Axil Brands, Inc.: Form 10-Q for the period ended Aug 31, 2025

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, 2025 filed with the SEC on August 21, 2025. 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.

We have two reportable segments: hair and skin care, and hearing enhancement and protection. In addition, we have recently incorporated a wholly owned subsidiary with the intent to offer marketing services. This new subsidiary is expected to support third-party clients by leveraging our direct-to-consumer expertise to deliver performance-driven marketing solutions.

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 and skin care segment, we manufacture, market, sell, and distribute professional quality hair and skin care products.

Our overall business strategy is to establish market awareness of our products through our direct-to-consumer campaigns. Our strategy centers on driving growth by expanding market share within existing channels and developing new ones through both online and traditional platforms. Our primary focus is optimizing our e-commerce strategies, building sales teams to meet the needs of distribution channels, and enhancing value through strategic partnerships. We are also working to expand our offline retail presence and enter into new international markets. We believe the increase in awareness will allow us 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; however, we cannot provide any assurances that such increases will occur, or that we will realize the anticipated benefits of our actions.

The Company entered into a strategic supply arrangement with a leading national membership-based retail chain, marking a significant milestone in our wholesale channel expansion strategy. Under this agreement, the retailer placed a substantial initial purchase order, with fulfillment beginning in the first quarter of fiscal 2026 and expected to be completed in the second quarter of fiscal 2026. While there can be no assurances that additional purchase orders will be placed or as to the timing of the fulfillment of any orders, this development has and is anticipated to continue to drive meaningful revenue growth and enhance brand visibility across a broader customer base.

In September 2025, we announced a partnership with a major national salon chain across Canada to offer our full Reviv3 Procare® line, a collaboration that significantly expands our brand’s professional reach through one of the country’s most influential haircare networks.

In June 2025, the Company expanded its leadership team by hiring a senior contractor to lead growth initiatives in our hair and skin care division. This individual brings extensive experience in brand development and channel expansion. His appointment reflects our commitment to scaling this business segment and capitalizing on emerging industry growth.

We also gained media recognition in leading military publications, including Military Times, Air Force Times, Marine Corps Times, and Navy Times, highlighting our hearing protection and enhancement technology. We believe this visibility strengthens our credibility among professional and tactical users.

We continue to make progress on our supply chain transition strategy in response to elevated U.S. tariffs and broader geopolitical risks. Key initiatives include relocating senior manufacturing leadership to the United States and advancing early-stage domestic production capabilities. While tariff-related cost pressures impacted fiscal 2025, we do not expect a material ongoing effect into fiscal 2026 based on current tariff levels. If tariff rates change or other changes in trade policy are implemented, the expected impact on our operations could change.

On July 4, 2025, legislation commonly referred to as The One Big Beautiful Bill Act of 2025 (“OBBBA”) was enacted in the U.S., making permanent certain provisions of the Tax Cuts and Jobs Act and introducing changes to corporate tax provisions. We are currently assessing the impact of OBBBA on our consolidated financial statements.

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Results of Operations

Our results of operations are summarized below.

We calculate EBITDA by taking net income calculated in accordance with accounting principles generally accepted in the United States (“GAAP”), and adjusting for income taxes, interest income or expense, and depreciation and amortization. We calculate adjusted EBITDA as EBITDA, further adjusted for stock-based compensation. Adjusted EBITDA is also presented as a percentage of revenue, which is calculated by dividing the non-GAAP adjusted EBITDA for a period by revenue for the same period. Other companies may calculate EBITDA and adjusted EBITDA differently, limiting the usefulness of these measures for comparative purposes. We believe that these non-GAAP measures of financial results provide useful information regarding certain financial and business trends relating to our financial condition and results of operations, and management considers EBITDA and adjusted EBITDA important indicators in evaluating our business on a consistent basis across various periods for trend analyses. These non-GAAP financial measures exclude significant expenses and income that are required by GAAP to be recorded in our financial statements and are subject to inherent limitations as they reflect the exercise of judgments by management about which expenses and income are excluded or included in determining these non-GAAP financial measures. Investors should review the reconciliation of these non-GAAP financial measures to the comparable GAAP financial measure included below. Investors should not rely on any single financial measure to evaluate our business.

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For the Three Months Ended August 31, 2025 Compared to the Three Months Ended August 31, 2024

Net sales for the three months ended August 31, 2025 increased by $1,004,946 or 17.2%, as compared to the three months ended August 31, 2024. The increase in net sales was primarily driven by a material order from a leading national membership-based retail chain. The order generated significant incremental revenue and positioned us for additional shipments in subsequent periods.

Cost of sales includes the cost of products, freight-in costs, and depreciation related to fixed assets that are used in the production and distribution process to bring goods to their saleable condition and location. For the three months ended August 31, 2025, the overall cost of sales increased by $523,660 or 30.8%, as compared to the three months ended August 31, 2024. Cost of sales as a percentage of net revenues for the three months ended August 31, 2025 was 32.4% as compared to 29.0% for the three months ended August 31, 2024. Cost of sales increased as a percentage of revenue primarily due to a material order with a leading national membership-based retail chain, which carried tighter margins compared to our direct-to-consumer business.

Gross profit increased by $481,286 or 11.6% from $4,153,648 in the three months ended August 31, 2024 to $4,634,934 for the three months ended August 31, 2025. Gross profit as a percentage of sales for the three months ended August 31, 2025 was 67.6%, as compared to 71.0% for the three months ended August 31, 2024 Gross profit increased due to higher sales volumes, partially offset by lower margins related to a material order with a leading national membership-based retail chain.

