Exeo Entertainment, Inc. - Quarter Report: 2018 May (Form 10-Q)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
☒ QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended May 31, 2018
☐ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 333-190690
EXEO ENTERTAINMENT, INC.
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(Exact
name of registrant as specified in its charter)
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Nevada
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45-2224704
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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4478 Wagon Trail Ave., Las Vegas, NV 89118
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(Address
of principal executive offices and Zip Code)
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(702) 361-3188
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(Registrant's
telephone number, including area code)
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Indicate
by check mark whether the issuer (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
☒
No ☐
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post
such files). Yes ☒ No
☐
Indicate
by check mark whether the Registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of "large accelerated
filer," "accelerated filer" and "smaller reporting company" in Rule
12b-2 of the Exchange Act.:
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Large
accelerated filer
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☐
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Accelerated
filer
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☐
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Non-accelerated
filer
(Do not
check if a smaller reporting company)
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☐
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Smaller
reporting company
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☒
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Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). ☐
Yes ☒ No ☒
As of
the date of filing of this report, there were outstanding
26,216,646
shares of the issuer’s common stock, par value $0.0001 per
share. There were also outstanding 19,500 Series A,
and 246,690, Series B Preferred Shares of the issuers
preferred stock, par value $0.0001 per share.
1
EXEO ENTERTAINMENT, INC.
Form 10-Q
Table of Contents
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Page
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PART I - FINANCIAL INFORMATION
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3
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Item
1.
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Financial
Statements
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3
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Balance Sheets
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4
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Statements of
Operations
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5
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Statements of Cash
Flows
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6
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Notes to Financial
Statements
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7
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Item
2.
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Management's Discussion and
Analysis of Financial Condition and Results of
Operations
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12
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Item
3.
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Quantitative and Qualitative
Disclosures About Market Risk
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16
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Item
4.
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Controls and
Procedures
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16
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PART II - OTHER INFORMATION
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17
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Item
1.
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Legal
Proceedings
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17
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Item1A.
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Risk Factors
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17
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Item
2.
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Unregistered Sales of Equity
Securities
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17
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Item
3.
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Defaults Upon Senior
Securities
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17
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Item
4.
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Mine Safety
Disclosures
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17
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Item
5.
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Other
Information
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17
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Item
6.
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Exhibits
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18
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SIGNATURES
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19
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2
PART I – FINANCIAL INFORMATION
The
accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and Item Regulation
S-X, Rule 10-01(c) Interim Financial Statements, and, therefore, do
not include all information and footnotes necessary for a complete
presentation of financial position, results of operations, cash
flows, and stockholders' equity in conformity with generally
accepted accounting principles. In the opinion of management, all
adjustments considered necessary for a fair presentation of the
results of operations and financial position have been included and
all such adjustments are of a normal recurring nature. Operating
results for the three and six months ended May 31, 2018 are not
necessarily indicative of the results that can be expected for the
year ending November 30, 2018.
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EXEO ENTERTAINMENT, INC.
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BALANCE SHEETS
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(unaudited)
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May 31,
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November 30,
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2018
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2017
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ASSETS
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Current Assets
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Cash
and cash equivalents
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$81,731
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$139,525
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Inventory
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59,860
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64,137
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Prepaid
expenses
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57,591
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125,923
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Accounts
Receivable
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186
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-
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Total current assets
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199,368
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329,585
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Property and equipment, net
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29,786
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37,294
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TOTAL ASSETS
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$229,154
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$366,879
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LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
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Liabilities
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Current liabilities
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Accounts
payable and accrued expenses
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$34,745
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$40,610
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Accrued
interest payable - related party
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21,106
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18,787
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Payroll
liabilities
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150,490
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138,604
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Due
to related parties
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75,000
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75,000
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Royalty
payable
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1,010,254
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858,142
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Notes
payable
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9,314
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9,314
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Total current liabilities
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1,300,909
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1,140,457
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Long-term liabilities
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Notes
payable
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15,701
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20,484
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Total long-term liabilities
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15,701
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20,484
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Total Liabilities
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1,316,610
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1,160,941
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Series A redeemable convertible preferred stock; $0.0001 par
value,
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1,000,000
shares authorized; 19,500 shares issued and outstanding; 19,500
shares unissued as of May 31, 2018 and November 30, 2017
(liquidation preference of $87,800). Stated at redemption
value.
