PART
I
Throughout
this Annual Report on Form 10-K, the “Company,” “Verus,” “we,” “us,” and “our”
refers to Verus International, Inc. and its subsidiaries.
ITEM
1. BUSINESS
Explanatory
Note
All
references to shares of our common stock contained herein have been adjusted to reflect a 1-for-500 reverse stock split which
was completed and became effective on January 13, 2021.
Overview
Since
August 1, 2018, we, through our wholly-owned subsidiary, Verus Foods, Inc. (“Verus Foods”), 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 brand 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 in 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. We have also begun to explore new consumer packaged goods (“CPG”)
non-food categories, such as cosmetic and fragrances, for future product offerings.
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 (“UAE”), Oman, Bahrain, Qatar, Kingdom of Saudi Arabia and Kuwait.
Our 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 sold pint size ice cream in grocery store-type packaging. In addition, under our confections product
line, we sold gummi and chocolate candies. The MLB license covers all 30 MLB teams, and all of our products pursuant to such license
featured “home team” packaging that matched the fan base in each region. On December 18, 2020, we and our wholly owned
subsidiary, BLF, entered into a letter agreement with ACG Global Solutions, Inc. and Game on Foods, Inc. (“GOF”),
whereby for certain consideration, BLF sold, transferred, and assigned all of BLF’s rights, title, and interest in and to
all of BLF’s assets to GOF.
Furthermore,
during August 2019, we purchased all of the assets of a french fry business in the Middle East and during May 2020, we acquired
a 51% interest of ZC Top Apparel Manufacturing, Inc. (“TAM”), a Philippines-based maker of reusable N95 fabric masks
and biohazard suits. On October 5, 2020, as a result of TAM’s failure of contractual performance and breach of contract,
all obligations under the binding term sheet were rescinded and a demand made for immediate return of the cash consideration of
$100,000, that we paid, plus fees and costs to be determined. As we were unsuccessful in collecting the $100,000, at October 31,
2020 we determined the $100,000 uncollectible and wrote-off the balance to loss on disposal of unconsolidated entity within our
consolidated statement of operations.
Government
Regulation
We
are subject to the laws and regulations in the countries in which we operate.
Our
food products are subject to local, national and multinational regulations related to labeling, health and nutrition claims, packaging,
pricing, marketing and advertising, privacy and related areas. In addition, various jurisdictions regulate our operations by licensing
and inspecting the manufacturing plants and facilities of our suppliers, enforcing standards for select food products, grading
food products, and regulating trade practices related to the sale and pricing of our food products. Many of the food commodities
we use in our operations are subject to government agricultural policy and intervention. These policies have substantial effects
on prices and supplies and are subject to periodic governmental review.
Examples
of laws and regulations that affect our business include selective food taxes, labeling requirements such as front-of-pack labeling
and nutrient profiling, marketing restrictions, potential withdrawal of trade concessions as dispute settlement retaliation and
sanctions on sales or sourcing of raw materials.
In
addition, we are subject to U.S. and foreign anti-corruption laws including the Foreign Corrupt Practices Act (“FCPA”)
which prohibits us from providing anything of value to foreign officials for the purposes of obtaining or retaining business or
securing any improper business advantage. We are also subject to the Export Sales Reporting Program of the United States Department
of Agriculture (“USDA”) which monitors U.S. agricultural export sales on a daily and weekly basis. Commodities currently
covered by the program include feed grains, wheat, wheat products, rye, flaxseed, linseed oil, cotton, cottonseed, oilseed products,
rice, cattle hides and skins, and beef. In addition to the weekly requirement, daily reporting is required (except for soybean
oil) when a single exporter sells in excess of specified amounts of one commodity in one
day to a single destination, or cumulative sales in excess of specified amounts of one commodity during the weekly reporting period
to a single destination. In addition to the foregoing, we must comply with The Office of Foreign Assets Control trade sanctions.
The Office of Foreign Assets Control (“OFAC”) of the U.S. Department of Treasury administers and enforces economic
and trade sanctions based on U.S. foreign policy and national security goals targeted against foreign countries and regimes, terrorists,
international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction and
other threats to national security, foreign policy or economy of the United Stated.
Our
failure to comply with any of the foregoing regulations or regulations that we may be subject to may be punishable by civil penalties,
including fines, denial of export privileges, injunctions and asset seizures as well as criminal fines and imprisonment.
Market
and Competition
We
generate a majority of our revenue from food imported into the GCC countries of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and
the United Arab Emirates. The GCC has highly developed wholesale, grocery, and retail infrastructures that attract thousands of
brands from around the world. According to reports published by Alpen Capital, halal food imports into the GCC are expected to
continue growing significantly, while food imports account for the majority of food consumed in the GCC.
We
also generate revenue from domestic U.S. sales of our MLB branded ice cream and gummi and chocolate candies. According to the
International Dairy Foods Association, ice cream is an $11 billion industry with 1.4 billion gallons of ice cream and related
frozen desserts produced annually in the U.S. and according to the National Confectioners Association, the confectionary industry
generates $35 billion annually.
In
the branded product space, management believes that our key competitors in the GCC countries in which we operate include The Savola
Group and Almarai which are based in Saudi Arabia; Americana Quality which is based in Kuwait; and Al Islami Foods which is based
in the UAE and is currently ranked as the world’s largest Halal food vendor, with more than 80 frozen and specialty lines.
In addition to the foregoing, we also compete with recognized international brands from multi-line companies such as Nestle and
Mondelez International. In the U.S., management believes that our key competitors include premium ice cream brands such as Ben
& Jerry’s, Breyers, and Haagen-Dazs and domestic confectionary brands in the gummi and chocolate candy space such as
Mars, Mondelez International, and Nestle.
Although
many of our competitors have greater financial, distribution and marketing resources than us, management believes there are many
food categories and niches in which we can successfully compete in this highly-fragmented market. In addition, we focus on the
regional sensitivities and dietary requirements of the markets we export products to. We offer both Verus Foods-branded products
along with products from other brands, particularly from brands that desire to enter the GCC market, but lack the infrastructure
or resources to do so. Furthermore, management believes that we are one of the only U.S. based public companies operating in the
GCC that can provide its own branded products and also act as a distributor for other brands across all of the major food sales
categories. Management believes that a majority of the suppliers in this space are either non-U.S. based private companies or
are public entities with a narrow focus on their own brands.
Recent
Developments
Eliot’s
Adult Nut Butter
On
September 1, 2020 (the “Closing Date”), we entered into an asset purchase agreement (the “APA”) with Eliot’s
Adult Nut Butter, LLC (the “Seller” or “Eliot’s”) and the member owners of the Seller (the “Members”).
Pursuant to the terms of the APA, on the Closing Date, the Seller sold and assigned substantially all of the assets, and certain
specified liabilities, of the Seller to us. The aggregate purchase price of $400,000 for the purchased assets, plus the assumption
of the assumed liabilities, will be paid by us as follows:
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(i)
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$25,000
within six (6) months of the Closing Date;
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(ii)
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$25,000
within twelve (12) months of the Closing Date;
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(iii)
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issuance
of $60,000 of our common stock to the Members based upon the closing market price on
the Closing Date;
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(iv)
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earn
out payments (up to a maximum of $290,000) to be paid quarterly at a rate equal to the
greater of (i) $1.26 per case sold or (ii) five percent (5%) of the per case wholesale
price; provided that certain gross profit margin and EBITDA conditions are also met.
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In
addition, in connection with the APA, on the Closing Date, Eliot’s entered into an employment agreement with the Founder
of the Seller to serve as the President of Eliot’s.
Subsequent
to the Closing Date, as a result of our and Sellers inability to agree upon advancement of Eliot’s business operations,
effective February 1, 2021, we entered into a Mutual Rescission and Release Agreement (“Rescission Agreement”) with
the Sellers, pursuant to which, among other things, all agreements between the parties including (i) the Asset Purchase Agreement
dated September 1, 2020, (ii) the Assignment and Assumption Agreement dated September 1, 2020, (iii) the Bill of Sale dated September
1, 2020, (iv) the Employment Agreement by and between Eliot’s and Michael Kanter dated September 1, 2020, and (v) all related
ancillary agreements (collectively, “Original Contracts”) were terminated and the parties released each other from
all obligations arising from the Original Contracts.
Big
League Foods
On
December 18, 2020, we and our wholly owned subsidiary, Big League Foods, Inc. (“BLF”), entered into a letter agreement
(the “Agreement”) with ACG Global Solutions, Inc. (“ACG”) and Game on Foods, Inc. (“GOF”),
whereby for certain consideration, BLF agreed to sell, transfer, and assign all of BLF’s rights, title, and interest in
and to all of BLF’s assets to GOF.
Financings
On
January 4, 2021, we entered into a securities purchase agreement with an accredited investor pursuant to which we issued and sold
a convertible promissory note in the principal amount of $95,000 (the “Note”). The Note matures on January 4, 2022,
bears interest at a rate of 9% per annum (increasing to 22% per annum upon the occurrence of an Event of Default (as defined in
the Note)) and is convertible into shares of our common stock at a conversion price as specified in the Note, subject to adjustment.
The Note may be prepaid at any time prior to the 180th day after the issuance date of the Note with certain prepayment penalties
as set forth therein. On January 7, 2021, the proceeds received from this Note were used to prepay the convertible promissory
note dated July 14, 2020.
On
January 7, 2021, we prepaid a convertible promissory note, including principal, accrued interest, and prepayment amount as set
forth within such convertible promissory note dated July 14, 2020. The convertible promissory note in the principal amount of
$63,000 was issued and sold by us to an accredited investor under a securities purchase agreement dated July 14, 2020.
On
January 13, 2021, we issued and sold a convertible promissory note to an accredited investor in the principal amount of $88,000
(including a $4,000 original issuance discount) (the “Note”). The Note matures on January 13, 2022, bears interest
at a rate of 8% 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 our common stock at a conversion price as specified in the Note, subject to adjustment. The Note
may be prepaid at any time prior to the 180th day after the issuance date of the Note with certain prepayment amounts
as set forth therein.
On
February 1, 2021, we entered into a securities purchase agreement with an accredited investor pursuant to which we issued and
sold a promissory note in the principal amount of $303,000 (including a $39,500 original issue discount) (the “Note”).
The Note matures on February 1, 2022, bears interest at a rate of 12% per annum (increasing to 24% per annum upon the occurrence
of an Event of Default (as defined in the Note)), and is only convertible into shares of our common stock upon an Event of Default
at a conversion price as specified in the Note, subject to adjustment. Payments shall be made in eight (8) installments each in
the amount of $42,420 commencing on the fifth (5th) monthly anniversary following the issue date and continuing thereafter each
thirty (30) days for eight (8) months. The Note may be prepaid at any time as set forth therein.
Employees
As
of March 18, 2021, we had 13 full-time employees and 7 part-time employees.
Corporate
History
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.
Effective
October 16, 2018, we changed our name from RealBiz Media Group, Inc. to Verus International, Inc. and our ticker symbol to “VRUS.”
On
April 25, 2019, we entered into a stock purchase agreement with BLF and James Wheeler, the sole stockholder of BLF pursuant to
which we purchased all of the outstanding capital stock of BLF. Upon the closing of such acquisition, BLF became our wholly-owned
subsidiary and we acquired a license with MLB to sell MLB-branded frozen dessert products and confections covering all 30 MLB
teams. On December 18, 2020, we and our wholly owned subsidiary, BLF, entered into a letter agreement with ACG Global Solutions,
Inc. and Game on Foods, Inc. (“GOF”), whereby for certain consideration, BLF sold, transferred, and assigned all of
BLF’s rights, title, and interest in and to all of BLF’s assets to GOF.
On
August 30, 2019, we entered into an asset purchase agreement with a seller (“Seller”), to which we purchased all of
the assets of the Seller’s french fry business in the Middle East.
On
May 8, 2020, we acquired a 51% interest of ZC Top Apparel Manufacturing, Inc. (“TAM”), a Philippines-based maker of
reusable N95 fabric masks and biohazard suits. On October 5, 2020, as a result of TAM’s failure of contractual performance
and breach of contract, all obligations under the binding term sheet were rescinded and a demand made for immediate return of
the cash consideration of $100,000, that we paid, plus fees and costs to be determined. As we were unsuccessful in collecting
the $100,000, at October 31, 2020 we determined the $100,000 uncollectible and wrote-off the balance to loss on disposal of unconsolidated
entity within our consolidated statement of operations.
ITEM
1A. RISK FACTORS
An
investment in our securities involves significant risks. Before deciding to invest in our securities, you should carefully consider
each of the following risk factors and all of the other information set forth in this Annual Report on Form 10-K. Our business
and results of operations could be seriously harmed by any of the following risks. The risks set out below are not the only risks
we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially
adversely affect our business, financial condition and/or operating results. If any of the following events occur, our business,
financial condition and results of operations could be materially adversely affected. In such case, the value and trading price
of our common stock could decline, and you may lose all or part of your investment.
Risks
Related to Our Business
We
have no history of profitability.
We
commenced operations in 1994 and to date have not generated any profit. We do not have a significant operating history which would
provide you with meaningful information about our past or future operations with respect to our international consumer packaged
goods, foodstuff distribution and wholesale trade. We have not yet achieved positive cash flow on a monthly basis during any fiscal
year including the current fiscal year ended October 31, 2020.
We
have had net losses of $ 15,670,193 and $2,389,850 for the years ended October 31, 2020 and 2019, respectively. Furthermore, we
had a working capital surplus of $488,312 and deficit of $1,787,284 at October 31, 2020 and 2019, respectively. If we are unable
to achieve profitability, we may be unable to continue our operations.
Our
independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern,
which may hinder our ability to obtain future financing.
Our
financial statements as of October 31, 2020 have been prepared under the assumption that we will continue as a going concern for
the next twelve months. Our independent registered public accounting firm included in its opinion for the year ended October 31,
2020 an explanatory paragraph referring to our recurring losses from operations and expressing substantial doubt in our ability
to continue as a going concern without additional capital becoming available. Our ability to continue as a going concern is dependent
upon our ability to obtain additional equity or debt financing, reduce expenditures and to generate significant revenue. Our financial
statements as of October 31, 2020 did not include any adjustments that might result from the outcome of this uncertainty. The
reaction of investors to the inclusion of a going concern statement by our independent registered public accounting firm, and
our potential inability to continue as a going concern, in future years could materially adversely affect our share price and
our ability to raise new capital or enter into strategic alliances.
We
will require additional financing in the future to fund our operations which may cause dilution to our existing stockholders or
restrict our operations.
