Notes to Financial Statements
(Unaudited)
February 28, 2019
Note A:
BASIS OF
PRESENTATION
The foregoing unaudited interim financial statements have been
prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions for Form 10-Q and Regulation S-X as promulgated by the
Securities and Exchange Commission (“SEC”).
Accordingly, these financial statements do not include all of the
disclosures required by generally accepted accounting principles in
the United States of America for complete financial statements.
These unaudited interim financial statements should be read in
conjunction with the audited financial statements and the notes
thereto included on Form 10-K for the year ended November 30, 2018.
In the opinion of management, the unaudited interim financial
statements furnished herein include all adjustments, all of
which are of a normal recurring nature, necessary for a fair
statement of the results for the interim period
presented.
The preparation of financial statements in accordance with
generally accepted accounting principles in the United States of
America requires the use of estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities known to exist as of the date the
financial statements are published, and the reported amounts of
revenues and expenses during the reporting period. Uncertainties
with respect to such estimates and assumption are inherent in the
preparation of the Company’s financial statements;
accordingly, it is possible that the actual results could differ
from these estimates and assumptions that could have a material
effect on the reported amounts of the Company’s financial
position and results of operations.
Operating results for the three-month period ended February 28,
2019 are not necessarily indicative of the results that may be
expected for the year ending November 30, 2019.
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
(Unaudited)
February 28, 2019
Note B:
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
The Company was incorporated in Nevada on May 12, 2011. The Company
is based in Las Vegas, Nevada, and designs, develops, licenses,
manufactures, and distributes its products. The Company plans to
market the
Krankz™
Headphones
along with other cell phone accessories and other
new peripheral products for the video gaming industry, including
the
Psyko Krypton™
surround sound gaming headphones.
Use of Estimates
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect
the amount of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting
period. A significant estimate includes the carrying value of the
Company’s patents, fair value of the Company’s common
stock, assumptions used in calculating the value of stock options,
depreciation and amortization.
Fair Value of Financial Instruments
Effective
January 1, 2008, the Company adopted FASB ASC 820, Fair Value
Measurements and Disclosures, Pre Codification SFAS No. 157,
“Fair Value Measurements”, which provides a framework
for measuring fair value under GAAP. Fair value is defined as the
exchange 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.
The standard also expands disclosures about instruments measured at
fair value and establishes a fair value hierarchy, which requires
an entity to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. The standard
describes three levels of inputs that may be used to measure fair
value:
Level 1
— Quoted prices for identical assets and liabilities in
active markets;
Level 2
— Quoted prices for similar assets and liabilities in active
markets; quoted prices for identical or similar assets and
liabilities in markets that are not active; and model-derived
valuations in which all significant inputs and significant value
drivers are observable in active markets; and
Level 3
— Valuations derived from valuation techniques in which one
or more significant inputs or significant value drivers are
unobservable.
The
Company designates cash equivalents (consisting of money market
funds) and investments in securities of publicly traded companies
as Level 1. The total amount of the Company’s investment
classified as Level 3 is de minimis.
Fair
value of financial instruments: The carrying amounts of financial
instruments, including cash and cash equivalents, short-term
investments, accounts payable, accrued expenses and notes payables
approximated fair value as of February 28, 2019 and November 30,
2018 because of the relative short term nature of these
instruments. At February 28, 2019 and November 30, 2018, the fair
value of the Company’s debt approximates carrying
value.
Foreign Currency Transactions
Transaction gains and losses, such as those resulting from the
settlement of nonfunctional currency receivables or payables, are
included in foreign currency gain (loss) in our statements of
operations. Additionally, payable and receivable balances
denominated in nonfunctional currencies are marked-to-market at
month-end, and the gain or loss is recognized in our statements of
operations.
Cash and Cash Equivalents
The
Company considers cash on hand, cash in banks, certificates of
deposit, time deposits, and U.S. government and other short-term
securities with maturities of three months or less when purchased
as cash and cash equivalents.
Inventory
Inventories
are stated at cost, not to exceed fair market value. The cost of
the Company’s inventory $38,306 and $39,456 at February 28,
2019 and November 30, 2018, respectively has been determined using
the first-in first-out (FIFO) method.
The Company has
reviewed its inventory at the year ended November 30, 2018 and
believes its basis for its reserve of $0 is appropriate as of
February 28, 2019 based on the anticipated sales during the current
year ended November 30, 2019.
