CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED JANUARY 31, 2020 AND 2019
(UNAUDITED)
NOTE
1: NATURE OF BUSINESS AND BASIS OF PRESENTATION
Organization
and Nature of Business
Verus
International, Inc., including its wholly-owned subsidiaries, are collectively referred to herein as “Verus,” “VRUS”,
“Company,” “us,” or “we.”
We
were incorporated in the state of Delaware under the name Spectrum Gaming Ventures, Inc. on May 25, 1994. On October 10, 1995,
we changed our name to Select Video, Inc. On October 24, 2007, we filed a Certificate of Ownership with the Delaware Secretary
of State whereby Webdigs, Inc., our wholly-owned subsidiary, was merged with and into us and we changed our name to Webdigs, Inc.
On
October 9, 2012, we consummated a share exchange (the “Exchange Transaction”) with Monaker Group, Inc. (formerly known
as Next 1 Interactive, Inc.), a Nevada corporation (“Monaker”) pursuant to which we received all of the outstanding
equity in Attaché Travel International, Inc., a Florida corporation and wholly owned subsidiary of Monaker (“Attaché”)
in consideration for the issuance of 93 million shares of our newly designated Series A Convertible Preferred Stock to Monaker.
Attaché owned approximately 80% of a corporation named RealBiz Holdings Inc. which is the parent corporation of RealBiz
360, Inc. (“RealBiz”). As a condition to the closing of the Exchange Transaction, on October 3, 2012, we filed a Certificate
of Ownership with the Delaware Secretary of State whereby RealBiz Media Group, Inc., our wholly-owned subsidiary, was merged with
and into us and we changed our name to RealBiz Media Group, Inc.
On
May 1, 2018, Verus Foods MENA Limited (“Verus MENA”) entered into a Share Purchase and Sale Agreement with a purchaser
(the “Purchaser”) pursuant to which Verus MENA sold 75 shares (the “Gulf Agro Shares”) of Gulf Agro Trading,
LLC (“Gulf Agro”), representing 25% of the common stock of Gulf Agro, to the Purchaser. In consideration for the Gulf
Agro Shares, the Purchaser was assigned certain contracts executed during a specified period of time. Upon the consummation of
the transaction contemplated by the Share Purchase and Sale Agreement, the Purchaser obtained a broader license for product distribution.
All liabilities of Gulf Agro remained with Gulf Agro.
Since
August 1, 2018, we, through our wholly-owned subsidiary, Verus Foods, Inc., an international supplier of consumer food products,
have been focused on international consumer packaged goods, foodstuff distribution and wholesale trade. Our fine food products
are sourced in the United States and exported internationally. We market consumer food products under our own brands primarily
to supermarkets, hotels, and other members of the wholesale trade. Initially, we focused on frozen foods, particularly meat, poultry,
seafood, vegetables, and french fries with beverages as a second vertical, and during 2018, we added cold-storage facilities and
began seeking international sources for fresh fruit, produce and similar perishables, as well as other consumer packaged foodstuff
with the goal to create vertical farm-to-market operations. Verus has also begun to explore new consumer packaged goods (“CPG”)
non-food categories, such as cosmetic and fragrances, for future product offerings.
VERUS
INTERNATIONAL, INC.
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED JANUARY 31, 2020 AND 2019
(UNAUDITED)
NOTE
1: NATURE OF BUSINESS AND BASIS OF PRESENTATION (continued)
We
currently have a significant regional presence in the Middle East and North Africa (“MENA”) and sub-Saharan Africa
(excluding The Office of Foreign Assets Control restricted nations), with deep roots in the Gulf Cooperation Council (“GCC”)
countries, which includes the United Arab Emirates, Oman, Bahrain, Qatar, Kingdom of Saudi Arabia and Kuwait. The Company’s
long-term goal is to source goods and generate international wholesale and retail CPG sales in North and South America, Europe,
Africa, Asia and Australia.
In
addition to the foregoing, since our acquisition of Big League Foods, Inc. (“BLF”) during April 2019, pursuant to
which we acquired a license with Major League Baseball Properties, Inc. (“MLB”) to sell MLB-branded frozen dessert
products and confections, we have been selling pint size ice cream in grocery store-type packaging and are exploring novelty “grab-and-go”
size ice cream in cone, bar, and sandwich versions under our frozen dessert product line. In addition, under our confections product
line, we are selling gummi and chocolate candies. The MLB license covers all 30 MLB teams, and all of our current products pursuant
to such license feature “home team” packaging that matches the fan base in each region.
Furthermore,
during August 2019, we purchased all of the assets of a french fry business in the Middle East.
Basis
of Presentation
The
consolidated unaudited financial information furnished herein reflects all adjustments, consisting only of normal recurring
items, which in the opinion of management, are necessary to fairly state the Company’s financial position, results of
operations and cash flows for the dates and periods presented and to make such information not misleading. Certain
information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting
principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted pursuant to
rules and regulations of the Securities and Exchange Commission (the “SEC”); nevertheless, management of the
Company believes that the disclosures herein are adequate to make the information presented not misleading.
The
consolidated unaudited financial statements for the three months ended January 31, 2020 and 2019 include the operations of
BLF effective April 25, 2019, Verus MENA effective May 1, 2018, and Verus Foods, Inc. effective January 2017. All significant
intercompany balances and transactions have been eliminated in the consolidation.
