10-Q/A: Limitless X Holdings Reports Steep Revenue Decline and Widening Losses Amidst Marketing Strategy Shift and Internal Control Weaknesses

Limitless X Holdings Inc. filed an amended quarterly report revealing a significant 40.7% drop in net revenue and a 35.4% increase in net loss for the first half of 2023, alongside a critical material weakness in its financial reporting controls.

Summary

• Limitless X Holdings Inc. reported a net loss of $7,756,317 for the six months ended June 30, 2023, a 35.4% increase from the $5,728,545 net loss in the same period of 2022.
• Total net revenue decreased by 40.7% to $12,861,527 for the six months ended June 30, 2023, down from $21,699,584 in the prior year, primarily due to a 40.8% decline in product sales.
• Gross profit fell by 50.8% to $7,291,606 for the six months ended June 30, 2023, compared to $14,834,029 in the previous year, with cost of sales increasing to 43.3% of sales from 31.6%.
• Operating expenses decreased by 29.4% to $14,560,261, mainly driven by an $8.3 million reduction in advertising and marketing expenses, but offset by a 1450% increase in salaries and compensation to $2,071,845.
• The company's cash balance significantly decreased from $5,802,216 at December 31, 2022, to $58,318 at June 30, 2023.
• Net cash used in operating activities was $6,699,760 for the six months ended June 30, 2023, compared to $4,349,511 in the prior year.
• A material weakness in internal control over financial reporting was identified due to insufficient personnel, leading to inadequate segregation of duties and independent review.
• The company deconsolidated its wholly-owned subsidiary, Vybe Labs, Inc., on June 1, 2023, by selling it to Emblaze One, Inc. (a company owned by the CEO) to settle a $1,167,011 debt.

Sentiment

Score: 2

Explanation: The company experienced severe financial deterioration with significant declines in revenue and gross profit, a widening net loss, and a drastic reduction in cash. The identified material weakness in internal controls further exacerbates concerns about financial stability and reporting reliability. While operating expenses decreased, this was largely due to reduced marketing spend, and the increase in salaries due to unpaid accruals is a negative indicator. The reliance on related-party debt for financing highlights ongoing liquidity challenges.

Positives

• Overall operating expenses decreased by $6.0 million, primarily due to a significant reduction in advertising and marketing spend.
• The company successfully secured additional borrowings from convertible debt, shareholders, and related parties, totaling $957,466 in the first half of 2023, indicating continued access to financing.

Negatives

• Net revenue experienced a substantial decline of 40.7% for the six months ended June 30, 2023, indicating significant operational challenges.
• Gross profit decreased by 50.8%, and the cost of sales as a percentage of revenue increased from 31.6% to 43.3%, suggesting lower profit margins on new product lines.
• The net loss widened by 35.4% to $7,756,317 for the six months ended June 30, 2023.
• Cash balance plummeted from $5,802,216 to $58,318, highlighting severe liquidity issues.
• Interest expense surged by 3377% to $455,760 for the six months ended June 30, 2023, reflecting increased debt burden.
• Salaries and compensation increased by 1450% to $2,071,845, partly attributed to accruals of unpaid salaries, which could indicate cash flow strain.
• An increase of $232,374 in bad debt expense was recorded due to uncollectible accounts receivable.
• The company reported a material weakness in its internal control over financial reporting due to insufficient accounting personnel and lack of segregation of duties.

Risks

• The company faces general economic conditions and intense competition from larger competitors in its industry.
• There is a risk of failure to successfully develop new business relationships, which could impact future growth.
• Concentration of credit risk exists with accounts receivable, and the company relies heavily on a few key suppliers (three largest suppliers accounted for 95% of total purchases in fiscal 2022).
• Foreign import risks include changes in tariffs, duties, quotas, new restrictions, loss of most favored nation status, antidumping/countervailing duty orders, retaliatory actions, work stoppages, shipment delays, freight expense increases, product cost increases due to currency fluctuations, and public health issues.
• Shipping port disruptions (capacity constraints, labor strikes, adverse weather, acts of terrorism or war) could delay product delivery and impact profitability.
• A material weakness in internal control over financial reporting, stemming from insufficient personnel and inadequate segregation of duties, poses a risk of material misstatements not being prevented or detected timely.

