CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED JULY 31, 2019 AND 2018
(UNAUDITED)
NOTE
1: NATURE OF BUSINESS AND BASIS OF PRESENTATION
Organization
and Nature of Business
Verus
International, Inc., including its wholly-owned subsidiary, are collectively referred to herein as “Verus,” “VRUS”,
“Company,” “us,” or “we.”
The
Company was incorporated in the state of Delaware under the name Spectrum Gaming Ventures, Inc. on May 25, 1994. On October 10,
1995, the Company changed its name to Select Video, Inc. On October 24, 2007, the Company filed a Certificate of Ownership with
the Delaware Secretary of State whereby Webdigs, Inc., the Company’s wholly-owned subsidiary, was merged with and into the
Company and the Company changed its name to Webdigs, Inc.
On
October 9, 2012, the Company 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 the Company 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 the Company’s 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, the Company filed a Certificate of Ownership with the Delaware Secretary of State whereby RealBiz
Media Group, Inc., the Company’s wholly-owned subsidiary, was merged with and into the Company and the Company changed its
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.
Until
July 31, 2018, the Company operated a real estate segment which generated revenue from service fees (for video creation and production
and website hosting (ReachFactor)) and product sales (Nestbuilder Agent 2.0 and Microvideo app). The real estate segment was formed
through the merging of three divisions: (i) the Company’s fully licensed real estate division (formerly known as Webdigs);
(ii) the Company’s television media contracts division (Home Preview Channel /Extraordinary Vacation Homes); and (iii) the
Company’s Real Estate Virtual Tour and Media group division (RealBiz 360). The assets of these divisions were used to create
a new suite of real estate products and services that created stickiness through the utilization of video, social media and loyalty
programs. At the core of the Company’s programs was its proprietary video creation technology which allowed for an automated
conversion of data (text and pictures of home listings) to a video with voice and music. The Company provided video search, storage
and marketing capabilities on multiple platform dynamics for web, mobile and television. Once a home, personal or community video
was created using the Company’s proprietary technology, it could be published to social media, emailed or distributed to
multiple real estate websites, broadband or television for consumer viewing.
The
Company entered into a Contribution and Spin-off Agreement with NestBuilder.com Corp. (“NestBuilder”) on October 27,
2017, as amended on January 28, 2018, whereby, effective as of August 1, 2018, the Company spun off its real estate division into
NestBuilder. All of the Company’s stockholders as of July 2, 2018, the record date, which held their shares as of July 20,
2018, the ex-dividend date, received one share of NestBuilder common stock for each 900 shares of the Company owned. As a result
of the spin-off of the real estate segment, all related assets and liabilities are disclosed net as current assets and current
liabilities within the consolidated balance sheets, and all related income and expenses are disclosed net as income (loss) from
discontinued operations within the consolidated statements of operations.
Since
August 1, 2018, the Company, through its wholly-owned subsidiary, Verus Foods, Inc. (“Verus Foods”), an international
supplier of consumer food products, is focused on international consumer packaged goods, foodstuff distribution and wholesale
trade. The Company’s fine food products are sourced in the United States and exported internationally. The Company markets
consumer food products under its own brand primarily to supermarkets, hotels and other members of the wholesale trade. Initially,
in 2017, the Company focused on frozen foods, particularly meat, poultry, seafood, vegetables, and french fries with beverages
as a second vertical. During 2018, the Company 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. The Company 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 NINE MONTHS ENDED JULY 31, 2019 AND 2018
(UNAUDITED)
NOTE
1: NATURE OF BUSINESS AND BASIS OF PRESENTATION (continued)
The
Company currently has 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.
Effective
October 16, 2018, the Company changed its name from RealBiz Media Group, Inc. to Verus International, Inc. and its ticker symbol
to “VRUS”.
On
April 25, 2019 (the “Closing Date”), the Company entered into a stock purchase agreement with Big League Foods, Inc.
(“BLF”) and James Wheeler, the sole stockholder of Big League Foods, Inc. (the “Seller”). Upon the closing
of such acquisition, BLF became the Company’s wholly-owned subsidiary and the Company acquired a license with Major League
Baseball Properties, Inc. (“MLB”) to sell MLB-branded frozen dessert products and confections.
Basis
of Presentation
The
condensed 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 (“US 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
condensed consolidated unaudited financial statements for the nine months ended July 31, 2019 and 2018 include the
operations of Verus MENA effective May 1, 2018, Verus Foods effective January 1, 2017, Gulf Agro Trading, LLC through April 30,
2018 (see Note 12), and Big League Foods, Inc. effective April 25, 2019. The historical operations of the Company’s real
estate segment which were spun-off effective as of August 1, 2018, are reported as discontinued operations for the nine months
ended July 31, 2018. All significant intercompany accounts and transactions have been eliminated in the consolidation.
