Notes
to Financial Statements
(Unaudited)
August
31, 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 and nine-month period ended August 31, 2019 are not necessarily indicative of the results that may
be expected for the year ending November 30, 2019.
As
of August 31, 2019, the Company has cumulative losses totaling $9,606,083 and negative working capital of $1,243,642. The Company
incurred a net loss of $1,027,871 for the nine months ended August 31, 2019. 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.
EXEO
ENTERTAINMENT, INC.
Notes
to Financial Statements
(Unaudited)
August
31, 2019
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 August 31, 2019 and November
30, 2018 because of the relative short term nature of these instruments. At August 31, 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, 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 $321,068 and $39,456 at August
31, 2019 and November 30, 2018, respectively has been determined using the first-in first-out (FIFO) method.
EXEO
ENTERTAINMENT, INC.
Notes
to Financial Statements
(Unaudited)
August
31, 2019
Note
B: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounts
Receivable
Accounts
receivable are stated at the amount the Company expects to collect from outstanding balances and do not bear interest. The Company
provides for probable uncollectible amounts through an allowance for doubtful accounts, if an allowance is deemed necessary. The
allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s
existing accounts receivable; however, changes in circumstances relating to accounts receivable may result in a requirement for
additional allowances in the future. On a periodic basis, management evaluates its accounts receivable and determines the requirement
for an allowance for doubtful accounts based on its assessment of the current and collectible status of individual accounts with
past due balances over 90 days. Account balances are charged against the allowance after all collection efforts have been exhausted
and the potential for recovery is considered remote.
As
of August 31, 2018, the Company had accounts receivable of approximately 92% from one customer.
Allowance
for Uncollectible Accounts
The
Company estimates losses on receivables based on known troubled accounts, if any, and historical experience of losses incurred.
There was no allowance for doubtful customer receivables at August 31, 2019 and November 30, 2018.
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, 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.
EXEO
ENTERTAINMENT, INC.
Notes
to Financial Statements
(Unaudited)
August
31, 2019
Note
B: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue
Recognition
The
Company recognizes revenue in accordance with generally accepted accounting principles as outlined in the Financial Accounting
Standard Board’s (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue From Contracts
with Customers, which consists of five steps to evaluating contracts with customers for revenue recognition: (i) identify the
contract with the customer; (ii) identity the performance obligations in the contract; (iii) determine the transaction price;
(iv) allocate the transaction price; and (v) recognize revenue when or as the entity satisfied a performance obligation.
Revenue
recognition occurs at the time we satisfy a performance obligation to our customers, when control transfers to customers, provided
there are no material remaining performance obligations required of the Company or any matters of customer acceptance. We only
record revenue when collectability is reasonably assured.
For
the nine months ended August 31, 2019 and 2018, the Company recognized $137,490 and $4,518 in revenue, respectively. During the
nine months ended May 31, 2019, one customer accounted for approximately 93.85% of the revenue.
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.
Stock-Based
Compensation
The
Company follows ASC 718-10, “Stock Compensation”, which addresses the accounting for transactions in which an entity
exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee
services in share-based payment transactions. ASC 718-10 is a revision to SFAS No. 123, “Accounting for Stock-Based Compensation,”
and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,”
and its related implementation guidance. ASC 718-10 requires measurement of the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). Incremental compensation
costs arising from subsequent modifications of awards after the grant date must be recognized.
Concentrations
of Credit 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, 2019, the Company’s bank balance did not exceed the
insured amounts.
EXEO
ENTERTAINMENT, INC.
Notes
to Financial Statements
(Unaudited)
August
31, 2019
Note
B: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentrations
of Credit Risk (continued)
The
Company had one major customer that generated approximately 93.85% of the total revenue for the nine months ended August 31, 2019.
The
Company has one major customer that comprised of approximately 92% of the total accounts receivable as of August 31, 2019.
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 $9,606,083 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 except as noted below.