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
(Unaudited)
February 28, 2019
Note B:
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
Property
and equipment are stated at the lower of cost or fair value.
Depreciation is provided on a straight-line basis over the
estimated useful lives of the assets, as follows:
|
Description
|
Estimated Life
|
|
Furniture
& Equipment
|
5
years
|
|
Vehicles
|
5
years
|
The
estimated useful lives are based on the nature of the assets as
well as current operating strategy and legal considerations such as
contractual life. Future events, such as property expansions,
property developments, new competition, or new regulations, could
result in a change in the manner in which the Company uses certain
assets requiring a change in the estimated useful lives of such
assets.
Maintenance
and repairs that neither materially add to the value of the asset
nor appreciably prolong its life are charged to expense as
incurred. Gains or losses on disposition of property and equipment
are included in the statements of operations. There were no
dispositions during the periods presented.
Impairment of Long-Lived Assets
The
Company evaluates its property and equipment and other long-lived
assets for impairment in accordance with related accounting
standards. No impairments were recorded at February 28, 2019. For
assets to be held and used (including projects under development),
fixed assets are reviewed for impairment whenever indicators of
impairment exist. If an indicator of impairment exists, the Company
first groups its assets with other assets and liabilities at the
lowest level for which identifiable cash flows are largely
independent of the cash flows of other assets and liabilities (the
“asset group”). Secondly, the Company estimates the
undiscounted future cash flows that are directly associated with
and expected to arise from the completion, use and eventual
disposition of such asset group. The Company estimates the
undiscounted cash flows over the remaining useful life of the
primary asset within the asset group. If the undiscounted cash
flows exceed the carrying value, no impairment is indicated. If the
undiscounted cash flows do not exceed the carrying value, then
impairment is measured based on fair value compared to carrying
value, with fair value typically based on a discounted cash flow
model.
Revenue Recognition
As of January 1, 2018, the Company adopted Revenue from Contracts
with Customers (Topic 606) (“ASC 606”). The new
guidance sets forth a new five-step revenue recognition model which
replaces the prior revenue recognition guidance in its entirety and
is intended to eliminate numerous industry-specific pieces of
revenue recognition guidance that have historically existed in U.S.
GAAP. The underlying principle of the new standard is that a
business or other organization will recognize revenue to depict the
transfer of promised goods or services to customers in an amount
that reflects what it expects to receive in exchange for the goods
or services. The standard also requires more detailed disclosures
and provides additional guidance for transactions that were not
addressed completely in the prior accounting guidance. The Company
adopted the standard using the modified retrospective method and
the adoption did not have a material impact on its financial
statements.
The Company recognizes revenue when products are fully delivered or
services have been provided and collection is reasonably assured.
For the three months ended
February 28, 2019 and
2018
, the Company recognized $750 and
$2,765 in revenue, respectively.
Income Taxes
Income
taxes are computed using the asset and liability method. Under the
asset and liability method, deferred income tax assets and
liabilities are determined based on the differences between the
financial reporting and tax bases of assets and liabilities and are
measured using the currently enacted tax rates and laws. A
valuation allowance is provided for the amount of deferred tax
assets that, based on available evidence, are not expected to be
realized.
Basic Income (Loss) Per Share
Basic income (loss) per share is calculated by dividing the
Company’s net loss applicable to common shareholders by the
weighted average number of common shares during the period. Diluted
earnings per share is calculated by dividing the Company’s
net income available to common shareholders by the diluted weighted
average number of shares outstanding during the year. The diluted
weighted average number of shares outstanding is the basic weighted
number of shares adjusted for any potentially dilutive debt or
equity.
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
(Unaudited)
February 28, 2019
Note B:
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-Based Compensation
Pursuant
to ASC Topic 718, the Company recorded the fair value of the stock
options on a monthly basis over the vesting period as stock-based
compensation expense. The fair value of the options is calculated
using the Black-Scholes method as of the date of grant. In fiscal
year 2012, the Company adopted an incentive stock option plan for
its employees. In fiscal year 2012 the Company granted stock
options to three officers of the Company.
Concentrations of Risk
The
Company’s bank accounts are deposited in insured
institutions. The maximum insured by the FDIC per bank account is
not an issue here since the Company’s bank accounts do not
bear any interest and the FDIC limits far exceed balances on
deposit. The Company’s funds were held in a single account.