These
condensed consolidated unaudited financial statements should be read in conjunction with the Company’s audited
consolidated financial statements for the year ended October 31, 2018, contained in the Company’s Annual Report on Form
10-K filed with the SEC on March 19, 2019. The results of operations for the nine months ended July 31, 2019, are not necessarily
indicative of results to be expected for any other interim period or the fiscal year ending October 31, 2019.
VERUS
INTERNATIONAL, INC.
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED JULY 31, 2019 AND 2018
(UNAUDITED)
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use
of Estimates
The
preparation of condensed consolidated unaudited financial statements in conformity with US 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 during
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, valuation of intangible assets, stock-based compensation and the deferred tax
asset valuation allowance.
Reclassifications
Certain
reclassifications have been made to prior year’s unaudited consolidated financial statements to enhance comparability with
the current year’s unaudited consolidated financial statements, including, but not limited to, presenting the spin-off of
the Company’s real estate segment as discontinued operations for the nine months ended July 31, 2018.
Concentrations
of Credit Risk
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 the Company purchases could adversely affect its operating results
if the Company is unable to fully offset the effect of these increased costs through price increases, and the Company can provide
no assurance that it will be able to pass along such increased costs to the Company’s customers. Furthermore, if the Company
cannot obtain sufficient food products or its suppliers cease to be available, the Company could experience shortages in its food
products or be unable to meet its 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 July 31, 2019 and October 31, 2018.
VERUS
INTERNATIONAL, INC.
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED JULY 31, 2019 AND 2018
(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 July 31, 2019 and October
31, 2018, 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.
All inventory are considered finished goods.
Intangible
Asset
The
Company amortizes its only intangible asset, a license with Major League Baseball Properties, Inc., on a straight-line basis over
the estimated useful life of the license.
Fair
Value of Financial Instruments
The
Company has adopted Accounting Standards Codification (“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.
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).
Share-Based
Compensation
The
Company computes share based payments in accordance with ASC 718-10, Compensation (“ASC 718-10”). ASC 718-10
establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods and services
at fair value, focusing primarily on accounting for transactions in which an entity obtains employees services in share-based
payment transactions. It also addresses transactions in which an entity incurs liabilities in exchange for goods and services
that are based on the fair value of an entity’s equity instruments or that may be settled by the issuance of those equity
instruments. In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107, Share-Based Payment No. 107
(“SAB 107”) which provides guidance regarding the interaction of ASC 718-10 and certain SEC rules and regulations.
The Company has applied the provisions of SAB 107 in its adoption of ASC 718-10. The Company accounts for non-employee share-based
awards in accordance with ASC Topic 505-50, Equity Based Payments to Non-Employees. The Company estimates the fair value
of stock options and warrants by using the Black-Scholes option pricing model.
VERUS
INTERNATIONAL, INC.
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED JULY 31, 2019 AND 2018
(UNAUDITED)
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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, 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, 2018
and 2017.
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 July
31, 2019 and 2018, and for the nine months ended July 31, 2018 as we incurred a net loss for those periods. At July 31, 2019,
there were outstanding warrants to purchase up to 643,205,000 shares of the Company’s common stock and approximately 12,050,000
shares of the Company’s common stock to be issued, which may dilute future EPS. At July 31, 2018, there were outstanding
warrants to purchase up to 17,786,467 shares of the Company’s common stock and approximately 369,000,000 shares of the Company’s
common stock to be issued, which may dilute future EPS.
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
nine months ended July 31, 2019 and 2018 was $322,590 and $106,787, respectively.
Concentrations,
Risks and Uncertainties
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.
VERUS
INTERNATIONAL, INC.
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED JULY 31, 2019 AND 2018
(UNAUDITED)
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recently
Adopted Accounting Standards
Effective
November 1, 2018, the Company adopted Revenue from Contracts with Customers (Topic 606) (“ASC 606”). The new guidance
sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and
is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in US
GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the
transfer of promised goods or services to customers in an amount that reflects what it expects to receive in exchange for the
goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that
were not addressed completely in the prior accounting guidance. The Company adopted ASC 606 using the modified retrospective method,
which did not have an impact on its consolidated financial statements. The Company expects the impact to net income of the new
standard will be immaterial on an ongoing quarterly and annual basis. The comparative information has not been restated and continues
to be reported under the accounting standards in effect for those periods. Refer to Note 6 for additional information regarding
the Company’s adoption of ASC 606.
Effective
November 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2016-15, Statement of Cash Flows (Topic
230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which provides clarification on classifying
a variety of activities within the statement of cash flows. The Company determined the adoption of ASU 2016-15 did not have a
material impact on its consolidated financial statements.
Effective
November 1, 2018, the Company adopted ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”),
which changes the presentation of restricted cash and cash equivalents on the statement of cash flows by including restricted
cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period
total amounts shown on the statement of cash flows. The Company determined the adoption of ASU 2016-18 did not have a material
impact on its consolidated financial statements.