EXEO
ENTERTAINMENT, INC.
Notes
to Financial Statements
(Unaudited)
August
31, 2019
Note
B: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent
Accounting Pronouncements (continued)
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This guidance requires an entity to recognize lease
liabilities and a right-of-use asset for all leases on the balance sheet and to disclose key information about the entity’s leasing
arrangements. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods
within that reporting period, with earlier adoption permitted. In July 2018, the FASB approved an amendment to the new guidance
that allows companies the option of using the effective date of the new standard as the initial application (at the beginning
of the period in which it is adopted, rather than at the beginning of the earliest comparative period) and to recognize the effects
of applying the new ASU as a cumulative effect adjustment to the opening balance sheet or retained earnings.
The
Company adopted this accounting standard at the beginning of the second quarter of fiscal 2019 using the new transition election
to not restate comparative periods. The Company elected the package of practical expedients upon adoption, which permits the Company
to not reassess under the new standard the Company’s prior conclusions about lease identification, lease classification and initial
direct costs. In addition, the Company elected not to separate lease and non-lease components for all real estate leases and did
not elect the hindsight practical expedient. Lastly, the Company elected the short-term lease exception policy, permitting it
to exclude the recognition requirements of this standard from leases with initial terms of 12 months or less. Upon
adoption, the Company recognized right of use lease assets of approximately $209,000 and operating lease liabilities
of approximately $204,000 on its consolidated balance sheet. In addition, upon adoption deferred rent and various lease incentives
which were recorded as of March 1, 2019 were reclassified as a component of the right-of-use assets. Upon adoption, the Company
recognized a cumulative adjustment decreasing opening retained earnings by approximately $4,000 due to the impairment of
certain right-of-use assets. The adoption of the new standard did not have a material impact on the consolidated statements of
operations or cash flows.
Note
C: COMMON STOCK
The
Company has 100,000,000 shares at $0.0001 par value common stock authorized and 28,737,373 and 26,697,109 shares issued and outstanding
at August 31, 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 during the three months ended May 31, 2019.
During
the three months ended February 28, 2019, the Company issued 16,860 shares of common stock for the conversion of 2,500 shares
of Series B Preferred Stock.
During
the three months ended May 31, 2019, the Company received $275,985 for the exercise of warrants. The stock was subscribed for;
however, the certificates representing the shares were not issued as of May 31, 2019 and, resultantly, are considered owed as
a common stock payable of $275,985. The shares were issued during July 2019.
EXEO
ENTERTAINMENT, INC.
Notes
to Financial Statements
(Unaudited)
August
31, 2019
Note
C: COMMON STOCK (CONTINUED)
During
the three months ended May 31, 2019, the Company issued 17,489 shares of common stock for the conversion of 2,500 shares of Series
B Preferred Stock.
During
the three months ended August 31, 2019, the Company sold 236,462 shares of common stock for cash totaling $177,700. 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.
During
the three months ended August 31, 2019, the Company received $37,120 for the exercise of warrants and issued 74,200 shares of
common stock.
During
the three months ended August 31, 2019, the Company issued 45,000 shares of common stock for services rendered of $42,750.
The shares were valued according the closing price of the common stock as quoted on the OTC Electronic Bulletin Board Quotation
System on the grant date.
As of August 31, 2019, the Company had a balance in stock payable totaling $12,500.
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
$1,352,897 as of August 31, 2019. For the nine months ended August 31, 2019 and 2018, royalty expense and the related gain/(loss)
on foreign currency transactions were $1,901 and $16,174, respectively.
Sponsorship
Agreement
On July 13, 2018, the Company entered
into a sponsorship agreement for headphones with Black Knight Sports and Entertainment, LLC (dba Vegas Golden Knights)(“BKSE”)
for a period through June 2021. During the 2018/2019 NHL season, the Company was obligated to pay $230,000. For the 2019/2020 NHL
season, the Company is obligated to pay $239,200 and for the 2020/2021 NHL season, the Company is obligated to pay $248,768. If
the Vegas Golden Knights Make the NHL Playoffs there will be additional fees due because of the additional sponsorship opportunities.
