SEC Filing Summary
Filing and entity: The provided Form 10-K identifies the registrant as Reviv3 Procare Company, not Axil Brands, Inc. The report covers the fiscal year ended May 31, 2018, with comparative fiscal 2017 data, and was filed August 10, 2018. The filing states that the company later traded under the symbol “RVIV,” although no active trading market existed at the reporting date.
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 eight products and 14 SKUs and sold through distributors, salons, its e-commerce site and third-party online platforms across the United States, Canada, Europe and Asia.
- Fiscal year ended May 31, 2018; fiscal 2017 is the prior comparable period.
- Six full-time employees and four outside consultants were reported.
- The LANU baby-care product line was launched in January 2018.
Financial Performance and Position
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net revenue | $933,218 | $582,005 | Up 60% |
| Gross profit | $356,972 | $300,426 | Up 19% |
| Gross margin | 38% | 52% | Down 14 percentage points |
| Operating expenses | $695,817 | $838,632 | Down 17% |
| Loss from operations | $(338,845) | $(538,206) | Improved |
| Net loss | $(342,539) | $(538,777) | Improved |
| Basic and diluted loss per share | $(0.01) | $(0.01) | No change reported |
| Net cash used in operating activities | $(468,490) | $(369,965) | Higher cash burn |
| Cash at year-end | $227,870 | $416,873 | Down $189,003 |
Cost of sales increased 105% to $576,246, principally because of higher product purchases and shipping costs. Management attributed the margin contraction to increased shipping costs and lower-margin sales to a new direct customer. One customer represented approximately 45% of FY2018 revenue; three customers represented approximately 67%.
At May 31, 2018, total assets were $609,514, including $227,870 of cash and $321,537 of inventory. Total liabilities were $96,169, consisting primarily of accounts payable and accrued expenses. Stockholders’ equity was $513,345, and the accumulated deficit was $4,488,167. The filing reports no outstanding long-term debt; a $675,000 related-party note from 2016 was repaid in September 2016.
Financing activities provided $283,610 in FY2018, including $283,400 from common-stock issuances and $210 of related-party advances. The company had no committed external credit facility or other identified external liquidity source. Operating cash burn exceeded financing inflows, resulting in a $189,003 decrease in cash.
Material Changes Versus the Prior Period
- Revenue increased by approximately $351,000, primarily due to a new direct customer.
- Gross margin declined from 52% to 38% despite higher gross profit.
- Operating expenses declined by approximately $143,000, driven mainly by lower stock-based consulting expense and operating efficiencies.
- Operating cash use increased by approximately $99,000 because of the net loss and a $197,305 increase in inventory.
- Inventory increased from $129,794 to $321,537, while cash declined from $416,873 to $227,870.
- Common shares outstanding increased from 39,679,047 to 40,505,047, primarily through stock issued for cash and services.
- Revenue concentration increased: the top three customers represented approximately 67% of FY2018 sales versus 48% in FY2017.
Outlook, Risks, Contingencies and Unusual Items
- Going concern: Management and the auditor identified substantial doubt about the company’s ability to continue as a going concern because of recurring losses, operating cash outflows, and a $4.49 million accumulated deficit. Management expects losses to continue in fiscal 2019 and plans to seek additional capital, but no assurance is provided.
- Customer and supplier concentration: One customer generated 45% of FY2018 revenue, and one supplier represented approximately 60% of purchases. Loss of a major customer or supplier could materially affect operations.
- Liquidity risk: The company may need additional equity financing or other borrowing. Failure to raise funds or generate sufficient revenue could require cessation of operations or bankruptcy protection.
- Internal controls: Management concluded that disclosure controls and internal control over financial reporting were ineffective because of material weaknesses, including insufficient qualified accounting personnel, lack of independent directors and inadequate segregation of duties. No auditor attestation of internal control effectiveness was included.
- Related parties: The company sold $150,000 of stock to an affiliate of the CEO’s brother and paid $10,100 and $15,430 to CEO- and CEO-family-affiliated entities for advisory services during FY2018. The CEO also provided $210 of short-term, non-interest-bearing advances outstanding at year-end.
- Lease commitment: The company reported $121,929 of remaining operating lease payments for its office and warehouse facility, including $85,664 due within one year.
- Unusual items: The company abandoned $3,285 of inventory held at a former foreign distributor and recorded it in cost of sales. It also recorded $5,562 of inventory obsolescence expense.
- Market and governance: The filing states there was no active market for the common stock at the reporting date, no audit committee or audit committee financial expert, and no independent directors.
- Legal matters: The company reported no pending or threatened legal proceedings.
Most Important Facts to Verify
- Confirm that this filing belongs to Reviv3 Procare Company rather than Axil Brands, Inc., as indicated in the request metadata.
- Reconcile the company’s ability to fund operations with $227,870 of year-end cash, $468,490 of annual operating cash burn and substantial doubt regarding going-concern status.
- Assess whether the 45%-of-revenue customer and concentrated supplier relationships remain in place and on commercially sustainable terms.
- Evaluate whether the 38% gross margin can improve after the FY2018 decline and whether the new direct-customer channel is sufficiently profitable.
- Review the material weaknesses in financial reporting controls and the absence of independent directors and an audit committee.
- Verify future equity financing requirements, potential dilution and the company’s ability to obtain capital without committed financing sources.
- Review related-party stock sales, advisory payments and advances for pricing, necessity and governance implications.