Effective
November 1, 2018, the Company adopted ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business
(“ASU 2017-01”), which clarifies the definition of a business with the objective of adding guidance to assist
entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses. The Company
determined the adoption of ASU 2017-01 did not have a material impact on its consolidated financial statements.
Effective
November 1, 2018, the Company adopted ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification
Accounting (“ASU 2017-09”), which clarifies and reduces both (1) diversity in practice and (2) cost and complexity
when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions
of a share-based payment award. The Company determined the adoption of ASU 2017-09 did not have a material impact on its consolidated
financial statements.
Effective
November 1, 2018, the Company adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting
for Hedging Activities (“ASU 2017-12”), which provides new guidance about income statement classification and
eliminates the requirement to separately measure and report hedge ineffectiveness. The Company determined the adoption of ASU
2017-12 did not have a material impact on its consolidated financial statements.
VERUS
INTERNATIONAL, INC.
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED JULY 31, 2019 AND 2018
(UNAUDITED)
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recently
Issued Accounting Standards Not Yet Adopted
In
February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”). The standard amends the existing accounting standards
for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes
to lessor accounting. ASU 2016-02 will be effective beginning in the first quarter of fiscal 2020. Early adoption of ASU 2016-02
is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered
into after, the date of initial application, with an option to use certain transition relief. In September 2017, the FASB issued
ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases
(Topic 842, which amends certain aspects of the new lease standard). The Company is currently evaluating the impact of adopting
ASU 2016-02 and ASU 2017-13 on the Company’s consolidated financial statements.
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure
Requirements for Fair Value Measurement, 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 $1,425,926 for the nine months ended July 31, 2019. At July 31, 2019,
the Company had a working capital deficit of $699,686, and an accumulated deficit of $25,635,808. 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.
VERUS
INTERNATIONAL, INC.
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED JULY 31, 2019 AND 2018
(UNAUDITED)
NOTE
4: ASSET ACQUISITION
On
April 25, 2019, the Company entered into a stock purchase agreement with BLF and James Wheeler, the sole stockholder of BLF. Pursuant
to the terms of the stock purchase agreement, on the Closing Date, the Seller sold all of BLF’s outstanding capital stock,
or 1,500 shares of common stock to the Company. Subsequent to the Closing Date, the Company paid the Seller $50,000 net of the
aggregate amount of any pre-closing liabilities or obligations of BLF (other than the Assumed Company Obligations (as defined
in the stock purchase agreement)) and the applicable payees thereof, the aggregate amount of the Assumed Company Obligations.
Within ten business days from the date upon which the Company delivers its first invoice for the Product (as defined in the stock
purchase agreement) to a customer, the Company will pay the Seller an additional $50,000 net of the Aggregate Liabilities and
the applicable payees thereof, the aggregate amount of the Assumed Company Obligations. At July 31, 2019, the additional $50,000
was recorded as an accrued expense within the unaudited consolidated balance sheet.
In
addition, the Company will pay the Seller earnout payments in an amount not to exceed $5 million during the period commencing
on the Closing Date (as defined in the stock purchase agreement) through the quarter including December 31, 2022. During
the Earnout Period the Seller will be entitled to receive a payment for each fiscal quarter based on the difference of the Operating
Income (as defined in the stock purchase agreement) minus the Earnout Commission (as defined in the stock purchase agreement).
If the Difference is a positive number for the applicable fiscal quarter, the Earnout Payment for such fiscal quarter shall equal
the amount of the Earnout Commission. If the Difference is equal to zero or a negative number for the applicable fiscal quarter,
the Earnout Payment for such fiscal quarter shall be equal to the Operating Income. During the Earnout Period, the Seller will
be entitled to receive any portion of the Earnout Commission that was excluded from any prior Earnout Payment based on the Difference
in the applicable fiscal quarter being a negative number; provided, however, no Catch-up Payment will be payable following the
date on which the final Earnout Payment is made for the last fiscal quarter in the Earnout Period.
Upon
the closing of such acquisition, BLF became the Company’s wholly-owned subsidiary and the Company acquired a license with
MLB to sell MLB-branded frozen dessert products and confections. The license covers all 30 MLB teams.
The
transaction was accounted for as an asset acquisition, with substantially all of the purchase consideration allocated to the license
(see Note 5).
NOTE
5: INTANGIBLE ASSET – LICENSE, NET
Intangible
asset - license, net, represents a license (the “License”) with Major League Baseball Properties, Inc. (“MLB”)
to sell MLB-branded frozen dessert products and confections. The License was acquired as part of the April 25, 2019 Stock Purchase
Agreement (see Note 4) to purchase all of the outstanding capital stock of Big League Foods, Inc. 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 totals $5,357,377, which consists 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.
