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.
32
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.
33
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.
34
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.
35
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.
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VERUS INTERNATIONAL, INC. 