We
will need additional capital in the future to continue to execute our business plan. Therefore, we will be dependent upon additional
capital in the form of either debt or equity to continue our operations. At the present time, we do not have arrangements to raise
all of the needed additional capital, and we will need to identify potential investors and negotiate appropriate arrangements
with them. Our ability to obtain additional financing will be subject to a number of factors, including market conditions, our
operating performance and investor sentiment. To the extent that we raise additional capital through the sale of equity or convertible
debt securities, the ownership interests of our stockholders will be diluted, and the terms of such financings may include liquidation
or other preferences, anti-dilution rights, and other provisions that may adversely affect the rights of our stockholders, including
rights, preferences and privileges that are senior to those of our holders of common stock in the event of a liquidation. In addition,
debt financing, if available, could include covenants limiting or restricting our ability to take certain actions, such as incurring
additional debt, making capital expenditures, or declaring dividends and may require us to grant security interests in our assets.
If we are unable to raise additional capital when required or on acceptable terms we may need to curtail or cease our operations.
Our
indebtedness and liquidity needs could restrict our operations and make us more vulnerable to adverse economic conditions.
Our
existing indebtedness may adversely affect our operations and limit our growth, and we may have difficulty repaying our debt when
due. If market or other economic conditions deteriorate, our ability to comply with covenants contained in our debt instruments
may be impaired. If we violate any of the restrictions or covenants set forth in our debt instruments, all or a significant portion
of our indebtedness may become immediately due and payable. Our inability to make payments on our indebtedness when due may have
a material adverse effect on our operations and financial condition.
We
depend on a small number of customers and the loss of one or more major customers could have a material adverse effect on our
business, financial condition and results of operations.
For
the year ended October 31, 2020, approximately 54% of accounts receivable were concentrated with six customers and approximately
61% of revenues were concentrated with seven customers, all of which customers are located outside the United States. For the
year ended October 31, 2019, approximately 42% of accounts receivable were concentrated with three customers and approximately
66% of revenues were concentrated with six customers, all of which customers are located outside the United States. 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.
Our
reliance on distributors and retailers could affect our ability to efficiently and profitably distribute and market our products,
maintain our existing customers and expand our business.
Our
ability to maintain and expand our customer base, maintain our presence in existing markets and establish a presence in new markets
is dependent on our ability to establish and maintain successful relationships with reliable distributors and retailers. Most
of our distributors and retailers sell and distribute competing products and our products may represent a small portion of their
businesses. The success of our distribution network will depend on the performance of the distributors and retailers. There is
a risk that the retailers and distributors that we engage may fail to distribute our products or position our products in localities
that may not be receptive to customers. Our ability to incentivize, motivate and retain distributors to manage and sell our products
is affected by competition from other food companies that have greater resources than we do. To the extent that our distributors
and retailers are distracted from selling our products or do not deploy sufficient resources to manage and sell our products,
our sales and results of operations could be adversely affected. Furthermore, our distributors’ and retailers’ financial
position or market share may deteriorate, which could adversely affect the distribution, marketing and sales activities related
to our products thereby having a material adverse effect on our business.
Our
ability to maintain and expand our distribution network and attract additional distributors and retailers depends on a number
of factors, some of which are outside our control. Some of these factors include:
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the
level of demand for our brand and products in a particular geographic location;
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our
ability to price our products at levels competitive with those of our competitors; and
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our
ability to deliver products in the quantity and at the time requested by distributors
and retailers.
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We
may not be able to successfully manage all or any of these factors in any of our current or prospective markets which could have
a material adverse effect on our results of operation and financial condition.
If
we do not adequately manage our inventory levels, our operating results could be adversely affected.
We
need to maintain adequate inventory levels to be able to deliver products on a timely basis. Our inventory supply depends on our
ability to accurately estimate demand for our products. Our ability to estimate demand for our products is imprecise, particularly
for new products, for seasonal promotions and in new markets. If we materially underestimate demand for our products or are unable
to maintain sufficient inventory, we may not be able to satisfy demand on a short-term basis. Alternatively, if we overestimate
demand for our products, we may have too much inventory on hand, which may result in higher storage costs and the risk of inventory
spoilage. If we fail to manage our inventory to meet demand, we could damage our brand and our relationship with our customers
which could have a material adverse effect on our operating results and financial condition.
If
we do not continually enhance our brand recognition, increase distribution of our products, attract new customers and introduce
new products our business may suffer.
The
food industry is subject to rapid and frequent changes in consumer demands. Because consumers in this industry are constantly
seeking new products, our success relies heavily upon our ability to continue to market new products. We may not be successful
in introducing or marketing new products on a timely basis, if at all. Our inability to commercialize new products may have an
adverse effect on our business, financial condition and results of operations.
Any
damage to our brand or reputation could adversely affect our business, financial condition and results of operations.
We
must protect and grow the value of our brand to continue to be successful in the future. Any incident that erodes consumer affinity
for our brand could significantly reduce our value and damage our business. For example, negative third-party reports regarding
our products, whether accurate or not, may adversely impact consumer perceptions. In addition, if we recall certain products irrespective
of whether such recall is mandatory or voluntary, the public perception of the quality of our products may be diminished. We may
also be adversely affected by news reports or other negative publicity, regardless of their accuracy, regarding other aspects
of our business, such as public health concerns, illness and safety. This negative publicity could adversely affect our brand
and reputation which could have a material adverse effect on our business and financial condition.
We
have no long-term contracts with our customers which require our customers to purchase a minimum amount of our products. The absence
of long-term contracts could result in periods during which we must continue to pay costs and service indebtedness without revenues.
We
do not have long-term contacts with our customers which require our customers to purchase a minimum amount of our products. Accordingly,
we could have periods during which we have no or limited orders for our products, which will make it difficult for us to operate
as we will have to continue paying our expenses and servicing our debt. We cannot provide assurance that we will be able to timely
locate new customers, if at all. The periods in which we have no or limited purchase orders for our products could have a material
adverse effect on our business and financial condition.
Severe
weather conditions and natural disasters may affect manufacturing facilities and distribution activities which may negatively
impact the operating results of our business.
Severe
weather conditions and natural disasters, such as fires, floods, droughts, frosts, hurricanes, earthquakes and tornadoes may curtail
or prevent the manufacturing or distribution of our products which may have a material adverse effect on our results of operation
or financial condition.
Global
or regional health pandemics or epidemics, including COVID-19, could negatively impact our business operations, financial performance
and results of operations.
Our
business and financial results could be negatively impacted by the recent outbreak of COVID-19 or other pandemics or epidemics.
The severity, magnitude and duration of the current COVID-19 pandemic is uncertain, rapidly changing and hard to predict. During
2020, COVID-19 has significantly impacted economic activity and markets around the world, and it could negatively impact our business
in numerous ways, including but not limited to those outlined below:
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Commodity
costs have become more volatile due to the COVID-19 outbreak and we expect continued
commodity cost volatility;
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The
COVID-19 outbreak could disrupt our global supply chain, operations and routes to market
or those of our suppliers, customers, distributors and retailers. These disruptions or
our failure to effectively respond to them could increase product or distribution costs
or cause delays in delivering or an inability to deliver products to our customers;
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Disruptions
or uncertainties related to the COVID-19 outbreak for a sustained period of time could
result in delays or modifications to our strategic plans and initiatives and hinder our
ability to achieve our business objectives;
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Illness,
travel restrictions or workforce disruptions could negatively affect our supply chain,
distribution or other business processes;
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Government
or regulatory responses to pandemics could negatively impact our business. Mandatory
lockdowns or other restrictions on operations in some countries have temporarily disrupted
our ability to distribute our products in some of these markets. Continuation or expansion
of these disruptions could materially adversely impact our operations and results; and
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The
COVID-19 outbreak has increased volatility and pricing in the capital markets and volatility
is likely to continue which could have a material adverse effect on our ability to obtain
financing.
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These
and other impacts of the COVID-19 or other global or regional health pandemics or epidemics could have the effect of heightening
many of the other risks described in this “Risk Factors” section such as those relating to our reputation, brands,
product sales, results of operations or financial condition. We might not be able to predict or respond to all impacts on a timely
basis to prevent near- or long-term adverse impacts to our results. The ultimate impact of these disruptions also depends on events
beyond our knowledge or control, including the duration and severity of any outbreak and actions taken by parties other than us
to respond to them. Any of these disruptions could have a negative impact on our business operations, financial performance and
results of operations, which impact could be material.
Our
international operations expose us to regulatory, economic, political and social risks in the countries in which we operate.
The
international nature of our operations involves a number of risks, including changes in regulations, tariffs, taxes and exchange
controls, economic downturns, inflation and political and social instability including retaliation, war, and civil unrest in the
countries in which we operate. Moreover, consumers in different countries may have varying tastes, preferences and nutritional
opinions. We cannot be certain that we will be able to enter and successfully compete in additional foreign markets or that we
will be able to continue to compete in the foreign markets in which we currently operate.
Doing
business outside the United States requires us to comply with the laws and regulations of various foreign jurisdictions, which
place restrictions on our operations, trade practices, partners and investment decisions. In particular, our operations are subject
to anti-corruption and trade control laws and regulations, including, but not limited to, the FCPA and the Export Sales Reporting
Program. The FCPA prohibits us from providing anything of value to foreign officials for the purposes of obtaining or retaining
business or securing any improper business advantage. Our continued expansion outside the United States and our development of
new partnerships and joint venture relationships worldwide could increase the risk of FCPA violations in the future. We have operations
and deal with governmental clients in countries known to experience corruption, including certain emerging countries in the Middle
East. Our activities in these countries create the risk of unauthorized payments or offers of payments by one of our employees
or third parties that we engage that could be in violation of various laws including the FCPA and other anti-corruption laws,
even though these parties are not always subject to our control. As a result of doing business in foreign countries and with foreign
partners, we are exposed to a heightened risk of violating anti-corruption laws. In addition, we are subject to the Export Sales
Reporting Program which monitors U.S. agricultural export sales on a daily and weekly basis, and we must comply with OFAC trade
sanctions. Violations of anti-corruption, export and other regulations we may be subject to may be punishable by civil penalties,
including fines, denial of export privileges, injunctions and asset seizures as well as criminal fines and imprisonment.
Disruptions
in the worldwide economy may adversely affect our business, financial condition and results of operations.
Adverse
and uncertain economic conditions may impact distributor, retailer and consumer demand for our products. In addition, our ability
to manage normal commercial relationships with our suppliers, distributors, retailers and consumers may suffer. Consumers may
shift to purchasing lower-priced products during economic downturns, making it more difficult for us to sell our premium products.
During economic downturns, it may be more difficult to persuade existing consumers to continue to use our brand or persuade new
consumers to select our brand without price promotions. Furthermore, during economic downturns, distributors and retailers may
reduce their inventories of our products. Our results of operations depend upon, among other things, our ability to maintain and
increase sales volume with our existing distributors and retailers, to attract new consumers and to provide products that appeal
to consumers at prices they are willing and able to pay. Prolonged unfavorable economic conditions may have an adverse effect
on our results of operation and financial condition.
We
purchase substantially all of our food products from a limited number of regions and from a limited number of suppliers. Price
increases and shortages in food products could adversely affect our operating results.
We
purchase substantially all of our 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. Any such failure
to supply or delay caused by our supplies may have a material adverse effect on our operating results.
Price
increases may not be sufficient to cover increased costs, or may result in declines in sales volume due to price elasticity in
the marketplace.
We
may be able to pass some or all input costs to our customers by increasing the selling price of our products or decreasing the
size of our products; however, higher product prices or decreased product sizes may also result in a reduction in sales volume
and/or consumption. If we are not able to increase our selling prices or reduce product sizes sufficiently, or in a timely manner,
to offset increased input costs, including packaging, freight, direct labor, overhead and employee benefits, or if our sales volume
decreases significantly, there could be a negative impact on our financial condition and results of operations.
We
operate in a highly competitive industry.
The
food industry is intensely competitive and consolidation in this industry continues. We face competition in the areas of brand
recognition, taste, quality, price, advertising/promotion, convenience and service. A number of our competitors are larger than
us and have substantial financial, marketing and other resources as well as substantial international operations. In addition,
reduced barriers to entry are creating new competition. Furthermore, in order to protect our existing market share or capture
increased market share in this highly competitive environment, we may be required to increase expenditures for promotions and
advertising and continue to introduce and establish new products. Due to inherent risks in the marketplace associated with advertising
and new product introductions, including uncertainties about trade and consumer acceptance, increased expenditures may not prove
successful in maintaining or enhancing our market share and could impact our operating results. In addition, we may incur increased
credit and other business risks because we operate in a highly competitive environment.
Our
business operations could be disrupted if our information technology systems fail to perform adequately.
The
efficient operation of our business depends on our information technology systems. We rely on our information technology systems
to effectively manage our business data, communications, supply chain, order entry and fulfillment, and other business processes.
The failure of our information technology systems to perform as we anticipate could disrupt our business and could result in transaction
errors, processing inefficiencies, and the loss of sales and customers, causing our business and results of operations to suffer.
In particular, as we grow, we need to make sure that our information technology systems are upgraded and integrated throughout
our business and able to generate reports sufficient for management to run our business. In addition, our information technology
systems may be vulnerable to damage, interruption or security breaches from circumstances beyond our control, including fire,
natural disasters, system failures, cyber-attacks, corporate espionage, and viruses. Any such damage, interruption or security
breach could have a material adverse effect on our business.
We
may be subject to significant liability and may have to recall our products if the consumption of any food product manufactured
or marketed by us causes injury, illness or death. Regardless of whether such claims against us are valid, they may be expensive
to defend and may generate negative publicity, both of which could materially adversely affect our business, operating results
and financial condition.
The
sale of food products for human consumption involves the risk of injury to consumers. Such injuries may result from tampering
by unauthorized third parties or product contamination or spoilage, including the presence of bacterial contamination, foreign
objects, substances, chemicals, other agents or residues introduced during production processes. Our food products may also be
subject to product tampering, contamination or spoilage or be mislabeled or otherwise damaged which may result in a product recall.
We
are dependent on our third-party manufacturers for compliance with rules and regulations with respect to production of many of
our products. Although we believe that we and our manufacturers are in material compliance with all applicable laws and regulations,
if the consumption of our products causes or is alleged to have caused an illness in the future, we may become subject to claims
or lawsuits relating to such matters. Even if a product liability claim is unsuccessful or is not fully pursued, the negative
publicity surrounding an illness, injury or death could have a material adverse effect on our business, results of operations
and financial condition.
