Axil Brands, Inc.: Form 10-Q for the period ended Nov 30, 2023

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with, and is qualified in its entirety by, the unaudited consolidated financial statements and related notes thereto included in Item 1 in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended May 31, 2023 filed with the SEC on August 21, 2023. Our Management’s Discussion and Analysis of Financial Condition and Results of Operations contains not only statements that are historical facts, but also statements that are forward-looking.

Although the forward-looking statements in this Quarterly Report on Form 10-Q reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in herein and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects. Please see “Cautionary Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q for additional information.

Overview

The Company is engaged in the manufacturing, marketing, sale and distribution of high-tech, innovative hearing and audio enhancement and protection products that provide cutting-edge solutions for people with varied applications across many industries and professional quality hair and skin care products under various trademarks and brands.

On May 1, 2022, we entered into an Asset Purchase Agreement dated May 1, 2022 and amended on June 15, 2022 and September 8, 2022 with AXIL, a Delaware corporation, and a leader in hearing protection and enhancement products, for the acquisition of both the hearing protection business of AXIL consisting of ear plugs and ear muffs, and AXIL’s ear bud business. These businesses constituted substantially all of the business operations of AXIL. The acquisition was completed subsequently on June 16, 2022. On September 8, 2022, the Company and AXIL entered into an amendment to the Asset Purchase Agreement which eliminated the provision in the Asset Purchase Agreement requiring the Company to effectuate a reverse stock split of our Common Stock and preferred stock pursuant to the Asset Purchase Agreement within a certain period of time.

As a result of the acquisition of AXIL’s assets, the Company has two reportable segments: hair care and skin care, and hearing enhancement and protection.

Through our hearing enhancement and protection segment, we design, innovate, engineer, manufacture, market and service specialized systems in hearing enhancement, hearing protection, wireless audio, and communication. Through our hair care and skin care segment, we manufacture, market, sell, and distribute professional quality hair and skin care products.

The Company’s overall business strategy is to establish market awareness of our products through our direct-to-consumer campaigns. We believe the increase in awareness will allow the Company to increase distribution and gain customers through our distribution partners’ retail establishments, with the goal of helping us achieve growth in market share and diversify our sales channels.

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Recent Developments

The Company is in the process of seeking to list its shares of Common Stock on the NYSE American Stock Exchange (the “NYSE American”). No assurance can be given that the Company’s Common Stock will be accepted for listing on the NYSE American.

On December 4, 2023, the Company filed with the SEC a Definitive Information Statement on Schedule 14C (the “Information Statement”). Pursuant to Rule 14c-2 of the Exchange Act, the Information Statement became effective on or around December 25, 2023, approximately twenty (20) days after it was filed and mailed to the Company’s stockholders of record as of October 31, 2023 (“Effective Date”). The Information Statement informed our stockholders of certain corporate actions taken by written consent of stockholders holding at least a majority of our issued and outstanding shares of the Company’s common stock. The following corporate actions (the “Corporate Actions”) were approved by a majority of our stockholders on October 31, 2023:

(i) An amendment to our Amended and Restated Certificate of Incorporation (the “Charter”) to effect a name change of the Company from “Reviv3 Procare Company” to “AXIL Brands, Inc.”;

(ii) The Company’s 2022 Equity Incentive Plan (the “Plan”) and an amendment to the Plan to effect an increase in authorized shares for issuance under the Plan by an additional 15,000,000 shares to an aggregate of 25,000,000 shares available under the Plan;

(iii) An amendment to our Charter to effect a reverse stock split of the issued and outstanding shares of our Common Stock in a range of not less than one-for-3 shares and not more than one-for-25 shares, at the discretion of the Board;

(iv) Amendments to our Charter and to our Bylaws to increase the size of our Board and create three (3) classes of directorships for the Board; and

(v) Amendments to our Charter and to our Bylaws to vest the Board with authority to make, repeal, alter, amend or rescind any or all of the Bylaws and to amend the Bylaws to add a provision relating to notice of stockholder business and nominations.

Following the Effective Date of the Information Statement, the Company’s Board has the authority to implement any or all of the foregoing Corporate Actions at their discretion. As of the date of this Quarterly Report on Form 10-Q, the Board has not yet implemented any of the Corporate Actions, but may do so in the future.

Results of Operations

Our results of operations are summarized below.

For the Six months Ended November 30, 2023 Compared to the Six months Ended November 30, 2022

Net sales for the six months ended November 30, 2023 and 2022 were $14,527,946 and $10,969,357, respectively. Net sales for the six months ended November 30, 2023 increased by $3,558,589 or 32.4% for the six months ended November 30, 2023, as compared to the six months ended November 30, 2022. The increase was driven primarily by an increase in marketing campaign spend and strength in our sales channels for AXIL products.

