Business Context and Reporting Period
The filing is a Form 10-Q for the quarter and six months ended November 30, 2021, filed January 13, 2022. The registrant is identified in the filing as Reviv3 Procare Company, not Axil Brands, Inc.; this entity discrepancy should be verified. The company manufactures, markets, sells, and distributes professional hair and skin care products in the United States, Canada, Europe, and Asia. Manufacturing is outsourced to co-packers and other manufacturing partners.
The financial statements are unaudited. The company reported 41,945,881 common shares outstanding as of November 30, 2021.
Financial Performance and Position
| Metric | Three Months Ended November 30, 2021 | Three Months Ended November 30, 2020 | Six Months Ended November 30, 2021 | Six Months Ended November 30, 2020 |
|---|---|---|---|---|
| Sales | $493,816 | $644,061 | $1,333,088 | $912,515 |
| Gross profit | $381,016 | $396,233 | $856,392 | $528,428 |
| Gross margin | 77% | 62% | 64% | 58% |
| Operating income/(loss) | $(5,237) | $54,558 | $(19,711) | $(13,482) |
| Net income/(loss) | $28,201 | $53,103 | $12,162 | $(16,166) |
| Operating cash flow | Not separately provided | Not separately provided | $(28,060) | $161,059 |
Six-month operating expenses increased 62% to $876,103, and operating expenses represented 66% of sales versus 59% in the prior-year period. The six-month net profit included $35,000 of gain on loan forgiveness and $25,000 of California COVID-19 relief grants, as well as $10,000 of EIDL loan forgiveness. No income tax provision was recorded.
At November 30, 2021, cash was $480,850, total current assets were $884,280, and total assets were $1.06 million. Current liabilities were $698,740, and total liabilities were $702,590. Stockholders’ equity was $357,810, while accumulated deficit was $5.10 million. Current inventory was $302,491, compared with $450,978 at May 31, 2021.
Total loan payable was $156,300, all classified as current at November 30, 2021. Equipment payable totaled $7,150, and current lease liability was $91,599. The EIDL loan was described as being in default because no installments had been paid; the Second Draw PPP loan was also described as in default because no installments had been paid.
Material Changes Versus the Prior Comparable Period
- Six-month sales increased 46% to $1.33 million, attributed primarily to growth in direct-to-consumer and distribution sales.
- Quarterly sales declined 23% to $493,816, primarily because supply-chain disruptions reduced distribution-channel sales.
- Six-month gross margin improved to 64% from 58%, and quarterly gross margin improved to 77% from 62%, driven by a greater mix of higher-margin direct-to-consumer sales.
- Six-month operating expenses rose $334,193, primarily from increased marketing, advertising, and shipping costs.
- Six-month operating cash flow changed from $161,059 provided to $28,060 used, despite the reported net profit. The change reflected working-capital movements and the noncash $35,000 debt-forgiveness gain.
- Cash declined by $16,087 during the six months, compared with a $170,467 increase in the prior-year period.
- Related-party advances payable to the chief executive officer declined to $32,927 from $54,304 after $21,377 of repayments.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management expects losses to continue during fiscal 2022, although it stated that current cash and anticipated operating cash flow should fund operations for at least one year from the financial statement issuance date. Management also stated that additional capital may be required and that it may seek private or public financing, with no assurance that financing will be available on acceptable terms or at all.
The financial statements include a going-concern warning. The accumulated deficit and potentially insufficient cash to support daily operations raise substantial doubt about the company’s ability to continue as a going concern for 12 months from issuance. If financing and revenue generation are insufficient, management stated that the company could be forced to cease operations or seek bankruptcy protection.
- COVID-19 may disrupt suppliers, manufacturing, labor availability, customer demand, shipping, and access to financing. Chinese facilities had previously been temporarily closed.
- One customer represented approximately 12% of quarterly sales. Two customers represented approximately 34% of six-month sales.
- Four customers represented approximately 76% of accounts receivable.
- A lawsuit by Jacksonfill, LLC alleges breach of contract and nonpayment relating to allegedly defective products. The claimed amount is $204,182 and has been recorded in accounts payable.
- Cash held above FDIC insurance limits was approximately $213,766 at November 30, 2021.
- Disclosure controls and internal control over financial reporting were deemed ineffective because of material weaknesses involving insufficient accounting personnel, lack of independent directors, and inadequate segregation of duties. Management stated that reliance on third-party accounting and consulting services and recruitment of independent directors are expected remediation steps.
- The company relies on a limited supplier base; three vendors represented approximately 96% of purchases during the six months ended November 30, 2021.
Important Facts for Investors to Verify
- Confirm whether this filing belongs to Axil Brands, Inc. or Reviv3 Procare Company, as the filing identifies Reviv3 Procare Company as the registrant.
- Assess the going-concern warning, available cash, recurring operating cash burn, and feasibility of planned financing.
- Verify the status, repayment requirements, and default consequences of the $150,000 EIDL and $6,300 PPP-2 loans.
- Separate recurring operating profitability from the $35,000 debt-forgiveness gain and COVID-related grants and loan forgiveness.
- Evaluate customer, supplier, inventory, and geographic concentration risks, including the $204,182 Jacksonfill claim.
- Monitor remediation of the material weaknesses in disclosure controls and internal control over financial reporting.