The
food industry has been subject to a growing number of claims, including class action lawsuits based on the nutritional content
of food products as well as disclosure and advertising practices. In the future we may be subject to these types of claims and
proceedings and, even if we are successful in defending such claims, publicity about these matters may harm our reputation and
adversely affect our results. Regardless of whether any claims against us are valid, or whether we are ultimately held liable,
claims may be expensive to defend and may divert time and money away from our operations, which could have a material adverse
effect on our performance. Furthermore, a significant judgment could materially and adversely affect our financial condition or
results of operations.
Outbreaks
of disease among livestock and poultry flocks could harm our revenues and operating margins.
As
a supplier of meat products, we are subject to risks associated with the outbreak of disease in beef livestock and poultry flocks,
including, but not limited to, avian influenza and bovine spongiform encephalopathy. The outbreak of disease could adversely affect
our supply of raw materials, increase the cost of production and reduce operating margins. Additionally, the outbreak of disease
may hinder our ability to market and sell products which could have a material adverse effect on our results of operations and
financial condition.
We
are dependent upon key personnel whose loss may adversely impact our business.
Our
success materially depends upon the expertise, experience and continued service of our management and other key personnel, including
but not limited to, our current Chairman of the Board of Directors, Anshu Bhatnagar. If we lose the services of Anshu Bhatnagar
or any of other member of management, our business would be materially and adversely affected.
Our
future success also depends upon our ability to attract and retain highly qualified management personnel and other employees.
Any difficulties in obtaining, retaining and training qualified employees could have a material adverse effect on our results
of operation or financial condition. The process of identifying such personnel with the combination of skills and attributes required
to carry out our business plan is often lengthy. Any difficulties in obtaining and retaining qualified managers and employees
could have a material adverse effect on our results of operation or financial condition.
We
may fail to realize all of the anticipated benefits of any entities which we acquire, such benefits may take longer to realize
than expected or we may encounter significant difficulties integrating acquired businesses into our operations. If our acquisitions
do not achieve their intended benefits, our business, financial condition, and results of operations could be materially and adversely
affected.
We
believe that businesses that we acquire will result in certain benefits, including certain cost synergies and operational efficiencies;
however, to realize these anticipated benefits, the businesses we acquire must be successfully combined with our business. The
combination of independent businesses is a complex, costly, and time-consuming process that will require significant management
attention and resources. The integration process may disrupt the businesses and, if implemented ineffectively, would limit the
expected benefits of these acquisitions to us. The failure to meet the challenges involved in integrating acquired businesses
and realizing anticipated benefits could cause an interruption of, or a loss of momentum in, our activities and could adversely
affect our results of operations.
The
overall integration of acquired businesses may result in material unanticipated problems, expenses, liabilities, competitive responses,
loss of customer and other business relationships, and diversion of management’s attention. The difficulties of combining
the operations of companies include, among others:
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the
diversion of management’s attention to integration matters;
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difficulties
in achieving anticipated cost savings, synergies, business opportunities, and growth
prospects from the combinations;
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difficulties
in the integration of operations and systems; and
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conforming
standards, controls, procedures, accounting and other policies, business cultures, and
compensation structures between the two companies.
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Many
of these factors are outside of our control and any one of these factors could result in, among other things, increased costs
and decreases in the amount of expected revenues, which could materially adversely impact our business, financial condition, and
results of operations. In addition, even if we are able to successfully integrate acquired businesses, the full benefits, including
the synergies, cost savings, revenue growth, or other benefits that are expected, may not be achieved within the anticipated time
frame, or at all. All of these factors could decrease or delay the expected accretive effect of the acquisitions, and negatively
impact our business, operating results, and financial condition.
Risks
Relating to Our Securities
Certain
provisions of the Delaware General Corporation Law (“DGCL”), our Amended and Restated Certificate of Incorporation,
as amended (the “Certificate of Incorporation”), and our Amended and Restated Bylaws (“Bylaws”) may have
anti-takeover effects that could discourage, delay or prevent a change in control, which may cause our stock price to decline.
Our
Certificate of Incorporation, Bylaws and Delaware law could make it more difficult for a third party to acquire us, even if closing
such a transaction would be beneficial to our stockholders. Our Certificate of Incorporation authorizes us to issue up
to 125,000,000 shares of preferred stock. This preferred stock may be issued in one or more
series, the terms of which may be determined at the time of issuance by our board of directors without further action by stockholders.
The terms of any series of preferred stock may include voting rights (including the right to vote as a series on particular matters),
preferences as to dividend, liquidation, conversion and redemption rights and sinking fund provisions. The issuance of any preferred
stock could materially adversely affect the rights of the holders of our common stock, and therefore, reduce the value of our
common stock. In particular, specific rights granted to holders of preferred stock could be used to restrict our ability to merge
with, or sell our assets to, a third party and thereby preserve control by the present management. As of March 18,
2021, we have designated (i) 120,000,000 shares of preferred stock as Series A Convertible Preferred Stock, of which 28,955,601
are outstanding, (ii) 1,000,000 shares of preferred stock as Series B Convertible Preferred Stock, none of which are outstanding
and (iii) 1,000,000 shares of preferred stock as Series C Convertible Preferred Stock, of which 680,801 shares are outstanding.
Provisions
of our Certificate of Incorporation, Bylaws and Delaware law also could have the effect of discouraging potential acquisition
proposals or making a tender offer or delaying or preventing a change in control, including changes a stockholder might consider
favorable. Such provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. In
particular, our Certificate of Incorporation, Bylaws and Delaware law, as applicable, among other things:
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provide
the board of directors with the ability to alter the Bylaws without stockholder approval;
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provide
that vacancies on the board of directors may be filled by a majority of directors in
office, although less than a quorum; and
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provide
that special
meetings of stockholders may be called only by our board.
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If
we fail to comply with the rules under the Sarbanes-Oxley Act of 2002, as amended (“Sarbanes-Oxley”) related to internal
controls and procedures in the future, or, if we discover material weaknesses and other deficiencies in our internal controls
over financial reporting, our stock price could decline significantly and raising capital could be more difficult.
Section
404 of Sarbanes-Oxley requires annual management assessments of the effectiveness of our internal controls over financial reporting.
If we fail to comply with the rules under Sarbanes-Oxley related to disclosure controls and procedures in the future, or, if we
discover material weaknesses and other deficiencies in our internal controls over financial reporting, our stock price could decline
significantly and raising capital could be more difficult. If material weaknesses or significant deficiencies are discovered or
if we otherwise fail to achieve and maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude
on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of Sarbanes-Oxley.
Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to helping
prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results
could be harmed, investors could lose confidence in our reported financial information, and the trading price of our common stock
could drop significantly.
Because
our management controls a significant percentage of our voting capital, they may have control over the actions requiring stockholder
approval.
As
of March 18, 2021, members of our management team beneficially owned approximately 50% of our outstanding voting capital.
As a result, our management team may have the ability to control substantially all matters submitted to our stockholders for approval
including:
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election
of our board of directors;
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removal
of any of our directors;
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amendments
of our Certificate of Incorporation or Bylaws; and
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adoption
of measures that could delay or prevent a change in control or impede a merger, takeover
or other business combination involving us.
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In
addition, management’s stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting
to obtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over
our stock price.
Our
common stock is subject to the “penny stock” rules of the SEC and the trading market in the securities is limited,
which makes transactions in the stock cumbersome and may reduce the value of an investment in the stock.
Rule
15g-9 under the Exchange Act establishes the definition of a “penny stock,” for the purposes relevant to us, as any
equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject
to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: (a) that a broker or dealer
approve a person’s account for transactions in penny stocks; and (b) the broker or dealer receive from the investor a written
agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
In
order to approve a person’s account for transactions in penny stocks, the broker or dealer must: (a) obtain financial information
and investment experience objectives of the person and (b) make a reasonable determination that the transactions in penny stocks
are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating
the risks of transactions in penny stocks.
The
broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating
to the penny stock market, which, in highlight form: (a) sets forth the basis on which the broker or dealer made the suitability
determination; and (b) confirms that the broker or dealer received a signed, written agreement from the investor prior to the
transaction. Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock”
rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of
our common stock.
Disclosure
also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker or dealer and the registered representative, current quotations for the securities and
the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have
to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in
penny stocks.
We
have never paid cash dividends and have no plans to pay cash dividends in the future
Holders
of shares of our common stock are entitled to receive such dividends as may be declared by our board of directors. To date, we
have paid no cash dividends on our capital stock and we do not expect to pay cash dividends in the foreseeable future. We intend
to retain future earnings, if any, to provide funds for operations of our business. Therefore, any return investors in our capital
stock may have will be in the form of appreciation, if any, in the market value of their shares of common stock.
If
we fail to remain current in our reporting requirements, we could be removed from the OTC Pink which would limit the ability of
broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.
As
a company listed on the OTC Pink and subject to the reporting requirements of the Exchange Act, we must be current with our filings
pursuant to Section 13 or 15(d) of the Exchange Act in order to maintain price quotation privileges on the OTC Pink. If we fail
to remain current in our reporting requirements, we could be removed from the OTC Pink. As a result, the market liquidity of our
securities could be severely adversely affected by limiting the ability of broker-dealers to trade our securities and the ability
of stockholders to sell their securities in the secondary market.
Our
common stock could be subject to extreme volatility.
The
trading price of our common stock may be affected by a number of factors, including events described in the risk factors set forth
in this Annual Report and in our other reports filed with the SEC from time to time, as well as our operating results, financial
condition and other events or factors. In addition to the uncertainties relating to future operating performance and the profitability
of operations, factors such as variations in interim financial results or various, and unpredictable, factors, many of which are
beyond our control, may have a negative effect on the market price of our common stock. In recent years, broad stock market indices,
in general, and smaller capitalization companies, in particular, have experienced substantial price fluctuations. In a volatile
market, we may experience wide fluctuations in the market price of our common stock. In addition, securities markets have, from
time to time, experienced significant price and volume fluctuations that are not related to the operating performance of particular
companies. These market fluctuations may have a material adverse effect the market price of our common stock.
Financial
reporting obligations of being a public company in the United States are expensive and time-consuming, and our management will
be required to devote substantial time to compliance matters.
As
a publicly traded company we incur significant legal, accounting and other expenses. The obligations of being a public company
in the United States require significant expenditures and places significant demands on our management and other personnel, including
costs resulting from public company reporting obligations under the Exchange Act and the rules and regulations regarding corporate
governance practices, including those under the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection
Act. These rules require the establishment and maintenance of effective disclosure and financial controls and procedures, internal
control over financial reporting and changes in corporate governance practices, among many other complex rules that are often
difficult to implement, monitor and maintain compliance with. Our management and other personnel will need to devote a substantial
amount of time to ensure that we comply with all of these requirements and to keep pace with new regulations, otherwise we may
fall out of compliance and risk becoming subject to litigation or being delisted from the OTC Pink, among other potential problems.
ITEM
1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM
2. PROPERTIES
The
Company has two operating leases, one for its corporate office in Gaithersburg, Maryland and one for its domestic warehouse operations
in Stafford, Texas. The Company also has a short-term lease for office space in Dubai, UAE. Through February 8, 2021, our corporate
office was located at 9841 Washingtonian Blvd., Suite 390, Gaithersburg, MD 20878, and consisted of 2,798 square feet for $7,644
per month. Effective February 8, 2021, we terminated this sublease and entered into a short-term lease for corporate office space
at 9841 Washingtonian Blvd., Suite 200, Gaithersburg MD 20878. Our domestic warehouse operations are located at 4003 Greenbriar
Drive, Stafford, TX 77477, and consists of 10,100 square feet of warehouse and office space for $8,383 per month, through expiration
on November 30, 2023.
ITEM
3. LEGAL PROCEEDINGS
From
time to time, we may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business.
Litigation is subject to inherent uncertainties, and an adverse result in matters may arise from time to time that may harm our
business. As of the date of this Annual Report on Form 10-K, except as set forth herein, management believes that there are no
claims against us, which it believes will result in a material adverse effect on our business or financial condition.
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. During October 2019, we paid $205,300
and received a Final Judgment Order releasing Verus Foods, Inc. and Anshu Bhatnagar from all claims.
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.
ITEM
4. MINE SAFETY DISCLOSURES
Not
applicable.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
NOTE
1: ORGANIZATION AND NATURE OF BUSINESS
Explanatory
Note
All
references to shares of our common stock contained herein have been adjusted to reflect a 1-for-500 reverse stock split which
was completed and became effective on January 13, 2021.
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.
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 sold pint size ice cream in grocery store-type packaging. In addition, under our confections product
line, we sold gummi and chocolate candies. The MLB license covers all 30 MLB teams, and all of our products pursuant to such license
featured “home team” packaging that matched the fan base in each region. On December 18, 2020, we and our wholly owned
subsidiary, BLF, entered into a letter agreement with ACG Global Solutions, Inc. and Game on Foods, Inc. (“GOF”),
whereby for certain consideration, BLF sold, transferred, and assigned all of BLF’s rights, title, and interest in and to
all of BLF’s assets to GOF.
VERUS
INTERNATIONAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
NOTE
1: ORGANIZATION AND NATURE OF BUSINESS (Continued)
Furthermore,
during August 2019, we purchased all of the assets of a french fry business in the Middle East and during May 2020, we acquired
a 51% interest of ZC Top Apparel Manufacturing, Inc. (“TAM”), a Philippines-based maker of reusable N95 fabric masks
and biohazard suits. On October 5, 2020, as a result of TAM’s failure of contractual performance and breach of contract,
all obligations under the binding term sheet were rescinded and a demand made for immediate return of the cash consideration of
$100,000, that we paid, plus fees and costs to be determined. As we were unsuccessful in collecting the $100,000, at October 31,
2020 we determined the $100,000 uncollectible and wrote-off the balance to loss on disposal of unconsolidated entity within our
consolidated statement of operations.
Impact
of COVID-19 Pandemic
A
novel strain of coronavirus, COVID-19, surfaced during December 2019 and has spread around the world, including to the United
States. During March 2020, COVID-19 was declared a pandemic by the World Health Organization. During certain periods of the pandemic
thus far, a number of U.S. states and various countries throughout the world had been under governmental orders requiring that
all workers remain at home unless their work was critical, essential, or life-sustaining. As a result of these governmental orders,
the Company temporarily closed its domestic and international offices and required all of its employees to work remotely. Although
these temporary office closures created minor disruption to the Company’s business operations, such disruptions to date
have not been significant.
The
full impact of the COVID-19 pandemic on the Company’s financial condition and results of operations will depend on future
developments, such as the ultimate duration and scope of the pandemic, its impact on the Company’s employees, customers,
and vendors, in addition to how quickly normal economic conditions and operations resume and whether the pandemic impacts other
risks disclosed in Item 1A “Risk Factors” within this Annual Report on Form 10-K. Even after the pandemic has subsided,
the Company may continue to experience adverse impacts to its business as a result of any economic recession or depression that
has occurred as a result of the pandemic. Therefore, the Company cannot reasonably estimate the impact at this time. The Company
continues to actively monitor the pandemic and may determine to take further actions that alter its business operations as may
be required by federal, state, or local authorities or that it determines are in the best interests of its employees, customers,
vendors, and shareholders.