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156,049
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148,736
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Series B redeemable convertible preferred stock; $0.0001 par
value,
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1,000,000
shares authorized; 244,190 and 244,190 shares issued and
outstanding; 2,500 shares unissued as of May 31, 2018 and November
30, 2017 (liquidation preference of $725,846). Stated at redemption
value, net of Treasury Stock (2,500 shares)
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1,650,938
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1,576,930
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Stockholders' equity (deficit)
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Convertible
Preferred Stock Series A - 15%, $0.0001 par value, 1,000,000
shares
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authorized,
19,500 and 19,500 shares issued, respectively
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Convertible
Preferred Stock Series B - 12%, $0.0001 par value, 1,000,000
shares
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authorized,
246,690 and 246,690 shares issued, respectively
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Common stock - $0.0001 par value, 100,000,000 shares
authorized;
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26,216,646
and 26,216,646 shares issued and outstanding,
respectively
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2,622
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2,622
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Additional
paid-in capital
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4,795,523
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4,795,523
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Treasury
stock, Series B Preferred Stock - 2,500 shares
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(12,500)
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(12,500)
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Stock
payable
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285,000
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68,750
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Deficit
accumulated
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(7,965,088)
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(7,374,123)
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Total stockholders' equity (deficit)
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(2,894,443)
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(2,519,728)
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TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
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$229,154
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$366,879
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The accompanying notes are an integral part of these financial
statements.
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4
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EXEO ENTERTAINMENT, INC.
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STATEMENTS OF OPERATIONS
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(unaudited)
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For
three months ended
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For six
months ended
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May
31,
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May
31,
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2018
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2017
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2018
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2017
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REVENUES
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$1,162
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$3,908
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$3,927
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$7,517
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COST OF GOOD SOLD
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Cost
of direct materials, shipping and labor
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(20)
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(2,905)
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(1,699)
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(5,336)
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GROSS PROFIT
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1,142
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1,003
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2,228
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2,181
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OPERATING EXPENSES
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General
and administrative
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161,883
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212,200
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325,685
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372,644
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Executive
compensation
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37,087
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90,608
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77,693
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187,465
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Professional
fees
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43,385
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11,446
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103,455
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29,460
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Depreciation
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3,560
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8,133
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7,508
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16,265
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TOTAL OPERATING EXPENSES
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245,915
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322,387
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514,341
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605,834
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INCOME (LOSS) FROM OPERATIONS
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(244,773)
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(321,384)
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(512,113)
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(603,653)
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OTHER INCOME (EXPENSE)
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Gain
(loss) from foreign currency transactions
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12,476
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(16,276)
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5,203
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(28,500)
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Loss
of service agreement
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-
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-
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Interest
expense - related party
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(1,171)
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(1,171)
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(2,318)
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(2,318)
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Interest
expense
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(196)
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(263)
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(414)
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(2,050)
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TOTAL OTHER INCOME (EXPENSES)
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11,109
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(17,710)
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2,471
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(32,868)
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NET INCOME (LOSS)
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(233,664)
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(339,094)
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(509,642)
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(636,521)
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DIVIDEND OF REDEEMABLE PREFERRED STOCK
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(40,660)
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(40,660)
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(81,320)
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(81,320)
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NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
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$(274,324)
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$(379,754)
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$(590,962)
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$(717,841)
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NET LOSS PER SHARE: BASIC
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$(0.01)
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$(0.02)
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$(0.02)
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$(0.03)
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WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: BASIC
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26,289,685
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25,053,539
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26,289,685
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24,933,276
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The accompanying notes are an integral part of these financial
statements.
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5
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EXEO ENTERTAINMENT, INC.
