NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
These financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America on a going concern basis, which assumes that the Company will continue to realize its assets and discharge its obligations and commitments in the normal course of operations. Realization values August be substantially different from carrying values as shown and these financial statements do not give effect to adjustments that would be necessary to the carrying values and classification of assets and liabilities should the Company be unable to continue as a going concern.
While the information presented in the accompanying nine months to November 30, 2015 financial statements is unaudited, it includes all adjustments which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows for the interim period presented in accordance with accounting principles generally accepted in the United States of America. 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. It is suggested that these interim unaudited financial statements be read in conjunction with the Company’s audited financial statements for the year ended February 28, 2015.
Reclassification
Certain amounts reported in the prior period financial statements have been reclassified to the current period presentation.
Recently Adopted and Recently Enacted Accounting Pronouncements
In September, 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805) (“ASU 2015-16”). Topic 805 requires that an acquirer retrospectively adjust provisional amounts recognized in a business combination, during the measurement period. To simplify the accounting for adjustments made to provisional amounts, the amendments in the Update require that the acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined. The acquirer is required to also record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition an entity is required to present separately on the face of the income statement or disclose in the notes to the financial statements the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for fiscal years beginning December 15, 2015. The adoption of ASU 2015-016 is not expected to have a material effect on the Company’s consolidated financial statements.
In August, 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”). The amendment in this ASU defers the effective date of ASU No. 2014-09 for all entities for one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 31, 2016, including interim reporting periods with that reporting period.
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, Interest–Imputation of Interest (Subtopic 835-30) (“ASU 2015-03”), which changes the presentation of debt issuance costs in financial statements. ASU 2015-03 requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. It is effective for annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The new guidance will be applied retrospectively to each prior period presented. The Company is currently in the process of evaluating the impact of adoption of ASU 2015-03 on its balance sheets.
On November 2014, The Financial Accounting Standards Board (FASB) issued Accounting Standard Update No. 2014-16—Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity (a consensus of the FASB Emerging Issues Task Force). The amendments in this Update do not change the current criteria in GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required. That is, an entity will continue to evaluate whether the economic characteristics and risks of the embedded derivative feature are clearly and closely related to those of the host contract, among other relevant criteria. The amendments clarify how current GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. The effects of initially adopting the amendments in this Update should be applied on a modified retrospective basis to existing hybrid financial instruments issued in the form of a share as of the beginning of the fiscal year for which the amendments are effective. Retrospective application is permitted to all relevant prior periods.
On November 2014, The Financial Accounting Standards Board (FASB) issued Accounting Standard Update No. 2014-17—Business Combinations (Topic 805): Pushdown Accounting (a consensus of the FASB Emerging Issues Task Force). The amendments in this Update provide an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. The amendments in this Update are effective on November 18, 2014. After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event. However, if the financial statements for the period in which the most recent change-in-control event occurred already have been issued or made available to be issued, the application of this guidance would be a change in accounting principle.
On August 2014, The Financial Accounting Standards Board (FASB) issued Accounting Standard Update No. 2014-15, Presentation of Financial Statements – Going Concerns (Subtopic 205-40): Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.
In June 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The new guidance requires that share-based compensation that require a specific performance target to be achieved in order for employees to become eligible to vest in the awards and that could be achieved after an employee completes the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation costs should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. This new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2015. Early adoption is permitted. Entities August apply the amendments in this Update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The adoption of ASU 2014-12 is not expected to have a material impact on our financial position or results of operations.
