Business Context and Reporting Period
The supplied filing is a Form 10-Q for Reviv3 Procare Company, not Axil Brands, Inc.; investors should verify the registrant identity. The unaudited period ended August 31, 2020, representing the three months ended August 31, 2020, compared with August 31, 2019. Reviv3 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 manufacturing partners.
The company reported 41,485,881 common shares outstanding as of August 31, 2020. It is a smaller reporting company and emerging growth company with no securities registered under Section 12(b).
Financial Performance, Cash Flow, Debt, and Liquidity
| Metric | Three months ended August 31, 2020 | Three months ended August 31, 2019 |
|---|---|---|
| Sales | $268,454 | $125,682 |
| Gross profit | $132,195 | $80,529 |
| Gross margin | Approximately 49% | Approximately 64% |
| Operating expenses | $200,235 | $183,403 |
| Loss from operations | $(68,040) | $(102,874) |
| Net loss | $(69,269) | $(100,609) |
| Operating cash flow | $18,156 provided | $6,130 used |
| Investing cash flow | $12,984 used | $9,230 used |
| Financing cash flow | $8,740 provided | $6,696 provided |
| Ending cash | $422,943 | $337,515 |
At August 31, 2020, total assets were $1.25 million, including $505,750 of inventory and $68,796 of net accounts receivable. Total liabilities were $799,490, and stockholders’ equity was $451,334. Current assets were $1.01 million versus current liabilities of $523,997.
Total loans payable were $162,900, consisting of a $12,900 Paycheck Protection Program loan and a $150,000 Economic Injury Disaster Loan. The company also reported $11,275 of equipment financing payable and $186,939 of operating lease liabilities. Related-party amounts due to the chief executive officer were $11,961 and were payable on demand without interest.
Material Changes Versus the Prior Comparable Period
- Sales increased $142,772, or 114%, primarily due to higher sales from existing distributors, expanded international distribution, and increased direct-to-consumer sales.
- Gross profit increased by $51,666, but gross margin declined to approximately 49% from 64%. Management attributed the decline to high-volume orders at lower margins and increased international freight costs related to COVID-19.
- Operating expenses increased 9% to $200,235. Marketing and selling expenses and professional and consulting expenses increased, while general and administrative expenses declined.
- Net loss narrowed by $31,340, from $100,609 to $69,269. The prior-year period included $2,342 of other income from recovered bad debts; the current period included $1,236 of interest and finance expense.
- Inventory increased to $505,750 from $288,124, primarily because raw materials increased to $477,535 from $258,285.
- Accounts payable and accrued expenses increased to $333,396 from $128,851, while cash increased to $422,943 from $409,031.
- The company issued 200,000 common shares to a consultant for past services, recorded at $16,000, increasing the share count from 41,285,881 to 41,485,881.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management expected operating losses to continue during fiscal 2021. The filing states that the company may need additional capital and intends to seek funding through a private or public offering, but there is no assurance that financing will be available on acceptable terms or at all.
The financial statements include a going-concern disclosure. The company reported an accumulated deficit of $4,880,178 and stated that these conditions raise substantial doubt about its ability to continue as a going concern for 12 months from the issuance date. Management believes it has sufficient capital and liquidity to fund operations for at least one year, but also states that its cash position may not be sufficient to support daily operations.
COVID-19 created risks involving supply availability, shipping, labor, customer demand, international operations, and access to financing. Chinese facilities were temporarily closed and most had reopened by July 2020. The filing states that the specific future financial impact was not determinable.
Revenue concentration increased in certain areas: three customers represented approximately 63% of sales in the current period, and four customers represented approximately 95% of accounts receivable at August 31, 2020. One vendor represented approximately 86% of purchases. Approximately 26% of current-period sales were outside the United States, consisting of Canadian sales.
Disclosure controls and procedures were ineffective because of material weaknesses involving insufficient qualified accounting personnel, lack of independent directors, and inadequate segregation of duties. Management warned that these weaknesses could result in financial statement errors or a restatement. The filing reported no material litigation and no material off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Confirm whether this filing belongs to Axil Brands, Inc. or Reviv3 Procare Company, as the supplied filing names Reviv3 Procare Company throughout.
- Assess the going-concern disclosure, accumulated deficit, recurring losses, and the company’s ability to obtain additional financing.
- Evaluate whether the increase in sales can be sustained while gross margin remains below the prior-year level.
- Review inventory growth, supplier concentration, customer concentration, and the collectability of accounts receivable.
- Verify the terms, repayment obligations, and potential forgiveness of the PPP and EIDL loans.
- Monitor COVID-19 effects on outsourced manufacturing, international freight, customer demand, and supply chains.
- Review remediation of the reported material weaknesses in internal control over financial reporting.
- Confirm the treatment and potential dilution from the 200,000 shares issued for consulting services.