/a/ Grove Acquisition Subsidiary, Inc.

a Nevada corporation as of August 1, 2021;

and 55% Cygnet Online, LLC a Delaware limited liability corporation, as of April 1, 2022.

For the year ended June 30, 2023, 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.

include all of the subsidiary accounts included in the consolidated financial statements for the year ended June 30, 2022, and include the subsidiaries in which the Company holds a controlling financial interest as of June 30, 2023, which include E-Core Technology, Inc.

d/b/a New England Technology, Inc.

as of October 21, 2022.

Infusionz LLC, a Colorado limited liability company, along with select CBD asset;

and Interactive Offers, LLC a Delaware limited liability corporation have been classified as discontinued operations for the years ended June 30, 2023 and 2022, respectively and the assets and liabilities have been classified as current assets and liabilities of discontinued operations and assets held for sale on the balance sheets for June 30, 2023 and 2022.

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

Key Factors Affecting Operating Results

Cyclicality and Seasonality

Our business can be affected by seasonality, which historically has resulted in higher sales volume during our second quarter, which ends December 31.

Operating Segments

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:

branded products, manufacturing of products to be sold under customers brands and white label products that are sold under customer brands.

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.

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

Branded Products and Recommerce.

Other sources of revenue and related costs are aggregated and viewed by management as immaterial or have similar economic characteristics, products, production, distribution processes and regulatory environment as the other product sales.

Results of Operations

2 unchanged sentences

Cost of revenue

Operating Expenses

Other expense (income), net

Net income (loss)

Sales and marketing expenses

Distribution costs

General and administrative expenses

Other operating expenses

Other (expense) income

$ (10,919,488 )

$ (11,020,570 )

Net (loss) income attributable to non-controlling interest

Discontinued operations

$ (2,068,054 )

$ (5,891,675 )

Net loss attributable to Upexi, Inc.

$ (16,930,289 )

$ (2,100,850 )

$ (14,182,442 )

Revenues increased by $57,611,165 or 250% for the fiscal year ended June 30, 2023, compared with the fiscal year ended June 30, 2022.

$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.

$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.

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.

$41,041,341 or 71% of the increase was related to the acquisitions of the LuckyTail brand and E-Core Technology, Inc.

(“2023 acquisitions”) during 2023 and $18,848,230 or 33% was related to the acquisitions of Cygnet Online, LLC and VitaMedica, Inc.

(“2022 acquisitions”) compared to the prior year period.

This was offset by a decline in other businesses of $2,278,475 or 4%.

Our primary brands of VitaMedica, LuckyTail and newly acquired Tytan Tiles all had significant growth year over year and management will continue to focus on these high margin and growth potential business in 2024 and beyond.

The recommerce businesses, E-Core Technology, Inc.

and Cygnet Online, LLC, continue to represent a significant portion of the overall revenue of the Company, although we did see lower than expected sales volume from our Amazon sales channels.

Management expects revenue to continue to increase in the 2024 fiscal year with a primary focus on growing our branded products.

Cost of revenue increased by $38,922,455 or 475% compared with the fiscal year ended June 30, 2022.

$31,144,149 or 80% of the increase was related to the 2023 acquisitions and $8,640,033 or 22% was related to the 2022 acquisitions.

The gross profit increased by $18,688,710.

The gross profit margin declined by 22% to 42% compared to 64% in the prior year.

The decline in gross profit margin was primarily related to the sales from the recommerce business versus the sales of our branded products.

Management expects the gross margin to improve as the branded products segment continues to grow as a percentage of the overall sales and as we continue to gain economies of scale in our purchasing of products.

Sales and marketing expenses increased by $5,259,135 or 103% compared with the same period last year.

$2,396,876 or 46% of the increase was related to the 2023 acquisitions and $1,373,733 or 26% was related to the 2022 acquisitions.

There was an increase of $1,488,526 or 28% related to the other business.

The increase in sales and marketing expenses was primarily related to the acquisitions and increased expenditures for brand and company awareness, however management has aligned the marketing expenditures with the expected growth strategy to decrease the overall percentage of sales and marketing costs to sales.

We anticipate our advertising expenses will continue to fluctuate in the following quarters as we fully implement our overall brand marketing strategy.

Distribution costs increased $10,155,581 or 459% compared with the same period last year.

$1,850,306 or 18% of the increase was related to the 2023 acquisitions and $7,306,309 or 72% of the increase was related to the 2022 acquisitions and the rest of the business.

There continue to be increases in transportation costs and third-party provider rates.

Management has implemented a strategy to change promotions, increase prices and adjust packaging to decrease the overall percentage of distribution costs to sales and is in process of consolidating its distribution centers, including closing the California facility as of July 1, 2023.