At February 28, 2019, the Company’s bank balance did not
exceed the insured amounts.
Accounting for Research and Development Costs
The
Company records an expense in the current period for all research
and development costs, which include Hardware Development Costs.
The Company does not capitalize such amounts. Pursuant to ASC Topic
730 Research and Development, once we determine that our Extreme
Gamer video game console is technologically feasible and a working
model is put into use, the Company will capitalize Software
Development costs associated with its products. Once this occurs we
will determine a useful life of our software and apply a reasonable
economic life of five years or less. At this time, our software
development costs only relate to the Extreme Gamer and Zaaz
keyboard hardware. The software development costs cannot be
separated from the associated hardware development. We do not
develop stand-alone software for sale to the retail consumers,
rather we develop software in order to operate the designed
hardware. The software is designed to be encoded within chips
inside the hardware. Thus, it has been determined that the current
software development costs, which are intertwined within the
hardware development, are to be expensed rather than capitalized
pursuant to ASC Topic 730.
This
conclusion is also based upon our decision to devote further
research and development costs in the support of our product
interface to the video game players: Sony PS4® (and other
products such as Nintendo Switch® and Microsoft Xbox
One®).
Liquidity and Going Concern
The
Company has incurred an accumulated deficit of ($8,985,941) since
inception. The Company incurred significant initial research and
product development costs, including expenditures associated with
hardware engineering and the design and development of its hardware
components and prototypes associated with the Zaaz™ keyboard,
the Extreme Gamer, and the Psyko Krypton™ surround sound
gaming headphones. The Company also incurred costs associated with
its acquisition of property, plant and equipment for its 10,000
square foot office and warehouse.
These
factors create substantial doubt about the Company’s ability
to continue as a going concern. The financial statements do not
include any adjustments to reflect the possible future effects on
the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the possible
inability of the Company to continue as a going
concern.
The
ability of the Company to continue as a going concern is dependent
on the Company generating cash from the sale of its common stock or
obtaining debt financing and attaining future profitable
operations.
Management’s
plan includes selling its equity securities and obtaining debt
financing to fund its capital requirement and ongoing operations;
however, there can be no assurance the Company will be successful
in these efforts.
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
(Unaudited)
February 28, 2019
Note B:
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Subsequent Events
In accordance with ASC 855-10, the Company has analyzed its
operations subsequent to February 28, 2019 to the date these
financial statements were issued, and has determined that it does
not have any material subsequent events to disclose in these
financial statements.
Recent Accounting Pronouncements
The
Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on the Company’s
results of operations, financial position or cash flow except as
noted below.
In
February 2016, the FASB issued authoritative guidance, which is
included in ASC 842, “Leases.” This guidance requires
lessees to recognize most leases on the balance sheet by recording
a right-of-use asset and a lease liability. This guidance is
effective for the Company as of March 1, 2019. Based on the
completed analysis, the Company has determined the adjustment will
not have a material impact on the financial
statements.
In June
2018, the FASB issued ASU 2018-07, Compensation—Stock
Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting, which aligns accounting for share-based
payments issued to nonemployees to that of employees under the
existing guidance of Topic 718, with certain exceptions. This
update supersedes previous guidance for equity-based payments to
nonemployees under Subtopic 505-50, Equity—Equity-Based
Payments to Non-Employees. This guidance is effective for the
Company as of March 1, 2019. Based on the completed analysis, the
Company has determined the adjustment will not have a material
impact on the financial statements.
Note C:
COMMON
STOCK
The
Company has 100,000,000 shares at $0.0001 par value common stock
authorized and 27,449,098 and 26,697,109 shares issued and
outstanding at February 28, 2019 and November 30, 2018,
respectively.
During
the three months ended February 28, 2019, the Company sold 534,152
shares of common stock for cash totaling $440,000. The price per
share is equal to eighty-five percent of the average daily
“Ask Price” as quoted on the OTC Electronic Bulletin
Board Quotation System for the ten trading days immediately
preceding the Closing. In addition, for each share of common stock
purchased, each investor shall receive two warrants. Warrant A
shall provide the investor the right to purchase one additional
share of the Company’s common stock equal to one hundred
percent of the average daily “Ask Price” as quoted on
the OTC Electronic Bulletin Board Quotation System for the ten
trading days immediately preceding the Closing. Warrant B shall
provide the investor the right to purchase one additional share of
the Company’s common stock equal to one hundred twenty-five
percent of the average daily “Ask Price” as quoted on
the OTC Electronic Bulletin Board Quotation System for the ten
trading days immediately preceding the Closing. The stock was
subscribed for; however, the certificates representing the shares
were not issued as of February 28, 2019 and, resultantly, are
considered owed as a common stock payable of $307,500.
