UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For
the quarterly period ended |
Or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from _______________________ to ___________________ |
Commission
File Number
(Exact name of registrant as specified in its charter)
(State of incorporation) |
(I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s
telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| None | None | None |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.
☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller
reporting company | |
| Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
☐
Yes ☒
As of September 7, 2022, there were shares of the issuer’s common stock, $0.000001 par value per share, issued, as adjusted for a 1-for-500 reverse stock split which was completed and became effective on January 13, 2021.
VERUS INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
| 2 |
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact could be deemed forward-looking statements. Statements that include words such as “may,” “will,” “might,” “projects,” “expects,” “plans,” “believes,” “anticipates,” “targets,” “intends,” “hopes,” “aims,” “can,” “should,” “could,” “would,” “goal,” “potential,” “approximately,” “estimate,” “pro forma,” “continue” or “pursue” or the negative of these words or other words or expressions of similar meaning may identify forward-looking statements. For example, forward-looking statements include any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new products, services or developments; any statements regarding future economic conditions or performance; statements of belief and any statement of assumptions underlying any of the foregoing.
These forward-looking statements are found at various places throughout this Quarterly Report on Form 10-Q and the other documents referred to and relate to a variety of matters, including, but not limited to, other statements that are not purely statements of historical fact. These forward-looking statements are made on the basis of the current beliefs, expectations and assumptions of management, are not guarantees of performance and are subject to significant risks and uncertainty. These forward-looking statements should not be relied upon as predictions of future events and Verus International, Inc. (the “Company”) cannot assure you that the events or circumstances discussed or reflected in these statements will be achieved or will occur. Furthermore, if such forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by the Company or any other person that the Company will achieve its objectives and plans in any specified timeframe, or at all.
These forward-looking statements should, therefore, be considered in light of various important factors, including those set forth in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended October 31, 2021, filed with the SEC on April 15, 2022 and elsewhere in this Quarterly Report on Form 10-Q. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. The Company disclaims any obligation to publicly update or release any revisions to these forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events, except as required by law.
| 3 |
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Verus International, Inc.
Condensed Consolidated Balance Sheets
| July 31, 2022 | October 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Other assets | ||||||||
| Assets of discontinued operations | ||||||||
| Total Current Assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use asset | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Operating lease liability | ||||||||
| Interest payable | ||||||||
| Due to former officer | ||||||||
| Notes payable | ||||||||
| Convertible notes payable, net | ||||||||
| Derivative liability | ||||||||
| Liabilities of discontinued operations | ||||||||
| Total Current Liabilities | ||||||||
| Operating lease liability, net of current portion | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (Note 9) | ||||||||
| Stockholders’ Deficit | ||||||||
| Series A convertible preferred stock, $ par value; shares authorized and shares issued and outstanding at July 31, 2022 and October 31, 2021 | ||||||||
| Series B convertible preferred stock, $ par value; shares authorized and shares issued and outstanding at July 31, 2022 and October 31, 2021 | ||||||||
| Series C convertible preferred stock, $ par value; shares authorized and shares issued and outstanding at July 31, 2022 and October 31, 2021 | ||||||||
| Common stock, $ par value; shares authorized and and shares issued at July 31, 2022 and October 31, 2021, respectively (as adjusted for a | ||||||||
| Additional paid-in-capital | ||||||||
| Shares to be issued | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Deficit | ( | ) | ( | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | $ | ||||||
The accompanying condensed notes are an integral part of these unaudited condensed consolidated financial statements.
| 4 |
Verus International, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| July 31, | July 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of revenue | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| Operating Expenses: | ||||||||||||||||
| Salaries and benefits | ||||||||||||||||
| Selling and promotions expense | ||||||||||||||||
| Legal and professional fees | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other (Expense) Income: | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Amortization of original issue discounts and deferred financing costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss on extinguishment and settlement of convertible notes payable | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain (loss) on change in fair value of derivative liability | ( | ) | ( | ) | ||||||||||||
| Default principal increase on convertible notes payable | ( | ) | ||||||||||||||
| Initial derivative liability expense | ( | ) | ( | ) | ||||||||||||
| Gain on forgiveness of Paycheck Protection Program loan | ||||||||||||||||
| Gain on settlement of liabilities | ||||||||||||||||
| Total Other (Expense) Income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss from continuing operations before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income taxes | ||||||||||||||||
| Loss from continuing operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Discontinued operations (Note 11) | ||||||||||||||||
| (Loss) gain from discontinued operations | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per common share: | ||||||||||||||||
| Loss from continuing operations per common share – basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss from discontinued operations per common share – basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
| Loss per common share – basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average shares outstanding – basic and diluted | ||||||||||||||||
The accompanying condensed notes are an integral part of these unaudited condensed consolidated financial statements.
| 5 |
Verus International, Inc.
Condensed Consolidated Statement of Changes in Stockholders’ Deficit
For the Nine Months Ended July 31, 2022 and 2021
(Unaudited)
Preferred Stock A | Preferred Stock B | Preferred Stock C | Common Stock | Additional Paid-In | Common Stock to be | Accumulated | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||
| Shares | Par | Shares | Par | Shares | Par | Shares | Par | Capital | Issued | Deficit | (Deficit) | |||||||||||||||||||||||||||||||||||||
| Balance, October 31, 2021 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||||||||
| Conversion of convertible promissory notes to common stock | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation for restricted shares under employment contract | ||||||||||||||||||||||||||||||||||||||||||||||||
| Shares of common stock to be issued for board member services rendered | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, January 31, 2022 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||||||||
| Conversion of convertible promissory notes to common stock | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation for restricted shares under employment contract | ||||||||||||||||||||||||||||||||||||||||||||||||
| Shares of common stock to be issued for board member services rendered | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, April 30, 2022 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||||||||
| Conversion of convertible promissory notes to common stock | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation for restricted shares under employment contract | ||||||||||||||||||||||||||||||||||||||||||||||||
| Shares of common stock to be issued for board member services rendered | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, July 31, 2022 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||||||||
Preferred Stock A | Preferred Stock B | Preferred Stock C | Common Stock | Additional Paid-In | Common Stock to be | Accumulated | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||
| Shares | Par | Shares | Par | Shares | Par | Shares | Par | Capital | Issued | Deficit | (Deficit) | |||||||||||||||||||||||||||||||||||||
| Balance, October 31, 2020 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||||||||
| Conversion of convertible promissory notes to common stock | ||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for vendor services | ||||||||||||||||||||||||||||||||||||||||||||||||
| Shares of common stock to be issued for vendor services | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, January 31, 2021 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||||||||
| Conversion of convertible promissory notes to common stock | ||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for note payable issuance | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation for restricted shares under employment contract | ||||||||||||||||||||||||||||||||||||||||||||||||
| Shares of common stock to be issued for vendor services | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, April 30, 2021 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||||||||
| Conversion of convertible promissory notes to common stock | ||||||||||||||||||||||||||||||||||||||||||||||||
| Shares of common stock to be issued for vendor services | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, July 31, 2021 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||||||||
The accompanying condensed notes are an integral part of these unaudited condensed consolidated financial statements.
