UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended February 28, 2015
or
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
Commission File Number: 333-190690
EXEO ENTERTAINMENT, INC.
(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 incorporation or organization)
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(I.R.S. Employer Identification Number)
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4478 Wagon Trail Ave., Las Vegas, NV 89118
(Address of principal executive offices and Zip Code)
(702) 361-3188
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) during the preceding 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 x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x 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 definition of “large accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large Accelerated Filer
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o
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Accelerated Filer
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o
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Non-accelerated Filer
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o (Do not check if a smaller reporting company)
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Smaller reporting company
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x
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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 x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of the date of filing of this report, there were outstanding 24,462,788 shares of the issuer’s common stock, par value $0.0001 per share. There were also outstanding 19,500 Series A, and 42,200 Series B Preferred Shares of the issuers preferred stock, par value $0.0001 per share.
1
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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Item 2
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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4
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Item 3
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Quantitative and Qualitative Disclosures About Market Risk
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8
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Item 4
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Controls and Procedures
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8
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PART II – OTHER INFORMATION
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9
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Item 1
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Legal Proceedings
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9
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Item 1A
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Risk Factors
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9
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Item 2
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Unregistered Sale of Equity Securities and Use of Proceeds
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9
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Item 3
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Defaults Upon Senior Securities
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10
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Item 4
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Mine Safety Disclosures
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10
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Item 5(a)
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Other Information
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10
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Item 6
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Exhibits
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11
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2
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
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 months ended February 28, 2015 are not necessarily indicative of the results that can be expected for the year ending November 30, 2015.
EXEO ENTERTAINMENT, INC.
TABLE OF CONTENTS
FEBRUARY 28, 2015
(UNAUDITED)
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Balance Sheets as of February 28, 2015 and November 30, 2014
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F - 1
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Statements of Operations for the three months ended February 28, 2015 and 2014
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F - 2
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Statements of Cash Flows for the three months ended February 28, 2015 and 2014
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F - 3
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Notes to Financial Statements
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F - 4 – F – 13
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3
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EXEO ENTERTAINMENT, INC.
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BALANCE SHEETS
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(unaudited)
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February 28,
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November 30,
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2015
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2014
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ASSETS
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Current Assets
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Cash and cash equivalents
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$ | 154,217 | $ | 326,684 | ||||
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Inventory
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144,744 | 14,914 | ||||||
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Prepaid expenses
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7,868 | 2,919 | ||||||
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Accounts Receivable
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110 | 110 | ||||||
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Total current assets
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306,939 | 344,627 | ||||||
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Property and equipment, net
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74,458 | 81,130 | ||||||
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TOTAL ASSETS
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$ | 381,397 | $ | 425,757 | ||||
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Liabilities
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Current liabilities
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Accounts payable and accrued expenses
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$ | 25,338 | 69,287 | |||||
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Accrued interest payable to non-affiliates
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18,233 | 11,792 | ||||||
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Federal and states taxes payable
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35,530 | 18,025 | ||||||
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Due to related parties
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85,000 | 85,000 | ||||||
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Notes payable
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9,698 | 9,698 | ||||||
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Total current liabilities
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173,799 | 193,802 | ||||||
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Long-term liabilities
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Notes payable
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7,641 | 9,307 | ||||||
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Total long-term liabilities
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7,641 | 9,307 | ||||||
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Total Liabilities
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181,440 | 203,109 | ||||||
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Stockholders' Equity
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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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2 | 2 | ||||||
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Convertible Preferred Stock Series B - 15%, $0.0001 par value, 1,000,000 shares
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authorized, 32,500 and 10,000 shares issued, respectively
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3 | 1 | ||||||
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Common stock - $0.0001 par value, 100,000,000 shares authorized; 24,140,600
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and 23,433,100 shares issued and outstanding, respectively
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2,414 | 2,414 | ||||||
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Additional paid-in capital
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3,116,808 | 2,971,871 | ||||||
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Accumulated deficit
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(2,919,270 | ) | (2,751,640 | ) | ||||
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Total stockholders' equity
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199,957 | 222,649 | ||||||
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
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$ | 381,397 | $ | 425,757 | ||||
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The accompanying notes are an integral part of these financial statements.
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F-1
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EXEO ENTERTAINMENT, INC.
