Axil Brands, Inc. (AXIL) Q1 2027 Earnings Call Transcript

Greetings and welcome to the Axel Brands First Quarter 2027 Financial Results. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I'll now turn the conference over to Peter Salzberg, VP Investor Relations. Thank you, Peter. You may begin.

Good afternoon, and thank you for joining us for Axel Brand's first quarter 2027 financial update and earnings conference call. I'm Peter Seltzberg, working with the team here at Axel, and we're excited to get back in front of our shareholders with the first quarter 2027 update. Before we begin, I'd like to remind everyone that certain statements made during today's call may constitute forward-looking statements and are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Please refer to our filings with the Securities and Exchange Commission for discussion of these risks and other important factors, as well as an explanation of any non-GAAP items that we may refer to in today's press release and on this call. Presenting on behalf of management today are Jeff Taherein, Axel's Chief Executive Officer, and Jeff Brown, Axel's Chief Financial Officer. We will begin with prepared remarks and then open the line for Q&A. Thank you for the questions submitted in advance. You can continue to send questions during the call to investors at goaxel.com, and we will add them to the queue. With that, I'll turn the call over to Jeff Tahirai, Axel's Chairman and Chief Executive Officer.

Good afternoon, and thank you for joining us. I am pleased to discuss our results for the three months ended august 31st 2026 and the direction we see in axel's business at the start of the new fiscal year we are more constructive on the business than we have been at any point we see several milestones ahead that we believe will serve shareholders well in the first quarter we remain profitable continue to fund the business from operations and ended the quarter in the strongest cash position in our history operations provided 3.8 million dollars compared with the use of 739 000 a year ago we closed august 31st with 7.9 million of cash or approximately 96 cents per diluted share up from 4.5 million on may 31st and remain debt free that is the position from which we intend to fund the next phase of growth including the x-core 2 launch for those less familiar with the product x-core 2 is our next generation flagship wireless platform it carries our most advanced active noise reduction and our most immersive soundstage to date the transition to x-core 2 is the context for the quarter turning to the quarterly results sales were 6.1 million dollars down 11.2 percent from 6.9 million a year ago two items explain the comparison the first is the shift from x-core 1 to x-core 2 During the quarter, X-Core 1 orders slowed while customers prepared for the next generation launch. Direct-to-consumer in-hearing was down less than 1%. The other side of that transition is already visible. X-Core 2 has produced the strongest early demand of any Axel product to date, and demand remains healthy across retail, distribution, and direct-to-consumer. Those figures are orders, not revenue. on august 26 we announced initial orders of more than 2.8 million dollars by september 30 that order book had grown to more than 3.6 million dollars those figures are orders not revenue the product became available on september 15th and the majority of those orders have shipped and will be recognized in the second quarter with the remainder expected to ship in october although orders can be cancelled or returned and this is not a guarantee of revenue we expect that demand to begin showing up in revenue this quarter and in the periods that follow. The larger factor is the timing of orders from our retail partners. Last year's first quarter included a significant big box order that did not repeat this quarter.

Our relationships with major retail chains continue to expand and follow-on purchase orders have continued to come in.

Those partners buy on their own shelf and promo calendars so the timing of any one order sits outside our control. As we said in August, retail coverage is still early and one order can move a quarter. We expect that effect to moderate as the footprint deepens. That is a coverage issue, not a demand issue. In our observation, this channel is better judged over two to four quarters than by any single quarter comparison. Jeff Brown will now take you through the financials.