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STATEMENTS OF CASH FLOWS
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(unaudited)
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For the
six months ended
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May
31,
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2018
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2017
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CASH FLOWS FROM OPERATING ACTIVITIES
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Net
loss for the period
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$(509,642)
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$(636,521)
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Adjustments to reconcile net loss to net cash used in operating
activities
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Depreciation
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7,508
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16,265
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Stock-based
compensation to officers
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-
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100,001
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Changes in assets and liabilities
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Decrease
in prepaid expenses
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68,332
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26,530
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(Increase)
in accounts receivable
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(186)
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-
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Decrease
(Increase) in inventory
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4,277
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(31,679)
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(Decrease)
in accounts payable and accrued expenses
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(5,865)
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(15,027)
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Increase
in accrued interest - related party
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2,319
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2,318
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Increase
in payroll liabilities
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11,886
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12,426
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Increase
in royalty payable
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152,110
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179,010
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Net Cash Used in Operating Activities
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(269,261)
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(346,677)
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CASH FLOWS FROM INVESTING ACTIVITIES
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Cash Flows Used in Investing Activities
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-
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-
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CASH FLOWS FROM FINANCING ACTIVITIES
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Proceeds
from issuance of common stock, net of issuance costs
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216,250
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421,562
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Repurchase
of Series B preferred stock for treasury
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-
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(15,000)
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Payments
on notes payable - auto loan (principal)
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(4,783)
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(4,646)
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Cash Flows Provided by Financing Activities
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211,467
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401,916
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Net increase in cash and cash equivalents
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(57,794)
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55,239
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Cash and cash equivalents, beginning of the period
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139,525
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131,001
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Cash and cash equivalents, end of the period
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$81,731
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$186,240
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SUPPLEMENTAL CASH FLOW INFORMATION:
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Dividend
of redeemable preferred stock
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$81,320
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$81,320
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The accompanying notes are an integral part of these financial
statements.
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6
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
(Unaudited)
May 31, 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 six month period ended May 31, 2018 are
not necessarily indicative of the results that may be expected for
the year ending November 30, 2018.
As of May 31, 2018, the Company has cumulative losses totaling
$(7,965,088) and negative working capital of $1,101,541. The
Company incurred a net loss of $509,642 for the six months ended
May 31, 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.
7
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
(Unaudited)
May 31, 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 May 31, 2018 and November 30, 2017
because of the relative short term nature of these instruments. At
May 31, 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 $59,860 and $64,137 at May 31, 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 May 31, 2018 and
November 30, 2017, respectively.
8
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
(Unaudited)
May 31, 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:
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Description
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Estimated Life
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Furniture
& Equipment
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5
years
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Vehicles
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5
years
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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, 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 six months ended May 31, 2018 and 2017, the Company recognized $3,927 and $7,517 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.
9
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
(Unaudited)
May 31, 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 May 31, 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 ($7,965,088) 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.
10
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
(Unaudited)
May 31, 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 May 31, 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 May 31, 2018 and November 30, 2017,
respectively.
During
the six months ended May 31, 2018, the Company sold 319,189 shares
of common stock for cash totaling $216,250. 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 May 31, 2018 and, resultantly, are considered
owed as a common stock payable of $285,000.
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 $1,010,254 as of May 31, 2018. For the six months ended
May 31, 2018 and 2017, royalty expense and the related gain/(loss)
on foreign currency transactions was $5,203 and ($28,500),
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 $59,906 and $42,036
for the six months ended May 31, 2018 and 2017,
respectively.
Note E: 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.
11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
OVERVIEW
Exeo
Entertainment, Inc. designs, develops, licenses, manufacturers, and
markets consumer electronics in the video gaming, music and smart
TV sector. Our current business objectives are:
·
Complete product
development and establish channels of distribution,
and
·
Expand SKUs within
the headphone market for both music and gaming
Activities to
date
We
incorporated in the state of Nevada on May 12, 2011. For the six
months ended May 31, 2018, we generated $3,927 in revenues and
continue to operate at a loss. Our activities have centered on the
design and engineering of peripherals in the video gaming, music,
and smart TV sector.
Products and Services
Products
under development include the Psyko™ 5.1 surround sound
gaming headphones for consoles, Krankz™ MAXX Bluetooth™
wireless headphones, Zaaz™ Smart TV keyboards, the Extreme
Gamer® a multi-disc video game changer, and an android based
portable gaming system. We are finalizing development on the
Zaaz™ keyboard and will soon begin tooling for manufacturing.
The Extreme Gamer™ and portable gaming system are still in
development.