| 6 |
Verus International, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| For the Nine Months Ended | ||||||||
| July 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Loss on extinguishment and settlement of debt | ||||||||
| Allowance for accounts receivable | ||||||||
| Initial derivative liability expense | ||||||||
| Amortization of original issue discounts and deferred financing costs | ||||||||
| Stock-based compensation | ( | ) | ||||||
| Default principal increase on convertible notes payable | ||||||||
| Depreciation and amortization | ||||||||
| Loss (Gain) on change in fair value of derivative liability | ( | ) | ||||||
| Gain on settlement of liabilities | ( | ) | ||||||
| Gain on forgiveness of Paycheck Protection Program loan | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Increase in accounts receivable | ( | ) | ||||||
| Increase in inventory | ( | ) | ||||||
| Decrease in prepaid expenses | ||||||||
| Increase in other assets | ( | ) | ||||||
| Increase in accounts payable and accrued expenses | ||||||||
| Decrease in right to use and lease obligation, net | ( | ) | ||||||
| Net cash used in operating activities of continuing operations | ( | ) | ( | ) | ||||
| Net cash provided by (used in) operating activities of discontinued operations | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of convertible notes payable, net of commissions | ||||||||
| Proceeds from issuance of notes payable | ||||||||
| Payments applied to convertible promissory notes | ( | ) | ||||||
| Net cash provided by financing activities of continuing operations | ||||||||
| Net (decrease) increase in cash | ( | ) | ||||||
| Cash at beginning of period | ||||||||
| Cash at end of period | $ | $ | ||||||
| Supplemental disclosure: | ||||||||
| Cash paid for interest | $ | $ | ||||||
The accompanying condensed notes are an integral part of these unaudited condensed consolidated financial statements.
| 7 |
| For the Nine Months Ended | ||||||||
| July 31, | ||||||||
| 2022 | 2021 | |||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Common Stock issued in exchange for conversion of convertible promissory note and accrued interest: | ||||||||
| Value | $ | $ | ||||||
| Shares | ||||||||
| Common Stock issued for note payable issuance: | ||||||||
| Value | $ | $ | ||||||
| Shares | ||||||||
| Common Stock issued for vendor services: | ||||||||
| Value | $ | $ | ||||||
| Shares | ||||||||
| Common Stock to be issued for vendor services: | ||||||||
| Value | $ | $ | ||||||
| Shares | ||||||||
The accompanying condensed notes are an integral part of these unaudited condensed consolidated financial statements.
| 8 |
VERUS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2022 AND 2021
(UNAUDITED)
NOTE 1: NATURE OF BUSINESS AND BASIS OF PRESENTATION
Explanatory Note
All
references to shares of our common stock contained herein have been
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 million shares of our newly designated Series A Convertible Preferred Stock to Monaker. Attaché
owned approximately
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 shares (the “Gulf Agro Shares”) of Gulf Agro Trading, LLC (“Gulf
Agro”), representing
For the period August 1, 2018 through October 31, 2021, we, through our wholly-owned subsidiary, Verus Foods, Inc., an international supplier of consumer food products, were focused on international consumer packaged goods, foodstuff distribution and wholesale trade. Our fine food products were sourced in the United States and exported internationally. We marketed 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.
| 9 |
VERUS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2022 AND 2021
(UNAUDITED)
NOTE 1: NATURE OF BUSINESS AND BASIS OF PRESENTATION (continued)
Through October 31, 2021, we had 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. During the three months ended October 31, 2021, we made a decision to cease operating as an international supplier of consumer food products, whereby we cancelled and settled all supplier and customer contracts to avoid any future significant liabilities. Accordingly, we have classified the operating results and associated assets and liabilities from Verus MENA as discontinued operations in the consolidated financial statements for the years ended October 31, 2021 and 2020 (see Note 11).
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. The assignments of our interests in the MLB and NHL licenses were completed on March 15, 2021 and March 25, 2021, respectively. Accordingly, we have classified the operating results and associated assets and liabilities from BLF as discontinued operations in the consolidated financial statements for the years ended October 31, 2021 and 2020 (see Note 11).
Furthermore, during August 2019, we purchased all of the assets of a french fry business in the Middle East.
Basis of Presentation
The unaudited condensed consolidated financial information furnished herein reflects all adjustments, consisting only of normal recurring items, which in the opinion of management, are necessary to fairly state the Company’s financial position, results of operations and cash flows for the dates and periods presented and to make such information not misleading. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted pursuant to rules and regulations of the Securities and Exchange Commission (the “SEC”); nevertheless, management of the Company believes that the disclosures herein are adequate to make the information presented not misleading.
The unaudited condensed consolidated financial statements for the nine months ended July 31, 2022 and 2021 include the operations of BLF effective April 25, 2019, Verus MENA effective May 1, 2018, and Verus Foods, Inc. effective January 2017. The operating results and associated assets and liabilities from BLF and Verus MENA have been classified as discontinued operations in the unaudited consolidated financial statements for the nine months ended July 31, 2022 and 2021 (see Note 11). All significant intercompany balances and transactions have been eliminated in the consolidation.
These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended October 31, 2021, contained in the Company’s Annual Report on Form 10-K filed with the SEC on April 15, 2022. The results of operations for the nine months ended July 31, 2022, are not necessarily indicative of results to be expected for any other interim period or the fiscal year ending October 31, 2022.
| 10 |
VERUS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2022 AND 2021
(UNAUDITED)
NOTE 1: NATURE OF BUSINESS AND BASIS OF PRESENTATION (continued)
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. As economic activity has begun and continues recovering, the impact of the COVID-19 pandemic on our business has been more reflective of greater economic and marketplace dynamics. Furthermore, in light of variant strains of the virus that have emerged, the COVID-19 pandemic could once again impact our operations and the operations of our customers and vendors as a result of quarantines, illnesses, and travel restrictions.