These
consolidated unaudited financial statements should be read in conjunction with the Company’s audited consolidated
financial statements for the year ended October 31, 2019, contained in the Company’s Annual Report on Form 10-K filed
with the SEC on April 13, 2020. The results of operations for the three months ended January 31, 2020, are not necessarily
indicative of results to be expected for any other interim period or the fiscal year ending October 31, 2020.
VERUS
INTERNATIONAL, INC.
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED JANUARY 31, 2020 AND 2019
(UNAUDITED)
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use
of Estimates
The
preparation of consolidated unaudited financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the unaudited consolidated financial statements and reported amounts of revenues and expenses for the reporting
period. Actual results could differ from those estimates. If actual results significantly differ from the Company’s estimates,
the Company’s financial condition and results of operations could be materially impacted. Significant estimates include
the collectability of accounts receivable, valuations of inventory, finite-lived intangible assets, derivative liabilities, stock-based
compensation and the valuation reserve for income taxes.
Concentrations
of Credit Risk
The
Company places its cash and cash equivalents with high-quality financial institutions. At times, balances in the Company’s
cash accounts may exceed the Federal Deposit Insurance Corporation (“FDIC”) limit. At January 31, 2020 and October
31, 2019, Company’s cash balances did not exceed the FDIC limit.
The
Company’s food products accounts receivable, net and revenues are geographically concentrated with customers located in
the GCC countries. In addition, significant concentrations exist with a limited number of customers. Although the loss of one
or more of our top customers, or a substantial decrease in demand by any of those customers for our products, could have a material
adverse effect on our business, results of operations and financial condition, such risks may be mitigated by our access to credit
insurance programs.
The
Company purchases substantially all of its food products from a limited number of regions around the world or from a limited number
of suppliers. Increases in the prices of the food products which we purchase could adversely affect our operating results if we
are unable to offset the effect of these increased costs through price increases, and we can provide no assurance that we will
be able to pass along such increased costs to our customers. Furthermore, if we cannot obtain sufficient food products or our
suppliers cease to be available to us, we could experience shortages in our food products or be unable to meet our commitments
to customers. Alternative sources of food products, if available, may be more expensive. For periods in which the prices are declining,
the Company may be required to write down its inventory carrying cost which, depending on the extent of the differences between
market price and carrying cost, could have a material adverse effect on the Company’s consolidated results of operations
and financial position.
Cash
and Cash Equivalents
For
purposes of balance sheet presentation and reporting of cash flows, the Company considers all unrestricted demand deposits, money
market funds and highly liquid debt instruments with an original maturity of less than 90 days to be cash and cash equivalents.
There were no cash equivalents at January 31, 2020 or October 31, 2019.
VERUS
INTERNATIONAL, INC.
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED JANUARY 31, 2020 AND 2019
(UNAUDITED)
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Accounts
Receivable
The
Company regularly reviews outstanding receivables and provides for estimated losses through an allowance for doubtful accounts.
In evaluating the level of established loss reserves, the Company makes judgments regarding its customers’ ability to make
required payments, economic events and other factors. As the financial condition of these parties change, circumstances develop
or additional information becomes available, adjustments to the allowance for doubtful accounts may be required. The Company maintains
reserves for potential credit losses and such losses traditionally have been within its expectations. At January 31, 2020 and
October 31, 2019, the Company determined there was no requirement for an allowance for doubtful accounts.
Inventory
Inventory
is stated at the lower of net realizable value, determined on the first-in, first-out basis, or cost. Net realizable value is
based on estimated selling prices in the ordinary course of business less reasonably predictable costs of completion and transportation.
Inventories consist of raw materials (film and packaging) and finished products.
Intangible
Assets
The
Company amortizes its two intangible assets, a license with Major League Baseball Properties, Inc., and certain acquired customer
contracts, on a straight-line basis over the estimated useful lives of the assets.
Property
and Equipment
All
expenditures on the acquisition for property and equipment are recorded at cost and capitalized as incurred, provided the asset
benefits the Company for a period of more than one year. Expenditures on routine repairs and maintenance of property and equipment
are charged directly to operating expense. The property and equipment is depreciated based upon its estimated useful life after
being placed in service. The estimated useful lives range from 3 to 7 years based upon asset class. When an asset is retired,
sold or impaired, the resulting gain or loss is reflected in earnings.
Impairment
of Long-Lived Assets
In
accordance with Accounting Standards Codification (“ASC”) 360-10, “Property, Plant, and Equipment”, the
Company periodically reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected
undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference
between the asset’s estimated fair value and its book value.
Fair
Value of Financial Instruments
The
Company measures its financial instruments in accordance with ASC topic 820, “Fair Value Measurements and Disclosures”
(“ASC 820”), formerly SFAS No. 157 “Fair Value Measurements”. ASC 820 defines “fair value”
as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date.
ASC
820 also describes three levels of inputs that may be used to measure fair value:
Level
1: Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities traded in active markets.
Level
2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or
indirectly.
Level
3: Inputs that are generally unobservable. These inputs may be used with internally developed methodologies that result in management’s
best estimate of fair value.
Financial
instruments consist principally of cash, accounts receivable, prepaid expenses, due from affiliates, accounts payable, accrued
liabilities and other current liabilities. The carrying amounts of such financial instruments in the accompanying balance sheets
approximate their fair values due to their relatively short-term nature. The fair value of short and long-term debt is based on
current rates at which the Company could borrow funds with similar remaining maturities. The carrying amounts approximate fair
value. It is management’s opinion that the Company is not exposed to any significant currency or credit risks arising from
these financial instruments.