Thanks, Jeff. I will cover revenue and mix, gross margin, and the IEPA refunds, operating expenses and profitability, a brief revive accounting note, then cash flow, and the balance sheet. Consolidated retail and wholesale revenue was $2.2 million or 35.5% of net revenues compared with $2.9 million or 42.5% a year ago. Direct-to-consumer was $3.9 million or 64.2% compared with 57.5%. The hearing enhancement and protection segment generated $5.8 million down 12.4%. Within that, retail and wholesale were $1.9 million down 29.2% from $2.7 million, and direct-to-consumer was $3.85 million, down less than 1%. Revive and Sharper Vision Marketing together generated $328,000, or roughly 5% of net revenues. No customer represented more than 10% of net sales or more than 10% of gross receivables at quarter end. gross profit was five million dollars up 8.6 percent reported gross margin was 82.6 percent compared with 67.6 percent a year ago we collected 907 thousand dollars from u.s customs and border protection including interest of that 551 thousand dollars related to duties on goods already sold and was recognized as a reduction of cost of revenues. $321,000 related to goods still in inventory and reduced inventory on the balance sheet. The remaining $35,000 was interest and is in other income. No IEPA refund claims remain outstanding. Excluding the $551,000 cost of revenues benefit, gross profit would have been $4.48 million and gross margin 73.6%, still above last year's 67.6%. On operating expenses, we reclassified certain prior period amounts to match the current presentation. Stock-based compensation previously included in sales and marketing and professional fees is now in compensation and related taxes. Other professional and consulting costs relating to consulting fees are now in general and administrative. The reclassifications did not change total operating expenses or income from operations. Total operating expenses were $4.6 million, up $372,000, or 8.8%. As a percentage of revenue, they rose from 61.6% to 75.4%, primarily because of increased charges related to our build-out and marketing of XCOR2, and because of a non-cash expense related to the issuance of revived shares, which I will discuss shortly. R&D expense reflects employees and contractors who are focused on specific product development projects like XCOR2 during the quarter. Under GAAP, that work is recorded as research and development rather than compensation or contractor costs. Sales and marketing was $2.84 million, up about $78,000, or 2.8%. Advertising was essentially flat at $1.53 million versus $1.55 million. About $360,000 of that spend went to XCOR2 branding and launch and did not produce revenue in the first quarter. Those shipments began in September at the start of the second quarter. Compensation and related taxes were $374,000 compared with $397,000. General and administrative expenses were $0.9 million compared with $1.1 million and include the one-time non-cash charge of $138,000 related to the revived share issuance. Non-cash stock-based compensation and operating expenses was $322,000, up from $199,000, with the revived charge accounting for most of the increase. Income from operations was $437,000, compared with $412,000, up 6.1%. That increase primarily reflects the customs refunds partially offset by lower revenue and higher operating expenses, including the X-Corps 2 launch and the Revive charge. The tax provision was $100,000, an effective rate of about 19%, compared with $115,000, or about 26%, a year ago. Net income was approximately $420,000, or $0.05 per diluted share, compared with $334,000, or $0.04 per diluted share. Adjusted EBITDA, a non-GAAP measure, was $827,000, compared with $674,000. That figure includes the $551,000 refund benefit. Excluding this, adjusted EBITDA would have been approximately $276,000. The reconciliation of adjusted EBITDA to net income is in today's release. On August 25th, Revive issued $12,501 of its own common shares to three strategic partners for services at $11 per share, or $137,511 in total. We expense that amount at issuance. It is a non-cash charge. Because we kept control, the ownership change was recorded in equity. The non-controlling interest was adjusted to the partner's share of ReviveNet assets, and the difference went to additional paid-in capital. That equity adjustment did not affect net income or cash. Axel still owns about 75% and still consolidates Revive, and Axel stockholders were not diluted. What the partners received is a minority stake in Revive, not a claim on Axel. Revive does not currently intend to pay dividends, and any distributions are at the discretion of Revive's board, which Axel controls. As a result, we expect the partners to realize the value of their interest, principally upon a sale of Revive or another liquidity event. Net cash provided by operating activities was $3.8 million, compared with $739,000 used in the first quarter last year. The largest driver was collections. Accounts receivable fell from $4.7 million on May 31st to $1.3 million. dollars. Cash was strong this quarter in large part because we collected on the retail and wholesale shipments that were outstanding at year-end. That is the other side of the model we leaned into last year, a mix of offline retail and direct-to-consumer. That mix is what allows us to fund our growth from operations. Inventory was $4.4 million flat with year-end and included $1 million in transit. Pre-payments to vendors for inventory rose to $558,000 from $145,000. We used the quarter to pre-market and stage X-Cort 2 so shipments could start when the product went live in September. We invested $165,000 in intangibles and equipment, including product certification testing. We ended the quarter with $7.9 million of cash and cash equivalents, working capital of $10.3 million, and no outstanding borrowings. Based on current cash and anticipated operating cash flows, we believe we have sufficient liquidity to meet working capital needs. We intend to use that liquidity to find inventory and the launch and do not see a need for outside capital. I will turn the call back to Jeff Dogre.