Strategy and Marketing Plan
Once
manufacturing is established we intend on utilizing existing
consumer electronics distributers, such as Synnex Corp. (SNX) and
Ingram Micro to distribute our products to big box retailers such
as Best Buy, GameStop, and Fry’s Electronics. We
do not have distribution agreements with these companies at this
time.
Competition
Psyko ™ Headphones
While
our Psyko™ headphone offering differs from the competition in
the method of 5.1-surround sound delivery, we will face competition
from manufacturers with established channels of distribution,
mature capital structures, and significantly larger marketing
budgets. Well established gaming headphone manufacturers include
Turtle Beach; a private company, Tritton – a subsidiary of
Mad Catz Interactive (MCZ), and Astro Gaming which is a subsidiary
of Skullcandy (SKUL).
While
other headphone manufacturers replicate 5.1 surround sound through
Digital Signal Processing (DSP), the Psyko™ headphones use a
patented method of sound delivery that doesn’t require the
use of DSP. Management believes that the difference in audio
quality is a major differentiating factor between our product
offering and what is currently available on the
market.
Krankz™ Headphones
The
driver design provides a deep bass sound with clear midrange audio
for a full-range for use up to 30’ distance. These
headsets work with most mobile devices and have a retractable,
foldable design with built-in microphone and noise cancelling
feature. We expect to face competition from lifestyle headphone
companies such as Beats by Dr. Dre and Skull candy. These entities
are well established and have a loyal customer following. We expect
to carve out a niche within the market by initially marketing to
the X games demographic through endorsements and sponsorships in
Extreme sports such as motocross, supercross, snowboarding,
surfing, skating, and similar such sports..
Zaaz™ Keyboard
The
majority of the competition in the Bluetooth wireless keyboard
arena is concentrated amongst a few well-known companies such as
Logitech® (LOGI), Microsoft® (MSFT), Apple® (AAPL),
and Samsung® (SSNLF). While management believes that only
Samsung makes keyboards specifically designed to interact with
smart TVs, and that their keyboards only work with certain
Samsung® TVs, there can be no assurance that other companies
do not currently manufacture, or plan to manufacture, such units in
the future. Any such companies that manufacture keyboards capable
of connecting to a smart TV would further increase
competition.
12
The
Company intends on differentiating the Zaaz™ keyboard through
a set of features designed specifically for smart TV users. The
Zaaz™ keyboard features a customized set of “one touch
access keys” that allows users to access specific, user
defined features of the consumers smart TV. Examples include one
touch access to the following: Netflix®, Facebook®,
Hulu®, and Amazon®. Additionally, the Zaaz™
keyboard will differentiate itself by including a full size track
pad – built into the keyboard – to navigate, point,
click, and select.
Extreme Gamer®
The
Extreme Gamer® is a patent pending (patent application
12/543,296) multi-disc video game changer that connects to current
generation video game consoles offered by Nintendo®,
Microsoft®, and Sony®.
Management
believes from regularly reading Video Gaming news from sources such
as IGN.com, EGNnow.com, 1up.com, and gamespot.com that no other
company is currently manufacturing a multi-disc video game changer.
If such a unit is being made management is unaware of its
existence.
Management
however acknowledges that while it cannot find any commercially
available products that our patents may never be awarded and that
we could face competition from any number of existing video game
accessory manufacturers.
Sources and Availability of Suppliers and Supplies
Currently
we have access to an adequate supply of products, from various
manufacturers. These companies and their products are
new, not well established, and are a subject to significant risk
and uncertainty.
Dependence on One or a few Major Customers
We do
not anticipate dependence on one or a few major customers into the
foreseeable future.
Patents, Trademarks, Licenses, Franchise Restrictions and
Contractual Obligations and Concessions
We
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). With regard to
intellectual property rights associated with Psyko ™
Headphones, we have a license to use this mark as well as the
patented technology.