VERUS
INTERNATIONAL, INC.
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED JANUARY 31, 2020 AND 2019
(UNAUDITED)
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue
Recognition
Revenue
is derived from the sale of food and beverage products. The Company recognizes revenue when obligations under the terms of a contract
with the customer are satisfied. Product sales occur once control is transferred upon delivery to the customer. Revenue is measured
as the amount of consideration the Company expects to receive in exchange for transferring products. The amount of consideration
the Company receives and revenue the Company recognizes varies with changes in customer incentives the Company offers to its customers
and their customers. In the event any discounts, sales incentives, or similar arrangements are agreed to with a customer, such
amounts are estimated at time of sale and deducted from revenue. Sales taxes and other similar taxes are excluded from revenue
(see Note 6).
Shipping
and Handling Costs
Shipping and handling costs for freight expense
on goods shipped are included in cost of sales. Freight expense on goods shipped for the three months ended January 31, 2020 and
2019 was $250,853 and $73,915, respectively.
Share-Based
Compensation
The
Company computes share based payments in accordance with the provisions of ASC Topic 718, Compensation –
Stock Compensation and related interpretations. As such, compensation cost is
measured on the date of grant at the fair value of the share-based payments. Such compensation amounts, if any, are amortized
over the respective vesting periods of the grants. The Company estimates the fair value of stock options and warrants by
using the Black-Scholes option pricing model.
Convertible
Debt Instruments
The
Company records debt net of debt discount for beneficial conversion features and warrants, on a relative fair value basis. Beneficial
conversion features are recorded pursuant to the Beneficial Conversion and Debt Topics of the Financial Accounting Standards Board
(“FASB”) ASC. The amounts allocated to warrants and beneficial conversion rights are recorded as debt discount and
as additional paid-in-capital. Debt discount is amortized to interest expense over the life of the debt.
Foreign
Currency
The
Company has one non-U.S. subsidiary, where the functional currency is not the U.S. dollar. The related assets and liabilities
of this non-U.S. subsidiary have been translated using end of period exchange rates or historical exchange rates to the U.S. dollar.
Income
Taxes
The
Company accounts for income taxes in accordance with Accounting for Income Taxes, as clarified by ASC 740-10, Accounting for
Uncertainty in Income Taxes (“ASC 740”). Under this method, deferred income taxes are determined based on the
estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities and net operating
loss and tax credit carryforwards given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based
on changes to the assets or liabilities from year-to-year. In providing for deferred taxes, the Company considers tax regulations
of the jurisdictions in which the Company operates, estimates of future taxable income, and available tax planning strategies.
If tax regulations, operating results or the ability to implement tax-planning strategies vary, adjustments to the carrying value
of deferred tax assets and liabilities may be required. Valuation allowances are recorded related to deferred tax assets based
on the “more likely than not” criteria of ASC 740.
VERUS
INTERNATIONAL, INC.
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED JANUARY 31, 2020 AND 2019
(UNAUDITED)
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
ASC
740 requires that the Company recognize the financial statement benefit of a tax position only after determining that the relevant
tax authority would more likely than not sustain the position following an audit. For tax positions meeting the “more-likely-than-not”
threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent
likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company’s tax returns for its
October 31, 2019, 2018, 2017 and 2016 tax years may be selected for examination by the taxing authorities as the statute of limitations
remains open.
The
Company recognizes expenses for tax penalties and interest assessed by the Internal Revenue Service and other taxing authorities
upon receiving valid notice of assessments. The Company has received no such notices for the tax years ended October 31, 2019
and 2018.
Earnings
Per Share
In
accordance with the provisions of FASB ASC Topic 260, Earnings per Share, basic earnings per share (“EPS”)
is computed by dividing earnings available to common shareholders by the weighted average number of shares of common stock outstanding
during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating
EPS on a diluted basis.
In
computing diluted EPS, only potential common shares that are dilutive, those that reduce EPS or increase loss per share, are included.
The effect of contingently issuable shares are not included if the result would be anti-dilutive, such as when a net loss is reported.
Therefore, basic and diluted EPS are computed using the same number of weighted average shares for the three months ended January
31, 2020 and 2019, as we incurred a net loss for those periods. At January 31, 2020, there were outstanding warrants to purchase
approximately 839 million shares of the Company’s common stock, approximately 85 million shares of the Company’s common
stock issuable upon the conversion of Series A and Series C convertible preferred stock, approximately
74 million shares of the Company’s common stock to be issued, and approximately 51 million shares of the Company’s
common stock issuable upon the conversion of convertible notes payable which may dilute future EPS. At January 31, 2019, there
were outstanding warrants to purchase approximately 21 million shares of the Company’s common stock, approximately 90 million
shares of the Company’s common stock issuable upon the conversion of series A and series C convertible preferred stock which
may dilute future EPS.
Concentrations,
Risks and Uncertainties
A
significant portion of the Company’s ongoing operations are related to the international food industries, and its prospects
for success are tied indirectly to interest rates and the worldwide demand for the Company’s food and beverage products.