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Consolidation and Presentation
The
consolidated financial statements for the years ended October 31, 2020 and 2019 include the operations of BLF effective April
25, 2019, Verus MENA effective May 1, 2018, and Verus Foods, Inc. effective January 2017. All significant intercompany balances
and transactions have been eliminated in the consolidation.
Reclassifications
Certain
reclassifications of prior year amounts have been made to enhance comparability with the current year’s consolidated financial
statements, including, but not limited to, presentation of certain items within the consolidated statements of operations, consolidated
statements of cash flows, and certain notes to the consolidated financial statements.
VERUS
INTERNATIONAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use
of Estimates
The
preparation of consolidated 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 consolidated financial statements and the 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, estimated useful lives of finite-lived intangible assets, accrued expenses, valuation
of derivative liabilities, stock-based compensation, and the valuation reserve for income taxes.
Segment
Reporting
Although
the Company has a number of operating divisions, separate segment data has not been presented, as they meet the criteria for aggregation
as permitted by ASC Topic 280, Segment Reporting.
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 October 31, 2020 and 2019, the
Company’s cash balances did not exceed the FDIC limit.
The
Company’s food products accounts receivable, net and revenues as of and for the year ended October 31, 2020 were geographically
concentrated with customers located in the GCC countries. In addition, significant concentrations existed with a limited number
of customers. Approximately 54% of accounts receivable, net as of October 31, 2020 was concentrated with six customers and approximately
61% of revenues for the year ended October 31, 2020 were concentrated with seven 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. Approximately 56% of accounts payable as of October 31, 2020 were concentrated with four suppliers and
approximately 48% of cost of revenues for the year ended October 31, 2020 were concentrated with six suppliers.
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 October 31, 2020 or October 31, 2019.
VERUS
INTERNATIONAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
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 October 31, 2020 and
2019, the Company determined there was no requirement for an allowance for doubtful accounts.
Inventory
Inventory
is stated at the lower of net realizable value, determined on the first-in, first-out basis, or cost. Net realizable value is
based on estimated selling prices in the ordinary course of business less reasonably predictable costs of completion and transportation.
Inventories consist of raw materials (film and packaging) and finished products. At October 31, 2020, all inventory was finished
products inventory. At October 31, 2019, raw material and finished products inventory totaled $54,392 and $544,123, respectively.
Intangible
Assets
The
Company amortizes its three intangible assets, a license with MLB, a license with the NHL, 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. Leasehold improvements are depreciated based upon the remaining term of the related lease. 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. The Company incurred depreciation expense of $17,982 and $3,835 for the years ended October 31,
2020 and 2019, respectively.
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. For the years ended October 31, 2020 and 2019, the Company
did not impair any long-lived assets.
VERUS
INTERNATIONAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Revenue
Recognition
The
Company recognizes revenue in accordance with the Financial Accounting Standards Board’s (“FASB”), Accounting
Standards Codification (“ASC”) ASC 606, Revenue from Contracts with Customers (“ASC 606”). Revenues are
recognized when control is transferred to customers in amounts that reflect the consideration the Company expects to be entitled
to receive in exchange for those goods. Revenue recognition is evaluated through the following five steps: (i) identification
of the contract, or contracts, with a customer; (ii) identification of the performance obligations in the contract; (iii) determination
of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition
of revenue when or as a performance obligation is satisfied.
Revenue
is derived from the sale of consumable and non-consumable 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 11).
A
contract asset is recognized for incremental costs to obtain a customer contract that are recoverable, otherwise such incremental
costs are expensed as incurred.
VERUS
INTERNATIONAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cost
of Revenues
Cost
of revenues represents the cost of the products sold during the periods presented.
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
years ended October 31, 2020 and 2019 were $1,016,952 and $562,959, 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.
Restricted
stock awards are granted at the discretion of the compensation committee of the board of directors of the Company (the “Board
of Directors”). These awards are restricted as to the transfer of ownership and generally vest over the requisite service
periods (vesting on a straight–line basis). The fair value of a stock award is equal to the fair market value of a share
of the Company’s common stock on the grant date.
The
Company estimates the fair value of stock options and warrants by using the Black-Scholes option valuation model. The Black–Scholes
option valuation model requires the development of assumptions that are inputs into the model. These assumptions are the expected
stock volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock
and the expected forfeiture rate. Expected volatility is calculated based on the historical volatility of the Company’s
common stock over the expected term of the option. Risk–free interest rates are calculated based on continuously compounded
risk–free rates for the appropriate term.
Determining
the appropriate fair value model and calculating the fair value of equity–based payment awards requires the input of the
subjective assumptions described above. The assumptions used in calculating the fair value of equity–based payment awards
represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment.
The Company is required to estimate the expected forfeiture rate and recognize expense only for those shares expected to vest.
The
Company accounts for share–based payments granted to non–employees in accordance with ASC 505–50, “Equity
Based Payments to Non–Employees.” The Company determines the fair value of the stock–based payment as either
the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more readily determinable.
If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions
as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments
is reached, or (2) the date at which the counterparty’s performance is complete.
VERUS
INTERNATIONAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Derivative
Instruments
The
Company accounts for financing arrangements that consist of freestanding derivative instruments or are hybrid instruments that
contain embedded derivative features. The Company accounts for these arrangements in accordance with ASC Topic 815, Accounting
for Derivative Instruments and Hedging Activities as well as related interpretations of this standard. In accordance with
this standard, derivative instruments are recognized as either assets or liabilities in the balance sheet and are measured at
fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly and closely related to the
host contract are bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or loss in
earnings. The Company determines the fair value of derivative instruments and hybrid instruments based on available market data
using appropriate valuation models, considering all of the rights and obligations of each instrument.
The
Company estimates fair values of derivative financial instruments using various techniques (and combinations thereof) that are
considered consistent with the objective measuring fair values. In selecting the appropriate technique, the Company considers,
among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. Estimating
fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and
are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition,
option-based techniques (such as Black-Scholes model) are highly volatile and sensitive to changes in the trading market price
of the Company’s common stock. Since derivative financial instruments are initially and subsequently carried at fair values,
our income (expense) going forward will reflect the volatility in these estimates and assumption changes.
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 expense over the life of the debt using the effective interest method.
Foreign
Currency Translation and Transactions
The
Company has one non-U.S. subsidiary, where the functional currency is the United Arab Emirates dirham (“AED”). The
Company’s foreign subsidiary maintains its records using local currency. The related assets and liabilities of this non-U.S.
subsidiary have been translated using end of period exchange rates and stockholders’ equity is translated at the historical
exchange rates to the U.S. dollar. Income and expense items were translated using average exchange rates for the period. The resulting
translation adjustments, net of income taxes, are reported as other comprehensive income and accumulated other comprehensive income
in the stockholder’s equity in accordance with ASC 220 – Comprehensive Income.
VERUS
INTERNATIONAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The
exchange rate used to translate amounts in AED into USD for the purposes of preparing the unaudited condensed consolidated financial
statements were as follows:
Balance
sheet:
|
|
|
October 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Period-end AED: USD exchange rate
|
|
$
|
0.27229
|
|
|
$
|
0.27231
|
|
Income
statement:
|
|
|
Year Ended October 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Average Quarterly AED: USD exchange rate
|
|
$
|
0.27230
|
|
|
$
|
0.27230
|
|
Translation
gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional
currency are translated, as the case may be, at the rate on the date of the transaction and included in the results of operations
as incurred.
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. At October 31, 2020 and 2019, the Company had a full valuation
allowance against its deferred tax assets.
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, 2020, 2019, 2018 and 2017 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 years ended October 31, 2020 and
2019.
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.
VERUS
INTERNATIONAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 years ended October 31,
2020 and 2019 as we incurred a net loss for those periods. At October 31, 2020, there were outstanding warrants to purchase approximately
2,810,000 million shares of the Company’s common stock, approximately 194,000 shares of the Company’s common stock
issuable upon the conversion of Series A and Series C convertible preferred stock, and approximately 1,534,000 million shares
of the Company’s common stock issuable upon the conversion of convertible notes payable which may dilute future EPS. At
October 31, 2019, there were outstanding warrants to purchase approximately 1,450,000 million shares of the Company’s common
stock, approximately 175,000 shares of the Company’s common stock issuable upon the conversion of series A and series C
convertible preferred stock, and approximately 32,500 shares of the Company’s common stock issuable upon the conversion
of convertible notes payable which may dilute future EPS.
Modification/Extinguishment
of Debt
In
accordance with ASC 470, a modification or an exchange of debt instruments that adds or eliminates a conversion option that was
substantive at the date of the modification or exchange is considered a substantive change and is measured and accounted for as
extinguishment of the original instrument along with the recognition of a gain or loss. Additionally, under ASC 470, a substantive
modification of a debt instrument is deemed to have been accomplished with debt instruments that are substantially different if
the present value of the cash flows under the terms of the new debt instrument is at least 10 percent different from the present
value of the remaining cash flows under the terms of the original instrument. A substantive modification is accounted for as an
extinguishment of the original instrument along with the recognition of a gain or loss.
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 pre-existing 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.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Effective
November 1, 2019, the Company adopted ASU 2017-11, Update to Earnings Per Share (Topic 260); Distinguishing Liabilities
from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments
with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments
of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. The ASU
makes limited changes to the guidance on classifying certain financial instruments as either liabilities or equity. The ASU is
intended to improve (1) the accounting for instruments with “down-round” provisions and (2) the readability of the
guidance in ASC 480 on distinguishing liabilities from equity by replacing the indefinite deferral of certain pending content
with scope exceptions. The Company determined the adoption of ASU 2017-11 did not have an impact on its consolidated financial
statements.
Recently
Issued Accounting Standards Not Yet Adopted
During
August 2020, the FASB issued ASU 2020-06, to modify and simplify the application of U.S. GAAP for certain financial instruments
with characteristics of liabilities and equity. The standard is effective for the Company as of November 1, 2024, with early adoption
permitted. The Company is reviewing the impact of this guidance but does not currently expect the adoption of this guidance to
have a material impact on its consolidated financial statements.
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 consolidated financial statements.
NOTE
3: GOING CONCERN
The
accompanying 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 net losses of $15,670,193 and $2,389,850 and has used cash in operating activities of $2,486,939 and $2,238,364
for the years ended October 31, 2020 and 2019, respectively. At October 31, 2020, the Company had a working capital surplus of
$488,312, and an accumulated deficit of $44,164,783. 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 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 and to fund the growth of our 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. The Company’s ability to raise additional capital will also be impacted by the recent COVID-19
pandemic, which such ability is highly uncertain, cannot be predicted, and could have an adverse effect on the Company’s
business and financial condition.
VERUS
INTERNATIONAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
NOTE
4: PREPAID EXPENSES
Prepaid
expenses total $216,921 and $65,749 at October 31, 2020 and 2019, respectively, and consist mainly of prepaid advertising, prepaid
insurance, prepaid consulting, and deposits on purchases.
NOTE
5: LEASES
The
Company has two operating leases, one for its corporate office in Gaithersburg, Maryland, and one for its domestic warehouse operations
in Stafford, Texas. The Company also has a short-term lease for office space in Dubai, UAE.
At
the inception of a contract, the Company assesses whether the contract is, or contains, a lease. The Company’s assessment
is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether the Company obtains the right
to substantially all the economic benefit from the use of the asset throughout the term, and (3) whether the Company has the right
to direct the use of the asset. The Company allocates the consideration in the contract to each lease and non-lease component
based on the component’s relative stand-alone price to determine the lease payments. Lease and non-lease components are
accounted for separately. Leases are classified as either finance leases or operating leases based on criteria in ASC 842.
At
lease commencement, the Company records a lease liability equal to the present value of the remaining lease payments, discounted
using the rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing
rate. A corresponding ROU asset is recorded, measured based on the initial measurement of the lease liability. ROU assets also
include any lease payments made and exclude lease incentives. Lease terms may include options to extend or terminate the lease
when it is reasonably certain that the Company will exercise that option.
Lease
expense for operating leases, consisting of lease payments, is recognized on a straight-line basis over the lease term. Included
in lease expense are any variable lease payments incurred in the period that were not included in the initial lease liability.
Lease expense for finance leases consists of the amortization of the ROU asset, which is calculated on a straight-line basis over
the shorter of the useful life of the asset or the lease term, and interest expense on the lease liability, which is calculated
using the effective interest rate method. The Company had no finance leases at October 31, 2020.
For
the year ended October 31, 2020, the Company had operating lease costs of $177,659, which are included in general and administrative
expenses in the consolidated statements of operations. For the year ended October 31, 2020, the Company made operating lease cash
payments of $182,823, which are included in cash flows from operating activities in the consolidated statements of cash flows.
At
October 31, 2020, the remaining lease term for our corporate office and domestic warehouse operations is 14 months and 37 months,
respectively, and the discount rate is 5%. Future annual minimum cash payments required under these operating type leases at October
31, 2020 are as follows:
|
Future Minimum Lease Payments:
|
|
|
|
|
2021
|
|
$
|
193,925
|
|
|
2022
|
|
|
116,342
|
|
|
2023
|
|
|
100,595
|
|
|
2024
|
|
|
8,383
|
|
|
Total Minimum Lease Payments
|
|
$
|
419,245
|
|
|
Less: amount representing interest
|
|
|
(26,634
|
)
|
|
Present Value of Lease Liabilities
|
|
$
|
392,611
|
|
|
Less: current portion
|
|
|
(178,327
|
)
|
|
Long-Term Portion
|
|
$
|
214,284
|
|
VERUS
INTERNATIONAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
NOTE
6: BUSINESS ACQUISITIONS
Eliot’s
Adult Nut Butter, LLC
On
September 1, 2020 (the “Closing Date”), the Company entered into an asset purchase agreement (the “APA”)
with Eliot’s Adult Nut Butter, LLC (the “Seller” or “Eliot’s”) and the member owners of the
Seller (the “Members”). Pursuant to the terms of the APA, on the Closing Date, the Seller sold and assigned substantially
all of the assets, and certain specified liabilities, of the Seller to the Company. The aggregate purchase price of $400,000 for
the purchased assets, plus the assumption of the assumed liabilities, will be paid by the Company as follows:
|
|
(v)
|
$25,000
within six (6) months of the Closing Date;
|
|
|
(vi)
|
$25,000
within twelve (12) months of the Closing Date;
|
|
|
(vii)
|
issuance
of $60,000 of the Company’s common stock to the Members based upon the closing market price on the Closing Date;
|
|
|
(viii)
|
earn
out payments (up to a maximum of $290,000) to be paid quarterly at a rate equal to the greater of (i) $1.26 per case sold
or (ii) five percent (5%) of the per case wholesale price; provided that certain gross profit margin and EBITDA conditions
are also met.
|
In
addition, in connection with the APA, on the Closing Date, Eliot’s entered into an employment agreement with the Founder
of the Seller to serve as the President of Eliot’s.