General and administrative expenses increased by $404,521 or 4% compared with the same period last year.

General and administrative expenses increased by $2,332,690 from 2023 acquisitions with the remainder of the business had a decrease in general and administrative expenses of $1,928,169.

Management has actively been reducing general and administrative costs by consolidation of administrative functions and capitalizing on the overall size of the Company.

Management will continue to implement strategies to decrease the percentage of general and administrative costs when compared to total sales.

Other operating expenses increased by $3,932,350 or 80% compared with the same period last year.

These expenses are primarily non-cash and increase based on the intangible assets created with acquisitions and the continued amortization of stock compensation.

$1,612,815 or 41% was related to the 2023 acquisitions amortization of acquired intangible assets and $1,616,188 or 41% of the increase was related to the 2022 acquisitions amortization of acquired intangible assets.

The remaining increase of $703,347 was related to increases in stock-based compensation and depreciation.

Other expenses increased by $11,020,570, which was primarily the loss recognized on the sale of Infusionz and select CBD assets, the reserves against amounts owed to the Company by the buyers of that business, the impairment of Interactive Offers intangible assets and an increase of interest expense from both acquisition debt and the termination of a $15,000,000 senior secured debt facility on October 1, 2022.

Management estimates based on the current and expected debt balances in fiscal year 2024 that interest expense will be less than $2,800,000 and cash paid for interest expense to be less than $1,400,000.

The Company had a net loss of $16,930,289 compared to a net loss of $2,100,850 in the prior year.

The decrease in the net losses primarily related to the above-mentioned changes, which was offset by the net loss attributable to non-controlling interest of our consolidated subsidiary.

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.

Segment Information

The Company provides the following segments:

(a) branded product segment and (b) product distribution segment.

For the year ended June 30, 2023:

Branded Products

Loss from operations

$ (6,945,411 )

$ (7,552,007 )

Other (expense)

$ (10,378,183 )

$ (10,919,488 )

Depreciation expense

Income tax benefit

Segment assets:

Additions to property, plant, and equipment

Liquidity and Capital Resources

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Years Ended June 30,

Cash flows provided by operating activities

Cash flows used in investing activities

Cash flows provided by operating activities – continuing operations

Cash flows used in investing activities – continuing operations

(10,903,318 )

Cash flows provided by financing activities

Net increase (decrease) in cash during period

Cash flows used in financing activities – continuing operations

Cash flows used by operating activities – discontinued operations

Cash flows provided by (used by) investing activities – discontinued operations

Cash flows provided by (used by) financing activities – discontinued operations

Net decrease in cash during the period

$ (2,657,515 )

$ (7,384,405 )

On June 30, 2023, the Company had cash of $4,492,291 or a decrease of $2,657,515 from June 30, 2022.

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

The decrease in cash was primarily used for investing in the 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.

The net cash provided by operating activities was $517,697 and offset by cash used in discontinued operations of $315,021.

The loss of $16,284,292 was offset by the non-cash expenses of $5,153,695 depreciation and amortization, impairment of goodwill and identifiable intangible assets, $3,664,538 amortization of stock compensation, $2,212,542 of non-cash loses for the sale of Infusionz $969,098 amortization of consideration discount offset by $3,785,224 changes in deferred tax asset.

The losses were also offset by an increase in liabilities of $3,312,604 and a decrease of $1,905,234 in current assets.

Net cash used in investing activities for the years ended June 30, 2023, and 2022 was $2,574,858 and $10,903,318, respectively.

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.

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.

The principal and interest of the October 2019 Notes are payable in full at the maturity date of April 2021, if not previously converted.

The October 2019 Notes have an interest rate of 8%, total accrued interest is to be repaid at maturity, and are convertible into common stock if the Company enters an initial public offering arrangement which results in the Company’s common stock becoming listed or trading.

The conversion rate was set at $5.00 which is equal to the price of the Company’s common stock sold in the prospectus.

On June 29, 2021, the Company issued 348,309 shares of the Company’s common stock for the full payment of principal and interest of these loans.

On April 28, 2020, the Company entered a Paycheck Protection Program loan for $398,945 in connection with COVID-19.

The loan and accrued interest amounted to $403,277 which was forgiven on June 11, 2021 and recognized as a gain on the extinguishment of debt.

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

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.

On June 3, 2020, the Company entered a loan for $150,000 with the Small Business Administration.

The promissory note as a fixed payment schedule commencing on June 3, 2021, consisting of principal and interest payments of $731 monthly.

The balance of the principal of $150,000 and interest of $6,876 was paid on August 30, 2021 and classified as a current liability on the balance sheet at June 30, 2021.

During December 2020, the Company entered into a note agreement for total proceeds of $750,000 with the Chief Executive Officer of the Company, a related party.