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STATEMENTS OF OPERATIONS
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(unaudited)
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Three month period ending February 28, 2015
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Three month period ending February 28, 2014
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REVENUES
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$ | 5,792 | $ | - | ||||
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COST OF GOOD SOLD
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Cost of direct materials, shipping and labor
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$ | (2,850 | ) | - | ||||
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GROSS PROFIT
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$ | 2,942 | $ | - | ||||
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OPERATING EXPENSES
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Advertising
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466 | 280 | ||||||
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Automobile and truck
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998 | 1,386 | ||||||
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Bank service charges
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153 | 290 | ||||||
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Compensation - non-directors
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37,863 | 5,952 | ||||||
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Compensation - officers / directors
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30,000 | 30,000 | ||||||
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Stock-based compensation to officers and employee
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50,001 | 50,001 | ||||||
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Computer and internet
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392 | 202 | ||||||
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Consulting fees
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- | 30,000 | ||||||
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Depreciation
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6,672 | 6,810 | ||||||
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Filing fees
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1,546 | 1,388 | ||||||
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Insurance Premiums
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1,231 | |||||||
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Investor Relations and News
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- | 410,000 | ||||||
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Legal and professional
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14,584 | 30,085 | ||||||
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Meals and entertainment
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84 | - | ||||||
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Office rent
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21,018 | 21,018 | ||||||
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Office expense
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1,464 | 1,707 | ||||||
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Promotions / trade show exhibit
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- | - | ||||||
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Promotions / other
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616 | 1,556 | ||||||
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Research and product development
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238 | 19,268 | ||||||
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Royalties
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2,919 | 24,063 | ||||||
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Taxes - Federal and State
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17,284 | - | ||||||
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Travel
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77 | 705 | ||||||
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Utilities
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6,769 | 4,252 | ||||||
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TOTAL OPERATING EXPENSES
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194,375 | 638,963 | ||||||
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LOSS FROM OPERATIONS
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(191,433 | ) | (638,963 | ) | ||||
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OTHER INCOME
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Forgiveness of debt
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33,149 | - | ||||||
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TOTAL OTHER INCOME
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33,149 | - | ||||||
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OTHER EXPENSE
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Interest expense
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(6,721 | ) | (137 | ) | ||||
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TOTAL OTHER EXPENSE
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(6,721 | ) | (137 | ) | ||||
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NET LOSS
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$ | (165,005 | ) | $ | (639,100 | ) | ||
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NET LOSS PER SHARE: BASIC
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$ | (0.01 | ) | $ | (0.03 | ) | ||
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WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: BASIC
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23,433,100 | 23,433,100 | ||||||
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The accompanying notes are an integral part of these financial statements.
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F-2
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EXEO ENTERTAINMENT, INC.
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STATEMENTS OF CASH FLOWS
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(unaudited)
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Three month period ending February 28, 2015
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Three month period ending February 28, 2014
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CASH FLOWS FROM OPERATING ACTIVITIES
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Net loss for the period
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$ | (165,005 | ) | $ | (639,100 | ) | ||
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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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6,672 | 6,810 | ||||||
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Stock-based compensation to officers
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50,001 | 450,001 | ||||||
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Imputed interest as to unrelated parties
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6,441 | - | ||||||
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Changes in assets and liabilities
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Decrease (Increase) in pre-paid expenses
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(4,950 | ) | (6,219 | ) | ||||
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Decrease (Increase) in inventory
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(129,829 | ) | - | |||||
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(Decrease) Increase in accounts payable and accrued expenses
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(46,574 | ) | 386 | |||||
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Increase in federal and state taxes payable
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17,505 | |||||||
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Net Cash Used in Operating Activities
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(265,739 | ) | (188,122 | ) | ||||
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CASH FLOWS FROM INVESTING ACTIVITIES
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Acquisition of property and equipment
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0 | (1,430 | ) | |||||
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Cash Flows Used in Investing Activities
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0 | (1,430 | ) | |||||
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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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- | 65,685 | ||||||
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Proceeds from issuance of preferred stock, net of issuance costs
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94,938 | |||||||
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Proceeds from related party debt
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- | 85,000 | ||||||
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Payments on notes payable - auto loan (principal)
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(1,665 | ) | (2,452 | ) | ||||
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Cash Flows Provided by Financing Activities
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93,273 | 148,233 | ||||||
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Net increase in cash and cash equivalents
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(172,466 | ) | (41,319 | ) | ||||
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Cash and cash equivalents, beginning of the period
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326,684 | 358,299 | ||||||
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Cash and cash equivalents, end of the period
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$ | 154,217 | $ | 316,980 | ||||
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The accompanying notes are an integral part of these financial statements.
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F-3
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
February 28, 2015
Note A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Exeo Entertainment, Inc. (the “Company”) is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, who is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied to the preparation of the financial statements. The Company will adopt accounting policies and procedures based upon the nature of future transactions.
Nature of Business
The Company was incorporated in Nevada on May 12, 2011. The Company is based in Las Vegas, Nevada, and designs, develops, licenses, manufactures, and distributes its products. The Company plans to market the Zaaz™ Keyboard, to be used with Samsung’s Smart TV® as well as other smart devices, the Extreme Gamer™, and other new peripheral products for the video gaming industry, including the Psyko Krypton™ surround sound gaming headphones.
Basis of Presentation
The financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America and are presented in US dollars.
Accounting Basis
The Company uses the accrual basis of accounting and accounting principles generally accepted in the United States of America (“GAAP” accounting). The Company has adopted a November 30 fiscal year end. Prior to that, the Company adopted a calendar year end for 2011.
Cash and Cash Equivalents
The Company considers cash on hand, cash in banks, certificates of deposit, time deposits, and U.S. government and other short-term securities with maturities of three months or less when purchased as cash and cash equivalents.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, accounts payable, notes payable, and accrued expenses. The carrying amount of these financial instruments approximates fair value due either to length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed in these financial statements.
Inventory
Inventories are stated at cost, not to exceed fair market value. The cost of the Company’s inventory ($144,743 and $14,914 at February 28, 2015 and November 30, 2014, respectively) has been determined using the first-in first-out (FIFO) method. The reduction in current costs as compared to LIFO costs of inventory equals zero at February 28, 2015 and November 30, 2014, respectively.
F-4
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
February 28, 2015
Note A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
Property and equipment are stated at the lower of cost or fair value. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets, as follows:
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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 February 28, 2015. 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 an impairment is measured based on fair value compared to carrying value, with fair value typically based on a discounted cash flow model.
