CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED APRIL 30, 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 SIX MONTHS ENDED APRIL 30, 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 six months ended April 30, 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 six months ended April 30, 2020, are not necessarily indicative of results
to be expected for any other interim period or the fiscal year ending October 31, 2020.
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.
VERUS
INTERNATIONAL, INC.
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED APRIL 30, 2020 AND 2019
(UNAUDITED)
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 April 30, 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 April 30, 2020 or October 31, 2019.
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 April 30, 2020 and October
31, 2019, the Company determined there was no requirement for an allowance for doubtful accounts.
VERUS
INTERNATIONAL, INC.
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED APRIL 30, 2020 AND 2019
(UNAUDITED)
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 SIX MONTHS ENDED APRIL 30, 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 7).
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
six months ended April 30, 2020 and 2019 was $456,625 and $178,360, respectively.
Customer Deposits
From time to time the Company requires
prepayments for deposits in advance of delivery of products. Such amounts are initially recorded as customer deposits. The Company
recognizes such revenue as it is earned in accordance with revenue recognition policies.
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 SIX MONTHS ENDED APRIL 30, 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 and six months ended
April 30, 2020, as we incurred a net loss for those periods. At April 30, 2020, there were outstanding warrants to purchase approximately
1.3 billion 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
7.5 million shares of the Company’s common stock to be issued, and approximately 212 million shares of the Company’s
common stock issuable upon the conversion of convertible notes payable which may dilute future EPS. At April 30, 2019, there
were outstanding warrants to purchase approximately 624 million shares of the Company’s common stock, approximately 88 million
shares of the Company’s common stock issuable upon the conversion of series A and series C convertible preferred stock,
approximately 595 million shares of the Company’s common stock to be issued, and approximately 6 million shares of
the Company’s common stock issuable upon the conversion of convertible notes payable 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 5).
VERUS
INTERNATIONAL, INC.
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED APRIL 30, 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 a net loss of $9,816,408 and negative cash flows from operations of $1,296,364 for the six months
ended April 30, 2020. At April 30, 2020, the Company had a working capital deficit of $174,754, and an accumulated deficit
of $38,310,998. 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: PREPAID EXPENSES
Prepaid expenses total $507,071 and $65,749
at April 30, 2020 and October 31, 2019, respectively, and consist mainly of prepaid advertising, prepaid insurance, and deposits
on purchases.
NOTE
5: 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.
VERUS
INTERNATIONAL, INC.
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED APRIL 30, 2020 AND 2019
(UNAUDITED)
NOTE
5: LEASES (continued)
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 April 30, 2020.
For
the three and six months ended April 30, 2020, the Company had operating lease costs of $21,362 and $42,723, respectively, which
are included in general and administrative expenses in the unaudited consolidated statements of operations. For the three and
six months ended April 30, 2020, the Company made operating lease cash payments of $22,486 and $44,749, respectively, which are
included in cash flows from operating activities in the unaudited consolidated statements of cash flows.
At
April 30, 2020, the remaining lease term is 20 months and the discount rate is 5%. Future annual minimum cash payments required
under this operating type lease as of April 30, 2020 are as follows:
Future Minimum Lease Payments:
|
|
|
|
Remainder of fiscal year 2020
|
|
$
|
45,862
|
|
2021
|
|
|
93,329
|
|
2022
|
|
|
15,745
|
|
Total Minimum Lease Payments
|
|
$
|
154,936
|
|
Less: amount representing interest
|
|
|
(6,621
|
)
|
Present Value of Lease Liabilities
|
|
$
|
148,315
|
|
Less: current portion
|
|
|
(86,496
|
)
|
Long-Term Portion
|
|
$
|
61,819
|
|
NOTE
6: 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 10). 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
|
|
April 30,
2020
|
|
|
October 31,
2019
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
MLB license
|
|
32 months
|
|
$
|
357,027
|
|
|
$
|
357,027
|
|
Customer contracts
|
|
7 years
|
|
|
544,630
|
|
|
|
544,630
|
|
Accumulated amortization
|
|
|
|
|
(183,686
|
)
|
|
|
(63,950
|
)
|
Intangible assets, net
|
|
|
|
$
|
717,971
|
|
|
$
|
837,707
|
|
As
a result of the COVID-19 pandemic, we have considered its potential impact on our global supply chain, operations and routes to
market or those of our suppliers, customers, distributors and retailers. Based on our analysis, we have determined there is currently
no indication that the carrying amounts of our MLB License and acquired customer contracts are impaired and not fully recoverable,
and therefore no impairment exists at April 30, 2020.
