Sport Endurance, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended February 28, 2018. The filing identifies the registrant as Sport Endurance, Inc.; the request metadata names SRX Global Inc. The filing describes a dietary-supplement business and reports a post-period entry into cryptocurrency lending.
Financial performance
| Metric | Three months ended Feb. 28, 2018 | Six months ended Feb. 28, 2018 | Comparable 2017 period |
|---|---|---|---|
| Revenue | $261 | $475 | $90 quarter; $320 six months |
| Gross profit (revenue less cost of goods sold) | $77 | $264 | $31 quarter; $227 six months |
| Gross margin | 29.5% | 55.6% | 34.4% quarter; 70.9% six months |
| Operating expenses | $66,479 | $151,722 | $221,477 quarter; $305,603 six months |
| Operating loss | $66,402 | $151,458 | $221,446 quarter; $305,376 six months |
| Net loss | $951,494 | $1,062,194 | $755,150 quarter; $955,713 six months |
| Net loss per share, basic and diluted | $(0.01) | $(0.01) | $(0.01) in both comparable periods |
Six-month operating cash use was $166,013, versus $23,666 in the prior-year period. Financing provided $418,000, principally including $482,500 of convertible-debt proceeds, offset by $100,000 of related-party principal repayments. Cash rose to $253,429 from $1,442 at August 31, 2017. There were no investing cash flows.
Balance sheet and liquidity
- At February 28, 2018, cash was $253,429, inventory $14,671, and total current assets $268,100.
- Current liabilities were $1,951,276, producing a working-capital deficit of $1,683,176, compared with a $1,182,874 deficit at August 31, 2017. The largest liability was the $1,328,033 derivative liability, measured using Level 3 inputs.
- Other current obligations included $212,237 of convertible notes, net of discounts; $169,524 of related-party notes and accrued interest; $160,000 of accrued officer salary; and $81,482 of accounts payable and accrued liabilities.
- Management states cash was $624,682 as of April 2, 2018, but says the company lacked sufficient working capital for debt and operating needs. The filing reports substantial doubt about the company’s ability to continue as a going concern.
Changes, outlook, and risks
- Revenue remained extremely low. Six-month revenue increased to $475 from $320, while operating expenses fell mainly because of lower financing penalties. Professional fees rose to $63,390 from $47,098.
- Six-month net loss increased to $1,062,194 from $955,713, driven in part by a $600,923 non-cash loss from revaluing derivative liabilities and $449,136 of interest expense. A $139,323 non-cash gain from a January 2018 debt exchange partly offset expenses.
- Convertible notes carry 10% interest, are secured by company assets, and include conversion-price reset provisions. Management expects future operating and professional expenses to increase, anticipates operating losses, and intends to seek equity or debt financing. No quantified revenue or earnings guidance is provided.
- Subsequent events: In March, the company issued a $777,202 face-value secured convertible note for $750,000 cash proceeds. Its subsidiary also borrowed $5 million in bitcoin under a $5.5 million face-value secured note, bearing 10% interest and payable 30 days after written demand; the parent guaranteed it. The bitcoin was to be lent to third parties through Madison Partners. Prism received 25 million five-year warrants exercisable at $0.01 per share. These arrangements introduce material repayment, bitcoin-value, counterparty, and dilution risks.
- The CEO is also the CFO and principal accounting officer. Management concluded disclosure controls were ineffective, citing lack of an independent board or audit committee, inadequate segregation of duties, and reliance on a financial consultant for financial reporting.
Important facts for investors to verify
- Reconcile the filing’s conflicting six-month results: the financial statements report a $1,062,194 net loss, while MD&A gives inconsistent figures, including $951,494 (the reported quarterly loss) and other misstated comparisons.
- Reconcile accumulated-deficit disclosures: the balance sheet reports $4,170,666, while MD&A elsewhere reports $3,836,719.
- Confirm the current amount, demand status, repayment terms, and collateral implications of all debt, especially the bitcoin note and the March convertible note; assess whether the disclosed April cash is sufficient for near-term obligations.
- Assess dilution from the 25 million bitcoin-transaction warrants, other warrants, and convertible notes, including the effect of reset provisions and any waivers.
- Evaluate whether the cryptocurrency lending arrangement generates revenue and whether bitcoin can be returned or its value recovered when the secured note is demanded.
- Consider the going-concern warning, financing dependence, related-party obligations, and ineffective disclosure controls. The filing states there were no known material pending or threatened lawsuits.