AXIL

Business Context and Reporting Period

Axil Brands, Inc. (AXIL) filed its Form 10-Q for the quarterly period ended November 30, 2024. The Company, formerly Reviv3 Procare Company, operates in two reportable segments: hearing enhancement and protection, and hair care and skin care. Effective February 14, 2024, the Company uplisted to the NYSE American. The Company is classified as a non-accelerated filer and a smaller reporting company.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 8% ($689k) for the quarter and 6% ($944k) for the six months compared to the prior year. Management attributes this to the timing of post-Thanksgiving sales events (recognized in Q3 this year vs. Q2 last year), reduced advertising spend, and increased discounts.
• Margin Compression: Gross profit margins declined from 74.3% to 71.1% (quarterly) and 75.1% to 71.1% (six-month). This was driven by a shift in sales mix toward lower-margin distributor sales in the hair care segment and lower-margin products in the hearing segment.
• Operating Expenses: Total operating expenses decreased slightly (3% quarterly, 4% six-month) due to lower advertising costs and a one-time forgiveness of approximately $220,000 in accounts payable. However, this was partially offset by a significant increase in stock-based compensation ($304k quarterly vs. $51k prior year).
• Net Income: Net income decreased 38% for the quarter and 55% for the six months. The decline is attributed to lower gross profit, higher stock-based compensation, and the absence of a $79k gain on debt settlement recorded in the prior year.
• Balance Sheet: Cash increased by $1.96M during the six-month period. Accounts receivable grew significantly to $1.44M from $510k, while inventory decreased by $730k as the Company sold down stock built up in the prior year.

Outlook, Risks, and Unusual Items

• Guidance: Management expects to earn net income and positive cash flows for the fiscal year ending May 31, 2025. They believe current cash balances and operating cash flows are sufficient to meet working capital requirements for at least one year.
• Unusual Items:
  • Debt Forgiveness: A $218,699 gain on the forgiveness of accounts payable related to royalties was recorded in the current period, improving operating cash flow.
  • Stock-Based Compensation: Significant non-cash expense ($602k for six months) due to new grants to officers and consultants for market expansion.
• Risks and Contingencies:
  • Liquidity: While currently sufficient, the Company notes it may require additional capital in the future, which may not be available on favorable terms.
  • Concentration: Manufacturing is outsourced; the two largest vendors accounted for 73.2% and 15.9% of purchases in the quarter. One customer accounted for 14.5% of accounts receivable.
  • Legal: The Company is involved in ordinary course legal proceedings but does not expect a material adverse effect.

Investor Verification Checklist

• Verify the sustainability of the $220k accounts payable forgiveness and whether similar one-time gains are expected in future periods.
• Monitor the impact of increased stock-based compensation on future earnings, particularly as new grants vest.
• Assess the Company's ability to recover gross margins as it shifts sales mix back to higher-margin direct-to-consumer channels.
• Review the timing of post-Thanksgiving sales recognition to ensure Q3 2024 results reflect the anticipated revenue shift.
• Confirm the status of the $143k EIDL loan repayment schedule and any potential refinancing needs.