Amortization
expense for the three and six months ended April 30, 2020 was $53,233 and $119,736, respectively. There was no amortization expense
during the three and six months ended April 30, 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
|
|
$
|
106,465
|
|
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 SIX MONTHS ENDED APRIL 30, 2020 AND 2019
(UNAUDITED)
NOTE
7: 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
|
|
|
For the Six Months Ended
|
|
|
|
April 30,
|
|
|
April 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
United Arab Emirates
|
|
$
|
3,592,222
|
|
|
$
|
2,084,506
|
|
|
$
|
8,499,065
|
|
|
$
|
3,820,170
|
|
Oman
|
|
|
437,047
|
|
|
|
198,732
|
|
|
|
1,036,627
|
|
|
|
398,251
|
|
Kingdom of Saudi Arabia
|
|
|
376,208
|
|
|
|
463,737
|
|
|
|
693,313
|
|
|
|
660,385
|
|
Bahrain
|
|
|
217,423
|
|
|
|
195,460
|
|
|
|
567,557
|
|
|
|
507,449
|
|
United States
|
|
|
24,986
|
|
|
|
-
|
|
|
|
24,986
|
|
|
|
-
|
|
Revenue
|
|
$
|
4,647,886
|
|
|
$
|
2,942,435
|
|
|
$
|
10,821,548
|
|
|
$
|
5,386,255
|
|
NOTE
8: 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.
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.
VERUS
INTERNATIONAL, INC.
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED APRIL 30, 2020 AND 2019
(UNAUDITED)
NOTE
8: DEBT (continued)
On
February 10, 2020, the Company issued and sold a convertible promissory note to an accredited investor in the principal amount
of $420,000 (including a $70,000 original issuance discount). The note matures on November 10, 2020, bears 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 with certain prepayment
penalties as defined in the note.
On
April 8, 2020, the Company entered into Amendment #1 to the convertible notes dated September 13, 2019 in the aggregate principal
amount of $660,000 (including an aggregate of $110,000 in original issuance discounts), amending the conversion price. As a result
of this amendment, an aggregate beneficial conversion feature of $598,888 was recognized based upon the intrinsic value of the
conversion option as a discount of the convertible notes, which will be amortized to interest expense through the maturity dates.
On various dates through April 30, 2020, an aggregate of $138,000 of the outstanding principal and $674 of accrued interest
was converted into an aggregate of 25,029,712 shares of the Company’s common stock.
On
April 21, 2020, the Company entered into Amendment #1 to the convertible note dated October 2, 2019 in the principal amount of
$345,000 (including a $45,000 original issuance discount), amending the conversion price. As a result of this amendment, a beneficial
conversion feature of $231,274 was recognized based upon the intrinsic value of the conversion option as a discount of the convertible
note, which will be amortized to interest expense through the maturity date. On April 21, 2020, $50,000 of the outstanding principal
and $1,660 of accrued interest was converted into 6,833,369 shares of the Company’s common stock.
On
April 29, 2020, the Company issued and sold a convertible promissory note to an accredited investor in the principal amount of
$165,000 (including a $15,000 original issuance discount). The note matures on April 29, 2021, bears interest at a rate of 8%
per annum, (increasing to 18% 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 $0.02 per share, subject to adjustment. The note may
be prepaid by the Company at any time prior to the maturity date of the Note with certain prepayment penalties as defined in the
note.
At
April 30, 2020 and October 31, 2019, there was $1,092,524 and $1,378,855 of convertible notes payable outstanding, net
of discounts and beneficial conversion features of $916,475 and $231,146, respectively.
During
the six months ended April 30, 2020 and 2019, amortization of debt discount, issuance costs, and beneficial conversion features
amounted to $398,969 and $702,376, respectively.
During
the six months ended April 30, 2020, an aggregate of $809,276 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 six months ended April 30, 2019, an aggregate of $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 SIX MONTHS ENDED APRIL 30, 2020 AND 2019
(UNAUDITED)
NOTE
8: DEBT (continued)
Notes
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 April 30, 2020, the Company expects to repay the Monaco Note in full as quickly as possible based upon its available
capital.
