Notes to Financial Statements
(Unaudited)
August 31, 2017
Note A:
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
This
summary of significant accounting policies of Exeo Entertainment,
Inc. (the “Company”) is presented to assist in
understanding the Company’s financial statements. The
financial statements and notes are representations of the
Company’s management, who is responsible for their integrity
and objectivity. These accounting policies conform to generally
accepted accounting principles and have been consistently applied
to the preparation of the financial statements. The Company will
adopt accounting policies and procedures based upon the nature of
future transactions.
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
Zaaz™
Keyboard
, to be used with Samsung’s Smart TV® as
well as other smart devices, the
Extreme Gamer™
, and other new
peripheral products for the video gaming industry, including the
Psyko Krypton™
surround sound gaming headphones.
Basis of Presentation
The
financial statements of the Company have been prepared in
accordance with generally accepted accounting principles in the
United States of America and are presented in US
dollars.
Accounting Basis
The Company uses the accrual basis of accounting and accounting
principles generally accepted in the United States of America
(“GAAP” accounting). The Company has adopted
a November 30 fiscal year end.
Foreign Currency Transactions
Transaction gains and losses, such as those resulting from the
settlement of nonfunctional currency receivables or payables,
including intercompany balances, are included in foreign currency
gain (loss) in our consolidated statements of earnings.
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.
Fair Value of Financial Instruments
The
Company’s financial instruments consist of cash and cash
equivalents, accounts payable, notes payable, and accrued expenses.
The carrying amount of these financial instruments approximates
fair value due either to length of maturity or interest rates that
approximate prevailing market rates unless otherwise disclosed in
these financial statements.
Inventory
Inventories
are stated at cost, not to exceed fair market value. The cost of
the Company’s inventory $254,479 and $227,085 at August 31,
2017 and November 30, 2016, respectively has been determined using
the first-in first-out (FIFO) method. The reduction in current
costs as compared to LIFO costs of inventory equals zero at August
31, 2017 and November 30, 2016, respectively.
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
(Unaudited)
August 31, 2017
Note A:
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 August 31, 2017. 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.
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.
Management Estimates
The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
(Unaudited)
August 31, 2017
Note A:
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
The Company recognizes revenue when products are fully delivered or
services have been provided and collection is reasonably assured.
For the nine months ended
August 31
, 2017 and 2016, the Company recognized $9,487 and
$24,727 in revenue, respectively.
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.
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 August 31, 2017, 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®).
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
(Unaudited)
August 31, 2017
Note A:
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Liquidity and Going Concern
The
Company has incurred an accumulated deficit of ($6,869,990) 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.
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.
Note B:
PROPERTY AND
EQUIPMENT
The
Company owned property and equipment, recorded at cost, which
consisted of the following at August 31, 2017 and November 30,
2016:
|
|
|
|
|
Furniture and
fixtures
|
$
21,499
|
$
21,499
|
|
Office &
computer equipment
|
37,982
|
37,982
|
|
Vehicles
|
96,943
|
96,943
|
|
Subtotal
|
156,424
|
156,424
|
|
Less: Accumulated
depreciation
|
(114,187
)
|
(91,481
)
|
|
Property
and equipment, net
|
$
42,237
|
$
64,943
|
Depreciation
expense was $22,707 and $24,133 for the nine months ended August
31, 2017 and 2016.
Note C:
PREPAID
EXPENSES
At
August 31
, 2017, the balance
of prepaid expenses on the balance sheet of the Company is
$164,371, which is comprised of a prepayment of consulting fees,
prepayment of an annual fee for investor relations, a deposit on
product placement and rent paid in advance. At November 30, 2016,
the balance of prepaid expenses on the balance sheet of the Company
was $51,869. Prepaid expenses at November 30, 2016 consisted of a
deposit on inventory not delivered, deposit on product placement
and prepayment of an annual fee for investor
relations.
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
(Unaudited)
August 31, 2017
Note D:
PATENT AND
TRADEMARKS
In June
2013, the Company executed a license agreement with Psyko Audio
Labs Canada to manufacture and distribute the Carbon and Krypton
line of patented headphones. US Patent # 8,000,486 (for the Psyko
Krypton™ surround sound gaming headphones). On April 2, 2015,
Krank Amplifiers, LLC submitted to the U.S. Patent and Trademark
Office a request for a design mark as to “Krank
Amplifiers”) for registry on the Principal Register (serial
number 86585697). This design mark includes the name Krank
Amplifiers. The requested goods and services category is for IC
009, which is the same category in which our Company would request
as to our common law trademark “Krankz™.” This
amplifier company submitted its mark on the basis of 1B – not
yet in commerce, while our Company has used the name Krankz™
in commerce for several years, well before Krank Amplifiers. As of
the date of this report, no official action has been taken by the
U.S. PTO. We may no longer be able to use the common law trademark
“Krankz™” if Krank Amplifiers is granted its
trademark and we do not file an opposition to such mark or we do
not prevail in the defense of our mark in the U.S. Trademark and
Trial Appeal Board (TTAB).
