Business context and reporting period
The filing is Sport Endurance, Inc.’s unaudited Form 10-Q for the three months ended November 30, 2018, with comparison to the three months ended November 30, 2017. The request identifies the company as SRX Global Inc.; the filing itself names Sport Endurance, Inc., so the issuer identity should be verified.
The company had exited its bitcoin-lending activities and had suspended sales of its sports-nutrition products. It was seeking opportunities in CBD, hemp, or legal marijuana-related businesses. In December 2018, it acquired a 6.7% interest in TruPet, an animal-health products business, and reported signing a letter of intent to acquire TruPet, subject to a definitive agreement, customary conditions, and financing.
Key financial results
| Metric | Three months ended Nov. 30, 2018 | Three months ended Nov. 30, 2017 |
|---|---|---|
| Revenue | $0 | $214 |
| Gross profit | $0 | $187 |
| SG&A | $147,523 | $85,243 |
| Operating loss | ($147,523) | ($85,056) |
| Interest expense | ($133,545) | ($136,925) |
| Net income (loss) | $505,220 | ($110,700) |
| Cash used in operating activities | ($148,801) | ($111,020) |
2018 net income included a $472,267 gain on exchanging debt and equity and a $314,021 noncash gain from revaluing derivative liabilities. The filing therefore reports a profit despite no revenue and an operating loss; the profit does not indicate profitable ongoing operations. Basic earnings per share were $0.01; diluted earnings per share were reported as $0.00.
At November 30, 2018, cash was $23,602 and inventory was $9,402. Current assets were $33,004 versus current liabilities of $223,515, a working-capital deficit of $190,511. Current liabilities included $132,000 of accrued officer salary and $29,808 of dividends payable. Convertible notes and derivative liabilities were reported at zero after the October exchange. Stockholders’ deficit was $190,511.
Material changes and transactions
- In October 2018, the company exchanged convertible debt, accrued interest, Series B preferred stock, dividends, warrants, and related derivative liability for approximately 2.85 million shares of Series E preferred stock. Series E carries a 10% annual dividend and is convertible at $0.03 per share; the filing describes certain default-related redemption and conversion-price reset provisions.
- In November, the company repurchased 27,271,500 common shares for $27,271. Common shares outstanding fell from 79,683,842 at August 31 to 52,412,342 at November 30.
- In December, a private placement generated approximately $2.8 million before fees. The company invested $2.2 million for its minority TruPet interest. It reported $297,858 in cash as of January 10, 2019, after that investment.
- SG&A increased by $62,280 year over year, primarily because of higher legal and accounting fees. The company reported no investing cash flows in the quarter.
Outlook, risks, and controls
Management anticipated operating losses over the next 12 months. The filing states that recurring losses, a $5,554,071 accumulated deficit, negative operating cash flows, and insufficient cash at quarter-end raised substantial doubt about the company’s ability to continue as a going concern. Management said January cash after the private placement and TruPet investment should cover working-capital needs for at least 12 months, but stated that completing an acquisition would likely require further financing. The amount, terms, and dilution from any such financing were not determined.
The company reported that disclosure controls and procedures were not effective, citing the lack of an independent board or audit committee, inadequate segregation of duties, and reliance on a financial consultant for financial reporting. It planned to address these weaknesses as resources permitted. The filing checked “No” to whether all required Exchange Act reports had been filed during the preceding 12 months.
No material pending or threatened litigation was reported. The filing provides no operating revenue guidance or quantified acquisition forecast.
Important facts for investors to verify
- Confirm the correct registrant and filing match: the request names SRX Global Inc., but the filing names Sport Endurance, Inc.
- Review the October debt-for-preferred-stock exchange, including Series E dividend, conversion, reset, and default-redemption terms, and the accounting gains that drove reported net income.
- Confirm the final terms, financing requirements, and status of the proposed TruPet acquisition; the disclosed minority investment is not the same as completing an acquisition.
- Assess liquidity after the private placement and TruPet investment, including the company’s ability to fund operations and any additional acquisition financing.
- Review the ineffective disclosure controls and the filing’s response that required periodic reports had not all been filed during the preceding 12 months.