Income Taxes
Income taxes are computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.
Management Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
F-5
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
February 28, 2015
Note A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
The Company recognizes revenue when products are fully delivered or services have been provided and collection is reasonably assured. For the three months ended February 28, 2015, the Company recognized $5,792 in revenue. For the period from inception to February 28, 2015, the Company recognized $9,428 in revenue.
Basic Income (Loss) Per Share
Basic income (loss) per share is calculated by dividing the Company’s net loss applicable to common shareholders by the weighted average number of common shares during the period. Diluted earnings per share is calculated by dividing the Company’s net income available to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity.
Stock-Based Compensation
Pursuant to ASC Topic 718, the Company recorded the fair value of the stock options on a monthly basis over the vesting period as stock-based compensation expense. The fair value of the options is calculated using the Black-Scholes method as of the date of grant. In fiscal year 2012, the Company adopted an incentive stock option plan for its employees. In fiscal year 2012 the Company granted stock options to three officers of the Company. These are described in Note G- Stock Options and Warrants.
Concentrations of Risk
The Company’s bank accounts are deposited in insured institutions. The maximum insured by the FDIC per bank account is $250,000. The Company’s funds were held in a single account. At February 28, 2015, 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 PS3® (and other products such as Nintendo Wii® and Microsoft Xbox 360®).
Liquidity and Going Concern
The Company has incurred an accumulated deficit of ($2,919,270) 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.
F-6
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
February 28, 2015
Note A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
These factors create substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.
The ability of the Company to continue as a going concern is dependent on the Company generating cash from the sale of its common stock or obtaining debt financing and attaining future profitable operations.
Management’s plan includes selling its equity securities and obtaining debt financing to fund its capital requirement and ongoing operations; however, there can be no assurance the Company will be successful in these efforts.
Recent Accounting Pronouncements
The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on the Company’s results of operations, financial position or cash flow.
Note B: PROPERTY AND EQUIPMENT
The Company owned property and equipment, recorded at cost, which consisted of the following at February 28, 2015 and November 30, 2014:
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February 28, 2015
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November 30, 2014
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Furniture and fixtures
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$ | 21,499 | $ | 21,499 | ||||
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Office & computer equipment
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31,364 | 31,364 | ||||||
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Vehicles
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87,181 | 87,181 | ||||||
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Subtotal
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140,044 | 140,044 | ||||||
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Less: Accumulated depreciation
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(65,586 | ) | (58,914 | ) | ||||
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Property and equipment, net
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$ | 74,458 | $ | 81,130 | ||||
Depreciation expense was $6,672 and $6,810 for the three months ended February 28, 2015 and 2014.
Note C: HARDWARE DEVELOPMENT COSTS
The Company incurred $2,919 and $24,063 for research and development costs for the three months ended February 28, 2015 and 2014, respectively. As to the three months ended February 28, 2014, these costs relate to hardware engineering, design and development of the Krankz™ and Krankz Maxx™ Bluetooth Wireless Headset and the Psyko Krypton® surround sound gaming headphones for personal computers. During the three months ended February 28, 2015, the Company reduced its research and development costs as it had already received its inventory of various products.
F-7
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
February 28, 2015
Note D: PREPAID EXPENSES
At February 28, 2014, the balance of prepaid expenses on the balance sheet of the Company is $7,868, which primarily relates to pre-paid office rents of $7,006 due March 1, 2015. At November 30, 2014, the balance of prepaid expenses on the balance sheet of the Company is $2,919. Prepaid expenses at November 30, 2014 consist of royalty incurred in the first quarter of 2015 as to Psyko Audio Labs as to the Psyko Audio Headphones.
Note E: PATENT AND TRADEMARKS
In June 2013, the Company executed a license agreement with Psyko Audio Labs Canada to manufacture and distribute the Carbon and Krypton line of patented headphones. US Patent # 8,000,486 (for the Psyko Krypton™ surround sound gaming headphones).
The Company entered into a license agreement with Digital Extreme Technologies, Inc., a Delaware Corporation, (also referred to as DXT) for use of certain intellectual property associated with the products being designed and developed by the Company. The specific terms of the license agreement are addressed under the related party transactions note I. The Black Widow keyboard is now known as the Zaaz keyboard. DXT worked to design and develop the Extreme Gamer as well as the Black Widow keyboard. The Company continues to work, under a license agreement, with DXT to advance the use of technologies designed by DXT.
DXT applied to the U.S. PTO for a patent of its Multi Video Game Changer. The agency assigned an application number of 12/543,296 to its application, which was published on February 25, 2010. The proposed 10 disk Video Game Changer is designed to interface directly with Sony PS3®, Nintendo Wii®, and Microsoft Xbox 360®. The Company anticipates incorporating Blu-Ray® compatible optics technology under a license agreement. This would allow users to insert Blu-Ray® discs into the Video Game Changer, and once connected to the video game console, to play movies on television. Sony PS3® is now capable of playing Blu-Ray® discs, but only with a capacity for a single disk. This technology would provide for the loading of up to 10 DVD’s, CD’s or Blu-Ray® discs into a single console that communicates with a video game console via USB. Furthermore, users would be able to plug in any external hard disc drive (“HDD”) directly into the console via an internal ATPI port, allowing movies, music and pictures to be played directly from the HDD.
