Business context and reporting period
Sport Endurance, Inc. (the registrant named in the filing) filed this Form 10-Q for the three months ended November 30, 2017, its fiscal first quarter. The requested company name, SRX Global Inc., does not match the registrant identified in the filing; verify the issuer identity. Sport Endurance develops, markets, and distributes dietary supplements.
Financial results and liquidity
| Metric | Three months ended Nov. 30, 2017 | Prior-year period or balance-sheet comparison |
|---|---|---|
| Revenue | $214 | $230 |
| Cost of goods sold / gross profit | $27 / $187 | $34 / $196 |
| Operating expenses | $85,243 | $84,126 |
| Operating loss | $(85,056) | $(83,930) |
| Interest expense | $(136,925) | $(183,705) |
| Derivative fair-value gain | $111,281 | $67,072 |
| Net loss | $(110,700) | $(200,563) |
| Cash used in operating activities | $(111,020) | $(9,233) |
Gross margin was approximately 87% on very small sales. Cash was $92,172 at November 30, 2017, versus $1,442 at August 31, 2017. Current assets were $107,027 and current liabilities $1,322,154, yielding a working-capital deficit of $1,215,127 (compared with $1,182,874 at August 31). Stockholders’ deficit was $1,215,127. No meaningful revenue or operating margin is evident from the reported sales.
Financing activities provided $201,750, including $241,250 in proceeds from a new convertible note, offset by $75,000 of related-party note repayments and $35,500 of new related-party borrowing. Cash at the end of the prior-year quarter was $964. The filing reports current liabilities including $600,457 of convertible notes, net of discounts; $304,707 of derivative liability; $193,752 of related-party notes and accrued interest; and $144,000 of accrued officer salary. No debt-to-equity or liquidity facility is reported.
Material changes versus the prior comparable period
- Net loss narrowed by $89,863, mainly reflecting lower interest expense and a larger noncash gain from revaluing derivative liabilities. The derivative gain is valuation-driven, not operating cash generation.
- Revenue declined by $16; operating expenses increased by $1,117. General and administrative expense fell $22,435, primarily due to lower insurance expense, while professional fees rose $23,552.
- Operating cash use increased to $111,020 from $9,233. Financing cash inflows supported the quarter-end cash balance.
- Common shares outstanding increased to 78,685,302 from 78,226,969, including shares issued upon conversion of convertible debt and accrued interest.
Outlook, risks, contingencies, and unusual items
- Management states that recurring losses, negative operating cash flows, and the working-capital deficit raise substantial doubt about the company’s ability to continue as a going concern. Continued operations depend on additional debt or equity financing; management says there is no assurance financing will be available.
- The company expected to incur operating losses over the next 12 months and did not expect anticipated revenue to be material or sufficient to meet working-capital needs. It was exploring another business opportunity and said it may need to reduce or suspend operations if it cannot obtain financing.
- A November 2017 senior secured convertible note had $250,000 face value, carried 10% annual interest, matured in six months, and was convertible at $0.50 per share subject to a full reset feature. It was secured by all company assets and included premium repayment terms.
- After quarter-end, on January 17, 2018, a lender consolidated notes reported as due December 27, 2017 into a new one-year secured 10% convertible note with principal of $542,343 and a $0.03 conversion price. The lender had expressed interest in conversion to preferred stock, but the filing says there was no binding agreement for that conversion.
- As of January 4, 2018, cash was reported at $75,552. Management said funds were insufficient for the coming 12 months; it cited CEO demand notes of $193,752 and back salary of $160,000. The filing also reports accrued officer salary of $144,000 at November 30, 2017.
- Management concluded disclosure controls and procedures were ineffective, citing lack of an independent board or audit committee, inadequate segregation of duties, and reliance on a financial consultant for financial reporting. No material litigation or off-balance-sheet arrangements were reported.
- Derivative liabilities are Level 3 fair-value estimates using a lattice model and management assumptions, including stock volatility. The resulting noncash revaluation materially affected reported net loss.
Important facts for investors to verify
- Confirm the issuer’s identity: the filing is for Sport Endurance, Inc., not SRX Global Inc.
- Reconcile the filing’s accumulated-deficit figures: the balance sheet reports $3,219,172, while MD&A reports $3,219,151.
- Verify the status, maturity, security, conversion terms, and any subsequent conversion or refinancing of the $542,343 note and other debt; confirm whether the proposed preferred-stock conversion ever became binding.
- Assess near-term funding needs and the ability to continue as a going concern, including the reported January cash balance and CEO-related obligations.
- Review the extent to which the reported loss improvement depends on noncash derivative revaluation rather than revenue growth or operating performance.
- Confirm the timing and amount of CEO salary accruals and reconcile the $144,000 quarter-end balance with the $160,000 back-salary amount cited in MD&A.