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
Use of Estimates
The preparation of unaudited condensed 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 unaudited condensed consolidated financial statements and reported amounts of revenues and expenses for the reporting period. Actual results could differ from those estimates. If actual results significantly differ from the Company’s estimates, the Company’s financial condition and results of operations could be materially impacted. Significant estimates include the collectability of accounts receivable, valuations of inventory, estimated useful lives of finite-lived intangible assets, accrued expenses, valuation of derivative liabilities, stock-based compensation and the valuation reserve for income taxes.
Reclassifications
Certain reclassifications of prior period amounts have been made to enhance comparability with the current period unaudited condensed consolidated financial statements, including, but not limited to, presentation of certain items within the unaudited consolidated balance sheets, unaudited statements of operations, unaudited consolidated statements of cash flows, and certain notes to the unaudited condensed consolidated financial statements. These reclassifications had no effect on the previously reported net loss.
| 11 |
VERUS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2022 AND 2021
(UNAUDITED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Concentrations of Credit Risk
Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company maintains cash and cash equivalents with high-quality financial institutions. Deposits held with the financial institutions may exceed the amount of insurance provided by the Federal Deposit Insurance Corporation on such deposits, but may be redeemed upon demand. The Company performs periodic evaluations of the relative credit standing of the financial institutions. With respect to accounts receivable, the Company monitors the credit quality of its customers as well as maintains an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments.
Revenue Risk
The
Company’s products accounts receivable, net and revenues are geographically concentrated with customers located domestically in
the United States. In addition, significant concentrations exist with a limited number of customers. Approximately
Supplier Risk
The Company purchases substantially all of its products from a limited number suppliers. Increases in the prices of the 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 products or our suppliers cease to be available to us, we could experience shortages in our products or be unable to meet our commitments to customers. Alternative sources of products, if available, may be more expensive. For periods in which the prices are declining, the Company may be required to write down its inventory carrying cost which, depending on the extent of the differences between market price and carrying cost, could have a material adverse effect on the Company’s consolidated results of operations and financial position.
Cash and Cash Equivalents
For purposes of balance sheet presentation and reporting of cash flows, the Company considers all unrestricted demand deposits, money market funds and highly liquid debt instruments with an original maturity of less than 90 days to be cash and cash equivalents. There were no cash equivalents at July 31, 2022 or October 31, 2021. 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 July 31, 2022 and October 31, 2021, the Company’s cash balances did not exceed the FDIC limit.
| 12 |
VERUS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2022 AND 2021
(UNAUDITED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Accounts Receivable
The
Company regularly reviews outstanding receivables and provides for estimated losses through an allowance for doubtful accounts. In evaluating
the level of established loss reserves, the Company makes judgments regarding its customers’ ability to make required payments,
economic events and other factors. As the financial condition of these parties change, circumstances develop or additional information
becomes available, adjustments to the allowance for doubtful accounts may be required. The Company maintains reserves for potential credit
losses and such losses traditionally have been within its expectations. At July 31, 2022 and October 31, 2021, we determined $
Inventory
Inventory is stated at the lower of net realizable value or cost, determined on the first-in, first-out basis. 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 finished products.
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
Impairment of Long-Lived Assets
In accordance with Accounting Standards Codification (“ASC”) 360-10, “Property, Plant, and Equipment”, the Company periodically reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value.
Fair Value of Financial Instruments
The Company measures its financial instruments in accordance with ASC topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”), formerly SFAS No. 157 “Fair Value Measurements”. ASC 820 defines “fair value” as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
| 13 |
VERUS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2022 AND 2021
(UNAUDITED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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, 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. At July 31, 2022, the Company had a Level 3 financial instrument related to its derivative liability.
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 5).
A contract asset is recognized for incremental costs to obtain a customer contract that are recoverable, otherwise such incremental costs are expensed as incurred.
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. For the nine months ended July 31, 2022 and 2021 there was no freight expense on goods shipped as the operating results and associated assets and liabilities from BLF and Verus MENA have been classified as discontinued operations in the consolidated financial statements for the nine months ended July 31, 2022 and 2021 (see Note 11).
| 14 |
VERUS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2022 AND 2021
(UNAUDITED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
The Company computes share based payments in accordance with the provisions of ASC Topic 718, Compensation – Stock Compensation and related interpretations. As such, compensation cost is measured on the date of grant at the fair value of the share-based payments. Such compensation amounts, if any, are amortized over the respective vesting periods of the grants. The Company estimates the fair value of stock options and warrants by using the Black-Scholes option valuation model.
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 interest expense over the life of the debt using the effective interest method.
| 15 |
VERUS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2022 AND 2021
(UNAUDITED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreign Currency Translation
Through October 31, 2021, the Company had one non-U.S. subsidiary, where the functional currency was the United Arab Emirates dirham (“AED”). The Company’s foreign subsidiary maintained 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.
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:
July 31, 2022 | October 31, 2021 | |||||||
| Period-end AED: USD exchange rate | $ | $ | ||||||
Income statement:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| July 31, | July 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Average Period AED: USD exchange rate | $ | $ | $ | $ | ||||||||||||
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.
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, 2021, 2020, and 2019 tax years may be selected for examination by the taxing authorities as the statute of limitations remains open.
The Company recognizes expenses for tax penalties and interest assessed by the Internal Revenue Service and other taxing authorities upon receiving valid notice of assessments. The Company has received no such notices for the tax years ended October 31, 2021 and 2020.
| 16 |
VERUS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2022 AND 2021
(UNAUDITED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In accordance with the provisions of FASB ASC Topic 260, Earnings per Share, basic earnings per share (“EPS”) is computed by dividing earnings available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating EPS on a diluted basis.
