10-Q/A: Limitless X Holdings Reports Steep Q1 2023 Losses Amidst Revenue Decline and Soaring Costs; Restatement Reveals Significant Financial Deterioration

Limitless X Holdings Inc. filed an amended quarterly report for Q1 2023, revealing a substantial net loss of $3.68 million, a sharp reversal from a profit in the prior year, driven by decreased product sales, higher cost of goods, and a significant increase in operating expenses.

Summary

• Limitless X Holdings Inc. (the Company) filed an Amendment No. 1 to its Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, restating its financial statements and management's discussion and analysis.
• The Company reported a net loss of $3,684,263 for the three months ended March 31, 2023, a significant decline from a net income of $308,304 in the same period of 2022.
• Total net revenue decreased by 7.0% to $6,578,037 in Q1 2023, down from $7,075,362 in Q1 2022, primarily due to a 7.2% drop in product sales.
• Cost of sales more than doubled, increasing by 110.7% to $2,637,768 (40.1% of sales) in Q1 2023 from $1,251,713 (17.7% of sales) in Q1 2022, attributed to new product lines with lower margins and increased freight, inventory, and supply costs.
• Gross profit plummeted by 32.3% to $3,940,269 in Q1 2023 from $5,823,649 in Q1 2022.
• Operating expenses surged by 35.6% to $7,367,518, mainly driven by a 706.9% increase in general and administrative expenses and a 1797.0% rise in salaries and compensation.
• The Company experienced a loss from operations of $3,427,249 in Q1 2023, compared to an income from operations of $390,258 in Q1 2022.
• Cash and cash equivalents significantly decreased from $5,802,216 at December 31, 2022, to $108,037 at March 31, 2023.
• Net cash used in operating activities was $6,192,575 for the three months ended March 31, 2023, a substantial shift from net cash provided of $116,823 in the prior year period.
• The Company raised $500,000 from convertible debt during Q1 2023, contributing to net cash provided by financing activities of $500,000.
• As of March 31, 2023, total current liabilities were $23,822,275, and total stockholders' deficit increased to $(20,786,869).
• The Company identified a material weakness in its internal control over financial reporting due to insufficient personnel in accounting and financial reporting functions, leading to inadequate segregation of duties and independent review.

Sentiment

Score: 2

Explanation: The financial results for Q1 2023 show significant deterioration across all key metrics, including a substantial net loss, declining revenue, soaring costs, and a severe cash burn. The identified material weakness in internal controls and heavy reliance on related party debt further contribute to a negative outlook, indicating significant operational and financial challenges.

Negatives

• The Company swung from a net income of $308,304 in Q1 2022 to a significant net loss of $3,684,263 in Q1 2023.
• Total net revenue decreased by 7.0% year-over-year, primarily driven by a 7.2% decline in product sales.
• Cost of sales increased by an alarming 110.7%, significantly outpacing revenue and leading to a sharp reduction in gross profit margin from 82.3% to 59.9%.
• Operating expenses rose by 35.6%, with general and administrative expenses increasing by 706.9% and salaries and compensation by 1797.0%.
• The Company's cash balance drastically fell from $5,802,216 at the end of 2022 to $108,037 by March 31, 2023, indicating a severe cash burn.
• Net cash used in operating activities was $6,192,575, highlighting significant operational cash outflow.
• The accumulated deficit increased to $(24,446,786) as of March 31, 2023, further eroding stockholders' equity.
• A material weakness in internal control over financial reporting was identified due to insufficient accounting personnel, raising concerns about financial reporting reliability.

Risks

• The Company's reliance on a small number of clients for its services poses a concentration of credit risk.
• Dependence on six primary suppliers, with the three largest accounting for 95% of total purchases in fiscal 2022, creates supply chain risk.
• A significant portion of inventory is manufactured abroad in Asia, exposing the Company to risks from changes in import tariffs, duties, quotas, trade restrictions, and geopolitical events like the conflict in Ukraine.
• Shipping port capacity constraints, labor strikes, work stoppages, or other disruptions could delay product delivery and impact net sales and profitability.
• The identified material weakness in internal control over financial reporting due to insufficient personnel could lead to material misstatements in financial statements not being prevented or detected on a timely basis.
• The Company's substantial accumulated deficit and significant cash burn raise concerns about its ability to continue as a going concern without additional financing.
• The terms of convertible notes, including potential automatic conversion, could lead to significant dilution for existing common stockholders.