In June 2014, the FASB issued ASU No. 2014-10: Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation , to improve financial reporting by reducing the cost and complexity associated with the incremental reporting requirements of development stage entities. The amendments in this update remove all incremental financial reporting requirements from U.S. GAAP for development stage entities, thereby improving financial reporting by eliminating the cost and complexity associated with providing that information. The amendments in this Update also eliminate an exception provided to development stage entities in Topic 810, Consolidation, for determining whether an entity is a variable interest entity on the basis of the amount of investment equity that is at risk. The amendments to eliminate that exception simplify U.S. GAAP by reducing avoidable complexity in existing accounting literature and improve the relevance of information provided to financial statement users by requiring the application of the same consolidation guidance by all reporting entities. The elimination of the exception August change the consolidation analysis, consolidation decision, and disclosure requirements for a reporting entity that has an interest in an entity in the development stage. The amendments related to the elimination of inception-to-date information and the other remaining disclosure requirements of Topic 915 should be applied retrospectively except for the clarification to Topic 275, which shall be applied prospectively. For public companies, those amendments are effective for annual reporting periods beginning after December 15, 2014, and interim periods therein. Early adoption is permitted. The adoption of ASU 2014-10 is not expected to have a material impact on our financial position or results of operations.
NOTE 2 – GOING CONCERN
At November 30, 2015, the Company had not yet achieved profitable operations, had an accumulated deficit of $21,388,056 (February 28, 2015 - $21,047,354) since its inception and incurred a net loss of $317,008 (2014 - $516,869) for the nine months ended November 30, 2015 and expects to incur further losses in the development of its business, all of which casts substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to generate future profitable operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management has no formal plan in place to address this concern but considers obtaining additional funds by equity financing and/or from related party. Management expects the Company’s cash requirement over the twelve-month period ended February 28, 2016 to be $300,000. While the Company is expending its best efforts to achieve the above plans, there is no assurance that any such activity will generate funds for operations.
NOTE 3 – PREPAID EXPENSES
As of November 30, 2015, included in prepaid expenses is $23,438 (February 28, 2015: $27,134) for an insurance premium for the directors of the Company financed through Flatiron Capital. Insurance policy is from August 23, 2015 to August 23, 2016.
NOTE 4 – ACCRUED EXPENSES/ACCRUED EXPENSES – RELATED PARTY
Other liabilities and accrued expenses consisted of the following:
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November 30,
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February 28,
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2015
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2015
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Accounts payable – related party
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Accrued royalties payable – Guardian Alert
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Detail of Accrued Expenses:
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Accrued non-resident withholding taxes, including accrued interest
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Detail of Accrued Expense – Related party:
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Accrued payroll – related party
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Other accrued liabilities – related party
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Total accrued expenses – related party
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As of November 30, 2015, included in the accounts payable – related party is $33,495 (February 28, 2015: $33,495) and $2,389 (February 28, 2015: $2,389) owing to directors of the Company, an accounting firm in which a director of the Company is a partner and a company controlled by the Company’s President and a director with respect to unpaid fees, purchases and expenses, $480,000 (February 28, 2015: $480,000) owing to stockholders of the Company in respect of royalties payable and $53,694 (February 28, 2015: $53,694) owing to the former president of the Company in respect of unpaid wages.
At November 30, 2015, advances payable of $nil (February 28, 2015: $76,100) are due to a company controlled by a director of the Company.
The accounts payable and advances payable are unsecured, non-interest bearing and have no specific terms of repayment. Sense Technologies, Inc. plans to use the funds from sales, and if we are able to raise funds through equity issuances, to fund the payment of delinquent liabilities.
NOTE 5 – ROYALTIES PAYABLE
Pursuant to the licenses with ScopeOut® license called for $150,000 to be paid over two years (paid) along with a royalty of 10% of wholesale price for each ScopeOut® unit sold, but not less than $2.00 per unit. In order to maintain the exclusive license for the ScopeOut® products, in accordance with the license agreement with Palowmar Industries, LLC, we are required to pay royalties to the licensor based on the following minimum quantities of units sold:
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a)
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30,000 units per year beginning in years 1-2
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b)
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60,000 units per year beginning in years 3-4
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c)
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100,000 units per year beginning in years 5 and above.
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During 2010, the Company re-negotiated the exclusive license agreement with the Scope Out® inventor. All prior minimum royalties were eliminated, and accordingly, the Company recorded $602,907 additional capital for a related party write-off.