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Cost of sales includes primarily the cost of products and freight-in costs. For the six months ended November 30, 2023, the overall cost of sales increased by $974,772 or 36.8%, as compared to the comparable period ended November 30, 2022, which was primarily due to the relative increase in sales of AXIL products. Cost of sales as a percentage of net revenues for the six months ended November 30, 2023 was 24.9% as compared to 24.1% for the comparable period in 2022. The marginal increase in cost of sales, as a percentage of sales, was primarily attributable to higher transportation costs. The Company will continue to work to increase efficiencies in procurement and logistics, as well as focus on enhanced production capabilities.

Operating expenses consisted of marketing and selling expenses, compensation and related taxes, professional and consulting fees, and general and administrative costs. Operating expenses for the six months ended November 30, 2023 and 2022 were $9,467,836 and $7,137,292, respectively. Operating expenses as a percentage of net revenues for the six months ended November 30, 2023, were 65.2% compared to 65.1% for the comparable period in 2022. Operating expenses increased by $2,330,544 or 32.7% year-over-year due to an increase in advertising and marketing expenses by $2,028,483 in the AXIL spend for expansion of current marketing campaigns and costs attributable to new product awareness, with an increase in spend of $714,318 for general and administrative costs as the Company requires more robust oversight in compliance and to enhance existing business processes. The increase in marketing, advertising and general and administrative costs, were partially offset by an overall reduction in approximately $300,000 in operating expenses for the Reviv3 business for the six months ended November 30, 2023 as compared to the comparable period in 2022.

Gross profit for the six months ended November 30, 2023 and 2022 was $10,905,505 and $8,321,688, respectively. Gross profit as a percentage of sales for the six months ended November 30, 2023, was 75.1% as compared to 75.9% for the same comparable period in 2022. The slight decrease in gross profit for the six months ended November 30, 2023 was primarily attributable to an increase in discounts and merchant fees related to sales of AXIL products.

Income from operations for the six months ended November 30, 2023 and 2022 was $1,437,669 and $1,184,396, respectively. The increase in income from operations for the six months ended November 30, 2023, of $253,273 or 21.4% compared to the six months ended November 30, 2022, was primarily driven from the positive impact of the increase in sales and marketing efforts of AXIL products.

Provision for income taxes amounted to $430,382 and $335,797 for the six months ended November 30, 2023 and 2022, respectively.

As a result of the above, we reported a net income of $1,172,527 and $902,427, for the six months ended November 30, 2023 and 2022, and respectively, an increase of $270,100.

For the Three months Ended November 30, 2023 Compared to the Three months Ended November 30, 2022

Net sales for the three months ended November 30, 2023 and 2022 were $8,421,677 and $6,731,999, respectively. Net sales for the three months ended November 30, 2023 increased by $1,689,678 or 25.1% for the three months ended November 30, 2023, as compared to the three months ended November 30, 2022, also due to the increase in marketing campaign spend and strength in our sales channels for AXIL products.

For the three months ended November 30, 2023, the overall cost of sales increased by $470,773 or 27.8%, as compared to the comparable period ended November 30, 2022, which was also primarily due to the relative increase in sales of AXIL products. Cost of sales as a percentage of net revenues for the three months ended November 30, 2023 was 25.7% as compared to 25.1% for the comparable period in 2022. The marginal increase in cost of sales, as a percentage of sales, was primarily attributable to an increase in transportation costs. As noted, the Company will continue to work to increase efficiencies in procurement and logistics.

Operating expenses consisted of marketing and selling expenses, compensation and related taxes, professional and consulting fees, and general and administrative costs. Operating expenses for the three months ended November 30, 2023 and 2022 were $4,994,027 and $4,054,039, respectively. Operating expenses as a percentage of net revenues for the three months ended November 30, 2023, were 59.3% compared to 60.2% for the three months ended November 30, 2022. Operating expenses increased by $939,988 or 14.0% compared to the three months ended November 30, 2022, primarily due to an increase in advertising, marketing campaigns and sales related expenses by $858,311 in the AXIL spend for displaying our products through various advertising platforms, with an increase in spend of $167,494 for general and administrative costs as the Company requires more oversight in compliance. The increase in marketing, advertising and general and administrative costs, were partially offset by an overall reduction of approximately $100,000 in operating expenses for the Reviv3 products for the three months ended November 30, 2023 as compared to the comparable period in 2022.