The
net carrying amount of the License is as follows:
|
|
July 31, 2019
|
|
|
October 31, 2018
|
|
Intangible asset – license, gross carrying amount
|
|
$
|
357,377
|
|
|
$
|
-
|
|
Less accumulated amortization
|
|
|
(30,483
|
)
|
|
|
-
|
|
Intangible asset – license, net
|
|
$
|
326,894
|
|
|
$
|
-
|
|
The
License is amortized on a straight-line basis over a useful life of 32 months, coinciding with the remaining contractual term
of the License agreement, which terminates on December 31, 2021. Amortization expense is presented in cost of revenue. Amortization
expense for the three and nine months ended July 31, 2019 was $30,483. There was no amortization expense during the three and
nine months ended July 31, 2018.
Future
amortization expense related to the existing net carrying amount of the License at July 31, 2019 is expected to be as follows:
Remainder of fiscal year 2019
|
|
$
|
33,817
|
|
Fiscal year 2020
|
|
|
135,266
|
|
Fiscal year 2021
|
|
|
135,266
|
|
Fiscal year 2022
|
|
|
22,544
|
|
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.
The
adoption of ASC 606 resulted in no impact to the individual financial statement line items of the Company’s unaudited
Consolidated Statements of Operations during the nine months ended July 31, 2019.
Information
about the Company’s revenue by country is as follows:
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
July 31,
|
|
|
July 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Kingdom of Saudi Arabia
|
|
$
|
534,873
|
|
|
$
|
53,054
|
|
|
$
|
1,195,259
|
|
|
$
|
462,377
|
|
Oman
|
|
|
311,214
|
|
|
|
193,123
|
|
|
|
709,465
|
|
|
|
376,233
|
|
Bahrain
|
|
|
356,339
|
|
|
|
312,925
|
|
|
|
863,788
|
|
|
|
630,432
|
|
United Arab Emirates
|
|
|
2,220,805
|
|
|
|
812,343
|
|
|
|
6,040,974
|
|
|
|
2,136,847
|
|
United States
|
|
|
54,263
|
|
|
|
-
|
|
|
|
54,263
|
|
|
|
-
|
|
Revenue
|
|
$
|
3,477,494
|
|
|
$
|
1,371,445
|
|
|
$
|
8,863,749
|
|
|
$
|
3,605,889
|
|
VERUS
INTERNATIONAL, INC.
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED JULY 31, 2019 AND 2018
(UNAUDITED)
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
February 8, 2019, the Company entered into a securities purchase agreement with an accredited investor (the “First Investor”),
whereby the Company sold an 8% convertible promissory note in the original principal amount of $1,250,000 (the “First Note”)
and a three-year warrant to purchase up to 925,925,925 shares (the “First Warrant”) of the Company’s common
stock. The Company allocated a value of $573,389 to the three-year warrant based upon a relative fair value methodology. The note
converts at 90% of the lowest sale price during the 30 trading days prior to conversion. Due to certain ratchet provisions contained
in the convertible promissory note, the Company accounted for this conversion feature as a derivative liability. Accordingly,
the Company recorded a derivative liability of $842,676 and a debt discount of $676,611 and began amortizing the debt discount
over the related term of the note. On March 6, 2019, the Company received a conversion notice from the First Investor, pursuant
to which the principal amount of the First Note together with interest accrued thereon was to convert into an aggregate of 512,333,333
shares of the Company’s common stock at a fixed conversion price of $0.0025 per share and the First Warrant was amended
such that the First Warrant is exercisable for 500,000,000 shares of the Company’s common stock at a fixed exercise price
of $0.0025 per share. As of March 6, 2019, the date the Company received the conversion notice, the Company did not have sufficient
available shares of common stock to issue and therefore recorded the value of such shares at such date as Shares to be Issued
within the unaudited consolidated balance sheets. On June 4, 2019, the Company issued the 512,333,333 shares of its common stock
to the First Investor. In connection with the securities purchase agreement, the Company entered into a Registration Rights Agreement
with the First Investor (the “First Registration Rights Agreement”), pursuant to which the Company is required to
file a Registration Statement on Form S-1 (or Form S-3, if available) (the “Registration Statement”) covering the
resale of the shares of common stock underlying the note and the warrant.
On
February 11, 2019, the Company entered into a securities purchase agreement with an accredited investor (the “Second Investor”),
whereby the Company sold an 8% convertible promissory note in the original principal amount of $200,000 (the “Second Note”
and together with the First Note, the “Notes”) and a three-year warrant to purchase up to 148,148,148 shares (the
“Second Warrant” and together with the First Warrant, the “Warrants”) of the Company’s common stock.
