SEC Form 10-Q Summary
Filing discrepancy: The request identifies Axil Brands, Inc., but the provided filing names Reviv3 Procare Company as the registrant. The filing covers the fiscal quarter ended February 28, 2019, and the nine months then ended; financial statements are unaudited.
Business Context and Reporting Period
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 manufacturing partners. Management reported seven products across 13 SKUs and plans to expand its product lines over the following 12 months.
The company is a smaller reporting company and emerging growth company. As of April 10, 2019, 41,277,547 common shares were outstanding.
Financial Results and Key Metrics
| Metric | Three Months Ended February 28, 2019 | Three Months Ended February 28, 2018 | Nine Months Ended February 28, 2019 | Nine Months Ended February 28, 2018 |
|---|---|---|---|---|
| Sales | $281,062 | $219,254 | $662,401 | $466,408 |
| Gross profit | $122,216 | $84,018 | $280,163 | $219,049 |
| Gross margin | 43% | 38% | 42% | 47% |
| Operating expenses | $125,727 | $195,996 | $434,791 | $557,005 |
| Loss from operations | $(3,511) | $(111,978) | $(154,628) | $(337,956) |
| Net loss | $(3,568) | $(112,910) | $(154,911) | $(340,937) |
Quarterly sales increased 28%, while nine-month sales increased 42%. Quarterly gross margin improved to 43%, but nine-month gross margin declined to 42%. Operating expenses declined 36% for the quarter and 22% for the nine-month period. The company remained unprofitable, although losses narrowed materially versus the prior comparable periods.
At February 28, 2019, cash was $400,494, accounts receivable were $38,521, inventory was $427,761, and total current assets were $866,776. Total liabilities were $249,302, including $171,267 of accounts payable and accrued expenses, $58,647 of customer deposits, and $16,178 of equipment financing payable. Stockholders’ equity was $667,434, and accumulated deficit was $4,643,078.
For the nine months, operating activities used $120,214 of cash, investing activities used $13,887, and financing activities provided $306,725. Cash increased $172,624 from May 31, 2018. Financing primarily reflected $304,000 raised through common stock issuances. The filing contains an inconsistency: the going-concern note refers to net cash used in operations of $103,989, while the cash flow statement and MD&A report $120,214.
Material Changes Versus the Prior Comparable Period
- Sales increased by $61,808 for the quarter and $195,993 for the nine-month period.
- Management attributed revenue growth primarily to increased sales to existing customers, greater brand recognition, and a large November 2018 customer order.
- Quarterly gross margin improved because of vendor price concessions associated with higher purchase volume.
- Nine-month gross margin declined because promotional products sold in November 2018 carried lower margins.
- Operating expenses declined primarily because of lower independent-contractor, legal, and professional fees, partly offset by higher rent, insurance, and other general and administrative costs.
- Inventory increased from $321,537 at May 31, 2018 to $427,761 at February 28, 2019, while accounts payable and accrued expenses increased from $79,759 to $171,267.
- The company issued 760,000 common shares for $304,000 in cash and recorded 12,500 shares valued at $5,000 for consulting services.
- The company acquired a forklift under installment financing. The outstanding balance was $16,178, with $3,300 classified as current.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management did not provide quantified revenue, earnings, or cash-flow guidance. It expects losses to continue during fiscal 2019 and intends to expand its product lines. Management expects to seek additional financing through private or public offerings, but stated that there is no assurance such financing or sufficient revenue will be obtained.
The financial statements raise substantial doubt about the company’s ability to continue as a going concern for 12 months from the issuance date. Management stated that cash may not be sufficient to support daily operations and that failure to obtain funding could require cessation of operations or protection under applicable bankruptcy laws.
- Customer concentration is significant: two customers represented approximately 51% of nine-month sales, and one customer represented approximately 50% of quarterly sales.
- Four customers represented approximately 93% of accounts receivable at February 28, 2019.
- Three vendors represented approximately 76% of nine-month purchases, and two vendors represented approximately 92% of quarterly purchases.
- Approximately $129,200 of cash exceeded federally insured limits.
- The company has an operating lease for its California facility, with stated future minimum payments of $57,897.
- Disclosure controls and procedures were deemed 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 errors or a restatement.
- On April 9, 2019, Chris Go was appointed interim Chief Financial Officer, principal financial officer, and principal accounting officer, without a current compensation arrangement.
- The consultant agreement that resulted in the issuance of 12,500 shares was rescinded in January 2019 after the shares had been earned and issued.
- No material litigation was reported. The company reported no material off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Confirm the correct registrant and whether this filing relates to Axil Brands, Inc. or Reviv3 Procare Company.
- Reconcile the conflicting operating cash-flow amount of $103,989 versus $120,214 in the filing.
- Assess the company’s ability to raise additional capital and fund operations given the going-concern disclosure and recurring losses.
- Evaluate whether the November 2018 large customer order and promotional pricing are recurring or nonrecurring.
- Monitor customer, receivable, and supplier concentration and the potential impact of losing a major relationship.
- Verify remediation of the disclosed internal-control material weaknesses and the effectiveness of the interim CFO appointment.
- Assess inventory recoverability, particularly the increase to $427,761 and the company’s exposure to obsolescence or markdowns.