Gross profit for the three months ended November 30, 2023 and 2022 was $6,257,677 and $5,039,034, respectively. Gross profit as a percentage of sales for the three months ended November 30, 2023, was 74.3% as compared to 74.9% for the same comparable period in 2022. The slight decrease in gross profit for the three months ended November 30, 2023 was primarily attributable to the minor increase in product discounts and merchant fees related of AXIL products.

Income from operations for the three months ended November 30, 2023 and 2022 was $1,263,912 and $984,995, respectively. The year-over-year increase in income from operations of $278,917 or 28.3% was primarily driven from the positive impact of sales and marketing efforts of AXIL products.

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Provision for income taxes amounted to $364,393 and $261,044 for the three months ended November 30, 2023 and 2022, respectively.

As a result of the above, we reported a net income of $1,018,075 and $726,900 for the three months ended November 30, 2023 and 2022, respectively, an increase of $291,175 or 40.1%.

Liquidity and Capital Resources

We are currently engaged in our product sales and development. Although we earned a net income in the six months ended November 30, 2023, we have incurred operating losses in the past. We currently expect to earn net income during the current fiscal year ending May 31, 2024. We believe our current cash balances, coupled with anticipated cash flow from operating activities, will be sufficient to meet our working capital requirements for at least one year from the date of issuance of the accompanying unaudited consolidated financial statements. We intend to continue to control our cash expenses as a percentage of expected revenue on an annual basis and thus may use our cash balances in the short-term to invest in revenue growth. As a result of the acquisition of AXIL ’s assets, we have generated and expect we will continue to generate sufficient cash for our operational needs, including any required debt payments, for at least one year from the date of issuance of the accompanying unaudited consolidated financial statements. Management is focused on growing the Company’s existing product lines, introducing new products, as well as expanding its customer base, to increase its revenues. The Company cannot give assurance that it can increase its cash balances or limit its cash consumption and thus maintain sufficient cash balances for its planned operations or future acquisitions. Future business demands, including those resulting from the purchase of AXIL’s assets in June 2022, may lead to cash utilization at levels greater than recently experienced. The Company cannot provide any assurance that it will be able to raise additional capital or obtain necessary financing on acceptable terms, or at all. Subject to the foregoing, management believes that the Company has sufficient capital and liquidity to fund its operations for at least one year from the date of issuance of the accompanying unaudited consolidated financial statements.

Cash Flows

Operating Activities

Net cash provided by operating activities for the six months ended November 30, 2023 was $1,252,113, attributable to a net income of $1,172,527, items of adjustments to depreciation and amortization, bad debts, gain on settlement and stock based compensation that total $143,382. There were favorable changes in accounts payable and accrued expenses of $1,092,735, and contract and current liabilities of $751,853. The net decrease in cash was increased by a net decrease in operating assets and liabilities of $1,908,384 primarily due to increase in accounts receivable, prepaid expenses and other current assets and inventory.

Net cash flows provided by operating activities for the six months ended November 30, 2022 was $2,196,195, attributable to net income of $902,427, depreciation and amortization of $43,015, provision for bad debts of $105,975, stock based compensation expense of $124,145, gain on settlement of debt of $50,500, utilization of security deposit to pay rent of $8,385, amortization of prepaid expenses of $3,159 and net change in operating assets and liabilities of $1,059,589 primarily due to an increase in inventory, increase in prepaid expenses, increase in security deposit and increase in accounts receivable offset by an increase in accounts payable, increase in other current liabilities and increase in contract liabilities.

Investing Activities

Net cash flows used in investing activities for the six months ended November 30, 2023 was $70,845 due to the purchase of property and equipment for the AXIL business. For the six months ended November 30, 2022, net cash flows provided were $1,012,014, attributable to the cash received from acquisition of the AXIL business and partially offset by the purchase of property and equipment during the same period.

Financing Activities

Net cash flows used in financing activities for the six months ended November 30, 2023 was $51,519, and were for repayment of equipment financing and note payable, and a decrease in the amount due from a related party. Net cash flows provided by financing activities for the six months ended November 30, 2022, amounted to $436,230 as the Company raised capital of $328,050 pursuant to a private placement of shares of common stock, receipt of $111,392 in related party loans, and repayment of loans that totaled $3,212.

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During the six months ended November 30, 2023, the Company has various financed items and has debt outstanding in order to run the business operations. In 2019, the Company purchased a forklift under an installment purchase plan. The loan amount is $16,500 payable in 60 monthly installment payments of $322 comprising of principal payment of $275 and interest payment of $42. At November 30, 2023 and 2022, the balance outstanding on the loan was $550 and $3,850, respectively, of which the $550 balance is payable within the next year.