Subsequent
to the Closing Date, as a result of the Company and Sellers inability to agree upon advancement of Eliot’s business operations,
effective February 1, 2021, the Company and Sellers entered into a Mutual Rescission and Release Agreement (“Rescission
Agreement”) pursuant to which, among other things, all agreements between the parties including (i) the Asset Purchase Agreement
dated September 1, 2020, (ii) the Assignment and Assumption Agreement dated September 1, 2020, (iii) the Bill of Sale dated September
1, 2020, (iv) the Employment Agreement by and between Eliot’s and Michael Kanter dated September 1, 2020, and (v) all related
ancillary agreements (collectively, “Original Contracts”) were terminated and the parties released each other from
all obligations arising from the Original Contracts. Accordingly, the Company concluded that no business combination occurred
on September 1, 2020, as the Company never obtained control over Eliot’s as it did not have control over management nor
could it agree with the management of Eliot’s to advance the business and operate pursuant to the terms of the APA. Therefore,
in accordance with ASC topic 855, “Subsequent Events”, this Rescission Agreement was considered a Type 1 subsequent
event and therefore no financial information related to this transaction has been included in the Company’s consolidated
financial statements as of and for the year ended October 31, 2020.
Nutribrands
Holdings, LLC
On
October 30, 2019 (the “Closing Date”), the Company entered into a Contribution and Sale Agreement (the “Agreement”)
with Nutribrands Holdings, LLC, a wholly-owned subsidiary of the Company (“Nutribrands Holdings”), South Enterprise,
LLC (“South Enterprise”), the members of South Enterprise (the “SE Members”), Nutribrands, LTDA (“Nutribrands”
and together with South Enterprise, the “Companies” and each individually, a “Company”) and the equity
holders of Nutribrands (the “NB Equity Holders” and together with the SE Members, the “Sellers”) and Rodrigo
Nogueira, solely in his capacity as the Seller’s representative. Pursuant to the terms of the Agreement, on the Closing
Date, the Sellers contributed all of their limited liability interests and equity interests (collectively, the “Interests”)
in South Enterprise and Nutribrands, respectively, to Nutribrands Holdings in exchange for 49% of the membership interests of
Nutribrands Holdings (the “Nutribrands Holdings Membership Interests”). Pursuant to the terms of the Agreement, until
the five year anniversary of the Closing Date, the Companies may request that Nutribrands Holdings make available, Working Capital
(as defined in the Agreement) for Qualified Transactions (as defined in the Agreement). Of such Working Capital, $1 million may
be used by the Sellers for certain transaction fees. Furthermore, the Company has agreed to provide certain Working Capital Financing
(as defined in the
VERUS
INTERNATIONAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
NOTE
6: BUSINESS ACQUISITIONS (Continued)
Agreement)
for Qualified Transactions, and to the extent that the Company does not provide such Working Capital Financing and fails to fund
the Qualified Transactions, the Sellers shall have the right to terminate the Agreement and the Holdings LLC Agreement (as defined
in the Agreement). Moreover, upon the expiration of the Measurement Period (as defined the Agreement), if the Companies fail to
meet or exceed the Projections (as defined in the Agreement) with respect to the end of the Measurement Period, Nutribrands Holdings
shall have the right to redeem or the Company shall have the right to acquire, and the Sellers shall have the obligation to transfer,
pursuant to the Holdings LLC Agreement, the Nutribrands Holdings Membership Interests having an aggregate value (based on the
value assigned to such interests on the Closing Date) equal to the amount of the shortfall of the actual revenue of the Company
for the trailing 12 month period ending on the fifth anniversary of the Closing Date and the projected revenue for such trailing
12 month period included in the Projections. Furthermore, pursuant to the Agreement, beginning one year after the Closing Date,
until the five-year anniversary thereof, the Sellers shall have the opportunity to receive an annual dividend of up to $4.5 million
per year based upon the cumulative consolidated financial performance of the Companies; provided, however, such dividend shall
not exceed an aggregate of $18 million.
Subsequent
to the Closing Date, as a result of the Company and Sellers inability to agree upon advancement of Nutribrands’ business
operations, effective March 31, 2020, the Company and Sellers entered into a Termination and Release Agreement (“Termination
Agreement”) pursuant to which, among other things, (i) all agreements between the parties (including the October 30, 2019
Amended and Restated Operating Agreement of Nutribrands International, LLC and the Agreement and all related ancillary agreements)
were terminated (the “Released Transactions”) and (ii) the parties released each other from any and all obligations
whatsoever arising from the Released Transactions, subject to certain exceptions. Accordingly, the Company concluded that no business
combination occurred on October 30, 2019, as the Company never obtained control over Nutribrands as it did not have control over
management nor could it agree with the management of Nutribrands to advance the business and operate pursuant to the terms of
the Agreement. Therefore, in accordance with ASC topic 855, “Subsequent Events”, this Termination Agreement was considered
a Type 1 subsequent event and therefore no financial information related to this transaction has been included in the Company’s
consolidated financial statements as of and for the year ended October 31, 2019.
NOTE
7: ASSET ACQUISITIONS
French
Fry Business
On
August 30, 2019, the Company entered into an asset purchase agreement with a certain seller (“Seller”) pursuant to
which, on September 6, 2019, the Company acquired all of the assets of the Seller’s french fry business (the “Acquired
Assets”) in consideration for $544,477 (2,000,000 United Arab Emirates Dirham) in cash, plus assumption of certain liabilities.
The purchase price was satisfied by relieving the Seller of certain accounts receivable invoices which totaled the purchase price
and were outstanding and due to the Company.
The
transaction was accounted for as an asset acquisition, with all of the purchase consideration allocated to the customer contracts
which provide the Company the right to earn revenue under the related terms (see Note 8).
VERUS
INTERNATIONAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
NOTE
7: ASSET ACQUISITIONS (Continued)
Big
League Foods, Inc.
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. On 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 (as defined in the stock
purchase agreement) and the applicable payees thereof, the aggregate amount of the Assumed Company Obligations. During August
2019, the additional $50,000 was paid to the Seller.
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 through the quarter including December 31, 2022 (the “Earn Out Period”). 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) (the “Difference”).
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 (the “Catch-Up Payment”); 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 8).
Subsequent
to fiscal year end, on December 18, 2020, we and our wholly owned subsidiary, BLF, entered into a letter agreement with ACG Global
Solutions, Inc. and Game on Foods, Inc. (“GOF”), whereby for certain consideration, BLF sold, transferred, and assigned
all of BLF’s rights, title, and interest in and to all of BLF’s assets to GOF.
NOTE
8: INTANGIBLE ASSETS, NET
Intangible
assets, net, consist of three intangible assets, a license with MLB (“MLB License”), a license with the National Hockey
League (“NHL License”), 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 as part of the April
25, 2019 stock purchase agreement (see Note 7) 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.
VERUS
INTERNATIONAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
NOTE
8: INTANGIBLE ASSETS, NET (continued)
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 17). 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.
NHL
License
On
August 20, 2020, our wholly owned subsidiary, BLF, entered into a retail license agreement (“NHL License”) with the
NHL which allows us to produce and sell NHL-themed chocolate, gum, gummies and other confectionary products. The NHL License provides
us the rights to feature the names, nicknames, slogans, symbols, logos, emblems, insignia, colors, and uniform designs of each
of the member teams of the NHL and sell such products throughout the United States territory. The term of the NHL License is through
June 30, 2022 and requires periodic license payments consisting of royalty payments and guaranteed annual minimum payments.
Acquired
Customer Contracts
The
acquired customer contracts were purchased for $544,477 (2,000,000 United Arab Emirates Dirham) from a third-party frozen foods
vendor on September 6, 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
|
|
|
|
|
|
|
|
October 31,
|
|
Useful Lives
|
|
2020
|
|
|
2019
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
MLB license
|
|
32 months
|
|
$
|
357,027
|
|
|
$
|
357,027
|
|
|
NHL license
|
|
12 months
|
|
|
25,000
|
|
|
|
-
|
|
|
Customer contracts
|
|
7 years
|
|
|
544,630
|
|
|
|
544,630
|
|
|
Accumulated amortization
|
|
|
|
|
(298,485
|
)
|
|
|
(63,950
|
)
|
|
Intangible assets, net
|
|
|
|
$
|
628,172
|
|
|
$
|
837,707
|
|
Amortization
expense included in cost of revenue for the years ended October 31, 2020 and 2019 was $234,535 and $63,950, respectively.
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:
|
Fiscal year 2021
|
|
$
|
229,597
|
|
|
Fiscal year 2022
|
|
$
|
100,325
|
|
|
Fiscal year 2023
|
|
$
|
77,804
|
|
|
Fiscal year 2024
|
|
$
|
77,804
|
|
|
Fiscal year 2025
|
|
$
|
77,804
|
|
VERUS
INTERNATIONAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
Note
9: Property and Equipment
At
October 31, 2020 and 2019, the Company’s property and equipment are as follows:
|
|
|
Estimated
|
|
|
|
|
|
|
|
October 31,
|
|
Useful Lives
|
|
2020
|
|
|
2019
|
|
|
Computer equipment
|
|
3 years
|
|
$
|
90,089
|
|
|
$
|
86,974
|
|
|
Furniture and fixtures
|
|
7 years
|
|
|
13,213
|
|
|
|
13,213
|
|
|
Production assets
|
|
3 years
|
|
|
12,624
|
|
|
|
9,624
|
|
|
Leasehold improvements
|
|
3 years
|
|
|
136,108
|
|
|
|
-
|
|
|
Accumulated depreciation
|
|
|
|
|
(104,536
|
)
|
|
|
(86,554
|
)
|
|
|
|
|
|
$
|
147,498
|
|
|
$
|
23,257
|
|
The
Company recorded $17,982 and $3,835 of depreciation expense for the years ended October 31, 2020 and 2019, respectively. There
was no property and equipment impairments recorded for the years ended October 31, 2020 and 2019.
NOTE
10: INVESTMENT IN UNCONSOLIDATED ENTITY
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 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 October 5, 2020, as a result of TAM’s failure
of contractual performance and breach of contract, all obligations under the binding term sheet were rescinded and a demand made
for immediate return of the cash consideration of $100,000, that we paid, plus fees and costs to be determined. As we were unsuccessful
in collecting the $100,000, at October 31, 2020 we determined the $100,000 uncollectible and wrote-off the balance to loss on
disposal of unconsolidated entity within our consolidated statement of operations.
NOTE
11: REVENUE DISAGGREGATION
The
following table presents the Company’s revenue by country and major product lines:
|
Year Ended October 31,
|
|
2020
|
|
|
2019
|
|
|
United Arab Emirates
|
|
$
|
15,792,092
|
|
|
$
|
9,326,205
|
|
|
Oman
|
|
|
2,407,045
|
|
|
|
1,140,116
|
|
|
Kingdom of Saudi Arabia
|
|
|
1,254,938
|
|
|
|
1,891,059
|
|
|
Bahrain
|
|
|
1,122,580
|
|
|
|
1,202,282
|
|
|
United States
|
|
|
1,170,706
|
|
|
|
51,439
|
|
|
Revenue
|
|
$
|
21,747,361
|
|
|
$
|
13,611,101
|
|
|
|
|
|
|
|
|
|
|
|
|
Food products
|
|
|
96
|
%
|
|
|
100
|
%
|
|
Apparel products
|
|
|
4
|
%
|
|
|
-
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
For
the year ended October 31, 2020, the Company was subject to revenue concentration risk as seven customers accounted for approximately
61% of our total revenue. For the year ended October 31, 2019, the Company was subject to revenue concentration risk as six customers
accounted for approximately 66% of our total revenue.
VERUS
INTERNATIONAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
NOTE
12: DEBT
Convertible
Notes Payable
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 163,246 shares of the Company’s common stock, fully satisfying this obligation and 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 $7.50 per share, subject to adjustment. The note may be prepaid by the Company at any time prior to the 180th day
after the issuance date of the note with certain prepayment penalties as defined in the note. On various dates through August
26, 2020, the outstanding principal and accrued interest was converted into an aggregate of 1,755,528 shares of the Company’s
common stock, fully satisfying this obligation. The Company recorded a loss on extinguishment of debt of $1,064,474 as a result
of the Company issuing shares of its common stock to satisfy this obligation.
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 $6.25 per share,
subject to adjustment. The note may be prepaid by the Company at any time prior to the 180th day after the issuance
of the note with certain prepayment penalties as defined in the note. Due to the variable conversion provision contained in the
convertible promissory note that became effective upon the Company’s common stock closing share price falling below $5.00,
the Company accounted for this conversion feature as a derivative liability, and recorded a derivative liability of $86,000. On
various dates through October 7, 2020, the outstanding principal and accrued interest was converted into an aggregate of 1,575,000
shares of the Company’s common stock, fully satisfying this obligation. The Company recorded a loss on extinguishment of
debt of $1,033,375 as a result of the Company issuing shares of its common stock to satisfy this obligation.
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 July 31, 2020, the outstanding principal and accrued interest was converted into an aggregate of 327,925
shares of the Company’s common stock, and an aggregate beneficial conversion feature balance of $531,259 was amortized to
interest expense, fully satisfying this obligation.
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 various dates through July 31, 2020, the outstanding
principal and accrued interest was converted into an aggregate of 260,628 shares of the Company’s common stock, and the
beneficial conversion feature balance of $218,583 was amortized to interest expense, fully satisfying this obligation.
VERUS
INTERNATIONAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
NOTE
12: DEBT (Continued)
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 $10.00 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. Due to the variable conversion provision contained in the convertible promissory note that became effective upon the VWAP
of the Company’s common stock falling below $5.50 at any time after the prepayment date, the Company accounted for this
conversion feature as a derivative liability, and recorded a derivative liability of $250,329. On October 30, 2020, $48,000 of
outstanding principal was converted into 200,000 shares of the Company’s common stock. At October 31, 2020, the aggregate
balance of the convertible promissory note and accrued interest was $123,706. The aggregate balance of the convertible promissory
note, net of original issue discount and deferred financing costs at October 31, 2020 was $98,918.