In computing diluted EPS, only potential common shares that are dilutive, those that reduce EPS or increase loss per share, are included. The effect of contingently issuable shares are not included if the result would be anti-dilutive, such as when a net loss is reported. Therefore, basic and diluted EPS are computed using the same number of weighted average shares for the three and nine months ended July 31, 2022 and 2021, as we incurred a net loss for those periods. At July 31, 2022, there were outstanding warrants to purchase approximately shares of the Company’s common stock, approximately shares of the Company’s common stock issuable upon the conversion of Series A and Series C convertible preferred stock, approximately shares of the Company’s common stock to be issued, and approximately shares of the Company’s common stock issuable upon the conversion of convertible notes payable which may dilute future EPS. At July 31, 2021, there were outstanding warrants to purchase approximately shares of the Company’s common stock, approximately shares of the Company’s common stock issuable upon the conversion of Series A and Series C convertible preferred stock, approximately shares of the Company’s common stock to be issued, and approximately 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 nutraceutical products industry, and its prospects for success are tied indirectly to interest rates and the worldwide demand for the Company’s nutraceutical products.
Recently Adopted Accounting Standards
Effective November 1, 2021, the Company adopted ASU 2019-12, Income Taxes (Topic 740), which amended and simplified the accounting for income taxes by removing certain exceptions to the general principles of Topic 740, and also improved consistent application of and simplified U.S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The Company determined the adoption of ASU 2019-12 did not have a material impact on its unaudited condensed consolidated financial statements.
| 17 |
VERUS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2022 AND 2021
(UNAUDITED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recently Issued Accounting Standards Not Yet Adopted
During May 2021, the FASB issued ASU 2021-04, to clarify and reduce diversity in accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange. The standard is effective for the Company as of November 1, 2022, 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 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.
Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material impact on the accompanying unaudited condensed consolidated financial statements.
NOTE 3: GOING CONCERN
The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
The
Company has incurred a net loss from continuing operations of $
In order to meet its working capital needs through the next twelve months from the date of this report and to fund the growth of its 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 continued 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.
NOTE 4: LEASES
At July 31, 2022, the Company was party to one operating lease for its corporate office and domestic warehouse operations in Stafford, Texas. Effective February 8, 2021, the Company terminated the operating lease for its corporate office at Gaithersburg, Maryland and entered into a new, short-term lease, which the Company subsequently terminated. The Company also terminated its 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.
| 18 |
VERUS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2022 AND 2021
(UNAUDITED)
NOTE 4: LEASES (continued)
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 July 31, 2022.
For
the nine months ended July 31, 2022, the Company had operating lease costs of $
At
July 31, 2022, the remaining lease term for our domestic warehouse operations is
| Future Minimum Lease Payments: | ||||
| Remainder of fiscal year 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| Total Minimum Lease Payments | $ | |||
| Less: amount representing interest | ( | ) | ||
| Present Value of Lease Liabilities | $ | |||
| Less: current portion | ( | ) | ||
| Long-Term Portion | $ |
| 19 |
VERUS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2022 AND 2021
(UNAUDITED)
NOTE 5: REVENUE DISAGGREGATION
The
Company did not generate any revenue from continuing operations for the nine months ended July 31, 2022, and therefore did not have any
revenue disaggregation. For the nine months ended July 31, 2021, the Company’s largest customer accounted for approximately
NOTE 6: DEBT
Convertible Notes Payable
On
April 7, 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 $
On
April 8, 2021, the Company issued and sold a convertible promissory note to an accredited investor in the principal amount of $
On
April 15, 2021, the Company issued and sold a convertible promissory note to an accredited investor in the principal amount of $
| 20 |
VERUS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2022 AND 2021
(UNAUDITED)
NOTE 6: DEBT (continued)
On
June 29, 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 $
On
August 5, 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 $
On
August 12, 2021, the Company issued and sold a convertible promissory note to an accredited investor in the principal amount of $
On
November 5, 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 $
| 21 |
VERUS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2022 AND 2021
(UNAUDITED)
NOTE 6: DEBT (continued)
On
December 10, 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 $
On
May 10, 2022, 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 $
On
June 24, 2022, 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 $
At
July 31, 2022 and October 31, 2021, there was $
During
the nine months ended July 31, 2022 and 2021, amortization of original issue discount and issuance costs amounted to $
During
the nine months ended July 31, 2022, an aggregate of $
| 22 |
VERUS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2022 AND 2021
(UNAUDITED)
NOTE 6: DEBT (continued)
Notes Payable
On
January 26, 2019, the Company entered into Amendment No. 1 to the promissory note (the “Monaco Note”) issued in favor of
the Donald P. Monaco Insurance Trust on January 26, 2018 in the principal amount of $
On
February 8, 2019, the Company entered into Amendment No. 2 to the Monaco Note whereby
Upon
maturity on November 8, 2019, the Company was not able to pay the balance due and the interest rate immediately increased to
At
July 31, 2022, the aggregate balance of the Monaco Note and accrued interest was $
On
March 31, 2020, the Company issued and sold a promissory note to an accredited investor in the principal amount of $
| 23 |
VERUS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2022 AND 2021
(UNAUDITED)
NOTE 6: DEBT (continued)
On
February 1, 2021, the Company entered into a securities purchase agreement with an accredited investor and issued an
Revolving Credit Agreement
On
July 31, 2019, the Company entered into a secured, $
At
July 31, 2022, the aggregate balance outstanding under the Credit Facility including accrued interest was $
| 24 |
VERUS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2022 AND 2021
(UNAUDITED)
NOTE 7: 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.
The derivative liability is measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from October 31, 2021 to July 31, 2022.
Conversion feature derivative liability | ||||
| October 31, 2021 | $ | |||
| Initial fair value of derivative liability charged to other expense | ||||
| Loss on change in fair value included in earnings | ||||
| Derivative liability relieved by conversions of convertible promissory notes | ( | ) | ||
| July 31, 2022 | $ | |||
Total
derivative liability at July 31, 2022 and October 31, 2021 amounted to $
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 July 31, 2022:
| Expected volatility | % | |||
| Expected term | ||||
| Risk-free interest rate | % | |||
| Stock price | $ |
The Company recognizes its derivative liabilities as Level 3 and values its derivatives using the methods discussed above. 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 July 31, 2022, the Company did not have any derivative instruments that were designated as hedges.
| 25 |
VERUS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2022 AND 2021
(UNAUDITED)
NOTE 8: STOCKHOLDERS’ DEFICIT
The total number of shares of all classes of stock that the Company shall have the authority to issue is shares consisting of shares of common stock with a $ par value per share of which are issued at July 31, 2022 and shares of preferred stock, par value $ per share of which (A) shares have been designated as Series A Convertible Preferred of which are outstanding at July 31, 2022, (B) shares have been designated as Series B Convertible Preferred Stock, of which shares are outstanding at July 31, 2022 and (C) have been designated as Series C Convertible Preferred Stock, of which shares are outstanding at July 31, 2022.
