SRX Global Inc. quarterly report, Q1 FY2018

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

MetricThree months ended Nov. 30, 2017Prior-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

  1. Confirm the issuer’s identity: the filing is for Sport Endurance, Inc., not SRX Global Inc.
  2. Reconcile the filing’s accumulated-deficit figures: the balance sheet reports $3,219,172, while MD&A reports $3,219,151.
  3. 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.
  4. Assess near-term funding needs and the ability to continue as a going concern, including the reported January cash balance and CEO-related obligations.
  5. Review the extent to which the reported loss improvement depends on noncash derivative revaluation rather than revenue growth or operating performance.
  6. 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.