Business Context and Reporting Period
The supplied filing is a Form 10-K for Reviv3 Procare Company, not Axil Brands, Inc. It covers the fiscal year ended May 31, 2020, with comparative results for May 31, 2019. Reviv3 manufactures, markets and distributes hair- and skin-care products through outsourced manufacturers, distributors, salons, e-commerce and other online channels. The company reported 10 products and 16 SKUs, six full-time employees and four outside consultants.
Financial Results and Key Metrics
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Net sales | $1,012,711 | $992,670 | Up 2.0% |
| Cost of sales | $480,778 | $553,017 | Down 13.1% |
| Gross profit | $531,933 | $439,653 | Up 21.0% |
| Gross margin | 52.5% | 44.3% | Up 8.2 percentage points |
| Operating expenses | $703,052 | $589,293 | Up approximately 19.3% |
| Loss from operations | $(171,119) | $(149,640) | Loss increased |
| Net loss | $(172,767) | $(149,975) | Loss increased |
| Cash used in operating activities | $(89,704) | $(175,040) | Improved |
| Cash at period end | $409,031 | $346,179 | Up $62,852 |
Management attributed the gross-margin improvement to procurement and manufacturing efficiencies, lower product costs and greater emphasis on direct-to-consumer sales. Operating expenses rose primarily because advertising and marketing increased by $93,691 and payroll and benefits increased by $16,506.
At May 31, 2020, current assets were $893,064, including $409,031 of cash, $182,201 of net accounts receivable and $288,124 of inventory. Current liabilities were $339,799, producing reported working capital of approximately $553,265. Total liabilities were $638,299 and stockholders’ equity was $504,603.
Total debt-related obligations included $162,900 of CARES Act loans, consisting of a $12,900 PPP loan at 1.0% and a $150,000 EIDL loan at 3.75%, plus $12,100 of equipment financing. The balance sheet also included $203,698 of operating lease liabilities, of which $71,896 was current.
Material Changes Versus the Prior Comparable Period
- Sales increased modestly, but gross profit improved substantially because cost of sales declined faster than revenue.
- Marketing and selling expenses increased to $187,821 from $94,130, while total operating expenses increased to $703,052 from $589,293.
- The net loss widened to $172,767 from $149,975 despite the higher gross profit.
- Operating cash burn improved to $89,704 from $175,040, primarily reflecting increased customer deposits and accounts payable, partially offset by higher receivables and inventory.
- Financing shifted from $309,000 of common-stock proceeds in FY2019 to $162,900 of CARES Act loans and $2,186 of related-party advances in FY2020. No shares were issued during FY2020.
- The company adopted lease accounting guidance and recognized a $201,984 net right-of-use asset and $203,698 lease liability at May 31, 2020.
Outlook, Risks, Contingencies and Unusual Items
- Management expects operating losses to continue during fiscal 2021 and states that substantial doubt exists regarding the company’s ability to continue as a going concern. Management expects to seek additional financing and relies on increased revenue and capital raising to fund operations.
- The independent auditor identified the same going-concern uncertainty, noting the $4,810,909 accumulated deficit at May 31, 2020. The financial statements contain no adjustments for a possible failure to continue as a going concern.
- COVID-19 had a limited material effect on FY2020 results according to management, but future effects could materially affect demand, operations, personnel, supply chains, liquidity and financing access.
- Revenue and supply-chain concentration are material: two customers represented approximately 50% of FY2020 sales, one customer represented approximately 69% of year-end accounts receivable, and one vendor represented approximately 79% of purchases.
- The company had approximately $176,210 of cash above FDIC insurance limits at May 31, 2020.
- Internal controls over financial reporting and disclosure controls were deemed ineffective because of material weaknesses involving insufficient qualified accounting personnel, lack of independent directors and inadequate segregation of duties. The auditor did not provide an internal-control attestation.
- The company has no established national trading market, its common stock trades over OTC Link under RVIV, and the stock is subject to penny-stock restrictions. The May 31, 2020 closing bid range was $0.10 to $0.38.
- On July 20, 2020, the company agreed to issue 200,000 common shares valued at $16,000 to a vendor for past services.
Most Important Facts to Verify
- Verify the issuer identity: the provided filing names Reviv3 Procare Company, while the request identifies Axil Brands, Inc.
- Confirm the terms, forgiveness eligibility and remaining balances of the PPP and EIDL loans.
- Assess the going-concern dependence on additional financing and whether subsequent financing was obtained.
- Review customer, receivable and supplier concentration and the collectability of the $182,201 receivable balance.
- Evaluate remediation of the disclosed material weaknesses and the absence of independent directors and an audit committee financial expert.
- Confirm the July 2020 share issuance commitment and any additional dilution after the reporting date.