The Company allocated a value of $124,222 to the three-year warrant based upon a relative fair value methodology. The note converts
at 90% of the lowest sale price during the 30 trading days prior to conversion. Due to certain ratchet provisions contained in
the convertible promissory note, the Company accounted for this conversion feature as a derivative liability. Accordingly, the
Company recorded a derivative liability of $134,828 and a debt discount of $75,778 and began amortizing the debt discount over
the related term of the note. On March 6, 2019, the Company received a conversion notice from the Second Investor, pursuant to
which the principal amount of the Second Note together with interest accrued thereon was to convert into an aggregate of 81,920,000
shares of the Company’s common stock at a fixed conversion price of $0.0025 per share and the Second Warrant was amended
such that the Second Warrant is exercisable for 80,000,000 shares of the Company’s common stock at a fixed exercise price
of $0.0025 per share. As of March 6, 2019, the date the Company received the conversion notice, the Company did not have sufficient
available shares of common stock to issue and therefore recorded the value of such shares at such date as Shares to be Issued
within the unaudited consolidated balance sheets. On June 4, 2019, the Company issued the 81,920,000 shares of its common stock
to the Second Investor. In connection with the securities purchase agreement, the Company entered into a Registration Rights Agreement
with the Second Investor (the “Second Registration Rights Agreement”), pursuant to which the Company is required to
file the Registration Statement covering the resale of the shares of common stock underlying the note and the warrant.
The
Company filed the Registration Statement with the SEC on June 7, 2019. The Company filed an amended Registration Statement with
the SEC on August 1, 2019, which became effective on August 7, 2019.
Upon
conversions of the Notes together with interest accrued thereon, and amendments of the Warrants, the related derivative liabilities
and debt discounts were eliminated and the Company recorded a net gain on extinguishment of debt of $2,700,737, which is recorded
within the unaudited consolidated statements of operations.
On
February 8, 2019, the Company used a portion of the proceeds it received from the First Investor to pay off all convertible note
holders at an aggregate amount less than the total amount due, which consisted of the principal amount of the notes, accrued interest,
and penalties consisting of default principal and interest. The aggregate payment of $1,118,049 paid all convertible note holders
in full and resulted in a gain on extinguishment of debt of $681,945.
On
April 26, 2019, the Company entered into a securities purchase agreement with an accredited investor (the “Third Investor”)
pursuant to which the Company issued and sold a convertible note in the principal amount of $600,000 (including a $90,000 original
issuance discount). The note matures on November 12, 2019, bears interest at a rate of 5% 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 $0.10 per share, subject to adjustment. The note may be prepaid by the Company at any time without
penalty.
On
July 1, 2019, the Company entered into a securities purchase agreement with an accredited investor (the “Fourth 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 July 1, 2020, 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 $0.10 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
July 31, 2019 and October 31, 2018, there was $1,074,038 and $1,497,126 of convertible notes payable outstanding, net of discounts
of $130,962 and $4,765, respectively.
During
the nine months ended July 31, 2019 and 2018, amortization of debt discount amounted to $751,414 and $15,000, respectively.
During
the nine months ended July 31, 2019, $1,485,633 of convertible notes, including accrued interest, were converted into shares of
the Company’s common stock and there were payments of an aggregate of $1,118,049 toward the outstanding balances of convertible
notes.
VERUS
INTERNATIONAL, INC.
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED JULY 31, 2019 AND 2018
(UNAUDITED)
Note
Payable
In
connection with the closing of the transactions contemplated by the securities purchase agreement entered into with the First
Investor, the Company entered into Amendment No. 1 dated January 26, 2019 to the promissory note (the “Monaco Note”)
issued in favor of the Donald P. Monaco Insurance Trust in the amount of $530,000, with an annual interest rate of 12%, whereby
(i) the maturity date of the Monaco Note was amended from January 26, 2019 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; provided, however, that the failure by the Company to prepay such amount by March 31, 2019 would
not result in an event of default pursuant to the terms of the Monaco Note.
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 amended to November 8, 2019.
At
July 31, 2019, the Company was in compliance with the terms of the Monaco Note.
Revolving
Credit Agreement
On
July 31, 2019, the Company entered into a secured, $500,000 revolving credit agreement (“Credit Facility”). Proceeds
from the Credit Facility may be used to fund seasonal working capital needs. Borrowings under the Credit Facility bear interest
at a one-month LIBOR-based rate plus 300 basis-points (5.28% at July 31, 2019). The Company’s performance and payment obligations
under the Credit Facility are guaranteed by substantially all of its assets. 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
July 31, 2019, no amount 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 believes
it was in compliance with all covenants at July 31, 2019.
NOTE
8: STOCKHOLDERS’ 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, $0.000001 par value per shares, of which 2,290,449,898 are issued at July 31, 2019 and
125,000,000 shares of preferred stock, par value $0.001 per share of which (A) 120,000,000 shares have been designated as Series
A Convertible Preferred of which 44,570,101 are outstanding at July 31, 2019, (B) 1,000,000 shares have been designated as Series
B Convertible Preferred Stock, none of which are outstanding at July 31, 2019 and (C) 1,000,000 have been designated as Series
C Convertible Preferred Stock, of which 430,801 shares are outstanding at July 31, 2019.