Note F: COMMON STOCK
The Company has 100,000,000 shares at $0.0001 par value common stock authorized and 24,140,600 and 23,433,100 shares issued and outstanding at February 28, 2015 and November 30, 2014, respectively. During the three months ended February 28, 2015 the Company offered and sold no shares of common stock.
Note G: STOCK OPTIONS AND WARRANTS
Stock-Based Compensation to Employees
Pursuant to the employee incentive stock option plan, on July 15, 2012, the Company granted 2,000,000 shares to each of its two officers and directors. The option agreement provides the employee has no more than five years from the date of the grant to exercise the options at an exercise price of $0.25 per share. The employee may only exercise such options based upon the contracted vesting schedule, which provides that the options vest on a pro-rata basis over 60 months of future services to be rendered by such employee. In addition, on August 15, 2012, the Company granted 100,000 incentive stock options to another officer of the Company. This employee received the right to exercise the options on the date of grant at an exercise price of $0.25 per share. As the officer was fully vested in his right to such exercise at the time of the grant, the Company recorded the entire fair value of his stock options at the date of grant.
F-8
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
February 28, 2015
Note G: STOCK OPTIONS AND WARRANTS (CONTINUED)
The fair value of the options is calculated using the Black-Scholes method as of the date of grant. The factors used to calculate fair value of the stock options include the following: 1) Risk free interest rate, 2) Volatility of returns of the underlying asset, 3) current stock price, 4) Term of the Option, and 5) The exercise price. The risk free interest rate used in this calculation equals 0.63% and 0.80% for the stock options granted on July 15, 2012 and August 15, 2012, respectively. The term of the option is 5 years from the date of the grant. The exercise price is $0.25 per share. The current stock price at the dates of grant, which is July 15, 2012 and August 15, 2012, is $0.25 based on the sale of common shares to investors for the eleven months prior to the date of grant. Several industry comparables to this Company were used in order to determine an approximation of the volatility. The approximate volatility based on these comparables is approximately 458%.
The following is a summary of the status of all of the Company’s stock options issued to the Company’s management as of November 30, 2014 and the changes from December 1, 2014 to February 28, 2015.
|
# of Options
|
Weighted Average Exercise Price
|
Weighted Average Remaining Life
|
|
|
Outstanding November 30, 2014
|
4,000,000
|
$0.25
|
40.75 months
|
|
Granted
|
-
|
$ -
|
-
|
|
Exercised
|
-
|
$ -
|
-
|
|
Cancelled
|
-
|
$ -
|
-
|
|
Outstanding at February 28, 2015
|
4,000,000
|
$0.25
|
28.50 months
|
|
Exercisable at February 28, 2015
|
1,138,600
|
$0.25
|
28.50 months
|
Stock Warrants Issued to Investors
Prior to March 3, 2014, the Company issued 48,750 common stock warrants to Series A Preferred Stock purchasers in February and March, 2014.
The following is a summary of the status of all of the Company’s stock warrants as of February 28, 2015, and the changes from December 1, 2014 to February 28, 2015.
F-9
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
February 28, 2015
Note G: STOCK OPTIONS AND WARRANTS (CONTINUED)
|
# of Warrants
|
Weighted Average Exercise Price
|
Weighted Average Remaining Life
|
|
|
Outstanding at November 30, 2014
|
1,841,250 | $1.00 |
1 month
|
|
Granted
|
0 | $1.00 | |
|
Exercised
|
0 | $ .80 | - |
|
Cancelled
|
- | $ - | - |
|
Outstanding at February 28, 2015
|
1,841,250 | $1.00 |
1 month
|
|
Exercisable at February 28, 2015
|
1,841,250 | $1.00 |
1 month
|
Note H: PREFERRED STOCK
Issuances of Series A Convertible Preferred Stock
Since March 3, 2014, the Company has not offered or sold any Series A Convertible Preferred Stock and has no intent to do so during fiscal year ended November 30, 2015.
Issuances of Series B Convertible Preferred Stock
On January 14, 2014, the Board of Directors of Exeo Entertainment, Inc. (the “Company” adopted a resolution pursuant to the Company’s Certificate of Incorporation, as amended, providing for the designations, preferences and relative, participating, optional and other rights, and the qualifications, limitations and restrictions, of the Series B Convertible Preferred Stock.
On January 18, 2014, the Company filed a Certificate of Designations for a Series B Convertible Preferred Stock. The authorized number of Series B Convertible Preferred Stock is 1,000,000 shares, par value 0.0001. The holders of shares of Series B Convertible Preferred Stock shall vote as a separate class on all matters adversely affecting the Series B Stock. The authorization or issuance of additional Common Stock, Series B Convertible Preferred Stock or other securities having liquidation, dividend, voting or other rights junior to or on a parity with, the Series B Convertible Preferred Stock shall not be deemed to adversely affect the Series B Convertible Preferred Stock. In each case the holders shall be entitled to one vote per share. During the conversion period, each Series B Preferred share may be converted to common stock at a fixed conversion price of $1.25 per share or the Variable Conversion Price set forth in the Company’s Certificate of Designation. Series B stock bears interest at 12% per annum, paid annually, with principal paid at maturity twenty-four (24) months after the date of issuance of the stock. See table below in this note. Principal repayment may not apply if the stockholder exercises the right to convert all preferred stock to common stock during the conversion period.