Thanks, Jeff. We expect fiscal 2027 to be a year of top-line and bottom-line growth, with results more visible from Q2 onward. That view rests on three things we are executing now. The first is X-Core 2. The product became available on September 15. By month-end, we had fulfilled the majority of the pre-orders and backlog, and demand remains healthy in wholesale retail and direct to consumer the launch is no longer ahead of us it is on the market and it is converting the second is fuller retail coverage the work now is to deepen that footprint so quarterly performance is less exposed to swing from any one order the third is revive we brought highly experienced operators into the subsidiary ahead of the global relaunch without spending significant cash or issuing actual stock. The team expects to start onboarding new distributors and retailers in the U.S. and overseas as early as next quarter. This concludes our prepared remarks.

We are happy to take any questions.

Thank you. Management has received questions in advance of the call, and we will now respond to as many as time will allow. Go ahead, Peter, and start the Q&A session.

Thank you. Your quarterly sales seem to fluctuate. Would you please describe the seasonality in the business? Specifically, will Q1 generally be the lowest of the four quarters, and will fiscal Q2 generally be the highest? Thank you.

Well, the Q2 has been a strong order because of the proximity to the holidays, but that dynamic is skewed when large orders from big retailers, for example, Q4 was our highest order last year, last fiscal year, and I think it was the softest year prior. So it really depends on when these big box orders come in, and that is essentially what creates the fluctuations. I want to emphasize that we are more than shortfall in XCOR2 sales in Q2. Next question.

Okay, thank you.

Another question is, how do you envision getting to $10 million per quarter in sales? uh well we're pretty close to 10 million now we did 8.6 million q4 um you know any given quarter can get us to 10 million dollars uh moving forward um i think if the question is getting consistently over 10 million dollars every quarter the function of how many doors how many new doors are we able to open and how many skews are we able to put in existing doors and you know that's been our primary focus since 2025, and we're making excellent progress in that front.

Next question. We have, what has been the range of your quarterly gross margin for the past three years?

You want to take that, Jay?

Yeah, I can jump in for this. Over the last three years, Axel Brand's quarterly gross margin has been in a pretty tight range. It's been approximately 67% to 74%. Of course, that excludes this quarter, which was an outlier of 82.6% due to the customs and duties that were refunded. But if you remove that, it would have been a gross margin of 73.6%, which is in that range. And we expect to maintain that range going forward through fiscal 27.

Okay, next is, can you describe the credit quality of your receivables?

Yeah, the credit quality of our receivables remains high. Over the last year, we've reserved and expensed about half a percent of our account receivables, which is a low loss rate. This quarterly provision was actually a gain under our policy. We expense receivables that are more than 90 days past due.

So the gain came from recoveries of amounts that had already been written off under the Okay, next question is, what business could Axel acquire to get this company to a level of $100 million in annual sales?

$100 million in annual sales is completely achievable. I don't think we need to acquire a business to get to $100 million. If you look at the global hearing protection market, it's $3 billion, and we're a little over 1% of that a year. I would argue that our customers are using our systems for more than just hearing protection, but either way, I think there's plenty of runway to get to $100 million a year, and it's quite achievable without acquisitions.

Okay. We have a final question. why is there a health and beauty care business in Axel?

I can take that. So Revive is a small part of the company, 4% of the revenues last year. Where we find the business is attractive is we believe this deal gives us the ability to market and scale the brand globally. And we'll have indications how well we're executing by next quarter. But I think it's important for us to point out to Axel shareholders that at this stage, Revive is essentially running entirely independent. We're not drawing on Axel people or Axel resources to help out the Revive team. there isn't a drag as far as talent or time, whatever the Axel team is doing in order to help revive. Revive team is extremely capable at this point. It's fully operational, and we have a lot of confidence that they're going to do great. Ultimately, it's a pretty straightforward equation for us. If this plan executes, Axel can achieve a very meaningful upside. If it doesn't for any other reason, if something was wrong, it's more or less neutral for us. So we see this as a high-reward, low-risk opportunity for Axel. It makes a lot of sense to us, and we'll know soon enough. We'll have early indications how well we're doing, and we'll keep everyone updated.

Is there another question?

No, we're all set.

Awesome. Thank you, everyone, for participating.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.