TMCnet News
EXEO ENTERTAINMENT, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) OVERVIEW Exeo Entertainment, Inc. designs, develops, licenses, manufactures, 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. We are a development stage company. From our inception to date we have not generated any 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) In 2011, we executed an exclusive license agreement with Digital Extreme Technologies, Inc. to secure the rights to manufacture and distribute the Extreme Gamer®, Zaaz™ keyboard and the Reality Pro™ handheld gaming system. 2) In 2012, the Company completed its first round of financing for proceeds of $773,035 and used said proceeds to continue product development on the aforementioned licensed products. 3) In 2013, we completed our second round of financing for proceeds of $937,740 and we executed a license agreement with Psyko Audio Labs Canada to manufacture and distribute the Psyko® Carbon and Krypton line of patented headphones; Patent US # 8,000,486. 4) In June 2013, we debuted the Extreme Gamer®, the Zaaz™ keyboard, and the Psyko® Krypton headphones to the public at the 2013 Electronic Entertainment Expo (E3) held June 11-13. 5) In July 2013, we executed a contract with Elite Product Management, Ltd. Hong Kong to handle the sourcing, procurement, QA, Logistics and manufacturing of the Psyko® headphones, Zaaz™ keyboard, and the Extreme Gamer®. 6) In January 2014, the SEC granted the effectiveness of our S-1 registration statement. 7) In February 2014, FINRA approved the ticker "EXEO". 8) In March 2014, we were approved by DTC (The Depository Trust and Clearing Company). DTC provides the electronic basis through which stock sales bought and sold through brokers are transferred from the seller's brokerage account to the buyer's account. 9) We completed the molds for the Psyko® headphones (PC model), and are working on the molds for the Psyko® video game console unit and the Zaaz™ keyboard. 10) We completed the molds for the Krankz™ Bluetooth® audio headsets, started working on the molds for the Krankz Maxx™ audio headsets; and placed an order for the manufacturing of our Psyko® headphones (PC Model). 11) On April 30, 2014 we entered into a non-exclusive contract with Global Marketing Partners, Inc. The agreement provides the Company with an avenue for the distribution of its products through various retailers using the Speed Commerce (formerly Navarre) channel of distribution. 12) In May, 2014 our stock began trading on the OTC Markets and on the Over-the-Counter Bulletin Board (OTCBB). 13) In June, 2014, we introduced our entire product line to attendees of the Electronic Entertainment Expo (E3). We had an exhibit booth and met with potential buyers. Products and Services Products under development include the Psyko® 5.1 surround sound gaming headphones for both PCs and consoles, Krankz™ Bluetooth™ wireless headphones, Zaaz™ Smart TV keyboards, the Extreme Gamer®; a multi-disc video game changer, and an android based portable gaming system. We have completed the engineering on the Psyko® and Krankz™ headphones. We are finalizing development on the Zaaz™ keyboard and the Krankz Maxx™ Bluetooth® Audio Headset, and will soon begin tooling for manufacturing. The Extreme Gamer™ and portable gaming system are still in development and expected to be released in 2015. Strategy and Marketing Plan Once manufacturing is established we intend on utilizing existing consumer electronics distributers, such as Speed Commerce to distribute our products to big box retailers such as Best Buy, GameStop, and Fry's Electronics. 4-------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS- continued Competition Psyko® Surround Sound Headphones [[Image Removed]]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 [[Image Removed]]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 [[Image Removed]]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. 5 -------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS- continued Extreme Gamer® [[Image Removed]]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, 2014, 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. 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 or Krankz Maxx. 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. 6 -------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued Comparison of Three and Nine Month Results -for the quarters ended August 31, 2014 and 2013, respectively Revenues and Gross Profit The Company recorded no revenue in the three months ended August 31, 2013. The Company is a development stage company and has incurred significant costs in research and development activities. See discussion below for further information. At August 31, 2014, the Company had incurred an accumulated deficit of $2,464,311 since inception. Costs and Expenses Total cost and expenses were ($97,589) and $266,199 for the three months ended August 31, 2014 and 2013, respectively. Total cost and expenses were $815,671 and $677,956 for the nine months ended August 31, 2014 and 2013, respectively. The decrease in