Business Context and Reporting Period
The filing is a Form 10-K for Reviv3 Procare Company, not Axil Brands, Inc. It covers the fiscal year ended May 31, 2019, with comparison to May 31, 2018; the source does not present a separate 2018 Q4 quarterly period. Reviv3 manufactures, markets and distributes hair- and skincare products through distributors, e-commerce channels and direct-to-consumer sales in the United States, Canada, Europe and Asia. Manufacturing is outsourced to co-packers and manufacturing partners.
The company reported eight products and 14 SKUs, six full-time employees and four outside consultants. Its LANU baby-care line was launched in January 2018, with marketing planned for fiscal 2019.
Financial Performance and Position
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $992,670 | $933,218 | +6.4% |
| Cost of sales | $553,017 | $576,246 | -4.0% |
| Gross profit | $439,653 | $356,972 | +23.2% |
| Gross margin | 44.3% | 38.3% | +6.0 percentage points |
| Operating expenses | $589,293 | $695,817 | -15.3% |
| Loss from operations | $(149,640) | $(338,845) | Improved |
| Net loss | $(149,975) | $(342,539) | Improved |
| Net loss per share | $(0.00) | $(0.01) |
Management attributed sales growth primarily to organic growth in direct-to-consumer sales. Gross-margin expansion reflected negotiated product costs, procurement and manufacturing efficiencies, and a greater focus on direct sales. Operating expenses declined mainly because of lower consulting, legal and accounting costs, partly offset by higher rent and public-filing expenses.
| Cash flow and balance-sheet metric | May 31, 2019 / FY2019 | May 31, 2018 / FY2018 |
|---|---|---|
| Cash and cash equivalents | $346,179 | $227,870 |
| Net cash used in operating activities | $(175,040) | $(468,490) |
| Net cash used in investing activities | $(14,361) | $(4,123) |
| Net cash provided by financing activities | $307,710 | $283,610 |
| Total assets | $741,464 | $609,514 |
| Total liabilities | $64,094 | $96,169 |
| Stockholders’ equity | $677,370 | $513,345 |
| Accumulated deficit | $(4,638,142) | $(4,488,167) |
Financing cash flow consisted primarily of $309,000 from common-stock issuances. The company had equipment financing of $15,210 at May 31, 2019, including $3,300 current and $11,910 long term. It reported no institutional credit arrangements or other external liquidity sources and stated that additional equity financing may be required.
Material Changes Versus the Prior Comparable Period
- Sales increased 6.4%, while cost of sales declined 4.0%, producing a 600-basis-point improvement in gross margin.
- Operating expenses fell 15.3%, and the net loss decreased by $192,564.
- Operating cash use improved by $293,450, but operations remained cash-flow negative.
- Cash increased by $118,309, principally because of approximately $309,000 in equity proceeds.
- Accounts receivable increased to $79,588 from $29,991, while inventory declined to $264,578 from $321,537.
- Common shares outstanding increased to 41,285,881 from 40,505,047, reflecting equity issuances for cash and services.
- The company adopted ASC 606 effective June 1, 2018; management reported no material impact. ASC 842 was adopted effective June 1, 2019, also with no material impact reported.
Guidance, Outlook, Risks and Unusual Items
- Going concern: Management expects losses to continue during fiscal 2020. The auditor and management stated that recurring losses, negative operating cash flow and the $4.64 million accumulated deficit raise substantial doubt about the company’s ability to continue as a going concern. Management expects to seek private or public financing, but no assurance is provided that funding will be available.
- Liquidity risk: The company depends on product sales and additional common-stock sales to fund operations. It stated that failure to obtain sufficient funding could force cessation of operations or a bankruptcy filing.
- Customer and supplier concentration: Two customers represented approximately 54% of FY2019 sales. Three vendors represented approximately 76% of purchases. Five customers represented approximately 94% of year-end accounts receivable.
- Geographic concentration: Approximately 26% of FY2019 sales were outside the United States, primarily Canada.
- Market and execution risk: Hair-care and cosmetics markets are highly competitive. The company has limited operating history, a small workforce, outsourced manufacturing and relies on distributors and online channels.
- Internal controls: Management concluded that disclosure controls and internal control over financial reporting were not effective because of material weaknesses involving insufficient qualified accounting personnel, lack of independent directors and inadequate segregation of duties. There was no auditor attestation on internal controls.
- Governance: The company had no audit, nominating or compensation committees, no audit committee financial expert, no independent directors, and an interim CFO as of the filing.
- Lease commitment: The office and warehouse lease was scheduled to expire in October 2019. Remaining minimum payments disclosed at May 31, 2019 totaled $36,266.
- Unusual items: FY2019 included $5,000 of stock-based compensation and a $1,551 recovery of previously written-off inventory. The company also issued 768,334 shares for $309,000 in cash and 12,500 shares for $5,000 of services during the year.
- Trading and ownership: The common stock began trading on OTCQB in the first quarter of 2019. The filing reported a July 16, 2019 closing price of $1.00, 91 shareholders of record and beneficial ownership of approximately 81% by disclosed beneficial owners.
Most Important Facts to Verify
- Confirm the issuer identity: the supplied filing is for Reviv3 Procare Company, whereas the request identifies Axil Brands, Inc.
- Confirm the intended reporting period: the filing is annual for the fiscal year ended May 31, 2019, not a standalone 2018 Q4 filing.
- Review the going-concern disclosure and determine whether post-filing financing or operating improvements were obtained.
- Assess the sustainability of revenue growth and gross-margin improvement given the company’s customer, supplier and product concentrations.
- Verify cash availability, equity issuance terms, dilution and the company’s ability to fund operating cash deficits.
- Review remediation of the disclosed material weaknesses and the absence of independent directors and an audit committee.
- Confirm the status of the October 2019 facility lease and any subsequent occupancy or financing commitments.