During the three month period ended February 28, 2015, six accredited investors subscribed to 12,500 shares, in total, of Series B Preferred Stock in exchange for cash consideration of $62,500, in total, at $5.00 for each share. The Company relies upon an exemption from registration under the Securities Act of 1933 pursuant to Regulation D, Section 506. The Company agreed to pay interest on such funds at 12% per annum. Each person executed a stock subscription agreement and delivered funds in exchange for the delivery of Series B Convertible Preferred Shares at a price of $5.00 per share. Stock warrants were not sold or included in the offering to such investors.
F-10
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
February 28, 2015
Note H: PREFERRED STOCK (CONTINUED)
We incurred equity issuance costs of $5,062 and $4,315 during the three months ended February 28, 2015, and 2014, respectively. Rather than expense these costs, such items are charged against the Company’s equity. These costs include mailing, copying, courier, and other miscellaneous costs associated with the duplication and delivery of our offering circular to investors and paying for the return delivery of signed stock subscription agreements.
|
Illustration of Accrued Interest (due annually) and Principal and Remaining Interest
|
||||||||||||||||||
|
Due at the Maturity Date of Convertible Preferred Stock Sold
|
||||||||||||||||||
|
Class of
|
Interest
|
Subscription
|
Maturity
|
Amount
|
Interest Accrued
|
Principal and
|
||||||||||||
|
PF Stock
|
Rate
|
Date
|
Date
|
Invested
|
to Maturity Date
|
Interest
|
||||||||||||
| A | 15% |
2/21/2014
|
2/20/2017
|
$ | 12,500 | $ | 5,620 | $ | 18,120 | |||||||||
| A | 15% |
2/21/2014
|
2/20/2017
|
12,500 | 5,620 | 18,120 | ||||||||||||
| A | 15% |
2/21/2014
|
2/20/2017
|
10,000 | 4,496 | 14,496 | ||||||||||||
| A | 15% |
2/21/2014
|
2/20/2017
|
10,000 | 4,496 | 14,496 | ||||||||||||
| A | 15% |
3/1/2014
|
2/28/2017
|
12,500 | 5,625 | 18,125 | ||||||||||||
| A | 15% |
3/1/2014
|
2/28/2017
|
10,000 | 4,496 | 14,496 | ||||||||||||
| A | 15% |
3/1/2014
|
2/28/2017
|
15,000 | 6,750 | 21,750 | ||||||||||||
| A | 15% |
3/1/2014
|
2/28/2017
|
15,000 | 6,750 | 21,750 | ||||||||||||
| B | 12% |
9/9/2014
|
9/8/2016
|
12,500 | 3,252 | 15,752 | ||||||||||||
| B | 12% |
10/21/2014
|
10/20/2016
|
25,000 | 6,506 | 31,506 | ||||||||||||
| B | 12% |
11/26/2014
|
11/25/2016
|
12,500 | 3,252 | 15,752 | ||||||||||||
| B | 12% |
12/05/2015
|
12/04/2017
|
25,000 | 6,506 | 31,506 | ||||||||||||
| B | 12% |
01/12/2015
|
01/11/2017
|
12,500 | 3,337 | 15,837 | ||||||||||||
| B | 12% |
01/12/2015
|
01/11/2015
|
12,500 | 3,337 | 15,837 | ||||||||||||
| B | 12% |
01/20/2015
|
01/19/2017
|
12,500 | 3,456 | 15,956 | ||||||||||||
| B | 12% |
02/10/2015
|
02/09/2017
|
12,500 | 3,339 | 15,839 | ||||||||||||
| B | 12% |
02/27/2015
|
02/26/2017
|
25,000 | 6,670 | 31,670 | ||||||||||||
|
Totals
|
|
$ | 247,500 | $ | 83,508 | $ | 331,008 | |||||||||||
F-11
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
February 28, 2015
Note I: RELATED PARTY TRANSACTIONS
Notes Payable to Officer
An officer received promissory notes from the Company in exchange for loans from the officer for $85,000. The terms of the notes provide that the Company shall repay the principal of each note in full within nine months of the date of each note. In addition, the Company is obligated to pay interest at a flat rate of 6.00% upon maturity of each note. At the sole discretion of the officer, the notes may be extended for an additional nine month term. The Officer agreed to extend the notes for an additional nine month period. The maturity dates prior to the extension are reflected below. See also Note K - Subsequent Events for an updated disclosure of new maturity dates for each note.
|
Date of Each Note
|
Amount of Each Note
|
Maturity Date of Each Note
|
|
December 18, 2013
|
$ 10,000
|
December 15, 2015
|
|
December 30, 2013
|
$ 25,000
|
December 29, 2015
|
|
January 24, 2014
|
$ 50,000
|
January 23, 2016
|
Compensation of Officers
The Company entered into officer compensation agreements with two officer/directors whereby each receives $60,000 per annum as cash compensation. The Company pays each officer $5,000 per month. At year end, it was determined that one officer also received a compensatory expense reimbursement of $325 which was recorded at the date of receipt in late November, 2014 as compensation to the officer.
The amount paid to the two officers in total was $30,000 and $30,000 during the three months ended February 28, 2015 and 2014, respectfully. In addition, each officer/director received additional compensation in the form of non-cash incentive stock options granted on July 15, 2012. Each person received 2,000,000 stock options. For further discussion of the terms of the grant of stock options, see Note G.
