Business context and reporting period
Filing identity: The supplied filing is for Sport Endurance, Inc., not SRX Global Inc. It is a Form 10-Q for the quarter and six months ended February 28, 2017; the company reports an August 31 fiscal year-end. Sport Endurance develops and distributes dietary supplements in the United States, including Ultra Peak T, Sports Leg and Lung Formula, and Pain-Freeze Recovery Gel.
Financial performance and condition
| Metric | Three months ended February 28, 2017 | Six months ended February 28, 2017 |
|---|---|---|
| Revenue | $90 | $320 |
| Cost of goods sold | $59 | $93 |
| Gross profit | $31 | $227 |
| Operating expenses | $221,477 | $305,603 |
| Interest expense | $200,360 | $384,065 |
| Derivative remeasurement loss | $333,344 | $266,272 |
| Net loss | $755,150 | $955,713 |
Gross margin was approximately 34% for the quarter and 71% for the six-month period, but revenue was minimal. Prior-year revenue was zero; prior-year net losses were $7,486 for the quarter and $26,172 for the six months. The reported loss per share was $0.01 for both 2017 periods.
At February 28, 2017, cash was $6,531, inventory $15,149, current assets $21,680, and current liabilities $1,030,978, resulting in a working-capital deficit of $1,009,298. Total stockholders’ deficit was $1,009,298, and accumulated deficit was $2,320,927. Cash used in operations for the six months was $23,666; financing provided $20,000, leaving ending cash of $6,531. Management reported cash of only $1,708 as of April 7, 2017.
Current liabilities included a $430,143 derivative liability, $361,475 in convertible notes net of unamortized discounts, $70,178 of related-party notes and accrued interest, and $72,000 in accrued officer salary. The CEO lent the company $70,000 in January and February at 2% interest. Debt-related expenses and derivative remeasurement were major contributors to the period’s losses.
Material changes, outlook, and risks
- Compared with 2016, operating expenses, interest expense, derivative losses, and net losses rose substantially, while revenue remained negligible. Management attributed higher operating costs to implementing its business plan and higher interest expense primarily to amortizing convertible-debt discounts.
- The company restructured its May 2016 secured convertible notes into new notes with aggregate principal of $614,258, including $212,702 of penalties, fees, and accrued interest. The notes bear 10% interest, have a stated conversion price of $0.50 subject to a downward reset, and include a 3.5% discount. Two notes totaling $494,340 were due in March 2017 and one note of $119,918 was due in August 2017. In April, holders of the two March-due notes agreed to extend them to April 17 in exchange for $75,000 in principal payments.
- Management stated that the company cannot meet its debt and operating needs for the next 12 months without additional financing. It planned to seek equity or debt financing and anticipated some revenue, but not enough to meet working-capital needs. It warned that failure to obtain financing could require reduced or suspended business activity and stated that it expected operating losses over the next 12 months. The filing provides no quantified revenue or earnings guidance.
- The auditor is not quoted here, but management and the financial statements identify substantial doubt about the company’s ability to continue as a going concern. The statements do not include adjustments that might be required if the company cannot continue operating.
- Management concluded disclosure controls were ineffective, citing no independent board or audit committee, inadequate segregation of duties, and reliance on a financial consultant for financial reporting. The company said it planned to address these issues as resources permitted.
- The filing reports no material pending or threatened litigation and no material off-balance-sheet arrangements. It notes that derivative-liability valuation depends on a lattice model and subjective assumptions.
Important facts for investors to verify
- Confirm the issuer identity: the filing names Sport Endurance, Inc., despite the request metadata naming SRX Global Inc.
- Verify the status and current balance of the $614,258 restructured convertible notes, the April 17, 2017 extension and required $75,000 payment, and any further amendments or defaults.
- Check subsequent financing, cash balances, debt repayment, and whether the company remained able to fund operations after the reported $1,708 cash balance on April 7, 2017.
- Assess the likelihood of meaningful product sales and whether inventory can be sold at recorded value; reported sales were only $320 for the six-month period.
- Review derivative-liability valuation and the reported period change: the statements show a quarterly loss of $333,344, while MD&A states $333,334.
- Note the filing’s working-capital figures: the balance sheet and MD&A show a $1,009,298 deficit, while the going-concern note contains a conflicting $1,009,928 figure.