On
May 12, 2020, the Company entered into a securities purchase agreement with an accredited investor and issued and sold a convertible
promissory note in the principal amount of $153,000. The note matures on May 12, 2021, bears interest at a rate of 9% per annum,
(increasing to 22% 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 equal to the greater of (i) the Fixed Conversion Price (as defined in
the note) or (ii) the Variable Conversion Price (as defined in the note), subject to adjustment. The note may be prepaid by the
Company at any time prior to the 180th day after the issuance of the note with certain prepayment penalties as defined
in the note. At October 31, 2020, the aggregate balance of the convertible promissory note and accrued interest was $159,527.
The aggregate balance of the convertible promissory note, net of deferred financing costs at October 31, 2020 was $151,422.
On
July 14, 2020, the Company entered into a securities purchase agreement with an accredited investor and issued and sold a convertible
promissory note in the principal amount of $63,000. The note matures on July 14, 2021, bears interest at a rate of 9% per annum,
(increasing to 22% 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 equal to the greater of (i) the Fixed Conversion Price (as defined in
the note) or (ii) the Variable Conversion Price (as defined in the note), subject to adjustment. The note may be prepaid by the
Company at any time prior to the 180th day after the issuance of the note with certain prepayment penalties as defined
in the note. At October 31, 2020, the aggregate balance of the convertible promissory note and accrued interest was $64,709. The
aggregate balance of the convertible promissory note, net of deferred financing costs at October 31, 2020 was $60,904.
On
July 22, 2020, the Company entered into a securities purchase agreement with an accredited investor and issued and sold a convertible
promissory note in the principal amount of $90,000 (including a $15,000 original issuance discount). The note matures on July
22, 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 $50.00 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 adjustments as defined in the note. At October 31, 2020, the aggregate balance of the convertible promissory note and
accrued interest was $91,006. The aggregate balance of the convertible promissory note, net of original issue discount and deferred
financing costs at October 31, 2020 was $75,949.
VERUS
INTERNATIONAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
NOTE
12: DEBT (Continued)
At
October 31, 2020 and 2019, there was $387,193 and $1,378,855 of convertible notes payable outstanding, net of discounts
of $35,806 and $231,146, respectively.
During
the years ended October 31, 2020 and 2019, amortization of debt discount, issuance costs, and beneficial conversion features amounted
to $1,300,002 and $839,876, respectively.
During
the year ended October 31, 2020, an aggregate of $2,861,517 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 year ended October 31, 2019, an aggregate of $1,638,531 of convertible notes, including accrued interest, were converted into
shares of the Company’s common stock and there were payments of an aggregate of $1,577,172 toward the outstanding balances
of convertible notes.
At
October 31, 2020, the Company was in compliance with the terms of the outstanding convertible notes.
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.
On
February 8, 2019, the Company entered into Amendment No. 2 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. On August 14, 2020, the Company entered into Amendment No. 3 (the “Third Note Amendment”) to the Monaco
Note whereby (i) the timing of payments of principal and interest was amended and (ii) it was acknowledged and agreed that so
long as the principal and interest payment schedule, as amended by the Third Note Amendment, is satisfied by the Company, the
Company will not be in default pursuant to the payment of principal and interest of the Note. Furthermore, on October 26, 2020,
the Company entered into Amendment No. 4 (the “Fourth Note Amendment”) to the Monaco Note whereby amendments were
made to (i) the timing of payments of principal and interest, (ii) the determination of status of default, and (iii) the manner
and application of payments. Through October 31, 2020, the Company paid an aggregate of $100,152 of accrued interest in accordance
with the provisions of the Fourth Note Amendment.
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 (“BLF”). The
note may be prepaid by the Company at any time prior to the maturity date with no prepayment penalties. On July 20, 2020, the
Company and its wholly owned subsidiary, BLF, entered into a letter agreement (“Agreement”) with the accredited investor
to extend the maturity date ninety (90) days to September 29, 2020. The Agreement also provides that BLF will sell certain of
its inventory (“Purchased Inventory”) to the accredited investor as an approved Distributor and that the accredited
investor will make certain invoice payments to BLF vendors. Upon the sale of Purchased Inventory by the accredited investor, the
accredited investor will retain the first $60,000 of proceeds and then apply future proceeds on a per case amount, as specified
within the Agreement, as a reduction of the outstanding promissory note balance. Any remaining note balance will be due and payable
by the Company upon maturity of the promissory note. Furthermore, subsequent to fiscal year end, on December 18, 2020, the Company
and its wholly owned subsidiary, BLF, entered into a special agreement with the accredited investor to extend the maturity date
to December 31, 2021, add a prepayment clause to whereby in the event the accredited investor has received a total of $150,000
or more pursuant to the note on or before December 31, 2021 (the “Prepayment”), then the note shall be forgiven and
considered paid in full, and add an event of default to whereby until January 1, 2022, the only event of default on the note shall
be the Company’s failure to make the Prepayment. Through October 31, 2020, the Company has not paid any amount toward the
outstanding balance of this promissory note.
VERUS
INTERNATIONAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
NOTE
12: DEBT (Continued)
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 (3.145% at October 31, 2020). The Company’s performance and payment obligations under the Credit Facility are
guaranteed by substantially all of its assets. The structure of this Credit Facility is a note payable with a revolving credit
line feature with a mutual termination provision instead of a stated maturity date. The outstanding balance under the Credit Facility
may be prepaid at any time without premium or penalty. Additionally, the Credit Facility contains customary events of default
and remedies upon an event of default, including the acceleration of repayment of outstanding amounts under the Credit Facility.
At
October 31, 2020, $425,772 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 October 31, 2020.
NOTE
13: DERIVATIVE LIABILITY
The
Company evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded
components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, Derivatives and Hedging.
The result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and
recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in
the statement of operation as other income (expense). Upon conversion or exercise of a derivative instrument, the instrument is
marked to fair value at the conversion date then that fair value is reclassified to equity. Equity instruments that are initially
classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to liabilities at the fair value
of the instrument on the reclassification date.
VERUS
INTERNATIONAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
NOTE
13: DERIVATIVE LIABILITY (Continued)
The
derivative liability is measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from October
31, 2019 to October 31, 2020:
|
|
|
Conversion
feature derivative liability
|
|
|
October 31, 2019
|
|
$
|
-
|
|
|
Initial fair value of derivative liability charged to other expense
|
|
|
336,329
|
|
|
Gain on change in fair value included in earnings
|
|
|
(69,925
|
)
|
|
Derivative liability relieved by conversions of convertible promissory notes
|
|
|
(86,000
|
)
|
|
October 31, 2020
|
|
$
|
180,404
|
|
Total
derivative liability at October 31, 2020 amounted to $180,404. At October 31, 2019 there was no derivative liability. The change
in fair value included in earnings for the year ended October 31, 2020 is $69,925.
The
Company used the following assumptions for determining the fair value of the convertible instrument granted under the binomial
pricing model with a binomial simulation at October 31, 2020:
|
Expected volatility
|
|
|
265.9
|
%
|
|
Expected term
|
|
|
5.9 months
|
|
|
Risk-free interest rate
|
|
|
0.11
|
%
|
|
Stock price
|
|
$
|
0.475
|
|
The
Company recognizes its derivative liabilities as Level 3 and values its derivatives using the methods discussed below. While the
Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that
the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in
a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values
using the methods discussed are that of volatility and market price of the underlying common stock of the Company.
At
October 31, 2020, the Company did not have any derivative instruments that were designated as hedges.
NOTE
14: 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 10,278,867 are issued at October 31, 2020
and 125,000,000 shares of preferred stock, par value $0.000001 per share of which (A) 120,000,000 shares have been designated
as Series A Convertible Preferred of which 28,944,601 are outstanding at October 31, 2020, (B) 1,000,000 shares have been designated
as Series B Convertible Preferred Stock, of which no shares are outstanding at October 31, 2020 and (C) 1,000,000 have been designated
as Series C Convertible Preferred Stock, of which 680,801 shares are outstanding at October 31, 2020.
VERUS
INTERNATIONAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
NOTE
14: STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)
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 January 11, 2020, the approved
Reverse Stock Split expired as such Reverse Stock Split had not been completed.
On
October 6, 2020, 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 Certificate of Incorporation, (the “Certificate
of Incorporation”) to effect a consolidation of the issued and outstanding shares of Common Stock, pursuant to which the
shares of Common Stock would be combined and reclassified into one share of Common Stock at a ratio of 1-for-500 (the “Reverse
Stock Split”), 2) approval of the Company’s 2020 Equity Incentive Plan (the “2020 Plan”) and the reservation
of 750,000,000 (1,500,000 post-split) shares of Common Stock for issuance thereunder; and, 3) approval of Amendments to and Restatement
of the Company’s Certificate of Incorporation pursuant to the Delaware General Corporation Law Section 242(a)(3) to (a)
with the exception of actions to enforce a duty or liability arising from the Exchange Act, which may be brought only in federal
court pursuant to Section 27 of the Exchange Act, or claims made under the Securities Act, that may be brought in either state
or federal court pursuant to Section 22 of the Exchange Act, adopt Delaware General Corporation Law Section 115 to require that
any or all other internal corporate claims, including claims made in the right of the Company, shall be brought solely and exclusively
in any or all of the courts of the State of Delaware; and, (b) revise the Certificate of Incorporation to correct and consolidate
legacy disclosures, including a description of its common stock and the adoption of Section 155 of the General Delaware Corporation
Law, so as to comprise one document with the Delaware Secretary of State in the future.
On
November 18, 2020, the Company filed a Certificate of Amendment (the “Amendment”) to its Certificate of Incorporation,
to 1) effect a consolidation of the issued and outstanding shares of Common Stock, pursuant to which the shares of Common Stock
would be combined and reclassified into one share of Common Stock at a ratio of 1-for-500 (the “Reverse Stock Split”),
2) adopt Delaware General Corporation Law Section 115 to require that any or all other internal corporate claims, including claims
made in the right of the Company, shall be brought solely and exclusively in any or all of the courts of the State of Delaware;
and, 3) revise the Certificate of Incorporation to correct and consolidate legacy disclosures, including a description of its
common stock and the adoption of Section 155 of the General Delaware Corporation Law, so as to comprise one document with the
Delaware Secretary of State in the future. On January 13, 2021, the Company’s Reverse Stock Split was completed and became
effective.
Common
Stock
During
the year ended October 31, 2020, the Company:
|
|
●
|
issued
4,282,326 shares of its common stock valued at $7,370,059, which includes aggregate beneficial conversion features of $830,162,
as repayment for outstanding principal and interest on convertible promissory notes as requested by the note holders in accordance
with contractual terms.
|
VERUS
INTERNATIONAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
NOTE
14: STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)
|
|
●
|
issued
31,251 shares of its common stock for the conversion of 15,625,500 shares of its Series A Convertible Preferred stock.
|
|
|
|
|
|
|
●
|
issued
30,000 shares of its common stock for the vesting of the first 50% of a 60,000 common stock grant to the Company’s Chief
Financial Officer. The Company recorded $142,500 of stock-based compensation expense during the year ended October 31, 2020,
related to this common stock grant.
|
|
|
|
|
|
|
●
|
issued
24,483 shares of its common stock to an accredited investor for proceeds of $91,917.
|
|
|
|
|
|
|
●
|
issued
52,000 shares of its common stock to a vendor for services rendered, valued at $78,000.
|
|
|
|
|
|
|
●
|
issued
50,219 shares of its common stock to its Chief Executive Officer for proceeds of $20,087.
|
|
|
|
|
|
|
●
|
issued
1,197,031 shares of its common stock under a registration statement, valued at $1,327,248.
|
During
the year ended October 31, 2019, the Company:
|
|
●
|
issued
304,060 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.
|
|
|
|
|
|
|
●
|
entered
into a securities purchase agreement with an accredited investor pursuant to which the Company issued 83,333 shares of its
common stock for aggregate gross proceeds of $500,000.
|
|
|
|
|
|
|
●
|
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 1,024,667 shares of the Company’s common stock at a fixed conversion
price of $1.25 per share and the First Warrant was amended such that the First Warrant is exercisable for 1,000,000 shares
of the Company’s common stock at a fixed exercise price of $1.25 per share. The Company issued the 1,024,667 shares
of its common stock on June 4, 2019.
|
|
|
|
|
|
|
●
|
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 163,840 shares of the Company’s common stock at a fixed
conversion price of $1.25 per share and the Second Warrant was amended such that the Second Warrant is exercisable for 160,000
shares of the Company’s common stock at a fixed exercise price of $1.25 per share. The Company issued the 163,840 shares
of its common stock on June 4, 2019.
|
|
|
|
|
|
|
●
|
granted
60,000 shares of its common stock to 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 $143,750 of stock-based compensation
expense during the year ended October 31, 2019, related to this common stock grant.
|
|
|
|
|
|
|
●
|
issued
4,839 shares of its common stock to satisfy a former employee’s exercise of 6,000 warrants on a cashless basis.
|
|
|
|
|
|
|
●
|
issued
25,819 shares of its common stock valued at $152,897 as repayment for outstanding principal and interest on a convertible
promissory note as requested by the note holder according to contractual terms.
|
VERUS
INTERNATIONAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
NOTE
14: 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 15,000 shares of the Company’s common stock
at an exercise price of $3.00 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 943,768
shares of the Company’s common stock at an exercise price of $3.00 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. All warrants to
purchase shares of the Company’s common stock that are granted under the provisions of the Chief Executive Officer’s
2020 Employment Agreement and 2017 Agreement are immediately vested upon being earned.
During
February 2019, the Company entered into securities purchase agreements with the First and Second Investor, whereby the Company
sold the First and Second Notes and First and Second Warrants, respectively. The Company allocated a value of $697,611 to the
First and Second Warrants based upon a relative fair value methodology.
At
October 31, 2020, the Company has no further commitments to issue warrants to purchase shares of its common stock to its Chief
Executive Officer. At October 31, 2019, the Company was committed to issue warrants to purchase 285,000 shares of its common stock
under the provisions of the employment agreement of its Chief Executive Officer. The fair value of these warrants was $2,515,794
and was recognized as an operating expense within the consolidated statements of operations.
At
October 31, 2020 and 2019, there were warrants to purchase up to 2,619,114 and 1,451,410 shares, respectively, of the Company’s
common stock outstanding which may dilute future EPS.
At
October 31, 2020, no warrants remained to be earned by the Chief Executive Officer. At October 31, 2019, there remained warrants
to purchase approximately 788,000 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.
