Form 10-K Summary
Registrant and period: The filing is for Reviv3 Procare Company, not Axil Brands, Inc., and covers the fiscal year ended May 31, 2022, with comparative fiscal 2021 data. The filing was signed August 25, 2022. The requested “2021 Q4” period does not match the filing’s annual reporting period.
Business Context
The company manufactured, marketed and distributed outsourced hair and skin care products under the Reviv3 Procare brand through business-to-business distributors, direct-to-consumer e-commerce and third-party platforms. It operated with eight full-time employees and 17 outside consultants, and sold seven products across 16 SKUs.
On June 16, 2022, after the fiscal year-end, the company acquired substantially all of Axil & Associated Brands Corp.’s hearing protection and ear bud businesses. The acquisition excluded Axil’s hearing aid business and therefore was not included in fiscal 2022 operating results.
Financial Metrics
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Net sales | $2,336,257 | $1,633,609 | +43.0% |
| Gross profit | $1,507,671 | $1,033,908 | +45.9% |
| Gross margin | 64.5% | 63.3% | +1.2 percentage points |
| Operating expenses | $1,719,074 | $1,354,962 | +26.9% |
| Operating loss | $(211,403) | $(321,054) | Improved by $109,651 |
| Net loss | $(182,903) | $(297,755) | Improved by $114,852 |
| Net loss per share | $(0.00) | $(0.01) | Not meaningful |
Cost of sales increased 38.2% to $828,586, but declined to 35.5% of sales from 36.7%. Management attributed the improved gross margin to procurement and manufacturing efficiencies and greater direct-to-consumer sales. Marketing and selling expenses increased to $1,199,305 from $730,056, primarily because of higher advertising, delivery and independent marketing contractor costs.
Cash used in operating activities was $126,055, compared with cash provided of $48,407 in fiscal 2021. Investing activities used no cash in fiscal 2022, versus $15,408 in fiscal 2021. Financing activities provided $2,849, compared with $54,907 in fiscal 2021. Year-end cash was $373,731, down from $496,937.
| Balance-sheet item | May 31, 2022 | May 31, 2021 |
|---|---|---|
| Total assets | $893,915 | $1,262,764 |
| Total liabilities | $709,203 | $917,116 |
| Stockholders’ equity | $184,712 | $345,648 |
| Accounts payable and accrued expenses | $458,263 | $458,962 |
| Loans payable | $156,300 | $156,300 |
| Accumulated deficit | $(5,291,567) | $(5,108,664) |
The outstanding loans consisted primarily of a $150,000 EIDL and a $6,300 PPP loan. The filing states that neither loan had received installment payments and both were in default as of May 31, 2022. The company also had $5,500 of equipment financing and $47,166 of current lease liabilities.
Material Changes and Unusual Items
- Revenue growth was driven primarily by direct-to-consumer sales and higher-margin product channels.
- Inventory declined to $323,388 from $450,978, including a $71,481 slow-moving inventory write-off in fiscal 2022 versus $23,714 in fiscal 2021.
- Other income included a $35,000 gain on debt settlement and $25,000 of California COVID-19 relief grants. Financing cash flows also included $35,000 of SBA-related grant proceeds.
- The company granted officers options to purchase 5.3 million common shares at $0.09 per share, with an aggregate grant-date fair value of $477,000. None were vested at May 31, 2022.
- Two customers represented approximately 31% of fiscal 2022 sales. Four vendors represented approximately 97% of inventory and product purchases.
- The company’s acquisition of Axil closed after year-end for 73,183,893 common shares and 250,000,000 non-voting Series A preferred shares, convertible one-for-one into common shares subject to lock-up and ownership limitations. Preliminary purchase consideration was approximately $4.0 million, including estimated goodwill of $315,803.
- Unaudited pro forma information, assuming the Axil acquisition occurred June 1, 2021, showed revenue of $18,356,862 and net loss of $3,212,320 for the twelve months ended May 31, 2022. The filing cautions that the pro forma information is not indicative of future results.
Guidance, Outlook and Risks
Management expected operating losses to continue during fiscal 2023 and stated that additional capital would be required. The company planned to pursue private or public offerings and expected to expand product lines, direct-to-consumer sales and the acquired hearing enhancement business. No quantified revenue, earnings or cash-flow guidance was provided.
The auditor and management identified substantial doubt about the company’s ability to continue as a going concern because of recurring losses, negative operating cash flow, a $5.3 million accumulated deficit and potentially insufficient cash to fund operations. Continued operations depend on raising capital, increasing revenue and achieving profitability; the filing states that financing may not be available on acceptable terms or at all.
Principal risks include defaulted SBA loans, customer and supplier concentration, inventory obsolescence, dependence on outsourced manufacturing and Chinese vendors, inflation, supply-chain disruption, labor shortages, COVID-19 effects, reduced discretionary spending, competition, limited trading liquidity, potential dilution from equity financing and outstanding options, and integration and execution risks related to the Axil acquisition.
A lawsuit filed by Jacksonfill, LLC alleges breach of contract relating to unpaid products and alleged manufacturing discrepancies. The company intends to defend the claim; the claimed amount of $204,182 was recorded in accounts payable. Management stated that no other known legal proceedings were expected to have a material adverse effect, but litigation outcomes remain uncertain.
Important Facts to Verify
- Confirm the intended issuer and period: the source filing identifies Reviv3 Procare Company and fiscal year 2022, not Axil Brands, Inc. or 2021 Q4.
- Verify the status, repayment terms and default consequences of the $156,300 of SBA-related loans.
- Assess whether the company obtained additional financing and whether it remained a going concern after August 25, 2022.
- Review final purchase accounting for the June 2022 Axil acquisition, including goodwill, acquired liabilities, deferred revenue and intangible assets.
- Evaluate dilution and control implications of the 73.2 million common shares, 250 million convertible preferred shares, 5.3 million officer options and voting agreement.
- Review subsequent operating results to determine whether Axil generated the expected revenue and cash-flow improvement.
- Monitor the Jacksonfill litigation and the recorded $204,182 claim.