As of November 30, 2023, we had a secured Economic Injury Disaster Loan outstanding, administered pursuant to the CARES Act in the principal amount of $147,931, with a maturity date of May 18, 2050. The Company continues to pay interest on the loan.

We are dependent on our product sales to fund our operations and may require additional capital in the future, such as pursuant to the sale of additional common stock or of debt securities or entering into credit agreements or other borrowing arrangements with institutions or private individuals, to maintain operations, which may not be available on favorable terms, or at all, and could require us to sell certain assets or discontinue or curtail our operations. If the current equity and credit markets deteriorate, it may make any necessary debt or equity financing more difficult, more costly and more dilutive. In addition, pursuant to a voting agreement, effective June 16, 2022, with AXIL and Intrepid Global Advisors, we are subject to certain limitations on our ability to sell our capital stock until June 2024. Our officers and directors have made no written commitments with respect to providing a source of liquidity in the form of cash advances, loans, and/or financial guarantees. We do not have any plans to seek additional financing at this time and anticipate that our existing cash equivalents and cash provided by operations will be sufficient to meet our working capital requirements. However, if the need arises for additional cash, there can be no assurance that we will be able to raise the capital we need for our operations on favorable terms, or at all. We may not be able to obtain additional capital or generate sufficient revenues to fund our operations. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or abandon our business plans. If we are unsuccessful at raising sufficient funds, for whatever reason, to fund our operations, we may be forced to cease operations. If we fail to raise funds, we expect that we will be required to seek protection from creditors under applicable bankruptcy laws.

Off-Balance Sheet Arrangements

As of November 30, 2023, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results or operations, liquidity, capital expenditures or capital resources that is material to investors.

Critical Accounting Policies

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions affect the reported amounts of expenses during the reporting period. On an ongoing basis, we evaluate estimates and assumptions based upon historical experience and various other factors and circumstances. We believe our estimates and assumptions are reasonable in the circumstances; however, actual results may differ from these estimates under different future conditions.

We believe that the estimates and assumptions that are most important to the portrayal of our financial condition and results of operations, in that they require the most difficult, subjective or complex judgments, form the basis for the accounting policies deemed to be most critical to us. These critical accounting policies relate to revenue recognition, impairment of intangible assets and long-lived assets, inventory, stock compensation, and evaluation of contingencies. We believe estimates and assumptions related to these critical accounting policies are appropriate under the circumstances; however, should future events or occurrences result in unanticipated consequences, there could be a material impact on our future financial condition or results of operations.

See the footnotes to our unaudited consolidated financial statements for the three and six months ended November 30, 2023 and 2022, included with this Quarterly Report on Form 10-Q for additional discussion of our critical accounting policies and use of estimates.

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Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Principal Executive Officer, and Chief Financial Officer (“CFO”) and Principal Financial and Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure. We conducted an evaluation, under the supervision and with the participation of our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures as of November 30, 2023. Based on this evaluation of disclosure controls and procedures as of November 30, 2023, our CEO and CFO concluded that our disclosure controls and procedures were not effective.

Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance to our management and the Board regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management, including our CEO and CFO, assessed the effectiveness of our internal control over financial reporting as of November 30, 2023 using criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission Internal Control-Integrated Framework issued in 2013. Based on the assessment, our management has concluded that as of November 30, 2023, our internal control over financial reporting was not effective based on those criteria.

Remediation

The Company plans to initiate measures to improve the effectiveness of the internal controls over financial reporting and disclosure controls and procedures. We are currently working with a third-party to enhance the reporting in our accounting systems, as well as increase the level of review when any non-routine accounting entry is proposed. The Company hired additional accounting personnel to oversee the financial close and reporting process. The Company plans to hire additional staff to aid in segregation of duties to continue to improve our internal controls in the coming fiscal year. We have also started to develop an internal control structure and identify key procedures for financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002 and we are currently in the process of documenting our internal control policies and procedures. We have adopted written policies and procedures that are being distributed to employees for review and approval by the Board, and should be fully implemented during the fiscal year ending May 31, 2024. In addition, the company has adopted controls related to corporate governance, including a Code of Business Conduct and Ethics that applies to all of our employees, including our CEO, CFO, and Board.

Changes in internal control over financial reporting

There has been no change in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) or 15d-15(d) under the Exchange Act that occurred during the fiscal quarter ended November 30, 2023 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting. Our management is currently taking corrective action to remedy the internal control weaknesses. See section entitled “Remediation” above.

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