Business Context and Reporting Period
This unaudited Form 10-Q was filed by Reviv3 Procare Company for the quarter and six months ended November 30, 2023. The company subsequently received approval to change its name to AXIL Brands, Inc.; the filing had not yet been amended to reflect that change. The business operates in two segments: hearing enhancement and protection products, and hair and skin care products. The hearing business was acquired from AXIL in June 2022.
The company reported 117,076,949 common shares outstanding as of January 4, 2024, plus 250,000,000 outstanding non-voting Series A preferred shares convertible one-for-one into common stock, subject to stated limitations.
Financial Results and Key Metrics
| Metric | Three Months Ended Nov. 30, 2023 | Three Months Ended Nov. 30, 2022 | Six Months Ended Nov. 30, 2023 | Six Months Ended Nov. 30, 2022 |
|---|---|---|---|---|
| Net sales | $8.42 million | $6.73 million | $14.53 million | $10.97 million |
| Gross profit | $6.26 million | $5.04 million | $10.91 million | $8.32 million |
| Gross margin | 74.3% | 74.9% | 75.1% | 75.9% |
| Operating expenses | $4.99 million | $4.05 million | $9.47 million | $7.14 million |
| Income from operations | $1.26 million | $0.98 million | $1.44 million | $1.18 million |
| Net income | $1.02 million | $0.73 million | $1.17 million | $0.90 million |
| Basic earnings per share | $0.01 | $0.01 | $0.01 | $0.01 |
Six-month sales increased 32.4%, while quarterly sales increased 25.1%. Hearing enhancement and protection sales represented approximately $13.98 million, or 96.2% of six-month sales, compared with $10.07 million in the prior-year period. Hair and skin care sales declined to $545,594 from $903,970.
Six-month operating income increased 21.4% and net income increased $270,100, or approximately 29.9%. Quarterly net income increased 40.1%. The filing attributes growth primarily to higher AXIL marketing spending and stronger sales channels.
Marketing and selling expense increased to $6.88 million for the six months, from $5.08 million, while general and administrative expense increased to $1.19 million from $591,000. Cost of sales rose faster than sales, and the filing cites higher transportation costs, discounts, and merchant fees as factors affecting margins.
Balance Sheet, Cash Flow, Debt, and Liquidity
- Cash was $5.96 million at November 30, 2023, compared with $4.83 million at May 31, 2023.
- Total current assets were $10.34 million and total current liabilities were $4.48 million. Working-capital assets included $2.35 million of inventory and $953,315 of net accounts receivable.
- Total assets were $13.13 million and total liabilities were $5.18 million. Stockholders’ equity was $7.95 million, compared with $6.67 million at May 31, 2023.
- Net cash provided by operating activities was $1.25 million for the six months, down from $2.20 million in the prior-year period. Inventory increased by $1.04 million, accounts receivable by $601,000, and prepaid and other current assets by $267,000, partly offset by increases in accounts payable and other liabilities.
- Investing cash flow was a use of $70,845, primarily for property and equipment. Financing cash flow was a use of $51,519, primarily from debt repayments and reduced related-party advances.
- Debt consisted principally of a $147,931 Economic Injury Disaster Loan, including $144,661 classified as long term, and $550 of equipment financing. The EIDL bears interest at 3.75% and matures in 2050.
- Contract liabilities totaled $1.61 million, including $1.37 million related to unfulfilled warranty obligations and $233,804 related to estimated product returns.
Management expects positive net income and operating cash flow for fiscal 2024 and believes existing cash and anticipated operating cash flow will fund requirements for at least one year from issuance of the financial statements. Management also acknowledges that future cash needs, weaker sales, or inability to obtain financing could require additional capital or curtailment of operations.
Material Changes, Outlook, Risks, and Unusual Items
- Business expansion: Growth is concentrated in the AXIL hearing and audio business. Ghost Stryke products represented approximately 55% of six-month hearing product sales, down from approximately 91% for the comparable prior-year period, indicating greater product diversification.
- Customer and supplier concentration: The largest outsourced manufacturer accounted for approximately 91.8% of hearing-product purchases during the six months. Hair and skin care sales and receivables also remain concentrated among a limited number of customers.
- Settlement gain: The company settled the Jacksonfill litigation for $125,000 and recognized a $79,182 gain because the recorded reserve exceeded the final settlement payment.
- Liquidity risks: The company depends on product sales and operating cash flow, has an accumulated deficit of $2.29 million, and states that additional financing may be unavailable or costly. Approximately $5.16 million of cash exceeded FDIC insurance limits at November 30, 2023.
- Control deficiencies: Management concluded that disclosure controls and internal control over financial reporting were not effective as of November 30, 2023. Planned remediation includes additional accounting personnel, improved review of non-routine entries, segregation of duties, and documented procedures.
- Corporate actions: Stockholders approved a name change to AXIL Brands, Inc., an increase in equity-plan shares from 10 million to 25 million, a potential one-for-three to one-for-25 reverse split, and governance amendments. As of the filing date, the board had not implemented these actions.
- Listing objective: The company is seeking a NYSE American listing, but the filing provides no assurance that an application will be accepted.
- Forward-looking risks: Management identifies inflation, discretionary-spending weakness, supply-chain constraints, labor shortages, competition, product acceptance, cybersecurity, regulatory and legal matters, acquisition integration, inventory valuation, and the ability to repay debt or obtain financing as material risks.
Investor Verification Checklist
- Verify the company’s legal name, trading symbol, and whether the approved AXIL Brands name change and any reverse stock split were implemented after the filing date.
- Assess the potential dilution from 250 million convertible preferred shares and outstanding stock options, including the proposed increase in equity-plan capacity.
- Review whether revenue growth and operating cash flow remain dependent on elevated AXIL advertising expenditures and a concentrated overseas supplier base.
- Monitor inventory, accounts receivable, contract liabilities, product returns, and the conversion of these balances into cash.
- Evaluate remediation of ineffective disclosure and financial-reporting controls in subsequent filings.
- Confirm the status of the NYSE American listing effort and any related financing or capital-raising activity.