Recently
Adopted Accounting Standards
Effective
November 1, 2019, the Company adopted FASB ASC Topic 842, Leases (“ASC 842”), which requires lessees to
recognize leases on-balance sheet and disclose key information about leasing arrangements. The new standard establishes
a right-of-use (“ROU”) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet
for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting
the pattern and classification of expense recognition in the income statement. The Company adopted ASC 842 using a modified
retrospective approach as of the effective date of the new standard. Consequently, financial information has not been updated
and the disclosures required under the ASC 842 have not been provided for dates and periods before November 1, 2019. The Company
elected the package of practical expedients permitted under the transition guidance within ASC 842, which allowed the Company
to carry forward the historical lease classification, not reassess prior conclusions related to expired or existing contracts
that are or that contain leases, and not reassess the accounting for initial direct costs. Upon adopting ASC 842 on November 1,
2019, the Company recognized a ROU asset of $174,241 and a corresponding lease liability of $188,792 pertaining to the Company’s
corporate office lease. The lease liability was measured based on the present value of the future minimum lease payments utilizing
the Company’s incremental borrowing rate. The ROU asset was measured based on the initial measurement of the lease liability,
less a preexisting deferred rent balance from the prior fiscal year. As the Company’s Dubai, UAE office lease has a lease
term of only 12 months, no ROU asset or lease liability was recognized for this lease (see Note 4).
VERUS
INTERNATIONAL, INC.
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED JANUARY 31, 2020 AND 2019
(UNAUDITED)
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recently
Issued Accounting Standards Not Yet Adopted
During
August 2018, the FASB issued ASU 2018-13, to modify the disclosure requirements on fair value measurements in Topic 820, Fair
Value Measurement, based on the concepts in the Concept Statement, including the consideration of costs and benefits. The standard
is effective for the Company as of November 1, 2020, with early adoption permitted. The Company does not expect the adoption of
this guidance to have a material impact on its consolidated financial statements.
Management
does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material
impact on the accompanying unaudited consolidated financial statements.
NOTE
3: GOING CONCERN
The
accompanying unaudited consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
The
Company has incurred negative cash flows from operations of $599,062 for the three months ended January 31, 2020. At January 31,
2020, the Company had a working capital deficit of $610,342, and an accumulated deficit of $30,997,878. It is management’s
opinion that these facts raise substantial doubt about the Company’s ability to continue as a going concern for a period
of twelve months from the date of this report, without additional debt or equity financing. The unaudited consolidated financial
statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts nor to the
amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
In
order to meet its working capital needs through the next twelve months from the date of this report and to fund the growth of
the food business, the Company may consider plans to raise additional funds through the issuance of equity or debt. Although the
Company intends to obtain additional financing to meet its cash needs, the Company may be unable to secure any additional financing
on terms that are favorable or acceptable to it, if at all.
NOTE
4: LEASES
The Company has an operating lease for
its corporate office in Gaithersburg, Maryland and a short-term lease for office space in Dubai, UAE.
At the inception of a contract, the Company
assesses whether the contract is, or contains, a lease. The Company’s assessment is based on: (1) whether the contract involves
the use of a distinct identified asset, (2) whether the Company obtains the right to substantially all the economic benefit from
the use of the asset throughout the term, and (3) whether the Company has the right to direct the use of the asset. The Company
allocates the consideration in the contract to each lease and non-lease component based on the component’s relative stand-alone
price to determine the lease payments. Lease and non-lease components are accounted for separately. Leases are classified as either
finance leases or operating leases based on criteria in ASC 842.
At lease commencement, the Company records
a lease liability equal to the present value of the remaining lease payments, discounted using the rate implicit in the lease
or, if that rate cannot be readily determined, the Company’s incremental borrowing rate. A corresponding ROU asset is recorded,
measured based on the initial measurement of the lease liability. ROU assets also include any lease payments made and exclude
lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company
will exercise that option.
Lease expense for operating leases, consisting
of lease payments, is recognized on a straight-line basis over the lease term. Included in lease expense are any variable lease
payments incurred in the period that were not included in the initial lease liability. Lease expense for finance leases consists
of the amortization of the ROU asset, which is calculated on a straight-line basis over the shorter of the useful life of the
asset or the lease term, and interest expense on the lease liability, which is calculated using the effective interest rate method.
The Company had no finance leases at January 31, 2020.
For the three months ended January 31,
2020, the Company had operating lease costs of $21,362, which are included in general and administrative expenses in the unaudited
consolidated statements of operations. For the same period, the Company made operating lease cash payments of $22,263, which are
included in cash flows from operating activities in the unaudited consolidated statements of cash flows.
At January 31, 2020, the remaining lease term
is 23 months and the discount rate is 5%. Future annual minimum cash payments required under this operating type lease as of January
31, 2020 are as follows:
Future Minimum Lease Payments:
|
|
|
|
Remainder of fiscal year 2020
|
|
$
|
68,347
|
|
2021
|
|
|
93,329
|
|
2022
|
|
|
15,746
|
|
Total Minimum Lease Payments
|
|
$
|
177,422
|
|
Less: amount representing interest
|
|
|
(8,647
|
)
|
Present Value of Lease Liabilities
|
|
$
|
168,775
|
|
Less: current portion
|
|
|
(84,755
|
)
|
Long-Term Portion
|
|
$
|
84,020
|
|
VERUS
INTERNATIONAL, INC.
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED JANUARY 31, 2020 AND 2019
(UNAUDITED)
NOTE
5: INTANGIBLE ASSETS, NET
Intangible
assets, net, consist of two intangible assets, a license (the “License”) with MLB and certain acquired customer contracts.