As
of August 31, 2019, the Company owes an additional prepayment of $59,800.
EXEO
ENTERTAINMENT, INC.
Notes
to Financial Statements
(Unaudited)
August
31, 2019
Note
E: LEASES
In
the first quarter of fiscal 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic
842),” and related amendments.
The
Company leases certain property consisting principally of its corporate headquarters, its retail stores, the majority of its distribution
and fulfillment centers, and certain equipment under operating leases. Many of the Company’s leases include options to renew
at the Company’s discretion. The renewal options are not included in the measurement of right-of-use (“ROU”)
assets and lease liabilities as the Company is not reasonably certain to exercise available options. Rent escalations occurring
during the term of the leases are included in the calculation of the future minimum lease payments and the rent expense related
to these leases is recognized on a straight-line basis over the lease term.
The
Company determines whether an agreement contains a lease at inception based on the Company’s right to obtain substantially
all of the economic benefits from the use of the identified asset and its right to direct the use of the identified asset. Lease
liabilities represent the present value of future lease payments and the ROU assets represent the Company’s right to use
the underlying assets for the respective lease terms. ROU assets and lease liabilities are recognized at the lease commencement
date based on the present value of the lease payments over the lease term. The ROU asset is further adjusted to account for previously
recorded lease-related expenses such as deferred rent and other lease liabilities. As the Company’s
leases do not provide an implicit rate, the Company uses its incremental borrowing rate as the discount rate to calculate the
present value of lease payments. The incremental borrowing rate represents an estimate of the interest rate that would be required
to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
The
Company elected not to recognize a ROU asset and a lease liability for leases with an initial term of twelve months or less and
not to separate lease and non-lease components. In addition to minimum lease payments, certain leases require payment of a proportionate
share of real estate taxes and certain building operating expenses or payments based on a percentage of sales in excess of a specified
base. These variable lease costs are not included in the measurement of the ROU asset or lease liability due to unpredictability
of the payment amount and are recorded as a lease expense in the period incurred. The Company’s lease agreements do not
contain residual value guarantees or significant restrictions or covenants other than those customary in such arrangements. As
of June 1, 2019, the Company did not have material leases that had been signed but not yet commenced.
The
components of lease cost are as follows:
|
|
|
For the nine months ended
August 31, 2019
|
|
|
Operating lease cost
|
|
$
|
87,605
|
|
|
Total lease cost
|
|
$
|
87,605
|
|
EXEO
ENTERTAINMENT, INC.
Notes
to Financial Statements
(Unaudited)
August
31, 2019
Note
E: LEASES (CONTINUED)
The following table discloses the weighted average remaining
lease term and weighted average discount rate for the Company’s leases as of August 31, 2019:
|
|
|
For the nine months ended
August 31, 2019
|
|
|
Remaining lease term – operating leases (years)
|
|
|
1.58
|
|
|
Incremental borrowing rate
|
|
|
5.57
|
%
|
As
of August 31, 2019, the Company had the following future minimum operating lease payments:
|
Fiscal Year
|
|
|
|
|
2019 (remaining)
|
|
$
|
30,945
|
|
|
2020
|
|
|
106,728
|
|
|
2021
|
|
|
14,049
|
|
|
Total lease payments
|
|
|
151,722
|
|
|
Less: interest
|
|
|
225
|
|
|
Total lease obligation
|
|
$
|
151,947
|
|
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
August 31, 2019, the Company received $10,000 for the exercise of warrants and plan to issue 20,000 shares of common stock. As
of the date of this filing the shares have not been issued.
On
September 9, 2019, the Company sold 15,480 shares of common stock, 15,480 warrant A and 15,480 warrant B to an investor in exchange
for $12,500. As of the date of this filing the shares have not been issued.