In
regard to intellectual property rights associated with
Krankz™ Bluetooth® wireless headphones, we do not have a
federally registered trademark in the word
Krankz. Therefore, we do not have the same presumptive
rights which might otherwise apply had we obtained a federally
registered trademark. We believe we have intellectual
property rights to this mark under common law. If we are
unable to register this mark, we may use an alternative name for
these headphones. On April 2, 2015, Krank™
Amplifiers (associated with guitar amplifiers) filed an application
for a design plus words mark on the Principal Register with the
U.S. PTO. Guitar amplifiers consist of electronic
communication and amplification devices and would generally fall in
the same or similar category as our Krankz™ Bluetooth®
Audio Headset. As of this date of this report, no office action has
been issued by the U.S. PTO, and Krank™ Amplifiers reported
in April that they have not yet made any use of this mark in
interstate commerce. We have been using this mark in
interstate commerce for quite some time prior to April,
2015. 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). We shall continue to
monitor the status of that mark to determine what impact it might
have, if any, as to our Krankz mark.
Subsidiaries
We do
not have any subsidiaries.
13
MANAGEMENT’S DISCUSSION AND ANALYSIS
COMPARISON OF THREE MONTH RESULTS FOR THE QUARTERS ENDED MAY 31,
2018 AND 2017, RESPECTIVELY
Revenues and Gross Profit
For the
three months ended May 31, 2018 and 2017, the Company recognized
$1,162 and $3,908 in revenue, respectively. Cost of
sales for the quarter ended May 31, 2018 was $20, leading to a
gross profit of $1,142 during the period. In the comparable quarter
ended May 31, 2017, cost of sales was $2,905, resulting in a gross
profit of $1,003.
Costs and Expenses
Total
cost and expenses were $245,915 and $322,387 for the three months
ended May 31, 2018 and 2017, respectively. The decrease was
primarily due to staff turnover and decreases in legal and
consulting fees paid.
Other Income and Expenses
During
the course of our business, we experienced a gain from foreign
currency transactions of $12,476 in the three month period ended
May 31, 2018, compared to a loss of $16,276 in the comparable
period ended May, 2017. These gains/losses are associated with
currency exchange rate fluctuations as our royalty obligation under
the license agreement is stated in Canadian dollars.
Interest
expense associated with obligations to related parties was $1,171
and $1,171 in the three month periods ended May 31, 2018 and 2017,
respectively.
Interest
expense associated with non-related party obligations was $196 and
$263 in the three month periods ended May 31, 2018 and 2017,
respectively.
COMPARISON OF SIX MONTH RESULTS FOR THE PERIODS ENDED MAY 31, 2018
AND 2017, RESPECTIVELY
Revenues and Gross Profit
For the
six months ended May 31, 2018 and 2017, the Company recognized
$3,927 and $7,517 in revenue, respectively. Cost of
sales for the six months ended May 31, 2018 was $1,699, leading to
a gross profit of $2,228 during the period. In the comparable six
months ended May 31, 2017, cost of sales was $5,336, resulting in a
gross profit of $2,181.
Costs and Expenses
Total
cost and expenses were $514,113 and $605,834 for the six months
ended May 31, 2018 and 2017, respectively. The decrease was
primarily due to staff turnover and decreases in legal and
consulting fees paid.
Other Income and Expenses
During
the course of our business, we experienced a gain from foreign
currency transactions of $5,203 in the six month period ended May
31, 2018, compared to a loss of $28,500 in the comparable period
ended May, 2017. These gains/losses are associated with currency
exchange rate fluctuations as our royalty obligation under the
license agreement is stated in Canadian dollars.
Interest
expense associated with obligations to related parties was $2,318
and $2,318 in the six month periods ended May 31, 2018 and 2017,
respectively.
Interest
expense associated with non-related party obligations was $414 and
$2,050 in the six month periods ended May 31, 2018 and 2017,
respectively.
14
Liquidity and Capital Resources
Other
than what is described in this Report, the Company had no material
commitments for capital expenditures at May 31, 2018 and
2017.
On May
25, 2011, Exeo Entertainment, Inc. entered into an exclusive
license agreement with Digital Extreme Technologies, Inc. whereby
Exeo Entertainment, Inc. will manufacture and market the Extreme
Gamer and Zaaz keyboard. Exeo Entertainment, Inc. will pay Digital
Extreme Technologies, Inc. a 5% royalty fee on gross sales of both
products.