Operating expenses decreased by $71,154 or 1.7% from $4,294,350 in the three months ended August 31, 2024 to $4,223,196 in the three months ended August 31, 2025. Operating expenses as a percentage of net revenues for the three months ended August 31, 2025 was 61.6% compared to 73.4% for the three months ended August 31, 2024. Included in operating expenses were non-cash stock-based compensation of $199,212 and $297,864 in the three months ended August 31, 2025 and 2024, respectively. The decrease in operating expenses was primarily driven by lower professional and consulting fees, reflecting reduced reliance on external consultants as part of our efforts to enhance operating efficiency.

Income from operations for the three months ended August 31, 2025, was $411,738 compared to a loss from operations of $140,702 for the three months ended August 31, 2024. The increase in income from operations of $552,440 or 392.6% was primarily related to the increase in unit sales and the resulting contribution to gross profit, in addition to gained efficiencies within the Company resulting in reduced operating expenses.

For the three months ended August 31, 2025, provision for income tax expense was $115,058. For the three months ended August 31, 2024, we had an income tax of $0.

As a result of the above, we reported a net income of $334,294 and net loss of $109,805 for the three months ended August 31, 2025 and 2024, respectively.

Adjusted EBITDA increased by $502,032 or 291.3% from $172,323 for the three months ended August 31, 2024 to $674,355 for the three months ended August 31, 2025. Adjusted EBITDA as a percentage of sales, net for the three months ended August 31, 2025 and 2024, was 9.8% and 2.9%, respectively. Adjusted EBITDA increased primarily due to the increase in gross profit related to higher volume of units sold.

Basic and diluted earnings per share for the three months ended August 31, 2025 were $0.05 and $0.04, respectively, compared to basic and diluted loss per share of $0.02 for the three months ended August 31, 2024.

Liquidity and Capital Resources

We are currently engaged in product sales and development. Although we have experienced operating losses in prior periods, we expect to continue generating net income and positive cash flow in the fiscal year ending May 31, 2026. Based on our current cash balances and anticipated operating cash flows, we believe we have sufficient liquidity to meet working capital needs for at least one year from the issuance date of the accompanying consolidated financial statements.

We plan to manage expenses relative to expected revenue and may reinvest near-term cash to support revenue growth. In recent years, we have generated sufficient cash to support our operations and required debt payments, and we expect this to continue, although we cannot provide any assurance. Management remains focused on expanding product lines and our customer base to drive revenue. However, future cash demands may exceed historical levels. If needed, we may seek additional capital, although there is no assurance that financing will be available on acceptable terms or at all. Subject to these uncertainties, we believe we have sufficient capital and liquidity to fund operations for at least one year from the issuance date of the accompanying consolidated financial statements.

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Cash Flows for the three months ended August 31, 2025 and 2024

Operating Activities

Net cash used in operating activities for the three months ended August 31, 2025, was $739,194, compared to net cash provided by operating activities of $897,318 for the three months ended August 31, 2024. The decrease was related to a material order from a leading national membership-based retail chain, which we began fulfilling in the first quarter of fiscal 2026 and we expect to complete in the second quarter of fiscal 2026. This resulted in a significant inventory purchase, and a material increase in accounts receivable, as the order was placed near the end of the quarter.

Investing Activities

Net cash flows used in investing activities for the three months ended August 31, 2025 was $94,497 due to the purchase of intangibles and property and equipment for our business. For the three months ended August 31, 2024, net cash flows used in investing activities was $41,840, attributable to the cash used in the purchase of intangibles relating to our expansion into new product lines.

Financing Activities

Net cash flows provided by financing activities for the three months ended August 31, 2025 was $150,461 primarily related to net advances made from a related party of $151,491. Net cash provided by financing activities for the three months ended August 31, 2024 was $39,370 primarily related to net advances from a related party of $41,707.

As of August 31, 2025, we had a secured Economic Injury Disaster Loan outstanding, administered pursuant to the CARES Act in the principal amount of $139,199, with a maturity date of May 18, 2050. The Company continues to pay interest and principal 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, preferred stock, 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 to obtain, more costly and more dilutive. 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 August 31, 2025, we did 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.

Significant Accounting Policies and Estimates

Significant accounting policies and practices are those that are both most important to the portrayal of the Company’s financial condition and results, and require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates.

Accounts receivable and allowance for credit losses

The Company has a policy of providing an allowance for credit losses based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company periodically reviews its accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to bad debt expense and included in the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

Revenue recognition

We recognize revenue in accordance with ASC 606, Revenue from Contracts with Customers. Revenue is recognized when control of the product is transferred to the customer, typically upon shipment. In determining the transaction price, we consider discounts, promotional incentives, and expected returns. These estimates require judgment based on historical experience and current market conditions. Changes in customer behavior or promotional strategies could impact the timing and amount of revenue recognized.

Goodwill

Goodwill represents the excess of the consideration paid over the fair value of net assets acquired in a business combination. We evaluate goodwill for impairment at least annually during the fourth quarter, or more frequently if circumstances or events suggest potential impairment. Throughout the year, we monitor for indicators that might trigger an interim impairment review. Our testing may begin with a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit exceeds its carrying value. If a quantitative test is performed, fair value is estimated based on the amount a market participant would pay in a hypothetical sale of the reporting unit. When the fair value exceeds the carrying value, goodwill is considered to be not impaired. If the carrying value exceeds fair value, an impairment charge is recorded for the amount of the excess, limited to the total carrying amount of goodwill.

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Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) or 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’s 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 August 31, 2025. Based on this evaluation of disclosure controls and procedures as of August 31, 2025, our CEO and CFO concluded that our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There have been no changes 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 August 31, 2025 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended May 31, 2025.