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. On April 16, 2019, the Company filed a Certificate of Amendment to its Certificate
of Incorporation to increase its authorized common stock from 1,500,000,000 shares to 7,500,000,000 shares and to decrease the
par value of its common stock and preferred stock from $0.001 per share to $0.000001 per share. As of July 31, 2019, the Company
has not effected any Reverse Stock Split.
Common
Stock
On
April 22, 2019, the Company issued 152,029,899 shares of its common stock to satisfy the settlement agreement by and among the
Company, Monaker, American Stock Transfer & Trust Company, LLC and NestBuilder that was executed on or about December 22,
2017.
VERUS
INTERNATIONAL, INC.
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED JULY 31, 2019 AND 2018
(UNAUDITED)
NOTE
8: STOCKHOLDERS’ DEFICIT (continued)
On
May 30, 2019, the Company entered into a securities purchase agreement with an accredited investor pursuant to which the Company
issued 41,666,666 shares of its common stock for aggregate gross proceeds of $500,000.
On
May 30, 2019, the Company entered into a letter agreement with the First Investor, pursuant to which the principal amount of the
First Note together with interest accrued thereon was converted into an aggregate of 512,333,333 shares of the Company’s
common stock at a fixed conversion price of $0.0025 per share and the First Warrant was amended such that the First Warrant is
exercisable for 500,000,000 shares of the Company’s common stock at a fixed exercise price of $0.0025 per share. The Company
issued the 512,333,333 shares of its common stock on June 4, 2019 (see Note 7).
On
May 30, 2019, the Company entered into a letter agreement with the Second Investor, pursuant to which the principal amount of
the Second Note together with interest accrued thereon was converted into an aggregate of 81,920,000 shares of the Company’s
common stock at a fixed conversion price of $0.0025 per share and the Second Warrant was amended such that the Second Warrant
is exercisable for 80,000,000 shares of the Company’s common stock at a fixed exercise price of $0.0025 per share. The Company
issued the 81,920,000 shares of its common stock on June 4, 2019 (see Note 7).
On
June 1, 2019, the Company granted 30,000,000 shares of common stock to Christopher Cutchens, the Company’s Chief Financial
Officer. The common stock will vest 25% on the six month, 1 year, 2 year, and 3 year anniversaries of the grant date. The Company
recorded $57,500 of stock-based compensation expense during the three and nine months ended July 31, 2019, related to this common
stock grant.
On
June 21, 2019, a former employee exercised 3,000,000 warrants on a cashless basis into 2,419,355 shares of the Company’s
common stock. The Company issued the common stock subsequent to July 31, 2019, and therefore recorded the value of such shares
at such date as Shares to be Issued within the unaudited consolidated balance sheets.
At
July 31, 2019, the Company was committed to issue warrants to purchase 60,000,000 shares of its common stock under the provisions
of the employment agreement of its Chief Executive Officer.
At
July 31, 2019, there were warrants to purchase up to 643,205,000 shares of the Company’s common stock outstanding and approximately
12,050,000 shares of the Company’s common stock to be issued which may dilute future EPS.
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 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
July 31, 2019, there remained approximately 473,000,000 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 nine months ended July 31, 2019:
Expected volatility
|
|
1.46% - 6.37
|
%
|
|
Weighted-average volatility
|
|
|
0.38
|
%
|
|
Expected dividends
|
|
|
0
|
%
|
|
Expected term (in years)
|
|
|
0.9
|
|
|
Risk-free rate
|
|
|
1.88% - 2.56
|
%
|
|
The
following table sets forth common share purchase warrants outstanding at July 31, 2019:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Value
|
|
Outstanding, October 31, 2018
|
|
|
123,761,716
|
|
|
$
|
0.007
|
|
|
$
|
0.00
|
|
Warrants granted and issued
|
|
|
1,714,074,073
|
|
|
$
|
0.001
|
|
|
$
|
0.00
|
|
Warrants exercised
|
|
|
(3,000,000
|
)
|
|
$
|
(0.006
|
)
|
|
$
|
0.00
|
|
Warrants exchanged
|
|
|
(1,191,630,789
|
)
|
|
$
|
(0.002
|
)
|
|
$
|
0.00
|
|
Outstanding, July 31, 2019
|
|
|
643,205,000
|
|
|
$
|
0.003
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issuable upon exercise of warrants
|
|
|
643,205,000
|
|
|
$
|
0.003
|
|
|
$
|
0.00
|
|
Series
A Convertible Preferred Stock
On
February 8, 2019, the Company filed the Second Amended and Restated Certificate of Designations, Preferences and Rights of the
Series A Convertible Preferred Stock (the “Second Amended and Restated COD”) with the Delaware Secretary of State
whereby the Company removed the anti-dilution protection for holders of Series A Convertible Preferred Stock and provided holders
of such preferred stock with a right of participation in future financings.
Series
C Convertible Preferred Stock
On
December 28, 2018, the Board of Directors awarded the Company’s Chief Executive Officer 295,801 shares of Series C Preferred
Stock, in exchange for 117,556,716 of his warrants to acquire shares of common stock and a 501,130 share common stock bonus as
approved by the Company’s Board of Directors related to the Company’s fiscal 2018 performance.