Unless
the Royalty Agreement is modified by Psyko Audio Labs Canada and
the Company, at January 1, 2016, the Company is obligated to pay
minimum monthly royalties of $80,000 (CDN $100,000) per quarter for
the remaining term of the contract. No such modification has
been made as of the date of this report. The company carries the
risk of currency exchange rate fluctuations as our royalty
obligation under the license agreement is stated in Canadian
dollars. For the six months ended May 31, 2018 and 2017, the
Company made no payments towards this obligation and no royalty
invoices have been received from Psyko Audio Labs. Royalty payable
was $1,010,254 for the six months ended May 31, 2018. For the six
months ended May 31, 2018, royalty expense and related gain on
foreign currency transactions was $157,313 and $5,203,
respectively. For the six months ended
May 31, 2017, royalty expense and related losses on foreign
currency transactions was $150,510 and $28,500,
respectively.
The
Company has an office and warehouse rental lease obligation through
September 30, 2020, which equals $239,624 as of May 31, 2018. The
monthly minimum rental payment is $8,558. Rent expense was $59,906
and $42,036 for the six months ended May 31, 2018 and 2017,
respectively.
Cash Flow Information
On May
31, 2018, the Company had working capital of approximately
$(1,101,541). On November 30, 2017, the Company had working capital
of approximately $(810,872). The decrease in working capital of
$290,669 primarily relates to an increase in royalty payable in the
amount of $152,112 during the six months ending May 31, 2018. The
Company believes it has insufficient cash resources to meet its
liquidity requirements for the next 12 months.
The
Company had cash and cash equivalents of approximately $81,731 and
$139,525 at May 31, 2018 and November 30, 2017, respectively. This
represents a decrease in cash of $57,794.
Cash used in Operating Activities
The
Company used approximately $269,261 of cash for operating
activities in the six months ended May 31, 2018 as compared to
using $346,677 of cash for operating activities in the six months
ended May 31, 2017. This decrease in cash used in operating
activities, is primarily attributed to a decrease in the net
loss.
Cash Provided by Financing Activities
Financing
activities in the six months ended May 31, 2018 provided $211,467
of cash as compared to providing $401,916 of cash in the six months
ended May 31, 2017. The difference is attributable to a decrease in
cash receipts from sales of the Company’s common
stock.
The
Company’s principal sources and uses of funds are investments
from accredited investors. The Company would need to raise
additional capital in order to meet its business plan. Management
intends to secure additional funds using borrowing or the further
sale of Regulation D, Section 506 securities to accredited
investors in the future.
The
Company anticipates that its future liquidity requirements will
arise from the need to fund its growth, pay its current obligations
and future capital expenditures. The primary sources of funding for
such requirements are expected to be cash generated from operations
and raising additional funds from private sources and/or debt
financing.
Going Concern Consideration
There
is 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.
15
Off-Balance Sheet Arrangements
The
Company has no off-balance sheet arrangements.
Forward-Looking Statements
Many
statements made in this report are forward-looking statements that
are not based on historical facts. Because these forward-looking
statements involve risks and uncertainties, there are important
factors that could cause actual results to differ materially from
those expressed or implied by these forward-looking statements. The
forward-looking statements made in this report relate only to
events as of the date on which the statements are
made.
Item 3. Quantitative and Qualitative Disclosure About Market
Risks
As a
“smaller reporting company”, we are not required to
provide the information required by this Item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our
management has evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended) as of the end of the
period covered by this Report. Based on the management evaluation,
we concluded that our disclosure controls and procedures may not be
effective to provide reasonable assurance that information we are
required to disclose in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized, and reported
within the time periods specified in the SEC’s rules and
forms, and that such information is accumulated and communicated to
our management, including our principal executive officer and
principal financial officer, or persons performing similar
functions, as appropriate to allow timely decisions regarding
required disclosure. In the 2nd Quarter, 2018,
management is in the process of determining how to most effectively
improve our disclosure controls and procedures.
Management’s Report on Internal Control over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate
internal control, as is defined in the Securities Exchange Act of
1934. These internal controls are designed to provide reasonable
assurance that the reported financial information is presented
fairly, that disclosures are adequate and that the judgments
inherent in the preparation of financial statements are reasonable.
There are inherent limitations in the effectiveness of any system
of internal controls, including the possibility of human error and
overriding of controls. Consequently, an effective internal control
system can only provide reasonable, not absolute, assurance with
respect to reporting financial information.