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
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
During the nine months ended July 31, 2022, the Company:
| ● | issued
shares of its common stock valued at $ | |
| ● | recorded
shares of its common stock valued at $ |
| 26 |
VERUS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2022 AND 2021
(UNAUDITED)
NOTE 8: STOCKHOLDERS’ DEFICIT (continued)
During the nine months ended July 31, 2021, the Company:
| ● | issued
shares of its common stock valued at $ | |
| ● | issued restricted shares of its common stock consisting of 1) restricted shares of its common stock (“Commitment Shares”) to an accredited investor as additional consideration for the purchase of a promissory note and 2) restricted shares of its common stock (“Returnable Shares”) to an accredited investor which will be returned to the Company upon timely completion of the required repayment schedule. | |
| ● | issued shares of its common stock to a vendor for services rendered. | |
| ● | recorded shares of its common stock as shares to be issued to a vendor for services rendered. |
Common Stock Warrants
At
July 31, 2022, there were warrants to purchase up to
The following table sets forth common share purchase warrants outstanding at July 31, 2022:
| Weighted | ||||||||||||
| Average | ||||||||||||
| Exercise | Intrinsic | |||||||||||
| Warrants | Price | Value | ||||||||||
| Outstanding, October 31, 2021 | $ | $ | ||||||||||
| Warrants granted and issued | $ | $ | ||||||||||
| Warrants exercised | $ | $ | ||||||||||
| Warrants forfeited | ( | ) | $ | $ | ||||||||
| Outstanding, July 31, 2022 | $ | $ | ||||||||||
| Common stock issuable upon exercise of warrants | $ | $ | ||||||||||
| 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 July 31, | Contractual | Exercise | At July 31, | Exercise | |||||||||||||||||
| Prices | 2022 | Life (Years) | Price | 2022 | Price | |||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||
| $ | $ | |||||||||||||||||||||
| 27 |
VERUS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2022 AND 2021
(UNAUDITED)
NOTE 9: COMMITMENTS AND CONTINGENCIES
Contracts and Commitments Executed Pursuant Employment Agreements
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. On May 18, 2021, Mr. Dhruv was appointed as a member of the Board of Directors and will serve in the role of Chairman of the Board of Directors of the Company.
Lease Agreement
At
July 31, 2022, the Company was party to one operating lease for its corporate office and domestic warehouse operations in Stafford, Texas.
The Company incurs rent expense of $
NOTE 10: LITIGATION
On April 4, 2019, Auctus Fund, LLC (“Auctus”) commenced a lawsuit against the Company in the United States District Court for the District of Massachusetts. On August 27, 2019 the Company filed a motion to dismiss this lawsuit. On September 30, 2019, Auctus responded by filing a First Amended Complaint. The Company then filed a second motion to dismiss on October 24, 2019. On February 25, 2020, the court issued a decision dismissing the securities laws and unjust enrichment and breach of fiduciary duty claims and retaining the breach of contract, breach of covenant of good faith, fraud and deceit, and negligent misrepresentation, and the Massachusetts Consumer Protection Act claims. The Company filed its Answer to the complaint on March 10, 2020. The case remains pending in the District of Massachusetts. This case stems from a securities purchase agreement and convertible note issued in May 2017, a securities purchase agreement and convertible note issued in July 2018, the spin-off of the Company’s real estate division into NestBuilder including the issuance of shares of NestBuilder in the spin-off to the Company’s stockholders and an inducement agreement, release and payoff agreement executed by the parties in February 2019 whereby the Company settled the balance of outstanding amounts owed to Auctus in consideration for cash and shares of NestBuilder. Auctus has requested that the court grant it injunctive and equitable relief and specific performance with respect to the Company’s obligations; determine that the Company is liable for all damages, losses and costs and award Auctus actual losses sustained; award Auctus costs including, but not limited to, costs required to prosecute the action including attorneys’ fees; and punitive damages. The Company intends to continue to defend this matter and although the ultimate outcome cannot be predicted with certainty, based on the current information available, the Company does not believe the ultimate liability, if any, will have a material adverse effect on its financial condition or results of operations.
On April 23, 2021, a class action complaint for violation of federal securities laws was filed which names our former Chief Executive Officer, our former Chief Financial Officer, and Verus, as defendants. This class action complaint was filed on behalf of all persons and entities who purchased or otherwise acquired securities of Verus between June 17, 2019 and October 8, 2020. On November 9, 2021 this complaint was dismissed.
On November 16, 2021, Fulton Bank, N.A. (“Fulton”) commenced a lawsuit against the Company in the United States Circuit Court for Montgomery County, Maryland as a result of the Company not making required payments under the Credit Facility. The Company intends to defend this matter and although the ultimate outcome cannot be predicted with certainty, an adverse ruling against the Company could have a material adverse effect on its financial condition and results of operations.
On December 15, 2021, Donald P. Monaco as trustee of the Donald P. Monaco Insurance Trust, commenced a lawsuit against the Company in the United States Circuit Court for Montgomery County, Maryland as a result of the Company not making required payments under the Monaco Note. The Company intends to defend this matter and although the ultimate outcome cannot be predicted with certainty, an adverse ruling against the Company could have a material adverse effect on its financial condition and results of operations.
On February 7, 2022, Indeglia & Carney, LLP, commenced a lawsuit against the Company in the United States Circuit Court for Washington County, Maryland as a result of allegations of the Company not making payment of an outstanding balance due for services rendered. The Company intends to defend this matter and although the ultimate outcome cannot be predicted with certainty, an adverse ruling against the Company could have a material adverse effect on its financial condition and results of operations.
On March 10, 2022, AGC Global Solutions, Inc., commenced a lawsuit against the Company in the United States Circuit Court for Montgomery County, Maryland as a result of the Company not making required payments under a promissory note. The Company intends to defend this matter and although the ultimate outcome cannot be predicted with certainty, an adverse ruling against the Company could have a material adverse effect on its financial condition and results of operations.