Note E:
COMMON
STOCK
The
Company has 100,000,000 shares at $0.0001 par value common stock
authorized and 25,274,287 and 24,764,129 shares issued and
outstanding at August 31, 2017 and November 30, 2016,
respectively.
During
the three months ended August 31, 2017, the Company sold 234,453
shares of common stock for cash totaling $186,500. 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 August 31, 2017 and, resultantly, are
considered owed as a common stock payable of $186,500.
On
August 10, 2017, the Company entered into a Consulting Agreement
with a third-party, for which it is obligated to issue 200,000
shares of its common stock with a fair market value of
$150,000. The stock was subscribed for; however, the
certificates representing the shares were not issued as of August
31, 2017 and, resultantly, are considered owed as a common stock
payable of $150,000.
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
(Unaudited)
August 31, 2017
Note F:
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 year ended November 30, 2017.
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.
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 August 31, 2017 was
$145,080 and $1,539,926, respectively.
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
(Unaudited)
August 31, 2017
Note G:
RELATED PARTY
TRANSACTIONS
Notes Payable to Officer
An
officer received promissory notes from the Company in exchange for
loans from the officer for $85,000. The terms of the notes provide
that the Company shall repay the principal of each note in full
within nine months of the date of each note. In addition, the
Company is obligated to pay interest at a flat rate of 6.00% upon
maturity of each note. At the sole discretion of the officer, the
notes may be extended for an additional nine month term. The
Officer agreed to extend the notes for an additional nine month
period. The maturity dates after the extensions are reflected
below. In August 2015, the Company made a $10,000 payment to an
officer towards the entire principal of one note dated December,
2013. The principal balance as of August 31, 2017 was $75,000. The
Company made no payment towards $17,628 accrued interest. As of the
date of this filing, the notes are in default and is being
negotiated.
|
Date of Each Note
|
Amount of Each Note
|
Accrued Interest through the Maturity Date
|
Maturity Date of Each Note
|
|
December 30, 2013
|
$25,000
|
$6,417
|
February 28, 2017
|
|
January 24, 2014
|
$50,000
|
$11,211
|
February 28, 2017
|
Compensation of Officers
The
Company entered into officer compensation agreements with two
officer/directors collectively receives $150,000 per annum as cash
compensation. The Company pays the two officers a total of $12,500
per month.
The
amount paid to the two officers in total was $280,722 and $271,822
during the nine months ended August 31, 2017 and 2016,
respectfully. Each officer/director received compensation in the
form of non-cash incentive stock options granted on July 15, 2012.
The fair value of the stock options were a total of $50,001. Each
person received 2,000,000 stock options.
Note H:
COMMITMENTS AND
CONTINGENCIES
Royalty Payable Obligation
At January 1, 2015, the Company is obligated to pay minimum monthly
royalties of approximately $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 $752,585 as of August 31, 2017. For the nine months
ended August 31, 2017, royalty expense and the related loss on
foreign currency transactions was $230,083 and $(43,974),
respectively.
Operating Lease Obligation
On
October 25, 2012, the Company signed a lease for its current office
and warehouse. The Company executed a one year extension effective
October 1, 2014. The original lease contains an option for a
three-year renewal; which shall expire on September 30, 2016. The
Company signed an additional one-year lease at the same terms as
the prior lease. The typical monthly rent expense is $7,006, which
includes base rent of $5,496 and common area maintenance of $1,510.
Rent expense was $63,054 and $63,054 for the six months ended
August 31, 2017 and 2016, respectively.
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
(Unaudited)
August 31, 2017
Note H:
COMMITMENTS AND
CONTINGENCIES (CONTINUED)
Note Payable for Vehicle Financing Obligations
On
September 27, 2012, the Company acquired a pre-owned company
vehicle on credit. The original cost basis was $49,824. On November
13, 2015, the Company traded the vehicle for a new leased vehicle
for $6,714 due at signing. The Company is obligated to pay a total
of $51,963 for 36 months with a monthly payment of
$1,196.
On
November 13, 2015, the Company acquired a pre-owned company vehicle
on credit. The original cost basis was $56,963. The Company paid
$5,000 as a down payment. The amount financed by the seller is
$48,259, and the Company makes monthly payments of $866. The
Company is obligated to pay a total of $51,963 over the course of
the loan. This note bears interest at the annual percentage rate of
2.9%, and the term is 60 months. The total finance charge
associated with this note is $3,704.