VERUS
INTERNATIONAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
NOTE
14: STOCKHOLDERS’ EQUITY (DEFICIT) (continued)
The
Company estimates the fair value of each award on the date of grant using a Black-Scholes option valuation model that uses the
assumptions noted in the table below. Since Black-Scholes option valuation models incorporate ranges of assumptions for inputs,
those ranges are disclosed. Expected volatilities are based on the historical volatility of the Company’s stock. The Company
uses historical data to estimate award exercise and employee termination within the valuation model, whereby separate groups of
employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of
granted awards is derived from the output of the option valuation model and represents the period of time that granted awards
are expected to be outstanding; the range given below results from certain groups of employees exhibiting different behavior.
The risk-free rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at
the time of grant. The following assumptions were utilized during the years ended October 31, 2020 and 2019:
|
|
|
2020
|
|
|
2019
|
|
|
Expected volatility
|
|
|
194.54% - 399.10
|
%
|
|
|
0.20% - 486.01
|
%
|
|
Weighted-average volatility
|
|
|
122.01
|
%
|
|
|
50.14
|
%
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Expected term (in years)
|
|
|
5.0
|
|
|
|
0.5
|
|
|
Risk-free rate
|
|
|
0.37% - 1.57
|
%
|
|
|
1.46% - 2.60
|
%
|
The
following table sets forth common share purchase warrants outstanding as of October 31, 2020:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Value
|
|
|
Outstanding, October 31, 2019
|
|
|
1,451,410
|
|
|
$
|
1.72
|
|
|
$
|
-
|
|
|
Warrants granted and issued
|
|
|
1,172,114
|
|
|
$
|
3.00
|
|
|
$
|
-
|
|
|
Warrants exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Warrants forfeited
|
|
|
(4,410
|
)
|
|
$
|
(32.99
|
)
|
|
$
|
-
|
|
|
Outstanding, October 31, 2020
|
|
|
2,619,114
|
|
|
$
|
2.24
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issuable upon exercise of warrants
|
|
|
2,619,114
|
|
|
$
|
2.24
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
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 October 31,
|
|
|
Contractual
|
|
|
Exercise
|
|
|
at October 31,
|
|
|
Exercise
|
|
|
Prices
|
|
|
2020
|
|
|
Life (Years)
|
|
|
Price
|
|
|
2020
|
|
|
Price
|
|
|
$
|
1.25
|
|
|
|
1,160,000
|
|
|
|
1.35
|
|
|
$
|
1.25
|
|
|
|
1,160,000
|
|
|
$
|
1.25
|
|
|
$
|
3.00
|
|
|
|
1,457,114
|
|
|
|
2.26
|
|
|
$
|
3.00
|
|
|
|
1,457,114
|
|
|
$
|
3.00
|
|
|
$
|
25.00
|
|
|
|
2,000
|
|
|
|
2.17
|
|
|
$
|
25.00
|
|
|
|
2,000
|
|
|
$
|
25.00
|
|
|
|
|
|
|
|
2,619,114
|
|
|
|
1.85
|
|
|
$
|
2.24
|
|
|
|
2,619,114
|
|
|
$
|
2.24
|
|
VERUS
INTERNATIONAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
NOTE
14: STOCKHOLDERS’ EQUITY (DEFICIT) (continued)
The
following table sets forth common share purchase warrants outstanding as of October 31, 2019:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Value
|
|
|
Outstanding, October 31, 2018
|
|
|
247,523
|
|
|
$
|
10.10
|
|
|
$
|
-
|
|
|
Warrants granted and issued
|
|
|
3,593,148
|
|
|
$
|
0.641
|
|
|
$
|
-
|
|
|
Warrants exercised
|
|
|
(6,000
|
)
|
|
$
|
(3.00
|
)
|
|
$
|
-
|
|
|
Warrants exchanged
|
|
|
(2,383,261
|
)
|
|
$
|
(1.20
|
)
|
|
$
|
-
|
|
|
Outstanding, October 31, 2019
|
|
|
1,451,410
|
|
|
$
|
1.72
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issuable upon exercise of warrants
|
|
|
1,451,410
|
|
|
$
|
1.72
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
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 October 31,
|
|
|
Contractual
|
|
|
Exercise
|
|
|
at October 31,
|
|
|
Exercise
|
|
|
Prices
|
|
|
2019
|
|
|
Life (Years)
|
|
|
Price
|
|
|
2019
|
|
|
Price
|
|
|
$
|
1.25
|
|
|
|
1,160,000
|
|
|
|
2.35
|
|
|
$
|
1.25
|
|
|
|
1,160,000
|
|
|
$
|
1.25
|
|
|
$
|
3.00
|
|
|
|
285,000
|
|
|
|
0.79
|
|
|
$
|
3.00
|
|
|
|
285,000
|
|
|
$
|
3.00
|
|
|
$
|
12.50
|
|
|
|
2,000
|
|
|
|
0.17
|
|
|
$
|
12.50
|
|
|
|
2,000
|
|
|
$
|
12.50
|
|
|
$
|
25.00
|
|
|
|
2,000
|
|
|
|
1.17
|
|
|
$
|
25.00
|
|
|
|
2,000
|
|
|
$
|
25.00
|
|
|
$
|
50.00
|
|
|
|
2,410
|
|
|
|
0.35
|
|
|
$
|
50.00
|
|
|
|
2,410
|
|
|
$
|
50.00
|
|
|
|
|
|
|
|
1,451,410
|
|
|
|
1.99
|
|
|
$
|
1.72
|
|
|
|
1,451,410
|
|
|
$
|
1.72
|
|
Series
A Convertible Preferred Stock
On
October 14, 2014, the Company filed a certificate of amendment to its Certificate of Designations, Number, Voting Powers, Preferences
and Rights of Series A Convertible Preferred Stock with the Delaware Secretary of State pursuant to the July 31, 2014 Board of
Directors approval to increase the Series A Convertible Preferred A shares from 100,000,000 shares to 120,000,000 shares. The
Series A Convertible Preferred Stock was issued at $0.001 par value and bear dividends at a rate of 10% per annum payable on a
quarterly basis when declared by the board of directors. Dividends accrue whether or not they have been declared by the board.
At the election of the Company, Preferred Dividends may be converted into Series A Convertible Preferred Stock, with each converted
share having a value equal to the market price per share, subject to adjustment for stock splits. In order to exercise such option,
the Company delivers written notice to the holder. Each 10,000 shares of Series A Convertible Preferred Stock is convertible at
the option of the holder thereof at any time into one share of Common Stock. Each holder of Series A Convertible Preferred Stock
shall be entitled to one vote for each whole share of common stock that would be issuable upon conversion of such share on the
record date for determining eligibility to participate in the action being taken.
VERUS
INTERNATIONAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
NOTE
14: STOCKHOLDERS’ EQUITY (DEFICIT) (continued)
In
the event of (a) the sale, conveyance, exchange, exclusive license, lease or other disposition of all or substantially all of
the intellectual property or assets of the Company, (b) any acquisition of the Company by means of consolidation, stock exchange,
stock sale, merger of other form of corporate reorganization of the Company with any other entity in which the Company’s
stockholders prior to the consolidation or merger own less than a majority of the voting securities of the surviving entity, or
(c) the winding up or dissolution of the Company, whether voluntary or involuntary (each such event in clause (a), (b) or (c)
a “liquidation event”), the Board shall determine in good faith the amount legally available for distribution to stockholders
after taking into account the distribution of assets among, or payment thereof over to, creditors of the Company (the “net
assets available for distribution”). The holders of the Series A Convertible Preferred Stock then outstanding shall be entitled
to be paid out of the net assets available for Distribution (or the consideration received in such transaction) before any payment
or distribution shall be made to the holders of any class of preferred stock ranking junior to the Series A Convertible Preferred
Stock or to the Common Stock, an amount for each share of Series A Convertible Preferred Stock equal to all accrued and unpaid
Preferred Dividends plus the Stated Value, as adjusted (the “Series A Liquidation Amount”).
On
February 8, 2019, the Company filed a Second Amended and Restated Certificate of Designations, Preferences and Rights of the Series
A Convertible Preferred Stock (the “Second Amended and Restated Series ACOD”), as amended on April 9, 2019 with the
Delaware Secretary of State. Pursuant to the Second Amended and Restated Series A COD, the Company designated 120,000,000 shares
as Series A Convertible Preferred Stock (the “Series A Preferred Stock”). Each share of Series A Preferred Stock is
convertible at any time at the option of the holder into such number of shares of the Company’s common stock determined
by dividing the Series A Conversion Price divided by the Series A Stated Value. The “Series A Conversion Price” is
$1.00 per share, subject to adjustment, and the “Series A Stated Value is $1.00 per share. Each share of Series A Preferred
Stock shall be entitled to vote such number of shares into which the Series A Preferred Stock are convertible into. In addition,
from the date the Company issued the First Note until such time that no shares of Series A Preferred Stock are outstanding, each
holder of Series A Preferred Stock shall have the right to participate in any subsequent financings of the Company in an amount
equal to up to 50% of such financing. In the event of (a) the sale, conveyance, exchange, exclusive license, lease or other disposition
of all or substantially all of the intellectual property or assets of the Company, (b) any acquisition of the Company by means
of consolidation, stock exchange, stock sale, merger of other form of corporate reorganization of the Company with any other entity
in which the Company’s stockholders prior to the consolidation or merger own less than a majority of the voting securities
of the surviving entity, or (c) the winding up or dissolution of the Company, whether voluntary or involuntary (each such event
in clause (a), (b) or (c) a “Liquidation Event”), the board shall determine in good faith the amount legally available
for distribution to stockholders after taking into account the distribution of assets among, or payment thereof over to, creditors
of the Company (the “Net Assets Available for Distribution”). The holders of the Series A Preferred Stock then outstanding
shall be entitled to be paid out of the Net Assets Available for Distribution (or the consideration received in such transaction)
before any payment or distribution shall be made to the holders of any class of preferred stock ranking junior to the Series A
Preferred Stock or to the common stock, an amount for each share of Series A Preferred Stock equal to the Series A Stated Value.
On
March 25, 2019, the Company entered into an inducement agreement (the “Inducement Agreement”) effective as of February
8, 2019, pursuant to which the Company issued Monaker 304,069 shares of its common stock as an inducement to remove certain anti-dilution
provisions contained in the Series A Preferred Stock Certificate of Designation in connection with the offering to the First Investor
of the First Note and the First Warrant. At October 31, 2018, the value of the 304,069 shares of common stock was $456,090 and
was recorded as shares to be issued within our Consolidated Statement of Changes in Stockholders’ Equity (Deficit).
VERUS
INTERNATIONAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
NOTE
14: STOCKHOLDERS’ EQUITY (DEFICIT) (continued)
During
the year ended October 31, 2020, shareholders converted 15,625,500 shares of Series A Preferred Stock into 31251 shares of the
Company’s common stock. During the year ended October 31, 2019, there were no conversions of Series A Preferred Stock into
shares of the Company’s common stock.
At
October 31, 2020 and 2019, there were 28,944,601 and 44,570,101 shares of Series A Convertible Preferred Stock outstanding, respectively.
Series
B Convertible Preferred Stock
On
July 31, 2014, the Company’s Board of Directors approved the creation of a new Series B Convertible Preferred Stock and
on October 14, 2014 the Company filed a Certificate of Designation of Series B Convertible Preferred Stock with the Delaware Secretary
of State designating 1,000,000 shares, par value of $0.001 per share, as Series B Convertible Preferred Stock (“Series B
Convertible Preferred Stock”). The Series B Convertible Preferred Stock have a stated value of $5.00 per share (the “Series
B Stated Value”). The Series B Convertible Preferred Stock accrue dividends at a rate of 10% per annum on the Series B Stated
Value of such shares of the Series B Convertible Preferred Stock. Dividends accrue whether or not they have been declared by the
board of directors. At the election of the Company, it may satisfy its obligations to pay dividends on the Series B Convertible
Preferred Stock by issuing shares of common stock to the holders of Series B Convertible Preferred Stock on a uniform and prorated
basis. Each share of Series B Convertible Preferred Stock is convertible at the option of the holder thereof at any time into
a number of shares of common stock determined by dividing the Series B Stated Value by the conversion price then in effect. The
conversion price for the Series B Convertible Preferred Stock is equal to $0.05 per share, subject to adjustment. Each holder
of Series B Convertible Preferred Stock shall be entitled to the number of votes equal to 200 votes for each shares of Series
B Convertible Preferred Stock held by them.
Upon
the occurrence of a Liquidation Event, the board shall determine in good faith the amount legally available for distribution to
stockholders after taking into account the Net Assets Available for Distribution. The holders of the Series B Convertible Preferred
Stock then outstanding shall be entitled to be paid out of the Net Assets Available for Distribution (or the consideration received
in such transaction) before any payment or distribution shall be made to the holders of any class of preferred stock ranking junior
to the Series B Convertible Preferred Stock or to the common stock, an amount for each share of Series B Convertible Preferred
Stock equal to all accrued and unpaid preferred dividends plus the Series B Stated Value.
As
of October 31, 2020 and 2019, there were no shares of Series B Convertible Preferred Stock outstanding.
Series
C Convertible Preferred Stock
On
May 5, 2015, the Company filed a Certificate of Designation of Series C Convertible Preferred Stock (the “Series C COD”)
with the Delaware Secretary of State. Pursuant to the Series C COD, the Company designated 1,000,000 shares as Series C Convertible
Preferred Stock (the “Series C Preferred Stock”). Each share of Series C Preferred Stock is convertible at any time
at the option of the holder into such number of shares of the Company’s common stock determined by dividing the Series C
Stated Value by the Series C Conversion Price. The “Series C Stated Value” means $5.00 per share, and the “Series
C Conversion Price” means $0.05 per share, subject to adjustment.
Each
share of Series C Preferred Stock shall be entitled to vote such number of shares equal to 100 votes for each share of common
stock into which the Series C Preferred Stock is then convertible into. Shares of Series C Preferred Stock shall accrue dividends
at a rate of 10% per annum on the Series C Stated Value which shall be payable when and if declared by the board of directors.
Upon the occurrence of a Liquidation Event, the board shall determine in good faith the amount legally available for distribution
to stockholders after taking into account the Net Assets Available for Distribution. The holders of the Series C Convertible Preferred
Stock then outstanding shall be entitled to be paid out of the Net Assets Available for Distribution (or the consideration received
in such transaction) before any payment or distribution shall be made to the holders of any class of preferred stock ranking junior
to the Series C Convertible Preferred Stock or to the common stock, an amount for each share of Series C Convertible Preferred
Stock equal to all accrued and unpaid preferred dividends plus the Series C Stated Value.
VERUS
INTERNATIONAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
NOTE
14: STOCKHOLDERS’ EQUITY (DEFICIT) (continued)
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 235,113 of his warrants to acquire shares of common stock and a 1,002 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 5,000 shares of the Company’s
common stock.