Prepaid royalties payable under the new license are $5,000 per month for twelve months commencing September 1, 2010. The new agreement also calls for a 5% royalty with a $.75 per unit maximum “minimum royalty” to retain exclusivity with the following volumes:
End of calendar year containing the second anniversary: 30,000 units
End of calendar year containing the third anniversary: 60,000 units
End of calendar year containing the fourth anniversary: 110,000 units
End of calendar year containing the fifth anniversary and thereafter: 125,000 units
No royalties are currently accrued as we have not yet reached the end of the calendar year containing the second anniversary.
Such “calendar year” commencing the minimum royalties to retain exclusivity is the first year within which an Original Equipment Manufacturer (OEM) and/or Tier 1 manufacturer sub-licenses the Scope Out® product.
For any sub-licenses of the product, royalties are shared as follows:
OEM/Tier 1 Supplier Sub Licensor: 65% Sense Technologies
35% Inventor
Any other Sub-Licensor: 50% Sense Technologies
50% Inventor
The current royalties accrued for Scope Out royalties are $nil as of November 30, 2015 and February 28, 2015.
Pursuant to the Guardian Alert licenses, we are required to make royalty payments to the licensors and meet sales targets as follows:
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a)
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$6.00(US) per unit on the first one million units sold;
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b)
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thereafter, the greater of $4.00(US) per unit sold or 6% of the wholesale selling price on units sold; and
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c)
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50% of any fees paid to Sense in consideration for tooling, redesign, technical or aesthetic development or, should the licensors receive a similar fee, the licensors will pay 50% to Sense.
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In order to retain the exclusive right to this license we incurred minimum royalty fees. Because we were unable to pay these fees, we accrued the royalties as a payable. Royalties accruals were ceased in 2004 and rights of exclusivity were forfeited. Royalties payable to Guardian Alert are $480,000 and $480,000 as of November 30, 2015 and February 28, 2015, respectively.
NOTE 6 – NOTES PAYABLE, CONVERTIBLE NOTES PAYABLE, AND NOTES PAYABLE – RELATED PARTY
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November 30,
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February 28,
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2015
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2015
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Promissory notes payable, unsecured, bearing interest at the rate of 12% per annum with repayment due February, 2017.
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Promissory notes payable to related party, unsecured, bearing interest at the rate of 12% per annum, maturing between April, 2016 through December, 2016.
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Promissory notes payable, unsecured, bearing interest at the rate of 12% per annum with repayment due February 23, 2017.
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Promissory notes payable, unsecured, bearing interest at the rate of 12% per annum with repayment due March 30, 2012. In default.
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Finance agreement on directors’ and officers’ liability policy secured by the unearned insurance premium, bearing interest at 7.75%, maturing June 23, 2016. This agreement is repayable in monthly principal and interest payments of $2,174.
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Finance agreement on directors and officers liability policy, bearing interest at 7.75% per annum, no maturity date. In default.
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Promissory note payable, unsecured, bearing interest at the rate of 5.25% per annum, due in December 2007. In default.
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Promissory note payable, unsecured, bearing interest at the rate of 6% per annum, maturing January and May, 2016.
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Promissory note payable, unsecured, bearing interest at the rate of 6% per annum, maturing June 1, 2014. In default.
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Promissory note payable, unsecured, bearing interest at the rate of 7% per annum, maturing August 1, 2016.
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Promissory note payable, unsecured, bearing interest at the rate of 5.5% per annum, maturing August and October, 2016.
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Promissory note payable, personally guaranteed by a director of the Company, bearing interest at 4.0% per annum and maturing August 27, 2018.
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Promissory note payable, unsecured, bearing interest at the rate of 7% per annum, maturing July 20, 2016.
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Promissory note payable, unsecured, bearing interest at the rate of 12% per annum, maturing June 4, 2016
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Promissory note payable, unsecured, bearing interest at the rate of 5.5% per annum, maturing between June, 2015 and November, 2016.
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Promissory note payable, unsecured, bearing interest at the rate of 5.5% per annum, maturing August 13, 2016.
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Promissory note payable, unsecured, bearing interest at the rate of 12% per annum, maturing December 21, 2015. In default.