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VERUS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2022 AND 2021
(UNAUDITED)
NOTE 11: DISCONTINUED OPERATIONS
The Company has classified the operating results and associated assets and liabilities from its BLF subsidiary, of which BLF assets were sold, transferred, and assigned to GOF on December 18, 2020, and from its Verus MENA subsidiary, of which operations as an international supplier of consumer food products ceased during the three months ended October 31, 2021, as discontinued operations in the consolidated financial statements for the three and nine months ended July 31, 2022 and 2021.
The assets and liabilities associated with discontinued operations included in our consolidated balance sheets were as follows:
| July 31, 2022 | October 31, 2021 | |||||||||||||||||||||||
| Discontinued | Continuing | Total | Discontinued | Continuing | Total | |||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Current Assets | ||||||||||||||||||||||||
| Cash | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Accounts receivable, net | ||||||||||||||||||||||||
| Inventory | ||||||||||||||||||||||||
| Prepaid expenses | ||||||||||||||||||||||||
| Other assets | ||||||||||||||||||||||||
| Total Current Assets | ||||||||||||||||||||||||
| Property and equipment, net | ||||||||||||||||||||||||
| Operating lease right-of-use asset, net | ||||||||||||||||||||||||
| Total Assets | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||
| Current Liabilities | ||||||||||||||||||||||||
| Accounts payable and accrued expenses | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Operating lease liability | ||||||||||||||||||||||||
| Interest payable | ||||||||||||||||||||||||
| Due to former officer | ||||||||||||||||||||||||
| Notes payable | ||||||||||||||||||||||||
| Convertible notes payable, net | ||||||||||||||||||||||||
| Derivative liability | ||||||||||||||||||||||||
| Total Current Liabilities | ||||||||||||||||||||||||
| Operating lease liability, net of current portion | ||||||||||||||||||||||||
| Total Liabilities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
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VERUS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2022 AND 2021
(UNAUDITED)
NOTE 11: DISCONTINUED OPERATIONS (continued)
The revenues and expenses associated with discontinued operations included in our consolidated statements of operations were as follows:
| Three Months Ended July 31, | ||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||
| Discontinued | Continuing | Total | Discontinued | Continuing | Total | |||||||||||||||||||
| Revenue | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Cost of revenue | ||||||||||||||||||||||||
| Gross Profit | ||||||||||||||||||||||||
| Salaries and benefits | ||||||||||||||||||||||||
| Selling and promotions expense | ||||||||||||||||||||||||
| Legal and professional fees | ||||||||||||||||||||||||
| General and administrative | ||||||||||||||||||||||||
| Total Operating Expenses | ||||||||||||||||||||||||
| Operating (loss) income | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Other Income (Expense): | ||||||||||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Gain (Loss) on change in fair value of derivative liability | ( | ) | ( | ) | ||||||||||||||||||||
| Amortization of original issue discounts and deferred financing costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Loss on extinguishment and settlement of debt | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Gain on forgiveness of Paycheck Protection Program loan | ||||||||||||||||||||||||
| Total Other (Expense) Income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| (Loss) income before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Income taxes | ||||||||||||||||||||||||
| Net (loss) income | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
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VERUS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2022 AND 2021
(UNAUDITED)
NOTE 11: DISCONTINUED OPERATIONS (continued)
| Nine Months Ended July 31, | ||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||
| Discontinued | Continuing | Total | Discontinued | Continuing | Total | |||||||||||||||||||
| Revenue | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Cost of revenue | ||||||||||||||||||||||||
| Gross Profit | ||||||||||||||||||||||||
| Salaries and benefits | ||||||||||||||||||||||||
| Selling and promotions expense | ||||||||||||||||||||||||
| Legal and professional fees | ||||||||||||||||||||||||
| General and administrative | ||||||||||||||||||||||||
| Total Operating Expenses | ||||||||||||||||||||||||
| Operating (loss) income | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Other Income (Expense): | ||||||||||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| (Loss) Gain on change in fair value of derivative liability | ( | ) | ( | ) | ||||||||||||||||||||
| Default principal increase on convertible notes payable | ( | ) | ( | ) | ||||||||||||||||||||
| Amortization of original issue discounts and deferred financing costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Loss on extinguishment and settlement of debt | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Initial derivative liability expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Gain on forgiveness of Paycheck Protection Program loan | ||||||||||||||||||||||||
| Gain on settlement of liabilities | ||||||||||||||||||||||||
| Total Other (Expense) Income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| (Loss) income before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Income taxes | ||||||||||||||||||||||||
| Net (loss) income | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||||
NOTE 12: SUBSEQUENT EVENTS
Subsequent
to July 31, 2022, an aggregate of
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto, and our audited consolidated financial statements and related notes for our fiscal year ended October 31, 2021 found in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on April 15, 2022.
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
For the period August 1, 2018 through October 31, 2021, we, through our wholly-owned subsidiary, Verus Foods, Inc. (“Verus Foods”), an international supplier of consumer food products, were focused on international consumer packaged goods, foodstuff distribution and wholesale trade. Our fine food products were sourced in the United States and exported internationally. We marketed 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.
Through October 31, 2021, we had 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 included the United Arab Emirates (“UAE”), Oman, Bahrain, Qatar, Kingdom of Saudi Arabia and Kuwait. During the three months ended October 31, 2021, we made a decision to cease operating as an international supplier of consumer food products, whereby we cancelled and settled all supplier and customer contracts to avoid any future significant liabilities. Accordingly, we have classified the operating results and associated assets and liabilities from Verus MENA as discontinued operations in the consolidated financial statements for the years ended October 31, 2021 and 2020.
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. The assignments of our interests in the MLB and NHL licenses were completed on March 15, 2021 and March 25, 2021, respectively. Accordingly, we have classified the operating results and associated assets and liabilities from BLF as discontinued operations in the consolidated financial statements for the years ended October 31, 2021 and 2020.
Furthermore, during August 2019, we purchased all of the assets of a french fry business in the Middle East.
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Recent Developments
Litigation
On November 16, 2021, Fulton Bank, N.A. (“Fulton”) commenced a lawsuit against the Company in the United States Circuit Court for Montgomery County, Maryland as a result of the Company not making required payments under the Credit Facility. The Company intends to defend this matter and although the ultimate outcome cannot be predicted with certainty, an adverse ruling against the Company could have a material adverse effect on its financial condition and results of operations.