MLB
License
The
MLB License allows us to sell MLB-branded frozen dessert products and confections. The License was acquired during April 2019
under a stock purchase agreement pursuant to which the Company purchased all of the outstanding capital stock of BLF. The transaction
was accounted for as an asset acquisition, with substantially all of the purchase consideration allocated to the License.
The
purchase consideration to acquire the License totaled $5,357,377, which consisted of $50,000 cash paid subsequent to closing,
$257,377 of accrued MLB License royalty fees that were assumed by the Company upon acquisition of the License (net of cash acquired
of $350), and $5,050,000 cash that is contingently payable over time, through December 31, 2022, based on the future sales of
MLB-branded products (see Note 9). The contingent consideration is recognized as an increase to the carrying amount of the License
intangible asset when the payment becomes probable and estimable, net of any catch-up for amortization expense.
Acquired
Customer Contracts
The
acquired customer contracts were purchased for $544,630 (2,000,000 United Arab Emirates Dirham) from a third-party frozen
foods vendor during September 2019, giving the Company the right to earn revenue under the terms of the acquired customer contracts.
The
net carrying amount of the intangible assets are as follows:
|
|
Estimated
|
|
|
|
|
|
|
|
|
Useful Lives
|
|
January 31, 2020
|
|
|
October 31, 2019
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
MLB license
|
|
32 months
|
|
$
|
357,027
|
|
|
$
|
357,027
|
|
Customer contracts
|
|
7 years
|
|
|
544,630
|
|
|
|
544,630
|
|
Accumulated amortization
|
|
|
|
|
(130,454
|
)
|
|
|
(63,950
|
)
|
Intangible assets, net
|
|
|
|
$
|
771,203
|
|
|
$
|
837,707
|
|
Amortization
expense for the three months ended January 31, 2020 was $66,504. There was no amortization expense during the three months ended
January 31, 2019.
Annual
amortization expense related to the existing net carrying amount of the intangible assets for the next five years is expected
to be as follows:
Remainder of fiscal year 2020
|
|
$
|
159,698
|
|
Fiscal year 2021
|
|
$
|
212,931
|
|
Fiscal year 2022
|
|
$
|
100,325
|
|
Fiscal year 2023
|
|
$
|
77,804
|
|
Fiscal year 2024
|
|
$
|
77,804
|
|
VERUS
INTERNATIONAL, INC.
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED JANUARY 31, 2020 AND 2019
(UNAUDITED)
NOTE
6: REVENUE
The
Company recognizes revenue when obligations under the terms of a contract with the customer are satisfied. Product sales occur
once control is transferred upon delivery to the customer. Revenue is measured as the amount of consideration the Company expects
to receive in exchange for transferring products. The amount of consideration the Company receives and revenue the Company recognizes
varies with changes in customer incentives the Company offers to its customers and their customers. Sales taxes and other similar
taxes are excluded from revenue.
Information
about the Company’s revenue by country is as follows:
|
|
For the Three Months Ended
|
|
|
|
January 31,
|
|
|
|
2020
|
|
|
2019
|
|
United Arab Emirates
|
|
$
|
4,906,843
|
|
|
$
|
1,735,664
|
|
Oman
|
|
|
599,580
|
|
|
|
199,518
|
|
Bahrain
|
|
|
350,134
|
|
|
|
311,989
|
|
Kingdom of Saudi Arabia
|
|
|
317,105
|
|
|
|
196,649
|
|
United States
|
|
|
-
|
|
|
|
-
|
|
Revenue
|
|
$
|
6,173,662
|
|
|
$
|
2,443,820
|
|
NOTE
7: DEBT
Convertible
Notes Payable
The
Company records debt net of debt discount for beneficial conversion features and warrants, on a relative fair value basis. Beneficial
conversion features are recorded pursuant to the Beneficial Conversion and Debt Topics of the FASB ASC. The amounts allocated
to warrants and beneficial conversion rights are recorded as debt discount and as additional paid-in-capital. Debt discount is
amortized to interest expense over the life of the debt.
On January
2, 2020, the Company entered into Amendment #1 to the convertible note dated July 1, 2019 in the principal amount of $605,000
(including a $90,000 original issuance discount), amending the conversion price. As a result of this amendment, the outstanding
balance was determined extinguished and a loss on convertible note payable extinguishment of $355,317 was recognized, and a new
liability was established. On various dates through January 31, 2020, the outstanding principal and accrued interest was converted
into an aggregate of 81,623,171 shares of the Company’s common stock at an average conversion price of $0.009527, resulting
in the recognition of a loss on convertible note payable settlement of $368,456. At January 31, 2020, 66,525,117 shares, valued
at $465,675, are to be issued.
On
January 9, 2020, the Company entered into a securities purchase agreement with an accredited investor pursuant to which the Company
issued and sold a convertible note in the principal amount of $605,000 (including a $90,000 original issuance discount). The note
matures on January 9, 2021, bears interest at a rate of 4% per annum (increasing to 24% per annum upon the occurrence of
an Event of Default (as defined in the note)) and is convertible into shares of the Company’s common stock at a conversion
price of $0.015 per share, subject to adjustment. The note may be prepaid by the Company at any time prior to the 180th
day with certain prepayment penalties as defined in the note.
At
January 31, 2020 and October 31, 2019, there was $1,395,439 and $1,378,855 of convertible notes payable outstanding, net of discounts
of $214,562 and $231,146, respectively.
