Notes to Financial Statements
(Unaudited)
February 28, 2018
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, 2017.
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,
2018 are not necessarily indicative of the results that may be
expected for the year ending November 30, 2018.
As of February 28, 2018, the Company has cumulative losses totaling
$(7,690,762) and negative working capital of $912,783. The Company
incurred a net loss of $316,638 for the three months ended February
28, 2018. Because of these conditions, the Company will require
additional working capital to develop business operations. The
Company intends to raise additional working capital through the
continued licensing of its technology as well as to generate
revenues for other services. There are no assurances that the
Company will be able to achieve the level of revenues adequate to
generate sufficient cash flow from operations to support the
Company’s working capital requirements. To the extent that
funds generated are insufficient, the Company will have to raise
additional working capital. No assurance can be given that
additional financing will be available, or if available, will be on
terms acceptable to the Company. If adequate working capital is not
available, the Company may not continue its
operations.
These conditions raise substantial doubt about the Company’s
ability to continue as a going concern. The financial statements do
not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and
classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
(Unaudited)
February 28, 2018
Note B:
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
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, 2018 and November 30,
2017 because of the relative short term nature of these
instruments. At February 28, 2018 and November 30, 2017, 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,
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.
Inventory
Inventories
are stated at cost, not to exceed fair market value. The cost of
the Company’s inventory $59,109 and $64,137 at February 28,
2018 and November 30, 2017, 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
February 28, 2018 and November 30, 2017, respectively.
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
(Unaudited)
February 28, 2018
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, 2018. 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
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, 2018 and
2017
, the Company recognized $2,765
and $3,609 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, 2018
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, 2018, 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 ($7,690,762) 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, 2018
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, 2018 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.
Note C:
COMMON
STOCK
The
Company has 100,000,000 shares at $0.0001 par value common stock
authorized and 26,216,646 and 26,216,646 shares issued and
outstanding at February 28, 2018 and November 30, 2017,
respectively.
During
the three months ended February 28, 2018, the Company sold 261,034
shares of common stock for cash totaling $172,500. 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 February 28, 2018 and, resultantly, are
considered owed as a common stock payable of $172,500.
Note D:
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 $945,119 as of February 28, 2018. For the three months
ended February 28, 2018, royalty expense and the related gain on
foreign currency transactions was $79,703 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 $25,674 and $21,018
for the three months ended February 28, 2018 and 2017,
respectively.