On December 15, 2021, Donald P. Monaco as trustee of the Donald P. Monaco Insurance Trust, commenced a lawsuit against the Company in the United States Circuit Court for Montgomery County, Maryland as a result of the Company not making required payments under the Monaco Note. The Company intends to defend this matter and although the ultimate outcome cannot be predicted with certainty, an adverse ruling against the Company could have a material adverse effect on its financial condition and results of operations.
On February 7, 2022, Indeglia & Carney, LLP, commenced a lawsuit against the Company in the United States Circuit Court for Washington County, Maryland as a result of allegations of the Company not making payment of an outstanding balance due for services rendered. The Company intends to defend this matter and although the ultimate outcome cannot be predicted with certainty, an adverse ruling against the Company could have a material adverse effect on its financial condition and results of operations.
On March 10, 2022, AGC Global Solutions, Inc., commenced a lawsuit against the Company in the United States Circuit Court for Montgomery County, Maryland as a result of the Company not making required payments under a promissory note. The Company intends to defend this matter and although the ultimate outcome cannot be predicted with certainty, an adverse ruling against the Company could have a material adverse effect on its financial condition and results of operations.
Critical Accounting Policies and Estimates
The discussion and analysis of the Company’s financial condition and results of operations are based upon its unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these unaudited condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going basis, management evaluates past judgments and estimates, including those related to bad debts, potential impairment of intangible assets, accrued liabilities and contingencies. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The accounting policies and related risks described in Note 2 above and the Company’s Annual Report on Form 10-K as filed with the SEC on April 15, 2022 are those that depend most heavily on these judgments and estimates. As of July 31, 2022, there had been no material changes to any of the critical accounting policies contained therein.
Results of Operations
Three months ended July 31, 2022 compared to three months ended July 31, 2021
Continuing Operations
Revenue
For the three months ended July 31, 2022, there was no revenue from continuing operations, compared to $35,456 of revenue for the three months ended July 31, 2021. The decrease in revenue is due to no nutraceutical product sales for the three months ended July 31, 2022.
Cost of Revenue
There was no cost of revenue for the three months ended July 31, 2022, compared to $9,811 for the three months ended July 31, 2021.
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Operating Expenses
Our operating expenses, which include salaries and benefits, stock-based compensation, selling and promotions expense, legal and professional fees, and general and administrative expenses increased to $316,235 for the three months ended July 31, 2022, compared to $199,420 for the three months ended July 31, 2021, an increase of $116,815, or 57%. The increase is primarily due to increases of $133,278 in general and administrative expenses and $1,160 in legal and professional fees, partially offset by decreases of $14,265 in salaries and benefits and $3,358 in selling and promotions expense.
Other (Expense) Income
Our other income (expense), net increased by $211,271, or 363%, for the three months ended July 31, 2022. The increase is primarily the result of increases in loss on convertible note payable extinguishment / settlement and interest expense, coupled with a decrease in gain on forgiveness of Paycheck Protection Program loan, and partially offset by decreases in amortization of original issue discounts and deferred financing costs and gain on change in fair value of derivative liability.
Net Loss from Continuing Operations
We generated a net loss from continuing operations of $585,720 for the three months ended July 31, 2022, compared to a net loss of $231,989 for the three months ended July 31, 2021, an increase of $353,731. The increase in net loss is primarily driven by the increases in operating expenses and other expenses as disclosed above.
Discontinued Operations
For the three months ended July 31, 2022, there are no revenue, cost of revenue, or other income (expense) from discontinued operations. For the three months ended July 31, 2022, operating expenses were $40, generating a net loss of $40 from discontinued operations. For the three months ended July 31, 2021, we generated $1,812,932 of revenue, incurred $1,374,399 of cost of revenue, incurred $510,031 of operating expenses, and generated a net loss of $71,498 from discontinued operations.
Nine months ended July 31, 2022 compared to nine months ended July 31, 2021
Continuing Operations
Revenue
For the nine months ended July 31, 2022, there was no revenue from continuing operations, compared to $383,300 of revenue for the nine months ended July 31, 2021. The decrease in revenue is due to no nutraceutical product sales for the nine months ended July 31, 2022.
Cost of Revenue
There was no cost of revenue for the nine months ended July 31, 2022, compared to $178,678 for the nine months ended July 31, 2021.
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Operating Expenses
Our operating expenses, which include salaries and benefits, stock-based compensation, selling and promotions expense, legal and professional fees, and general and administrative expenses increased to $759,872 for the three months ended July 31, 2022, compared to $711,862 for the three months ended July 31, 2021, an increase of $48,010, or 7%. The increase is primarily due to increases of $76,160 in legal and professional fees and $11,480 in general and administrative expenses, partially offset by decreases of $36,272 in salaries and benefits and $3,358 in selling and promotions expense.
Other (Expense) Income
Our other income (expense), net decreased by $79,028 or 8%, for the nine months ended July 31, 2022. The decrease is primarily the result of decreases in initial derivative liability expense and amortization of original issue discounts and deferred financing costs, partially offset by increases in interest expense, loss on convertible note payable extinguishment / settlement, default principal increase on convertible notes payable, loss on change in fair value of derivative liability, gain on forgiveness of Paycheck Protection Program loan, and gain on settlement of liabilities.
Net Loss from Continuing Operations
We generated a net loss from continuing operations of $1,653,171 for the nine months ended July 31, 2022, compared to a net loss of $1,479,567 for the nine months ended July 31, 2021, an increase of $173,604. The increase in net loss is primarily driven by the increase in operating expenses, partially offset by the decrease in other expenses as disclosed above.
Discontinued Operations
For the nine months ended July 31, 2022, there are no revenue, cost of revenue, or other income (expense) from discontinued operations. For the nine months ended July 31, 2022, operating expenses were $41,079, generating a net loss of $41,079 from discontinued operations. For the nine months ended July 31, 2021, we generated $8,230,413 of revenue, incurred $6,630,524 of cost of revenue, incurred $1,577,456 of operating expenses, and generated net income of $22,432 from discontinued operations.
Liquidity and Capital Resources
At July 31, 2022, we had $21,678 of cash and a working capital deficit of $3,188,445 as compared to cash of $66,022 and a working capital deficit of $3,447,103 at October 31, 2021.