Note J: COMMITMENTS AND CONTINGENCIES
Operating Lease Obligation
On October 25, 2012, the Company signed a lease for its current office and warehouse. The Company became a co-tenant along with DXT. The Company executed a one year extension effective October 1, 2014. The original lease contains an option for a three year renewal; which shall expire on September 30, 2016. The typical monthly rent expense is $7,006, which includes base rent of $5,496 and common area maintenance of $1,510. The Company is not obligated to pay a security deposit to the management company. A deposit to secure the current lease was made by DXT in 2009. DXT will receive the security deposit at the end of the lease.
As of February 28, 2015, the monthly minimum rental payment is $7,006. Rent expense was $21,018 and $21,018 for the three months ended February 28, 2015 and 2014, respectively.
As of February 28, 2015, minimum rent to be paid under this lease agreement is summarized as follows:
F-12
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
February 28, 2015
Note J: COMMITMENTS AND CONTINGENCIES (CONTINUED)
|
Minimum rent payments
|
||||
|
Year ended November 30, 2015
|
$ | 49,042 | ||
|
Total Lease Obligation
|
$ | 49,042 | ||
Note Payable for Vehicle Financing Obligations
On September 27, 2012, the Company acquired a pre-owned company vehicle on credit. The original cost basis was $49,824. The Company paid $10,000 as a down payment. The amount financed by the seller is $39,824, and the Company makes monthly payments of $863. The Company is obligated to pay a total of $41,420 over the course of the loan. This note bears interest at the annual percentage rate of 1.9%, and the term is 48 months. The total finance charge associated with this note is $1,596. At February 28, 2015, the cost basis is $46,200 as the Company recorded an impairment loss associated with this asset in the amount of $2,624.
Minimum financing payment to be paid under this finance agreement is summarized as follows:
|
Years ending November 30,
|
Total Payments
|
Principal
|
Interest
|
|||||||||
|
2015
|
$ | 10,355 | $ | 10,073 | $ | 282 | ||||||
|
2016
|
2,499 | 2,438 | 61 | |||||||||
|
Total Financing Obligation
|
$ | 12,854 | $ | 12,511 | $ | 343 | ||||||
Obligation to Purchase Additional Inventory of the Psyko Headphones
In early September, 2014 the Company issued a purchase order for the acquisition of $200,000 in inventory for the Psyko® Krypton™ 5.1 surround-sound gaming headphones with amplifiers made for use with personal computers. Sometime thereafter, the Company and the manufacturer agreed to divide the single purchase order in to several separate purchase orders of $40,000 each. On December 5, 2014, the Company paid the first installment of $40,000. The headphone units were shipped to the Company and were received and accepted on December 30, 2014. On January 9, 2015, the Company paid $80,000 for two additional installments under this agreement. It is possible, but not probable, that the Company remains liable for the $80,000 balance as to this September, 2014 purchase order, even if the Company does not order additional inventory.
Note K: SUBSEQUENT EVENTS
For the period from March 1, 2015, to the date of this report, four accredited investors subscribed to 12,200 shares of Series B Preferred Stock in exchange for cash consideration of $61,000, at $5.00 for each share. The Company relies upon an exemption from registration under the Securities Act of 1933 pursuant to Regulation D, Section 506. The Company agreed to pay interest on such funds at 12% per annum. The investor executed a stock subscription agreement and delivered funds in exchange for the delivery of Series B Convertible Preferred Shares at a price of $5.00 per share. Stock warrants were not sold or included in the offering to such investors.
F-13
EXEO ENTERTAINMENT, INC.
Notes to Financial Statements
February 28, 2015
Note K: SUBSEQUENT EVENTS (CONTINUED)
Also during the month of March, 2015, one accredited investor, previously known by the officers of the Company, as well as having been a prior investor in the common stock of the Company, subscribed to 322,188 shares of common stock of the Company upon the exercise of his common stock warrants. The Company accepted this subscription at a discounted price of $0.31037 per share. Prior private party sales of the Company’s common stock occurred in August, 2014 and such sales by the Issuer were at $0.80 per share. The discount in sales price represented by this transaction cannot be reasonably ascertained due to the lack of recent sales of issuer securities. Reasons for such discount may include various factors such as the dollar amount of the single transaction, limitations upon the immediate marketability of the common stock of the company, restrictive legends applied to this stock certificate, and price volatility, if applicable, as reflected in the open market. At the time of this subscription, the Common shares of the Company were quoted at $1.00 per share and were not actively trading on the OTC BB and OTC Markets- QB. For the reasons stated above, the price quotation in the open market should not be relied upon for purpose of the determination of the discount rate applied to this sales transaction.
F-14
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. From our inception to date we have generated $9,428 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.
We accomplished the following:
|
1)
|
We completed the molds for the Psyko™ PC model and are working on the molds for the Psyko™ console unit.
|
|
2)
|
During the three months ending February 28, 2015, we received inventory of the Krankz™ Bluetooth Wireless Headsets,and the Psyko®5.1 Surround Sound Gaming Headsets (with built-in microphone) with external amplifier for Personal Computers. We also approved the working prototypes of the similar type of Psyko® Krypton headphones for use with gaming consoles (such as Xbox®).
|
|
3)
|
We are currently working on molds for the Zaaz™ keyboard.
|
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. We expect to release several new products in fiscal years 2015 and 2016.
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.
4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
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.
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 attending the Consumer Electronics Show (CES) January 11-13, 2013, having a booth and its products on display at the Electronic Entertainment Expo (E3) June 11 – 13, 2013 (booth 4010), and 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.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
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.