During
the three months ended January 31, 2020 and 2019, amortization of debt discount and issuance costs amounted to $145,584 and $2,538,
respectively.
During
the three months ended January 31, 2020, $618,941 of convertible notes, including accrued interest, were converted into shares
of the Company’s common stock and there were no payments toward the outstanding balances of convertible notes. During
the three months ended January 31, 2019, there were no conversions of convertible notes into shares of the Company’s common
stock and no payments toward the outstanding balances of convertible notes.
VERUS
INTERNATIONAL, INC.
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED JANUARY 31, 2020 AND 2019
(UNAUDITED)
NOTE
7: DEBT (continued)
Note
Payable
On
January 26, 2019, the Company entered into Amendment No. 1 to the promissory note (the “Monaco Note”) issued in favor
of the Donald P. Monaco Insurance Trust on January 26, 2018 in the principal amount of $530,000, with an annual interest rate
of 12%, whereby (i) the maturity date of the Monaco Note was extended to January 26, 2020 and (ii) the Company agreed to use its
best efforts to prepay the unpaid principal amount of the Monaco Note together with all accrued but unpaid interest thereon on
or prior to March 31, 2019.
Subsequently,
the Company entered into Amendment No. 2 dated February 8, 2019 to the Monaco Note whereby the maturity date of the Monaco Note
was extended to November 8, 2019.
Upon
maturity on November 8, 2019, the Company was not able to pay the balance due and the interest rate immediately increased to 18%
per annum. The note holder agreed to only impose the default interest rate and not proceed with any other default remedies currently
available. At January 31, 2020, the Company expects to repay the Monaco Note in full as quickly as possible based upon its available
capital.
Revolving
Credit Agreement
On
July 31, 2019, the Company entered into a secured, $500,000 revolving credit agreement (“Credit Facility”). Borrowings
under the Credit Facility may be used to fund working capital needs and bear interest at a one-month LIBOR-based rate plus 300
basis-points (4.66% at January 31, 2020). The Company’s performance and payment obligations under the Credit Facility are
guaranteed by substantially all of its assets. The structure of this Credit Facility is a note payable with a revolving credit
line feature with a mutual termination provision instead of a stated maturity date. The outstanding balance under the Credit Facility
may be prepaid at any time without premium or penalty. Additionally, the Credit Facility contains customary events of default
and remedies upon an event of default, including the acceleration of repayment of outstanding amounts under the Credit Facility.
At
January 31, 2020, $500,000 was outstanding under the Credit Facility. The Credit Facility contains customary affirmative and negative
covenants, including a borrowing base requirement upon each request for an advance from the Credit Facility. The Company was in
compliance with all covenants at January 31, 2020.
NOTE
8: STOCKHOLDERS’ EQUITY (DEFICIT)
The
total number of shares of all classes of stock that the Company shall have the authority to issue is 7,625,000,000 shares consisting
of 7,500,000,000 shares of common stock with a $0.000001 par value per share of which 2,320,876,565 are outstanding at January
31, 2020 and 125,000,000 shares of preferred stock, par value $0.000001 per share of which (A) 120,000,000 shares have been designated
as Series A Convertible Preferred of which 41,444,601 are outstanding at January 31, 2020, (B) 1,000,000 shares have been designated
as Series B Convertible Preferred Stock, of which no shares are outstanding at January 31, 2020 and (C) 1,000,000 have been designated
as Series C Convertible Preferred Stock, of which 430,801 shares are outstanding at January 31, 2020.
On
January 11, 2019, stockholders holding a majority of the voting power of the Company’s issued and outstanding shares of
voting stock, executed a written consent approving 1) an amendment to the Company’s Amended and Restated Certificate of
Incorporation, as amended (the “Certificate of Incorporation”) to (i) increase the number of authorized shares of
common stock of the Company to 7,500,000,000 shares from 1,500,000,000 shares and (ii) decrease the par value of the common stock
and preferred stock to $0.000001 from $0.001 per share; and 2) granting discretionary authority to the Company’s Board of
Directors to amend the Certificate of Incorporation to effect one or more consolidations of the issued and outstanding shares
of common stock of the Company, pursuant to which the shares of common stock would be combined and reclassified into one share
of common stock at a ratio within the range from 1-for-2 up to 1-for-400 (the “Reverse Stock Split”), provided that,
(X) that the Company may not effect Reverse Stock Splits that, in the aggregate, exceed 1-for-400, and (Y) any Reverse Stock Split
may not be completed later than January 11, 2020. Since the Company had not effectuated any Reverse Stock Split by January 11,
2020, the related approval expired.
VERUS
INTERNATIONAL, INC.
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED JANUARY 31, 2020 AND 2019
(UNAUDITED)
NOTE
8: STOCKHOLDERS’ EQUITY (DEFICIT) (continued)
Series
A Convertible Preferred Stock
On
January 8, 2020, a shareholder converted 3,125,500 shares of Series A Preferred Stock into the same number of shares of the Company’s
common stock.
