Axil Brands, Inc. — Form 10-K Summary
Business Context and Reporting Period
Axil Brands, Inc. filed its Form 10-K for the fiscal year ended May 31, 2024, although the request metadata identifies 2023 Q4. The company sells hearing enhancement and protection products and hair and skin care products through two operating segments. Hearing products represented approximately 95% of fiscal 2024 revenue and hair and skin care products approximately 5%.
During fiscal 2024, the company changed its name from Reviv3 Procare Company to AXIL Brands, Inc., completed a 1-for-20 reverse stock split, and uplisted its common stock from OTCQB to NYSE American under the symbol AXIL.
Financial Performance and Position
| Metric | Fiscal 2024 | Fiscal 2023 | Change |
|---|---|---|---|
| Net sales | $27.5 million | $23.5 million | Up 17.0% |
| Gross profit | $20.2 million | $17.7 million | Up 14.0% |
| Gross margin | 73.4% | 75.3% | Down 190 basis points |
| Operating expenses | $18.7 million | $15.7 million | Up 18.8% |
| Income from operations | $1.5 million | $2.0 million | Down 24.2% |
| Operating margin | 5.5% | 8.4% | Down approximately 290 basis points |
| Net income | $2.0 million | $1.8 million | Up 9.8% |
| Net income margin | 7.3% | 7.8% | Down approximately 50 basis points |
| Net cash provided by operating activities | $2,677 | $2.9 million | Material decrease |
| Cash balance | $3.3 million | $4.8 million | Down $1.6 million |
Hearing enhancement and protection revenue increased to $26.1 million from $21.9 million, while hair and skin care revenue declined to $1.4 million from $1.6 million. Hearing product sales shifted toward Bluetooth earbuds and Trackr earmuffs, while Ghost Stryke remained the largest product category.
Sales and marketing expense increased by $1.8 million, and professional and consulting expense increased by approximately $1.2 million, including costs associated with the NYSE American listing. Other income increased to $279,549, primarily because of higher interest income and a $79,182 gain on debt settlement. Net income benefited from the utilization of accumulated tax losses and a $220,205 tax benefit.
Fiscal 2024 investing cash outflows were $160,525, including $138,445 for property and equipment and $22,080 for intangible assets. Financing cash outflows were $1.4 million, principally reflecting the $1.25 million repurchase of preferred stock and debt repayments. The audited cash flow statement reports total financing cash outflows of $1,420,958; the MD&A table reports $1,432,756.
At May 31, 2024, total assets were $11.0 million, total liabilities were $3.3 million, and stockholders’ equity was $7.7 million. Inventory increased to $3.4 million from $1.3 million, including a $46,895 obsolescence reserve. The company had $146,594 of current EIDL debt, bearing interest at 3.75%, and no long-term debt reported on the balance sheet. Contract liabilities totaled $1.4 million.
Material Changes Versus the Prior Comparable Period
- Revenue grew 17%, driven primarily by hearing protection and enhancement sales initiatives.
- Gross margin declined because of costs associated with expansion into new retail and distribution channels.
- Operating income declined despite higher sales because marketing, selling, professional, consulting, and listing-related expenses grew faster than revenue.
- Operating cash generation fell sharply to $2,677, mainly because of a $2.1 million increase in inventory and other working-capital uses.
- The company repurchased 207,748,250 Series A preferred shares for $1.25 million, reducing preferred shares outstanding from 250 million to 42.3 million and recording a $1.33 million deemed dividend or equity benefit related to the repurchase accounting.
- Preferred shares remained convertible into common stock at a 20-to-1 ratio, subject to a 5% beneficial ownership limitation. After year-end, 10 million preferred shares were converted into 500,000 common shares.
- Cash declined by approximately $1.6 million, while inventory increased by approximately $2.1 million.
Guidance, Outlook, Risks, and Unusual Items
Management expects to continue generating net income during fiscal 2025 and believes existing cash and anticipated operating cash flow will fund working-capital requirements for at least one year from the financial statement issuance date. The company plans to expand existing product lines, introduce new products, increase distribution, grow e-commerce and retail channels, and pursue domestic and international opportunities. No specific revenue, earnings, or margin guidance was provided.
Key risks include dependence on product sales to fund operations, the potential need for additional financing, macroeconomic and discretionary-spending pressures, supply-chain disruption, competition, product acceptance, cybersecurity, regulatory compliance, intellectual property protection, litigation, and the company’s ability to maintain its NYSE American listing.
Supplier concentration is significant: one vendor represented 87% of hearing-segment purchases, while two vendors represented 97% of hair and skin care purchases. Approximately 91% of sales were direct-to-consumer through Shopify and Amazon. Approximately 95% of consolidated sales were to U.S. customers.
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. The company has added staff, established an audit committee, engaged a third party, and increased review procedures, but the weaknesses had not been remediated as of the filing date.
The company reports no material off-balance-sheet arrangements. Ordinary-course litigation is not expected by management to have a material adverse effect, although outcomes remain uncertain. The Jacksonfill litigation was settled for $125,000, with a $79,182 gain recognized from excess reserves.
Important Facts for Investors to Verify
- Confirm the correct reporting period: the filing covers the year ended May 31, 2024, not a 2023 quarterly period.
- Reconcile the financing cash-flow discrepancy between the MD&A table and the audited statement of cash flows.
- Assess whether the sharp decline in operating cash flow and substantial inventory buildup are temporary or indicate working-capital pressure.
- Evaluate the sustainability of revenue growth given lower gross and operating margins and substantially higher marketing expenses.
- Review the potential dilution from remaining convertible Series A preferred shares, stock options, restricted stock, and the subsequent 500,000-share conversion.
- Monitor remediation of the material weaknesses in internal control over financial reporting.
- Assess dependence on concentrated suppliers, direct-to-consumer channels, Shopify, Amazon, and paid advertising.
- Verify the company’s ability to fund operations and repay the $146,594 EIDL obligation without additional capital.