On
March 31, 2020, the Company issued and sold a promissory note to an accredited investor in the principal amount of $312,500 (including
a $62,500 original issuance discount). The note matures on July 1, 2020, bears interest at a rate of 4% per annum, (increasing
to 18% per annum upon the occurrence of an Event of Default (as defined in the note)) and provides a security interest in all
of the Company’s equity ownership interest in its wholly owned subsidiary, Big League Foods, Inc. The note may be prepaid
by the Company at any time prior to the maturity date with no prepayment penalties.
On
April 23, 2020, the Company entered into a promissory note with an approved lender in the principal amount of $104,479. The note
was approved under the provisions of the Coronavirus, Aid, Relief and Economic Security Act (the “CARES Act”) and
the terms of the Paycheck Protection Program of the U.S. Small Business Administration’s 7(a) Loan Program. The note accrues
interest for the first six months following the issuance date at a rate of 1% per annum, (increasing to 6% per annum upon the
occurrence of an Event of Default (as defined in the note)), and beginning November 23, 2020, requires 18 monthly payments of
$5,880 each, consisting of principal and interest until paid in full on April 23, 2022. The note may be prepaid by the Company
at any time prior to the maturity date with no prepayment penalties. Additionally, any portion of the note up to the entire principal
and accrued interest balance may be forgiven in the event the Company satisfies certain requirements as determined by the CARES
Act. The Company expects to satisfy the requirements for forgiveness of the entire principal and accrued interest balance and
will apply for such forgiveness by the deadline.
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 (3.30% at April 30, 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
April 30, 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 April 30, 2020.
VERUS
INTERNATIONAL, INC.
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED APRIL 30, 2020 AND 2019
(UNAUDITED)
NOTE
9: 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 2,422,390,263 are outstanding at April 30,
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 April 30, 2020, (B) 1,000,000 shares have been designated
as Series B Convertible Preferred Stock, of which no shares are outstanding at April 30, 2020 and (C) 1,000,000 have been designated
as Series C Convertible Preferred Stock, of which 430,801 shares are outstanding at April 30, 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.
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 six months ended April 30, 2020, the Company:
|
●
|
issued
113,486,252 shares of its common stock valued at $2,363,212 as repayment for outstanding principal and interest on convertible
promissory notes as requested by the note holders in accordance with contractual terms.
|
|
|
|
|
●
|
issued
3,125,500 shares of its common stock 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 $97,500 of stock-based compensation
expense during the six months ended April 30, 2020, related to this common stock grant.
|
VERUS
INTERNATIONAL, INC.
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED APRIL 30, 2020 AND 2019
(UNAUDITED)
NOTE
9: STOCKHOLDERS’ EQUITY (DEFICIT) (continued)
Common
Stock Warrants
On
April 29, 2020, the Company entered into an amended and restated employment agreement (the “2020 Employment Agreement”)
with its Chief Executive Officer, whereby the 2020 Employment Agreement amended and restated the prior employment agreement dated
January 31, 2017 (the “2017 Agreement”).
Under
the provisions of the 2017 Agreement, the Company was committed to issue warrants to its Chief Executive Officer 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.
|
These
provisions were amended and replaced in the 2020 Employment Agreement with the one-time grant of warrants to purchase 471,883,795
shares of the Company’s common stock at an exercise price of $0.006 per share. This one-time grant of warrants increased
the Chief Executive Officer’s ownership to 20% of the Company’s common stock on a fully diluted basis, which is consistent
with the intentions of the Company’s Board of Directors and with the Company’s former management.
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 six months ended April 30, 2020:
Expected volatility
|
|
|
194.54% - 399.10
|
%
|
Weighted-average volatility
|
|
|
122.01
|
%
|
Expected dividends
|
|
|
0
|
%
|
Expected term (in years)
|
|
|
5.0
|
|
Risk-free rate
|
|
|
0.37% - 1.57
|
%
|
During
the six months ended April 30, 2020, the grant date fair value of the warrants earned was $8,859,550.