We entered into a license agreement with Digital Extreme Technologies, Inc., a Delaware corporation, (also referred to as DXT) for use of certain intellectual property associated with the products being designed and developed by us. The Black Widow keyboard is now known as the Zaaz keyboard. DXT worked to design and develop the Extreme Gamer as well as the Black Widow keyboard. We continue to work under a license agreement with DXT to advance the use of technologies designed by DXT.
DXT applied to the U.S. PTO for a patent of its Multi Video Game Changer. The agency assigned an application number of 12/543,296 to its application, which was published on February 25, 2010. The proposed 10 disk Video Game Changer is designed to interface directly with Sony PS3®, Nintendo Wii®, and Microsoft Xbox 360®. The Company anticipates incorporating Blu-Ray® compatible optics technology under a license agreement. This would allow users to insert Blu-Ray® discs into the Video Game Changer, and once connected to the video game console, to play movies on television. Sony PS3® is now capable of playing Blu-Ray® discs, but only with a capacity for a single disk. This technology would provide for the loading of up to 10 DVD’s, CD’s or Blu-Ray® discs into a single console that communicates with a video game console via USB. Furthermore, users would be able to plug in any external hard disc drive (“HDD”) directly into the console via an internal ATPI port, allowing movies, music and pictures to be played directly from the HDD.
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.
Subsidiaries
We do not have any subsidiaries.
Comparison of Three Month Results –for the quarters ended February 28, 2015 and 2014, respectively
Revenues and Gross Profit
Revenues and Gross Profit for the three months ended February 28, 2015 and 2014 are $5,792 and zero, respectively. The Company has incurred significant costs in research and development activities. See discussion below for further information. At February 28, 2015, the Company had incurred an accumulated deficit of $2,915,380 since inception.
Costs and Expenses
Total cost and expenses were $194,375 and $638,963 for the three months ended February 28, 2015 and 2014, respectively. The decrease in costs in the current quarter as compared to the three months ended February 28, 2014 is $400,000 stock-based compensation paid to RedChip Companies, Inc. for investor relations services. Such agreements were later cancelled in fiscal year ended 2014, and the Company no longer was obligated for $400,000 in stock-based compensation.
Research and Development Costs
The Company incurred $238 and $19,268 for research and development costs during the three months ended February 28, 2015 and 2014, respectively. As to the 2014 year, these costs relate to the Psyko Krypton™ surround sound gaming headphones, Zaaz
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
Keyboard, Extreme Gamer, Krankz™ Bluetooth Wireless Headset, and multi-video game changer. Several of our products are now in inventory and require no further research and production costs.
Liquidity and Capital Resources
Long-Term Debt / Note Payable and Other Commitments
Other than what is described in this Report here and in Item 5(a), the Company had no material commitments for capital expenditures at February 28, 2015. In fiscal year 2014, the Company incurred a minimum royalty expense to Psyko Audio Labs, Canada of $159,025. During the three months ended February 28, 2015 we incurred $2,919 in royalty expense. We do not expect to incur any additional minimum royalty expense during the remainder of fiscal year 2015 unless our sales exceeds our current expectations.
The Company has an office and warehouse rental lease obligation through September 30, 2016, which equals $49,492 for the balance of fiscal year 2015. The monthly minimum rental payment is $7,006. Rent expense was $21,018 and $21,018 for the three month periods ended February 28, 2015 and 2014, respectively.
Cash Flow Information
On February 28, 2015, the Company had working capital of approximately $133,140. On November 30, 2014, the Company had working capital of approximately $150,825. The decrease in working capital at February 28, 2015 as compared to November 30, 2014 was primarily due to the change in working capital used for research and development expenses. 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 $154,217 and $326,684 at February 28, 2015 and November 30, 2014, respectively. This represents a decrease in cash of $172,467. The decrease in cash at February 28, 2015 primarily relates to the purchase of $130,000 in inventory and customs fees and brokerage charges which was purchased and received during the first three months ended February 28, 2015. In addition, during this quarter, the Company incurred $30,000 of legal and professional fees, including within this figures $12,500 for its annual auditing fees. We also paid 37,863 in employee (non-officer) cash-compensation, which includes $14,833 paid to the Company’s Financial and Accounting Controller.
Cash used in Operating Activities
The Company used approximately $265,739 of cash for operating activities in the three months ended February 28, 2015 as compared to using $188,122 of cash for operating activities in the three months ended February 28, 2014. This increase in cash used in operating activities, which is $77,617, is primarily attributed to the net loss generated in these periods.
Cash used for Investing Activities
Investing activities for the three months ended February 28, 2015 used $0 of cash as compared to using $1,430 of cash in the three months ended February 28, 2014. This decrease in use is attributable to a reduction in the acquisition of vehicles and equipment.
Cash Provided by Financing Activities
Financing activities in the three months ended February 28, 2015 provided $93,273 of cash as compared to providing $148,233 of cash in the three months ended February 28, 2014. The difference of $54,960 is attributable to the decrease in equity investments and notes payable from an officer of the Company. The Company did not incur any debt issuance costs in the first quarter, 2015 or the fiscal year 2014.
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
For the period from inception to February 28, 2015, the Company recorded revenue of $9,428. 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.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued
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 DISCLOSURES ABOUT MARKET RISK
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 are not 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. 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.
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ITEM 4. CONTROLS AND PROCEDURES - continued
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 was not effective as of February 28, 2015. The Company has resourced outside consultants to assist in implementing the necessary financial controls over the financial reporting and the utilization of internal management and staff to effectuate these controls.
