Business Context and Reporting Period
The filing is a Form 10-Q for Reviv3 Procare Company, not Axil Brands, Inc., covering the three months ended August 31, 2019; the financial statements are unaudited. Reviv3 manufactures, markets, sells, and distributes professional hair and skin care products in the United States, Canada, Europe, and Asia. Manufacturing is outsourced to co-packers and manufacturing partners.
Financial Highlights
| Metric | Three months ended August 31, 2019 | Three months ended August 31, 2018 |
|---|---|---|
| Sales | $125,682 | $141,180 |
| Gross profit | $80,529 | $77,404 |
| Gross margin | 64.1% | 54.8% |
| Operating loss | $(102,874) | $(93,053) |
| Net loss | $(100,609) | $(93,304) |
| Net loss margin | (80.0%) | (66.1%) |
| Net cash used in operating activities | $(6,130) | $(86,634) |
| Cash at period end | $337,515 | $141,236 |
- Total assets were $749,279 at August 31, 2019, including $337,515 of cash, $309,508 of inventory, and $37,604 of net accounts receivable.
- Total liabilities were $172,518, consisting primarily of $87,039 of accounts payable and accrued expenses, $63,363 of customer deposits, $7,859 due to a related party, and $14,257 of equipment financing payable.
- Stockholders’ equity declined to $576,761 from $677,370 at May 31, 2019, primarily because of the quarterly net loss.
- The company purchased $9,230 of property and equipment and received $7,649 of related-party advances during the quarter.
Material Changes Versus the Prior Comparable Period
- Sales decreased $15,498, or 11%, due to fewer orders from salon and distribution customers.
- Cost of sales declined 29% to $45,153, helped by a lower-cost supplier for product assembly. Gross profit increased 4%, and gross margin expanded by approximately 9 percentage points.
- Operating expenses increased 8% to $183,403. Marketing and selling expense rose to $46,745 from $9,203, reflecting increased marketing, advertising, and independent-contractor costs intended to expand direct-to-consumer sales.
- Operating loss increased from $93,053 to $102,874, and net loss increased from $93,304 to $100,609 despite the improved gross margin.
- Operating cash usage improved to $6,130 from $86,634, primarily because of collections of accounts receivable and higher accounts payable and accrued liabilities. This improvement was partly offset by increased inventory and prepaid expenses.
- Cash declined $8,664 during the quarter, compared with an $86,634 decline in the prior-year period.
- International sales increased to approximately 51% of total sales from 33%; four customers represented approximately 54% of current-quarter sales, compared with three customers representing approximately 59% previously.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing provides no formal revenue, earnings, or cash-flow guidance. Management expects losses to continue during fiscal 2019 and plans to expand product lines over the following 12 months.
- Management states that substantial doubt exists about the company’s ability to continue as a going concern for 12 months from the report issuance date. Continued operations depend on implementing the business plan, generating sufficient revenue, and raising additional capital or obtaining credit.
- Management states that cash may not be sufficient to support daily operations. If financing and revenue are inadequate, the company may be forced to cease operations or seek bankruptcy protection.
- The company had no external liquidity arrangements or material off-balance-sheet arrangements. Related-party advances were $7,649 during the quarter and the amount due to the chief executive officer was $7,859 at August 31, 2019; the advances are payable on demand and bear no interest.
- The company recorded $2,342 of other income from recovery of previously written-off bad debts and a $474 impairment loss on intangible assets.
- The California office and warehouse lease expires in October 2019, with $14,635 of future minimum rental payments disclosed. Rent expense was $23,666 for the quarter.
- Cash deposits exceeded FDIC insurance limits by approximately $87,273 at August 31, 2019. The company also depends heavily on a limited customer and supplier base.
- Disclosure controls and internal control over financial reporting were determined to be ineffective because of insufficient qualified accounting personnel, lack of independent directors, and inadequate segregation of duties. Management cautions that these weaknesses could result in financial statement errors or restatements.
Most Important Facts to Verify
- Confirm the issuer identity: the provided filing names Reviv3 Procare Company, while the request identifies Axil Brands, Inc.
- Assess the going-concern warning, projected cash needs, and the company’s ability to obtain additional equity or debt financing.
- Verify whether the increased gross margin is sustainable after the supplier change and whether higher marketing spending can generate sufficient sales growth.
- Monitor customer concentration, international sales exposure, supplier concentration, and the collectability of concentrated accounts receivable.
- Review remediation of the disclosed material weaknesses in internal controls and any subsequent financial statement corrections.
- Confirm the post-quarter lease status and the company’s liquidity after the October 2019 facility lease expiration.