Sport Endurance, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and nine months ended May 31, 2016. The filing identifies the registrant as Sport Endurance, Inc. (not SRX Global Inc.). The company intends to market dietary supplements and reported that it had not yet generated revenue and was preparing to launch its first product.
Financial results
| Metric | Three months ended May 31, 2016 | Three months ended May 31, 2015 | Nine months ended May 31, 2016 | Nine months ended May 31, 2015 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Operating expenses | $283,184 | $5,817 | $307,099 | $19,069 |
| Net loss | $464,483 | $11,909 | $490,655 | $37,414 |
| Loss per share, basic and diluted | $0.01 | $0.00 | $0.01 | $0.00 |
No meaningful operating margin is available because the company had no revenue. Nine-month operating cash use was $117,112; investing cash use was $250,000, principally for an asset acquisition; financing provided $456,200. Cash at May 31 was $89,088, versus zero at August 31, 2015. Cash was reported at $57,541 as of July 14, 2016.
At May 31, current assets were $90,137 and current liabilities were $301,223, yielding a $211,086 working-capital deficit. Total assets were $172,389; total liabilities were $301,223; stockholders’ deficit was $128,834. Current liabilities included a $193,842 derivative liability and convertible notes reported net of debt discounts. The balance sheet lists notes of $47,178; the notes section gives a different net balance of $47,148.
Material changes and unusual items
- Net loss increased substantially year over year, primarily reflecting a $167,251 asset impairment, higher general and administrative and professional costs, and $180,298 of quarterly interest expense (versus $6,092 a year earlier).
- On May 18, 2016, the company paid $250,000 for inventory and related product intellectual property, including the “sports leg and lung” drink product and rights to two future formulations. It recorded a $167,251 impairment during the quarter. Intangible assets were reported net at $81,700 after impairment.
- On May 11, the company issued $440,000 face value of senior secured convertible notes, receiving $426,400 after original-issue discount. The notes bear 10% interest, mature in six months, convert at $0.50 per share subject to a full reset, and are secured by all company assets. Holders received 200,000 commitment shares valued at $360,000. The associated derivative liability was $193,842 at May 31.
- Common shares outstanding increased from 37,581,903 at August 31, 2015 to 77,775,303 at May 31, 2016. The increase included debt conversions and the commitment-share issuance.
- Shareholders approved David Lelong’s appointment as sole director in April; he became CEO and other principal officer, and majority shareholder. His annual salary was set at $96,000, effective February 1, 2016.
Outlook, risks and controls
Management anticipated product sales and revenue in the following 12 months, but did not expect revenue to cover working-capital needs. It expected operating losses and planned to seek additional equity or debt financing; it cautioned that financing might not be available and that operations could be reduced or suspended if funds could not be raised. The filing states that recurring losses, a $922,108 accumulated deficit, a working-capital deficit, and insufficient resources create substantial doubt about the company’s ability to continue as a going concern.
Management reported that disclosure controls and procedures were not effective, citing no independent board or audit committee, inadequate segregation of duties, and reliance on a financial consultant for financial reporting. It planned to address weaknesses by adding independent directors and accounting personnel when resources permit. No material pending legal proceedings or material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether the company secured sufficient financing after the reported July 14 cash balance, and the status and terms of the six-month secured convertible notes, including conversion/reset provisions and repayment obligations.
- The note balance discrepancy ($47,178 on the balance sheet versus $47,148 in the note) and the reported debt discounts, interest expense, and derivative valuation.
- The asset purchase accounting: the filing’s acquisition allocation and intangible-asset table contain differing trade-name and total values; confirm the final allocation, impairment basis, and value of the acquired product assets.
- Whether the product launch generated sales, and whether inventory and planned product formulations can support the company’s revenue and liquidity plans.
- Progress in remediating ineffective disclosure controls and the going-concern risks.