Business context and reporting period
The supplied filing is Sport Endurance, Inc.’s Form 10-Q for the fiscal quarter ended May 31, 2018 (fiscal third quarter), filed August 29, 2018. This differs from the request metadata naming SRX Global Inc.; verify the issuer identity before relying on this summary. Sport Endurance described its business as developing and selling dietary supplements. In March 2018 it entered a bitcoin-lending venture through subsidiary Yield Endurance, then transferred Yield and exited that venture on August 21, 2018, after quarter-end. The filing presents Yield as a discontinued operation.
Financial performance and position
| Metric | Three months ended May 31 | Nine months ended May 31 |
|---|---|---|
| Revenue | 2018: $0; 2017: $714 | 2018: $475; 2017: $1,034 |
| Net revenue after cost of goods sold | 2018: $0; 2017: $576 | 2018: $264; 2017: $803 |
| Operating expenses | 2018: $239,511; 2017: $115,556 | 2018: $391,233; 2017: $421,159 |
| Net loss from continuing operations | 2018: $1,482,586; 2017: $465,671 | 2018: $2,544,780; 2017: $1,421,384 |
| Loss from discontinued operations | 2018: $3,571,043; 2017: $0 | 2018: $3,571,043; 2017: $0 |
| Consolidated net loss | 2018: $5,053,629; 2017: $465,671 | 2018: $6,115,823; 2017: $1,421,384 |
Continuing-operations gross margin was not meaningful in the quarter because revenue and cost of goods sold were both zero. For the nine-month period, gross profit was $264 on $475 of sales. No income tax expense was reported. Basic and diluted loss per share from continuing operations was $0.02 for the quarter and $0.03 for the nine months in 2018.
- Cash flow: For the nine months, cash used in operating activities was $336,429 for continuing operations and $367,327 for discontinued operations; the MD&A reports total operating cash use of $703,756. Continuing operations received $1,001,500 net from financing activities. Cash increased $297,744, from $1,442 at August 31, 2017 to $299,186 at May 31, 2018. The filing reports no investing cash flows.
- Liquidity and capitalization: May 31 cash was $299,186. Current assets were $4,210,563 and current liabilities $6,909,785, yielding a working-capital deficit of $2,699,222. The balance sheet included $3,897,293 of discontinued-operation current assets and $5,594,700 of related current liabilities. Stockholders’ deficit was $2,699,222; accumulated deficit was $9,224,295.
- Debt and noncash charges: Continuing-operation convertible notes were reported at $92,167 net of $935,037 in unamortized discounts, with an $880,192 derivative liability. Nine-month interest expense was $1,702,312 and the derivative revaluation loss was $601,048, both materially affecting results. The company received $1,232,500 from convertible debt during the period and repaid $266,500 of CEO-related notes.
- Discontinued venture: Yield’s reported assets included a $5 million bitcoin-loan receivable, offset by a $1,112,122 reserve; liabilities included a $5.5 million senior note. The $3,571,043 discontinued-operation loss included $8,488,090 of interest expense, a $1,112,122 bitcoin valuation loss, and a $6,387,081 warrant-cancellation credit.
Material changes, outlook, and risks
- Compared with 2017, sales remained negligible while continuing-operation losses increased: nine-month loss rose by $1,123,396. Management attributed higher interest expense mainly to amortization of debt discounts; quarterly SG&A rose mainly due to marketing, and professional fees increased mainly due to investor-relations costs in the quarter and legal costs over nine months.
- After quarter-end, the company transferred Yield to Madison, terminated its guarantee of the $5.5 million senior note, and canceled 15 million of the 25 million warrants issued in the bitcoin financing. The filing says there would be no continuing cash inflows or outflows from discontinued operations. This subsequent restructuring is not reflected as a May 31 balance-sheet transaction.
- Management disclosed substantial doubt about the company’s ability to continue as a going concern. It reported recurring losses, negative operating cash flows, a working-capital deficit, and insufficient resources for the next 12 months. It planned to seek equity or debt financing, considered converting convertible debt to preferred stock without a formal agreement, and was exploring other business opportunities. It expected operating losses and offered no assurance of meaningful revenue or successful financing.
- As of July 2, 2018, cash was $272,190, and the company reported $160,000 of accrued CEO salary. The Series B preferred stock issued in May to convert debt carries a 10% annual dividend and has specified default-related redemption and conversion-reset provisions.
- 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. No material change in internal control was reported during the quarter.
Important facts for investors to verify
- Confirm the issuer and filing match: the supplied metadata says SRX Global Inc., but the filing identifies Sport Endurance, Inc.
- Review the August 21, 2018 Yield transfer and guarantee termination, including the final treatment of bitcoin-related obligations and warrants.
- Assess financing availability, near-term cash requirements, and the company’s ability to address the going-concern uncertainty and accrued CEO salary.
- Reconcile reported cash-flow adjustments and discontinued-operation accounting; the filing’s MD&A and cash-flow presentation describe certain adjustments at different levels of detail.
- Evaluate dilution and potential obligations from convertible notes, Series B preferred stock, derivative features, and the 12,054,405 warrants outstanding at May 31, 2018.