The shares were
issued subsequently and discussed in Note F.
Note D:
PREFERRED
STOCK
Issuances of Series A Convertible Preferred Stock
Since
March 3, 2014, the Company has not offered or sold any Series A
Convertible Preferred Stock and has no intent to do so during
fiscal years ended November 30, 2019.
Issuances of Series B Convertible Preferred Stock
On January 14, 2014, the Board of Directors of Exeo Entertainment,
Inc. (the “Company”
adopted a resolution
pursuant to the Company’s Certificate of Incorporation, as
amended, providing for the designations, preferences and relative,
participating, optional and other rights, and the qualifications,
limitations and restrictions, of the Series B
Convertible Preferred Stock.
On January 18, 2014, the Company filed a Certificate of
Designations for a Series B Convertible Preferred Stock. The
authorized number of Series B Convertible Preferred Stock is
1,000,000 shares, par value 0.0001.
The holders of shares of
Series B Convertible Preferred Stock shall vote as a separate class
on all matters adversely affecting the Series B
Stock. The authorization or issuance of additional
Common Stock, Series B Convertible Preferred Stock or other
securities having liquidation, dividend, voting or other rights
junior to or on a parity with, the Series B Convertible Preferred
Stock shall not be deemed to adversely affect the Series B
Convertible Preferred Stock. In each case the holders shall be
entitled to one vote per share.
During the conversion period, each Series B
Preferred share may be converted to common stock at a fixed
conversion price of $1.25 per share or the Variable Conversion
Price set forth in the Company’s Certificate of Designation.
Series B stock bears interest at 12% per annum, paid annually, with
principal paid at maturity twenty-four (24) months after the date
of issuance of the stock. See table below in this note. Principal
repayment may not apply if the stockholder exercises the right to
convert all preferred stock to common stock during the conversion
period.
During
the three months ended February 28, 2019, there were no new
issuances of Series B Preferred Stock. However, there was a total
of 2,500 shares of Series B Preferred Stock converted into 16,860
shares of common stock.
All
shares of redeemable convertible preferred stock have been
presented outside of permanent equity in accordance with ASC 48-10,
Classification and Measurement of
Redeemable Securities
. The Company accretes the carrying
value of its Series A and B redeemable convertible preferred stock
to its estimate of fair value (i.e. redemption value) at period
end.
The
estimated fair value of the Series A and Series B redeemable
convertible preferred stock at February 28, 2019 was $167,017 and
$1,762,193, respectively.
The
estimated fair value of the Series A and Series B redeemable
convertible preferred stock at November 30, 2018 was $163,361 and
$1,725,191, respectively.
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
(Unaudited)
February 28, 2019
Note E:
COMMITMENTS AND
CONTINGENCIES
Royalty Payable Obligation
At January 1, 2015, the Company is obligated to pay approximate
royalties of $80,000 (CDN $100,000) per quarter for the remaining
term of the Psyko Audio Labs contract. The company carries the risk
of currency exchange rate fluctuations as our royalty obligation
under the license agreement is stated in Canadian dollars. Royalty
payable was $1,216,577 as of February 28, 2019. For the three
months ended February 28, 2019 and 2018, royalty expense was
$75,078 and $79,703, respectively, and the related gain/(loss) on
foreign currency transactions was ($12,046) and ($7,273),
respectively.
Operating Lease Obligation
On
September 30, 2017, the Company signed a renewed three-year lease
for its current office and warehouse. The typical monthly rent
expense is $8,558, which includes base rent of $7,048 and common
area maintenance of $1,510. Rent expense was $25,874 and $25,674
for the three months ended February 28, 2019 and 2018,
respectively.
Note F:
SUBSEQUENT
EVENTS
In
accordance with ASC 855-10, Company management reviewed all
material events through the date of this report and determined that
there are no additional material subsequent events to report except
for the disclosure below.
On
March 5, 2019, the Company issued 363,155 shares of common stock
and reduced the common stock payable by $307,500.
On
April 5, 2019, the Company issued 17,489 shares of common stock in
exchange for the conversion of 2,500 shares of Series B preferred
stock.