On
April 26, 2019, a shareholder converted 25,000 shares of Series C Preferred Stock into an aggregate of 2,500,000 shares of the
Company’s common stock.
VERUS
INTERNATIONAL, INC.
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED JULY 31, 2019 AND 2018
(UNAUDITED)
NOTE
9: COMMITMENTS AND CONTINGENCIES
Litigation
On
December 1, 2018, Mid-Atlantic CFO Advisory Services (“Mid-Atlantic”) commenced a lawsuit against Verus Foods, Inc.
and Anshu Bhatnagar in the Fairfax Circuit Court, Case No. 2018-16824. This case stems from the Company’s use of Mid-Atlantic’s
services for certain business transactions and the Company’s failure to pay for such services. On December 28, 2018, a Confirmation
of Arbitration Award and Final Judgment Order was approved, awarding Mid-Atlantic an amount which included claimed services, attorney’s
fees, arbitration costs and fees, and interest of 4% percent per annum from November 22, 2018. At July 31, 2019, the amount due
to Mid-Atlantic under this judgment, including interest, was approximately $203,000 and is included within other income (expense)
in the Company’s unaudited Consolidated Statements of Operations for the nine months ended July 31, 2019.
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. 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. On August 30, 2019, the Company
filed a motion to dismiss this lawsuit with the United States District Court for the District of Massachusetts. 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.
License
Contingent Consideration
As
described in Note 5, during April 2019 the Company acquired a 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.
At
July 31, 2019, $50,000 was accrued for the License contingent consideration as the initial sale of an MLB-branded product was
achieved during July 2019. However, 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 July 31, 2019, the Company’s total expected future obligation related
to these guaranteed minimum payments was $1,715,000, of which the Company expects to pay $405,000, $530,000 and $780,000 during
the fiscal years ending October 31, 2019, 2020, and 2021, respectively. Amounts accrued at July 31, 2019 relating to these guaranteed
minimum payments totaled $312,955 and are included in accounts payable and accrued expenses.
Guaranteed
Working Capital Funding
The
Company is obligated to fund BLF up to $500,000 as may be required to achieve the projections set forth in the financial budget,
unless mutually agreed by the Company and Seller. Such funding may be in a form of cash capital contributions, trade facilities
and/or guarantees of the Company’s obligations to third parties. Such funding is required prior to a date that is six months
following April 25, 2019.
Note
10: Segment reporting
Through
July 31, 2018, the Company had two reportable segments: real estate and food products. On August 1, 2018, the real estate segment
was spun-off into a separate public company, leaving the Company with only the food products segment (see Note 11).
NOTE
11: DISCONTINUED OPERATIONS
Through
July 31, 2018, the Company operated a real estate segment which generated revenue from service fees (for video creation and production
and website hosting (ReachFactor)) and product sales (Nestbuilder Agent 2.0 and Microvideo app). The real estate segment was formed
through the merging of three divisions: (i) the Company’s fully licensed real estate division (formerly known as Webdigs);
(ii) the Company’s TV media contracts (Home Preview Channel /Extraordinary Vacation Homes) division; and (iii) the Company’s
Real Estate Virtual Tour and Media group (RealBiz 360). The assets of these divisions were used to create a new suite of real
estate products and services that created stickiness through the utilization of video, social media and loyalty programs. At the
core of the Company’s programs was its proprietary video creation technology which allowed for an automated conversion of
data (text and pictures of home listings) to a video with voice and music. The Company provided video search, storage and marketing
capabilities on multiple platform dynamics for web, mobile and TV. Once a home, personal or community video was created using
our proprietary technology, it could be published to social media, email or distributed to multiple real estate websites, broadband
or television for consumer viewing.
As
a result of the spin-off of the Company’s real estate segment, all related assets and liabilities for periods prior to August
1, 2018 are disclosed net as current assets and current liabilities within the consolidated balance sheets, and all related income
and expenses are disclosed net as income from discontinued operations within the consolidated statements of operations.
VERUS
INTERNATIONAL, INC.