On
September 25, 2020, the Board of Directors awarded the Company’s Chief Executive Officer 250,000 shares of Series C Preferred
Stock to ensure his aggregate voting percentage across all classes of voting stock remained in excess of 50.1%.
At
October 31, 2020 and 2019, there were 680,801 and 430,801 shares of Series C Convertible Preferred Stock outstanding, respectively.
NOTE
15: RELATED PARTY TRANSACTIONS
During
the fiscal year ending October 31, 2020, the Company:
|
|
●
|
issued
30,000 shares of its common stock for the vesting of the first 50% of a 60,000 common stock grant to the Company’s Chief
Financial Officer. The Company recorded $142,500 of stock-based compensation expense during the year ended October 31, 2020,
related to this common stock grant.
|
|
|
|
|
|
|
●
|
issued
50,219 shares of its common stock to its Chief Executive Officer for proceeds of $20,087.
|
During
the fiscal year ending October 31, 2019, there were no related party transactions to report.
NOTE
16: INCOME TAXES
The
Company accounts for income taxes taking into account deferred tax assets and liabilities which represent the future tax consequences
of the differences between financial statement carrying amounts of assets and liabilities versus the tax basis of assets and liabilities.
Under this method, deferred tax assets are recognized for deductible temporary differences, and operating loss and tax credit
carryforwards. Deferred liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will
not be realized. The impact of tax rate changes on deferred tax assets and liabilities is recognized in the year the change is
enacted. Due to recurring losses, the Company’s tax provision for the years ended October 31, 2020 and 2019 was $0 and $0,
respectively.
VERUS
INTERNATIONAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
NOTE
16: INCOME TAXES (Continued)
The
provision for income taxes consisted of the following:
|
Year Ended October 31,
|
|
2020
|
|
|
2019
|
|
|
Deferred tax benefit (provision):
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
3,695,227
|
|
|
|
729,016
|
|
|
State, net of federal benefit
|
|
|
1,146,840
|
|
|
|
226,255
|
|
|
Change in valuation allowance
|
|
|
(4,842,067
|
)
|
|
|
(955,271
|
)
|
|
Income tax provision
|
|
$
|
-
|
|
|
$
|
-
|
|
The
following table presents the difference between the effective tax rate and the U.S. federal statutory income tax rate:
|
Year Ended October 31,
|
|
2020
|
|
|
2019
|
|
|
U.S. federal statutory income tax rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
|
State taxes, net of federal benefit
|
|
|
7.0
|
%
|
|
|
7.0
|
%
|
|
Other
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
Effect of valuation allowance
|
|
|
(28.0
|
)%
|
|
|
(28.0
|
)%
|
|
Effective income tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Deferred
income taxes reflect the net tax effect of temporary difference between the carrying amounts of assets and liabilities. The significant
components of the deferred income tax asset (liability) are as follows:
|
|
|
October 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards (US)
|
|
|
3,827,744
|
|
|
|
1,312,249
|
|
|
Deferred stock warrants
|
|
|
3,707,444
|
|
|
|
1,388,579
|
|
|
Other
|
|
|
76,692
|
|
|
|
17,075
|
|
|
Other
|
|
|
(20,663
|
)
|
|
|
-
|
|
|
Depreciation
|
|
|
(37,646
|
)
|
|
|
(6,400
|
)
|
|
Net deferred tax assets
|
|
|
7,553,571
|
|
|
|
2,711,503
|
|
|
Valuation allowance
|
|
|
(7,553,571
|
)
|
|
|
(2,711,503
|
)
|
|
Income tax provision
|
|
$
|
-
|
|
|
$
|
-
|
|
Valuation
Allowance
In
assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion
or all the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences will become deductible. The Company considers
the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this
assessment. The Company has recorded a full valuation allowance against its net deferred tax assets because it is not currently
able to conclude that it is more likely than not that these assets will be realized. The amount of deferred tax assets considered
to be realizable could be increased in the near term if estimates of future taxable income during the carryforward period are
increased. The valuation allowance increased by $4,842,068 and decreased by $904,059 during the fiscal years ended October 31,
2020 and 2019, respectively.
VERUS
INTERNATIONAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
NOTE
16: INCOME TAXES (Continued)
Other
Income Tax Related Items
At
October 31, 2020 and 2019, the Company has federal net operating loss carryforwards of approximately $13,900,000 and $4,600,000,
respectively. Net operating loss carryforwards generated before January 1, 2018 will expire through 2037. Under the Internal Revenue
Code Section 382, certain stock transactions which significantly change ownership, including the sale of stock to new investors,
the exercise of options to purchase stock, or other transactions between shareholders could limit the amount of net operating
loss carryforwards that may be utilized on an annual basis to offset taxable income in future periods. Effective December 22,
2017 a new tax bill was signed into law that reduced the federal income tax rate for corporations from 35% to 21%. The new bill
reduced the blended tax rate for the Company from 39.5% to 27.5%. The change in blended tax rate reduced the 2018 net operating
loss carry forward deferred tax assets by approximately $1,400,000.
At
October 31, 2020 and 2019, the Company had no material unrecognized tax benefits and no adjustments to liabilities or operations
were required. The Company does not expect that its unrecognized tax benefits will materially increase within the next twelve
months. The Company did not recognize any interest or penalties related to uncertain tax positions at October 31, 2020 and 2019.
Enacted
in late 2017, the Tax Cut and Jobs Act (“TCJA”) imposed a one-time tax on earnings held outside the United States
(“U.S.”). The Company did not have any earnings subject to this tax. Beginning in 2018, earnings generated outside
the U.S. are not subject to U.S. tax when repatriated. If the Company engages in certain business activities, non-U.S. earnings
may be required to be include in the income of the U.S. parent company. The TCJA added rules that require the U.S. parent company
to include in income certain low taxed income. The Company is subject to these so called GILTI (Global Intangible Low-taxed Income)
rules due to its presence in the Middle East. The GILTI tax has been properly reflected in the Company’s tax provision calculation
as of October 31, 2020.
During
April 2020, the Company received $104,479 under the Small Business Administration’s Paycheck Protection Program (“PPP
Loan”) created as part of the recently enacted CARES Act administered by the Small Business Administration (“SBA”).
Certain amounts of the loan may be forgiven if they are used towards qualifying expenses as described in the CARES Act. In the
event that forgiveness is applied for, an adjustment will be necessary for tax purposes to disallow for any expenses the loan
was used towards in the period in which forgiveness occurs.
NOTE
17: COMMITMENTS AND CONTINGENCIES
License
Contingent Consideration
As
described in Note 7, 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 October 31, 2020, the Company believes it is a reasonable possibility that the remaining
maximum amount of $5,000,000 will be paid over the term of the arrangement.
VERUS
INTERNATIONAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
NOTE
17: COMMITMENTS AND CONTINGENCIES (Continued)
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. At October 31, 2020, the Company’s total expected future obligation related
to these guaranteed minimum payments was $903,333, of which the Company expects to pay $773,333 and $130,000 during the fiscal
years ending October 31, 2021 and 2022, respectively. Amounts accrued at October 31, 2020 relating to these guaranteed minimum
payments totaled $447,123 and are included in accounts payable and accrued expenses.
Operating
Lease Obligations
The
Company’s future fiscal year minimum lease payments for its corporate office and domestic warehouse operating leases are
as follows:
|
2021
|
|
$
|
193,925
|
|
|
2022
|
|
$
|
116,342
|
|
|
2023
|
|
$
|
100,596
|
|
|
2024
|
|
$
|
8,383
|
|
|
Total
|
|
$
|
419,246
|
|
Rent
expense for the Company’s corporate office and domestic warehouse for the fiscal years ending October 31, 2020 and 2019
was $180,520 and $87,910, respectively.
NOTE
18: 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. On October 30, 2019, the Company
paid $205,300 and received a Final Judgment Order releasing Verus Foods, Inc. and Anshu Bhatnagar from all claims.
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.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
NOTE
19: SUBSEQUENT EVENTS
Subsequent
to October 31, 2020, an aggregate of $284,131 of principal, accrued interest, and fees have been converted into 1,685,981 shares
of the Company’s common stock.
On
November 18, 2020, the Company filed a Certificate of Amendment (the “Amendment”) to its Certificate of Incorporation,
to 1) effect a consolidation of the issued and outstanding shares of Common Stock, pursuant to which the shares of Common Stock
would be combined and reclassified into one share of Common Stock at a ratio of 1-for-500 (the “Reverse Stock Split”),
2) adopt Delaware General Corporation Law Section 115 to require that any or all other internal corporate claims, including claims
made in the right of the Company, shall be brought solely and exclusively in any or all of the courts of the State of Delaware;
and, 3) revise the Certificate of Incorporation to correct and consolidate legacy disclosures, including a description of its
common stock and the adoption of Section 155 of the General Delaware Corporation Law, so as to comprise one document with the
Delaware Secretary of State in the future. On January 13, 2021, the Company’s Reverse Stock Split was completed and became
effective.
On
December 7, 2020, the Company’s Board of Directors approved the dismissal of RBSM, LLP (“RBSM”) as the Company’s
independent registered public accounting firm to audit its consolidated financial statements for the fiscal year ending October
31, 2020, with such dismissal effective as of December 7, 2020.
On
December 8, 2020, the Company’s Board of Directors approved the appointment of Boyle CPA, LLC (“Boyle CPA”)
as the Company’s independent registered public accounting firm to audit its consolidated financial statements for the fiscal
year ending October 31, 2020, effective December 8, 2020. Boyle CPA replaces RBSM who was dismissed as the Company’s independent
registered public accounting firm effective as of December 7, 2020.
On
December 9, 2020, Mr. Chris Cutchens informed the Company’s Board of Directors that he was resigning as the Company’s
Chief Financial Officer and will support an appropriate transition to be completed by January 8, 2021.
On
December 18, 2020, Michael O’Gorman resigned from the Company’s Board of Directors, with such resignation effective
as of December 18, 2020.
Additionally,
on December 18, 2020, the Company entered into an amendment (the “Special Amendment”) to the promissory note issued
to ACG Global Solutions, Inc. (the “Note”), effective March 31, 2020, whereby amendments were made to (i) extend the
maturity date of the Note to December 31, 2021 (the “Maturity Date”), (ii) modify the prepayment clause to whereby
payment by the Company of $150,000 or more on or before the Maturity Date will cause the Note to be forgiven and considered paid
in full, (iii) modify the event of default and note collateral clauses, and (iv) add additional remedies upon the occurrence of
an event of default.
Furthermore,
on December 18, 2020, the Company and its wholly owned subsidiary, Big League Foods, Inc. (“BLF”), entered into a
letter agreement (the “Agreement”) with ACG Global Solutions, Inc. (“ACG”) and Game on Foods, Inc. (“GOF”),
whereby for certain consideration, BLF agreed to sell, transfer, and assign all of BLF’s rights, title, and interest in
and to all of BLF’s assets to GOF.
On
January 4, 2021, the Company entered into a securities purchase agreement with an accredited investor pursuant to which the Company
issued and sold a convertible promissory note in the principal amount of $95,000 (the “Note”). The Note matures on
January 4, 2022, bears interest at a rate of 9% per annum (increasing to 22% 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 as specified
in the Note, subject to adjustment. The Note may be prepaid by the Company at any time prior to the 180th day after the issuance
date of the Note with certain prepayment penalties as set forth therein. On January 7, 2021, the proceeds received from this Note
were used to prepay the convertible promissory note dated July 14, 2020.
VERUS
INTERNATIONAL, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended October 31, 2020 and 2019
NOTE
19: SUBSEQUENT EVENTS (Continued)
On
January 7, 2021, the Company prepaid a convertible promissory note, including principal, accrued interest, and prepayment amount
as set forth within such convertible promissory note dated July 14, 2020. The convertible promissory note in the principal amount
of $63,000 was issued and sold by the Company to an accredited investor under a securities purchase agreement dated July 14, 2020.
On
January 13, 2021, the Company issued and sold a convertible promissory note to an accredited investor in the principal amount
of $88,000 (including a $4,000 original issuance discount) (the “Note”). The Note matures on January 13, 2022, bears
interest at a rate of 8% 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 as specified in the Note, subject
to adjustment. The Note may be prepaid by the Company at any time prior to the 180th day after the issuance date of
the Note with certain prepayment amounts as set forth therein.
On
February 1, 2021, the Company entered into a Mutual Rescission and Release Agreement (the “Rescission Agreement”)
with Eliot’s Adult Nut Butter, LLC (“Eliot’s”) and the member owners of Eliot’s (the “Members”)
as a result of the parties’ inability to agree upon advancement of Eliot’s business operations. Pursuant to the terms
of the Rescission Agreement, among other things, all agreements between the parties including (i) Asset Purchase Agreement dated
September 1, 2020, (ii) the Assignment and Assumption Agreement dated September 1, 2020, (iii) the Bill of Sale dated September
1, 2020, (iv) the Employment Agreement by and between Eliot’s and Michael Kanter dated September 1, 2020, and (v) all related
ancillary agreements (collectively, “Original Contracts”) were terminated and the parties released each other from
all obligations arising from the Original Contracts.
On
February 1, 2021, the Company entered into a securities purchase agreement with an accredited investor pursuant to which the Company
issued and sold a promissory note in the principal amount of $303,000 (including a $39,500 original issue discount) (the “Note”).
The Note matures on February 1, 2022, bears interest at a rate of 12% per annum (increasing to 24% per annum upon the occurrence
of an Event of Default (as defined in the Note)), and is only convertible into shares of the Company’s common stock upon
an Event of Default at a conversion price as specified in the Note, subject to adjustment. Payments shall be made in eight (8)
installments each in the amount of $42,420 commencing on the fifth (5th) monthly anniversary following the issue date and continuing
thereafter each thirty (30) days for eight (8) months. The Note may be prepaid by the Company at any time as set forth therein.
On
February 16, 2021, as a result of the Company’s failure to timely file its Form 10-K, the Company was in default with respect
to certain of its convertible notes. The Company has not received any notification of default from any of its outstanding convertible
notes.
On
February 17, 2021, Anshu Bhatnagar resigned as Chief Executive Officer of the Company, however, will remain a member of the Board
of Directors and retain the role of Chairman of the Board of Directors. Mr. Bhatnagar’s resignation did not involve any
disagreement with us or management relating to our operations, policies, practices, or otherwise.
Additionally,
on February 17, 2021, Apurva Dhruv was appointed as Chief Executive Officer of the Company pursuant to the terms of an employment
agreement (the “2021 Employment Agreement”) as approved by the Board of Directors of the Company.