Future Outlook

The company's forward-looking statements indicate that actual results may differ materially due to general economic conditions, intense competition from larger entities, and the ability to develop successful business relationships. Management believes that hiring additional personnel with technical expertise will improve financial reporting and internal controls, but no specific financial guidance or projections are provided.

Management Comments

• "In 2023, there was a shift in our marketing strategies, including a change in performance marketers."
• "This decrease [in cost of sales] was primarily due to our new product lines that began being sold in with lower margins."
• "The decrease of $7.7 million in operating expenses was primarily due to decrease in advertising, and professional fees of $0.5 million and off-set by increase in payroll of $0.7 million due to increase in number of employees."
• "Our advertising and marketing expense decreased by $7.9 million due to a shift in marketing strategies from relying on performance marketers and celebrity endorsements."
• "The increase in transaction payroll is related to accruals of unpaid salaries."
• "The increase of $232,374 in bad debt expense was due to accounts receivable being deemed uncollectible."
• "The cash used in operating activities was primarily due to net loss and timing of settlement of assets and liabilities."
• "This amount [net cash provided by financing activities] was incurred by increased borrowings from convertible debt, shareholder and related party."
• "Management is of the opinion that such matters [legal actions and claims] will be resolved without material effect on the Companys financial condition or results of operations."
• "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."

Industry Context

Limitless X Holdings operates in the health and wellness industry, providing nutritional supplements, wellness studies, and digital marketing services. The reported decline in product sales and gross profit, despite reduced advertising spend, suggests challenges in its direct-to-consumer online sales model or increased competition. The shift in marketing strategies and reliance on new, lower-margin product lines indicate an attempt to adapt, but current results show a negative impact. The company's concentration of suppliers and reliance on foreign imports expose it to global supply chain and trade risks common in the consumer goods sector.

Corporate Governance

Related Party Transactions

• The company incurred consulting fees of $10,000 to an officer and an officer of one of its affiliates for the six months ended June 30, 2023.
• Royalty payables to Limitless Performance Inc., SMILZ INC., DIVATRIM INC., and AMAROSE INC. (all at least 50% owned by a shareholder) increased to $1,494,228 as of June 30, 2023.
• The company has outstanding notes payable to a shareholder totaling $4,862,028 as of June 30, 2023, including new loans of $150,000, $50,000, $150,000, and $50,000 originated in May-June 2023.
• Notes payable to related parties totaled $169,400 as of June 30, 2023, including a new $89,400 loan from Emblaze One, Inc. on June 30, 2023.
• On June 1, 2023, the company sold its wholly-owned subsidiary, Vybe Labs, Inc., to Emblaze One, Inc. (100% owned by the CEO, Jaspreet Mathur) as full payment and settlement of a $1,167,011 debt owed by the company to Emblaze One, Inc. This was evaluated and voted upon by disinterested board members.

Stakeholder Impact

• Shareholders face significant dilution risk due to the issuance of common stock for services and the potential conversion of $9.675 million in convertible notes. The substantial increase in accumulated deficit also negatively impacts shareholder equity.
• Employees may be affected by the increase in salaries and compensation being related to accruals of unpaid salaries, which could indicate cash flow challenges impacting timely payroll.
• Creditors, particularly those holding convertible notes and related-party loans, are exposed to increased financial risk given the company's widening losses, declining cash reserves, and overall negative financial performance.
• Suppliers face concentration risk, as the company's three largest suppliers accounted for 95% of total purchases in fiscal 2022, making the company vulnerable to disruptions or changes in terms from these key partners.

Next Steps

• Management plans to hire additional personnel in accounting and financial reporting to address the identified material weakness in internal controls and improve segregation of duties.
• The company will continue to monitor and evaluate the effectiveness of its disclosure controls and procedures and internal controls over financial reporting on an ongoing basis.

Key Dates

Recommendation

Keywords

Health and Wellness, Nutritional Supplements, Digital Marketing, SEC Filing, Form 10-Q/A, Financial Results, Revenue Decline, Net Loss, Liquidity, Internal Controls, Related Party Transactions, Convertible Debt