Notes to Financial Statements
(Unaudited)
May 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 six-month period ended
May 31, 2019 are not necessarily indicative of the results that may
be expected for the year ending November 30, 2019.
As of May 31, 2019, the Company has cumulative losses totaling
$9,236,568 and negative working capital of $1,182,587. The Company
incurred a net loss of $577,036 for the six months ended May 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)
May 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 May 31, 2019 and November 30, 2018
because of the relative short term nature of these instruments. At
May 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 $68,914 and $39,456 at May 31, 2019
and November 30, 2018, respectively has been determined using the
first-in first-out (FIFO) method.
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
May 31, 2019, the Company had accounts receivable of approximately
99.85% 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 May 31,
2019 and November 30, 2018.
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
(Unaudited)
May 31, 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 May 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.
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.
For the six months ended
May
31, 2019 and 2018
, the Company
recognized $125,812 and $3,927 in revenue, respectively. During the
six months ended May 31, 2019, one customer accounted for
approximate 98.48% of the revenue.
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
(Unaudited)
May 31, 2019
Note B:
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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 May 31, 2019, the Company’s bank balance did not exceed
the insured amounts.
The
Company had one major customer that generated approximately 98.48%
of the total revenue for the six months ended May 31,
2019.
The
Company has one major customer that comprised of approximately
99.85% of the total accounts receivable as of May 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®).
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
(Unaudited)
May 31, 2019
Note B:
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Liquidity and Going Concern
The
Company has incurred an accumulated deficit of $9,236,568 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.
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 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.
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
(Unaudited)
May 31, 2019
Note C:
COMMON
STOCK
The
Company has 100,000,000 shares at $0.0001 par value common stock
authorized and 27,829,742 and 26,697,109 shares issued and
outstanding at May 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.
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.
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 $1,257,413 as of May 31, 2019. For the six months ended
May 31, 2019 and 2018, royalty expense and the related gain/(loss)
on foreign currency transactions were $21,743 and $5,203,
respectively.
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
(Unaudited)
May 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 three months ended May 31, 2019
|
|
Operating
lease cost
|
$
2,717
|
|
Total
lease cost
|
$
2,717
|
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
(Unaudited)
May 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 May 31, 2019:
|
|
For the three months ended May 31, 2019
|
|
Remaining
lease term – operating leases (years)
|
1.83
|
|
Incremental
borrowing rate
|
5.57
%
|
As of May 31, 2019, the Company had the following future minimum
operating lease payments:
|
Fiscal
Year
|
For the three months ended May 31, 2019
|
|
2019
(remaining)
|
$
61,479
|
|
2020
|
106,728
|
|
2021
|
14,049
|
|
Total
lease payments
|
182,256
|
|
Less:
interest
|
5,725
|
|
Total
lease obligation
|
$
176,531
|
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 July 3, 2019, the Company issued 732,773 shares of common stock
to various investors. Of the total 551,969 shares were issued for
the exercised warrants during the quarter ended May 31, 2019 and
74,200 shares were issued for the exercised warrants during the
month ended June 30, 2019. Additionally, 106,604 shares were issued
for the sale of common stock for cash received in June
2019.
