Business context and reporting period
This Form 10-Q covers the three months ended November 30, 2016, with comparisons to the three months ended November 30, 2015. The filing identifies the registrant as Sport Endurance, Inc., a Nevada company marketing dietary supplements; this differs from the requested company name, SRX Global Inc., and should be verified.
The company reported sales of products including Ultra Peak T, Sports Leg and Lung Formula, and Pain-Freeze Recovery Gel. It had one employee, its CEO, as of quarter-end.
Financial performance and position
- Revenue: $230, versus zero in the prior-year quarter. Cost of goods sold was $34, yielding $196 net revenue; the implied gross margin was approximately 85%, on immaterial sales.
- Operating expenses: $84,126, up from $16,433. General and administrative expense was $66,153 and professional fees were $17,973.
- Net loss: $200,563, versus $18,686. Net loss per share was reported as $(0.00) in both periods; weighted-average shares were 77,775,303 versus 48,724,757.
- Interest and other expense: Interest expense was $183,705, compared with $2,253. The company attributed the increase mainly to convertible-note interest and amortization of debt discounts. A $67,072 gain from remeasuring the derivative liability partly offset expenses.
- Cash flow: Operating activities used $9,233, compared with $16,200 used in the prior-year quarter. There were no investing or financing cash flows in the quarter. Cash declined from $10,197 at August 31 to $964 at November 30.
- Liquidity: Current assets were $16,176, including $15,212 of inventory; current liabilities were $791,062, producing a working-capital deficit of $774,886. The filing describes this deficit as substantial and states the company lacks resources to meet near-term obligations and fund the next 12 months.
- Debt and liabilities: Current liabilities included $440,000 of convertible notes, $187,880 of derivative liability, and $163,182 of accounts payable and accrued liabilities. The notes were secured by all company assets and carried 10% annual interest.
Material changes versus the prior comparable period
- Sales began, but remained minimal at $230; the company had no revenue in the prior-year quarter.
- Net loss increased by $181,877. Management linked higher operating costs to implementing its business plan and higher interest expense to its convertible financing.
- Cash used in operations improved from $16,200 to $9,233, while cash on hand at quarter-end was only $964.
- Between August 31 and November 30, current liabilities increased from $590,963 to $791,062, and the working-capital deficit widened from $574,323 to $774,886.
Outlook, risks, contingencies, and unusual items
- Going concern: The filing says recurring losses, an accumulated deficit of $1,565,777, the working-capital deficit, and limited cash raise substantial doubt about the company’s ability to continue as a going concern. Management was seeking financing and new ventures; no assurance of financing success was given.
- Debt extensions after quarter-end: In December 2016, note maturities were extended to February and March 2017. One extension involved a $50,000 cash payment and a reduced principal balance of $102,113, including a penalty; another increased principal from $336,787 to approximately $490,389 and included 35,000 shares issued to the lender. The filing states the $50,000 could be added to principal if the applicable note is not paid.
- Subsequent borrowing: On January 4, 2017, CEO David Lelong provided a $52,000 demand note bearing 2% annual interest.
- Outlook: Management expected revenue and general and administrative and professional expenses to increase as it implemented its plan, but did not expect revenue to cover working-capital needs. It anticipated operating losses over the next 12 months and said it might need to slow or suspend activities absent financing.
- Accounting and valuation: The derivative liability was valued using a lattice model with significant unobservable inputs. The reported $67,072 revaluation gain is noncash. The company had previously impaired the $248,951 of acquired intangible assets in fiscal 2016.
- Controls and legal matters: Management concluded disclosure controls were not effective, citing no independent board or audit committee, inadequate segregation of duties, and reliance on a financial consultant for financial reporting. The company reported no material pending legal proceedings.
Important facts for investors to verify
- Confirm that this filing belongs to the intended issuer: the filing names Sport Endurance, Inc., not SRX Global Inc.
- Review the convertible-note agreements, extension and penalty terms, collateral, and whether the notes were repaid or further amended after the disclosed dates.
- Verify the status and terms of the CEO’s $52,000 demand loan and any subsequent financing.
- Assess whether the company obtained enough capital to address its going-concern risk and the stated near-term funding shortfall.
- Reconcile the very low reported sales and cash balance with management’s revenue and operating plans, and monitor inventory realizability.