The
following table sets forth common share purchase warrants outstanding at April 30, 2020:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Value
|
|
Outstanding, October 31, 2019
|
|
|
725,705,000
|
|
|
$
|
0.003
|
|
|
$
|
-
|
|
Warrants granted and issued
|
|
|
586,057,150
|
|
|
$
|
0.006
|
|
|
$
|
-
|
|
Warrants exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Warrants forfeited
|
|
|
(2,205,000
|
)
|
|
$
|
(0.066
|
)
|
|
$
|
-
|
|
Outstanding, April 30, 2020
|
|
|
1,309,557,150
|
|
|
$
|
0.005
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issuable upon exercise of warrants
|
|
|
1,309,557,150
|
|
|
$
|
0.005
|
|
|
$
|
-
|
|
|
|
|
|
|
|
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 April 30,
|
|
|
Contractual
|
|
|
Exercise
|
|
|
at April 30,
|
|
|
Exercise
|
|
Prices
|
|
|
2020
|
|
|
Life (Years)
|
|
|
Price
|
|
|
2020
|
|
|
Price
|
|
$
|
0.0025
|
|
|
|
580,000,000
|
|
|
|
1.85
|
|
|
$
|
0.0025
|
|
|
|
580,000,000
|
|
|
$
|
0.0025
|
|
$
|
0.0060
|
|
|
|
728,557,150
|
|
|
|
0.85
|
|
|
$
|
0.0060
|
|
|
|
728,557,150
|
|
|
$
|
0.0060
|
|
$
|
0.0500
|
|
|
|
1,000,000
|
|
|
|
0.67
|
|
|
$
|
0.0500
|
|
|
|
1,000,000
|
|
|
$
|
0.0500
|
|
|
|
|
|
|
1,309,557,150
|
|
|
|
1.29
|
|
|
$
|
0.0050
|
|
|
|
1,309,557,150
|
|
|
$
|
0.0050
|
|
VERUS
INTERNATIONAL, INC.
CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED APRIL 30, 2020 AND 2019
(UNAUDITED)
NOTE
10: COMMITMENTS AND CONTINGENCIES
Binding
Acquisition Agreement
On
April 3, 2020, the Company entered into a binding agreement (“Acquisition Agreement”) with ZC Top Apparel Manufacturing
(“ZC Top”), which was confirmed and superseded by a Securities Purchase Agreement on May 8, 2020 (the “May 8,
2020 Agreement”), wherein the Company acquired a controlling 51% interest of the issued and outstanding common voting shares
of ZC Top (the “Majority Interest”). The purchase price for the Majority Interest was $100,000, which was paid by
the Company and additional working capital can be provided by the Company when needed, from time to time, in the form of purchase
financing, letters of credit, bank guarantees, merchant cash advances or any other structure that may be required to facilitate
the business. ZC Top is a Philippines-based maker of highly sought-after reusable N95 fabric masks and biohazard suits.
License
Contingent Consideration
As
described in Note 6, 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 April 30, 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 April 30, 2020, the Company’s total expected future obligation related
to these guaranteed minimum payments was $1,133,333, of which the Company expects to pay $265,000 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 April 30, 2020 relating to these guaranteed minimum payments totaled $401,667 and are included in accounts payable
and accrued expenses.
NOTE
11: 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 SIX MONTHS ENDED APRIL 30, 2020 AND 2019
(UNAUDITED)
NOTE
12: ACQUISITION TERMINATION
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.
NOTE
13: SUBSEQUENT EVENTS
Subsequent
to April 30, 2020, an aggregate of $591,381 of principal and accrued interest have been converted into 158,544,788 shares
of the Company’s common stock.
On
May 8, 2020, the Company entered into a Securities Purchase Agreement (the “May 8, 2020 Agreement”) with ZC Top Apparel
Manufacturing (“ZC Top”) which confirmed and superseded a binding agreement dated April 3, 2020 (the “Acquisition
Agreement”) wherein the Company acquired a controlling 51% interest of the issued and outstanding common voting shares of
ZC Top (the “Majority Interest”). The purchase price for the Majority Interest was $100,000, which was paid by the
Company. Additional working capital can be provided by the Company when needed, from time to time, in the form of purchase financing,
letters of credit, bank guarantees, merchant cash advances or any other structure that may be required to facilitate the business.
ZC Top is a Philippines-based maker of highly sought-after reusable N95 fabric masks and biohazard suits.
On
May 28, 2020, the Company issued 12,500,000 shares of its common stock related to the conversion of 12,500,000 shares of its Series
A Convertible Preferred stock.