Common
Stock
During
the three months ended January 31, 2020, the Company:
|
●
|
issued
15,098,054 shares of its common stock valued at $877,039 and reflected 66,525,117
shares of its common stock valued at $465,675 as shares to be issued, as repayment
for outstanding principal and interest on a convertible promissory note as requested by the note holder in accordance with
contractual terms.
|
|
|
|
|
●
|
reflected
3,125,500 shares of its common stock as shares to be issued for the conversion of 3,125,500 shares of its Series A Convertible
Preferred stock.
|
|
|
|
|
●
|
reflected
7,500,000 shares of its common stock as shares to be issued for the vesting of the first 25% of a 30,000,000 common stock
grant to Christopher Cutchens, the Company’s Chief Financial Officer. The Company recorded $56,250 of stock-based compensation
expense during the three months ended January 31, 2020, related to this common stock grant.
|
Common
Stock Warrants
Under
the provisions of the employment agreement with its Chief Executive Officer, the Company is committed to issue warrants to purchase
shares of its common stock as follows:
|
●
|
For
each $1 million in revenue generated by the Company, a warrant to purchase 7,500,000 shares of the Company’s common
stock at an exercise price of $0.006 per warrant will be granted, until such time as the Chief Executive Officer owns
20% of the then-outstanding shares of common stock.
|
|
|
|
|
●
|
At
the beginning of each calendar year, a warrant to acquire 3% of the Company’s outstanding common stock will be granted.
|
At
January 31, 2020, there remained approximately 284 million shares of the Company’s common stock, to be issued if earned,
under the provisions of the Chief Executive Officer’s employment agreement, which would increase such ownership percentage
of the Company’s common stock to the 20% limit.
The
Company estimates the fair value of each award on the date of grant using a Black-Scholes option valuation model that uses the
following assumptions for warrants earned during the three months ended January 31, 2020:
Expected volatility
|
|
194.54% - 399.10
|
%
|
Weighted-average volatility
|
|
|
137.58
|
%
|
Expected dividends
|
|
|
0
|
%
|
Expected term (in years)
|
|
|
1.0
|
|
Risk-free rate
|
|
|
1.46% - 1.57
|
%
|
During the three months ended January 31,
2020, the grant date fair value of the warrants earned was $2,253,238.
The
following table sets forth common share purchase warrants outstanding at January 31, 2020:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Value
|
|
Outstanding, October 31, 2019
|
|
|
725,705,000
|
|
|
$
|
0.003
|
|
|
$
|
-
|
|
Warrants granted and issued
|
|
|
114,173,355
|
|
|
$
|
0.006
|
|
|
$
|
-
|
|
Warrants exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Warrants forfeited
|
|
|
(1,000,000
|
)
|
|
$
|
(0.025
|
)
|
|
$
|
-
|
|
Outstanding, January 31, 2020
|
|
|
838,878,355
|
|
|
$
|
0.004
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issuable upon exercise of warrants
|
|
|
838,878,355
|
|
|
$
|
0.004
|
|
|
$
|
-
|
|
|
|
|
|
|
|
Common Stock Issuable
|
|
|
|
|
Common Stock Issuable Upon Exercise of
|
|
|
Upon Warrants
|
|
|
|
|
Warrants Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Average
|
|
|
Weighted
|
|
|
Number
|
|
|
Weighted
|
|
Range of
|
|
|
Outstanding
|
|
|
Remaining
|
|
|
Average
|
|
|
Exercisable
|
|
|
Average
|
|
Exercise
|
|
|
at January 31,
|
|
|
Contractual
|
|
|
Exercise
|
|
|
at January 31,
|
|
|
Exercise
|
|
Prices
|
|
|
2020
|
|
|
Life (Years)
|
|
|
Price
|
|
|
2020
|
|
|
Price
|
|
$
|
0.0025
|
|
|
|
580,000,000
|
|
|
|
2.10
|
|
|
$
|
0.0025
|
|
|
|
580,000,000
|
|
|
$
|
0.0025
|
|
$
|
0.0060
|
|
|
|
256,673,355
|
|
|
|
0.78
|
|
|
$
|
0.0060
|
|
|
|
256,673,355
|
|
|
$
|
0.0060
|
|
$
|
0.0500
|
|
|
|
1,000,000
|
|
|
|
0.92
|
|
|
$
|
0.0500
|
|
|
|
1,000,000
|
|
|
$
|
0.0500
|
|
$
|
0.1000
|
|
|
|
1,205,000
|
|
|
|
0.10
|
|
|
$
|
0.1000
|
|
|
|
1,205,000
|
|
|
$
|
0.1000
|
|
|
|
|
|
|
838,878,355
|
|
|
|
1.69
|
|
|
$
|
0.0038
|
|
|
|
838,878,355
|
|
|
$
|
0.0038
|
|
VERUS
INTERNATIONAL, INC.
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED JANUARY 31, 2020 AND 2019
(UNAUDITED)
NOTE
9: COMMITMENTS AND CONTINGENCIES
License
Contingent Consideration
As
described in Note 5, during April 2019 the Company acquired the License to sell MLB-branded frozen dessert products and confections
as part of its acquisition of BLF. The consideration payable to the seller of BLF includes $5,050,000 of contingent consideration,
of which $50,000 is due upon the initial sale of an MLB-branded product and of which $5,000,000 is to be paid over time, through
December 31, 2022, based on future sales of MLB-branded products (the “Earnout”). The Earnout is payable on a quarterly
basis at $1.00 per case sold for sales that have a minimum gross margin of 20% per case. The Earnout payable each quarter is limited
in aggregate to the operating income of BLF; however, any amounts constrained due to this limit may be rolled forward to future
periods and paid when there is sufficient excess operating income. The Company accrues for this contingent consideration when
payment becomes both probable and estimable.