Our
internal control over financial reporting includes policies and
procedures that: (i) pertain to maintaining records that in
reasonable detail accurately and fairly reflect our transactions;
(ii) provide reasonable assurance that transactions are recorded as
necessary for preparation of our financial statements in accordance
with generally accepted accounting principles and the receipts and
expenditures of company assets are made and in accordance with our
management and directors authorization; and (iii) provide
reasonable assurance regarding the prevention or timely detection
of unauthorized acquisition, use or disposition of assets that
could have a material effect on our financial
statements.
Management
has undertaken an assessment of the effectiveness of our internal
control over financial reporting based on the framework and
criteria established in the Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (“COSO”). Based upon this
evaluation, management concluded that our internal control over
financial reporting may not be effective as of May 31, 2018. Other
than our two officers, we have no employees or contractors that
have the authority to implement any changes in our internal control
or financial reporting.
This
quarterly report does not include an attestation report of our
registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to
attestation by our registered public accounting firm pursuant to
the temporary rules of the Securities and Exchange Commission that
permit us to provide only management’s report in this
quarterly report.
Changes in Internal Control Over Financial Reporting
There
were changes in our internal control over financial reporting that
occurred during our most recent fiscal quarter that may have
materially affected, or may be reasonably likely to materially
affect, our internal control over financial reporting.
16
Limitations on Effectiveness of Controls and
Procedures
In
designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives. In addition,
the design of disclosure controls and procedures must reflect the
fact that there are resource constraints and that management is
required to apply its judgment in evaluating the benefits of
possible controls and procedures relative to their
costs.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
The
Company has no knowledge of existing or pending legal proceedings
against the Company, nor is the Company involved as a plaintiff in
any proceeding or pending litigation. There are no proceedings in
which any of the Company’s directors, officers or any of
their respective affiliates, or any beneficial stockholder, is an
adverse party or has a material interest adverse to our interest.
The Company’s address for service of process in Nevada is
Business Filings, Incorporated located at 311 S. Division Street,
Carson City, Nevada 89703.
Item 1A. Risk Factors
As a
“smaller reporting company”, we are not required to
provide the information required by this Item.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
During
the three months ended May 31, 2018, the Company sold 58,155 shares
of common stock for cash totaling $43,750. 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 May 31, 2018 and, resultantly, are considered
owed as a common stock payable of $285,000.
Item 3. Defaults Upon Senior Securities
None.
All payments were made on schedule.
Item 4. Mine Safety Disclosures
Not
applicable.
Item 5. Other Information
Market for the Company’s Common Stock
The
Company’s common stock is traded on the over-the-counter
market and quoted on the Over-The-Counter Bulletin Board (OTCBB)
under the trading symbol “EXEO”. Our common
stock is also quoted on OTCQB, a segment of OTC Link LLC and OTC
Markets Group. As of the date of this report, there is a limited
public market for our common stock. For purpose of this Item, the
existence of limited or sporadic quotations should not of itself be
deemed to constitute an “established public trading
market,” if any, for our common stock. We can provide no
assurance that our shares will be actively traded on the OTC or,
that the public market will achieve or continue with any particular
daily volume or price for our listed securities.
17
Item 6. Exhibits
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101.INS
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XBRL Instance
Document
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101.SCH
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XBRL Taxonomy Extension
Schema Document
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101.CAL
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XBRL Taxonomy Extension
Calculation Linkbase Document
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101.DEF
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XBRL Taxonomy Extension
Definition Linkbase Document
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101.LAB
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XBRL Taxonomy Extension Label
Linkbase Document
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101.PRE
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XBRL Taxonomy Extension
Presenation Linkbase Document
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18
SIGNATURES
Pursuant
to the requirements of the Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
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EXEO ENTERTAINMENT, INC.
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||
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(Registrant)
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Signature
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Title
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Date
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/s/ Jeffrey A. Weiland
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President
and Director
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July
16, 2018
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Jeffrey
A. Weiland
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/s/ Robert S. Amaral
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Chief
Executive Officer,
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July
16, 2018
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Robert
S. Amaral
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Treasurer
and Director
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(Principal
Executive and Financial Officer)
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19