SEC Filing Summary
Registrant and period: The filing is a Form 10-Q for Reviv3 Procare Company, not an entity named Axil Brands, Inc. It covers the three months ended August 31, 2022, with comparison to August 31, 2021. Reviv3 completed the acquisition of substantially all of Axil & Associated Brands Corp.’s hearing protection and ear bud businesses on June 16, 2022.
Business Context
Following the acquisition, the company operates two reportable segments: hearing enhancement and protection, and hair care and skin care. The acquired Axil businesses exclude Axil’s hearing aid line. The company’s products are manufactured through outsourced co-packers and manufacturing partners and sold primarily in the United States.
Financial Performance and Position
| Metric | Three Months Ended August 31, 2022 | Three Months Ended August 31, 2021 |
|---|---|---|
| Sales | $4.237 million | $0.839 million |
| Gross profit | $3.283 million | $0.475 million |
| Gross margin | 77.5% | 56.6% |
| Operating income (loss) | $0.199 million | $(0.014) million |
| Operating margin | 4.7% | (1.7)% |
| Net income (loss) | $0.176 million | $(0.016) million |
| Net margin | 4.1% | (1.9)% |
| Net cash provided by operating activities | $0.808 million | $0.008 million |
- Sales increased approximately 405%, primarily from the Axil acquisition. Hearing products generated $3.752 million, or approximately 89% of consolidated sales; hair and skin care generated $0.485 million.
- Cost of sales was $0.955 million, or 22.5% of sales, compared with 43.4% in the prior-year period. Management attributed the margin improvement to the acquired business’s higher margins.
- Operating expenses increased 529% to $3.083 million, led by $1.978 million of marketing and selling expenses, $0.466 million of professional and consulting expenses, and $0.359 million of general and administrative expenses.
- Net income included a $50,500 gain from settling certain accrued legal and marketing expenses and $97,283 of stock-based compensation expense.
- Cash was $2.243 million at August 31, 2022, compared with $0.374 million at May 31, 2022. Approximately $1.732 million was above FDIC-insured limits.
- Total assets increased to $6.967 million from $0.894 million, including $2.152 million of goodwill and $0.441 million of net intangible assets recognized in the Axil acquisition.
- Inventory increased to $1.233 million from $0.323 million, while contract liabilities were $1.126 million, consisting primarily of unfulfilled warranty obligations and estimated customer returns.
- Total liabilities were $2.502 million. Notes payable totaled $156,300, consisting of a $150,000 EIDL loan and a $6,300 PPP loan; both were reported as current and in default because no installments had been paid.
- Cash flow from operations was supported by net income, noncash compensation, and increases in accounts payable, contract liabilities, and other current liabilities. Investing cash flow of $1.060 million primarily reflected cash acquired in the Axil transaction, net of $6,400 of equipment purchases.
Material Changes Versus Prior Comparable Period
- The Axil acquisition materially changed the company’s scale, product mix, assets, liabilities, and operating results. Approximately 80% of sales came from ear buds for personal sound amplification and hearing protection, compared with 100% hair and skin care sales in the prior-year quarter.
- The company issued 73,183,893 common shares and 250,000,000 non-voting Series A preferred shares as acquisition consideration. The preferred shares are convertible one-for-one into common stock after a two-year restriction period, subject to ownership limitations.
- Common shares outstanding increased from 41,945,881 at May 31, 2022 to 115,129,774 at August 31, 2022. The preferred issuance and potential conversion create substantial potential dilution.
- Management adopted ASU 2021-08 effective June 1, 2022 for acquired contract assets and liabilities.
- The company moved from a prior-year net loss and operating loss to net income and operating income, although the current quarter included acquisition-related changes and a nonrecurring debt-settlement gain.
Outlook, Liquidity, Risks, and Unusual Items
- Management expects to generate net income during fiscal 2023 and believes existing cash and anticipated operating cash flow will fund operations and required debt payments for at least one year from the financial statement issuance date.
- Management cautioned that acquisition-related business demands may increase cash usage and that additional capital may be required. The company stated that financing may not be available on acceptable terms, or at all.
- The EIDL and PPP loans were in default as of August 31, 2022 and at the filing date. The filing does not describe any acceleration or enforcement action.
- A $204,182 claim by Jacksonfill, LLC concerning allegedly defective products remains recorded in accounts payable. The company intends to defend the matter.
- The company is exposed to COVID-19 effects, supply-chain disruption, inflation, labor shortages, reduced discretionary spending, vendor concentration, international operations, cybersecurity, competition, product liability, intellectual-property, regulatory, and acquisition-integration risks.
- Two vendors represented approximately 77% of purchases during the quarter, and international vendors represented approximately 77% of purchases. One customer represented approximately 20% of accounts receivable at quarter-end.
- The company is subject to limitations on selling capital stock under a voting agreement through June 2024, which may constrain future financing alternatives.
- Management reported that disclosure controls and procedures were effective as of August 31, 2022 and that no material changes to internal control over financial reporting occurred during the quarter.
Investor Verification Items
- Confirm the registrant identity and corporate relationship between Reviv3 Procare Company and Axil Brands, Inc.; the provided filing is for Reviv3 Procare Company.
- Verify the final purchase-price allocation for the Axil acquisition, including the provisional $2.152 million goodwill balance and $0.457 million of identifiable intangible assets.
- Assess the conversion terms and potential dilution from the 250 million Series A preferred shares and the 5.3 million unvested stock options.
- Monitor the defaulted $156,300 of CARES Act loans and any related repayment, forgiveness, acceleration, or enforcement developments.
- Evaluate whether the acquired hearing business can sustain reported margins after acquisition-related marketing and selling costs normalize.
- Reconcile cash flow generation with the substantial increases in inventory, contract liabilities, accrued obligations, and other working-capital balances.
- Review the Jacksonfill litigation, the $204,182 recorded payable, and other related-party payments and balances disclosed in the filing.
- Verify cash held above FDIC insurance limits and the company’s ability to obtain additional financing if operating cash needs increase.