Future Outlook

The Company anticipates expanding its product sales to brick-and-mortar retail stores and the wholesale marketplace in the future. Management believes that hiring additional personnel with technical expertise in accounting and finance will improve internal controls and financial reporting reliability.

Management Comments

• "In 2023, there was a shift in our marketing strategies, including a change in performance marketers."
• "This increase [in cost of sales] was primarily due to our new product lines that began being sold in November 2022 with lower margins."
• "The decrease in gross profit of $1.9 million was primarily a shift in our marketing strategies, including a change in performance marketers."
• "The increase of $1.9 million in operating expenses was primarily due to payroll and general and administrative expenses for travel and office expenses."
• "The increase of $0.3 million in other expense was primarily due to interest expense on convertible debt and other loans."
• "Management believes that the hiring of additional personnel who have the technical expertise and knowledge with the non-routine or technical issues we have encountered in the past will result in both proper recording of these transactions and a much more knowledgeable finance department as a whole."
• "Additional personnel will also ensure the proper segregation of duties and provide more checks and balances within the department."
• "We will continue to monitor and evaluate the effectiveness of our disclosure controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow."
• "We anticipate that a number of changes in our financial controls and procedures will be made in the ensuing periods."

Industry Context

The document does not provide specific industry-wide trends or competitor analysis to contextualize the company's performance beyond general statements about its health and wellness focus and digital marketing services. The shift in marketing strategies and introduction of lower-margin products suggest internal operational changes rather than broad industry shifts.

Management Changes

Corporate Governance

Related Party Transactions

• The Company incurred consulting fees of $7,000 to an officer and an officer of one of its affiliates during the three months ended March 31, 2023.
• The Company has manufacturing and distributorship license agreements with Limitless Performance Inc. (LPI), SMILZ INC. (Smiles), DIVATRIM INC. (Divatrim), and AMAROSE INC. (Amarose), all at least 50% owned by a shareholder of the Company.
• Royalty payments equal to 4.00% of gross sales (excluding returns, chargebacks, etc.) are payable to these entities, with a royalty payable balance of $1,399,031 as of March 31, 2023.
• The Company has multiple notes payable to a shareholder totaling $4,462,028 as of March 31, 2023, with various interest rates (6% to 10%) and maturity dates (some in May, July, August 2023).
• The Company has notes payable to related parties totaling $1,247,011 as of March 31, 2023, including loans from Emblaze One (a company owned by a shareholder) and other related parties, with interest rates of 8% to 10% and various maturity dates (some in May, August, December 2023).

Stakeholder Impact

• **Shareholders**: Significant net loss and increased accumulated deficit negatively impact shareholder equity. The potential for dilution from convertible notes and the identified material weakness in internal controls pose risks to shareholder value and confidence.
• **Employees**: Increased salaries and compensation indicate investment in human capital, but the overall financial performance and internal control issues could create uncertainty.
• **Customers**: Changes in marketing strategies and new product lines with lower margins could impact product availability, pricing, or customer experience, though the document doesn't specify direct customer impact.
• **Suppliers**: The Company's reliance on a few key suppliers and its cash burn could pose risks to timely payments or continued relationships.
• **Creditors (including related parties)**: The Company's increased debt, particularly convertible notes and significant related-party loans, indicates reliance on financing, and its deteriorating financial health could raise concerns about repayment ability, especially for loans maturing soon.

Next Steps

• The Company plans to expand product sales to brick-and-mortar retail stores and the wholesale marketplace.
• Management intends to hire additional personnel for accounting and financial reporting functions to address the identified material weakness in internal controls.
• Management anticipates making a number of changes in financial controls and procedures in ensuing periods.
• The unsecured promissory note of $35,000 is due on May 31, 2023.
• Several notes payable to shareholders are due on May 1, 2023, July 1, 2023, and August 1, 2023.
• Several notes payable to related parties are due on May 10, 2023, May 31, 2023, and August 1, 2023, and December 1, 2023.

Key Dates

Recommendation

Keywords

Health and Wellness, Nutritional Supplements, Digital Marketing, SEC Filing, Form 10-Q/A, Financial Restatement, Quarterly Report, Operating Loss, Cash Flow, Convertible Debt, Internal Controls, Related Party Transactions, E-commerce, Direct-to-Consumer