During
August 2019, $50,000 of the License contingent consideration was paid to the seller of BLF as the initial sale of an MLB-branded
product was achieved during July 2019. At January 31, 2020, the Company believes it is a reasonable possibility that the remaining
maximum amount of $5,000,000 will be paid over the term of the arrangement.
Guaranteed
Minimum Royalties
The
Company is obligated to pay royalties to certain vendors for the sale of products that contain their intellectual property. These
royalty fees are based on a percentage of sales of the underlying products and are included in cost of revenue. The royalties
also include certain guaranteed minimum payments. As of January 31, 2020, the Company’s total expected future obligation
related to these guaranteed minimum payments was $1,265,833, of which the Company expects to pay $397,500 during the remaining
fiscal year October 31, 2020, and $738,333 and $130,000 during the fiscal years ending October 31, 2021, and 2022, respectively.
Amounts accrued at January 31, 2020 relating to these guaranteed minimum payments totaled $314,826 and are included in accounts
payable and accrued expenses.
NOTE
10: LITIGATION
On
April 4, 2019, Auctus Fund, LLC (“Auctus”) commenced a lawsuit against the Company in the United States District Court
for the District of Massachusetts. On August 27, 2019, the Company filed a motion to dismiss this lawsuit. On September
30, 2019, Auctus responded by filing a First Amended Complaint. The Company then filed a second motion to dismiss on October 24,
2019. On February 25, 2020, the court issued a decision dismissing the securities laws and unjust enrichment and breach of fiduciary
duty claims and retaining the breach of contract, breach of covenant of good faith, fraud and deceit, and negligent misrepresentation-and
the Massachusetts Consumer Protection Act claims. The Company filed its Answer to the complaint on March 10, 2020. The case remains
pending in the District of Massachusetts. This case stems from a securities purchase agreement and convertible note issued in
May 2017, a securities purchase agreement and convertible note issued in July 2018, the spin-off of the Company’s real estate
division into NestBuilder including the issuance of shares of NestBuilder in the spin-off to the Company’s stockholders
and an inducement agreement, release and payoff agreement executed by the parties in February 2019 whereby the Company settled
the balance of outstanding amounts owed to Auctus in consideration for cash and shares of NestBuilder. Auctus has requested that
the court grant it injunctive and equitable relief and specific performance with respect to the Company’s obligations; determine
that the Company is liable for all damages, losses and costs and award Auctus actual losses sustained; award Auctus costs including,
but not limited to, costs required to prosecute the action including attorneys’ fees; and punitive damages. The Company
intends to continue to defend this matter and although the ultimate outcome cannot be predicted with certainty, based on the current
information available, the Company does not believe the ultimate liability, if any, will have a material adverse effect on its
financial condition or results of operations.
VERUS
INTERNATIONAL, INC.
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED JANUARY 31, 2020 AND 2019
(UNAUDITED)
NOTE
11: SUBSEQUENT EVENTS
Subsequent to January 31, 2020, an aggregate
of $30,674 of principal and accrued interest have been converted into 6,762,339 shares of the Company’s common stock.
On
February 10, 2020, the Company issued a convertible note in the principal amount of $420,000 (including a $70,000 original issuance
discount) to an accredited investor. The note matures on November 10, 2020, accrues interest at a rate of 4% per annum and is
convertible into shares of the Company’s common stock at a conversion price of $0.0125 per share, subject to adjustment.
The note may be prepaid by the Company at any time prior to the 180th day after the issuance date, subject to certain
prepayment penalties.
On
February 14, 2020, as a result of the Company’s failure to timely file its Form 10-K, the Company was in default with respect
to certain of its convertible notes. The Company obtained waiver agreements, within the stated cure periods, whereby the events
of default and the rights to the event of default remedies were waived until the earlier of (i) April 30, 2020 or (ii) the date
upon which the Company is no longer in default. The Company filed its Form 10-K on April 13, 2020 and is no longer in default.
On
February 25, 2020, the court issued a decision in the lawsuit commenced by Auctus against the Company dismissing the securities
laws and unjust enrichment and breach of fiduciary duty claims and retaining the breach of contract, breach of covenant of good
faith, fraud and deceit, and negligent misrepresentation-and the Massachusetts Consumer Protection Act claims. The Company filed
its Answer to the complaint on March 10, 2020. The case remains pending in the District of Massachusetts (see Note 10).
Effective
March 31, 2020, the Company and Sellers of Nutribrands entered into the Termination Agreement with Nutribrands LTDA pursuant to
which, among other things, all agreements between the parties (including the October 30, 2019 Amended and Restated Operating Agreement
of Nutribrands International, LLC, the Contribution and Sale Agreement and all related ancillary agreements (collectively, “Released
Transactions”)) were terminated and the parties released each other from all obligations arising from the Released Transactions.
On
March 31, 2020, the Company issued a promissory note in the principal amount of $312,500 (including a $62,500 original issuance
discount) to an accredited investor. The note matures on July 1, 2020, accrues interest at a rate of 4% per annum, and is secured
by an interest in all of the equity of BLF. The note may be prepaid by the Company at any time prior to maturity with no prepayment
penalties.
On April 17, 2020, the Company issued 3,125,500 shares of its common stock related to the conversion of
3,125,500 shares of its Series A Convertible Preferred stock. The shares were reported as shares to be issued at January 31, 2020.