Business Context and Reporting Period
The filing is a Form 10-Q for the three months ended August 31, 2023, filed October 12, 2023. Although the request identifies Axil Brands, Inc., the registrant named in the filing is Reviv3 Procare Company and Subsidiary. The company sells hearing enhancement and protection products, wireless audio products, and hair and skin care products. The hearing business was acquired from AXIL in June 2022.
The company is a non-accelerated filer and smaller reporting company. The financial statements are unaudited.
Key Financial Metrics
| Metric | Three Months Ended August 31, 2023 | Three Months Ended August 31, 2022 |
|---|---|---|
| Net sales | $6.106 million | $4.237 million |
| Cost of sales | $1.459 million | $0.955 million |
| Gross profit | $4.648 million | $3.283 million |
| Gross margin | 76.1% | 77.5% |
| Operating expenses | $4.474 million | $3.083 million |
| Operating income | $173,757 | $199,401 |
| Net income | $154,452 | $175,527 |
| Net margin | Approximately 2.5% | Approximately 4.1% |
| Cash flow from operating activities | $397,172 | $807,633 |
Hearing enhancement and protection revenue was $5.791 million, compared with $3.752 million in the prior-year quarter. Hair and skin care revenue was $314,853, compared with $485,236. Marketing and selling expense increased to $3.207 million from $1.978 million, primarily reflecting higher AXIL advertising and promotional spending.
At August 31, 2023, cash was $5.062 million and total current assets were $8.073 million. Total current liabilities were $3.429 million, implying a current ratio of approximately 2.4x. Total liabilities were $4.009 million, including $155,334 of notes payable, $87,208 of lease liabilities, and $1.471 million of contract liabilities. Stockholders’ equity was $6.878 million, while accumulated deficit was $3.313 million.
Cash increased by $229,041 during the quarter. Investing activities used $50,960 for property and equipment, and financing activities used $117,171 primarily for debt repayment and payments to a related party. Inventory increased to $2.070 million from $1.312 million at May 31, 2023.
Material Changes Versus the Prior Comparable Period
- Revenue increased $1.869 million, or 44.1%, primarily from higher AXIL product demand and increased online and non-digital marketing.
- Cost of sales increased 52.8%, and cost of sales as a percentage of revenue rose to 23.9% from 22.5%.
- Gross margin declined to 76.1% from 77.5%, which management attributed principally to expanded marketing, promotional activities, and related product-awareness costs.
- Operating expenses increased $1.391 million, or 45.1%; marketing and selling expense accounted for most of the increase.
- Operating income declined $25,644, or approximately 12.9%, and net income declined $21,075, or approximately 12.0%.
- Operating cash flow declined $410,461, or approximately 50.8%, largely because inventory increased substantially, compared with an inventory reduction in the prior-year period.
- The prior-year quarter included $1.066 million of cash acquired in the AXIL acquisition; no comparable acquisition cash was received in the current quarter.
- Hair and skin care revenue declined approximately 35.1%, while hearing enhancement and protection revenue increased approximately 54.3%.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management expects to generate net income and positive operating cash flow during the fiscal year ending May 31, 2024. Management believes existing cash and anticipated operating cash flow will fund working capital and debt obligations for at least one year from issuance of the financial statements, but provides no assurance that revenue growth, cash conservation, or additional financing will be sufficient.
- The company remains dependent on product sales and states that additional capital may be required. Financing may be unavailable, costly, or dilutive, and the company warns that failure to obtain funding could require curtailment of operations or creditor protection.
- Approximately $4.310 million of cash exceeded FDIC insurance limits at August 31, 2023.
- The largest AXIL supplier accounted for approximately 94.6% of AXIL purchases during the quarter, creating supplier-concentration risk.
- Three hair and skin care customers represented approximately 40% of consolidated sales. Approximately 96% of consolidated sales were to U.S. customers.
- The company reported that disclosure controls and internal control over financial reporting were not effective as of August 31, 2023. Remediation includes third-party accounting-system support, additional accounting personnel, enhanced review of non-routine entries, segregation-of-duties improvements, and documentation of procedures.
- On September 2, 2023, the company settled the Jacksonfill litigation for $125,000 without admitting liability. It had recorded a $204,182 reserve and expects to adjust the excess reserve in the subsequent reporting period.
- The company paid $58,000 in product-development consulting fees to a major AXIL stockholder and $35,805 to his sons for packaging-design and affiliate-marketing services during the quarter. The CEO is also a managing director of Intrepid Global Advisors, which held 19.5% of the company as of August 31, 2023.
- The company had 250 million shares of convertible, non-voting Series A preferred stock outstanding, in addition to 117.1 million common shares. Conversion and stock options create substantial potential dilution.
Important Facts for Investors to Verify
- Confirm the correct issuer and security identity, because the supplied company name differs from the registrant named in the filing.
- Assess whether AXIL revenue growth can continue without further increases in marketing spending and whether the lower gross margin stabilizes.
- Review inventory growth, product demand, return reserves, warranty-related contract liabilities, and the company’s ability to convert earnings into cash.
- Evaluate liquidity after considering uninsured cash balances, current debt maturities, lease obligations, related-party balances, and the company’s stated dependence on product sales.
- Monitor remediation of ineffective disclosure and financial reporting controls.
- Review the economic and voting effects of the 250 million convertible preferred shares, outstanding options, and restrictions on capital-stock sales through June 2024.
- Verify the subsequent-period accounting adjustment related to the Jacksonfill settlement and the final resolution of the recorded reserve.