Filing Summary
Source discrepancy: The supplied filing is Reviv3 Procare Company’s Form 10-K for the fiscal year ended May 31, 2021, not an Axil Brands, Inc. filing or a 2020 Q4 report. The summary below reflects the supplied filing.
Business Context and Reporting Period
Reviv3 Procare manufactures, markets, sells and distributes professional hair and skin care products under the Reviv3 Procare and LANU brands. Manufacturing is outsourced to co-packers and manufacturing partners. The company reported seven products and 16 SKUs, selling through distributors, salons, its ecommerce site and third-party online platforms.
The reporting period covers the fiscal years ended May 31, 2021 and May 31, 2020. The company had six full-time employees and seven outside consultants at May 31, 2021.
Financial Results and Key Metrics
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Net sales | $1,633,609 | $1,012,711 | +61.3% |
| Cost of sales | $599,701 | $480,778 | +24.7% |
| Gross profit | $1,033,908 | $531,933 | +94.4% |
| Gross margin | 63.3% | 52.5% | +10.8 percentage points |
| Operating expenses | $1,354,962 | $703,052 | +92.7% |
| Loss from operations | $(321,054) | $(171,119) | Higher loss |
| Net loss | $(297,755) | $(172,767) | Higher loss |
| Net loss per share | $(0.01) | $(0.00) | Not meaningful |
Marketing and selling expenses increased to $730,056 from $187,821, primarily reflecting higher advertising, delivery and independent marketing contractor costs. Professional and consulting expenses increased to $306,172 from $198,752, including stock-based fees.
Net cash provided by operating activities was $48,407, compared with $89,704 of cash used in FY2020. Investing cash use was $15,408, principally for property and equipment. Financing cash provided was $54,907, including $51,907 of related-party advances and $6,300 of Second Draw PPP proceeds. Ending cash was $496,937, compared with $409,031.
At May 31, 2021, total assets were $1,262,764, total liabilities were $917,116 and stockholders’ equity was $345,648. Current assets were $1,041,222 versus current liabilities of $712,411. Inventory totaled $490,852, including $39,874 classified as non-current inventory.
Total loans payable were $156,300, consisting primarily of a $150,000 EIDL loan and a $6,300 Second Draw PPP loan. The original $12,900 PPP loan was forgiven in March 2021. The company also had $131,801 of operating lease liabilities and $54,304 payable to its CEO for non-interest-bearing advances.
Material Changes Versus the Prior Comparable Period
- Sales increased 61.3%, primarily due to growth in direct-to-consumer sales.
- Gross margin improved from 52.5% to 63.3%, attributed to procurement and manufacturing efficiencies, lower product costs and a greater mix of higher-margin direct-to-consumer sales.
- Operating expenses grew faster than gross profit, resulting in a larger operating loss and net loss.
- Operating cash flow improved from a $89,704 use to $48,407 provided, substantially aided by a $346,545 increase in accounts payable and accrued expenses.
- Inventory increased to $490,852 from $288,124, including a $19,156 allowance for slow-moving inventory and a $4,558 inventory write-off.
- Accounts payable and accrued expenses increased to $458,962 from $128,851.
- Common shares outstanding increased to 41,945,881 from 41,285,881, including shares issued or issuable for consulting, investor relations and legal services.
Guidance, Outlook, Risks and Unusual Items
Management expects losses to continue during fiscal 2022 and states that substantial doubt exists regarding the company’s ability to continue as a going concern. Management expects to seek additional capital through a private or public offering, but provides no assurance that financing will be available on acceptable terms or at all.
The filing identifies COVID-19, supply disruptions, dependence on outsourced manufacturing, competition, raw-material costs, customer and product demand, intellectual property protection, employee retention, regulatory changes and execution of growth initiatives as material risks. Chinese vendor facilities were temporarily closed during the pandemic, although most had reopened by July 2020.
A lawsuit filed by Jacksonfill, LLC alleges nonpayment for products and breach of agreement. The company disputes the allegations and believes the products were defective. A claim of $204,182 was recorded in accounts payable as of May 31, 2021.
The independent auditor issued an unqualified opinion on the financial statements but included a going-concern emphasis based on the FY2021 net loss and accumulated deficit of $5,108,664. Management reported material weaknesses in internal control over financial reporting, including insufficient qualified accounting personnel, lack of independent directors and inadequate segregation of duties. Disclosure controls were also deemed ineffective.
Revenue was concentrated: two customers represented approximately 34% of FY2021 sales, and four customers represented approximately 83% of accounts receivable at year-end. Three vendors represented approximately 89% of FY2021 purchases. Cash exceeding FDIC insurance limits was approximately $224,395.
Important Facts for Investors to Verify
- Confirm the issuer and reporting period, because the supplied filing identifies Reviv3 Procare Company rather than Axil Brands, Inc. and covers the fiscal year ended May 31, 2021 rather than 2020 Q4.
- Assess the going-concern qualification, accumulated deficit, recurring losses and the company’s ability to obtain additional financing.
- Review the Jacksonfill litigation, including the $204,182 recorded payable and any potential additional exposure.
- Evaluate whether direct-to-consumer growth and improved gross margins can offset substantially higher advertising, consulting and operating costs.
- Verify debt terms, including the $150,000 EIDL balance, PPP-2 balance and long-dated repayment obligations.
- Assess the material weaknesses in internal controls and the absence of independent directors and an audit committee financial expert.
- Review customer, supplier and geographic concentration, as well as inventory valuation and slow-moving inventory reserves.
- Consider liquidity and marketability risks associated with OTC quotation, limited trading activity, penny-stock rules and the absence of an established trading market.