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED JULY 31, 2019 AND 2018
(UNAUDITED)
NOTE
11: DISCONTINUED OPERATIONS (continued)
The
revenues and expenses associated with discontinued operations included in our unaudited Consolidated Statements of Operations
for the three and nine months ended July 31, 2018 were as follows:
|
|
Three Months Ended July 31, 2018
|
|
|
|
Discontinued
|
|
|
Continuing
|
|
|
Total
|
|
Revenue
|
|
$
|
70,016
|
|
|
$
|
1,371,445
|
|
|
$
|
1,441,461
|
|
Cost of revenue
|
|
|
17,200
|
|
|
|
1,147,231
|
|
|
|
1,164,431
|
|
Gross Profit
|
|
|
52,816
|
|
|
|
224,214
|
|
|
|
277,030
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
23,482
|
|
|
|
55,347
|
|
|
|
78,829
|
|
Selling and promotions expense
|
|
|
26
|
|
|
|
-
|
|
|
|
26
|
|
Legal and professional fees
|
|
|
6,550
|
|
|
|
44,215
|
|
|
|
50,765
|
|
General and administrative
|
|
|
29,740
|
|
|
|
236,669
|
|
|
|
266,409
|
|
Total Operating Expenses
|
|
|
59,798
|
|
|
|
336,231
|
|
|
|
396,029
|
|
Operating loss
|
|
|
(6,982
|
)
|
|
|
(112,017
|
)
|
|
|
(118,999
|
)
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(429
|
)
|
|
|
(98,743
|
)
|
|
|
(99,172
|
)
|
Gain (Loss) on legal settlement of accounts payable and convertible debt
|
|
|
159,832
|
|
|
|
92,577
|
|
|
|
252,409
|
|
Default principal increase on convertible notes payable
|
|
|
-
|
|
|
|
(793,327
|
)
|
|
|
(793,327
|
)
|
Other income
|
|
|
48,148
|
|
|
|
-
|
|
|
|
48,148
|
|
Total Other Income (Expense)
|
|
|
207,552
|
|
|
|
(799,493
|
)
|
|
|
(591,941
|
)
|
Income (Loss) before income taxes
|
|
|
200,570
|
|
|
|
(911,510
|
)
|
|
|
(710,940
|
)
|
Income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net income (loss)
|
|
$
|
200,570
|
|
|
$
|
(911,510
|
)
|
|
$
|
(710,940
|
)
|
|
|
Nine Months Ended July 31, 2018
|
|
|
|
Discontinued
|
|
|
Continuing
|
|
|
Total
|
|
Revenue
|
|
$
|
216,315
|
|
|
$
|
3,605,889
|
|
|
$
|
3,822,204
|
|
Cost of revenue
|
|
|
56,800
|
|
|
|
3,112,002
|
|
|
|
3,168,802
|
|
Gross Profit
|
|
|
159,515
|
|
|
|
493,887
|
|
|
|
653,402
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
82,326
|
|
|
|
382,437
|
|
|
|
464,763
|
|
Selling and promotions expense
|
|
|
824
|
|
|
|
-
|
|
|
|
824
|
|
Legal and professional fees
|
|
|
82,999
|
|
|
|
251,061
|
|
|
|
334,060
|
|
General and administrative
|
|
|
71,713
|
|
|
|
465,547
|
|
|
|
537,260
|
|
Total Operating Expenses
|
|
|
237,862
|
|
|
|
1,099,045
|
|
|
|
1,336,907
|
|
Operating loss
|
|
|
(78,347
|
)
|
|
|
(605,158
|
)
|
|
|
(683,505
|
)
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,322
|
)
|
|
|
(178,079
|
)
|
|
|
(179,401
|
)
|
Gain (Loss) on legal settlement of accounts payable and convertible debt
|
|
|
338,855
|
|
|
|
(259,276
|
)
|
|
|
79,579
|
|
Default principal increase on convertible notes payable
|
|
|
-
|
|
|
|
(793,327
|
)
|
|
|
(793,327
|
)
|
Other income
|
|
|
72,924
|
|
|
|
-
|
|
|
|
72,924
|
|
Total Other Income (Expense)
|
|
|
410,457
|
|
|
|
(1,230,682
|
)
|
|
|
(820,225
|
)
|
(Loss) income before income taxes
|
|
|
332,110
|
|
|
|
(1,835,840
|
)
|
|
|
(1,503,730
|
)
|
Income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net (loss) income
|
|
$
|
332,110
|
|
|
$
|
(1,835,840
|
)
|
|
$
|
(1,503,730
|
)
|
VERUS
INTERNATIONAL, INC.
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED JULY 31, 2019 AND 2018
(UNAUDITED)
NOTE
12: BUSINESS DIVESTITURE
On
May 1, 2018, Verus MENA entered into a Share Purchase and Sale Agreement with the Purchaser pursuant to which Verus MENA sold
75 shares of 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. This transaction benefited Verus MENA by providing Verus MENA with a broader
license for product distribution and full control of all intellectual property rights.
NOTE
13: SUBSEQUENT EVENTS
On
August 30, 2019, the Company filed a motion to dismiss the lawsuit commenced against it by Auctus on April 4, 2019 (see Note 9).
On
August 30, 2019, the Company entered into an Asset Purchase Agreement with certain sellers (the “Sellers”), wherein
the Company agreed to acquire all of the assets of the Seller’s French Fry business (the “Acquired Assets”)
and all of the business conducted by Seller relating to the Acquired Assets. The purchase price for the Acquired Assets will be
equivalent to 2,000,000 AED ($544,477 USD) in cash, plus assumption of certain assumed liabilities. The consummation
of the acquisition is subject to customary closing conditions.