costs in the three month period ended August 31, 2014 as compared to the three month period ended May 31, 2013 is primarily due to the reversal of $400,000 stock-based compensation paid to RedChip Companies, Inc. for investor relations services. RedChip agreed to the cancellation of their stock subscription agreement. Research and Development Costs The Company incurred $33,036 and $7,375 for research and development costs during the three months ended August 31, 2014 and 2013, respectively. The Company incurred $89,863 and $0 for research and development costs during the nine months ended August 31, 2014 and 2013, respectively. As to the 2013 year, these costs pertain to the, Zaaz Keyboard and the Extreme Gamer. As to the 2014 year, these costs relate to the Psyko Krypton™ surround sound gaming headphones, Zaaz Keyboard, Extreme Gamer, and multi-video game changer. The increase in costs during incurred during the three months ended August 31, 2014 relates to the completion of molding and prototypes of the Krankz Bluetooth audio headset and the Psyko 5.1 surround sound video gaming headset for the P.C. Liquidity and Capital Resources Long-Term Debt / Note Payable and Other Commitments License Agreement On June 10, 2013, Exeo Entertainment, Inc. entered into a license agreement with Psyko Audio Labs, Canada whereby Exeo Entertainment. Inc. will manufacture and market the Psyko® Krypton and Carbon line of gaming headphones. The company will owe a 5% royalty on all headphone sales to Psyko Audio Labs. Payments are due quarterly on January 15, April 15, July 15, and October 15. In fiscal year 2014, the Company will incur increasing minimum royalty expenses as follows: $42,102 (CDN $46,787) and $60,155 (CDN $66,849) in the 3rd and 4th quarters, respectively. Royalty expense incurred for the three months ended August 31, 2014 was $40,907. Royalty expense incurred during the nine months ended August 31, 2014 was $98,175. At January 1, 2015, the Company is obligated to pay minimum monthly royalties of $89,986 (CDN $100,000) per quarter for the remaining term of the contract. The company carries the risk of currency exchange rate fluctuations as our royalty obligation under the license agreement is stated in Canadian dollars. Prepaid Expenses Associated with License Agreement At August 31, 2014, the balance of prepaid expenses was $16,998, and pertains to Psyko Audio Labs Canada (Canadian Dollars 18,103). At November 30, 2013 the balance of prepaid expenses was $44,146, and also pertains to Psyko Audio Labs. The difference of $27,148 equals the total amount of prepaid expenses applied against monthly royalty fees paid by the Company during the current fiscal year. Office & Warehouse Lease Extension As of August 31, 2014, the monthly minimum rental payment is $7,006. Rent expense was $21,018 and $21,018 for the three months ended August 31, 2014 and 2013, respectively. Rent expense was $63,054 and $63,054 for the nine months ended August 31, 2014 and 2013, respectively. In September, 2014, the Company executed a one year extension of the current lease agreement at the same terms. As of August 31, 2014, minimum rent to be paid under this lease agreement is $91,078 7 -------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued Cash Flow Information On August 31, 2014, the Company had working capital of approximately $336,974. On November 30, 2013, the Company had working capital of approximately $345,267. The increase in working capital is nominal. 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 $459,094 and $358,299 at August 31, 2014 and November 30, 2013, respectively. This represents an increase in cash of $100,795. Cash used in Operating Activities The Company used approximately $622,889 of cash for operating activities in the nine months ended August 31, 2014 as compared to using $537,603 of cash for operating activities in the nine months ended August 31, 2013. This increase in cash used in operating activities which is $85,287, and is primarily attributed to the following: net increase (decrease) in prepaid expenses associated with the Psyko Audio Headsets license agreement and expenditures pertaining to the Electronic Entertainment Expo (E3) held on June 11 - 13, 2014. Cash used for Investing Activities Investing activities for the nine months ended August 31, 2014 used approximately $5,067 of cash as compared to using $24,779 of cash in the nine months ended August 31, 2013. 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 nine months ended August 31, 2014 provided $728,751 of cash as compared to providing $889,116 of cash in the nine months ended August 31, 2013. The difference of $160,365 in the nine month periods is attributable to the decrease in equity investments. The Company did not incur any debt issuance costs in 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 August 31, 2014, the Company recorded no revenue. 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. 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. 8 -------------------------------------------------------------------------------- |