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Promissory note payable, unsecured, bearing interest at the rate of 9.5% per annum, maturing June 9, 2016.
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Promissory note payable, no stated interest or maturity date
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The Company is in default with respect to five of the above notes payable totaling 170,794 at November 30, 2015. The Company was in default with respect to three notes payable totaling $135,198 at February 28, 2015.
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Convertible notes payable:
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November 30,
2015
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February 29,
2015
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Series B secured promissory notes payable, secured by a charge over the Company’s inventory, bearing interest at 10% per annum and are payable on demand, along with accrued interest thereon, on or after August 30, 2005. These notes plus accrued interest August be redeemed at any time after August 30, 2005. These notes August be converted into common shares of the Company at any time prior to demand for payment at the rate of one common share for each $0.29 of principal and interest owed. As of November 30, 2015 and February 28, 2015, these notes were in default.
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Unsecured promissory notes bearing interest at 10% per annum. These notes plus accrued interest are convertible into common shares of the Company at the rate of one common share for each $5.40 of principal and interest owed. These notes have matured and the holders thereof have received default judgments against the Company.
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The Company is in default with respect to nine convertible notes payable totaling $584,447 at November 30, 2015 and February 28, 2015.
Future minimum note payments as of November 30, 2015 are as follows:
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Years Ending February 28,
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NOTE 7 – PREFERRED STOCK
The Class A preferred shares entitle the holders thereof to cumulative dividends of $0.10 per share annually and the right to convert the preferred shares into common shares at the rate of $0.29 per share. The shares were redeemable at the option of the Company at any time after August 30, 2005 at the redemption price of $1.00 per share plus payment of unpaid dividends.
Dividends on preferred shares are payable annually on July 31 of each year. During the nine months ended November 30, 2015, the Company accrued dividends payable of $23,694 (February 28, 2015: $31,591). Dividends are currently accruing and total $416,383 at November 30, 2015.
NOTE 8 – COMMON STOCK
a)
Common stock issued for cash
During the nine months ended November 30, 2015, the Company received $160,000 of common stock subscribed in common stock payable for 5,333,333 shares. The Company issued 1,500,000 shares of common stock for cash proceeds of $45,000. The Company issued 7,333,333 shares of common stock for common stock payable that was accrued during prior periods.
During the year ended February 28, 2015, the Company issued 15,000,000 shares of common stock for cash proceeds of $450,000.
The Company issued promissory notes with stock granted as an incentive. The stock was valued with relative fair value of common stock compared to fair market value of debt, common stock valued with closing price on date of agreement at $0.02. $960 recorded as a debt discount. As the debt was due on demand, the discount was fully expensed in the quarter ended May 31, 2015.
The Company issued 4,000,000 shares of common stock for cash proceeds of $120,000 which was received in prior years and was initially record in Common Stock Payable at February 28, 2015.
b)
Common stock for services
During the year ended February 29, 2008, the Company granted an officer and a director of the Company to the right to receive 2,500,000 common shares for past services provided. The fair value of each common share was $0.08 on the grant date. The shares, fully vested and non-forfeitable on the grant date, were issued in 2009. This balance is presented as Common Stock as of February 28, 2010. Further, in connection with a consulting services agreement, the Company also committed to issue 1,111,110 common shares with fair value of $88,889, being $0.08 per share based on the quoted market price of the Company’s common shares. This balance is presented as Common Stock Payable as of November 30, 2015 and February 28, 2015.
During the nine months ended November 30, 2015, the Company issued 1,000,000 shares of common stock for consulting services. The fair value of each common share was $0.03 based on the closing trading price on the grant date and was record as consulting expense of $30,000.
During the year ended February 28, 2015, the Company issued 150,000 common shares for consulting services. The fair value of each common share was $0.03 based on the closing trading price on the grant date and was recorded as consulting expense of $4,500.
c)
Options
Stock-based Compensation Plan
The Company has adopted a Stock Option Plan (‘the plan”) in which the Compensation Committee of the Board of Directors makes a determination to whom options should be granted and at what price and their terms of vesting.