Net cash used in operating activities of continuing operations was $294,406 for the nine months ended July 31, 2022, a decrease of $408,938 from $703,344 used during the nine months ended July 31, 2021. The decrease in net cash used in operating activities of continuing operations was primarily due to an increase in accounts payable and a net increase in non-cash charges, coupled with a decrease in accounts receivable, partially offset by an increase in net loss and decrease in prepaid expenses.
There was no net cash used in investing activities of continuing operations for the nine months ended July 31, 2022 and 2021.
We have financed our operations since inception primarily through proceeds from equity and debt financings and revenue derived from operations. During the nine months ended July 31, 2022, net cash provided by financing activities of continuing operations was $209,000 as compared to $755,725 during the nine months ended July 31, 2021. The decrease in net cash provided by financing activities of continuing operations was primarily due to lower net proceeds from the issuance of convertible notes payable and notes payable, partially offset by lower payments applied to convertible promissory notes. Our continued operations primarily depend upon our ability to raise additional capital from various sources including equity and debt financings, as well as our revenue derived from operations. We can give no assurances that any additional capital that we are able to obtain will be sufficient to meet our needs or will be on favorable terms. Based on our current plans, we believe that our cash provided from the above sources may not be sufficient to enable us to meet our planned operating needs for the next twelve months.
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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, we temporarily closed our domestic and international offices and required all of our employees to work remotely. As economic activity has begun and continues recovering, the impact of the COVID-19 pandemic on our business has been more reflective of greater economic and marketplace dynamics. Furthermore, in light of variant strains of the virus that have emerged, the COVID-19 pandemic could once again impact our operations and the operations of our customers and vendors as a result of quarantines, illnesses, and travel restrictions.
The full impact of the COVID-19 pandemic on our financial condition and results of operations will depend on future developments, such as the ultimate duration and scope of the pandemic, its impact on our 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, we may continue to experience adverse impacts to our business as a result of any economic recession or depression that has occurred as a result of the pandemic. Therefore, we cannot reasonably estimate the impact at this time. We continue to actively monitor the pandemic and may determine to take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, vendors, and shareholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company we are not required to provide information required by this item.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of July 31, 2022 to determine whether our disclosure controls and procedures are effective to provide reasonable assurance that the information required to be disclosed in our reports under the Exchange Act, and the rules and regulations thereunder, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Based on this evaluation, because of our limited resources and limited number of employees, management concluded that our disclosure controls and procedures were ineffective as of July 31, 2022. Management has identified control deficiencies regarding the lack of segregation of duties. Management of the Company believes that these material weaknesses are due to the small size of the Company’s accounting staff. The small size of the Company’s accounting staff may prevent adequate controls in the future, such as segregation of duties, due to the cost/benefit of such remediation.
To mitigate the current limited resources and limited employees, we rely heavily on direct management oversight of transactions, along with the use of external legal and accounting professionals. As we grow, we expect to increase our number of employees, which should enable us to implement adequate segregation of duties within the internal control framework.
These control deficiencies could result in a misstatement of account balances that would result in a reasonable possibility that a material misstatement to our consolidated financial statements may not be prevented or detected on a timely basis. In light of this material weakness, we performed additional analyses and procedures in order to conclude that our unaudited condensed consolidated financial statements for the nine months ended July 31, 2022, included in this Quarterly Report on Form 10-Q were fairly stated in accordance with GAAP. Accordingly, management believes that despite our material weaknesses, our unaudited condensed consolidated financial statements for the nine months ended July 31, 2022 are fairly stated, in all material respects, in accordance with GAAP.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. 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.
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.
On April 23, 2021, a class action complaint for violation of federal securities laws was filed which names our former Chief Executive Officer, our former Chief Financial Officer, and Verus, as defendants. This class action complaint was filed on behalf of all persons and entities who purchased or otherwise acquired securities of Verus between June 17, 2019 and October 8, 2020. On November 9, 2021 this complaint was dismissed.
On November 16, 2021, Fulton Bank, N.A. (“Fulton”) commenced a lawsuit against the Company in the United States Circuit Court for Montgomery County, Maryland as a result of the Company not making required payments under the Credit Facility. The Company intends to defend this matter and although the ultimate outcome cannot be predicted with certainty, an adverse ruling against the Company could have a material adverse effect on its financial condition and results of operations.
On December 15, 2021, Donald P. Monaco as trustee of the Donald P. Monaco Insurance Trust, commenced a lawsuit against the Company in the United States Circuit Court for Montgomery County, Maryland as a result of the Company not making required payments under the Monaco Note. The Company intends to defend this matter and although the ultimate outcome cannot be predicted with certainty, an adverse ruling against the Company could have a material adverse effect on its financial condition and results of operations.
On February 7, 2022, Indeglia & Carney, LLP, commenced a lawsuit against the Company in the United States Circuit Court for Washington County, Maryland as a result of allegations of the Company not making payment of an outstanding balance due for services rendered. The Company intends to defend this matter and although the ultimate outcome cannot be predicted with certainty, an adverse ruling against the Company could have a material adverse effect on its financial condition and results of operations.
On March 10, 2022, AGC Global Solutions, Inc., commenced a lawsuit against the Company in the United States Circuit Court for Montgomery County, Maryland as a result of the Company not making required payments under a promissory note. The Company intends to defend this matter and although the ultimate outcome cannot be predicted with certainty, an adverse ruling against the Company could have a material adverse effect on its financial condition and results of operations.
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Item 1A. Risk Factors.
As a smaller reporting company we are not required to provide information required by this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 5. Other Information
None.
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Item 6. Exhibits.
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| 41 |
| 31.1* | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1* | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS* | Inline XBRL Instance Document | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
| 104* | Cover Page Interactive Data File (embedded with the Inline XBRL document |
+ Each of these Exhibits constitutes a management contract, compensatory plan, or arrangement.
* Filed herewith.
# The SEC has granted confidential treatment with respect to certain portions of this exhibit. Omitted portions have been filed separately with the SEC.
## Pursuant to Item 601(b)(10) of Regulation S-K, certain confidential portions of this exhibit were omitted by means of making such portions with an asterisk because the identified confidential portions (i) are not material and (ii) would be competitively harmful if publicly disclosed.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Verus International, Inc. | |
| /s/ Apurva Dhruv | |
| Apurva Dhruv | |
| Chief Executive Officer (Principal Executive, Financial, and Accounting Officer) | |
| September 16, 2022 |
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