Filing summary
Issuer and period: The supplied filing is for Sport Endurance, Inc., not SRX Global Inc. It is a Form 10-K for the fiscal year ended August 31, 2018, rather than a standalone fourth-quarter report. The company’s business changed repeatedly: it had previously marketed sports nutrition products, entered bitcoin lending in March 2018 and exited that business in August, and was seeking new opportunities in CBD, hemp, or legal marijuana. The filing reports a December 2018 investment in TruPet, a privately held animal-health and pet-products business.
Financial performance and position
| Metric | FY 2018 / August 31, 2018 | FY 2017 / August 31, 2017 |
|---|---|---|
| Revenue | $475 | $1,734 |
| Gross profit | $264 | $1,400 |
| Operating loss | $527,887 | $524,038 |
| Loss from continuing operations | $1,114,908 | $1,743,258 |
| Loss from discontinued operations | $1,835,911 | — |
| Net loss | $2,950,819 | $1,743,258 |
| Cash used in continuing operating activities | $842,446 | $39,755 |
| Cash and cash equivalents | $199,674 | $1,442 |
| Current assets | $209,076 | $16,324 |
| Current liabilities | $2,858,351 | $1,199,198 |
| Working capital deficit | $2,649,275 | $1,182,874 |
| Accumulated deficit | $6,059,291 | $3,108,472 |
Sales were negligible relative to the company’s expenses. SG&A was approximately $528,000 in both years. Interest expense and debt-related accounting items were significant: reported interest expense included $532,907 of debt-discount amortization and $447,680 for derivative value exceeding note principal; the company also recorded a $1,033,669 gain on debt restructuring and a $474,648 loss on debt conversion. These noncash and financing-related items materially affected reported results.
At August 31, 2018, the balance sheet included $1,027,202 of convertible-note principal, presented net of discounts at $274,214, and a $2,317,412 derivative liability. The notes were classified as current. The filing does not provide a meaningful operating margin given the very small revenue base.
Material changes and subsequent events
- Continuing-operations loss improved by $628,350 from FY 2017, but the company reported a $1,835,911 discontinued-operations loss after exiting bitcoin lending; total net loss therefore increased by $1,207,561.
- The bitcoin venture involved a $5 million bitcoin borrowing and a $5.5 million senior note. In August 2018 the company transferred its Yield subsidiary, terminated its guarantee, and reported the senior-note liability extinguished. The filing describes a disagreement with the former auditor over whether Yield had acquired ownership of the bitcoin.
- On October 22, 2018, the company exchanged secured notes, Series B preferred stock, and warrants for 2,846,356 Series E preferred shares. Series E is convertible at $0.03 per common share, carries a 10% dividend plus additional quarterly amounts, and has price-protection and redemption provisions. The company estimated the securities could result in 93,929,748 additional common shares, with further dilution possible from accrued dividends.
- In December 2018, the company reported approximately $2.8 million in gross proceeds from a private placement. It also invested $2.2 million for an approximately 6.7% minority interest in TruPet. The filing gives inconsistent snapshots of post-year-end cash: it reports approximately $62,911 as of November 21 and $426,366 as of December 20, after the financing and loan. Management said the later cash position should meet working-capital needs for at least 12 months, while also noting financing may be needed for an acquisition.
- The company repurchased 27,271,500 common shares for $27,271 in November 2018. It reported 88,012,329 common shares outstanding as of December 20, 2018; the filing also contains a different share-count figure in its ownership disclosure.
Outlook, risks, and unusual items
The auditor’s report highlights substantial doubt about the company’s ability to continue as a going concern. The company had recurring losses, a large working-capital deficit, and limited operations; management said continued operation depends on financing and/or generating sufficient cash. Failure to raise funds could require cessation of operations. Management was exploring acquisitions but had no written acquisition agreement as of the report date; any acquisition and related financing could be highly dilutive.
- Accounting and governance: Management found disclosure controls and internal control over financial reporting ineffective, citing material weaknesses in the control environment and financial-statement disclosure. The company had one employee, no independent directors or audit committee, and said it could not presently implement significant remediation.
- Financial reporting concern: The company dismissed its former auditor after a disagreement about bitcoin ownership and related revenue recognition. It later disclosed that its May 31, 2018 Form 10-Q should no longer be relied upon because warrant derivative liability had been calculated incorrectly; an amended report was filed in December 2018.
- Financing and dilution: Convertible preferred stock, warrants, price resets, dividends, and redemption features create potential dilution and financing risk. The filing warns that additional capital may be required.
- Business and regulatory exposure: The proposed CBD, hemp, and marijuana strategy faced unsettled and changing federal and state laws, potential federal enforcement, banking restrictions, competition, and product-market uncertainty. TruPet also faces pet-food regulation, competition, supplier, and product-safety risks.
- Other unusual disclosures: The company reported that its 2017 U.S. federal and state tax returns were delinquent and anticipated filing by March 15, 2019. It also disclosed that 2018 discontinued-operations results include substantial warrant, derivative, bitcoin valuation, and disposal-accounting effects.
Most important facts for investors to verify
- Confirm the issuer’s identity and reporting period: the supplied 10-K names Sport Endurance, Inc., and covers the year ended August 31, 2018.
- Reconcile post-year-end cash and shares outstanding across the filing, financing disclosures, repurchase, and ownership table; confirm the net proceeds and use of private-placement funds.
- Review the October 2018 Series E exchange terms, conversion calculations, dividend and redemption provisions, and total potential dilution.
- Verify the status, valuation, governance rights, and financial information available for the $2.2 million TruPet investment, and whether any acquisition agreement was subsequently executed.
- Assess whether the company has adequate liquidity and financing commitments to support operations, given the going-concern warning and material working-capital deficit.
- Review the bitcoin transaction unwind and auditor disagreement, the amended May 2018 quarterly filing, and the remediation of reported control weaknesses.
- Confirm the status of delinquent tax filings and any subsequent auditor, accounting, or regulatory developments.