AXIL Brands, Inc. Form 10-Q Summary
Business Context and Reporting Period
AXIL Brands, Inc. changed its name from Reviv3 Procare Company effective February 14, 2024 and uplisted from the OTC markets to NYSE American on the same date. The company sells hearing enhancement, hearing protection, wireless audio, hair care, and skin care products through direct-to-consumer and other channels. The filing covers the three and nine months ended February 29, 2024, compared with February 28, 2023. Fiscal year-end is May 31, 2024.
Financial Performance and Position
| Metric | Three Months Ended February 29, 2024 | Three Months Ended February 28, 2023 | Nine Months Ended February 29, 2024 | Nine Months Ended February 28, 2023 |
|---|---|---|---|---|
| Net sales | $6.47 million | $5.66 million | $21.00 million | $16.63 million |
| Gross profit | $4.62 million | $4.22 million | $15.53 million | $12.54 million |
| Gross margin | 71.5% | 74.6% | 74.0% | 75.4% |
| Operating income (loss) | $(0.10) million | $0.22 million | $1.33 million | $1.40 million |
| Net income | $0.78 million | $0.16 million | $1.95 million | $1.06 million |
| Basic earnings per share | $0.13 | $0.03 | $0.33 | $0.19 |
- Nine-month sales increased 26.3%, primarily from increased marketing spending and stronger sales channels. Hearing enhancement and protection sales increased to $19.97 million from $15.42 million, while hair and skin care sales declined to $1.02 million from $1.21 million.
- Third-quarter sales increased 14.4%. Higher transportation costs and a greater mix of lower-margin products reduced gross margin.
- Nine-month operating expenses increased 27.4% to $14.20 million, including higher marketing, public-company, professional, and consulting costs. Operating expenses were 67.6% of sales versus 67.0% in the prior period.
- Third-quarter operating results moved to a loss because expense growth exceeded gross-profit growth. Net income benefited from an $827,436 income-tax benefit.
- The nine-month income-tax benefit was $397,054, primarily from reversal of a prior-year tax liability and recognition of net operating losses. These tax benefits materially increased reported net income.
- Cash was $4.89 million at February 29, 2024, compared with $4.83 million at May 31, 2023. Total assets were $12.71 million and stockholders’ equity was $8.79 million.
- Inventory increased to $3.44 million from $1.31 million, and accounts payable increased to $1.89 million from $0.91 million.
- Nine-month operating cash flow was $339,323, down from $2.32 million. The primary use of cash was a $2.13 million increase in inventory.
- Capital expenditures were $80,192. Financing cash outflow was $204,246, including debt repayments and related-party activity.
- Total notes payable were $147,150, consisting primarily of an Economic Injury Disaster Loan with a stated maturity of May 18, 2050. Current lease liabilities were $54,322.
Material Changes Versus the Prior Comparable Period
- Revenue growth continued, but profitability from operations weakened: nine-month operating income declined 4.8%, and the third quarter shifted from operating income of $216,588 to an operating loss of $103,879.
- Gross margin declined because of transportation costs and lower-margin product mix, while marketing and public-company costs increased substantially.
- Cash generation deteriorated despite higher net income, primarily because of inventory investment and working-capital requirements.
- The company’s customer and product concentration increased in certain areas. One hair and skin care customer represented 52% of third-quarter sales, and the largest outsourced manufacturing vendor represented 78.3% of third-quarter purchases and 89.2% of nine-month purchases.
- The company completed a 1-for-20 reverse stock split effective January 16, 2024. The financial statements retroactively reflect the split.
- On March 5, 2024, after quarter-end, the company repurchased 207,748,250 Series A Preferred shares for approximately $1.25 million in cash. The shares were convertible into approximately 10.39 million common shares on an as-converted basis, leaving 42,251,750 Series A Preferred shares outstanding.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management expects net income and positive operating cash flow for the fiscal year ending May 31, 2024 and believes existing cash plus anticipated operating cash flow will fund operations for at least one year from issuance of the financial statements.
- Management plans to invest in marketing, introduce new products, expand the customer base, and improve procurement and logistics. The filing does not provide quantitative revenue or earnings guidance.
- Management cautions that cash consumption may exceed expectations and that additional financing may be unavailable or costly. The company is dependent on product sales to fund operations.
- The company disclosed material weaknesses: disclosure controls and procedures and internal control over financial reporting were not effective as of February 29, 2024. Remediation includes third-party systems support, additional accounting personnel, improved review procedures, segregation of duties, and documentation of controls.
- The company settled litigation with Jacksonfill, LLC for $125,000 in September 2023. A previously recorded reserve exceeded the settlement amount, resulting in a $79,182 gain included in other income.
- Management identifies risks from macroeconomic conditions, inflation, supply-chain disruption, competition, product demand, cybersecurity, intellectual property, litigation, reliance on outsourced manufacturing, customer concentration, tax matters, and the ability to remediate control deficiencies and maintain the NYSE American listing.
- Cash exceeding FDIC insurance limits was approximately $4.15 million at February 29, 2024. The filing states that the company has not experienced losses on these deposits.
Important Facts for Investors to Verify
- Verify whether the company can sustain revenue growth while restoring gross margin and controlling marketing, consulting, and public-company expenses.
- Assess inventory levels, inventory turnover, and working-capital needs given the substantial increase in inventory and reduced operating cash flow.
- Evaluate the impact of the $1.25 million preferred-share repurchase on cash liquidity, capitalization, voting control, and potential common-share dilution.
- Review the nature, severity, and remediation progress of the disclosed material weaknesses in internal control and disclosure controls.
- Assess customer and supplier concentration, particularly the 52% third-quarter sales contribution from one hair and skin care customer and the dependence on one primary manufacturing vendor.
- Separate recurring operating performance from the $397,054 nine-month and $827,436 quarterly tax benefits and the $79,182 litigation-settlement gain.
- Confirm the conversion terms and restrictions applicable to the remaining Series A Preferred shares and the resulting potential dilution.