The principal and interest of the note is payable was repaid during the year ended June 30, 2021.

During the year ended June 30, 2021, the Company entered into convertible promissory notes (the “March 2021 Notes”) for total proceeds of $1,000,080.

The term of the March 2021 Notes is two years and bear interest at a rate 8% per annum, compounded annually.

The principal amount and accrued interest of the March 2021 Notes are automatically converted into capital stock of the company upon an initial public offering by the Company at a rate of seventy five percent of the initial public offering price of the shares of capital stock of the Company sold in the initial public offering.

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.

For the year ended June 30, 2023, cash of $7,129,826 was used for two new acquisitions and payment related to prior year acquisitions and $937,564 for the acquisition of property and equipment and improvements to the building purchased in 2022.

This was partially paid for with the $5,492,532, net cash received for the sale of Infusionz and select CBD assets.

Net cash flows used in financing activities for the year ended June 30, 2023, was $285,333 compared to $3,699,744 provided in the year ended June 30, 2022.

The Company had net proceeds of $6,127,893 from the issuance of stock and $7,120,000 in proceeds from the issuance of notes payable, including $1,470,000 of proceeds from a related party note payable, $3,000,000 of proceeds related to a note payable with a security interest in our building in Clearwater and $2,650,000 of unsecured debt.

The newly issued debt was primarily used to repay the senior convertible note payable and the line of credit.

On April 15, 2022, the Company entered into a non-negotiable convertible promissory note in the original principal amount of $1,050,000, as adjusted, (“Cygnet Note”) which can be converted into common stock of the Company at a price of $6.00 per share and is payable in full, to the extent not previously converted, on April 15, 2023.

This note was fully repaid in April of 2023.

In 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 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.

The spread of COVID-19 around the world has caused significant volatility in U.S.

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 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.

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

There was a loss of $3,540 for the change in the derivative liability for the period ended December 31, 2022.

On October 31, 2022, the Company entered into a letter agreement with the accredited investors in which all amounts owed were paid in full and the related convertible notes and all security interests were cancelled.

Additionally, the Company terminated the related Form S-3 registration statement.

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.

The remainder of the loan facility with Acorn Capital, LLC was fully repaid in October of 2022 when the Company received proceeds from the sale of Infusionz, including $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 terminates the agreement with the noteholders.

The Company also terminated the registration statement covering the senior secured notes payable.

In June 2022, the Company executed a promissory note with Allan Marshall, the Company’s Chief Executive Officer, in the original principal amount of $1,500,000 (“Marshall Loan”).

The promissory note has a 2-year term and bears cash interest at the rate of 8.5% per annum with an additional PIK of 3.5% per annum.

The promissory note provides for monthly payments of principal, on an even line 36-month basis, plus cash interest, with a balloon payment of all outstanding principal, cash interest, and PIK interest at maturity.

The Company received and deposited the principal amount on July 31, 2022.

Interest only has been paid related to this loan and $625,000 of principal payments were due at June 30, 2023 and are classified as current portion of notes payable in addition to the principal payments owed during fiscal year 2024.

On February 22, 2023, the Company executed a promissory note with an investor, in the original principal amount of $2,150,000 together with the issuance of 134,000 restricted shares (“the PIK shares”) of the Company’s common stock at a price of $4.53 per share.

The promissory note has a 21-month term and bears interest at 18.11% payable with the PIK shares.

The promissory note provides for 12 monthly payments of principal beginning on December 22, 2023, and PIK interest of restricted shares on the Effective Date of the promissory note.

The Company shall have the right at any time to convert all or any part of the outstanding and unpaid principal into fully paid and non-assessable shares of common stock, or any shares of capital stock or other securities, together with the PIK shares at a price per conversion share equal to $5.00.

On February 22, 2023, the Company executed a promissory note with an investor, in the original principal amount of $560,000.

The promissory note has a 21-month term and bears cash interest at the rate of 10% per annum.

The promissory note provides for monthly payments of interest beginning on March 22, 2023, and 12 monthly payments of principal beginning on December 22, 2023.

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

59 unchanged sentences

$ (16,930,289 )

$ (2,100,850 )

Interest expense, net

1 unchanged sentence

Stock compensation

Stock issued for services

Loss on the sale of Infusionz and select assets

Change in derivative liability

Gain on lease settlement

Gain on SBA PPP loan f orgiveness

Loss (gain) on discontinued operations

Gain on SBA PPP loan forgiveness

(Loss) income attributable to non-controlling interest

Lease impairment, California facility

Gain on sale of asset

Impairment of Intangible assets

Non-GAAP adjusted EBITDA

$ (1,603,248 )

Use of Non-GAAP Financial Measures

9 unchanged sentences

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