This annual 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 annual report.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or reasonably likely to materially affect, our internal control over financial reporting.
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 SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
On January 13, 2014, the Company filed a Certificate of Designation to designate the rights, preferences, privileges, and restrictions associated with Series B Convertible Preferred Shares. An Amendment to the Articles of Incorporation was filed and recorded by the Nevada Secretary of State on March 24, 2014.
During the three month period ended February 28, 2015, six accredited investors subscribed to 12,500 shares, in total, of Series B Preferred Stock in exchange for cash consideration of $62,500, in total, at $5.00 for each share. The Company relies upon an exemption from registration under the Securities Act of 1933 pursuant to Regulation D, Section 506. The Company agreed to pay interest on such funds at 12% per annum. Each person executed a stock subscription agreement and delivered funds in exchange for the delivery of Series B Convertible Preferred Shares at a price of $5.00 per share. Stock warrants were not sold or included in the offering to such investors.
The Company incurred equity issuance costs of $5,062 and $4,315 during the three month periods ended February 28, 2015 and 2014, respectively. Rather than expense these costs, such items are charged against the Company’s equity. These costs include mailing, copying, courier, and other miscellaneous costs associated with the duplication and delivery of our offering circular to investors and paying for the return delivery of signed stock subscription agreements.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5(a). 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.
Related Party Transactions
During the three month period ended February 28, 2014, an officer loaned to the Company $85,000 and advanced business expenses of $556. The terms of the notes provide that the Company shall repay the principal of each note in full within six months of the date of each note. In addition, the Company is obligated to pay interest at a flat rate of 6.00% upon maturity of each note. At the sole discretion of the officer, the notes may be extended for an additional six month term.
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Date of Each Note
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Amount of Each Note
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Maturity Date of Each Note
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December 18, 2013
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$ 10,000
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December 15, 2015
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December 30, 2013
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$ 25,000
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December 29, 2015
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January 24, 2014
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$ 50,000
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January 23, 2016
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Material Contracts
Obligation to Purchase Additional Inventory of the Psyko Krypton 5.1 surround sound headsets
In early September, 2014 the Company issued a purchase order for the acquisition of $200,000 in inventory for the Psyko® Krypton™ 5.1 surround-sound gaming headphones with amplifiers made for use with personal computers. Sometime thereafter, the Company and the manufacturer agreed to divide the single purchase order in to several separate purchase orders of $40,000 each. On December 5, 2014, the Company paid the first installment of $40,000. The headphone units were shipped to the Company and were received and accepted on December 30, 2014. On January 9, 2015, the Company paid $80,000 for two additional installments under this agreement. The headphone units were shipped to the Company and were received and accepted on January 28, 2015. It is possible, but not probable, that the Company remains liable for the $80,000 balance as to this September, 2014 purchase order, even if the Company does not order additional inventory.
UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
For the period from March 1, 2015, to the date of this report, four accredited investors subscribed to 12,200 shares of Series B Preferred Stock in exchange for cash consideration of $61,000, at $5.00 for each share. The Company relies upon an exemption from registration under the Securities Act of 1933 pursuant to Regulation D, Section 506. The Company agreed to pay interest on such funds at 12% per annum. The investor executed a stock subscription agreement and delivered funds in exchange for the delivery of Series B Convertible Preferred Shares at a price of $5.00 per share. Stock warrants were not sold or included in the offering to such investors.
During the month of March, 2015, one accredited investor, previously known by the officers of the Company, as well as having been a prior investor in the common stock of the Company, subscribed to 322,188 shares of common stock of the Company upon the exercise of his common stock warrants. The Company accepted this subscription at a discounted price of $0.31037 per share. Prior private party sales of the Company’s common stock occurred in August, 2014 and such sales by the Issuer were at $0.80 per share. The discount in sales price represented by this transaction cannot be reasonably ascertained due to the lack of recent sales of issuer securities. Reasons for such discount may include various factors such as the dollar amount of the single transaction, limitations upon the immediate marketability of the common stock of the company, restrictive legends applied to this stock certificate, and price volatility, if applicable, as reflected in the open market. At the time of this subscription, the Common shares of the Company were quoted at $1.00 per share and were not actively trading on the OTC BB and OTC Markets- QB. For the reasons stated above, the price quotation in the open market should not be relied upon for purpose of the determination of the discount rate applied to this sales transaction.
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ITEM 6. EXHIBITS
None.
INDEX TO EXHIBITS
Item 15(c) Reports on Form 8-K
On March 23, 2015 the Company filed with the Commission an announcement of a change in the Company’s certifying accountant. On March 20, 2015, the Board of Directors dismissed De Joya Griffith LLC as the independent registered public accounting firm for the Company, effective immediately. On March 20, 2015, upon approval by the Board of Directors, the Company engaged KLJ & Associates, LLP, Certified Public Accountants, the Company’s independent accountant to audit the Company’s financial statements, to perform reviews of the interim financial statements.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
EXEO ENTERTAINMENT, INC. (Registrant)
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Signature
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Title
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Date
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Jeffrey A. Weiland
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/s/ Jeffrey A. Weiland
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President and Director
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April 9, 2015
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Robert S. Amaral
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/s/ Robert S. Amaral
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Chief Executive Officer,
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April 9, 2015
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||
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Treasurer and Director
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||||
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(Principal Executive and Financial Officer)
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