The Company has elected to use the Black-Scholes option pricing model to determine the fair value of stock options granted. For employees, the compensation expense is amortized on a straight-line basis over the requisite service period which approximates the vesting period. Compensation expense for stock options granted to non-employees is amortized over the contract services period or, if none exists, from the date of grant until the options vest. Compensation associated with unvested options granted to non-employees is re-measured on each balance sheet date using the Black-Scholes option pricing model.
The expected volatility of options granted has been determined using the historical stock price. The Company uses historical data to estimate option exercise, forfeiture and employee termination within the valuation model. For non-employees, the expected term of the options approximates the full term of the options. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected term of the stock options. The Company has not paid and does not anticipate paying dividends on its common stock; therefore, the expected dividend yield is assumed to be zero. Based on the best estimate, management applied the estimated forfeiture rate of Nil in determining the expense recorded in the accompanying Statement of Loss.
The Company has granted directors common share purchase options. These options were granted with an exercise price equal to the market price of the Company’s stock on the date of the grant.
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November 30, 2015
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Options
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Weighted
Average
Exercise
Price
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Outstanding and exercisable at beginning of the year
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Outstanding and exercisable, November 30, 2015
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February 28, 2015
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Options
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Weighted
Average
Exercise
Price
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Outstanding and exercisable at beginning of the year
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Outstanding and exercisable, February 28, 2015
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At November 30, 2015, the following director common share purchase options were outstanding entitling the holders thereof the right to purchase one common share for each share purchase option held:
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Exercise
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Number
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Price
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Expiry Date
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d)
Warrants
As of November 30, 2015 and February 28, 2015, the Company had no outstanding warrants
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NOTE 9 – RELATED PARTY TRANSACTIONS
The Company incurred the following items with directors and companies with common directors and shareholders:
As of November 30, 2015, included in accounts payable – related party is $33,495 (February 28, 2015: $33,495) owing to an accounting firm in which a director of the Company is a partner and $2,389 (February 28, 2015: $2,389) to a shareholder with respect to unpaid fees and interest on promissory notes, $480,000 (February 28, 2015: $480,000) owing to shareholders of the Company in respect of royalties payable with no interest accruing, and $53,694 (February 28, 2015: $53,694) owing to the former president of the Company in respect of unpaid wages.
As of November 30, 2015, included in advances payable is $nil (February 28, 2015: $103,521) owed to a company controlled by a director.
As of November 30, 2015, promissory notes payable of $439,590 (February 28, 2015: $439,590 is due to a profit-sharing and retirement plan administered by a director of the Company. Terms are:
All bear interest at 12% per annum.
As of November 30, 2015, promissory note payable of $68,687 (February 28, 2015: $86,259) is personally guaranteed by a related party of the director of the company.
NOTE 10 – CONCENTRATIONS AND CONTINGENCIES
Concentrations
Approximately 100% of the Company’s revenues are obtained from two (2) customers. The Company is exposed to significant sales and accounts receivable concentration. Sales to these customers are not made pursuant to a long term agreement. Customers are under no obligation to continue to purchase from the Company.
For the nine months ended November 30, 2015, two (2) customers accounted for approximately 99% of revenue. For the nine months ended November 30, 2014, there was one (1) customer that accounted for 95% of sales revenue.
Contingencies
During the normal course of business we from time to time be involved in litigation or other possible loss contingencies. As of November 30, 2015 and November 30, 2014 management is not aware of any possible contingencies that would warrant disclosure pursuant to SFAS 5.
Commitments
Our future minimum royalty payments on the ScopeOut® agreement consist of the following:
A 5% royalty with a $.75 per unit maximum “minimum royalty” to retain exclusivity with the following volumes:
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End of calendar year containing the second anniversary:
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30,000 units
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End of calendar year containing the third anniversary:
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60,000 units
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NOTE 11 – SUBSEQUENT EVENTS
Management has evaluated subsequent events through March 24, 2016, the date of which the financial statements were available to be issued. The Company reports one subsequent event. It has terminated the ClubsCorp Communications public relations consulting contract effective February 16, 2016.